DeLong has a generous review of the Spring Shadow Open Market Committee[1] Conference. “An organization that is, from my perspective, one of John Stuart Mill’s useful intellectual adversaries: often wrong, but always thought-provoking, and definitely useful as an alternative perspective”
While it is proper to be generous and provoking though is a benefit, itis well to bear in mind that the SOMC never advocates for higher inflation, whatever the macroeconomic situation. It provokes thought only as its arguments for less “expansionary” policy vary over time.
Turning to the review of “the extremely sharp Athanasios Orphanides’s ideas on natural-growth targeting as a benchmark rule of thumb for framing monetary-policy discussions”, DeLong sets the stage with a nice quote from Keynes:
We leave Saving to the private investor, and we encourage him to place his savings mainly in titles to money. We leave the responsibility for setting Production in motion to the business man, who is mainly influenced by the profits which he expects ot accrue to himself in terms of money....
These arrangements... have great advantages. But they cannot work properly if the money, which they assume as a stable measuring-rod, is undependable. Unemployment, the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer—all proceed, in large measure, from the instability of the standard of value...
The statement is spot on provided we interpret “instability of the standard of value” as inflation that is either too high _or_ too low to facilitate the adjustment of relative prices in response to economic shocks [“getting and responding to the von Hayekian price signals needed for economic growth”] when price flexibility is heterogeneous, especially when some prices, like wages and land rents, are sticky downward. Providing this “goldilocks” amount of inflation is exactly what should be meant by saying that central banks make Say’s Law “true in practice even though it is false in theory.”
I am in much less substantial (like zero) agreement than is DeLong is with specifics of Orphanides view that the Fed should have a rule, even a rule of thumb, for setting its vector of monetary policy instruments, much less one of those instruments. Rather, the Fed should have a target for some outcome variable, inflation and NGDP have been suggested, and adjust all its instruments in such a way as seems, at the moment of decision, most likely to keep or return the outcome variable to its target value. This principle implies that the targeted level of the outcome variable has been chosen to maximize adjustment in “von Hayekian price signals needed for economic growth” in response to average levels (Brownian motion) of economic shocks AND that said target will be pursued “flexibly” when shocks are extraordinarily large. This implies FA[x]T.
In point of fact, I share DeLong’s more-favorable-than-Orphanides’s interpretation of the Fed response to COVID as generally favorable but recognizing both a short initial error of allowing inflation and inflation expectations to fall significantly below target in 2020 and then allowing above-target inflation to go on to long, the excess signaled, I think, by TIPS expectations going well over target between September 2021 and March 2022.
I share in no way DeLong’s concern with the ZLB and his partial sympathy for Orphanides proposed rule as a way of avoiding it. There may be extrinsic or self-imposed bounds in any given policy instrument but the Fed has at its disposal a vector of instruments (and a large number of economists who can presumably invent others if the need arises) for “doing what it takes” to achieve FA[x]T. Therefore, the existence of a ZLB on ST interest rates in no way implies “throwing the problem of macroeconomic management over the wall to the fiscal authorities.” Moreover, if fiscal authorities were behaving in accordance with a NPV > 0 rule for expenditures, it’s hard to see how ZLB, even on interest rates, could come to pass. And if fiscal authorities are not following an NPV rule, why should we believe that they would do the right thing?
The second long Keynes quote, a favorite of Right Wingers since it was first uttered,
Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers’, who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of Society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose…
bears on balancing the amount of over-target inflation necessary for Hayekian growth maximization against the public’s “non-economic” aversion to inflation of whatever sort.
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Turning to a second paper at the conference by Mickey Levi and Charles Plosser criticizing Flexible Average Inflation Targeting, I think L-P fundamentally misunderstand the target.
a) FAIT it has nothing to do with employment.
b) FAIT is _properly_ “asymmetric” in that above-target inflation can be necessary for Hayekian growth maximization in response to extraordinary supply or demand shocks whether positive or negative. That is what the “F” in FAIT means.
c) FAIT does not just “make up for” past shortfalls in inflation; that would be “Price Level” targeting. The “A” in FAIT is a forward-looking average.
d) “Forward Guidance” was indeed a mistake because the version employed sought to give guidance about future settings of the monetary instrument vector rather than the outcome target being pursued.
I commend DeLong for his parsed agreement with LP’s recommendations. I would go farther, however to suggest in addition that the Fed
a) explicitly consider in its upcoming policy review whether FA[I]T is better or worse than FA[NGDPL]T,
b) request Treasury to create a Trillionth security and shorter tenor TIPS’s [https://thomaslhutcheson.substack.com/p/improvements-in-macroeconomic-data]
c) abandon the expectation of serial correlation in movements of its instrument vector.
d) increase the frequency of changes in instrument vector to better approximate the rate of inflow of data guiding the setting of said vector.
As for “The central banks of today do indeed have such a more difficult and anxious task entrusted to them. They need our support. Badly.” I agree and recommending improvements in their decision processes is the best support we can give them.
[Standard bleg: Although my style is know-it-all-ism, I do sometime entertain the thought that, here and there, I might be mistaken on some minor detail. I would welcome comments on these views.]
[1] “An independent organization evaluat[ing] the policy choices and actions of the Federal Reserve’s Open Market Committee (FOMC)…. The Committee’s deliberations are intended to improve policy discussions among policy makers, journalists and the general public with the hope that wiser policy decisions will result.”