I recently read an interesting book about octopus consciousness, written by Peter Godfrey-Smith. This caught my eye:
Some philosophers have always disliked this obsession with sensory input, with receptivity, seen in theories of the mind. . . . In everyday experience there are two causal arcs. There is a sensory-motor arc, linking our senses to our actions, and a motor-to-sensory arc as well. Why turn the page? Because doing so will influence what you see next. . . .Philosophers often use the metaphor of a stream of experience. Experience, they say, is something like a river in which we are immersed. This image is quite misleading, though, as the flow in a river is almost entirely outside our control.
Exactly! And this is my problem with mainstream macro.
The standard view is that the Fed observes the nominal economy, and then reacts to “fix” problems that develop on occasion. Economists ask themselves, “What can the Fed do to end a demand-side recession?” Or how can it stop an inflationary spiral? I see the Fed as causing changes in the nominal economy, and ask myself, “What can it do to stop causing demand-side recessions?” What can it do to stop causing inflation?
The mainstream view is that a “shock” hit the US in late 2007, tipping the economy into recession. In my view, the Fed’s tight money policy pushed us into recession. Then the Fed eased aggressively in January 2008, and the economy expanded in the second quarter of 2008. But the Fed began to worry about inflation in the spring and summer of 2008, and sharply tightened policy again in the second half of the year.
Godfrey-Smith suggests that philosophers focus too much on how we see the environment, as if we are passive observers, and not enough on how our actions shape the environment that we perceive. In my view, the Fed is too quick to discount the possibility that the “shocks” it perceives are actually the effects of its previous actions, or inaction. (A distinction that is essentially meaningless. What does it mean to not do monetary policy? Barter?)
Godfrey-Smith points out that the (relatively intelligent) octopus has its brain distributed throughout its body, and that each arm can make its own decisions:
The octopus’s loss of almost all hard parts compounded both the challenge and the opportunities. A vast range of movements became possible, but they had to be organized, had to be made coherent. Octopuses have not dealt with this challenge by imposing centralized government on the body; rather, they have fashioned a mixture of local and central control. One might say the octopus has turned each arm into an intermediate-scale actor, But it also imposes order, top-down, on the huge and complex system that is the octopus body.
The Fed should control the price of NGDP futures contracts, while allowing the banking system to determine the money supply and the bond market to determine interest rates.
PS. Of course I’m not the first to compare the Fed to an octopus:
READER COMMENTS
Andrew_FL
May 3 2021 at 2:25pm
The Fed is always “causing” the path of the Effective Money Stream as long as it exists-correct.
Curious asymmetry in this framework, for some reason you attribute only either “recessions” or “high inflation” to this control over the Effective Money Stream. Or in other words money is only ever too tight, never too loose, only politically unacceptable rates of price increases.
Scott Sumner
May 3 2021 at 3:34pm
Of course money can be too loose.
Andrew_FL
May 4 2021 at 10:21am
What is the loose money equivalent of a “demand side recession”? If there is no business cycle, only “plucks” of output below, never above, trend, then there is no equivalent, and money is only *ever* too tight.
Scott Sumner
May 5 2021 at 12:07am
If trend NGDP growth is 4%, then greater than 4% NGDP growth is too loose.
David Seltzer
May 3 2021 at 9:12pm
It seems the Fed is driving a bumper car.
MarkLouis
May 4 2021 at 9:03am
I keep seeing the Fed single out certain parts of the labor pool to suggest that the economy is still weaker than it would like.
Under what theory of monetary policy can the Fed’s tools predictably impact a certain cohort of the labor market? Seems to me that “running hot” is just as likely to decrease total real wages as it is to help any given cohort.
Also, wouldn’t theory suggest that the Fed needs to consider the level and availability of unemployment benefits when it looks at things like unemployment?
Scott Sumner
May 5 2021 at 12:08am
Your skepticism is well justified—there is no plausible theory that would justify the Fed targeting one segment of the labor market.
Cove77
May 4 2021 at 3:58pm
The level and availability of Unemployment benefits isn’t a secret to the Fed or the bond mkt.
Thomas Lee Hutcheson
May 5 2021 at 6:29am
Go back to the ship being steered toward a destination. There ARE effects on the ship trajectory in addition to the rudder position. “Steering” means adjusting the rudder to offset these exogenous shocks.
In the absence of a robust NGDP futures market, what’s the alternative?
Scott Sumner
May 5 2021 at 11:23am
You asked:
“In the absence of a robust NGDP futures market, what’s the alternative?”
The Fed should create such a market.
Second best would be to look at other markets, and try to infer an NGDP prediction.
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