The semantics of stimulus, and how to win friends
Lars Christensen (the first person to subscribe to my blog, thank you Lars!) critiques my claim that we need monetary ‘stimulus':
It might be because Richard is not an economist (no offence intend), but to a quasi-reactionary economist like myself when I hear the word “stimulus” I am reminded of discretionary policies. Market Monetarists are arguing strongly against discretionary policies and in favour of rules.
I am on the record here and here as saying that it is the creation of the expectation (which I think is best expressed through adopting an explicit rule) that makes the difference and I am absolutely in favour of making sure this part of the message is not diluted. I completely agree that the monetary policy we both favour is not ‘discretionary’ in the old Keynesian sense*. I termed the adoption of an explicit central bank target the ‘rule of law’ policy, and I think it’s a good description.
Linguistically, on the market monetarist position I think it remains ‘true enough’ to say that the Federal Reserve could ‘stimulate’ the US economy in terms of increasing output and employment by adopting a NGDP level target (at least against the baseline of the contraction that actually took place). This all being said, if it is considered misleading to term this action ‘stimulus’, then I am quite happy to bow to the convention. In particular, the point Lars makes here is excellent and should be taken on board:
In fact from a strategic point of view more QE without a clear monetary policy rule might in fact undermine the public/political support for NGDP level targeting as another round of QE just risks just increasing the money base without really increasing expectations for NGDP growth. This is a key reason why it is so important for me to stress why we are favouring NGDP targeting. We have to be right for the right reasons.
However, I also believe that if a person thinks that the government should in some way manage ‘aggregate demand’ – which I at least implicitly used to think – then they are ripe for conversion to the cause. The way I personally travelled this road was basically starting from intuitive Keynesianism, to ‘the central bank moves last’ to monetary disequilibrium theory. Alternatively, you could travel the (shorter) road from monetarism by saying the central bank should offset changes to velocity of circulation because it turns out it’s not all that stable.
People start from lots of different places. The tent should be big. Of course, I agree that we must be right for the right reasons – but that figuring out how to present your case to people who bring their own conceptual baggage to the table is important if you want to build a movement. As anyone who has ever spent a lot of time arguing about philosophy will have experienced, people can initially take the same words to mean vastly different things, and it often takes repeated interactions to learn what the other person intends by a certain term (see almost any comment thread on Scott Sumner’s blog). We need to be sensitive to other people’s priors, whilst also being careful to state our position clearly. That is a very difficult brief given the seemingly vast divergence of opinion on macroeconomic policy that has emerged over the last three years. But I fear it’s a necessary one.
On a personal note, I’d like to thank Lars both for responding to me, and for a very kind email he sent last week. I would not have upped my blogging without it.
*On my use of language, it’s worth noting that as well as being a non-economist, the Great Moderation had already started when I was born. I missed out on what I am sure must have been an intensely frustrating debate in the prior years