Home > Economics - General > Nitpicking on nominal GDP targeting

Nitpicking on nominal GDP targeting

August 25th, 2016

Writing in the AFR, economics correspondent Jacob Greber begins his discussion of the Xenophon proposal with the assessment “What a stupid idea”. Given that he is dismissing proposals with wide support in the economics profession (including economists as different as me and Warwick McKibbin in the Australian context) one would expect that he had a knockdown argument to present. In fact, he offers a valid, but minor nitpick and a string of confusions and errors.

The nitpick relates to the distinction between nominal GDP growth, as reported by ABS, and the way the term is commonly used in the context of monetary policy discussion, to refer to the sum of the inflation rate and the real rate of GDP growth. Inflation is typically measured by the CPI. However, the statistical nominal GDP is associated with a different inflation measure, the GDP deflator, which is heavily influenced by export prices. So, a policy that targeted the statistical measure would imply trying to reduce growth when export prices boomed, and increase growth when they fell. In most times and places, the difference is too trivial to matter, but in the context of the recent minerals boom in Australia, it was substantial. So, I’d suggest we really want to use the phrase “nominal growth targeting” with nominal growth spelt out as the sum of CPI inflation and real GDP growth.

After that valid point, we have a mess of confusions and contradictions. First, Greber objects to Xenophon’s proposal on the basis that it would push up housing prices. If this is to be taken seriously, it means that the RBA should be targeting asset prices as well as CPI inflation. While there’s a good case to be made here (I discussed the issues in a paper with Stephen Bell quite a while back) it contradicts the central claim that everything is fine with inflation rate targeting.

Making the contradictions even worse, Greber notes that inflation has been well below the target range for some time. That is, under an inflation targeting system, the Reserve Bank should be cutting rates. But Greber appears to oppose this, while conceding that “To be fair, there is a legitimate debate to be had about how far and for how long inflation should range outside the current band”. In this context, the question of a shift to nominal growth targeting is a red herring. Real growth (about 2 per cent) is only marginally below the likely long term trend (2.5 per cent), so a monetary policy that targeted both growth and inflation would, if anything, be a little less expansionary than a strict inflation target

The obvious problem being ducked here is that, if the RBA sticks to inflation targeting, it may well have to cut interest rates all the way to zero, as most other central banks have already done. So, the temptation is to accept a long period when we are below the target rate. But that, in effect, is switching from a 2-3 per cent target to a 0-3 target, something for which no real justification has been given.

Like Bernard Keane and Glenn Dyer to whom I responded previously, Greber makes much of Australia’s special circumstances, treating nominal GDP targeting as (to quote Keane and Dyer) as “a foreign solution”. This piece of economic exceptionalism is surprising coming from a haven of orthodoxy like the AFR, and even more surprising in the context of monetary policy. Inflation targeting, central bank contracts and 25-basis point interest rate adjustments aren’t Australian inventions. We adopted this approach at the same time as the rest of the world and for the same reasons. We’ve had much better outcomes as Greber notes, but there’s nothing to suggest that inflation targeting is the main reason.

On the contrary, inflation targeting has evidently failed nearly everywhere in the developed world, in at least three ways
* it has not kept inflation within the target range
* interest rates have been driven to zero or below, so that “emergency measures” like reliance on open market operations now appear to be permanent fixtures
* it has not delivered on the promise that targeting inflation would also deliver stable GDP growth

The first of these problems is already evident in Australia, and the second appears imminent. We should think twice before saying that, since nothing has gone badly wrong so far, we should stick with our existing policy framework.

Greg Jericho in The Guardian has some similar thoughts.

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  1. Apocalypse
    August 25th, 2016 at 11:57 | #1

    inflation targeting has evidently failed nearly everywhere in the developed world

    The dismal economic performance of the developed world is due to the lingering effects of the financial crisis, which can’t be fixed by lowering interest rates to zero and beyond. Changing the target for monetary policy from policy from inflation to inflation + real growth isn’t going to change this.

  2. Tom Davies
    August 25th, 2016 at 14:03 | #2

    Are central banks which fail to reach their inflation targets really serious about targeting inflation? “No true inflation targeter…”

    What is it about NGDP level targeting which makes it easier for central banks to achieve their targets?

  3. Troy Prideaux
    August 25th, 2016 at 14:21 | #3

    @Tom Davies
    I really don’t think they are specifically targeting inflation (particularly in Europe and the US or even the UK) – at least that’s not the impression I get (from a glancing distance). If you listen to Yellen’s or Draghi’s or Carney’s justifications for their various actions recently, there’s at least as much mention of economic growth, employment growth, dept, market volatility etc as there is of inflation.

  4. Troy Prideaux
    August 25th, 2016 at 14:26 | #4

    That of course would be “debt” not “dept” (always do that grrrrr)

  5. Ikonoclast
    August 25th, 2016 at 14:32 | #5

    J.Q. your argument is well and good, meaning I agree with it. I know how much you care about whether I agree with you or not. <- That last sentence is irony directed mainly at myself. Your Aeon article is also well and good.

    What counts is the detail of recommended policies and programs to achieve, in this case, your recommended goals be these goals “nominal growth targeting” as a macroeconomic strategy and a "Keynesian style utopia" as social strategy/goal.

    Do you have any views (link to if necessary) on the Job Guarantee, Basic Income Guarantee and Negative Income Tax as policies?

    While debates remain technical-economic (and conducted somewhat in the standard terms seemingly approved by orthodox, status quo or even neoliberal economic thinking), I think a lot of the public would be left wondering what your ideas might mean in practical terms. What real world policies, budget policies and social policies, implementable in practicable stages, would get us from here to there? I guess there is the problem of talking and writing in such a way as to remain credible to a number of audiences at a number of levels. However, an outline of the recommended, stepped economic and social programs to reach the goals would answer such questions in practical terms: a manifesto if you will.

    If there would be anywhere where we would fundamentally disagree, if might be on whether our political economy needs "reform" or "revolution". This would in turn depend on definitions and details for such terms. I don't support violent revolution, except perhaps in the most extreme of cases, and we are far from such a case in Australia. Also, I would be happy for a "revolution" to occur initially solely in minds and hearts and then at the ballot box. However, I would hope that that such a "revolution" would not halt at full Keynesian style reform. Such reform would take us up to the level of social democracy we achieved previously and which proved susceptible to being wound back by neoliberalism as we now see. I see no enduring social democratic or civilisation security in that sort of achievement, substantial though it would be.

    We need to take a leaf out of the neoliberal play book. This "leaf" was their intention and detailed program to so restructure the state and retrench welfare such that a return to a Keynesian style welfare state was both structurally impossible and conceptually unimaginable by the populace. They have nearly achieved that goal except that in Australia welfare structures remain substantial even while other social goods are rapidly being evaporated by the ascendancy of the neoliberal sun. There may already be almost no way back. I certainly believe matters are dire. In turn, "reform" must progress or evolve further into a revolution of our political economy such that a return to neoliberalism is structurally, institutionally impossible or nearly so and such that we have a population well enough educated in both history and political economy who can conceptually understand those possibilities but in will in terms of morality and sensibility refuse to countenance the idea of a regress just as we now refuse to countenance the idea of a regress to institutionalised slavery.

  6. Jim Rose
    August 25th, 2016 at 15:39 | #6

    I do not know what the practical implications of nominal GDP targeting are but if you have inflation targeting, everybody knows that means low inflation. Much easier in terms of information messaging and information processing

  7. John Quiggin
    August 25th, 2016 at 16:07 | #7

    @Jim Rose

    *If ease of information messaging and information processing is the object of monetary policy, why not just pick an interest rate and leave it fixed once and for all? That’s far simpler than waiting every month to see what the central bank does**

    * Irony on
    ** Irony off

  8. Apocalypse
    August 25th, 2016 at 16:44 | #8

    @John Quiggin

    But there is a serious point about messaging. The RBA has spent over 20 years convincing people that is serious about getting CPI inflation in its 2-3% target range, even if it occasionally strays outside the range. It is widely believed (evidence for which is the large number of wage and price escalation clauses where 2.5% is the default). The messaging would be a lot more difficult with an inflation + growth target. Then there’s the difficulty that real GDP estimates are often revised by the ABS, sometimes a long time after the fact. The CPI is never, ever revised.

  9. reason
    August 25th, 2016 at 18:17 | #9

    “We’ve had much better outcomes as Greber notes, but there’s nothing to suggest that inflation targeting is the main reason. ”

    I think the main reason is the dominance in Australia of adjustable rate mortgages, which means that monetary policy directly and quickly effects disposable income (and so works more like fiscal policy).

  10. reason
    August 25th, 2016 at 18:20 | #10

    @Jim Rose
    This is like saying, people are too stupid to understand economics so lets just avoid it in setting economic policy.

  11. reason
    August 25th, 2016 at 18:29 | #11

    @Apocalypse

    To be honest I don’t see this being a problem (NGDP means that there will not be persistent inflation AND strong growth – and you need strong growth to maintain persistent inflation). And the process is forwards looking not backwards looking so what have revisions to do with it.

  12. Ikonoclast
    August 25th, 2016 at 19:30 | #12

    @reason

    Correction: NGDP means there will not be persistent inflation AND strong growth IF AND ONLY IF the component targets can be hit correctly.

    I agree with the NGDP target so far as it goes (with reservations about implied endless growth but that’s another argument). NGDP sounds like a better target or target set than the current targets. It also sounds a little more challenging to hit. Hitting a low inflation target is easy if one does not does not give a damn about high unemployment and lots of unmeasured under-employment and labour market disengagement.

    Nobody has explained to me what their policy recommendations or settings would be for hitting the NGDP target set (a combination of inflation and growth which sum to the right target). Is this easy to hit? I don’t know. Nobody here including J.Q. has outlined precisely how it might be hit reliably. They have also not indicated what social policies might go along with this. Budget policies without social policies are like (pick your metaphor) a car without wheels, a pizza without a base or whatever.

    Until this is fleshed out it’s more pointless riffing in the key of neoliberalism. By which I mean talking about budget settings and nothing else.

  13. Jordan from Croatia
    August 25th, 2016 at 21:10 | #13

    J.Q.

    You were mentioning in previous NGDP post that NGDP targeting growth would have to include fiscal policy beside monetary when needed.
    What policy mechanism would force implementation of fiscal policy ?
    Monetary policy is using Philips Curve and Taylor rule by including inflation and OUTPUT GAP, what would NGDP targeting use?

    I will argue that NGDP targeting is just a British fad and that it is worse then present monetary policy.

    Present monetary policy includes output gap which is important in letting higher inflation and higher growth then normal in order to catch up with the GDP gap from trend growth.

    NGDP targeting would after the steep decline from trend in recession/depression just accept the restart of growth after the bottom as target reached and mission accomplished. What about output gap and unemployed to catch up with the long run trend?

    It seems that NGDP targeting takes NAIRU to the next level of importance and accepting new trends as given without ever fixing the output gap and potential. This was attempted in recent history by economists with “new normal” NAIRU of 5,5% and made up Secular Stagnation which is just outrageous for ordinary folks.

    With NGDP targeting CBs would never even think that QE is needed because after the bottom the GDP growth returned to normal.

    So, again, is it just a fad and you do not have policy mechanism in mind, just as Simon-Wren Lewis did not answer many questions about how it would be better then present or policy is so secretive that ordinary people could not comprehend it?

    Where is policy mechanism to achieve NGDP targeting and consider output gap?

  14. Jordan from Croatia
    August 25th, 2016 at 21:20 | #14

    If there is a mechanism to force inclusion of fiscal policy into NGDP targeting, isn’t it just easier to do that with present moneary policy? As Friedman recomended.

    And why monetary policy is not working now? When will economists be able to answer that? Why QE is not working? Ahen are you going to answer that?

    May I? Monetary policy is not working since banks do not offer official interest rate to the economy. The official rate is only for banks and states, economy have to still suffer under the same interest rate as it was before ZLB was hit or just a slightly lower.

    Official rate is 0.25 or negative in some countries yet nobody can get such rate in the real economy. The spread is over 300 points.

    Offer the official rate to the economy and for refinance and secular stagnation is over.

    Is this so difficult to admit and comprehend when being an economist?

  15. Peter
    August 26th, 2016 at 00:17 | #15

    “In this context, the question of a shift to nominal growth targeting is a red herring. Real growth (about 2 per cent) is only marginally below the likely long term trend (2.5 per cent), so a monetary policy that targeted both growth and inflation would, if anything, be a little less expansionary than a strict inflation target”

    I don’t agree with this and would like to read you explain your reasoning.

    In the U.S., the Congressional Budget Office in 2009 forecast NGDP growth to be 33 percent by 2015. In actuality it was 22 percent. (Real GDP was forecast at 20 percent, actual was 10 percent.)

    That’s a huge failure. Seems to me there would be more impetus for the Fed to be more expansionary under that forecast and data set than what actually happened, where the Fed kept inflation between 1 and 2 percent, below its target (ceiling).

    Informed politicians, press and public would see more of a failure under an NGDP path target.

  16. Ikonoclast
    August 26th, 2016 at 04:31 | #16

    Simple questions.

    Is NGDP being advocated as just a monetary policy or is it advocated as a combination of monetary and fiscal policy?

    Wouldn’t NGDP targeting, as just a monetary policy, be limited in what it could do in the case of low inflation or deflation? Expansionary monetary policy is used to attempt to combat low growth or contraction by lowering interest rates. If there is little or no space left to lower interest rates how can NGDP work, at least on its own? Are we not still in the position then where the government needs to apply expansionary fiscal policy?

    If fiscal austerity stays in place, along with stagnation or even deflation, then it appears that the policy call for NGDP amounts to very little.

    Also, what is proposed in detail for NGDP targeting?
    Level targeting or growth rate targeting?
    Lagged adjustment vs. forecast adjustment?

    Remember, “let’s bake a cake” always begs the questions;
    What ingredients?
    What proportions?
    What method?

  17. August 26th, 2016 at 04:44 | #17

    I saw a neat video recently where the interviewee was explaining that one major problem with CPI is that different prices move at different rates, so you need to ditch baskets altogether and go with gauge theory.

    Ah here it is I think, Eric Weinstein:

    https://www.youtube.com/watch?v=XjCAsXUDvno

    The simpler argument from a US perspective is that it’s boneheaded to include mortgage interest into owner equivalent rent, so modern US CPI has a massive amount of error in it to begin with.

  18. Ikonoclast
    August 26th, 2016 at 09:44 | #18

    @Vic Twente

    The whole talk is interesting though I am not a mathematician. Quite a bit goes over my head. There has certainly seemed to me to be problems with measuring CPI and unemployment rates for example. These two stats are probably quite different in terms of technical measurement issues but both are problematic in their own way. In addition to definitional and technical problems there are problems of political manipulation of the numbers via the methods used and via up-front decisions to include or exclude certain factors. This all casts a cloud over macroeconomic management. Unmeasured asset inflation re the CPI has already been mentioned in this thread.

    I notice that even left-leaning economists are prone to taking official numbers at face value when it suits their theory. Supporters of neoliberalism or monetarism are equally or more prone to the same bias. The more macroeconomics focused a thinker is, the more he or she can be prone to be happy to take the official numbers not only when they support a theory but in general. This would appear to be because serious scepticism about official macroeconomic numbers would undermine the whole field. What value is the field if all the input numbers are dodgy? I am an amateur macroeconomic thinker myself albeit in a roughly Marxian (not Marxist) kind of way. So I can’t imagine myself exempt from this tendency to error.

    I do hold that our current Australian CPI and unemployment figures (to single two measures out) are false and essentially officially or definitionally falsified. With unemployment numbers it is almost trivially easy to demonstrate that our official unemployment numbers are false. The definition of unemployment is patently absurd.

    “The ABS uses internationally agreed standards in defining unemployment and the key indicators have been measured in a consistent way since 1966.
    To be classified as unemployed a person needs to meet the following three criteria:

    – not working more than one hour in the reference week;
    – actively looking for work in previous four weeks; and
    – be available to start work in the reference week.

    The ABS produces a range of measures, in addition to the unemployment rate, to help users understand the extent of underutilised labour supply, such as underemployment.” – ABS site.

    I don’t want to make this post too long. This definition, despite international “sanction”, is patently absurd. It suits current (and past I guess) economic management to understate inflation and understate unemployment. The (basically neoliberal) governments have political incentives to understate inflation. It looks better. It permits deflating real payments of welfare benefits. It facilitates deflating real wages. It continues the wealth transfer to capital.

  19. Ivor
    August 26th, 2016 at 10:28 | #19

    @Vic Twente

    This is not clear.

    If landlords jack up rents, OR banks jack up interest rates, BOTH impact on a family’s consumption equally?

    I cannot see the bone?

  20. Luke
    August 26th, 2016 at 10:41 | #20

    Prof. Q.,

    My understanding of NGDP targeting is that it, in essence, removes the need for decomposing nominal GDP changes into real GDP growth and inflation – if nominal changes are targeted, only nominal data is needed.

    That would seem to me an easier approach – nominal figures can be directly observed, while real figures (as I understand it) require decomposition of nominal figures into real figures + inflation.

    An NGDP targeting central bank would, therefore be agnostic as to the relative contribution of real GDP growth and inflation to NGDP growth (at least for monetary policy purposes).

    Finally, my reading of NGDP proponents is that they also believe monetary policy should be considered as not just interest rate policy – expansion of the money supply seems to be suggested as a tool that could assist in hitting NGDP level targets.

    Does my understanding broadly align with yours? If I am on the right track, NGDP level targeting does seem to me a better central bank regime than inflation rate targeting.

  21. Ikonoclast
    August 26th, 2016 at 10:54 | #21

    I have not yet found anything on the internet, nor received any answer here, that concisely yet fully explains the mechanics of the targeting of NGDP for the layperson. Exactly how is it targeted? For example, is it purely monetary targeting or does it have a fiscal component? Is there anyone who knows and is willing to explain on this thread?

    Initially, NGDP targeting sounded plausible and useful to me. The more I look into this the more it starts to look like another neoliberal diversion. My “spidey sense” intuitions are starting to suggest this to me. However, I may be wrong as I am operating on inadequate information on this issue.

  22. GrueBleen
    August 26th, 2016 at 15:06 | #22

    @reason

    Your #10 of 25 Aug.

    Yep, you got it in one. Or, to be just a little more “ironic”, have you ever seen any indication that either Scott Morrison or Malcolm Turnbull actually understand macroeconomics or have the faimtest of clues about running the world’s 12th (or 13th) largest economy ?

  23. GrueBleen
    August 26th, 2016 at 15:11 | #23

    @Ikonoclast

    Your #12 of 25 Aug

    As I see it, Ikono, Volcker showed the how to drive an inflation rate down, but there’s not ever been an ‘AntiVolcker’ to show ’em how to ‘inflate’ it up.

    Not unlike the fate of Humpty Dumpty, I guess.

  24. GrueBleen
    August 26th, 2016 at 15:30 | #24

    @Ikonoclast

    Your #21 of 26 August.

    It’s an underpants gnomes thing, Ikono:

    1. Get out of bed
    2. ?????
    3. NGDP is targeted !

  25. Ikonoclast
    August 27th, 2016 at 00:55 | #25

    @GrueBleen

    LOL, I am beginning to think so. These debates go nowhere. J.Q. started a thread on; “Market monetarism: a first look” back in Sep. 1 , 2013. It is related to this topic. I think Ernestine Gross makes the most sense in that thread.

    My own thoughts now? NGDP agitation is a minor technical storm in the teacup. It won’t change much even if it is successful. There are far more important issues.

  26. August 27th, 2016 at 02:28 | #26

    @Ivor

    Unfortunately I don’t know the nuts and bolts of how interest rates got incorporated into owner equivalent rent (OER) in the 70s, so I’m not as informed as I need to be to answer your question properly. Someone (Dean Baker?) has written about it. But on my own I can see loads of problems:

    1) if you take the aggregate mortgage costs as changing with interest rates (debatable, see 2 below), then the NPV of future payments with which you might calculate OER is only known post-hoc: you can’t extrapolate NPV from the present rate, because the present rate will continue to change, and compounding can introduce almost an order of magnitude of error! So it depends how OER amortizes an incredibly indefinite NPV.

    2) In my own parent’s case, they were locked in at 6.75% all through the 70s, so they saw their OER go *down* in real terms.

    3) mortgage interest, in the US, is tax-deductible anyway, so that’d make the delta of OER deductible.

    4) housing’s an asset, so if rapid house price accumulation eats into current consumption, it’ll also radically increase future income (in something like a sophomore economics 2-period everybody-dies model). Essentially, OER is paying for an asset, it’s not consumption.

    5) if we incorporate price inflation of housing assets into CPI, why not incorporate price inflation of other assets, like stocks?

    Does that help at all?

  27. Ikonoclast
    August 27th, 2016 at 09:11 | #27

    @vic twente

    Just thinking aloud here. Not sure I have any firm conclusions.

    I would think an owner-occupied house is a consumption good in at least one sense. It deteriorates with use and with time. Eventually it rots, rusts, crumbles or collapses especially without maintenance. It is not a standard capital good either. It is not deployed for future production of goods in the standard sense. Though we can see that a house can be deployed for the production and raising of humans (human reproduction). Rooms of an owner-occupied house can be let. Then it becomes an income producing asset to some extent. But it’s still a rented consumption good not producing goods in the standard sense.

    What we call consumption goods are goods we usually consume quite rapidly though there are exceptions. Clothing, food and jewelry are usually called consumption goods. Yet expensive jewelry does not decay over decades or maybe even hundreds of years.

    Food is also used to reproduce and grow new humans. In this sense food is like a house. They are both consumption goods with different shelf lives (destruction by time) and different consumption rates (short term versus long term).

    The thing we notice about both food and houses are that they are material. A stock or share is not material. Only the record of who owns what is stored in some material medium. A stock or share is an example of what Marx called fictitious capital. In more standard economics these are defined as “tradeable paper claims to wealth”. “Effectively, fictitious capital represents “accumulated claims, legal titles, to future production” and more specifically claims to the income generated by that production.” – Wikipedia.

    This last maybe gives an answer to your question 5. Because of the radical differences between real goods and real assets and these paper claims to real assets, the argument to include the value of paper claims to assets promising future production might be tenuous and might even be double-counting in a sense over time. I admit, I haven’t nailed this thought down properly.

    Overall, I think what our economic system calls a consumption good and what it calls an asset is in the end susceptible to some philosophical criticism in terms of category and mode of existence. However, tax law, finance convention and custom are used to rule these categories off into neat boxes. Given that, it is our moral or ethical value choices which decide some questions like the one of permitting negative gearing for investment houses but not for owner-occupied houses (Australia) or permitting owner-occupied mortgage payments to be deductible (USA). These are arbitrary decisions based on which social value goals we have chosen.

    In both the examples I mentioned above (negative gearing and tax deductible mortgage payments) we can notice that people with assets are given more money. That’s an interesting choice given there are really poor people in both countries.

  28. Ivor
    August 27th, 2016 at 09:32 | #28

    @vic twente

    These are different propositions than in the video you linked to.

    If

    it’s boneheaded to include mortgage interest into owner equivalent rent,

    then this should apply if interest rates are fixed as well.

    How is the “delta of OER” calculated?

    Housing is not a pure asset – except for landlords.

    For consumers – renters – it is a consumption item. Rents and owner occupier costs should be in CPI.

    Mortgage interest is a owner occupier cost. It is paid out of wages.

    How is price inflation of housing assets incorporated into CPI?

  29. Ernestine Gross
    August 27th, 2016 at 09:48 | #29

    @Apocalypse
    #1

    a) “The dismal economic performance of the developed world is due to the lingering effects of the financial crisis, which can’t be fixed by lowering interest rates to zero and beyond. ”

    Yes, subject to noting there are differences among juristictions, I agree.
    One of the reasons, possibly the most important one, for the said failure of lowering interest is that the money created (buying privately issued debt securities) to bring about lower rates went to the wrong people. It went to the banks, who had issued the debt securities. Banks didn’t spend the money on goods and services that require, among other inputs, people. Banks used the money ‘rebuild their balance sheet’. (Most obviously in the USA, the UK and some parts of the Euro-zone but by no means in every Euro-member country.)

    So, why did the monetary authorities in question give money to the wrong agents? IMO they had very little choice, in particular the USA, because the monetary authorities are also responsible for the payment system. It would not have taken much more than the Lehman event to have the entire US banking system to collapse – nothing coming out of ATMs, credit cards being cancelled by the simple means of some electronic network being switched off. Nothing moves, no trade, no shopping, no payments of wages – only barter. (I recall one finance industry person defining ‘security’ as the cans of food you own at the time of Lehman event.)

    Since the USA, the most relevant country in this context because this is where the GFC has its home, is linked with the rest of the world via the banking system and international trade, the monetary authority also has to keep an eye on the exchange rate. If the US banking system had collapsed, what would its major creditor, China have done? Would China have acted like the UK in relation to Iceland and, in an initial response, send military frigates?

    Setting all other economic policy objectives aside, Jan Tinbergen is still relevant even the narrow context of monetary policy as conceptualised in mainstream economics.

    b) “Changing the target for monetary policy from policy from inflation to inflation + real growth isn’t going to change this.

    Setting aside the Jan Tinbergen problem, I should think the conclusion depends on the relationship between the CPI measure of inflation and the GDP deflator and both in relation to a the full set of nominal prices and their timing and accuracy of measurement. This set of relationships is likely to vary both over time and across economies.

    JQ makes the point that in Australia export prices are important and their variability is captured by the GDP deflator and he recognises that physical (particularly real estate) asset and financial assets prices are potentially a problem.

    IMHO, the Tinbergen problem dominates even in the narrow monetary policy framework. If one wishes to look for an insight as to what the fundamental problem is, then Radner’s mid-1970s work on sequence economies with commodity and securities markets is a place to start off with. In contrast to commodity markets, there is no ‘lower bound’ on the issuance of financial securities by private agents.

  30. Ikonoclast
    August 27th, 2016 at 11:33 | #30

    @Ernestine Gross

    I agree with your analysis here so far as I can understand it. I don’t fully understand the section that follows the first mention of Jan Tinbergen. That is a result of my very limited self-education in economics.

    Let me address the section I do understand and agree with. All that you say is true, in my opinion, bar a minor off-topic nitpick. If, as you say, the authorities were bound to act in the manner they did, and I fully agree with you, then this follows. The resources of the state were utilised (capacities, capabilities, institutions, real assets, monies, tax revenues etc.) to effect the rescues or bailouts. The people of a democratic state own the resources of the state in the sense that they are common resources to be used for common purposes. In this case, the common purpose furthered, for the USA in this case, was to save the financial system for everyone right down to having ATMs working and food on the shelves in supermarkets.

    In this case, the use of common resources ought to have mandated a (partial possibly) change in ownership of the institutions bailed out. They ought to have been either partly nationalised to the value of the bailout or treated in a second manner. The second manner would have been to relieve existing shareholders in said institutions of that proportion of ownership which had been underwritten by the state bailout. Let us say it is 25% of market capitalisation in a particular bank’s situation. In this case, that 25% should have been spread as shares on a per capita basis to every registered adult in the USA.

    To make this workable, the shares would have been held in escrow by the US government. Individuals could then elect, possibly at tax time or another time for social security recipients, to take the market value of the shares in money (sell them to the government or have the government sell them on the exchange on their behalf) or take full possession of these shares and add them to a private share portfolio. The government would conduct these operations to reasonably but not unduly protect said share prices over an appropriate period of time to meet all objectives.

    Minor Nitpick Below.

    China could not send frigates at the USA in the manner that the UK could send frigates at Iceland. I am sure you know this of course. This leads to the point that military power has economic effects even in its potential and of course it can have massive economic effects if open war is waged. At this stage, the US still over-trumps every other nation individually in military power. Nuclear capability deters open war between major powers as per MAD (mutually assured destruction) but of course this does not fully guarantee that large scale conventional or nuclear war will never happen. China has to play the long game to wait for the USA’s decay and its own growth to reverse the balance of power. Open conflict is not now in China’s interests. China’s long term strategy runs another way. This is not the thread for such a discussion though.

  31. Ernestine Gross
    August 27th, 2016 at 12:24 | #31

    @Ikonoclast

    I assume JQ won’t mind if we explore this topic a little more.

    The UK (partially?) nationalised banks which were ‘bailed out’. But only temporarily. Your suggestion regarding the US (partial nationalisation and spreading the shares among the people) makes sense to me. The outcome may still fall short of expectations – the former USSR privatised its previously state owned enterprises by spreading shares. It didn’t take long until share ownership concentration emerged and worse. But then the situation isn’t quite comparable, if at all.

    As to ‘frigetes’, to be sure I don’t even know whether frigetes were the type of war vessels that had been employed by the UK. Maybe I should have used 2 question marks.

  32. Ikonoclast
    August 27th, 2016 at 13:29 | #32

    @Ernestine Gross

    “It didn’t take long until share ownership concentration emerged and worse.”

    Yes, I take it as a near certainty that this would happen again in our current economic system(s), albeit maybe at different rates in places like post Soviet Collapse Russia and contemporary USA.

    1. In the first instance, giving people, en masse, shares or money equivalent is at least a one off money or wealth transfer. It is a help that is better than nothing and a significant proportion is likely to liquidated and spent quite quickly likely boosting aggregate demand.

    2. The ability to hang onto and maybe even grow shares depends primarily on the initial wealth condition of the person at time t1. If he/she is living indigently (dirt poor, hand to mouth) then the shares must be liquidated straight away to eat and/or lodge better. Some people are just impecunious, disabled or foolish by misfortune or nature; this is true too. Better off, well organised people including those lucky by birth and circumstance can use money (or shares) to make more money.

    3. Your statement, which I quoted above, pertains to that precise point made about our current economic system and made by people from Marx to Piketty, though maybe in different forms and expressions. Our system functions a lot of the time to heavily concentrate wealth and the only way of “redress” or “rebalance” is redistributive taxing and spending (taxes and welfare or taxes and negative income tax (NIT)).

    4. This gets back to my endless bleating about changing the system at the front end. I mean at the level J.Q. terms “pre-distribution” and Marx terms “distribution” IIRC in each case. Terminology varies in different schools of economics so we need to be sure we are talking about basically the same thing.

    5. Changing the pre-distribution setup need not mean central planning in the usual centralised socialist economic sense. It could mean moving the balance between labour income and profits back towards labour. It could mean that share purchase from profits is subjected to a tax that share purchase from income from personal effort is not. It could mean moving ownership and management of enterprises from capitalists to workers. It could mean new laws essentially meaning companies and enterprises must take on junior partners in the first instance, as coopeerative owner/workers and not employees, unless the entrant freely prefers to be an employee and not a cooperative owner and worker. It also might indeed mean recreating institutions such that markets are more properly “completed” (correct term?) in the sense that you mean when discussing your work and that minumum wealth conditions are met again in the terms you mean. In turn, laws governing overall market operations, over-concentration of personal wealth, proliferation of financial instruments and inalienability of certain kinds of rights and wealth might all need to be theoretically designed, framed, implemented and then iteratively modified using real world results as the guide.

    6. This could be implemented in a variety of ways and one must needs get speculative. I have speculated in point 5 and add this. It would have aspects of market socialism and market capitalism about it which I won’t explore in detail here. Another overarching idea might be the Basic Income Guarantee (BIG) normatively conceptualised and implemented as an inalienable (unsellable, unforfeitable) share in the society one is born into or naturalised into and which yields a fortnightly income for all adults (18 years and over). Discussing child benefits introduces details which we can leave aside in a simple overview.

    7. Certainly my socialist ethics or “instincts” have not changed but the form in which I envisage implementation has been modified by debates on this blog and quite significantly by your views and expositions so far as I understand them.

    I could write more but it’s probably best to keep comments relatively short in any possible to and fro process.

  33. GrueBleen
    August 28th, 2016 at 02:25 | #33

    @Ikonoclast
    Your #32 above

    Keeping it short, if a tad belated, on the natter of “concentration”, my father used to say to me – back more than half a century ago – if we collected up our total wealth and then divided it equally amongst everybody, that within 6 months the rich would be rich again and the poor would be poor again. I still think he was probably right.

    Kinda like a short story I once read where a conman concentrated on bilking the poor because, compared to the rich, their hold on money was so much weaker.

    And whilst I sympathise to some extent with your “socialist instincts” it is surely clear long ere now that changing “systems” is just … well I won’t say “farting into the wind”, but that description is close. Whatever “system” we come up with, there will always be a sizable cohort of grifters and grafters, conmen and thieves – not to mention murderers and violators – who will immediately set to work to undermine and subvert order and propriety.

    And that cohort is clever and persistent and constantly renewed and expanded … and usually very successful, though individuals are not necessarily so.

    Although I admire idealism, it’s generally abut on a par with faithful belief in perpetual motion. But don’t let my cynicism stop you. 🙂

  34. Ikonoclast
    August 28th, 2016 at 06:20 | #34

    @GrueBleen

    Quote : “… my father used to say to me – back more than half a century ago – if we collected up our total wealth and then divided it equally amongst everybody, that within 6 months the rich would be rich again and the poor would be poor again.”

    And my father used to say to me, “Money is like manure. Heap it up in big piles and it stinks. Spread it around and it helps everything grow.”

    We can refer to folk wisdom, or we can actually look at both human propensities and variabilities and system propensities and variabilities. Both are real factors. However, no matter what I blog I you won’t change your mind. It’s made up. I can see that. Feel free to skip my posts when I talk about socialism or inequality. 🙂

  35. GrueBleen
    August 28th, 2016 at 09:14 | #35

    @Ikonoclast
    Your #34

    Folk wisdom ? There’s no such thing, mate. As I may have said before, though knowledge can be transmitted from generation to generation, wisdom must be acquired afresh every time.

    But I still reckon my dad was a lot more right than your dad once the money is spread paper thin everywhere, what can people do with it ?

    Yes of course both human and system propensities and variabilities are real factors, when have I ever said, or implied, otherwise ? My thesis is simple: in the perpetual dance of life, the universe and everything, it’s the people propensities that are dominant.

    Can you, given your own propensities, see that my concern with injustice and inequality is what drives me to reject any possible faith in”systems” to correct those ills ? Or should I just opt for saying: “despite the obvious lessons of history about the considerable corruptibility of “systems”, the stuff I believe in will, this time, overcome all evil” ?

    I enjoy, and will continue to read, your declarations of transcendent faith, Ikono, but as you’ve stated, don’t expect me to believe in any of them.

  36. Ikonoclast
    August 28th, 2016 at 09:52 | #36

    @GrueBleen

    I have a great respect for all of individual propensities, societal system propensities and natural system propensities. I endeavor to employ complex systems thinking where I don’t ignore the importance of each level and the influences and feedbacks between systems and sub-systems. Otherwise we can suffer from a form of intellectual tunnel vision where we over-estimate the determining influence of some sub-systems, as I consider you do with your implicit methodological individualism. Of course, methodological individualism is the soupe du jour for much modern thinking, especially in the fields of economics and liberal bourgeois politics. I take an unorthodox stance with respect to these but it is probably an orthodox stance with respect to recent complex systems philosophy and systems science.

    It’s not transcendent faith that drives me to these lengths, it’s existential despair. Believe me, if I was a happy, contented sort of person I wouldn’t be driven to this to level of ratiocination or rationalisation (pick a word).

  37. GrueBleen
    August 28th, 2016 at 10:44 | #37

    @Ikonoclast
    Your #36

    I know what you think you’re doing, Ikono, but i would commend to you the idea that most human thought is either woefully inadequate or just plain wrong.

    I would also comment to you the game Nomic (of which I vaguely remember there being a computer game version).

    Lastly, look carefully at that large heap of mammoth dung: that is where your next crop of pumpkins and maybe squashes or suchlike will come. And when they come, be sure to leave a just and equitable share for the mammoths, or they won’t be able to produce a pregnant heap next year. And don’t spread the dung too evenly and thinly, because then the cucurbita seeds won’t be able to successfully root and germinate.

    🙂

  38. Jordan from Croatia
    August 28th, 2016 at 21:27 | #38

    @GrueBleen
    at #33

    Nice rationalization on giving up on changing the system for the better. Or, letting it getting worse and worse.

    I live in a country that went through such experiment, Croatia as it was part of Yugoslavia a communist country of some crucial difference from Soviet style system. So much dfferent that it was under the economic embargo from Stallin for not being the part of Warshaw pact nor NATO. Yugoslavia was initiator of Independent Block of countries.

    We had prety equal distribution for over 44 years and very low corruption. It was one of the safest countries to live in. For 44 years. Only chronic alcoholics were poor, nobody else.
    Inequality was comming only from inheritance, not from wages. That was the system. And also hgher inflation took care of any large savings (they had to be spent), only safe saving was into land and housing.

    Inequality is systemic probem, not the natural thing as you believe and rationalize so not to resist it. It depends on the system that is set up.

    It was so untill the war `91-`95. During the war it started a transition to cpitalism. The president himself described the vision he was seting up Croatia to transition into; There wil be 200 rich families that will compete against international corporations for the benefit of Croatians. That was the idealised story; the reality was that they did not care for Croatians but for themselves only and always demanded less rights for rest of the population so that they would be “able” to compete.
    They made them rich by giving them companies that used to be in workers ownership. they were paying for companies with credits that were put on company ledgers (basicaly they gave no money of their own since nobody had large savings)
    Another way was giving them Yugoslavian dinar that was pull out of circulation after separation. They took worthles (for Croatia) money and transported it in lorries into Bosnia and Serbia where it was exchanged for foreign currencies and ended up in private pockets.
    Onyl that way they could start the seed of extreme inequality now present in Croatia, it would not be natural procivity of a system to legaly grow inequality in short time, only by design.

  39. J-D
    August 28th, 2016 at 22:38 | #39

    ‘Keeping it short, if a tad belated, on the natter of “concentration”, my father used to say to me – back more than half a century ago – if we collected up our total wealth and then divided it equally amongst everybody, that within 6 months the rich would be rich again and the poor would be poor again. I still think he was probably right.’

    ‘Sergeant Colon had had a broad education. He’d been to the School of My Dad Always Said, the College of It Stands to Reason, and was now a post-graduate student at the University of What Some Bloke In the Pub Told Me.’

  40. GrueBleen
    August 29th, 2016 at 02:07 | #40

    @J-D
    Your #39

    That’s really very good, J-D, where did you get that from ?

    And should we nominate you as the leading exemplar of Sergeant Colon Syndrome ?

  41. GrueBleen
    August 29th, 2016 at 02:23 | #41

    @Jordan from Croatia
    Your #38

    Well I’m just fascinated, Jordan, by your infallible capacity to misinterpret and/or misunderstand me. You are nearly as good at it as Ikonoclast.

    But thank you for your exposition of the near paradise that was Yugoslavia under Tito, and your description of how rapidly it disintegrated afterwards when none of its prior beneficiaries could be bothered defending it against the grifters and grafters, conmen and thieves, murderers and violators who took over.

    Much like in the once American near-paradise nobody can now be found to defend it against grifters and grafters etc etc.

    Not to mention how the once acknowledged “workers’ paradise” of Australia (once the land of the court mandated 8-8-8 and fair living wage) has fallen into the hands of the grifters and grafters etc etc.

    I think I’m beginning to see a pattern here – what do you think ?

  42. Jordan from Croatia
    August 30th, 2016 at 03:01 | #42

    @GrueBleen
    Wooow, how many straw man did you pull out for this avoidance of the topic you pulled first: “It is the nature that man will have extreme inequality no matter what else.”

    1) near paradise
    2) nobody wanted to protect succh near paradise
    3) Those are drifters and drafters, conmen and thieves… not really the wealthy i am thinking of
    4) America was like Yugoslavia
    5)Australia was paradise
    6) Australia is controlled by grifters and grafters

    How about staying on topic that you started? Or you have no arguments for it, just beliefs?

  43. Jordan from Croatia
    August 30th, 2016 at 03:04 | #43

    @Jordan from Croatia
    Any new talking topics you have plan to escape to instead of what we discussed and which you started?

  44. GrueBleen
    August 30th, 2016 at 17:56 | #44

    @Jordan from Croatia
    Your #42 of 30 August.

    Ha ha, Jordan, you are a very funny man – damn near as funny as J-D, but at least he can quote Terry Pratchett.

    When you learn to try to understand what you read instead of inventing your own ‘story’ to fool yourself with, then perhaps you will be able to join the human race in intelligent discussion. It will be a long, hard struggle, Jordan, but maybe you can last the course.

    Good luck !

  45. Jordan from Croatia
    August 30th, 2016 at 22:34 | #45

    @GrueBleen
    Is that a new straw man or you just lost all your marbles and resorted to pure insults just as every ignorant person after loosing all arguments and out of sheer desperation think that insults will make you a winner?? more like !!!!! instead ?

  46. Jordan from Croatia
    August 30th, 2016 at 22:36 | #46

    @GrueBleen
    You are not able to even invent your stories but instead you are hiding behind your papa

  47. GrueBleen
    August 31st, 2016 at 02:25 | #47

    @Jordan from Croatia
    Your #45 and #46

    You see what I mean, Jordan ? No, I guess you don’t because you’re still making up little bedtime stories to beguile yourself with.

    Insults, Jordan ? No, the truth is never an insult, you’ll have to understand that as you grow out of childhood.

    But keep it up, don’t give up, you never know when your breakthrough will come and you’ll begin to apprehend reality. And you might eventually learn to be able to combine a couple of sentences into a single reply. Or did you just get so excited that you couldn’t contain yourself even for a moment ?

  48. Greg McKenzie
    August 31st, 2016 at 07:57 | #48
  49. September 2nd, 2016 at 21:44 | #49

    I agree that inflation targeting could be improved upon, but I don’t think nominal GDP targeting is the way to do it, for reasons I explain here). I think price-level targeting would be a better alternative.

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