This is what progress looks like
I agree with Josh and I agree with C.J. and I agree with Sam. And you know how that makes me crazy. – Toby Ziegler
Steve Waldman (of Interfluidity) makes a terse but thought-provoking remark on Twitter about the recent exchange (here, here, here and finally here) between myself and Lars Christensen on arguments for NGDP targeting
Best to replace the fiscal/monetary debate w/rules vs discretion debate that is catholic about means
Automatic stabilizers are the key to effective 1) policy and 2) expectation-setting. Because 1) They happen, and 2) People know they’re gonna happen. Could be fiscal or monetary, largely a question of where you inject the money.
Lars has also written a response to Steve here, which expresses some reservations about his fiscal policy ideas and reiterates the valuable point that the key to all this is rules. I don’t have a lot to add at this point, except to say that I think that central bank NGDP-targeting, if it works, is a solution to a specific problem, which Karl Smith today described better than I ever could
I can’t hammer this home enough. A recession is not when something bad happens. A recession is not when people are poor.
A recession is when markets fail to clear. We have workers without factories and factories without workers. We have cars without drivers and drivers without cars. We homes without families and families without their own home.
Prices clear markets. If there is a recession, something is wrong with prices.
I personally think central bank NGDP-targeting is probably sufficient for solving this problem (my recent worries about GDP accounting aside for one moment). But this has a lot to do with central bank credibility, and I am not currently in possession of a model of central banking that takes into account public choice and other factors, assuring me that it will always retain its credibility. Prudence seems to dictate baking in some helpful fiscal rules as well. Well-designed fiscal rules will do little harm if the central bank is credible, and will help if for whatever reason it is less credible in the face of a large fall in velocity. Put it this way: imagine we designed fiscal rules that aggressively amplified changes in the velocity of circulation of money. That would seem to make central banks (at the margin) less credible in targeting NGDP, as the amount of hypothetical QE it would have to do to signal seriousness about hitting the target gets larger. Making central banks more credible at the margin sounds like a good idea to me.
The ‘MMT’ers (‘Modern Monetary Theorists’) Steve and Lars refer to are right in their contention that the distinction between monetary and fiscal policy is artificial, insofar as you can conceive of fiscal policy as the government creating money through spending and destroying it through taxes and issuing bonds. That being said, there may be excellent reasons for leaving this artificial distinction enshrined in our institutions. Given the inconsistent preferences of the public on tax and spending, it’s probably a very good thing if people see the government as operating under a clear budget constraint.
Central bank NGDP-targeting in no way answers the question about the proper role or size of government, but rather liberates it from having to fight ‘recessions’ – indeed, I think adopting the rule would stop us from falling into them in the first place. My hope is that in an NGDP-targeting world, debates about what the government should or should not be doing will be of a higher quality, and there will be less hard choices to make. Now that would be progress.