The economics of the EZ problems is “path dependent”

Ryan Avent links to Matt Yglesias:

But a sense of identity surely matters. Mr Yglesias closes by writing:

Americans, whether in San Francisco or in Kentucky, generally conceive of ourselves as all living in one country. We act either on behalf of narrow personally selfish claims or else broad idealistic concerns about what’s right and proper for the country as a whole. But if that spirit broke down, the whole national economy would have a very different feel.

Both posts worth reading

3 thoughts on “The economics of the EZ problems is “path dependent”

  1. I was as looking over some old fed minutes from December 1982, interesting stuff, they debated targeting NGDP but decided it was too politically sensitive:

    Click to access FOMC19821221meeting.pdf

    Here are some key quotes page 20:

    MR. MORRIS. I think we need a proxy–an independent intermediate target– for nominal GNP, or the closest thing we can come to as a proxy for nominal GNP, because that’s what the name of the game is supposed to be. If we have to target something that is not predictably related to GNP, which M1 has not been in the past two years, one of two things can happen. One is that we can do as we did in 1981 and say the M1 shift adjusted, which was our target, is coming in too low and we are just going to let it come in low–we’re not going to use it as a target de facto. I think that was the right decision. If we had tried to hit our targets for M1 in 1981, we obviously would have put too much money into the system. I think the targets have misled us this year. That is, up until October when we finally caught up with it, it seems to me that the monetary aggregates misled this Committee into following a much more restrictive policy than we intended. And that is reflected in a nominal GNP growth this year, which we’re now estimating at 3.6 percent, that I don’t think any of us a year ago would have [favored] as a target for nominal GNP. It seems to me that the best proxy for nominal GNP in this world of enormous change is the rate of growth of debt. Now, that may not be a perfect proxy, either. But we certainly don’t want to go back to interest rate targeting. Politically, I don’t think we could adopt a nominal GNP targeting approach even though theoretically that is what we ought to be doing. I don’t think we can do it. We need a proxy for nominal GNP.

    CHAIRMAN VOLCKER. What is that political objection?

    MR. MORRIS. Well, let’s say the President comes out in January and says we are going to have 12 percent nominal GNP growth, and you go up before the congressional committee in your Humphrey-Hawkins testimony the next month and say we’re going to finance a 9 percent nominal GNP growth. It seems to me it is not well suited to the needs of the central bank to be that far out on a limb.

    CHAIRMAN VOLCKER. How far do you think we can go in that regard by saying we’re going to project a 9 percent credit growth or 9 percent M2 growth or something that is inconsistent with the 12 percent [nominal GNP growth]?

    MR. MORRIS. I would merely submit that we’ve been getting away with this on the money supply for a number of years. I’m quite amazed that we have. But I think it’s very clear that the intermediate target should not be politically sensitive. And the wonderful thing about the rate of growth in the money supply, for all of its problems, is that it was never a politically sensitive item such as the unemployment rate, or interest rates, and so on. Nominal GNP, if we were to use that as a target, would be a politically sensitive target, and we ought to avoid it for that reason. But we need a proxy for it.

    Another from page 40:

    VOLCKER. I do think we’re going to be forced into a more explicit rationale, whatever we do, in terms of the nominal GNP. I’m not saying we have to target nominal GNP very directly, and there are obviously dangers in that, but I do suspect that we’re going to be drawn out on that subject much more heavily than we have been in the past. I think there is a real danger in that because it does overemphasize what we in practice can do. I think there’s great overemphasis now on what monetary policy can do either in terms of nominal GNP or interest rates. And it’s very dangerous. It’s partly just a matter of frustration. Nobody else can think of anything else to do so they say that the monetary authority must have control over all these things and if they press the right button everything is going to come out right. The presumption is that there’s a right button to press; I’m not sure there is. Some problems don’t have that simple an answer. I suspect we’re in one of those periods, and we ought to devote some attention to arguing that we’re not all that omnipotent. I myself would accept what some people have mentioned: That we keep an eye on such things as exchange rates or maybe even more importantly the price trend and the price forecast but that we not formally target them.

    And one more:

    MR. CORRIGAN. Just a simple case: Assume that we have not only a central tendency but a tremendous convergence that says nominal GNP is going to grow by 9 percent; prices will rise by 4 percent and real GNP by 5 percent to make it nice. Then we say we think M2 and M3 and total credit will look like X, Y, and Z. But then this central tendency [puts our forecasts] in a different light than the old forecasts if, as we get into the year, there’s a marked departure in actual performance of the economy from the central tendency even though the Ms and whatever else we use in our steering devices look all right. The question is: Do you contemplate any more of a direct linkage between what we would do with the steering devices or targets and that central tendency forecast?

    CHAIRMAN VOLCKER. Well, I’m not sure; my instinctive answer would be that I’d try not to make the central tendency all that prominent in terms of what is desirable. But I think we are going to be forced into precisely what you are saying, after some statement. It probably will be viewed more against the Administration forecast or some congressional forecast. They will say: We think a minimum adequate growth is X and if it’s below that, are you going to ease?. And if X is low enough, our answer might have to be yes. I don’t know how to state it or fuzz that up, but at some point that’s precisely what I would expect to happen.

    MR. WALLICH. I might have to state the associated increase in inflation.

    CHAIRMAN VOLCKER. Well, you can’t tell. Suppose after all the different permutations and combinations, the inflation rate is high and the real growth rate is low; we’d have a different answer than if real growth is low and inflation is low. One can [consider] any other combination of those. I’d try to talk my way around it. I think the Administration is going to have a low real [GNP forecast], as a matter of fact, because Mr. Feldstein is so preoccupied with not overestimating. But where I’m a little afraid of getting trapped is this: If they have high inflation and high real growth and the Congress says that’s just fine, we’re glad to live with 5 or 6 percent inflation and we want 5 percent real growth–that’s not what the forecast is going to be but suppose it were–we would say that’s much too much inflation and we’re satisfied with much less real growth. Then we’d have a real problem, I think.

    MR. PARTEE. Yes, if we get a high nominal, then we really have trouble. However it adds up, 11 or 12 percent is a problem.

    CHAIRMAN VOLCKER. I could picture that the happy staff optimism on inflation is right and it is coming in around [their forecast], but the real growth isn’t doing very well. They might say: My word, you’re doing much better on inflation than you’re supposed to be doing in some sense and you’re not doing very well on real growth, so you obviously have to ease up. That, I think, is going to be a big problem. And it’s going to be more so in that connection [depending on] what we say is the central tendency.

  2. Previously I had thought, how would it be possible for European countries to ever experience the smooth integration of the U.S. But after reading Ryan Avent I realized that wasn’t the point and what felt good was I saw one of my own intuitions confirmed: what matters are sustainability patterns at local levels. Doctors in Kentucky have salaries that reflect the actual costs of living there, i.e. not the expense to the rest of the country that one might imagine.

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