Bubbling Up...9/5/12

1) Thoughts on the Michael Woodford Paper…. by Cullen Roche @ Pragmatic Capitalism

Regarding NGDP Targeting I am definitely skeptical that the Fed’s commitment to a NGDP target will have the stimulative effects that some hope it will.  I still fail to see the transmission mechanism whereby balance sheets are meaningfully impacted in a manner that alters current income.  Fed policy usually works through altering credit markets by making inside money less expensive and inducing borrowers to borrow.  Obviously, at the zero bound with low demand for credit this policy approach has run aground.  QE could “work”, but it’s been implemented incorrectly or at least inefficiently in my opinion since monetary policy is about price and not quantity.  The portfolio rebalancing effect is interesting, but I have my hesitations about the unintended consequences of targeting nominal wealth as a form of putting the cart before the horse.  Ie, the Bernanke Put has its negative side effects.  But I am not against trying policies with the understanding that I could definitely be wrong.  At this point, the economy is so abysmal and unstable that we should be trying more.

Woj’s Thoughts - Cullen has been a primary source of knowledge/learning about monetary operations so his thoughts on these matters are always worth reading. My position remains similar that the transmission mechanisms (portfolio rebalancing, lower real rates, higher asset prices) are insufficient to meaningfully alter the demand for credit, which continues to restrain growth and inflation. One question I have regarding Woodford’s policy suggestions is, how does the Fed credibly commit to maintaining low interest rates beyond the tenure of Bernanke or voting FOMC members? This is a similar issue faced by Congress or the President in committing to any policy (ex. lower deficits) beyond their term. My hunch is that Bernanke recognizes this dilemma and will refrain from attempting such an action for fear of impairing the Fed’s credibility. Only time will tell if that’s correct. The one issue I have with Cullen’s post is the last sentence in the paragraph above. Saying “that we should be trying more” implies that the expected cost of further actions does not outweigh the expected benefits. I remain skeptical of this argument from the perspective that risks from rising commodity and stock prices, not to mention increasing wealth inequality, are greater than the likely benefits.  

2) Why you won’t find hyperinflation in democracies by Felix Salmon @ Reuters.com

The real value of this paper is its exhaustive nature. By looking down the list you can see what isn’t there — and, strikingly, what you don’t see are any instances of central banks gone mad in otherwise-productive economies. As Cullen Roche says, hyperinflation is caused by many things, such as losing a war, or regime collapse, or a massive drop in domestic production. But one thing is clear: it’s not caused by technocrats going mad or bad.

For that matter, there are no hyperinflations at all in North America: the closest we’ve come, geographically speaking, was in Nicaragua, from 1986-91. In fact, if you put to one side the failed states of Zimbabwe and North Korea, there hasn’t been a hyperinflation anywhere in the world since February 1997, more than 15 years ago, despite the enormous number of heterodox central-bank actions in that time.

Woj’s Thoughts - Why are we still even talking about hyperinflation in the US? How many years must pass with ~2% inflation before these concerns are simply ignored? Disinflation remains most characteristic of our economy today and I remain of the view that actual deflation is a more probable outcome in the next 5 years than inflation exceeding 5%.

3) Teaching History of Thought by Jonathan Finegold @ Economic Thought

Maybe it’s my inexperience, but I feel that a one semester undergraduate course — heavily complimented by course readings — could fit in most high profile economists between 1870 and present day, and teach them well. Mises and Hayek, for instance, could be taught in one or two fifty minute lectures (and, no doubt, these themes would recur), with 3–4 readings (call it ~150–200 pages over a weekend). Keynes could be taught in 1–2 lectures, as well. This kind of class would require a lot of reading of “basic” material, with lectures centered on more advanced ideas. Few undergraduate students experience this, but it would be a class where the professor doesn’t regurgitate the reading material.

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What would an “ideal” history of thought class look like to you? We can even talk about undergraduate and graduate courses. Who would you teach? Who would you leave out? Why?

Woj’s Thoughts - I’ve yet to take a true history of economic thought course, but found these questions intriguing since most of my background is based on a random walk through historical readings and economic blogs. My experiences in other economics courses, however, suggests that the specific economists or theories a professor finds worthy of lecturing on is highly correlated to those with whom they agree. Who knows how my future will play out, but the idea of teaching a history of thought course someday is incredibly appealing. Maybe the suggestions here and on Jonathan’s blog will help in structuring that course.