Lets concentrate on the policy framework

Here is Scott Sumner:

I’ve noticed that when I discuss economic policy with other free market types, it’s easier to get agreement on broad policy rules than day-to-day discretionary decisions.

I have noticed the same thing – or rather I find that when pro-market economists are presented with Market Monetarist ideas based on the fact that we want to limit the discretionary powers of central banks then it is much easier to sell our views than when we just argue for monetary “stimulus”. I don’t want central bank to ease monetary policy. I don’t want central banks to tighten monetary policy. I simply want to central banks to stop distorting relative prices. I believe the best way to ensure that is with futures based NGDP targeting as this is the closest we get to the outcome that would prevail under a truly free monetary system with competitive issuance of money.

I have often argued that NGDP level targeting is not about monetary stimulus (See here, here and here) and argued that NGDP level targeting is the truly free market alternative (see here).

This in my view is the uniting view for free market oriented economists. We can disagree about whether monetary policy was too loose in the US and Europe prior to 2008 or whether it became too tight in 2008/9. My personal view is that both US and European monetary policy likely was (a bit!) too loose prior to 2008, but then turned extremely tight in 2008/09. The Great Depression was not caused by too easy monetary policy, but too tight monetary policy. However, in terms of policy recommendations is that really important? Yes it is important in the sense of what we think that the Fed or the ECB should do right now in the absence of a clear framework of NGDP targeting (or any other clear nominal target). However, the really important thing is not whether the Fed or the ECB will ease a little bit more or a little less in the coming month or quarter, but how we ensure the right institutional framework to avoid a future repeat of the catastrophic policy response in 2008/9 (and 2011!). In fact I would be more than happy if we could convince the ECB and the Fed to implement NGDP level target at the present levels of NGDP in Europe and the US – that would mean a lot more to me than a little bit more easing from the major central banks of the world (even though I continue to think that would be highly desirable as well).

What can Scott Sumner, George Selgin, Pete Boettke, Steve Horwitz, Bob Murphy and John Taylor all agree about? They want to limit the discretionary powers of central banks. Some of them would like to get rid of central banks all together, but as long as that option is not on the table they they all want to tie the hands of central bankers as much as possible. Scott, Steve and George all would agree that a form of nominal income targeting would be the best rule. Taylor might be convinced about that I think if it was completely rule based (at least if he listens to Evan Koeing). Bob of course want something completely else, but I think that even he would agree that a futures based NGDP targeting regime would be preferable to the present discretionary policies.

So maybe it is about time that we take this step by step and instead of screaming for monetary stimulus in the US and Europe start build alliances with those economists who really should endorse Market Monetarist ideas in the first place.

Here are the steps – or rather the questions Market Monetarists should ask other free market types (as Scott calls them…):

1) Do you agree that in the absence of Free Banking that monetary policy should be rule based rather than based on discretion?

2) Do you agree that markets send useful and appropriate signals for the conduct of monetary policy?

3) Do you agree that the market should be used to do forecasting for central banks and to markets should be used to implement policies rather than to leave it to technocrats? For example through the use of prediction markets and futures markets. (See my comments on prediction markets and market based monetary policy here and here).

4) Do you agree that there is good and bad inflation and good and bad deflation?

5) Do you agree that central banks should not respond to non-monetary shocks to the price level?

6) Do you agree that monetary policy can not solve all problems? (This Market Monetarists do not think so – see here)

7) Do you agree that the appropriate target for a central bank should be to the NGDP level?

I am pretty sure that most free market oriented monetary economists would answer “yes” to most of these questions. I would of course answer “yes” to them all.

So I suggest to my fellow Market Monetarists that these are the questions we should ask other free market economists instead of telling them that they are wrong about being against QE3 from the Fed. In fact would it really be strategically correct to argue for QE3 in the US right now? I am not sure. I would rather argue for strict NGDP level targeting and then I am pretty sure that the Chuck Norris effect and the market would do most of the lifting. We should basically stop arguing in favour of or against any discretionary policies.

PS I remain totally convinced that when economists in future discuss the causes of the Great Recession then the consensus among monetary historians will be that the Hetzelian-Sumnerian explanation of the crisis was correct. Bob Hetzel and Scott Sumner are the Hawtreys and Cassels of the day.

Leave a comment


  1. Lars – Very well put. I´m all for it. There is one big problem. In the US IT has just been institutionalized. Pity, because it has been shown (just look at the US and EZ) that that´s a “criminal” target. Inflation has become an obsession and to propose/discuss another – although in principle much better target – is going to be quite hard. Be prepared to get “stones thrown at you/us”!

    • Marcus, I agree, but maybe the best way is to argue against inflation targeting that the risk of bubbles (the biggest fear of the conservative hawks) is much bigger with IT and than with NGDP targeting.

  2. david stinson

     /  April 2, 2012

    Good post.

    “… it is much easier to sell our views than when we just argue for monetary “stimulus”. I don’t want central bank to ease monetary policy. I don’t want central banks to tighten monetary policy. I simply want to central banks to stop distorting relative prices. ”

    Exactly. I have been suggesting the “S” word (stimulus) is part of the problem for a couple of years in comments on Scott Sumner’s blog (see
    http://www.themoneyillusion.com/?p=6564#comment-28171, http://www.themoneyillusion.com/?p=4088#comment-13954, http://www.themoneyillusion.com/?p=5312#comment-19163) but even Sumner still uses it or at least he was until recently.

    Of course, once one frames the discussion in terms of maintaining monetary equilibrium, it tends to raise uncomfortable questions (not for market monetarists necessarily or specifically) about why we have central banks at all, given our reluctance to rely on government agencies for maintaining equilibrium in other markets.

    Also, a question: would you say that most market monetarists believe that monetary disequilibrium of the excess supply variety can also distort relative prices?

    • David,

      Thank you. Yes, I am aware that Scott sometimes calls to “stimulus”, but that does not mean that he is not in favour of rules. However, he is more pragmatic than I am in the sense that he assumes that we will not get a rules based monetary policy in the US in the short-run and until we get that we should argue for the “right” discretionary policy and that would be for monetary “stimulus” right now. I am increasingly thinking that this “strategy” might be counterproductive – at least at the present state. It might have been the right thing in 2008/9 or 2010, but now we are so far from the “old” equilibrium that is basically would have little value to aim for going back to that (with can’t do it).

      Your hints about Free Banking is right…and I will not disagree. But even if you are in favour of privatizing the police you want to the government run policy to do their best in catching the bad guys. It is the same with Free Banking and NGDP targeting.

      Yes, I believe that all of the blogging Market Monetarists believe the monetary disequilibrium can lead to a distortion of relative prices. Prices are sticky and some prices are more sticky than other and therefore monetary disequilibrium will lead to a distortion of relative prices. That in my view is a key reason why central banks should target NGDP. That said, I am not sure that Scott are so worried about “micro issues” as for example Bill Woolsey and David Beckworth. Bill and David are more influenced by Leland Yeager and the GMU tradition than Scott. I am probably closer Bill and David than to Scott on this issue.

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