Silas responds
The best way I can think of to address your position is: the premise behind Sumner’s argument (and that of the macroeconomic consensus he references) is that total spending should be kept at some arbitrary level and growth rate.
But why? Why is more spending necessarily good? When people spend money, they are getting what they need via specialization and through a cash economy from (mostly) strangers.
Certainly, that has *usually* been a good metric of economic health: only a real undeveloped economy has people bartering or producing everything for themselves in their households. But this still runs into the Goodhard problem I complained about: you cannot take that general historical correlation and infer that, on the margin, decisions to spend less are “hurting the economy” — not unless you’re going to redefine the economy as “passing around pieces of paper”, which is about on the level of defining morality as “jumping off cliffs” and accusing people of being immoral because they’re cliff-jump-refrainers.
If I stop hiring my maid to clean my place, and do it myself, does that really indicate a loss of efficiency? There are any number of reasons I could be doing so. When you contort my incentives to the point that I reverse that decision, aren’t you just throwing the inefficiency right back in?
Spending is not, in and of itself, good. Rather, good spending is good. (Less, tautologically, the spending that people would do without manipulation, and because of an honest assessment of their situation, is good.)
Spending that exists only because incentives were jimmied until it looks like people’s best option … is not good.
Let me first say that I don’t have a strong opinion on whether a nominal income stabilization would respond correctly to a sudden change in the market vs. non-market economic activity. The case for nominal income targeting rests in large part on the claim that changes in nominal income due to monetary disequilibrium are larger and more frequent than those due to other causes. Second, if is not good to force people into spending more than the ‘natural’ amount, it is also not good to force people into spending less than the ‘natural’ amount. The Sumner camp contends that the ‘natural’ amount is most likely when nominal income is stabilized; the price level camp contends that the ‘natural’ amount is most likely when the price level is stabilized. However, right now, even the price level is significantly below trend, so even if you favor a a price level target you should still desire higher spending (though not as high as those who want stabilized nominal spending).
Reading the Selgin paper and talking with Silas made me realize I understood the relationship between monetary policy and demand shocks much better than than I understood the relationship between monetary policy and supply shocks. This implies I should be less of an advocate.
By the way, Selgin’s argument for stabilizing nominal income with respect to supply shocks is that allowing prices to rise in response to negative productivity shocks and decline in response to positive productivity shocks will minimize the burden of price adjustments since the prices to adjust will be the ones that experienced a productivity shock.
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August 3, 2010 at 3:10 pm
Silas Barta
John, first let me thank you for engaging the issue I’ve brought up. Also, what was “Silas Against Spending 1”?
And before I say anything further, I ask that if any point I make appears to be ignorant of a basic economic understanding, please point me to a good exposition of it, because I want to know if my concerns really have been addressed in the literature.
Regarding your post, I still think we’re not connecting, but we’re getting closer. You say that even by a price-level standard, more spending is justified. But what if I reject both targeting the price level, and NGDP? What if I believe that these levels should reflect, as any other macroeconomic variable, the aggregate preferences of people?
It’s not that I think the Fed should punish nominal spending down if it’s too high, or vice versa. It’s that pushing it either direction is erasing the market signals for production that come from individuals. If there is genuine uncertainty about the future economy’s ability to align workers into specialties that satisfy demand, then curtailing spending sounds like the appropriate response, with the market carrying the relevant signals to the relevant people.
By introducing spending where there would otherwise not be, you’re reversing a decision that may have been the right one. The Fed has no more power to recognize these inefficiencies than any other agency.
Whatever common ground you think we’re on, assume I’m questioning the premise that supports it 😉
August 3, 2010 at 3:39 pm
Silas against spending 1 « Good Morning, Economics
[…] August 3, 2010 in macroeconomics | by jsalvati I somehow failed to actually post this post earlier. Consider this to be a prequel to Silas against spending 2: […]
August 3, 2010 at 3:46 pm
jsalvati
Somehow I failed to actually post that post! I seem to have a lot of internet trouble around you.
We do indeed appear to be talking past each other.
Perhaps I would get a better idea of your position if you told me what monetary policy strikes you as good policy. You cannot have ‘no’ policy because a money economy has a free variable; it needs a nominal anchor. Having a fixed quantity of money in the economy would count as a policy, however.
August 3, 2010 at 6:16 pm
Silas Barta
I dispute the very assumptions on which the Fed exists. It’s not very responsive to ask what I think the Fed should do if I accept those functions.
Historically, money has increased and decreased in quantity without needing a central bank to direct it. With the right assumptions, it may become a free variable, but what if I don’t accept those assumptions?
See my response on the other thread for my attempt to identify where our disagreement is.
January 2, 2012 at 8:26 am
Debating Silas Barta « Good Morning, Economics
[…] 7, 2010 in macroeconomics | by jsalvati Silas Barta and I have a long ongoing debate (part 1, 2,3 part 2 actually comes before part 1) about monetary economics, 2008 recession policy and the […]