Tuesday, May 17, 2011

An Open Letter to Congressman Paul Ryan

Dear Congressman Paul Ryan,

In a recent speech you made the case for a more rules-based approach to monetary policy:
The Fed’s recent departures from rules-based monetary policy have increased economic uncertainty and endangered the central bank’s independence...  Congress should end the Fed’s dual mandate and task the central bank instead with the single goal of long-run price stability. The Fed should also explicitly publish and follow a monetary rule as its means to achieve this goal. 
I agree that we need a more systematic approach to monetary policy.  The ad-hoc nature of the QEs adds uncertainty and makes the Fed a political lightning rod for criticism.  Ultimately, this reduces the effectiveness of monetary policy.  So, yes, we need a predictable, rules-based approach to monetary policy.  We also need, however, an approach that responds appropriately to supply shocks.  For example, we wouldn't want the Fed to follow a rule that would call for a tightening of monetary policy just because a major computer virus shut down most computer systems and, as a result, caused prices to go up.  Instead, what we need is an approach to monetary policy that keeps the growth of total current dollar spending stable so that the booms and bust are minimized.   The good news is there is a way for monetary policy to do this in a systematic manner.  It is called nominal GDP level targeting.  This approach would narrow the Fed's mandate to single measure and thus make it more accountable.  I ask you to please consider this idea.   

For further reading on nominal GDP level targeting I suggest you read this article, this article, and this article from the National Review.

All the best,
David Beckworth


  1. Good post. I can't understand the current fad of Fed-bashing, when the core CPI is under two percent, and some say the CPI overstates inflation anyway.

    The NGDP targets appear to offer a path forward, and certainly we should try NGDP for 10 years or so, and then evaluate.

    In the meantime, and immediately, we need to take steps to avoid becoming the United States of Japan.

    With the concusion of QE2, we may see a bear market on the DJIA, and sinking real estate values--as the DJIA is roughly where it was in 1999, we are assuming Japan-like stasis and decline in asset values.

    Inflation id dead, ala Japan too.

    This is not a good situation, and can be fixed without incurring more federal debt.

    Go to QE3.


    I was perusing some of Bill Woolsey's early Monetary Freedom posts when I cam upon this little gem from 2009 (my italics):

    "As for the liquidity trap, it is almost certainly an artifact of 'conventional' monetary policy, particularly targeting interest rates, but also from limiting open market operations to Treasury bills. A commitment to adjust the quantity of money however much is needed to target nominal income implies a willingness to purchase longer term government bonds or even foreign bonds or private securities, if purchase of the entire outstanding stock of T-bills fails to do the job."

  3. @Lee:

    I completely agree with Woolsey (and Josh Hendrickson...and Keynes, for that matter) that the only operational definition of liquidity traps that makes sense is infinitely elastic demand for money, and that the zero bound is simply an artifact of how we choose to conduct monetary policy. That definition makes an actual liquidity trap pretty much impossible...and explains why the world has never seen one.

    Krugman, the foremost purveyor of 'liquidity trap' theorizing understands this well, and thus built a model of expectations traps, which makes sense and is consistent with my operational definition of the liquidity trap. The problem is he plays fast and loose with terminology...but never in an inappropriate way, just confusing.

    The fact that we think of "conventional" monetary policy as targeting interest rates on short term bonds is simply a human construct (Nick Rowe!).

  4. I don't believe that Fed. Res. NGDP targeting will stabilize current dollar spending. The GDP figures are unable to capture the nature of our current problems associated with employment, wealth, income, debt, and the rule of law

    Fundamentally we have a structural flow problem. This is something that the Fed. is unwilling to see.

    -It's not the # of jobs that matters, rather than the nature of the jobs, the security they entail, and most importantly the growth potential of jobs relative to the demographic imperatives of the labor market and population.

    -It's not the amount of spending or even the level of current income-- rather than the corresponding relationship, both spending and income have to debt, equity, wealth, and the sustainable viability of the fluctuations between them.

    -There is no such thing as a free market (gasp!) All markets require ,in some form, the existence of a legal order to exist in the first place. If the rule of law breaks down and the confidence in it's abilities to protect the market from its own self-destructive chaos and collapse are withheld-- as has just happened and still continues to do so, then there is no alternative policy short of direct legal remediation that can restore trust and more importantly justice.

    -Considering all of that, there should be no surprise why the statistics are either getting worse or are paralytic. We don't have a working economy much less one that is viably sustainable. This continues despite all the efforts to scare the public slave force and/or appease the corporate zombies, e.g. Libya & now maybe Pakistan, Bin Laden, the T.S.A. theatrics, the bailouts, the rule changes, the reliefs and revitalization efforts and all the other B.S. crap they can come up with.

    This absurdity has become a daily spectacle in our? government and I'm sure it does wonders for the American image abroad, but then again, maybe we're all in the same boat, so no one really minds.

    When we're all to blame, the truth rarely gets said or even acknowledged- this is the way empires fall. Even though the truth is staring us in the face, admitting it becomes a kid of prisoners dilemma with no favorable outcome.

    What we need are jobs AND educations that build and invest in our capital and infrastructure capacity here at home. Every effort should be taken by both public and private endeavors to make our "homeland" both sustainable and adaptable to the greater velocity of technological innovation and change in general.

    Far from just an excuse to grow our economy, this is also somewhat of an imperative. Sustainable and innovative planning of our urban and suburban regions while providing greater protection of our green spaces seems like the no B.S. answer to U.S. growth.

    If you like though we can go on with this debate over the minutia of severely outdated economic theories. Or we could always just tune-out and watch the commercials.

    Two final thoughts:
    1.) We are most assuredly an empire in case you were wondering. If that's not apparent to you go read or remove yourself from grown-up activities.

    2.) The Fed does not control the money supply. Private credit creation precedes federal reserve seeking. The reversal of this process is only viable in very limited cases and will likely have no clear outcome. Indeed it may in fact lead to very adverse outcomes like the use of federal credit for speculative investment and market predation esp. if inventories are far in excess of effective demand. Supply can create its own demand, but usually this is never a good thing - think: the nuclear arms race.

    If your mad or confused, I'm glad, you should be. I just hope you feel that way for the right reasons.