A new strain of macroeconomics going by the name of “Market Monetarism” is blooming in the blogosphere. In an earlier post, I sketched out what I saw as the fundamental economic arguments for market monetarism. The central idea is policy-focused: central banks should target the level of nominal GDP (NGDP), rather than other aggregates such as interest rates or inflation.
But policy proposals only get put into practice if they make political sense, and the political obstacles to market monetarism are significant, perhaps insurmountable. Scott Sumner argued last Fall that a high inflation target (say 3-4%) is “not politically viable,” but that NGDP targeting is politically sensible “because it effectively combines both facets of the Fed’s dual mandate, and so should be attractive to those on both the left and the right who argue that the requirement to simultaneous address inflation and unemployment makes it impossible for the Fed to tackle either very well.”
There is a certain logic here—though the idea that the left and the right these days would get together to pursue a radical new approach to, well, anything strikes me as naïve. However, it is the sort of grand bargain that appeals to policy intellectuals but not to politicians. Who is going to be the political leader on this approach? It is hard to see any elected official trying to build a consensus. This isn’t an issue that the public can sink its teeth into easily and, therefore, elected officials would probably be too risk averse to take it on (especially given that the number of elected officials who understand macroeconomic policy debates is a very small group to begin with).
Though it is challenging to sell NGDP targeting to the public (and, hence, to elected officials), it is painfully easy to mischaracterize and malign the policy. Isn’t the policy, after all, really just about easy money and debasing the currency? Taking this stance isn’t a political challenge, especially since the market monetarists use language like “debasing the currency.” NGDP targeting in a crisis, such as the crisis of 2008, involves a massive increase in the monetary base. The Fed aggressively purchases real assets and, as a result, pumps more money into the economy. This is fundamentally different than printing money to pay government debts, since it doesn’t hurt the government’s balance sheet, and the government is buying (and holding) market assets rather than spending on goods and services But the Fed is still creating new money, which is a political hot potato.
It is true that the market monetarists do not have to convince the public; they only have to convince the Fed. Yet the Fed and central banks hardly operate in a political vacuum. The legitimacy of their rule over the economy is actively contested, and they face a difficult task of steering through the political morass full of people who often hate them and usually have no idea of what they are talking about.
The prime example of course is Ron Paul and others who see the Fed as the Great Bogeyman. It doesn’t matter than none of the expansion of the monetary base has led to even the slightest amount of inflation, increases in interest rates or anything else indicative of easy money. Indeed, the market monetarists argue that the Fed’s anemic response to the sharp decline in NGDP in the Summer and Fall of 2008 was the main cause of the Great Recession and point to evidence that monetary policy in this area was actually contractionary, despite the large increase in the monetary base, and that the Fed should have increased the money supply much more than it did. But try to tell that story to fear mongers like Glenn Beck.
Regardless of the wisdom of NGDP targeting, it will be very hard for the Fed to pursue aggressive monetary measures while the economically ignorant voices on the right have so much influence. Ron Paul gets criticized by people on the right for a number of things, but his dangerous rhetoric on the Fed seldom gets challenged. Market monetarists want an unbridled (though rule-driven) Federal Reserve that can move quickly to offset nominal shocks by generating inflation. It’s hard to think of a political sales pitch that is going to rationalize such a policy action. During recessions, conservatives want to blame the problem (regardless of what the problem is) on a too-powerful government. The Fed makes a convenient government target, even when the real problem is that the Fed is being far too conservative, as it was in 2008.
It is true that leftists like the idea of fighting unemployment, so they might be tepid supporters for monetary expansions—in the short run. But when it comes time to ratchet down the money supply because of excessive NGDP growth, the leftists will quickly abandon any policy consensus. And, there will always be a segment of the left who see monetary policy not as bad policy in itself but as a threat to fiscal expansion, which is what they really want. Though the left has a genuine concern for those burdened by economic downturns, what the Krugmanites want, in the core of their being, is a reliable food supply for Leviathan. The long-term devotion to the regulatory welfare state outweighs any concerns for leveling out business cycles. This is why the Krugmanites are so eager to argue that we are in a liquidity trap without any monetary tools despite the silliness of this claim (market monetarists argue that no central bank that wanted to devalue its currency has ever failed to do so, and there are a variety of mechanisms to accomplish it).
The long-term concerns of the right, on the other hand, are reducing the scope of government and generating economic growth. There is a justifiable concern about using policy tools (printing money) in the short run that require a disciplined response (taking the money back) by a government that has never demonstrated long-term economic discipline. As Tyler Cowan noted today, “there is a widespread belief that central bank discretion will always be abused.” Even though NGDP targeting would actually curtail the discretion of central banks, Cowan notes that “expansionary” just sounds like discretion. Cowen also notes the widely held belief that inflation has been the cause of many economic problems, so an explicitly inflationary policy tool sounds like “an affiliation with ideas that are dangerous.” No matter how skillful the rational for NGDP targeting may be and no matter how hard advocates try to avoid the word inflation, the market monetarists approach to downturns is simple: inflation. It doesn’t matter that the inflation comes with a promise to contract quickly after NGDP recovers, it will continue to sound like irresponsibility.
But there may be a source of political opposition that is stronger than any of the traditional left-right political battles discussed above. What I’m talking about is old-fashioned academic politics. The market monetarists—Sumner (Bentley U.), Woolsey (The Citadel), Beckworth (Texas State, San Marcos), Rowe (Carleton U.), Hendrickson (U. Mississippi)—are economists at relatively obscure teaching colleges writing in blogs. Where are the prestigious vitas and the prestigious journals? This is not a critique of their ideas, merely a statement about the hubris of the academy. Who do these people think they are, anyway, and who takes blogging seriously?
To play the devil’s advocate, it will be important for market monetarism to start playing by the rules, meaning formal papers published in quality peer-reviewed outlets. The market monetarists have been very critical of the economics profession in many ways, including the failure to call for additional monetary expansion in the critical period in 2008 when NGDP was tanking. But they need to be more than just a voice crying in the wilderness. They need to write the papers that get published in places serious economists care about. The hope for market monetarists is not really getting the left and the right to form a consensus. The hope comes from the key aspect of the Market Monetarists approach: they take both market signals and market imperfections very seriously. That is what any sensible approach to business cycles has to involve. In terms of policy, there is a very real possibility of forging some alliances between real business cycle (RBC) theorists who understand the importance of nominal shocks and sticky prices with New Keynesians who are not ideologically riveted to the fool’s errand of fiscal policy. That, by the way, is a fairly large group of people. The love that Tyler Cowen gives them quite regularly is a good start in that direction. But now they need to move the debate from the blogosphere into the Journal of Monetary Economics and other similar outlets.
Bob Lucas is famous for saying (among many other things, of course) that “the language of economics is mathematics; all the rest is just pictures and talk.” The blog approach, for better and for worse, is all about pictures and talk. The new macro, unfortunately, won’t be taken seriously until they start speaking the language of economics.