A Nominal Targeting Rule Provides a Starting Line

...that is, for a more positive take as to what economies are still capable of. Regular readers know that I back the use of a nominal level targeting rule by central banks, for optimal monetary stability. For all practical purposes, this is where a lot of monetary discussion should be taking place. Even so, it's not quite clear, whether market monetarists are getting closer to this goal. In a recent Econlog post titled "What We Are Up Against", Scott Sumner noted that political realities led to a lot more "if only" comments through the course of the Great Recession, than to actual constructive changes.

As a result, sometimes the need for a clear starting line, remains far from obvious. Just the same, maintaining economic activity to a reasonable constant in nominal terms, continues to be one of the most important activities that any central bank can provide for the public. This would be the case even if only for the most obvious reason: i.e. the majority of economic damage occurs when policy makers decide to veer away from the general level of aggregate spending. That in turn affects both contractual obligations and overall patterns of resource use, which both rely on consistency over time.

But there is considerable rationale for the nominal target besides what is immediately obvious, and further rationale suggests places to apply more strategic perspectives. No one can forget that expectations represent public confidence, or that the public needs to take active part in the growth that is possible. This is why expectations for long term growth potential have a strong exterior, or exogenous component. Thus, expectations for the future also exist beyond the money that central bankers manage at any given moment. As David Beckworth suggested in a recent post, the endogenous activities of the central bank represent a present and ongoing fulfillment, of a broader set of societal expectation.

In the meantime, central banks could be reluctant to count the aggregate time potential of nominal income as central, because financial interests do not see it that way. One of the odd aspects of credit is that as a concept it seems to say to the borrower in aggregate: "I don't trust you. Yes, you may have something inherent in your makeup that says you are good for a loan now but that could change at any time." Hmm. If credit were a central component of the economy, this would be like the fruit tree saying to the (would be) harvester, "Die, fool, because tomorrow you will not have the strength to reach my branches."  If we can't trust human potential...what exactly can we trust?? Do robots need loans? Unfortunately, the fact that few agree on who the "race" even belongs to right now, makes it difficult to commit to the best starting line.

And yet, stray too far one way or the other from a level target of economic growth, and public perceptions regarding future possibilities are readily affected. Just as extended deflation over time impacts how individuals respond to time commitments and resource use, too much inflation over time can create a disconnect between price levels and the level of commitment which participants actually need for their investments and life strategies.

For instance, the inflation of the seventies allowed more individuals to fully participate in the economy in a certain sense, but it did so in ways which put the "practical frugality" lessons of the Great Depression, too much in the rear view mirror. More specifically, I was fortunate enough to learn frugality from one parent who experienced the Great Depression directly - indeed I even refused to borrow money for college education. However, I "forgot" my lessons for a couple of years in the seventies. A combination of steady work "certainty", easy money and easy credit provided plenty of consumer temptation. Even though I utilized credit again for a while afterward, it was with a different perspective.

Since then I have learned to think of credit availability as a fickle temptress (I'm not kidding, at all) which does not deserve a central role in anyone's life - let alone a central role for nations in prosperity based terms. Credit and anything finance based in general are especially to be avoided if possible, for anyone who relies on a small income. This is part of why I appreciate the practical nudge aspect of nominal targeting for the consumer, and also why I constantly promote specific means of incremental ownership creation.

The pragmatic thought process behind nominal targeting serves as a reminder that one's life is best built upon incrementally, gradually and carefully - not just in big jumps forward (and backward) as changing credit availability would define us. Credit use forces us to make bets with our lives which many cannot always remain certain about - especially as we get older. Even as people are admonished not to use credit extensively for everyday purchases, too much about primary life investments has become defined on credit based terms. How to be rational in the one respect, if it's impossible to remain rational in the other? The worst part about the present day finance realm, is that it sees all wealth and human potential through it's own crooked and myopic lens. The recent increased focus of inflation targeting is little more than a hangover, of the idea that the best is already behind us as a society.

Even positive outlooks can be tinged with unnecessary negatives in this regard. For instance, Brad Delong in a recent NYT article looked at the possibilities for five areas of work in the near future, and I want to expound a bit further on his "positive" take:

The optimistic view is that our collective ingenuity will create so many things for people to do that are so attractive to the rich, that they will pay through the nose for them and so recreate a middle class society. 

Think about this for a moment. When we had the kind of middle class which typically comes to mind for boomers, that earlier middle class was spread out across the better part of the U.S. In other words, for a long time it was not vitally important to live close to primary economic centers. And yet it is life near those primary centers, where middle class life continues to migrate towards a newly defined upper middle class existence. It is the lack of the previous middle ground, which many municipalities now need to be planning for. They are the ones asked to get more out of less with taxation, as desirable and needed services still seek migration to places more amply able to reward them.

Herein lies the problem, in expecting the future to consist of serving up tempting entrees for the rich. The rich are not always in the communities where people are actually able to live! Even as many areas would like to rely on the partnerships between government and finance for their futures, it is not as easy to do so, as before. In my next post, I will look at some possible ways that local economies might be able to break free of the government and finance dependent cycles. Those dependency cycles benefit neither the citizens or the governments, which expect those still engaged to run ever faster, just to stay in place.

For one thing, vital services and knowledge based aspects of work life, do not have to be compromised to the degree Brad Delong implied in the above linked article. To be sure, some will continue to provide services for the rich on exclusive terms that suggest "the high life". However, others could seek out a more rational context, where lower income levels become capable of providing services for one another. Doing so is not as impossible as it may seem. Reciprocity need not be strictly about paper shuffling, and innovation need not be strictly about fun gadgets for all. There are ways to return to these positive attributes - once again - more effectively and meaningfully.