NGDP, Economic Actors and the Transmission Mechanism

From my earliest days of reading The Money Illusion, I identified with Scott Sumner's excitement about nominal targeting and the ways it could potentially affect the entire economic spectrum. Of course when a seemingly simple idea meets a complex world, confusion ensues. Plus, while the implications of nominal targeting go well beyond macroeconomic concerns, NGDP level targeting is not yet a reality and so the primary discussion remains in macroeconomic terms. The fact that psychological and social factors also underlie monetary policy concerns is not always easy to acknowledge. Perhaps for that reason, comment threads on monetary and macroeconomics blogs occasionally seem to run in circles.

While all market monetarists agree on the core concepts of measurement (whether by central banks or free banking), interpretations vary for any potential growth trajectory. Economists in particular may be quite specific as to their preferred target, depending on whether they believe an economy can continue to grow. More importantly, one's belief system regarding the role of human skill in wealth creation could make a tremendous difference. That last point is especially important, given that the proposed anchor basically revolves around existing income and consumption patterns.

When discussions about the transmission mechanism do arise, one hears the technicalities of course, but below the surface lie individual conceptions as to what roles governments and citizens should play. Most importantly, the core concept of NGDP is "radical" in a way that hasn't quite been explored, and Scott Sumner has only alluded to from time to time. How so? The fact that people are even talking about moving the prime notion of wealth away from precious metals and other important resources to actual economic actors is a BIG DEAL. What's more, some are not so convinced about human potential right now, especially given that skills investments have suffered such blows in recent years.

Gold and other metallic standards of our monetary past were not quite so simple as they may seem. By putting the locus of wealth outside an actual population, notions of wealth could be more easily controlled by prevailing outside interests of the moment, which often represented the current "supreme" commodity. Today, interest rate targeting fulfills a similar function by focusing on the ability of banks to lend as the primary source of wealth. So thoughts of wealth as residing in consumer potential (all talk of consumer economies aside) can be a bit unsettling, especially when monetary equivalence is not viewed in terms of human skill. To be sure, money is connected with skill potential, but the correlation is not strong enough to convince many that this is in fact a suitable anchor.

While some individuals in developed economies have a sizable degree of monetary equivalence, that nonetheless does not seem relevant enough to apply to entire populations.  One senses this uncertainty not only in discussions about zero marginal productivity and sticky wages, but in what people interpret as appropriate growth targets. Those who place more emphasis on aggregate skills wealth tend towards higher targets, while others who question the ability of skills to translate into actual wealth may prefer lower growth targets or even no expansion at all.

In all fairness I admit there are reasonable grounds for such uncertainty. Were we to remain in the status quo of the present with no structural change, real long term growth would be hard to come by. With little consensus as to a way forward, the transmission mechanism of the Federal Reserve starts to seem like a stripped gear, by which Keynesians galore pray the car can get down the mountain and keep coasting until the long term when everyone is already dead...I have as little use for long term dead logic as for Armageddon dialogue, and would rather see the vehicle get a new transmission so as to continue right up to the next mountain and beyond.

But what exactly does fixing a broken transmission entail? To be sure, it depends on the model of the car (or nation and central bank) but it also depends on whether people are willing to determine how skills in general can become a valid component of monetary equivalence. The first step is to acknowledge that people need the service economies that are threatened, and debate how they can be transformed into more sustainable forms. None of this is to suggest that NGDP could not be realistically targeted in the here and now; only that it needs to be accompanied by real growth, for people to see nominal targeting as the solution it actually represents.  As Ben Bernanke has stressed, monetary policy cannot do the job all alone. Citizens also need to believe in growth and their own potential, so that they can create a better future with the help of their own printing press.