Home > Economic policy > Abandon inflation targeting while we still have time

Abandon inflation targeting while we still have time

August 22nd, 2016

Back in 2012, I wrote a piece arguing that Australia should abandon the policy of inflation rate targeting, and switch to one in which the target was the level of nominal GDP. As I argued then, inflation targeting is part of a package deal involving a number of propositions, most particularly
* Macroeconomic management should be left to an independent central bank
* Successful inflation targeting will also stabilize real GDP, and therefore fulfil the dual mandate of price stability and full (or as full as possible) employment
* The best policy approach for central banks involves modest regular adjustments of a key interest rate. In Australia this is the cash rate, which is the overnight money market interest rate.

The idea of nominal income targeting has recently been put forward by .Nick Xenophon and economist Danny Price, in relation to the contract with the new Governor of the Reserve Bank, Phil Lowe. The article mentions my support, and I commented on an earlier draft.

Writing in Crikey, Bernard Keane and Glenn Dyer criticise the idea, making three points
(a) Unlike other countries, we are not yet at the zero lower bound, so we can continue using interest rate policy
(b) Macroeconomic outcomes in Australia have been pretty good under inflation targeting
(c) A nominal GDP target can’t be achieved using monetary policy alone, we need fiscal policy as well.

My response to point (c) is “Yes, that’s the point of the shift. When we dump inflation targeting, we dump the entire package, including exclusive reliance on monetary policy”. On (a) and (b), it seems to me more sensible to make the change when we can, rather than be in the position of most countries, where inflation targeting remains notionally in force, but in practice the only instrument available is open market security purchases (aka quantitative easing). And in all those countries, macro outcomes in the inflation targeting era have ranged from poor to disastrous.

Although Australia is doing well right now, interest rates are heading down, and would certainly hit zero fast in the event of a crisis. So why not fix our policy now, while we still have time.

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  1. Geoff Edwards
    August 22nd, 2016 at 17:00 | #1

    Australia may be “doing well right now” if GDP is the metric. But GDP measures only traded goods and services and does not incorporate a balance sheet. So the macro-economic situation can look satisfactory all while a country can be racking up unpayable debt.

  2. Apocalypse
    August 22nd, 2016 at 17:21 | #2

    The original idea behind nominal GDP was that monetary policy shouldn’t be tightened when inflation is high but real growth is low. In those circumstances you’d tighten MP if you had an inflation target, which would further hit real growth, which is what you ultimately care about. But you wouldn’t tighten if you had a nominal GDP target.

    But this is not today’s problem, or tomorrow’s likely problem, which is super low inflation and low real growth. You’re going to get the same MP with either an inflation target or a nominal GDP target, so changing to a nominal GDP target doesn’t help you. If you want to add discretionary fiscal policy to your policy instruments, fine, but that doesn’t change anything much either, except maybe, possibly, make the target easier to hit. But that is far from assured.

  3. Kien
    August 22nd, 2016 at 17:32 | #3

    Adopting a higher inflation target (e.g., at least 4%, max 6%) seems more credible … And achievable.

    Agree we need to act now before Vs later.

  4. Newtownian
    August 22nd, 2016 at 17:36 | #4

    An interesting topic but its one to which one might ask “is it actually too late?” . I ask as I’m just emerging groggily from reading Satjayat Das’s book “A Banquet of Consequences”. (Before plunging into Mervyn King’s opus “The End of Alchemy” which bizarrely seem to suggest the 1990-2006 period was all rosy rather than the time when the current mess was set in motion through financialization”).

    I didnt encounter much new in Das’s book but it was good to see all the competing forces lined up together and to a degree integrated in one place. Problematically the book suggests that the backlashes from any financial engineering undertaken now will be dire, whichever way things evolve because of the legacy of the past 35 Years – and especially the failure to do anything new in the past 8 years. Das’s conclusion seems to be we have been now locked into a crash by the inability to disentangle the global financial Gordian Knot, the only question is whether it will be slow or fast motion.

    So bearing his arguments in mind its interesting that you suggest for Australia is currently all right. But from where I sit on the verge of retirement interest rates are terrible for those trying to survive on superannuation in the longer term – they are better than the US, but they arent enough for 20 years or more retirement even without medical bills. The alternatives seem to be to invest in a vastly inflated stock market or an unproductive housing bubble i.e. no choice at all.

    Conversely if interest rates do rise the mortgage impacts on intending and recent buyers would bring down the house(ing market).

    If I understand his arguments correctly there is just too much unproductive saving and simultaneious accumulated debt in a system and without someone losing say through quantitative easing, this situation will only get worse. Also the status quo is only kept going by a kind of hopeless faith in the need to keep dancing of the kind familiar to admirer’s of the depression topic film “They Shoot Horses Don’t They?”.

    Comments? In particular what are the dangerous potential blowbacks from what is suggested above with regarding to using GDP as a target?

    My impression is that it will be extremely hard to stimulate GDP because of the extent to which people are in debt overall or where they are hoarding as I probably am, its against the fear of a rainy day and the fact that I like so many older people dont actually need to buy that much as most of my material wants are satisfied. Put another way to really grow GDP you need to expand the market for goods and services. But what/who is this market you are thinking to see expanded?

  5. August 22nd, 2016 at 18:47 | #5

    Money is a measure of value as well as being a store of value. It is bizarre to allow a measure to “inflate”. Image if someone said we have a government policy to inflate degrees Centigrade. As global warming occurs we will change the value of centigrade so that we do not have global warming. People would say we were crazy to do such a thing- and yet that is what we have as government policy on money inflation.

    A solution is to have a zero inflation policy along with taking away the value of money tokens.

  6. August 22nd, 2016 at 19:16 | #6

    From a salespersonship point of view, I don’t think you should phrase it as an abandonment of inflation targeting, as that sounds too negative. After all, you’re not actually abandoning the monitoring of inflation altogether, just adding GDP targeting as well. If inflation suddenly jumped up to 10%, I’m sure the RBA would react under such a regime as you propose, even if nominal GDP was unchanged. Some more nuance would go a long way towards making the shift sound less dangerous.

  7. Ivor
    August 22nd, 2016 at 21:19 | #7

    This really is bad.

    The role of the RBA is not to

    stabilize real GDP,

    .

    This is zombie idea. GDP goes up or down. It does not have to be stable. Stabilise is camouflage for propping-up.

    Australia has never had a:

    independent central bank

    . It is chock full of capitalist Zombie executives.

    The only successful inflation targeting is either zero or at the same rate as wage increases. Otherwise the market system simply transfers wealth from workers to capitalists who build casinos not hospitals.

    Price stability is another zombie idea and is always promised (as under the Accord) but never delivered. The mandate for the RBA is currency stability and it has never even tried.

    The RBA mandate is not for

    as full as possible employment

    it is for the exact opposite, ie:

    ” the maintenance of full employment in Australia;” [RBA Act]

    The notion that:

    The best policy approach involves modest regular adjustments of the cash rate, which is the overnight money market interest rate.

    is another zombie idea. It just entrenches bankster greed and feed their gargantuan super profits.

    The RBA has never considered the

    ” the economic prosperity and welfare of the people of Australia.”

    is has only considered the economic prosperity and welfare of the businesses of Australia and ensured that the rich have got richer and the poor have got poorer and forced to camp in tents in the parks of major cities such as Sydney.

  8. Kel
    August 23rd, 2016 at 01:28 | #8

    Heard our stupid PM make his speech recently about Australia not wanting to fall behind the world’s leading economies and it struck me that we are it. We are a leading economy and yet we want to go down the way of other ‘leading’ economies who want to achieve growth any way other than fiscal policy.

    Not sue I agree totally with MMT but it seems to me we need a more productive deficit and GDP will take care of itself.

  9. Ikonoclast
    August 23rd, 2016 at 07:55 | #9

    What does “nominal GDP targeting” really mean policy wise? I went back J.Q.’s earlier post which he links to. Here is what J.Q. says;

    “The idea would be to combine a target rate of inflation (say 2-3 per cent) with an estimate of the medium-term rate of real economic growth required to maintain full employment (again 2-3 per cent is a plausible estimate). The aim would then be to keep the value of GDP, expressed in current dollars, on a growth path consistent with these targets (that is, at an average annual rate somewhere between 4 and 6 per cent).”

    Thus (I think) nominal GDP targeting is a policy of targeting an inflation rate and a real growth rate rate at the same time. In practice, what policies will or might achieve those goals? Without a comprehensive policy program and action list the mere statement of goals has no meaning. What are the policy prescriptions and action list which would likely achieve the goal(s)?

    There remain open questions. In theory it is posited that achieving these targets will achieve and maintain full employment (except for frictional unemployment). Would this actually occur in all or most economic conditions? Also, this economic program posits endless growth. Is that possible? It might be possible for a considerable time if the growth sooner or later becomes qualitative rather than quantitative. When do we begin considering how a steady state material economy might work, given that we cannot materially grow the economy for ever on a finite planet? Current orthodox economic theory seems to remain deliberately blind to the more difficult problems which political economy must sooner or later face in relation to biosphere sustainability. The endless material growth answer is obsolete.

  10. I am and will always be Not Trampis
    August 23rd, 2016 at 08:17 | #10

    A nominal GDP target is surely an implied inflation target.

    The problem we have at present is an fixed inflation target could be at odds with trying to have a sustained recovery.

    In times like this we need a higher inflation target. This is something NEVER contemplated by Bernie Fraser and the RBA when they debated what sort of inflation the RBA needed way back in the early 90s.

  11. EconoMan
    August 23rd, 2016 at 09:20 | #11

    Prof Q – how do you see NGDP targeting for a small, open, resource-intensive (when it comes to trade) economy? Would it be feasible or desirable to target nominal GDP during large swings in resource prices / the Terms of Trade?

    (Context – I read a fair bit about market monetarism from Scott Sumner et al a few of years ago, and it seemed attractive in theory but untested, but I’m not up with the latest debate.)

    P.S. @cscoxk

    That is the kind of analogy that sounds clever and sophisticated, but is actually pretty misguided. If you added a zero to every single amount of $AU, and all prices went up ten-fold, nothing ‘real’ has changed. You haven’t ‘masked’ some fundamental degradation.

  12. Troy Prideaux
    August 23rd, 2016 at 09:33 | #12

    @cscoxk
    The problem is our economy revolves around this stuff called debt and inflation does generally have a positive influence in helping service such.

  13. Greg McKenzie
    August 23rd, 2016 at 09:41 | #13

    EconoMan makes a very pertinent comment. The global issue facing all central banks, that actually have monetary policy targeting, is hoarding. If the Reserve Bank of Australia was to pursue either, a NGDP target, or, a higher inflation target then it would not have the support of all the big five central banks. As we now know, the US Federal Reserve is aiming to raise interest rates (on its money markets) this year. If and when that happens, there will be a flight of hot money to the USA. Meanwhile, the Bank of Tokyo is considering “helicopter money” for its stock market. If this happens then asset inflation will get worse, not better, globally. The central bank of China continues to manipulate its exchange rate to the determent of other trading nations and actually is exporting goods deflation. The European Central bank is continuing with its negative interest rate policy. This is deepening deflationary pressures in Europe and globally. And the Bank of England is fighting a rearguard action against the negative financial effects of the Brexit referendum. This is doing nothing to stop hoarding on global financial markets.As EconoMan rightly points out. our “Small, open, resource-intensive (trade based) economy”
    cannot afford a higher inflation target and faces falling nominal GDP for the foreseeable future. Until the central banks of the world take unified action to end hoarding of financial assets, any unilateral action by the Reserve Bank of Australia will be futile.

  14. Ernestine Gross
    August 23rd, 2016 at 10:14 | #14

    The Dutch economist and (Bank of Sweden) Nobel Prize laureate, Professor Jan Tinbergen comes to mind. There are two policy insights I recall from Prof Tinbergen’s work, which seem to be relevant:
    a) One needs at least as many policy instruments as targets. (Tinbergen was a mathematician – one needs at least as many equations as unknowns to get a solution in algebra).

    b) Income distribution matters for social cohesion. At the time Prof Tinbergen suggested the ratio of the highest to the lowest income should not exceed 5.

    JQ writes he agrees that: “A nominal GDP target can’t be achieved using monetary policy alone, we need fiscal policy as well.” I agree, too; it follows directly from a) and b) above.

    But I don’t agree with JQ’s belief that: “When we dump inflation targeting, we dump the entire package, including exclusive reliance on monetary policy”. I don’t agree because:

    i) There is no exclusive reliance on monetary policy at present.

    ii) The problem with inflation targeting is partly due to the accepted macro-economic framework where only a subset of all prices are included in the notion of inflation; the unchecked asset price inflation problem.

    iii) Nominal GDP targeting does not address the wealth and income inequality that has grown during the past decades. While Tinbergen’s ratio of 5 seems incredibly unrealistic under current conditions, his concern about income and wealth distribution is not. (See the minimum wealth condition in general equilibrium models of the Arrow-Debreu type which developed into agent models as well as the macro approach of Piketty.)

    ‘Dumping the entire package’ might require dumping the idea of ‘aggregate demand management’ and reviewing the entire macro-economic model, which is still Keynesian in concept with a bit of Monetarism (eg the money multiplier model with the hierarchy of measures of money, M0, M1, M2…., indicating there is no adequate concept of ‘money’).

    Tinbergen’s policy framework starts with policy goals, to which the targets are to be linked and implemented via a sufficiently large number of instruments.

    Since Tinbergen’s time of writing, the institutional arrangements, in Australia and in large parts of the ‘global economy’, have changed (neo-liberalism in JQ’s terminology). During this period of change environmental concerns have grown. I believe ‘dumping the entire package’ requires a review of policy goals in the first instance. A return to Keynesian aggregate demand
    management won’t do because the financial system is fundamentally different now.

  15. hc
    August 23rd, 2016 at 10:21 | #15

    Jacob Greber in today’s AFR asks how your proposal would have worked during the commodity price boom 2009-2012. Would you have set interest rates sky high to reflect high rates of nominal income growth. If so the Aussi dollar would have surged even more than it did utterly destroying Australian manufacturing. Today the immediate implication of targeting p+y rather than p alone would be to drive interest rates even lower than they are. These types of targeting rules need to be assessed against current and past historical episodes. I think it would be hard to dispute the argument that the RBA has done a sterling job of keeping the Australian economy onj an even keeln for decades. Would your proposal have done better?

  16. Troy Prideaux
    August 23rd, 2016 at 10:32 | #16

    @hc
    I’m of the belief that JQ is more inclined to favour fiscal stimulus as the primary lever for aggregate demand management than monetary control… well… that’s my hunch 😛

  17. Troy Prideaux
    August 23rd, 2016 at 10:36 | #17

    Ernestine Gross :
    ‘Dumping the entire package’ might require dumping the idea of ‘aggregate demand management’ and reviewing the entire macro-economic model, which is still Keynesian in concept with a bit of Monetarism (eg the money multiplier model with the hierarchy of measures of money, M0, M1, M2…., indicating there is no adequate concept of ‘money’).

    One thing is for sure, during a crisis, all options will be on the table if need be 🙂

  18. GrueBleen
    August 23rd, 2016 at 11:21 | #18

    @Greg McKenzie

    So, Greg, what you’re saying is that in this GU-EZ (Great Ununified Earth Zone) world, globalisation has already meant an end to national autonomy in economic management.

    So what China does today – or Japan, or the EU, or the USA, and even tiddling little old Britain – can defeat the best intentions of the RBA.

    And that despite the fact that our “Small, open, resource-intensive (trade based) economy” is a ctually the 12th or 13th largest economy (depending on whether you believe the World bank or the IMF) in this GU-EZ.

    Oh well, the powerful do what they will, and the weak suffer what they must, eh ? (to slightly reword Thucydides).

  19. Apocalypse
    August 23rd, 2016 at 11:21 | #19

    @hc

    Nominal GDP grew by 10% in 2010. A nominal GDP target of 5% would have seen interest rates through the roof, just as we were escaping the GFC. The economy would have been killed.

    Actually, in might have already been dead, because nominal GDP grew by 9% in 2008, during the GFC. It would have been insane to raise interest rates at this time, but that’s what would have happened under a nominal GDP target.

  20. Ikonoclast
    August 23rd, 2016 at 11:22 | #20

    @Ernestine Gross

    Your comment seems a fuller exposition than J.Q.’s minimalist position statement. I understand J.Q. is pressed for time. He has a day job and several writing projects in progress, most likely. However, his post is so succinct it begs any number of questions about the detail.

    I made the same call for detail albeit in a non-technical way. “Without a comprehensive policy program and action list the mere statement of goals has no meaning. What are the policy prescriptions and action list which would likely achieve the goal(s)?”

    In your detail;

    (a) “One needs at least as many policy instruments as targets.” In principle and largely in practice, I would agree. A comprehensive set of social targets are necessary. We seem to have put the economic policy / social policy “horse and cart” around the wrong way. It seems to be assumed that if we get broad macroeconomic parameters right (whatever “right” may be) then all desirable social outcomes will follow automatically. The thinking is: Liberalise markets and everything else will be automatically fixed. I am not saying J.Q. thinks that way but if we talk only economic parameters we default into the dominant discourse which is that economics leads our society not democratic social policy.

    We need to set social policies and then pick the instruments which will achieve these policies. In some cases, under some conditions, certain markets constructed in certain ways will achieve some policies. But liberalised markets and macroeconomic policies to suit liberalised markets (and to suit that relatively small subset of people who increase their personal wealth under liberalised markets) cannot be the only tools and in the toolkit.

    (b) I agree, especially with the point “The problem with inflation targeting is partly due to the accepted macro-economic framework where only a subset of all prices are included in the notion of inflation; the unchecked asset price inflation problem.”

    The current system’s propensity to generate ever greater income and wealth disparity is a key issue also. Piketty’s work seems to me to be conclusive on this issue. The current system under the current conditions (slow growth but also increasing monopoly concentration or oligopolisation and thus an absence of anything like perfect competition, as the Monthly Review Marxists excel in pointing out) misallocates in the social and economic senses. I think Stiglitz’s work shows that inequality leads to inefficiency and slow growth, if growth is one objective.

    Welfarism, as an after-the-fact redistribution, after maldistribution in the first place, is just not enough of a policy response. The construction of ownership in all arenas of production and distribution needs to be reformed in total in order to correct maldistribution at the source. If the current distribution or pre-distribution (terminology varies in the schools) does in fact lead to an efficient and effective economy (of sorts and for some at least) and yet at the same time requires substantial welfarist redistribution is not this proof of a contradiction in the system? Capital and capital formation (especially as fixed, productive capital) is served by the current system albeit at the cost or limit it seems of a trend to over-capacity and lack of aggregate demand. Human social needs of workers and unemployed (for adequate income, health services, education services etc.) are not adequately met in the prime income instance and only partially adequately met after an, admittedly half-hearted, welfarist intervention.

    The question in the case of a call for a “minimum wealth condition”, which I support, in turn revolves around what specific policies should be implemented to achieve that condition. Welfarist measures are one plank but insufficient on their own. Socialist measures must be another plank. Socialist measures must involve different settings, institutionally mandated, at the production level, ie at the pre-distribution level, of the economy. In turn this must be supported by institutional changes in the structure and meaning of ownership in our national economy.

    What it means to work and own must be comprehensively re-worked. Democracy, self-management and worker ownership, as well as some re-nationalisation, must be introduced more broadly into the economy. This might just mean developing a more truly “mixed economy” rather than the pale imitation we have of this at the moment and rather than any kind of “purist” or absolute socialist economy at the other end of the spectrum. But a separate sandpit would be needed for such an argument. It gets too long here obviously.

  21. derrida derider
    August 23rd, 2016 at 11:49 | #21

    The practical effect of an NGDP target rather than an inflation target is to make monetary and fiscal policy more activist (or, if you prefer, responsive), rather than tighter or looser in general. Yes, it would all else equal have meant higher interest rates in 2010. Though all else wouldn’t be equal – you’d surely use the regime switch to have a higher implicit inflation target, as many macro experts (Solow, Blanchard, etc) believe you always should have. That 2% target was an historic accident that theory, and now practical experience, suggests is simply too low for efficient management.

    Though don’t forget that, just like inflation targeting, NGDP targeting should be geared to expected conditions in a couple of year’s time rather than to current conditions. That would both have muted the spike and meant that we would have dropped interest rates sooner than we did – basically as soon as company tax revenue started to drop. If we didn’t do that (which we didn’t) by now we should most certainly be using QE or fiscal stimulus. The “debt emergency” stuff (see Geoff Edwards @1) was and is extremely unhelpful.

    To me NGDP targeting is better where shocks are likely to be endogenous (eg a wage-price spiral, a financial collapse). It has clear advantages for the Fed and is a complete no-brainer for the ECB (which of course is precisely the central bank least likely to implement it) . But I think it makes less sense for a small open commodities-based economy subject to large external shocks, where domestic saving/spending can never of itself buffer the real income effects.

    From the POV of Australians’ wellbeing how the fall or rise in income from such shocks is distributed matters much more than how much we can mitigate them (because we can’t do too much about them). The big advantage of using fiscal policy that it can distribute those losses or gains according to a democratic political decision, rather than completely arbitrarily as monetary policy does. Distribution matters.

  22. Ernestine Gross
    August 23rd, 2016 at 11:50 | #22

    @hc

    “I think it would be hard to dispute the argument that the RBA has done a sterling job of keeping the Australian economy onj an even keeln for decades.”

    I fully concur as far as the RBA’s powers go. Moreover, the RBA has often given public advise (opinion) on economic matters, which, IMHO, were clearly critical of beliefs held by what I call ‘naive market economics’. It is in this area where the RBA has shown independence.

  23. Ernestine Gross
    August 23rd, 2016 at 11:54 | #23

    @Troy Prideaux

    “One thing is for sure, during a crisis, all options will be on the table if need be…”

    I do not recall any non-trivial period of time when there was no ‘crisis’ of one kind or another. Still, the option I’ve hinted at is not on the table.

  24. Apocalypse
    August 23rd, 2016 at 12:34 | #24

    @derrida derider

    The big advantage of using fiscal policy that it can distribute those losses or gains according to a democratic political decision, rather than completely arbitrarily as monetary policy does. Distribution matters.

    Do you mean like the democratic political decision to spend billions building submarines in South Australia in order to save Christopher Pyne’s seat?

  25. Ernestine Gross
    August 23rd, 2016 at 13:05 | #25

    @Ikonoclast

    As said before, I don’t subscribe to the idea of central planning to avoid after the event corrective measures (which you call ‘welfarism’). As for ownership of the means of production, workers’ cooperatives are possible in the current legal framework. In Germany, all publicly listed companies must have worker representatives on the supervisory board. This is said to have helped (eg negotiating reduced hours for everybody instead firing some) but it has not prevented other measures to make corrections to the outcome.

    The minimum wealth condition is essentially a condition which ensures – in the logic of the mathematical economic theory – that the relative prices are such that everybody has ‘freedom of choice’, although people’s wealth (and income) can differ in absolute amounts. Just as ‘freedom of choice’ in economic theory is merely an ideal rather than an empirical certainty for each and every individual, ‘freedom of assembly’ and ‘voting rights’ are ideals we asscociate with democracy. This applies to worker cooperatives, too, I should think.

  26. Troy Prideaux
    August 23rd, 2016 at 13:36 | #26

    Ernestine Gross :
    “One thing is for sure, during a crisis, all options will be on the table if need be…”
    I do not recall any non-trivial period of time when there was no ‘crisis’ of one kind or another. Still, the option I’ve hinted at is not on the table.

    Income equality? Well… yeah… that lever is permanently welded to the chassis.

  27. suburbanite
    August 23rd, 2016 at 14:17 | #27

    Newtownian :
    An interesting topic but its one to which one might ask “is it actually too late?” . I ask as I’m just emerging groggily from reading Satjayat Das’s book “A Banquet of Consequences”. (Before plunging into Mervyn King’s opus “The End of Alchemy” which bizarrely seem to suggest the 1990-2006 period was all rosy rather than the time when the current mess was set in motion through financialization”).
    I didnt encounter much new in Das’s book but it was good to see all the competing forces lined up together and to a degree integrated in one place. Problematically the book suggests that the backlashes from any financial engineering undertaken now will be dire, whichever way things evolve because of the legacy of the past 35 Years – and especially the failure to do anything new in the past 8 years. Das’s conclusion seems to be we have been now locked into a crash by the inability to disentangle the global financial Gordian Knot, the only question is whether it will be slow or fast motion.
    So bearing his arguments in mind its interesting that you suggest for Australia is currently all right. But from where I sit on the verge of retirement interest rates are terrible for those trying to survive on superannuation in the longer term – they are better than the US, but they arent enough for 20 years or more retirement even without medical bills. The alternatives seem to be to invest in a vastly inflated stock market or an unproductive housing bubble i.e. no choice at all.
    Conversely if interest rates do rise the mortgage impacts on intending and recent buyers would bring down the house(ing market).
    If I understand his arguments correctly there is just too much unproductive saving and simultaneious accumulated debt in a system and without someone losing say through quantitative easing, this situation will only get worse. Also the status quo is only kept going by a kind of hopeless faith in the need to keep dancing of the kind familiar to admirer’s of the depression topic film “They Shoot Horses Don’t They?”.
    Comments? In particular what are the dangerous potential blowbacks from what is suggested above with regarding to using GDP as a target?
    My impression is that it will be extremely hard to stimulate GDP because of the extent to which people are in debt overall or where they are hoarding as I probably am, its against the fear of a rainy day and the fact that I like so many older people dont actually need to buy that much as most of my material wants are satisfied.

    I have been pondering this from John Kay’s article “No savings glut, investment opportunities abound”

    The problem is not that there is a shortage of productive investment opportunities that will yield rates of return well above zero. The problem is that we have put barriers — institutional, political and economic — in the way of making these investments.

    Maybe the problem is much simply that a deliberate dismantling of the social infrastructure that mitigated personal risk for health and retirement has resulted in both a savings glut and a debt explosion driven by housing investment for retirement security.
    The private market is fundamentally inefficient at providing insurance and in a worse case scenario is underwritten by the state anyway. Lets cut out the middle man!

  28. Ernestine Gross
    August 23rd, 2016 at 14:20 | #28

    @Troy Prideaux

    Looking back as long as I can remember as an adult, there has been a financial crisis somewhere in the ‘global economy’. Most of the time it happened in other places than where we live.

  29. suburbanite
    August 23rd, 2016 at 14:22 | #29

    Sorry – that was meant to be more concise – 2nd go

    Newtownian :
    …But from where I sit on the verge of retirement interest rates are terrible for those trying to survive on superannuation in the longer term – they are better than the US, but they arent enough for 20 years or more retirement even without medical bills. The alternatives seem to be to invest in a vastly inflated stock market or an unproductive housing bubble i.e. no choice at all.

    I have been pondering this from John Kay’s article “No savings glut, investment opportunities abound”

    The problem is not that there is a shortage of productive investment opportunities that will yield rates of return well above zero. The problem is that we have put barriers — institutional, political and economic — in the way of making these investments.

    Maybe the problem is simply that a privisation of social infrastructure that mitigated personal risk for health and retirement has resulted in both a savings glut and a debt explosion driven by housing investment for retirement security.
    The private market is fundamentally inefficient at providing insurance and in a worse case scenario is underwritten by the state anyway. Lets cut out the middle man!

  30. GrueBleen
    August 23rd, 2016 at 16:06 | #30

    @Ernestine Gross

    Your #14 of 23 Aug

    Your (a) about Tinbergen: try looking up Diophantine equations. 🙂

  31. Ernestine Gross
    August 23rd, 2016 at 16:22 | #31

    @GrueBleen

    True, one needs intergers, given the way I stated it. Thank you.

  32. Ernestine Gross
    August 23rd, 2016 at 16:30 | #32

    @suburbanite

    I am very sympathetic to the content of your last paragraph. For example, the economic security of the currently ‘old’ depends on the productivity of the currently ‘young’ and the expectation of the currently young regarding their economic security when they are ‘old’ depends on the productivity of the future ‘young’ generation and so forth. So one may as well cut out the middleman – the bloated financial system. Financial securities cannot ‘secure’ much. They are only state contingent contracts for monetary payoffs at best.

  33. Ernestine Gross
    August 23rd, 2016 at 17:21 | #33

    @GrueBleen
    Please take out the ‘r’ in the 5th spot in the third word, not counting the symble for comma, in my post #31. Thanks in advance.

  34. Ikonoclast
    August 23rd, 2016 at 17:37 | #34

    @Ernestine Gross

    We are already arguing past each other a bit. Your comment about “central planning” opens a whole, large discussion. I would need to take it to a new sandpit when such appears.

    Suffice it to say here, I am not arguing for a soviet-style communist command economy which in actuality turns out to be state capitalism. Of course, I would have to make the case supporting that thesis (or link to a paper) plus in turn make the case for a socialism or more socialism-biased mixed economy which is not merely, and indeed not predominantly, a centrally planned economy in the sense in which you seem to use that term. But as I said, it must be a sandpit discussion. I will await the appearance of a new sandpit… I hope.

  35. Stockingrate
    August 23rd, 2016 at 18:08 | #35

    @Geoff Edwards
    Not to forget asset sales, or asset related liabilities such as leases, or population growth.

  36. Ikonoclast
    August 23rd, 2016 at 21:18 | #36

    @Ernestine Gross

    I have been trying to re-find this essay for a while. I think it is very thought-provoking.

    “The Corporation as a Command Economy” – J. Bradford DeLong.

    http://www.irle.berkeley.edu/events/spring08/governance/DeLong,%20B.-Corporation-1997.pdf

  37. Ikonoclast
    August 23rd, 2016 at 21:19 | #37

    Ernestine Gross,

    I have been trying to re-find this essay for a while. I think it is very thought-provoking.

    “The Corporation as a Command Economy” – J. Bradford DeLong.

    http://www.irle.berkeley.edu/events/spring08/governance/DeLong,%20B.-Corporation-1997.pdf

  38. Jordan from Croatia
    August 24th, 2016 at 00:37 | #38

    NGDP targeting is bogus since doesnt account for asset price rise and it will excaserbate the inequality.

    I propose much better targeting and also a policy instrument with it. It is wage increase targeting. Wage growth is the main source of inflation, second source is credit expansion where credit adds to demand and increases infation. Recent decades in US show that only credit can be the source of inflation without wage increase. And it was relied on credit expansion to grow wages trough housing sector.

    Policy instrument that can raise wages without government spending a dollar is only one; minimum wage.
    Policy instrument that would target wage increase is CB calculating a minimum wage that would move toward the desired target. There is a danger that target could be 0. This is extremely dangerous since debt economy requiers inflation of prices and wages in order to keep economy out of recession in medium and long run.

    Target for nominal wage increase should be around 2% since it is needed to lower the burden of debt over time.

    Another policy instrument for buying power instead of wage increase is to add points on credit scores for poorer sections of population and firms in sectors that need support. Credit score points make for lower interest rate and with it the burden of debt reduced. Ammount of points can vary as needed. This also reduces real inequality as what real is: it is the usage of the housing and products not ownership. Credit allows us to use what we do not own.
    Adding score points to credit score is making credits cheaper for lower incomes reducing the inequality of wages and injustice of unequaly rewarding giving time to corporations.

    Why is CEO’s time away from the familly rewarded much much much more then a cleaning lady’s time given to corporation? Giving cheaper credits to cleaning lady then to a CEO is countering a bit this grave injustice of capitalism.

    NGDP targeting completely misses the effects of asset price inflation just as inflation targeting does.
    The real solution is wage rise targeting with minimum wage and credit score points.

  39. GrueBleen
    August 24th, 2016 at 02:19 | #39

    @Ernestine Gross

    Done, with alacrity.

  40. GrueBleen
    August 24th, 2016 at 02:28 | #40

    @Ikonoclast
    Your #36 of 23 Aug.

    Well, if you’re into that kind of thing, Ikono, you’d love Henri Fayol. Here’s a bit of a sample:
    ________________________________________
    Fayol’s Principles of Management

    During the early 20th century, Fayol developed 14 principles of management in order to help managers manage their affairs more effectively. Organizations in technologically advanced countries interpret these principles quite differently from the way they were interpreted during Fayol’s time as well. These differences in interpretation are in part a result of the cultural challenges managers face when implementing this framework. The fourteen principles are:

    Division of work,
    Delegation of authority,
    Discipline,
    Unity of commands,
    Unity of direction,
    Interrelation between individual interests and common organizational goals,
    Compensation package,
    Centralization,
    Scalar chains,
    Order,
    Equity,
    Job guarantee,
    Initiatives,
    Team-Spirit or Esprit de corps.
    _____________________________________________

    Just Google Henri Fayol wiki and you’ll get a couple of entries:

    Henri Fayol – Wikipedia, the free encyclopedia
    Fayolism – Wikipedia, the free encyclopedia

  41. Ikonoclast
    August 24th, 2016 at 07:54 | #41

    @GrueBleen

    DeLong’s essay is interesting more for where he doesn’t take the analysis than for where he takes it. Despite the promising title it ends up as a pro-corporation piece rather than a negative critique of the corporation as a command economy or autocracy or simply as an anti-competitive monopoly. It exposes the confusion in his overall position. However, when I attempt to analyse these matters (central command vs distributed autonomy) I discover confusion in my own ideological position – a different confusion – and I haven’t resolved it yet. I will look at Fayol. Thanks for the heads up.

  42. John Quiggin
    August 24th, 2016 at 08:19 | #42

    @hc

    Greber’s point is more of a nitpick than a fundamental objection. As I said in my 2012 piece, the aim is to target the sum of inflation and growth. That requires an inflation index. Most of the time this doesn’t matter, but during the minerals boom and bust there was a big divergence between the GDP deflator (which reflected export prices) and the CPI, which didn’t, at least not directly. Nominal GDP growth is the sum of real growth and inflation as measured by the GDP deflator, so, if this is treated literally we have the problem Greber mentions. But, as he implies, it’s easily fixed.

    The real issue is whether to include GDP growth in the target and here, Greber’s argument is very weak. More on this soon.

  43. Ikonoclast
    August 24th, 2016 at 09:35 | #43

    @John Quiggin

    The devil would be in the detail, I guess. How would an inflation rate target of say 2.5% and a growth rate target of say 2.5% be targeted conjointly in practice? What are the specific macroeconomic levers or settings which would or might achieve these goals?

    It seems to me, in the current economic system, we have trouble targeting more than one thing at a time. Inflation can be knocked on the head if we don’t much care about unemployment and all the people it affects. We’ve seen that occur in practice under neoliberalism or market liberalism. Going by at least some episodes of high inflation it appears we can target lower unemployment at the expense of high inflation. Sometimes, with stagflation for example, it appears everything goes bad at the same time.

    You don’t explicitly mention (in this thread or the link) unemployment. How do you fit employment targets into this scheme? What takes priority, the nominal GDP target or social goals like full employment? Or is this the wrong question or one which misconstrues the problem? How do you answer questions about inflation measurement methods and the issue of largely unmeasured asset inflation?

    I don’t want to sound too snarky but you throw a bone with no meat on it. Maybe some of the economic cognoscenti can crack the bone and get the marrow out but the average person wants to know how social goals are to be met and/or which ones are to be sacrificed for nice numbers which not so incidentally tend to work best for those who already have wealth.

  44. GrueBleen
    August 24th, 2016 at 10:46 | #44

    @Ikonoclast

    Your #41 of 24 Aug

    Yep, our Bradley can be a little confused at times, but he’s usually an interesting, or at least informative, read.

    What you’ll get from Fayol – who dates from very early 1900s – is a view of the ‘command and control’ organisation as it was envisaged at the start of the ‘corporate explosion’ of the 20th century.

    But just have a look at Fayol’s 14 ‘principles’ for a corporation, and tell me how that differs from, say, a well run army – eg the Roman Legions – or a major religious organisation – eg the Roman Catholic Church (add in Roman concrete and we can begin to see how much our “Judeo-Christian European Civilisation” depends, not on the Greeks, but on the Romans).

    Fayol is an interesting, “this is how it got started” read whom I first encountered in 1974, along with Taylor, Gantt and Mr Therblig, aka Frank Bunker Gilbreth (and Lillian Moller Gilbreth, collectively aka Mr and Mrs Cheaper By The Dozen).

  45. Jordan from Croatia
    August 24th, 2016 at 18:21 | #45

    @Ikonoclast
    Would wage increase target answer your question?
    Wage increase happens mostly in low unemployment environment (assuming there are no effective unions to demand higher wages which is present environment) naturaly, but minimum wage enables more borrowing by reducing burden of debt and wage growth across the scale.

    Since debt is a sufficiently large part of agregate demand and it is part of capitalist economy, increase of wages are necessery to reduce burden of debt and compounding interest rate problem.

    A monetary policy that targets wage increase instead of doing it indirectly trough interest rate would be more effective at GDP growth and unemployment. And also more effective at reducing inequality.

    Income (wages) is the starting point of agregate demand and also as the base for the credit issued. Income is the center point where everything starts but why is everyone scared to look at the center? Because it raises inflation? well, isn’t that the obvious mechanism?

  46. Jordan from Croatia
    August 24th, 2016 at 18:30 | #46

    Why is everyone scared to take a look at my proposal? or is it a comprehension problem?

  47. Ikonoclast
    August 24th, 2016 at 21:35 | #47

    @Jordan from Croatia

    I agree. A Government Job Guarantee policy which sets a minimum wage should be implemented. Unemployment could be reduced back to frictional unemployment of about 2%.

  48. Jordan from Croatia
    August 24th, 2016 at 22:51 | #48

    Neither Job Guarantee nor Basic Income Guarantee by themselves would do a complete job of managing economy for the best outcome.

    Job Guarantee only if it is coupled with BIG can do a sufficient and controling job.
    Job Guarantee is needed not to let productive capacity go to waste, while BIG is needed to cover those temporarily unable to work.

    One policy catches what other policy lets through the cracks. But more importantly is the ability of private sector to colude with administration and abuse one or other policy prescription. Coupling BIG and JG would prevent the abuse of the system since give more controlling power to workers to switch between programs if they do not find it fulfilling and rewarding.

  49. Ikonoclast
    August 25th, 2016 at 12:01 | #49

    @Jordan from Croatia

    Again, I am quite happy to agree. A Job Guarantee and a Basic Income Guarantee could and should work together. These would be consistent BTW with the propositions in the Aeon magazine article by John Quiggin – “Prospects of a Keynesian utopia”. The central thesis in that article is that productivity, aided by machines and automation, has reached a point where all people in a developed country can be given a reasonable, modern standard of living and that paid work, if scarce, can be shared around more. Some persons may even be permitted to opt out and “surf” or as I might suggest “think, write or get educated in something new.”

    Of course, the title of the article could also have been “Prospects of a Socialist utopia”. I say this to support the article not criticise it. J.Q., obviously more alert than I am to avoiding terminology which will frighten the natives (both overlords and underlings) of neoliberalism, has chosen a more careful term.

    Given that unemployment plus underemployment currently runs at about 14% IIRC and that Roy Morgan Research disputes Australia’s official unemployment rate of 5.7% and puts is at more like 11%, then it is clear that the current economy is highly inefficient in at least one respect. It underemploys on a large scale. Thus claims that avoiding a Job Guarantee and Basic Income Guarantee lead to an efficient economy in standard terms are clearly false. Labour underutilisation and fixed capital underutilisation are a factor of the current system.

    A move to a Job Guarantee (JG) and a Basic Income Guarantee (BIG) would simply formalise these realities and reduce both administrative overheads and “mendicant angst” at one stroke. Age pensions, invalid pensions, unemployment benefit, sole parent benefit, child payments etc. are in essence Basic Income Guarantees anyway, albeit poor paying ones which in many cases carry high administrative overheads and inflict onerous “proofs of eligibility” conditions on recipients.

    All welfare payments should be subsumed under a Basic Income Guarantee for persons aged 18 and over. The most logical way to implement this would be with a NIT (Negative Income Tax). Each person would have a tax threshold set. With income above that threshold they would start paying tax. With income below that thrshold they would incur a negative income tax which of course is a payment.

    There would never be any need to apply for a benefit of any type. Merely register or rather be registered automatically when a person turns 18. Every category of benefit goes out the window. The NIT exists for all and operates in one system. Work change events and life change events feed automatically through to change your NIT rate. The administrative simplification would be enormous.

    A JG would be necessary to give all those who wanted work some actual work to do. Despite the denigration of ordinary people and their implied reluctance to work, inherent in all neoliberal ideology, the fact is most people want to be useful and to do work which is to them interesting and fulfilling. A proportion of able people receiving income via the NIT, following a mass or staged transfer from the current welfare system, would want to perform socially recognised and payed work. A JG would accommodate these people again via a staged implementation. The JG would always soak up those people not employed by private enterprise and the need for this buffer would vary during the business cycle.

    A minimum wage for a full week’s work should also remain in force. A full week might be defined as 35 hours. A job via the JG would pay minimum wage rates too and be offered on a full or part-time basis as the applicant wishes.

    There would be no crowding out of private employment. The JG initiative employs only those who wish to work but cannot find work in private employment. There would be pressure on private employment to offer the minimum wage at least but that applies in any minimum wage system.

    JG recipients would also be under some performance pressure. Conditions of employment, including probation periods and performance evaluations would apply to the same degree as are applied to all public servants. Where persistent failure to meet work obligations occurs then after counselling etc., the person returns to essentially a NIT income with a waiting period of maybe 3 months (in the first instance) before being eligible again for the JG. The NIT income for a person with no other income would be at least as high as the current highest welfare payment which I believe is probably age pension. Single rates would always be paid. There would no testing for marital status or couple-hood.

    Overall, this system would be simple, effective, humane and completely economically sustainable given the high production of a modern, developed nation. There would be little or no reduction in overall incentive to work in the entire population. There would be an enormous increase in engagement and in the feeling of being worth something and valued and cared for by other people and society as a whole. The negative resistance engendered in people by the current blatantly coercive, exploitative and disrespectful (towards individuals) industrial relations system would largely disappear. Willing and happy people are vastly more productive, more inventive, more cooperative and more amenable. If we only we could lose the notion that people have to be whipped to work by the cruel economic goads of penury and exclusion snaking and snapping above their heads all the time.

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