To address your (a) comment, some countries have implemented close approximations to NGDP level targeting after the 2008 crisis, and have done well. They include most obviously Iceland (despite a severe financial crisis), and some less obvious instances like Australia, Poland and Isreal. One could point to the UK as the clearest counterexample, but just about everyone agrees that they have severe structural problems, which NGDPLT is not intended to address. And even then, monetary easing has allowed the conservative government to implement fiscal austerity without crashing the economy—this was widely expected to happen and there was a lot of public concern (compare the situation in the US wrt the “fiscal cliff” and “sequestration” scares. Here too, the Fed offset the negative fiscal effect by printing money).
As for (b), nobody argues that money hoarding is a bad thing per se. But it needs to be offset, because practically all prices in the economy are expressed in terms of money, and the price system cannot take the impact without severe side effects and misallocations. Inflation targeting is a very rough way of doing this, but it’s just not good enough (see George Selgin’s book Less than Zero for an argument to this effect). ISTM that this is not well understood in the mainstream (“NK”) macro literature, where supply shocks are confusingly modeled as “markup shocks”. I have seen cutting-edge papers pointing out that these make inflation targeting unsound (sorry for not having a ref here).
To address your (a) comment, some countries have implemented close approximations to NGDP level targeting after the 2008 crisis, and have done well.
None of the examples have targeted NGDP, which is what Sumner needs to be true to have supporting evidence. Rather, they had policies which, despite not specifically intending to, were followed by rising NGDP. The purported similarity to NGDPLT is typically justified on the grounds that the policy caused something related to happen, but there is a very big difference between that and directly targeting NGDP. And hence why it can’t demonstrate why targeting a metric (that, again, no one even cared about until Sumner started blogging about it) will have the causal power that is claimed of it.
As for (b), nobody argues that money hoarding is a bad thing per se.
I disagree; I have yet to see any anti-hoarders mention anything positive whatsoever about hoarding and take it as a given that eliminating it is bad. Landsburg says it better than I can: the very people promoting anti-hoarding policies lack any framework in which you can compare the benefits of hoarding to the hoarders against its costs, and thus know whether it’s on net bet. The best answer he gets is essentially, “well, it’s obvious that there’s a shortfall that needs to be rectified”—in other words, it’s just assumed.
To find an example of anyone saying anything positive about hoarding, you have to go to fringe Austrian economists, like in this article.
But it needs to be offset, because practically all prices in the economy are expressed in terms of money, and the price system cannot take the impact without severe side effects and misallocations.
But until you’ve quantified (or at least acknowledged the existence of) the benefits of hoarding, you can’t know if these supposed misallocations are worse than the benefits given by the hoarding. You can’t even know if they are misallocations, properly understood.
For once you accept that there’s a benefit to hoarding, then the changes in prices induced by it are actually vital market signals, just like any price. Which would mean that you can’t eliminate the price change without also destroying information that the market uses to improve resource use. I mean, oil shocks cause widespread price changes, but any attempt to stop these price changes is going to worsen the misallocation problem.
Toy example to illustrate the benefits, and important signal sent by, hoarding: let’s say we have a class of typical investors, with no special non-public knowledge about specific companies. So when they invest, they invest in the economy as a whole. (Let’s say they won’t even consider using this part of their money for consumption.) But! 70% of the economy’s investment venues are unsustainable and are actually destroying value in a way not currently obvious. In that case, it would be much better for these potential investors to hoard, rather than further advance this malinvestment. Sure, they’ll starve the good 30% of projects of funds, but they’ll also pull back on the bad 70%.
So I have yet to see any actual recognition of the benefits of hoarding among this group, which puts them in a ridiculous position. If holding money is bad, then the optimal situation is for any money received to be instantly spent on something else (whether consumption or investment). But this requires that you know what you’re going to spend the money on before you earn it—which just takes us back to barter! Thus, we see the benfit of hoarding/holding money: retaining the option value when you lack certainty about what you will spend it on. It thus signals consumers’ uncertainty that they will be able to enter sustainable patterns of trade, and cannot be costlessly squashed (as another another Econ School though of interest—that it could be zeroed without negative consequence).
None of the examples have targeted NGDP, which is what Sumner needs to be true to have supporting evidence.
I think my examples do constitute supporting evidence of some kind. Yes, it would be good to have examples of countries specifically targeting NGDP, to prevent spurious correlations or Lucas critique problems. But even so, Iceland and to a lesser extent, Poland—and, to be fair, the UK—specifically accepted a rise in inflation in order to sustain demand—it wasn’t a simple case of exogenously strong RGDP growth. (I think this might also apply to Australia, actually. Their institutional framework would certainly allow for that.) This makes the evidence quite credible, although it’s not perfect by any means.
Also, Sumner was not at all the first economist to care about NGDP as a possible target. He is a prominent popularizer, but James Meade and Bennett McCallum had proposed it first.
Your example of the “benefits of hoarding” doesn’t address the very specific problems with hoarding the unit of account for all prices in the economy, when prices are hard to adjust. Yes, money has a real option value, so money hoarding might signal some kind of uncertainty. However, you have not made the case that this “signaling” has any positive effects, especially when the operation of the price system is clearly impaired. By analogy, if peanuts were the unit of account and medium of exchange, then widespread hoarding of peanuts might signal uncertainty about the next harvest. But it would still cause a recession, and it wouldn’t actually cause the relative price of peanuts to rise (or rise much at any rate), which is what might incent additional supply.
Moreover, in practice, an uncertain agent can attain most (if not all) of the benefit of hoarding money by holding some other kind of asset, such as low-risk bonds, gold or whatever the case may be. It’s not at all clear that hoarding money specifically provides any additional benefit, or that such incremental benefits could be sustained without inflicting greater costs on other agents.
To address your (a) comment, some countries have implemented close approximations to NGDP level targeting after the 2008 crisis, and have done well. They include most obviously Iceland (despite a severe financial crisis), and some less obvious instances like Australia, Poland and Isreal. One could point to the UK as the clearest counterexample, but just about everyone agrees that they have severe structural problems, which NGDPLT is not intended to address. And even then, monetary easing has allowed the conservative government to implement fiscal austerity without crashing the economy—this was widely expected to happen and there was a lot of public concern (compare the situation in the US wrt the “fiscal cliff” and “sequestration” scares. Here too, the Fed offset the negative fiscal effect by printing money).
As for (b), nobody argues that money hoarding is a bad thing per se. But it needs to be offset, because practically all prices in the economy are expressed in terms of money, and the price system cannot take the impact without severe side effects and misallocations. Inflation targeting is a very rough way of doing this, but it’s just not good enough (see George Selgin’s book Less than Zero for an argument to this effect). ISTM that this is not well understood in the mainstream (“NK”) macro literature, where supply shocks are confusingly modeled as “markup shocks”. I have seen cutting-edge papers pointing out that these make inflation targeting unsound (sorry for not having a ref here).
None of the examples have targeted NGDP, which is what Sumner needs to be true to have supporting evidence. Rather, they had policies which, despite not specifically intending to, were followed by rising NGDP. The purported similarity to NGDPLT is typically justified on the grounds that the policy caused something related to happen, but there is a very big difference between that and directly targeting NGDP. And hence why it can’t demonstrate why targeting a metric (that, again, no one even cared about until Sumner started blogging about it) will have the causal power that is claimed of it.
I disagree; I have yet to see any anti-hoarders mention anything positive whatsoever about hoarding and take it as a given that eliminating it is bad. Landsburg says it better than I can: the very people promoting anti-hoarding policies lack any framework in which you can compare the benefits of hoarding to the hoarders against its costs, and thus know whether it’s on net bet. The best answer he gets is essentially, “well, it’s obvious that there’s a shortfall that needs to be rectified”—in other words, it’s just assumed.
To find an example of anyone saying anything positive about hoarding, you have to go to fringe Austrian economists, like in this article.
But until you’ve quantified (or at least acknowledged the existence of) the benefits of hoarding, you can’t know if these supposed misallocations are worse than the benefits given by the hoarding. You can’t even know if they are misallocations, properly understood.
For once you accept that there’s a benefit to hoarding, then the changes in prices induced by it are actually vital market signals, just like any price. Which would mean that you can’t eliminate the price change without also destroying information that the market uses to improve resource use. I mean, oil shocks cause widespread price changes, but any attempt to stop these price changes is going to worsen the misallocation problem.
Toy example to illustrate the benefits, and important signal sent by, hoarding: let’s say we have a class of typical investors, with no special non-public knowledge about specific companies. So when they invest, they invest in the economy as a whole. (Let’s say they won’t even consider using this part of their money for consumption.) But! 70% of the economy’s investment venues are unsustainable and are actually destroying value in a way not currently obvious. In that case, it would be much better for these potential investors to hoard, rather than further advance this malinvestment. Sure, they’ll starve the good 30% of projects of funds, but they’ll also pull back on the bad 70%.
So I have yet to see any actual recognition of the benefits of hoarding among this group, which puts them in a ridiculous position. If holding money is bad, then the optimal situation is for any money received to be instantly spent on something else (whether consumption or investment). But this requires that you know what you’re going to spend the money on before you earn it—which just takes us back to barter! Thus, we see the benfit of hoarding/holding money: retaining the option value when you lack certainty about what you will spend it on. It thus signals consumers’ uncertainty that they will be able to enter sustainable patterns of trade, and cannot be costlessly squashed (as another another Econ School though of interest—that it could be zeroed without negative consequence).
I think my examples do constitute supporting evidence of some kind. Yes, it would be good to have examples of countries specifically targeting NGDP, to prevent spurious correlations or Lucas critique problems. But even so, Iceland and to a lesser extent, Poland—and, to be fair, the UK—specifically accepted a rise in inflation in order to sustain demand—it wasn’t a simple case of exogenously strong RGDP growth. (I think this might also apply to Australia, actually. Their institutional framework would certainly allow for that.) This makes the evidence quite credible, although it’s not perfect by any means.
Also, Sumner was not at all the first economist to care about NGDP as a possible target. He is a prominent popularizer, but James Meade and Bennett McCallum had proposed it first.
Your example of the “benefits of hoarding” doesn’t address the very specific problems with hoarding the unit of account for all prices in the economy, when prices are hard to adjust. Yes, money has a real option value, so money hoarding might signal some kind of uncertainty. However, you have not made the case that this “signaling” has any positive effects, especially when the operation of the price system is clearly impaired. By analogy, if peanuts were the unit of account and medium of exchange, then widespread hoarding of peanuts might signal uncertainty about the next harvest. But it would still cause a recession, and it wouldn’t actually cause the relative price of peanuts to rise (or rise much at any rate), which is what might incent additional supply.
Moreover, in practice, an uncertain agent can attain most (if not all) of the benefit of hoarding money by holding some other kind of asset, such as low-risk bonds, gold or whatever the case may be. It’s not at all clear that hoarding money specifically provides any additional benefit, or that such incremental benefits could be sustained without inflicting greater costs on other agents.