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CronoDAS comments on Mathematicians and the Prevention of Recessions - Less Wrong
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The Sumner critique says that the Great Recession was more 'caused' by failure to supply enough money (when the market was clearly anticipating almost zero inflation) to keep NGDP on a level growth path, suggesting that the main path toward resolving this problem would be figuring some way to further convince the Federal Reserve to adopt NGDP level targeting. Also, as I understand it, even some of the people making money off shorting the housing market were quite loud about it - it's not obvious that a lack of transparency is the problem. To make money you need to time your short correctly which the now-famous winners may have done by coincidence, and this is always the problem with bubbles. For that matter, it's not obvious that the housing market would still have collapsed if the Fed had committed to an NGDP path.
If I'm understanding my Krugman right, declaring an NGDP target and actually achieving that target are two different things. The Fed's normal tools can't actually produce any inflation when the economy is depressed and interest rates are at zero. - increasing the money supply will just lead to more cash under Apple Computer's proverbial mattress instead of increased NGDP.
There actually is something a central bank can do when it's up against the zero lower bound, but it's risky. The interest rate won't always be zero, so if the central bank can credibly promise to create high levels of future inflation by keeping interest rates low even after the economy recovers - to "credibly promise to be irresponsible" - it can affect real interest rates today. But good luck getting investors to believe a central bank is going to keep the proverbial printing presses going even beyond the point where it starts doing more harm than good.
It's much easier under these circumstances to do the same thing with fiscal policy rather than monetary policy: have the government borrow and spend to put idle resources to work directly, increasing NGDP by increasing real GDP. (This is how World War II caused the end of the Great Depression.)
I think you're actually just not understanding Krugman right. He often writes misleadingly, so that's understandable. The Fed's normal tools perhaps can't be used to do that (but they probably can), but the Fed's normal tools are stupid and it's easy to produce inflation with slightly different tools (negative interest rates on reserves, level targeting, targeting the forecast etc., credible promise to keep interest rates low). This isn't some new theory, Krugman has a famous paper about how the Japanese Central Bank could do exactly that.
Having a target and achieving the target are definitely different things, but achieving an NGDP target is not difficult because central banks have approximately infinite control over a single future nominal variable (e.g. NGDP, nominal interest rate or price level).
One of the big lessons from central banks response to this recession is that interest rates and inflation are a very misleading and confusing ways to talk about monetary policy.
This is likely an incorrect understanding.
The problem isn't that the Fed can't reach (from low to hit) NGDP targets; the problem is that anyone can scheme to raise NGDP by conducting dummy transactions that nevertheless go on record in economic accounting as higher NGDP. At which point NGDP loses its evidential and causal power through Lucas/Goodhart effects.
Can there even exist a way to fix this without abandoning GDP-like indicators in favor of something closer to human level? Shifting resources around among enterprises, at higher and higher volume, is not the kind of economic activity worth wanting.
You are exactly correct. Policy must switch to a less gameable metric in order to avoid situations like that. But it's important to remember that the problem isn't just the potential for schemers, but that, even without schemers, the extra trades you've forced to goose NGDP are even less indicative of economic goodness than the normal "GDP = good" assumption requires!
And I don't think anyone can come up with such a metric without solving the (holy grail level) problem of microeconomic foundations for macro.
Wait, now I'm confused. Micro-foundations for monetary economics exist, and I know you know, because we've talked about them at length. Maybe you mean that there's more to macro beyond monetary economics?
I'm referring the commonly-known problem of deriving macro results from micro, which we also talked about in those exchanges, and during which you rejected the claim that failing to so derive results is a reason to reject the macro conclusions. If you remember differently, give a link.
Macro results are definitely derivable from micro principles: http://goodmorningeconomics.wordpress.com/2012/04/07/the-backrub-economy-a-simple-mathematical-model-of-monetary-disequilibrium/ .
I think we discussed that we haven't seen the AS/AD models derived from micro principles. I'm not sure this can't be done, its just not commonly discussed, and I don't see a good use for those concepts so I haven't tried to find a derivation.
If I'm understanding my Sumner right, Krugman is just plain wrong about this. Central banks can decrease interest rates, promise to keep future interest rates low, engage in quantitative easing, charge negative interest on reserves, and print physical money and drop it out of helicopters. "There is no zero bound" is a market monetarist slogan and I have to say it sounds a tad plausible from over here.
Plausible enough to overcome the presumption against "printing money is a costless way to solve economic problems"?
As a blanket presumption, that's dumb and you know it.
Certainly printing money is a near costless way to solve economic problems at some times otherwise we wouldn't use money at all. Sumner doesn't advocate printing money at all times and places, he advocates printing or destroying money until there is the correct amount (which he suggests is when NGDP is on-trend).
I think you're confusing "presumption" with "categorial principle" or "axiom" or something. A presumption can be overridden, given sufficient evidence; my question was whether or how strongly EY takes a presumption against it. If you agree with the concept of criminalizing counterfeiting, you agree with that presumption.
Does not follow. Not all moneys arose in a Pareto-optimal fashion, so their use not evidence printing money being costless.
My understanding is that Krugman is not wrong, he just writes correctly but very misleadingly for reasons that are not totally clear.
Oh, I think his reasons are pretty clear. They basically amount to politics.
I found the article "The Deflationist: How Paul Krugman found politics" educational on that point.
Holy crap: that article has "get to the point":fluff ratio of about 5%. I appreciate the link, but just want to warn readers they need to skip past a lot of meandering about scenes from NYC to get the answer to the question.
On this point, I'd just have to chalk it up as "beyond my current expertise". (Part of Krugman's argument is that although "unconventional" monetary policy is possible, political and other considerations make it much harder to do.)