Friday, January 21, 2011
Nominal GDP targeting.
Prof David Beckworth claims the Fed should attempt nominal GDP targeting (NGDP targeting). I’m sympathetic, but I don’t like the tool he advocates for actually effecting this policy. He advocates a monetary base (MB) increase to boost demand: any old MB increase it seems.
We have recently had an astronomic and unprecedented MB increase (thanks to QE) and the effect has been unspectacular, apart from boosting asset prices. And the latter in itself is totally useless.
In contrast, channelling extra MB into the pockets of households rather than into the pockets of banksters DOES have an effect: all the evidence is that a significant proportion of wage increases or windfalls enjoyed by households is actually SPENT, which is what we want, if we want stimulus. For the evidence, see here, here, here and here.
And apart from that strict economic point, there is a moral or philosophical point which backs the latter economic point. It’s a point made by Thomas Edison, which briefly is that new money should be the property of the people. The full quote is thus.
“If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good... If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper. Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency… instead of the bankers receiving the benefit of the people’s credit in interest-bearing bonds?” (Hat tip to Beowulf for that quote – it comes from NY Times, Dec. 6, 1921)
The above policy (having extra monetary base go straight to households) involves getting Congress to mesh fiscal policy with the Fed’s monetary policy, which is easily done in principle. And that “meshing” does not require a merging of the two bodies. That is the Fed can still be responsible for the economy’s overall deflationary / stimulatory stance, while Congress can decide on exactly where money is spent and how much money comes from which form of taxation. And same goes for any other central bank and parliament.
And finally this will all ring loud bells in the brains of Modern Monetary Theory (MMT) advocates. MMT favours having the government / central bank machine go for straightforward extra net spending in a recession. With no extra borrowing to cover the extra spending, and with the extra money very definitely not going into the pockets of banksters.
MMT just steamrollers everything in front of it!