Saturday, December 31, 2011

David Beckworth on recent The Economist article

David Beckworth responds to MMT criticism of the NGDP-targetting policy proposal he embraces based on lack of a transmission mechanism from reserves to bank deposit through bank loans. He claims that there is a different transmission mechanism operative — nominal expectations.
The real critique, then, is whether a change in  nominal expectations can really affect current spending decisions by firms and households.  I have an earlier post that shows inflation and nominal GDP expectations (as proxied by a survey of forecasters) do in fact influence spending decisions.  Josh Hendrickson and I also show in this recent working paper that shocks to inflation expectations cause households to adjust their portfolios in the manner outlined above.  Finally, as shown by Gautti Eggertson, a sudden change in nominal expectations was also key to FDR's 1933-1936 recovery.  If the MMTers (and Austrians) could come to accept this evidence, then we could truly have a deficient aggregate demand lovefest.  
Read it at Macro and Other Market Musings
The Market Monetarist, MMT, and the Austrian Lovefest
by David Beckworth

My comment at Beckworth's place:
Yes, I know neoliberals assert that the transmission mechanism is expectations and confidence, which they presume the central bank can use to manage economic behavior in aggregate. However, this is not an economic explanation that is empirically testable, but rather a pseudo-psychological one that has no basis in either psychological or sociological findings. It is a superstition that Paul Krugman has rightly lampooned as analogous to the tooth fairy.
Why would someone rationally expect something when there is no actual way to accomplish it in sight? It is like trying to rob someone with a toy pistol, hoping the victim doesn't notice it is just a toy. The Fed has been trying to stoke inflation through ZIRP and QE without success. Now people in aggregate are going to expect that inflation will rise because the Fed says to expect so? Please explain to me why anyone should expect that in light of what the Fed cannot do through monetary policy, which is its purview.

Expectations could perhaps work if the Fed were to threaten to do something it hasn't done, and the only actual policy gun the Fed has is the interest rate. That is already taking out the floor.

Afterthought: See Bill Mitchell's I am looking for the tooth fairy too
for an MMT critique of the fairy superstition in another context. See also Bill's Inflation targeting spells bad fiscal policy.

UPDATE: The debate continues at Macro and Other Market Musings. I can't find now to link to specific comments there so I am including them for the record here.

 David Beckworth said...
Tom Hickey:

"However, this is not an economic explanation that is empirically testable, 

I am sorry you haven't taken the time to actually read the literature and are thus making this misinformed claim. Again, take a look at Gautti Eggertson paper I linked to above and the reference found therein. Or at my working paper with Josh Hendrickson. There is plenty of evidence and expectations is a core part of modern macro for good reason. I was hoping for a more meaningful exchange with MMTers.


Paul Krugman has rightly lampooned as analogous to the tooth fairy. 

Here too you apparently haven't read the material closely.

Krugman is actually one of the strongest advocates for the the Fed committing to shaping the future path of nominal expectations. He has a famous paper in 1998 where he shows the way out of a liquidity trap is for a central bank to promise higher inflation going forward. He has blogged about this many times too. 

The confidence fairy that he torn apart has to do with the view that austerity will create more confidence. This is a different topic altogether.
January 1, 2012 8:12 AM

 Tom Hickey said...
David, correlation is not causation. What is the transmission mechanism from expectations (psychological) to behavior (real)? 

REH involves assumptions that are questionable in the light of findings in other social sciences.

OK. I was exaggerating on Krugman and the confidence fairy, but I think there is a close connection. And I think PK is as wrong was other monetarists are about inflationary expectations being a sound basis for monetary policy. I just don't but it as an actual transmission mechanism.

Look at the folks at Zero Hedge going long all sort of inflation hedges due to a misunderstand of what QE would do. Sure, they fell into the expectations trap, and many got burned. Bill Gross got his butt handed to him on tsy shorts, just as the MMT-based traders had predicted. (BTW, Mosler's bank had a three year average of 67.77% ROE.) But the neither firms nor consumers in aggregate caught the expectations bug, and the Fed is still fighting "deflationary expectations."

Now that the Fed has shot off all its big policy guns and used up its ammo, people are going to get inflationary expectations from what exactly?

The point that the MMT'ers make is that the way out through fiscal policy is clear, should politicians actually understand the potential of fiscal policy based on sectoral balances and functional finance, and compromise enough for the good of the country to use it.

This kerfuffle is essentially between monetarists and fiscalists, and I don't see any making nice as a way to fix it. MMT'ers claim that we need to debate the merits based on a correct understanding of monetary economics wrt the existing monetary system in general and the specifics of different countries. But you know that already from what commentators here have said previously and in interaction with Scott Sumner. 

Your guys criticize the MMT'er's for not being open to your pet ideas, but you seem resistant to looking at anything the MMT'ers say about monetary operations that calls your position into question.

MMT shows clear and actual transmission mechanisms that don't have to be "proved" though dubious correlation studies that don't show directly how psychological states translate into aggregate behavior. I think that it is a weak argument in the face of argument that show how transmissions occur directly in terms of actual and therefore observable monetary and fiscal operations. In my view it is magical v. scientific thinking, regardless of the sophistication of the models. Let's look at operations.
January 1, 2012 4:13 PM


Neil Wilson said...

Why on earth would you want to rely upon influence, curve fitting and other psychological mumbo jumbo when you have the concrete option of sticking a $100 note in everybody's fist?

Detroit Dan said...

The NGDP targeting proposal epitomizes the mumbo-jumbo, Wizard of Oz school of thought that dominates current economic orthodoxy...

Dan Kervick said...

That's the real mystery, Neil. If the market monetarists want to have an aggregate demand lovefest, then why don't they join the MMTers in the recognition that the obvious way additional money/NFAs are actually introduced into the economy is for the fiscal authorities to deficit spend them in?

The MMers just seem very deeply committed to the idea that the central bank can accomplish everything, and are stubbornly determined not to give anything up to fiscal policy. They're part of the mainstream tendency of recent decades to invent one excuse after another why fiscal policy won't work. (The mainstream blogs are embroiled in yet another argument this week about Ricardian equivalence.) The helicopter drop the MMers once seemed to support so strongly faded has from their focus once they grasped that what they were calling for was primarily a fiscal operation.

At this point I don't think it comes down to a commitment to monetarism, or rational expectations or any other theory. The preferred techniques and mechanisms keep moving around. It's just an ideological commitment to the idea that the central bank can control the economy.

Tom Hickey said...

@ Dan K

It's just an ideological commitment to the idea that the central bank can control the economy.

That's what monetarism is and it has failed miserably using its policy tools. To think that it can create nominal expectations otherwise is imputing magical powers.

Ralph Musgrave said...

In defence of David Beckworth, I suppose he is wrestling with the question as to what to do given that those geniuses in Congress won’t permit enough fiscal stimulus. But I wish he was more explicit about this.

He could also say more clearly that NGDP targeting using monetary tools is not the only way of doing such targeting: that is, one could do “fiscal NGDP targeting”.

Anonymous said...

"In defence of David Beckworth, I suppose he is wrestling with the question as to what to do given that those geniuses in Congress won’t permit enough fiscal stimulus."

i'm not sure about beckworth, but i know that sumner is virulently opposed to fiscal stimulus. it's part of their project, to prove the irrelevance of fiscal channels so the economy can be run by bankers

Tom Hickey said...

I updated the post with David Beckworth's response to me and may retort to him.

He says that he is disappointed in the MMT response, so someone else can go over there if interested.

But as I said in my response, the kerfuffle is between monetarists and fiscalists, and not just about expectations, NGDP, and the issue is really based on a correct understanding of the monetary system and monetary ops.

Senexx said...

For future reference hit the time of the post for the link to the comment you wish to..uh...reference.

Tom Hickey said...

Yeah, I know, Senexx. Tried it several times but it didn't work for some reason over there. Maybe it was a problem at the site.

Anonymous said...

Ralph Musgrave may be on to something about Beckworth:

Tom Hickey said...

But if you read that closely it is a real helicopter drop, i.e., fiscal. This is not monetary policy by any stretch. In my understanding the Fed is prohibited from doing that. Maybe Beowulf can clarify the law here for us.

There would be no problem if the Fed could just debit the Treasury reserve account (Fed liability-Treasury asset) in exchange for some tsys (Treasury liability-Fed asset). But that is prohibited.

Or the Treasury could sell tsys into the market and the Fed could buy them up, which is legal. Only this increases the debt limit, and I doubt that Congress would appreciate an end run on fiscal policy independent of appropriations. That would put the executive branch at odds with the legislative, and the US Constitution is on the side of Congress in this regard, I believe, if it went as far as the courts.

The platinum coin is a better solution for getting reserves into the Treasury account without increasing govt debt, because it is legal. but its blatantly fiscal and monetarists would not like that. But still, any fiscal use of the funds would have to go through Congress unless Congress delegated that power, which highly unlikely.

Tom Hickey said...

BTW, a lot of this is brought up in the comment there and also in comments at Warren's on this proposal.