Monetarism is like a Zombie: it can be found theoretically wanting, empirically false and technically infeasible but in one form or another it just soldiers on. In some ways the hype surrounding the conversation about the possibility of moving from an inflation based paradigm to targeting NGDP could be read as the end of monetarism. But viewed from another angle it (NGDP targeting) can also be read as the latest reincarnation of monetarism.
Purists will of course bulk: monetarism died along time ago as central banks realized they did not control the money supply as private banks also create money all the time in the form of credit. But if in narrow technical terms monetarism died soon after its birth, in broader political terms it came of age in the ensuing years. As I see it there were three initial pillars to monetarism only one of which technical. First, the CB can control the money supply (false) and thereby inflation; second, the CB should be independent (from democratic influence) to pursue price stability (not amenable to boolean operators); third, monetary policy is the preferred technocratic as opposed to democratic policy (fiscal) lever. Even though the first be dead the second and third live on.
My problem with NGDP targeting is threefold.
First, proponents of of inflation targeting like the quasi monetarists are want to argue that the last twenty years of inflation targeting has been a dizzying success. As per Nick Rowe:
We have 20 years of empirical evidence showing how inflation targeting works to stabilise expected and actual inflation.
Not so fast. We have twenty years in which many things were happening: a move across the advanced capitalist zone to flexibilise labour markets and the incorporation of broad swaths of eastern European and Asian, and south Asian labour reserves into the global market; and increasing trade liberalisation and capital mobility. So I am not sure the CB’s should get all or even most of the credit for price stability over the last twenty years. Although they may warrant some of the blame for higher average unemployment than the pre-monetarist CB regime.
Second, I remain to be convinced that the CB’s can actually target NGDP. They, the CB,s, have a limited range of arrows in their tactical quiver. If anything the present crisis has taught us (like the crisis of Keynesianism) at such periods in the micro-economic motivations swamp the thinking of businesses. I suspect the BOC could announce tomorrow that it had raised its inflation target to 6% and not much would happen in real or nominal terms. Defeating inflation was a rather simple exercise even if politically difficult. All the CBs had to do was to put interest rates through the roof and kill off every marginal producer of goods and services. Similarly keeping inflation in check (on target) was and is a relatively easy affair when one simply has to throw sand in the financial gears. It becomes a problem of second order magnitude to target NGDP growth when everyone who counts knows you do not really have the ability to independently bring it about.
Nominal growth targeting means nominal investment targeting and in the context of already hyper low interests rates it is hard to see where the CB has a viable policy lever. They can play around with quantitative easing (as they have already done) but all that appears to have done is set a soft floor on some classes of asset values. And it is an open question as to whether or not this is a good thing. On what rational basis was it decided that some asset values were worth preserving and others not? More importantly putting a soft floor under some classes of asset values has done next to nothing for investment rates which is after all how you target underlying economic growth even when not discounted by inflation.
Third NGDP targeting is opaque in a way that inflation targeting is not. There is a relatively decent link between the credible threat of high real interest rates and the threat of low real interest rates. The former pushes noun against a verb the latter not so much. Without the direct ability to determine aggregate investment rates the CBs are forced into much more cloistered channels with little to no capacity to sanction the relevant actors should it not get what it wants.
My critique probably boils down to the following. It is only under a supremely unique set of circumstances that CBs found their targeting regime and interest rates to have such a profound positive influence on the level of economic activity. In capitalist economies it is businesses that invest and hire (something both liberal and Marxist economists agree on) interest rates and asset valuations play only a small part of the calculus to invest. The government on the other hand can use fiscal policy to indirectly stimulate investment through tax policy and directly control aggregate investment and thus employment via direct spending.
Ironically if the government was to monetize the debt by putting Peter in bed with Paul (the CB and the treasury) it would inadvertently give some real teeth to the CB’s ability to prove to the relevant economic actors that it was serious about targeting NGDP growth. But I suspect Tory New-Keynesians like Rowe and Sumner would not abide. For once you show that fiscal policy is in fact a powerful force for economic regulation the last two pillars of monetarism come a tumbling down. Some version of industrial democracy would be back on the table.
Hardly what a Tory goes shooting for when they wake up early in the morning.
Relentlessly Progressive Political Economy 