Matt Yglesias has a new post that explains his views on monetary policy. Overall, Yglesias’s views are to the left of mine. For instance, he favors the aggressive use of fiscal policy, whereas I am skeptical. But on monetary policy our views align in quite a few areas. Readers of my two blogs are familiar with arguments similar to the following:
1. No “wait and see”:
Now there are lags here, but they are lags in the sense that financial investments (the price of copper going up) happen faster than physical investments (because copper is more expensive now, the copper mines increase production). But the proximate mechanism is essentially instantaneous. If your goal in an inflationary environment is to reduce expectations of future nominal growth, then you can tell more or less immediately whether or not that happened by looking at financial markets. And critically, while doing things can and does influence expectations, so does talking about doing things.
2. Beyond hawks and doves:
Another implication of my view is that when you have clearly overshot, it’s time to pivot hard. This is why after over a decade of being one of the most dovish figures in the macroeconomic debate, I’m now very much on the hawkish side. Economy-wide nominal spending and nominal income have fully recovered to their pre-pandemic trends. Whatever economic problems we have today are not problems of inadequate demand
3. Do “whatever it takes”:
What we need is for Powell and company to say clearly, and repeatedly, that they are proud and excited that nominal income has fully recovered but that since it has fully recovered, they want it to grow more slowly in the future than it did this year. . . . What will they do to accomplish that? Well, they will accelerate tapering. They will do an interest rate hike or two. If necessary, they will do three or however many are needed to hit their target. They could do 17! They won’t, of course, but they could. And the point is that if people believe they will do whatever it takes, then it won’t actually take much doing — the markets do it themselves.
I strongly encourage people to read Yglesias’s entire substack post.
PS. Of course expectations must be about something. Keynesians would argue that they are about the future path of short-term interest rates (relative to the time-varying natural interest rate if you are a sophisticated Keynesian.) I say they are about future expected changes in the supply and demand for base money.
READER COMMENTS
rsm
Dec 11 2021 at 2:29pm
《Whatever economic problems we have today are not problems of inadequate demand》
Is capitalism failing to allocate vast surplus efficiently? Is there plenty of supply out there on ships, rotting in silos, etc.?
《they want it to grow more slowly in the future than it did this year》
Based on history, do they really want a recession, but won’t admit it because it reveals the contradictions in their economic models?
Scott Sumner
Dec 11 2021 at 4:50pm
“Based on history, do they really want a recession, but won’t admit it because it reveals the contradictions in their economic models?”
No.
Arqiduka
Dec 11 2021 at 7:39pm
There may be less of a gap there than generally assumed.
Todd Kreider
Dec 12 2021 at 3:08am
This is weird.
Scott is an economist who is for some reason blogging about a guy who has never had an economics course. Just out of curiosity, why? Is Matt that insightful about monetary policy that we should care?
Scott Sumner
Dec 12 2021 at 12:26pm
Yglesias is one of the world’s most important pundits. Unlike me, he has great influence.
Mark Brady
Dec 12 2021 at 6:31pm
“Yglesias is one of the world’s most important pundits. Unlike me, he has great influence.”
More accurately, Yglesias is arguably one of the better-known pundits in the United States.
Lizard Man
Dec 12 2021 at 7:23am
I disagree that nominal gdp growth is too high. People, including politicians and business leaders, are simply out of practice at having an economy where ngdp grows at a good clip. If the Fed lowers ngdp growth, politicians will stop caring about productivity growth, bottlenecks, efficiency, and the impact their decisions have on those things.
As for business leaders, facing an inflationary environment reveals who is good and who isn’t much faster, which is quite valuable. Those who cannot produce more value from fewer inputs won’t make it, whereas if you have lower ngdp growth, zombie leaders and zombie companies can keep going for far too long just because they already exist and new business formation and investment are too depressed to drive the the dinosaurs to extinction.
Michael
Dec 12 2021 at 7:43am
As far as I can tell, neither Matt nor Scott is calling for lower NGDP growth. They are both calling for NGDP growth at a stable rate, rather than ever faster NGDP growth at an increasing rate.
Thomas Lee Hutcheson
Dec 14 2021 at 12:01am
My comment on his Substack was that his views were seminar to yours and he should reference you either as unacknowledged inspiration or intellectual support.
I also commented that while I agreed in practice with his view that recessions call for higher fiscal deficits, the reason is not the “need” to stimulate the economy. It is a result of executing the larger number of activities that have positive NPV’s when borrowing rates decline and some project inputs are available at marginal costs below market prices.
Michael Rulle
Dec 15 2021 at 3:08pm
It seems like a “whatever it takes” move today. More than I expected and seemingly committed too. Fascinating. I do not think this was predicted even a month ago by many at all—if anyone.
Michael Rulle
Dec 15 2021 at 3:33pm
PS.
It is also comforting the markets seem to be giving a salute sign. As I have said—even as my career literally started within a month of Volcker—-(and he obviously was successful in outcomes—perhaps the single best result from a Fed Policy move)—–during the last 20 years —-climaxing in ’08—-I associated tightening with bad choices and outcomes—having barely been aware in real-time what Volcker accomplished.
Combine that with Powell’s success until a few months ago—it is still hard for me to think “tighten and good economy” in the same thought—although Scott began saying that at least a few weeks ago—-which seems like a mini lifetime ago–given the last 2 inflation numbers.
When I saw 6.8 CPI—I kind of thought I had been wrong—but 9.6PPI?—for sure I was wrong.
Although, Powell’s first instinct was Covid recovery created “transitory”. That has not fully played out—–but on his risk-reward scale it has played out enough. Again, fascinating to watch.
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