Keynesians on NGDP-growth paths: Confusing arguments about policies and arguments about the goal

Bob Murphy recently suggested that a DeLong post expressing shock at Bernanke's policy decisions struck him as "B.S." because DeLong didn't endorse Scott Sumner's plan back in 2008. As I've noted here before, this kind of thinking bungles what Keynesians thought in 2008/09 (...10/11/12), and what the real differences are between Sumner and Keynesians. Scott Sumner's own spin on things has had an impact on the way people talk about this. Scott is an important voice in this crisis, but he also carefully manages the image of himself as a voice in the wilderness, and in a lot of ways I think that image is misleading. His position is unique (although getting less so every day) in his singular faith in the monetary authority's ability to successfully implement NGDP level targeting. He is not unique at all in (1.) thinking that expansionary monetary policy until we're back on trend is wise, and (2.) thinking that Bernanke of 2008-12 is not the Bernanke we used to know.

Let's get the easy part out of the way. I seem to remember Brad talking a lot about the gap between trend nominal GDP and actual nominal GDP in the early days of the crisis. I seem to remember lots of graphs of the gap on his blog (like this) that he would update on a regular basis and keep on a little banner at the top of the blog. I remember that it was Brad DeLong that challenged Ben Bernanke directly on the point of nominal growth in January 2010. I remember DeLong explicitly stating the problem in terms of nominal spending growth in 2009 when he contrasted the pragmatists (us) with the purists (the Fama gang), and I remember that from the beginning he explicitly pointed out that Fisher and Friedman and other quantity-of-money enthusiasts were on our side precisely because they recognized these points. Oh, and in March 2009 Bryan Caplan certainly seemed to be under the impression that Brad DeLong cared about NGDP trends.

So I think it's abundantly clear that NGDP was on Brad's radar from the beginning. It's also abundantly clear he had concerns about the Fed doing enough from the beginning. Which raises the question - why do people act like there's this gaping chasm between Keynesians and Sumner?

The answer is not that Keynesians don't care about NGDP, nor is it that they don't agree that the Fed should have a more expansionary stance. They are 100% on board with both of those things and as far as I can tell they have been from the beginning.
The real difference is that for Scott Sumner monetary policy is sufficient, and for Keynesians it's necessary, and there's a real chance it's not sufficient at a time like this. Sumner has a habit of strategically framing his position on this. He calls it "NGDP level targeting". Well what could be wrong with that? If the level is targeted then practically by definition we're doing OK, right? What Keynesians try to point out is that a level that is successfully targeted is a policy goal, not a policy. The policy is an expansionary monetary stance. The policy goal is targeting the level of NGDP. And the economic environment, agents' responses, etc. are what determine whether the policy is sufficient for achieving that policy goal.

Let's start with one objection by Keynesians (from Brad) that has been getting the most press: "The divide that worries me isn't sensible Democrat-sensible Republican. The divide that worries me is between economists who understand that the nominal money stock is not a sufficient statistic for the flow of nominal demand--especially when interest rates on short-term Treasuries are very low--and those who don't know enough to have figured that out, and who think that the nominal money stock is a sufficient statistic for the flow of nominal demand--even when interest rates on short-term Treasuries are very low."

This is the liquidity trap point. No, the interest rate mechanism is not everything. Yes, the interest rate mechanism is extremely important particularly when demand expectations are weaking MEC assessments anyway. Scott obviously scoffs at this. We say it's a good reason to not put all our eggs in one expansionary monetary stance basket in the effort to get total spending (again - note - we've gotta distinguish between the policy and the policy goal). That link up there is a good one because he also discusses other reasons to consider fiscal policy, including the expectations problem.

This is the Krugman point. Since the 1990s, Krugman has pointing to the possible new relevance of liquidity traps and has noted that a credible commitment to being irresponsible, monetary policy will still work in a liquidity trap. This is not new to the market monetarists, guys. It's all in the Japan paper. The problem is, a credible commitment to being irresponsible is hard for the monetary authority to do for the simple reason that all their pre-Fed work has been dedicated to convincing people that their policy responses are not going to be sustained indefinitely. There are Brad DeLong links above - if you want lots of links from me on why Krugman has always been on board with this (and why the distinction for Krugman too is really between policy and policy goals - two things that Sumner often confuses) see this post of mine.

So liquidity trap cuts out the interest rate mechanism. Anchored expetations and the Fed's track record (not to mention stubborn FOMC members) raise serious doubts about credible commitments to acting irresponsible can act on nominal spending through expectations.

That leaves fiscal policy.

And that's another difference between Keynesians and market monetarists. Sumner says that if the Fed is doing its job fiscal stimulus is pointless.

This is a reasonable statement to make.

But again, let's not confuse policies with policy goals. Has the Fed been doing its job? Has it succeeded in the expectations game that Krugman outlined many years ago? No.

Ergo...

Policies and policy goals are two different things. As far as I've been able to tell Brad DeLong has always been more or less on board with Scott's policy ideas. He has always been more or less on board with his policy goals. He has surpassed Scott in recognizing that those are two different things, and in recognizing that those are two different things he has been open to the idea of fiscal policy and not as sure about the efficacy of Scott's policy ideas (good ideas though they are).

So let's be careful when we talk about Keynesians and nominal spending.

Here's a good parting thought, also from an old post of Brad's:

"The government [he is referring to the Fed in this post] can buy more than Treasuries. After Treasuries, you buy GSE debt. And if that doesn't work, you buy bank and corporate debt. And if that doesn't work, you lend JPMorganChase $30 billion on the security of Jamie Dimon's dog. And if that doesn't work, you buy equities. And if that doesn't work, you buy the services of construction workers--by which time you are explicitly doing money printing-financed fiscal policy.

The thing that scares me is that I am not at all sure what or how much the Fed would have to buy. If you had asked me back at the start of 2008 how much the Fed would have to buy in order to keep nominal GDP on its pre-2008 growth trend, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet from $1 trillion to $1.5 trillion. And if you had asked me in the middle of 2008, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $2 trillion. And if you has asked me at the end of 209, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $3 trillion. Yet here we are with a Fed with a $3 trillion balance sheet..."

Policies and policy goals are two very different things. An NGDP level target is a policy goal, not a policy.