Commenter Michael Sandifer had this to say:
Seeing so many developed economies at negative nominal rates, with others trending there, as the global economy slows down, with those economies never having enjoyed even the nominal growth rates of the past, it is tempting to think there’s something very wrong with standard economic theory. And, perhaps there is. By standard economic theory, I mean Mishkin’s pre-Great Recession treatment of the subject. I bought an old copy of his textbook, after reading this blog.
But, there was a similar situation in the 70s, but opposite. Nominal growth was too high in most developed economies, and Volcker and others apparently showed that it was an easy problem to deal with, intellectually.
So, until central banks try something like NGDP level targeting, more deeply negative rates, with some changes suggested by Miles Kimball, etc., there’s no reason to go heterodox.
During the 1970s, high interest rates did not seem to slow inflation. As a result, all sorts of heterodox theories of inflation were invented. Too much union power, crop failures, monopoly power, budget deficits, oil prices. And each one failed, because it was monetary policy that was driving 11% NGDP growth (1971-81), which made 8% inflation inevitable. As soon as Volcker did an orthodox tight money policy, inflation promptly came down and heterodox theories of inflation were abandoned. Heterodox macro theories are the result of bad macro policies.
As soon as the world’s central banks adopt NGDP level targeting combined with a “whatever it takes” approach to QE, all these now fashionable heterodox theories of monetary impotence will fade away. The theory that we need fiscal stimulus will come to seem just as silly as the 1970s claim (by the best and the brightest) that we needed wage/price controls.
READER COMMENTS
Lorenzo from Oz
Aug 24 2019 at 9:25pm
An mildly unfair characterisation of the above would be “as soon as orthodoxy gets its act together, heterodoxy will no longer be needed/appealing”. Well, yes.
Scott Sumner
Aug 26 2019 at 3:07am
I’d emphasize the “mildly unfair”.
Lorenzo from Oz
Aug 27 2019 at 10:35pm
I wasn’t trying to be snarky: well, not much. Perhaps I was being too Australian.
Benjamin Cole
Aug 24 2019 at 11:12pm
“As soon as the world’s central banks adopt NGDP level targeting combined with a “whatever it takes” approach to QE…”–Scott Sumner
Maybe so. Does “whatever it takes” include an explicit statement that the the QE-induced increase in the central bank’s balance sheet is permanent?
Also, given that global asset markets are around $350 trillion (bonds, stocks, property) what if pouring more freshly printed (digitized) trillions of dollars into globalized capital markets does not boost economic activity in a specific geographic area (ie, the US)?
Should a person living in the US, prefer helicopter drops in the US?
Interesting thought: Suppose I live in Dallas, and I own land and a local business there, and that I am self-interested.
Should I support pouring more money into globalized (and flooded already) capital markets, ie QE, or should I support a program that would spend another $50 billion in Dallas in 2020?
I think the latter, as a practical matter. Interesting.
Ben
Aug 24 2019 at 11:52pm
Is QE in Europe and Japan not already “whatever it takes”?
How much more asset inflation and ever inflated wealth inequality do we need in these places to reach 2% inflation and, in the long-run, ‘normalized’ interest rates?
Thaomas
Aug 25 2019 at 9:06am
Apparently not. 🙂
But it would”take” a lot less QE if government investment were more sensitive to borrowing rates as it would be if they followed an NPV rule for activities that have current costs and future benefits. Not only would this act as if it were a “Keynesian” stimulus, but would also signal to the private sector that there will not be recessions caused by lack of aggregate demand in the future, raising the private sectors’s “animal spirits.”
Scott Sumner
Aug 26 2019 at 3:12am
Ben, You said:
“How much more asset inflation and ever inflated wealth inequality do we need in these places to reach 2% inflation and, in the long-run, ‘normalized’ interest rates?”
You premise is that I’m saying they need to do more of what they have done, whereas it’s more accurate to say they need to move in the opposite direction, to a more expansionary monetary policy.
Thomas Hutcheson
Aug 25 2019 at 9:12am
It would be good to see a specific pushback to the Summers thesis about the ineffectiveness of monetary policy that is not limited to manipulating ST rates with a self imposed ZLB.
Greg Jaxon
Aug 26 2019 at 7:48pm
It would be even more helpful to see any proof that a government policy (i.e. something that by-definition is coercive) can “improve” a functioning economy. Nothing done by central planning (banking in particular) is going to increase the coordination of (i.e. narrow the spreads between) economic actors on average.
Low and falling interest rates have an irresistible deflationary effect. NGDP targeting, even if it could be forced into existence, targets only the onrushing flow of what once was wealth being scavenged for present consumption even as it disincentivises the formation of new wealth (i.e. savings & new capital assets). GDP ignores the nation’s balance sheet entirely; Scott’s monetary policy puts the nation into liquidation mode and negative interest rates will measure how steep and slippery that slope has become.
Brian Donohue
Aug 26 2019 at 9:47am
But developed economies just can’t seem to generate inflation. It’s a real head-scratcher for the economics profession amirite?
Fans of government spending will grab any club handy to advance their agenda.
The way I see it, we’ve been “doing” fiscal policy to the tune of annual deficits close to $1 trillion for most of this century as it is.
Comments are closed.