Three Basic Ingredients for Economic Stability

While there are many ways to envision what contributes to economic stability, the current pandemic suggests a closer look at basic ingredients. Should it prove difficult to maintain current wealth levels, a focus on the essentials could also lead to sturdier safety net options. I find it useful to think about three elements in particular: First, the importance of stabilizing what is nominal. Then, building a simpler framing for physical and non physical aspects of the real economy which the nominal represents.

As a market monetarist, I also believe it is vital to maintain a level nominal target, so that general equilibrium will (hopefully) remain stabilized. And even though level NGDP targeting is not the stated approach of the Fed, central bankers have more closely adhered to nominal stability since the mistakes of the Great Recession. The greater danger now, however, is that monetary stabilization could be threatened by extensive supply side disruptions. Adjusting for optimal aggregate demand will be quite the challenge, since present supply side uncertainties - unlike many previous shocks to the real economy - are due to factors too numerous to understand.

Consequently, despite what it can accomplish in the near future, monetary policy still needs to adjust to lost general equilibrium capacity, at some point. In other words, accurate nominal representation also depends on what the real economy is able to accomplish. Clearly, there is a great deal of interdependence between the nominal realm, the physical realm, and human oriented aspects of our economic lives.

Again, consider what present uncertainty consists of, insofar as many chains of financial obligation are being disrupted. How will society respond? Understandably, fiscal policy also seeks to stabilize general equilibrium conditions. Nevertheless, doing so is only feasible up to a point. All the more so, when fiscal stabilization attempts to include many activities that are not essential to getting things done.

In all of this, many small businesses won't survive, and some Main Streets could end up even less dynamic than before. For instance, one third of Americans missed their rent payments in April. This means problems for renters and landlords alike. Stephen Cecchetti and Kermit Schoenholtz explain what financial institutions also face:

Banks will not be able to dodge the financial fallout. Many borrowers are likely to suspend repayment soon, presaging widespread default. We will not know the extent of the damage or who will ultimately bear the costs, for some time.

Yet this time really is different, as they further note:

Rather than the financial system undermining the real economy, it is very much the other way around. With few exceptions (like Sweden), advanced economies have entered a form of suspended animation. As a result, households and business are losing income that they can never replace. The hope is that the COVID-19 crisis does not trigger a full-fledged financial crisis, exacerbating what is already destined to be the most severe global downturn since the 1930s. 

Many households and businesses are going to need financial options in the foreseeable future, which rely on lower monthly expense levels. Hence when considering basic ingredients for economic stability, simplification of everyday living circumstance is key to making this possible. By way of example, in my most recent post , I suggested flexible building and infrastructure options as a way to address structural physical aspects of the real economy.

Likewise, broader options for economic participation and use of human capital, are needed for non physical aspects of our environments. We need locally applied time arbitrage, to rescue what are increasingly endangered knowledge chains. Two recent articles offer unsettling examples. From NPR:

According to a report released this month by the Chartis Center for Rural Health, nearly half of rural hospitals were already operating in the red before the COVID-19 crisis.

Further, Dylan Scott writes for Vox that hospitals are cutting staff "just when America needs them most". Even though the initial healthcare losses took place largely outside of hospitals, staff cuts are beginning to spread inside of these institutions. Only recall that much of this problem stems from the fact today's healthcare is heavily dependent on existing wealth - much of which is in jeopardy at least in the short term.

Let's create simpler procedures and settings for ownership and economic participation, so that individuals and businesses aren't jeopardized every time a month's revenues fall short. Ultimately, we could end up struggling to maintain general equilibrium in its present configuration. But even if existing wealth is somehow diminished, imagine what could still be done, to strengthen and preserve its core.

Why not make our physical and non physical environments easier to access for all concerned. If we can shake loose structural rigidities how productive activities are "supposed" to occur, oppressive financial burdens could be lightened as well. A direct structural approach today, would be better than the indirect response of a debt jubilee later on. Perhaps debt jubilees of the past also reflected the unwillingness of societies to relax their own expectations for working and living requirements. Debt jubilees may have been no real panacea, if they left in place the same rigid requirements that negated the economic participation of millions - even in good times. Let's work on reducing unnecessary barriers to ownership and economic participation, so that a better new normal might eventually emerge.

Medicare Cutbacks? No Rationale for Monetary Tightening

Clearly, there's problems with organizational patterns for healthcare, when losses in government support lead policy makers to assume the marketplace as a whole will be somewhat diminished as a result. Especially given basic structural reasoning, that private industry remains responsible for the dimensions of the real economy.

How many elites are giving up on economic dynamism, hence urging the Fed to adjust monetary representation downward, accordingly? In "What's Down With Inflation?", Tim Mahedy and Adam Shapiro argue that (expected) slow growth in healthcare prices is likely to remain a drag on inflation, and write:

We show that the key driver holding down acyclical inflation, and hence core PCE inflation over the past few years has been persistent changes to the health-care sector that began after the end of the recession. Specifically cuts to Medicare payment growth rates - which can affect prices throughout the health-care sector - have restrained health-care services inflation...Because health-care makes up a large share of PCE, price changes within this sector can have sizable effects on overall PCE inflation. We estimate that low inflation from this sector is currently subtracting about 0.3 percentage point from core PCE inflation, that is the measure that excludes food and energy prices. While health-care services inflation is expected to pick up in the coming years, it appears unlikely to return to its pre-recession level, which could restrain core PCE inflation for the foreseeable future.

Note first that "slow growth in healthcare prices" refers to expectations for aggregate or overall levels. However, my primary concern for this post, is with how the Fed is responding to cutbacks in fiscal support for healthcare. Given this rationale, the Fed is effectively allowing political curtailments for specific aspects of knowledge use, to be a drag for the monetary support of all economic activity. Why should political considerations for healthcare provision, be treated by the Fed as a negative supply side shock - particularly a fiscal adjustment that could prove relatively permanent? Where is the standard monetary offset to such a circumstance?

As Jeffrey Rogers Hummel indicated in a recent interview with Dave Beckworth (episode #83), "Inflation targeting doesn't do well with supply side shocks." Consider why this matters. If a nominal level target were in place, the loss in government spending for healthcare would be offset by monetary spending in other parts of the economy. As things stand, reactions to political healthcare constraints as negative supply side shocks, could make monetary policy directly responsible for the arbitrary reduction of long term growth potential.

Alas, this policy response, which does not take aggregate spending capacity into account, is an unwarranted judgement call about "necessarily" reduced output in general equilibrium. Nevertheless: When central bankers react by reducing monetary representation due to specific sectors, other areas of aggregate spending are affected.

Indeed, this central banker response could be likened to a form of unnecessary or artificial austerity, via the assumption that private interests can't maintain economic dynamism, when Washington is reluctant to maintain fiscal spending in any capacity. Are our private sectors prepared for the political fallout, should taxpayers become convinced this is the case? Already, the problems of healthcare organizational capacity, have contributed to further attacks on capitalism, in general.

P.S. Again: It's important to emphasize overall market reductions as responsible for "lower" (?) inflation in this instance. Consider the illusion of "lost" inflation in an insured family context. From JAMA, "Challenges in Measuring the Affordability of US Health Care":

The average employer plan had a premium equal to 9.2% of the median income in 1999 and increased to 18.4% in 2014.

Lane Kenworthy also recently noted marketplace limits in healthcare, when he stressed that "The share of wages going to benefits has been flat since the seventies (even though healthcare costs more), since - in aggregate - fewer employees receive healthcare benefits."

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.

Communications, Expectations and Equilibrium Dynamics

Are expectations important for monetary policy? Arnold Kling appears "frustrated" with modern macro, and not surprisingly, some of Scott Sumner's market expectations discussion in particular. Kling writes:

In modern macro, we have everybody working in the GDP factory. And we have everybody forming expectations about the price of the output from this GDP factory, or about the total nominal value of that output. And booms and recessions are caused by changes in their expectations...

I know that almost nobody who reads Specialization and Trade buys into my view that movements in aggregate price indices mostly reflect habits and inertia, rather than central bank operations. But when you see the contortions that monetary theorists have gone through over the years, I think I have a fair case.

Granted, for Kling and others who are all too used to the inertia of our nation's capital, ingrained habits can seem as though key economic drivers. Even so, tradable sector activity doesn't have the luxury of "standing still" for societal inertia, no matter how entrenched. Tradable sectors are going to reflect whether consumers and policy makers expect a dynamic economy to continue, even if all concerned are like rusted lug nuts when it comes to non tradable sector preferences. And - with today's digital communications - societal expectations continue to shift in real time.

Why should expectations matter? Why can't Kling's "GDP factory" exist as a mostly objective, "real economy" phenomenon? Tradable sector activity - in spite of it's primary position for wealth creation - is always affected by the subjective dynamics of non tradable sector activity. For instance: While time based services are often uninterrupted as they "wait" for budget reconciliation during economic downturns, tradable sectors lack that option. Other equilibrium dynamics for tradable/non tradable sector activity affect nominal income as well; and consequently, the marketplace structure which is maintained in any given time period.

Indeed, this is hardly the first era, that expectations proved important for economic activity and its associated monetary representation. When communications time between nations was shortened by the first transatlantic telegraph cable, marketplace expectations doubtless became more prominent, in the first globalization which lasted from approximately 1870 to 1914.

Prior to modern communications, it was a simpler matter to anchor tradable sector activity via a gold standard, especially since non tradable sector activity mostly consisted of informal norms which didn't make extensive claims on equilibrium territory. However, once non tradable sector activity grew in complexity and formality, it began to impose both time and political constraints on other sectors, which affected overall output and wealth formation. Even though today's non tradable service structure is still dependent on tradable sector revenue and redistribution, the fact the latter remains the starting point of wealth creation, is hidden by the general equilibrium effects of non tradable sector activity.

Services have always generated important macroeconomic effects, even though they aren't sufficiently emphasized in the literature. For instance, Carlo M. Cipolla noted that economists don't always give services their due. In the quote below: What I describe as primary market activity, Carlo M. Cipolla identifies as primary and secondary market activity. Likewise, he describes as tertiary activity, some of the activities which are included among my secondary market designations, in "Before the Industrial Revolution":

The primary sector normally includes agricultural activities and forestry. Sometimes fishing and mining are also included. The secondary sector consists of manufacturing. The tertiary sector includes the "remainder". Like all residual categories, this one is a source of ambiguity and confusion. In industrialized societies, the tertiary sector is mainly represented by the production of services such as transport, banking, insurance, the liberal professions, advertising and the like. Some years ago, an Australian economist, Colin Clark, put forward the theory of a highly positive correlation between the general level of development of an economy and the relative size of the tertiary sector. But other economists with firsthand knowledge of certain primitive societies have shown that in a preindustrial society, the tertiary, or "residual" group, is also fairly large, with the difference that, instead of including bankers and insurance agents, it includes a picturesque variety of people with trades ranging from dealers in stolen goods to gatherers of used items.

What has changed since the Industrial Revolution? Again, much of what once took place on informal terms (particularly service coordination and home building), was increasingly formalized. Also, as bankers and insurance came to dominate, they did so in ways which lent further confusion, given the interdependence of primary and secondary marketplace activity which defines fiat monetary policy.

The expectations of non tradable sector equilibrium circumstance, often weigh heavily on tradable sector formation. Yet in the 20th century, fiat money made it possible to expand the use of knowledge, beyond what might otherwise have occurred in a tradable sector dominant economy. The challenge now, is to make service formation and knowledge use less equilibrium dependent, so that state and national budgets can be reduced without extensive deflation. These misplaced fiscal policy expectations, will also need nominal stabilizers in the meantime. As Ben Bernanke noted in a recent speech:

Since 1977, real output in the United States has expanded by a cumulative 80 percent, and yet during that time, median weekly earnings of full-time workers have grown by only about 7 percent in real terms.

Marketplace expectations will only become increasingly important in the years ahead. Even though some degree of fiscal policy "bailout" might become necessary, it is vitally important to maintain nominal stability. Short term, such bailouts would place further strains on national budgets. The sooner that time based services can contribute to equilibrium dynamics via less equilibrium dependence, the better.

Capping Inflation Means Never Having to Say You're Sorry

Never admitting one's faults, also means not having to make amends for one's past mistakes. In particular, without a level target rule, central bankers don't need to explain to anyone why they may choose (via discretion) to withdraw aggregate spending capacity for any reason. Yet due to the way the Fed frames its communications processes, the public hardly understands what is at stake in their deliberations - nor is it easy to decipher what has actually been lost, since the Great Recession. On Milton Friedman's 90th birthday, Ben Bernanke made a surprising admission:

Regarding the Great Depression, you're right, we did it. We're very sorry. But thanks to you, we won't do it again.

Scott Sumner must have remembered this astonishing moment of honesty on Bernanke's part, in a recent monetary conference, when he mused: why, if apologies were in order for that earlier calamity, is admitting fault for the Great Recession still off the table? Granted, Bernanke and company did what they believed was necessary to rescue the financial system, and even congratulated themselves in the process. Ah well, when it comes to expecting inflation targeting to guide monetary policy, perhaps an arbitrary cap is simply Fed "toughlove" which means never having to say you're sorry.

Or perhaps the moral hazards of inflation targeting have yet to be publicly emphasized, because so much of economic debate remains "above the fray" in this regard. Yet without this perspective, it can be a bit of a struggle to explain the importance of a level nominal target to others, so as to reinforce one's points at an emotional level. Greg Ip's incisive questions for the last panel (well after an extended lunch!) at the "Monetary Rules for a Post-Crisis World" conference, was a case in point. Hence I agree with Bonnie Carr, that emphasizing the moral hazards of inflation targeting, may be a good tactic, especially now. In a recent post, she asks:

Why is it imperative, above all else to keep inflation low and stable rather than being allowed to reasonably drift with supply side conditions?...If headline inflation is nearly always a supply side phenomenon, what effect does it have to effectively cap pricing pressures as a matter of policy?...Don't those pressures have to go somewhere?

Indeed they do. Given that services (of non tradable sectors) are a larger component of developed economies than tradable sectors, inflation targeting has reached a point where it could be distorting the production potential of marketplace structure.

After all, remember what resides below a hard inflation cap. The relative inflation of non tradable sectors leaves less room for tradable sector formation. Think of this as expensive necessities versus "cheap" everything else. Yet the consequent lack of growth in tradable sectors, means less redistributed revenue remains available for service sector formation. As secondary markets, service sectors must rely on the very tradable sector wealth which their relative inflation continues to suppress. This state of affairs likely contributes to what has now become the slowest services growth in six years.

David Beckworth also pointed out in the above mentioned Mercatus conference that with a level target rule, the Fed would be formally committed to take care of past mistakes. Even though the Fed has become fairly consistent in representing aggregate spending capacity since the Great Recession, no one can really discern how those earlier monetary and production losses impacted output and growth potential. And because of inflation targeting framing, many still do not recognize how or why, so many of these losses took place.

According to Scott Sumner:

It is NGDP growth shocks that destabilize labor markets and financial markets, not inflation shocks...

He also responded to a recent claim from Michael Hatcher, that NGDP targeting is "confusing":

The public would actually find it much easier to understand NGDP targeting whereas the public is completely mystified by inflation targeting...When the public thinks about "inflation" they tend to implicitly hold their nominal income constant. Thus they wrongly think that inflation lowers their living standard...But of course the Fed has no impact on supply side inflation, it can only influence demand-side inflation.

What I find especially significant about Scott's remarks, is what the public mistakenly believes as to income already being held constant. Without the appropriate framing of nominal income or aggregate spending capacity for this discussion, it is only more difficult to deal with the fact that policy makers remain uncertain as to human contribution to economic activity in the near future. Because of the language of inflation targeting, people have few means by which to engage in the most important economic debate of our time: keeping citizens front and center, in both monetary representation and economic reality.

Public or Private: Who Can Make the First Step?

How to respond, to recent assertions that monetarism is dead? Granted, monetarism as a discipline is changing. Where it was once approached from a somewhat quantitative stance, this viewpoint has shifted towards a supply and demand approach in terms of aggregate spending capacity. Both economic time and resource capacity are represented by money, and their relation to one another is constantly changing. Indeed, market monetarism opens up additional ways of conceptualizing money in terms of economic freedom, which have yet to be explored.

For purposes of this post, imagine the output of aggregate supply as a "race for growth potential" between public and private interests. How to think about these efforts, in real economy terms? Many assume that government is now capable of growth capacity to a greater extent than private interests. While this is viewpoint is understandable, given government involvement across the economy - alongside a growing private sector reticence - few realize what's at stake for growth and economic stability. This issue is all the more confusing for the public, when discussions between opposing economists mostly involve technical complexities or political oversimplification.

Much of it really boils down to this. In a temporarily stalled economic environment, which "side" is best equipped to address a lack of economic dynamism: fiscal policy or monetary policy, and why? That is, who is prepared to make the first meaningful step forward? After the Great Depression in the twentieth century, some government "first steps" for renewed growth had measurable impact, even though monetary assistance was quite uneven. What had become new infrastructure patterns in those decades, also meant a broader economic framework in several respects. Even the expansion of square footage for housing played a role, in that it provided "storage" for the additional supply side capacity of mass manufacture.

However in the present, it is no longer possible for government funded infrastructure - or related strategies - to have the same dramatic effect. Neither Washington - or Main Street for that matter - had sufficient response to the fact the 21st century would not/could not be a redo of the 20th. Today, the digital realm means far less physical space is needed for living and working, even though non tradable sectors have yet to adjust. And while millions of individuals desire to produce and partake of experiential product, again, organizational patterns still need to take this important shift into account.

Today, fiscal revenue for physical infrastructure - while it is needed for maintenance - is a vastly different component, than the multiplier effect of infrastructure which previously contributed to supply side dynamics across the spectrum. And while new forms of infrastructure are needed to generate more closely spaced living/working patterns, national infrastructure dialogue is mostly that of increased competition with already existing infrastructure patterns of general equilibrium - many of which are far from being fully utilized to begin with.

So called government multipliers lose their effectiveness, as government debt comes to include more economic roles that include high levels of ongoing obligation. Today, government debt includes continuous budget responsibilities which make it all but impossible, for policy makers to respond to changing economic circumstance. Again, think about the "race for growth" in which governments have to take two half steps (debt funded activity) to account for each single monetary step on the part of private industry. Until the Great Recession, government was able to access sufficient revenue that it could take enough half steps to stay ahead in the race, if need be.

Private industry has long since lost confidence in government, as capable of providing meaningful assistance for economic prosperity. But by the same token, private interests are also not inclined to make the first move, or - if they are - remain blocked by other players. Just the same, it's Main Street's turn to make the first step in a race towards stronger growth. Even though some will insist they can't, or possibly even insist it's not their responsibility to do so.

In an important sense, the Great Recession was a "contained" depression - a fact which underlies the paradox of those "return to normal" scenarios the Fed continues to speak of, only years later. Perhaps "normalization" reflected the fact that government was no longer well positioned to contribute to a broader growth pattern. There was just one problem. Too many private interests had become content with a protected and limited marketplace which left too little room for economic access.

Fortunately, there are still ways to move forward which do not require the "half step" matched revenue of fiscal policy. Matched time value can renew non tradable sector activity, through coordinated settings which combine public/private efforts into a single monetary framework. Matched time value would represent wealth which requires no debt, public or private. With enough "whole" steps, output would finally return to a level capable of accommodating all who wish to take part.

Tyler Cowen's Challenge: Get "Real"

How so? The way I read it, "real" in the sense of market monetarist persuasion, which could go even further than the rationale presented by market monetarists thus far. For instance, what real economy conditions have contributed to slower growth and tighter monetary conditions? How has monetary policy contributed to problems for the real economy? There are ways to bring more elements into the discussion, without using structural considerations as diversionary tactics - as has often been the case.

Yesterday, Tyler Cowen explained why he didn't feel that present market monetarist arguments were (quite) adequate. He also questioned recent posts from Lars Christensen re tight Fed monetary policy, which makes me wonder if Cowen has thought through the ramifications of a rising dollar on the global economy. For instance, in a recent post from David Beckworth re China, one commenter noted that tight money in both the U.S. and China has prevented the drop in oil prices from having the effects of a positive shock. Beckworth wondered whether these negative global wealth effects on oil, are currently being researched. One can only hope so, because this information is sorely needed right now.

The reason I find Cowen's challenge useful, is while I've been sold on market monetarist arguments for quite some time, I'm not sure they are enough to convince a public which appears to be in greater need of explanatory stories. Whether or not central bankers are following aggregate spending capacity (in different time frames), has real economy effects which I believe the average person could understand - given the chance. In the meantime, those "simpler" - but devastatingly inaccurate financial stories - are still "winnning the day" for both voters and policy makers.

Unfortunately, without pressure from the public (i.e. not just economists), central bankers may not be willing to adopt the logic of NGDPLT. A regime change for monetary policy becomes a greater likelihood, when economists and citizens seek to make it happen. Here are some of the responses to Cowen's arguments, from Nick Rowe, Marcus Nunes and Scott Sumner. And, from Cowen's post:

I would encourage market monetarists to define - now - how tight or loose monetary policy really is. Then stick with that assessment, based on whatever variables you consulted. 

If only it were possible to pin down a given set of variables and specific indications of lost output once and for all, to gauge a seemingly appropriate Fed response! There's a problem with this particular request, which also explains the rationale for following a level target rule. Economic conditions and circumstance are always changing. A level target would not leave real economic conditions in a "static" mode, but rather see to it that Fed responses (to changing conditions) are not a series of overreaction to supply shocks.

What would change with NGDPLT, is the present day lack of support for aggregate spending capacity. What has been missed by too many policy makers, is that a somewhat smaller level of damage has been ongoing, since the initial level of high destruction at the onset of the Great Recession. Meanwhile, marketplace capacity is still being lost in ways which aren't readily apparent in the employment statistics.

The need for full inclusion on economic terms is also a fairly recent historical development. This need for full labor force participation instead of redistribution, could explain why some remain unconvinced that faithful representation of nominal income really matters. However, there is an odd wrinkle in the efforts of banks to protect their own interests. When income representation is insufficient, this lack of marketplace support eventually boomerangs back to the banks, even though central bankers are bending over backwards to protect asset formation.

By far the most pressing issue regarding tight monetary policy, are the global effects which are being set into motion. Had policy makers been willing to encourage innovation (i.e. a broader marketplace) in non tradable sectors, tradable sectors would not be paying the price now, in terms of lost growth. The challenge for everyone concerned - not just market monetarists - is making certain that tight monetary conditions do not devalue worldwide wealth anymore than has already occurred. The nominal income of many a nation, depends on monetary stabilization at the international level.

Notes on Human Capital and Monetary Equivalence

While I've not often referred to the phrase "monetary equivalence" since beginning this blog, the concept of equivalence for time aggregates remains central to what I believe is necessary for monetary representation. Not in the sense of specific valuations for given skills (as is presently the case for asymmetric compensation), but making certain that individuals eventually have a choice to contribute economic value through symmetric means, for the course of their lifetime. People need the option of time based wealth which need not make demands on other existing resource capacity. Such organization could also arise without distorting the functioning capacity that is general equilibrium conditions.

Presently, monetary representation for nominal income is not only missing, but a growing lack of this central marketplace factor has yet to be openly acknowledged. Fortunately monetary authorities have often provided sufficient representation for economic activity in the past, even when they weren't necessarily straightforward about doing so. However - during the Great Depression - and once again since the onset of the Great Recession - lack of sufficient monetary representation is starting to take its toll on the populations of multiple nations.

Some have responded with suggestions to remove the independence of central bankers, in the U.S. However, I'm not convinced that governments would automatically provide better monetary representation on behalf of their citizens, as things currently stand. Even as central bankers have skewered the rationale of monetary policy towards banking interests, governments harbor their own built in obscurities, often in the form of knowledge use shortcuts as substitutes for accurate recording of time based product.

The result of these knowledge product shortcuts, are government imposed limits on knowledge use, where "well being" measures supposedly make actual time aggregates unimportant. Not only is this a dramatic restraint on freedom of choice in services provision, it is a restraint on growth potential and a slap in the face to the sacrifice of personal time investment. As a result - until time value is once again closely associated with services product and monetary representation - Washington might not choose to provide the broad monetary representation which the public needs, should they gain the power to do so.

It was not always so difficult, to hold in one's mind the idea of human capital in aggregate as a direct contributor to wealth creation. For centuries, even as knowledge contributed to wealth gains in advanced sectors, more mundane forms of human capital still contributed to the economic activity which provided the consumer base so necessary for these gains. In all of this, aggregate time value existed as a direct component of supply chains, even when time value was not reflected in the statistics.

As governments have taken on larger roles in today's economic systems, they've also grown more reluctant to fully share monetary equivalence with the public. Much of the discussion which revolves around GDP as a "lost cause", reflects this reality - given that GDP (including its nominal component) is the measure of all economic commitments which are held on the part of populations.

In yet another recent discussion about the supposed lack of merit for the GDP measure, one commenter noted (at Askblog), "I get suspicious now that people are suggesting we reduce our interest in GDP now that GDP is going to stagnate." Mark Thoma's article in particular, mentioned the lack of association of GDP with well being, as reasoning for a GDP downgrade. However, the idea that government can be responsible for overall public well being - even as it benefits from the wealth capture of today's knowledge use limitations - is sadly an illusion.

Discussions about the lack of value in terms of GDP are dangerous, because they further remove the possibility of economic vitality away from all of us. It is dangerous in particular to point to (supposedly) less need of money because of technology gains, when said digital gains have not been allowed to evolve, so as to decrease the costs of services product which money is needed to represent. This broader debate around a supposed lack of GDP value, is a larger philosophical concern regarding market monetarist views, than I suspect is widely realized.

Contrary to Thoma's assertions re government responsibility, well being results when societies provide ample room for individuals to fully interact with resource potential in their own environments. When people are given room to measure (for GDP) and monetarily compensate their own personal contributions, citizens finally become free to fully participate in their lives. And in today's world, knowledge use lies at the heart of our economic realities.

Money needs to become more closely associated with the ability of individuals and groups, to create closely woven nets of social stability and wealth creation. Today's far flung nets - valuable though they have been and continue to be - largely originated through the wealth creation of tradable goods structures. In spite of the strength these nets still represent, the "holes" in the nets are - crucially - too widely spaced. Consequently, even as society has progressed in recent centuries, too many individuals are underrepresented, even though they experience some degree of participation.

Among the examples of "holes" in the net, is an over reliance on broadcast means as a stand in for the now burdensome (asymmetrically compensated) time value in today's budgets. By putting broadcast information to better use in personal settings, societies would gain the ability to reconstruct nets with a tighter "weave" than is presently the case.

This would also restore the possibility of longevity to all income levels, not just those who are able to access asymmetrically provided services product. Symmetric time value would also give individuals a chance to connect with others on levels that go well beyond the expectations of today's services product. In the process, the value of time aggregates would be restored in ways which asymmetric compensation simply cannot be expected to provide.

Services product on asymmetric terms will continue to face limitations, as traditional forms of production are expected to pull back in a time of reduced growth. But this doesn't mean human capital can't come to the fore, to gradually make up the difference and restore growth potential. The possibilities have scarcely been tapped, for human capital to become a direct component of wealth creation and by extension, provide hope for the future. But in order to do so, human capital needs to return to the beginning of the wealth creation chain, instead of the end of the employment line where much of it has been squandered in a race for highly exclusive skills preferences.

Human capital has to become more directly associated with money, if freedom is to remain a reality in our lives. Fortunately, there are ways to set this process into motion, and individuals will eventually realize how important money is in the quest for personal freedom and ability to become fully human. Not in the sense of being "rich", but in the sense of gaining the means to use one's time availability in a more meaningful capacity. Not in the sense of "removing" competition through value in exchange battles, but by making room for more competition in a broader, value in use economic arena.

There are vested interests which would understandably hesitate, at the prospect of average individuals discovering how important the time/money connection really is. But think about what happens otherwise, when people either reject money or else find themselves rejected by current economic conditions. Think how we take for granted getting things done in life through gainful employment, only to lose what we build and all that is associated with employment as well. As someone who has struggled to maintain personal freedom and identity the last 60 plus years, I sincerely hope that these vital connections between money and personal ability are not lost. Our future potential as fully functioning human beings, completely and utterly depends on our personal ability, to secure accurate and vital monetary representation for the bulk of what we seek to accomplish in our lifetimes.

Hopefully this post provides readers with a better understanding, how I think about monetary equivalence. I was asked earlier this month to provide a glossary of some of the terms I use, and this phrase is one which began the course of the blog, by serving as its identification online. My health has left a lot to be desired all month long but if I can just get my bearings, I will try to continue the process of adding my own personal interpretation to other phrases I have used in recent years. Eventually I hope to provide a glossary page for the sidebar, and whenever I do a blog post which touches on these concepts, will provide links to the relevant posts in the glossary page.

Government Intentions and the Zero Bound

Market monetarism is beginning to make gains, as Scott Sumner has noted in some recent Econlog posts. On one front, there is progress regarding consideration of negative interest on reserves. Even more important, is a growing realization that instead of being accommodative, monetary policy has been exactly the opposite relative to demand.

However I have to concur with Bonnie Carr's response to the referenced paper from Vasco Curdia of the San Francisco Fed. Even though the Fed paper is good news, as a CNBC report suggests, this is true insofar as the Fed may begin to provide more honest communication. According  to Bonnie Carr:

And there really isn't anything dovish here. It's basic macro and simply to the point of showing that the ZLB is the new normal...

For instance, an acknowledgement of the need to go to negative interest rates to stimulate monetary policy, is not the same dynamic as the supply side reforms which could have the potential to broaden marketplace possibilities. In the latter, greater capacity in aggregate supply would cause the natural Wicksellian rate to gradually rise. Consequently, negative interest rates on IOR would not be needed for any long period because real gains toward closing the output gap would have been realized, instead. However - that said - a negative interest rate is nonetheless expansionary, as Scott Sumner explains in this helpful and clarifying post.

The remaining problem (beyond not yet having gained a nominal target rule, of course)  is that zero bound territory extends into the future as far as the eye can see. This is also an issue of government intentions, for more than a passive response towards long term growth expectations is involved. Since potential supply side solutions are difficult to contemplate - given today's norms and status quo - policy makers have resorted to telling the public that this is as good as it gets.

Thinking about this, I was reminded of discussions at Scott Sumner's blog about four years earlier re the zero bound. Basically, he explained that the zero bound was not just an anomaly, it was a most unnecessary construct. In 2011, I don't think many of us realized that too many policy makers would abandon attempts to improve long term growth prospects. Who could have imagined then, that the zero bound would come to appear as "real" as it does now. As a result - even as market monetarism gains more advocates - the real economy will continue to generate problems for economic stability.

How might one think about present day government limits to growth in a broad framework? Government activity represents a substantial part of the marketplace, through redistribution and the financial gains of asset formation. Even so, assets result from income aggregates, which affects the wealth potential of assets relative to traditional production. Presently, knowledge based services, which could also be organized as direct wealth (hence marketplace growth), are still secondary in the sense of compensation from traditional manufacture and asset formation.

Even though developed nations were able to build services economies through increased consumption (more income parked in housing), consumers need access to production roles just the same. Too little attention has been paid to the production potential of aggregate supply, which in turn encouraged policy makers to short aggregate demand.

So long as government and special interests maintain control over services formation (in the U.S.) there are additional burdens on income aggregates. Given the fact too much services income is meritocracy based, income aggregates have become somewhat limited by default. Housing assets in particular are a reflection of this reality, as individuals are faced with limited choices for living and working environments. Where one observes tight monetary circumstance for housing aggregates, there is an insufficient marketplace for time value (as opposed to skills value) as well.

It is not necessary for governments to limit long term growth, even if they give the impression there is no other choice. Likewise, austerity is not necessary, but policy makers also need to be more upfront as to what they think austerity even represents. How do austerity concerns square with the misplaced notion that the world has seen "enough growth", for instance? Strange as this juxtaposition may seem, one often hears both arguments from the same vantage point. Perhaps the zero bound is little more than zero incentive to cooperative with anyone else, to get anything done. If so, those incentives need to be changed. The prosperity of future generations depends upon doing so.

Why Does Monetary Representation Seem "Unimportant"?

While this subject continues to get short shrift in public dialogue, monetary representation has also been overshadowed by non-monetary concerns where it matters most: monetary policy. Somehow, I get the feeling it wasn't always this way. Only consider dialogue from U.S. historical accounts, before governments became so heavily involved in the economy. Even though many individuals only partially understood what was at stake, presidents, policy makers and citizens alike appeared more concerned with monetary representation, than policy makers or citizens of the present

Whereas today, monetary representation takes a back seat to practically everything else imaginable. This makes it too easy for the Fed to obscure from the public, that they are gradually pulling away the monetary foundation of aggregate spending capacity - albeit in slow motion. Even now, too few realize what is happening to the long term growth trajectory, or how tight monetary conditions could generate further political instability.

Given the abundance of present day statistics and measuring capacity, why is it difficult to recognize where monetary representation exists? Even though there was less measuring capacity during the Great Depression, many forms of product still existed in simpler terms. Traditional manufacture played a much larger role, and the measurement uncertainty of services product was far less of a concern. As a result, aggregate wages and income were easier to correlate with overall product formation. So long as this was obvious to the average citizen, monetary representation for the average individual was doubtless more important in the public's mind.

Even though the challenges to GDP as "appropriate" measure must seem odd to market participants, the lack of correlation of GDP with understandable product formation is not lost on the public. Plus, much of GDP represents intangible wealth such as housing - also difficult to recognize as the primary capital formation now held in common. Just the same, calls to find something more "meaningful" than GDP do not take into account its central necessity for monetary representation. In other words, were it not for the ongoing capacity of GDP measure, monetary stability would be even more difficult to achieve, than has been the case already, particularly with a Fed which appears to have lost its monetary bearings.

Complexities regarding taxation, could also play into the seeming lack of concern regarding monetary representation. Even for students of economics, the quantity theory of money may not necessarily square with what is perceived to be government's role in the economy. Add in the difficulty of visualizing what gets spent on real product, and one does not even know how subjective values can be considered in context. When product formation becomes unrecognizable in economic activity, monetary representation cannot be far behind.

Another area of confusion regarding monetary policy, is that aggregate numbers are beginning to overwhelm the average individual. How does one think of monetary representation in personal terms, when the amounts are in the trillions? Indeed, this may be part of a growing rationale, to throw up one's hands and rely on "infinite money" (no backing) to tend to the enormous responsibility of financial matters. Even though trillions still make sense for the aggregate resource capacity of the world, it is difficult to understand where or how to match this capacity to the finite and limited capacity of time aggregates. One internet joke put it thusly, "CNN just said the world is 40 trillion dollars in debt. Who the *#&% does the world owe...Jupiter?"

Some of this might explain why central banks insist their current monetary policy has been "expansionary" when it most definitely has not, and have gotten away with this declaration for so long. For the average layperson, it has been easier to take the opinion of pundits at face value, than to dig deeper to discover what is actually occurring. Plus, the task of digging deeper - while rewarding in the sense of discovering the truth - is not going to make anyone popular at dinner parties!

Of course a lot more is at stake than popularity contests, and this is particularly true for the Fed. As David Beckworth recently indicated, it is time for the Fed to end their guessing game, and get back to a rule based framework which once again places monetary representation front and center. Granted, there are other important considerations for economic stability in the months and years ahead. Just the same, the Fed needs to get real with the public, as to what its most important job actually consists of.

Market Monetarists and the Great Divide

In a recent post, Scott Sumner reflects on the market monetarist effort to make headway in public dialogue, after Noah Smith highlights a "powerful" Neo-Fisherian argument, so to speak.

Unfortunately, market monetarism is still a fringe movement, even less popular than other heterodox theories like ABCT.

Neo-Fisherian thought provides a too convenient rationale, that "normalization" can occur by means of the interest rate peg. Steve Williamson and John Cochrane in particular, have found an audience that is willing to see whether economic logic can be turned inside out. Scott Sumner was clearly frustrated in the above linked post. How could an economist from the University of Chicago, so easily dismiss the veracity of QE at the zero bound?

Like many, Cochrane is focused on an increasingly limited equilibrium which is credit driven, instead of the broader equilibrium which markets seek to maintain. In recent decades, some have become convinced that monetary policy is just another name for credit policy. Apparently, central bankers at the Fed feel the same way - given the fact one hardly finds mentions of monetary factors in FOMC minutes. Instead, there are constant mentions of the interest rate.

Indeed the idea of credit as primary for wealth origination is important for Austrians in terms of private industry, just as Keynesians consider credit integral for government's role in the economy. Further, the average citizen is exposed on a regular basis to watered down versions of these opposing poles of economic thought. Since central bankers have proven to be more concerned about credit circumstance than monetary circumstance, Neo-Fisherism appears as though a "useful" concept whose time has come.

There has been insufficient time for market monetarism to influence public opinion to any real extent, at least in the U.S. Some years earlier, it didn't appear that a broader public understanding would be necessary. But who could have known, the degree to which public opinion would also contribute to an ongoing path of monetary tightening? With a little luck, market monetarism could influence monetary policy in the next presidential election. But in this one, as Bonnie Carr recently noted, only Marco Rubio has a market monetarist adviser on his team.

Market monetarist thought has yet to benefit, from the kinds of personal associations that populations hold in regard to Keynesian and Austrian thought - even if those associations are a crude reflection of the theoretical realities. For instance it is far too easy to align internet Austrians with anti-government rhetoric, much as crude versions of Keynesian thought are associated with government interests - especially those of major cities and U.S. coastal areas. Neither of these represents a cohesive interpretation, for the vast panorama that is today's economic activity.

Perhaps market monetarism needs an identification with something tangible, i.e. a concrete image or symbol in the public's mind. At the very least, balance could play a role. Thus far, without some degree of public support and understanding regarding monetary policy, it is not clear that central bankers will be willing to act in the public's best interests, any time soon.

Even though I believe market monetarism could help bridge the divide between pro and anti government factions, plenty of obstacles remain in the way. How to find identity in the middle of opposing forces, which seek to gain strength through opposition and divisiveness? Everyone needs to take part in healing the rift between pro and anti government forces. Perhaps the next political election will have more market monetarist representation, than the coming election holds thus far.

Musings on The Growth That Matters

It's been quite a rough week for the stock market. Even so, despite the recent mistakes of the Great Recession and a still evident output gap, central bankers will probably not respond to the realities on the ground. James Alexander outlines the unfolding scenario, in Taper Tantrum 2.

What we are seeing now is the very long and slow recovery from the Great Recession being threatened...What Market Monetarists and markets cannot grasp is why this should lead to active monetary tightening. All monetary theory says that you should tighten when nominal growth is too rapid, too far above trend. There is no conceivable data in the US or UK to show that we are above trend growth. Yet the very same central banks who messed up in 2007-08 are on the verge of doing it again. Markets can see this and are reacting badly, correctly.

One reason the Fed could be so anxious to "normalize" - misguided though the term truly has become: hardly anyone in a position of power can imagine economic growth, beyond the boundaries of what the elite expect to continue. Think NIMBYism, only at a grand scale. As a result the Fed is also willing to short rational expectations, which includes contractual agreements already in progress. Indeed, the growth which is needed most - for those with insufficient economic access - isn't even on the radar of the Fed right now. Today, Scott Sumner titled a post "Fed Policy is Bankrupt". The resignation of that title surprised me, especially given the years he has had such patience with Fed actions.

Many who remain on the sidelines in the U.S., do not necessarily have the (earlier) consumption capacity one normally associates with these groups. How many without work, no longer drive - for instance? With little provision for infrastructural considerations, output potential becomes somewhat of a moving target. Thus far, commodity producers are attempting to maintain their own output levels, even as monetary stability remains uncertain. From The Economist:

The real curse for producers is over-supply in almost all raw materials, yet they continue to act as if they are blithely unaware of it. Capital is still pouring into holes in the ground, creating a hangover that may last at least a decade. Jeff Currie of Goldman Sachs...says past cycles suggest it can take up to 15 years to work through the over-investment. "The world has just flip-flopped", he says.

And those demographic explanations re older individuals, which supposedly contribute to reduced labor force participation? Josh Zumbrun reminds us in this WSJ article:

Employment rates among those 55 and over actually are rising. As recently as the mid 1990s, less than 30% in this age group worked. That's since risen to 40%.

Another source of confusion regarding growth potential, is political. Even though Keynesian thought has seen better days in the political arena, many ascendant Republicans - and the internet Austrians they tend to espouse - have not adequately considered the importance of services formation in the marketplace. Populations may indeed suspect this, given extreme reactions in the media, to immigrants and other "unworthies" who "steal" needed services. Not until services formation is generated through broader and more direct means, will these kinds of reactions finally get a chance to calm down.

Even though privatization of many government functions is needed, today's version of services formation would cut back growth capacity even further than what has already occurred. The privatization which is needed is that which can grow economies, instead of holding them back. For market monetarists such as myself, the fact that much of the country scarcely notices monetarist contributions to the political debate, is also worrisome.

Services are an important component, of the kinds of potential growth which matter most. Further, the recording of services activity should provide means to recognize knowledge dispersal, as noted by Dietz Vollrath in a recent post. Much service formation is hidden within organizational structures which don't measure time based product in recognizable ways. Part of the problem of course is that many services are an undefined contributor to product formation, as Arnold Kling discussed in a series of posts in June. I wrote two posts on time based defined product, in part as a response to Kling's posts, here and here.

Local corporations could help solve recording problems for services functions in a number of ways. Any time based product which occurs between two individuals could have specific recorded designations. For one, there is the nature of the activity between participants, but also the larger context (either group or individual goal) in which the services take place. Even though recording in a sense would involve two separate designations, it should not be difficult to combine them for ongoing records.

Fortunately, local corporations would not involve extensive reform challenges on the part of governments, because they would exist in a context which does not change the nature of knowledge use as it is currently practiced in prosperous regions. Making room for the growth of local corporate knowledge use systems is not so much about policy change or reform, but simply a growth safety valve for those who do not have sufficient economic access through normal means.

Safety valves such as this are urgently needed. As citizens fear for their own services access, they become more skeptical of immigration from other countries, because they know that more immigrants means more competition for a still limited services marketplace. With a truly free marketplace for services formation, such fears would no longer be necessary.

AD to AS: Where You Lead, I Will (Ultimately) Follow

The main role of central bankers is aggregate demand, and making certain that it is sufficiently met. Since economists are divided as to whether aggregate demand management "should" be active or passive, what central bankers actually need to do, appears more complex than is necessary. In the short term, monetary policy has a vitally important role for both monetary stability and growth, while the supply side has the larger responsibility for growth in the long term.

During the short run, aggregate demand management "leads", but certainly not in a "central planning" context. Even though monetary policy sets the stage for presently occurring activities, it can do the greatest good by faithfully following ongoing trends, so that productive capacity is fully met. This is also the course of action which a nominal target would seek to provide, as well.

While some think of aggregate demand in terms of a government driven economy, both government activity and private marketplace elements are taken into account, for those who emphasize the importance of a nominal target. Hence in the midst of debates as to which is more "important" - government or private interests, it can be easy to forget that private interests are (still) the point of economic origination. This is also why private interests - i.e. the marketplace - are the ultimate determinant of long term growth. In aggregate, it is simply easier to provide unique - or new growth capacity - through the organizational capacity of a relative few. Sometimes populations agree on big government projects, but generally not for long periods.

What about the belief that governments are now more capable of leading (further) growth to a greater extent than the supply side? While governments are major contributors to economic growth, their current roles in this regard are somewhat murky. And even though aggregate demand plays a major role in the consumption driven economy of the early 21st century, private consumption still relies on the income which only the circumstance of aggregate supply can provide - in spite of government efforts to maximize consumption requirements.

In recent decades, it seemed that government could play a larger role for wealth creation through partnership with supply side interests, so long as populations could fulfill government defined consumption roles. One could say that governments "contribute" to growth by defining the environments for production capacity. Even though this was an equilibrium which proved capable of strong growth for decades, it did not offer alternative forms of growth besides the primary channel which was created. As a result, nominal income growth was able to keep pace with the given equilibrium so long as it continued to mature.

Once access to this defined equilibrium began to peak, neither policy makers or supply side interests were willing to consider growth potential through a revised equilibrium, because of the dislocations this would cause. Due to this reluctance, policy makers stand at the edge of the precipice, peering into the depths and trying to determine if progress can somehow resume on yesterday's terms. It's not easy to follow in a dance, if one's partner has suddenly gotten cold feet. Will the enthusiastic dance of the twentieth century become a memory? Who is the most reluctant partner in this dance - the supply side, the demand side, or both?

Consider the scenario in terms of needed infrastructure. Why can't governments somehow "lead the way" out of stagnation with further government consumption? Besides the fact few agree what infrastructure is important, too many ongoing monetary obligations now exist, even as maintenance for earlier infrastructure "goes begging". Even privately funded infrastructure offerings may not adequately consider shifts in consumer preferences, and some are too willing to place such preferences into political context where they don't belong. As to more immediate concerns, government provisions for needed highway maintenance, would mostly be short term stimulus with no long term effect. Why was there a broader growth aspect to government's prime infrastructural example: the interstate system of the fifties?

Interstate access provided economic access for the economically impoverished. In other words, those who had previously been excluded - particularly when agricultural choices became limited - were able to meaningfully attach to the new trunks and branches of transportation in ways which also meant economic reward. Many a road and highway became the locations of countless new businesses. It was much later, when brick and mortar retail and manufacture consolidated into more prosperous regions, and other retail distribution evolved from independent business people into digital records and delivery trucks.

Another form of infrastructure is ready, and government's contribution is mostly a memory, as it happened decades earlier. The digital highways of the present have the potential to provide main roads and side roads for the resources of the mind. Thus far however, the new infrastructure is mostly passive participation, instead of access. Why the difference? Whereas participation is entertainment and communication, access includes means to make a living. The go ahead for digital access is on hold.

This is one reason why all the supply side boasting about digital wealth, and that it "should" generate good deflation, rings hollow. Today, it is mostly the physical interstates which lead to full scale knowledge use and hold the artificially limited wealth value of the present. All the education in the world is not going to assist the coming generations, if there are no nodes at the end of all these new digital branches to set up business and prosper, once again.

Presently a contained depression is still papered over with excuses and wishful thinking. Few in power are comfortable with how continued growth now needs to take place, and the exclusive growth which special interests prefer has hit a speed bump. Government infrastructure serves little purpose - and even less growth capacity, when and if it is mostly about providing more options for those who already have options aplenty.

"Treading water" with monetary policy is not the only problem. When supply side interests (quietly) work to restrain further economic access, long term output potential is gradually reduced over time. While this represents problems in monetary terms, it also means societal problems. In recent years, market monetarists (including this blogger) have promoted a nominal target in order to promote economic stability and optimal conditions for continued growth. But if supply side representatives do not see continued growth as optimal, even nominal income can only follow where the supply side chooses to lead, in the long run.

An NGDP Target Rule is the Right Commonality

On March 30th, the Cato Institute will host an event to discuss possibilities for a Fed monetary policy rule. Scott Sumner - one of three speakers - will of course be advocating for a level nominal target. From the invitation:

The Federal Reserve Accountability and Transparency (FRAT) Act, introduced in the 113th Congress would have required the Federal Reserve to adopt a monetary policy rule. A new version of that bill will almost certainly be introduced in the 114th Congress. Could an unchanging monetary policy rule actually improve upon discretionary monetary policy? Many economists believe so, and several have proposed specific rules that each claims would foster greater economic stability than the Fed's current procedures.

As readers well know, I have "kept my fingers crossed" for the acceptance of NGDP level targeting. Those who have followed Scott Sumner's arguments, know that a nominal target is certainly not central planning on the part of the Fed. Rather, it is an acknowledgement of the kind of commonality that matters most: what any given society commits to economically and monetarily, at a given moment in time.

Acknowledging those commitments is not the same thing, as discretionary targets which could arbitrarily change marketplace conditions - as sometimes occurs with inflation targeting. Not only is it important to maintain aggregate spending capacity in an immediate sense, maintaining a steady level is also key to the stabilization process.

Part of the problem for any rule adoption, presently, is that central bankers are influenced by uncertainty in Washington as to long term growth potential. Are governments willing to commit to the stabilization of income aggregates, for instance? Or will they remain insistent on parking income in tightly specified asset formations, instead of supporting broader labor force participation?

Too many central bankers are caught at the "knife's edge", exhibiting firefighter responses to what sometimes appears as jobless growth. Inflation targeting was in part a response to the uncertainty of maintaining income aggregates. Even though inflation targeting has proven quite inadequate, it provided temporary cover for a changing set of labor force participation realities which have yet to be addressed. One reason that labor force participation has suffered, has been the imposition of a sticky market equilibrium for all income levels. Unlike the good commonality of a nominal target, the imposition of narrowly defined parameters for all participants is a negative commonality. Imposed by both governments and special interests, sticky markets remain a real threat to long term growth.

All too often, the harsh bust cycles of oversized financial sectors are simply the result of earlier damage, which slowly builds up from harsh consumption and production requirements. Those requirements result in mass failures, which often should not have to be necessary. Why are people willing to knock one another down - time and again - with depressions and harsh recessions, instead of allowing room for true economic diversity? As it is, the requirements of a sticky marketplace scarcely leave any room at all, for the stability of incremental growth.

The danger now is that central bankers will continue to use inflation targeting as a means to slowly "let the air" out of aggregate wealth potential and labor force participation. Don't let them do it! With a little luck, we can convince them not to continue down a desolate road where little hope can be found. Key to all this is restoring faith in the capacity of time value, as the central component of the economy it actually represents.

How, then, to think about potential growth levels? Much depends on what happens in the supply side sector in the years ahead. Will services become defined in more inclusive terms, for instance? Will knowledge use become more widespread? A decade may pass, before definitive answers appear certain for a stronger - possibly upgraded - growth trajectory.

Hence those who advocate for a nominal targeting rule, can hardly be expected to hold similar opinions as to growth levels. Much divergence is opinion as to presently existing market conditions. Plus, as Scott Sumner noted (in comments) recently, decisions re growth rate would be a group consensus. Even though it's good to have a commonality of viewpoints for an appropriate growth target, that commonality would be a benefit, instead of the necessity that aggregate spending capacity might represent for monetary stability.

Not only would the nominal target rule become the shared commonality that matters most, it provides the greatest clarity for how to think about the future of both monetary activity and the economy as a whole. Even though a nominal target is subservient (i.e. responds) to actual economic growth, whether or not it is adopted could still affect the long term growth trajectory. How so? Central bankers would not be able to continue using discretion either way (expansionary or contractionary) in favor of credit based goals.

What are the chances for an NGDP level target to be adopted in the near future? It's hard to say. But one thing is for certain: once this happens, it will be like a breath of fresh air. Everyone will finally be able to concentrate on the kinds of supply side reforms which mean real economic growth, for all concerned. Hey, it doesn't hurt to dream a little. Here's hoping that this week's Cato event goes well.

Finance, Government, Monetarism: Some Assembly Required

...yet how to put it all together, given the fact these "pieces" scarcely coordinate at all in central banking settings? Even though these areas are vastly different, they remain the expected convergence for present day monetary policy. Truth be told, most among the public are more familiar with the ongoing gyrations of finance and government, than what is at stake in the monetary policies which affect their lives. As a result, market monetarism has more of an uphill climb for broad acceptance, than otherwise might be the case.

This issue has been on my mind since Richard Wagner and Vipin Veetil of George Mason University, dismissed NGDP targeting - basically on "general principle" - in a recent paper. In Bill Woolsey's response to their arguments, he noted that Richard Wagner was his finance professor decades earlier, which at least provides perspective for their rationale. Perhaps this also explains why Woolsey - as a "charter market monetarist member" - seemed nonplussed by their objections!

However, Wagner and Veetil's broad based attack on market monetarism, makes it difficult for some of us to counter their critique on specific terms. Indeed, it almost appears that their lack of confidence in market monetarism is due to a lack of confidence in the monetary role of central banking. For one thing: insisting that NGDP stabilization is a centralized dictate which does not consider microeconomic realities, misses the point. Of all the centralized activities a nation could assume, a nominal target is possibly the most benign of all. Unlike many centralized functions, this is one which seeks to represent all economic participants to the best degree possible.

Among other issues I already have with their assessment, recessions and depressions certainly do not cleanse, as Marcus Nunes also notes. Any lack of monetary stabilization only exacerbates already difficult circumstance in these cycles. In particular, monetary tightening which generates deflation is not helpful, as some Austrians assume. "Bad" deflation is not the result of normal price adjustments or productivity gain. Instead, shorting aggregate spending capacity means negative AD shocks which derail prior commitments on the part of numerous participants. The worst part about this situation is that resource potential is needlessly lost, and is not necessarily regained afterward.

In recent decades, financial and governmental interests have become more closely entwined. In the meantime, important monetary lessons from the Great Depression have been forgotten. One odd aspect of the financial perspective, is that it generates a political common ground among some who would otherwise be ideological opposites. Perhaps this alignment has bearing why the primary monetary interests of central banking appear as though lost in the shuffle. Who will tend to real monetary policy, if the Fed won't?

As Benjamin Cole indicated in a recent post, time aggregates also matter:

The unvarnished truth is that Americans are working the same amount of hours now as they did in 2009 - and also as in 1999.

Whereas the labor force since 1999 has grown by 13 percent. However, these facts are being missed as the media portrays a "back to normal" economy. What monetary printing has been possible, was often disparaged - not just by the right, but many on the left who remain disappointed that more hasn't gone to fiscal activity. Is it possible to return to a central bank which is willing to stress to the public, the primacy of the monetary role? In a sense, the only thing a monetary offset even asks for, is that after financial institutions and governments get their representation, the public gains permission for their monetary representation as well.

What's Wrong With a Little (Marketplace) Faith?

For market monetarists, it was encouraging to get a response from Simon Wren-Lewis to Tony Yates, after Yates summarily dismissed NGDP in recent posts. Granted, Wren-Lewis mostly sees NGDP as a useful intermediate aid, which in turn raises its own set of questions.*

Nevertheless, a Wren-Lewis endorsement represents a bit of progress for all concerned. Indeed, particulars for a nominal target depend on both the central bank in question, and the nature of any given economy. How, then, to think about his assertion that "faith based" beliefs need to be replaced with models? Or the further implication that economic heavyweights need to "take it from here"?

While models are important, that's true mostly in the sense of the economists who need them as reference points. Those reference points of course need to be distinguished from events "on the ground". For example, central bankers need to focus on and respond to what is happening in the marketplace in real time.

Under normal circumstance, the input of the layperson might not seem necessary in either instance. But these are not normal circumstance and the present day economy is very much in a state of transition. In the years ahead, there will be times when governments need to "give the floor" to citizens who seek to redefine life in the 21st century.

As a result, economists won't be the only ones debating what represents useful models. Some of those "unnecessary " faith based components, include the marketplace expectations of any given year. When central bankers are willing to be faithful to aggregate spending capacity, people have more confidence that they are able to meet the obligations and contractual arrangements which are already in place.

In recent years, different factions have vied for economic supremacy, often with governments and financial interests at the top of the heap. Just the same, every financial instrument and government program ever devised, can be thought of as a result of wealth created by people in their interactions with the world. When central bankers refuse to follow the nominal intersections of time and resource use, they eventually lose the trust of populations which depend on accurate monetary representation.

Part of the faith based aspect of a nominal target is its simplicity, for it has the potential to make extra targets completely unnecessary. Granted, NGDPLT in and of itself is not what leads to greater growth, and work participation levels need to rise before a more substantial growth level becomes possible. Just the same, too much growth is being lost in the present, as central bankers continue to adhere to a level of inflation targeting which is increasingly asymmetrical.

The expectations associated with any given growth level, need to be matched with supply side and production reform which could lead to increased output. While developed nations made great strides in growth in the 20th century, completely different definitions of growth are needed now. What's more, preexisting commitments make it difficult for governments to assume the active roles they previously held. Still, the marketplace can do this in government's stead, if it is given a chance - particularly for much needed services formation.

For anyone who still harbors doubt, Have a little faith in the marketplace. Allow monetary policy to express that faith, so that long term growth potential will not continue to decline.


*Commenter James in London asks Simon Wren-Lewis how he would address:
1) The "single monetary and fiscal authority question", a key part of the monetary offset critique of fiscal policy.
2) The effectiveness of G question. Put another way, isn't there an upper level of G/GDP that becomes sub-optimal?
3) Do you agree with Market Monetarists that obsessive IT was the prime cause of the Global Financial Crisis?

Midweek Market Monetarist Links and Summaries - 11/19/14

...but will the politics hold? (Lars Christensen) http://marketmonetarist.com/2014/11/15/italys-greater-depression-eerie-memories-of-the-1930s/
Behind each war, an economic cause: http://marketmonetarist.com/2014/11/15/mussolinis-great-monetary-policy-failure/
Depressions all, just a matter of degree: http://marketmonetarist.com/2014/11/16/great-greater-greatest-three-finnish-depressions/

Some monsters under the bed refuse to go away (Britmouse) http://uneconomical.wordpress.com/2014/11/14/whip-inflation-now/

Apparently...Pascal Salin had it coming!
(Scott Sumner) Please respond to our arguments
(Bill Woolsey) Pascal Salin's Confusion: Inflation or Money
(Bonnie Carr) Piling on poor Pascal Salin

And somehow, Neo-Fisherism has become the latest fad:
(David Glasner) This label would not please Fisher: John Cochrane explains Neo-Fisherism
(Nick Rowe) http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/11/reverse-engineering-david-andolfattos-and-stephen-williamsons-neo-fisherian-paper.html
If the sign is wrong, the equilibrium is not robust (Nick Rowe): http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/11/fragility-of-nash-equilibria-and-neo-fisherites.html
(Bill Woolsey)...how monetary policy ought to operate? Neo-Fisherites
(David Beckworth) http://macromarketmusings.blogspot.com/2014/11/another-look-at-neo-fisherism.html

John Cochrane...advocating deflation??
(Scott Sumner) Wrong question, wrong answer
(Marcus Nunes) Deflation Targeting at 2 percent
(Benjamin Cole) http://thefaintofheart.wordpress.com/2014/11/16/john-cochrane-defiantly-takes-on-economic-history/

"Interest rate rises do not stifle investment" (Scott Sumner) Other things equal, lower prices cause consumers to buy less of a good
Even with IOR, quantity of money cannot be ignored: Josh Hendrickson on the problem with "moneyless" NK models
How would fiscal stimulus in one country benefit a currency zone? The real "beggar-thy-neighbor" policy
Business cycles aren't what they used to be, or are some VATs worse than others? Is Japan in recession?
Everything shifts when RGDP growth stalls...The USA doesn't have any debatable recessions. That's about to change.
And, when RDGP is better than recent employment figures: At the other extreme...

Econlog posts from Scott Sumner:
Rather, the guy who insists money has been tight since 2008...I'm not "the NGDP guy"
Of course this rationale hasn't stopped some folk from trying! No, low interest rates do not call for more public investment
When governments respond to (lesser valued) credit on offer...Sticky wages and sticky fed funds rates

Friedman could have enlightened Malkiel (Marcus Nunes) http://thefaintofheart.wordpress.com/2014/11/12/what-if-friedman-were-alive/
And the Kocherlakota 2010 argument led to...http://thefaintofheart.wordpress.com/2014/11/12/the-bipolar-fed/
A job market comparable to 2004. Seriously?! http://thefaintofheart.wordpress.com/2014/11/13/bad-decisions-follow-from-bad-analogies/
Only recently was there real deviation from trend: http://thefaintofheart.wordpress.com/2014/11/13/playing-safe-and-absolving-the-fed/
"What made Temin change his mind?" http://thefaintofheart.wordpress.com/2014/11/14/keynes-returns-in-fact-he-should-be-sanctified/
In charts - NGDP, RGDP and inflation: http://thefaintofheart.wordpress.com/2014/11/18/the-unending-and-frustrated-search-for-inflation/

Musings on Hayek, Mises and surprisingly enough, internet Austrian "Major Freedom" (David Glasner) http://uneasymoney.com/2014/11/16/ludwig-von-mises-explains-and-solves-market-failure/

A vague target has been the primary problem (Bill Woolsey): Selgin on Keynes and Quantitative Easing
Fiscal policy intentions are also behind this dilemma: Monetary Policy and Fiscal Policy

Nick Rowe just needs a little help with the math! http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/11/the-over-investment-and-under-saving-theory-of-the-zlb.html

Inflation targeting serves what purpose exactly?(Bonnie Carr) http://dajeeps.wordpress.com/2014/11/16/summarized-listing-the-perverse-incentives-and-deceptions-of-inflation-targeting/

The study of Buddhism can be a great help, re the concentration required for the skills of the mind (Ravi Varghese) http://insecurityanalyst.blogspot.com/2014/11/serenity-insight-and-investing.html

Will they be successful? (Justin Irving) http://economicsophisms.com/2014/11/18/augur-net-a-prediction-market-startup/

Also of interest:

"The long term unemployed also show much stronger attachment to the labor force than nonparticipants." Measuring Labor Market Slack: Are the Long-Term Unemployed Different?

How might economic aspects of this situation actually play out in the near future? Will government "come to the rescue"? The Problem With Millenials, In One Staggering Statistic