Monetary Policy and the Politically Possible

Would temporary price targeting be an improvement for the Fed? At the very least, it could provide limited means by which central bankers are better able to manage problems at the zero bound. Even though "temporary" seems like so little, especially since prices aren't the most relevant consideration, temporary price targeting might be politically feasible. Hence Scott Sumner was encouraged at a recent conference, by a paper which Ben Bernanke presented (Here's an abbreviated version).

Granted, temporary price targeting is a long way from the level nominal targeting rule that would be preferred by many market monetarists. Nevertheless, this may be a step in the right direction. Of course, it's worth pondering: What is it about a nominal level target - especially one that takes nominal income into consideration - which appears politically unfeasible? Or, why is a broader commitment to the maintenance of total spending capacity, still being rejected?

Perhaps the nature of the dominant services economy is part of the problem. Unlike the readily quantitative output of tradable sector activity, much of what takes place in non tradable sector activity - particularly time based services - tells few stories about output that are recognizable in terms of aggregate resource capacity.

However, there's another aspect of this problem as well, which might help to explain some of the ambivalence central bankers appear to have, regarding the stability of aggregate spending capacity. How much nominal income - in aggregate - actually derives from price taking, as contrast with price making? The reason this question is important, is that price taking is a more reliable means of coordinating resource capacity according to broader resource realities.

Whereas price making in terms of nominal income, derives from personal positioning and power in the marketplace. So long as tradable sector activity was dominant, more nominal income derived from price taking for wages and income. It's far simpler to achieve the price taking mechanisms of broad resource coordination, when commodity use definitions for final product are not tied to specific time and place. But with the increased dominance of non tradable sector activity, more nominal income - particularly that of high skill knowledge use - is presently in a position to require demands on resources which don't necessarily reflect aggregate resource capacity. Indeed, the recent income dominance of high skill time based service providers as price makers, could also be amplified by tax law changes.

Only consider that some of the conversation in FOMC minutes in the lead up to the Great Recession, seemed absolutely outrageous. How could policy makers actually laugh, for instance, over the predicament of healthcare practitioners who, due to monetary tightening, were losing customers for elective procedures that were dependent on disposable income? It's hardly irrational, to question whether nominal income demands on general equilibrium in the form of price making, are part of what make central bankers reluctant to consider nominal income as a reliable component of monetary stability.