How much are our incomes actually affected by the ways governments define our economic lives? Turns out, quite a lot, for how else in an era of incredible productivity and technological gains, would we have ended up with a hollowed out middle class? This set of circumstances is something which - in terms of true productivity and freedom of knowledge use - never should have happened. The fact that it happened just the same, also means a lot more needs to be reassessed for monetary policy than is currently happening in Washington. What might be different, if the Fed targeted not the terms and dictates of bankers (for the mutual gain of government and finance), but rather the actual terms and capacity of our own economic participation?
While nominal targeting would not be able to account for supply side issues on its own (strictly speaking), it still has the capacity to affect and highlight many elements of aggregate spending which otherwise would not be noticed in the same context at all. That unique focus - in turn - makes it possible for a nominal targeting rule to hone in on some problems which are otherwise not as obvious for potential supply side reforms. For one thing, people are not used to thinking about monetary matters in terms of their own consumption or production capacity.
Thus, many have been lulled by the reassurances of too many policy makers who have indicated (each in their own way) that the public shouldn't have to "worry their little heads" about such things anyway. That is going to change - hopefully sooner rather than later. Governments don't have adequate incentive to be reasonable about monetary matters, until the public starts to understand how bureaucrats and special interests benefit from cloudy interpretations of monetary policy in the first place.
Even though nominal targeting would be less expansionary than other anchors in the event of "animal spirits", the incremental nature of a level target means greater economic stability, for lending and credit use have less of a chance to get out of control. The actual spending capacity of individual actors has a greater chance to be taken into account - both in terms of consumption potential and the degree of discretionary income that actually exists. Importantly, governments have usurped (through tight definitions of environment and knowledge use) far too much of the discretionary portion of income in recent decades.
However that appropriation isn't easy to directly associate with the struggles of the middle class, because it is so pervasive and hidden in private business formations which do not represent free markets at all. Indeed, the fact that government supported healthcare caved in to special interests of all kinds - when it was once mostly beholden to the interests of physicians - is a major part of why today's definition of healthcare no longer works.
What of the discretionary aspect of income that has been lost to building and construction interests? Even though Fannie and Freddie may become a part of the past, and rightly so, they were nonetheless a temporary bit player in the recent housing boom. The fact remains that numerous governments continue to benefit from restricted definitions of building environments for their tax base, as builders, local realtors and associated financiers continue to diminish other forms of economic activity.
While higher real estate valuations (than some homeowners or businesses would choose were efficient structures available) bring in more money for municipal governments, such a strategy is destabilizing over time because higher housing costs mean larger incomes and pensions are also necessary for city employees, and so the cycle continues. Businesses with their higher overhead and construction costs, cannot pay enough in turn to their employees to compensate housing costs for them. Cycles such as this which become more noticeable in recessionary times, also make it difficult for temporary measures in monetary policy (QE) to have the desired effect.
As Scott Sumner has often indicated, temporary expansions in the monetary base don't do anything in the sense of overall equilibrium, whereas permanent expansions have the capacity to do so (also the difference between QE and a level target). Every new or added on cost for the operations of local economies, means more money has to be printed just to keep a relative equilibrium. What's more, those costs become part of even more non discretionary spending. Which in turn means less discretionary spending than before on anyone's part, and discretionary spending is unfortunately the primary income which actually promotes the positive aspects of free markets.
Thus while a temporary expansion of the monetary base for of QE might not go far to begin with, it becomes even more constrained, given the circumstance of pre-existing requirements and definitions of spending that governments impose on their citizens. Every time another fee or tax is factored in, it needs to also be accounted for in the form of what should be a permanent addition to the monetary base, in order to not take away from other discretionary spending. But when that doesn't happen, more jobs are lost and more businesses closed.
Unfortunately this is not the way the public receives information as to what money the Fed actually needs to print. As a result, if NGDPLT is not adequately considered, more economic exclusion results as it becomes necessary to allocate monetary printing primarily for pre existing government created economic circumstance. Every additional government expense can further distort the equilibrium overall, if in fact these effects are not considered in their relation to the monetary base.