Williamson not only disputes Romner's idea but he declares it shoddy, and her level of work and ability shoddy:
"Christina Romer is certainly consistent. In spite of her many years of experience in academia and policy circles, she consistently surprises me with her un-nuanced views on economic theory and empirical evidence and how they inform policymaking. Case in point: this NYT article"
He sees her point that the Fed does have a dual mandate and that the full employment half of the mandate is in much worse shape than the price stability side and so perhaps the Fed should at least in the short term tolerate more inflation as not persuasive and perhaps this is what he means by "un-nuanced."
"The "dual mandate" specified in the Full Employment and Balanced Growth Act of 1978, or Humphrey Hawkins Act, is in fact quite vague. Under the Act, the Fed is supposed to be promoting maximum employment and price stability. But any creative central banker would find it easy to make an argument that his or her favorite policy fits well within the Act's guidelines. One could argue (I'm not saying this argument would necessarily be correct), for example, that "price stability" means constant prices (0% inflation) and that employment is lower than it was five years ago due to factors which the Fed cannot correct for. That would then imply that policy should be less accommodating. The set of policies consistent with the Act is so large that the dual mandate argument is not going to help in making Romer's case. She's going to have to make the case by appealing to sound economics."
True it can be subjected to interpretation. As he seems to see it there are literally infinite interpretations it could be subject to and still be able to plausibly claim you are fulfilling Congress' directive within the dual mandate. If so, essentially the Humphrey Hawkins Act is basically meaningless as it can't be enforced-as it can be spun in almost any direction to mean almost anything and still have the plausible deniablity that it is being followed faithfully.
I'm not sure we have to be quite as strait jacketed as Williamson suggests here. I mean his very broad reading of it means essentially we are wholly shackled in being able to say the Fed is or is not following it. However, it seems to me the reasonably man or reasonable person standard is enough to get is out of such shackles. I think you can reasonably interpret what the spirit of the law was meant to be-clearly Congress would not have passed it if it wasn't trying to enforce it-Williamson's gloss means we can't enforce it.
Again, his quite categorical repudiation of Romer-not just her argument but her professional competency ability seems quite extravagant based on this first objection. Particularly after Williamson concedes:
"The inflation rate, as measured by the twelve-month percentage increase in the pce deflator, is indeed just below 2%, the Fed's inflation target. The unemployment rate is indeed historically high. Given the Fed's past behavior, one might think more accommodation would be appropriate, assuming of course that the Fed's past behavior was optimal."
See, he has no trouble employing the reasonable person standard here. So having finished this rather gratuitous quibble he moves on to the meat of his objection:
"1. Nominal GDP Targeting. Romer incorrectly refers to NGDP targeting as an "operating procedure." The operating procedure is actually a description of how the FOMC directs the open market desk at the New York Fed to act. The desk can only do one thing: conduct open market operations. The current fiction (in line with what is written in FOMC statements) is that the operating procedure is the same as before the financial crisis, i.e. the desk conducts open market operations to target the fed funds rate at a level specified by the FOMC. In fact, the fed funds rate is currently determined by the interest rate on reserves, as set by the Board of Governors (for the details, see this post). The desk currently just executes whatever the current quantitative easing (QE) program of the Fed is, without regard to the quantity of reserves that are held in the system overnight.
"It would not have made any sense even in pre-financial crisis times for the FOMC to direct the desk by just telling it to hit a NGDP target. Nominal GDP is measured on a quarterly basis, and the National Income Accounts numbers are published with a lag. Currently, for example, it is June 10, and the last NGDP number we have is for first quarter of the year. The FOMC meets about every six weeks. If we were practicing NGDP targeting, how exactly would the FOMC translate the difference between actual NGDP and target NGDP in the first quarter into a directive to the desk at the next meeting? If, as in pre-financial crisis times, excess reserves in the system were essentially zero overnight, then presumably the directive to the desk would have to be in terms of a fed funds target. Under current conditions, and given how the Fed thinks about the monetary policy problem, the directive to the desk would have to be in terms of quantitative goals for the Fed's portfolio. Thus, the operating procedure under a NGDP target would necessarily have to be identical to what it is now."
"NGDP targeting does not do anything other than specify the Fed's ultimate goals. As such, there are two problems with it. The first is the absence of a sound theory to justify NGDP targeting. It is unclear why an economy in which NGDP grows at a constant rate is an economy in which the central bank is doing what is optimal. Second, one can imagine circumstances under which particular NGDP targets will not be feasible. In fact, I do not think it would be feasible for the Fed to achieve 5% annual nominal GDP growth by the end of this year, for these reasons."
2. "More QE. Romer and the FOMC are on the same page on this one, but I don't think QE does anything at all (again, see the last link above). At best, QE can signal future intentions of the Fed with regard to the policy rate (and thus move asset prices), but the Fed can do the same thing with "forward guidance," i.e. announcements about the future path for the policy rate. Like other people, including Miles Kimball, Romer seems to think that QE isn't doing much because the Fed hasn't done it right."
" It does seem like there's some ambiguity over QE. Romer does seem to think it wasn't effective though it raised asset prices. I guess the question is what else does she think QE can do? If I understand the Market Monetarist approach, basically what QE is meant to do is raise expectations of future policy. Indeed Williamson mentions that it can do that:
"At best, QE can signal future intentions of the Fed with regard to the policy rate (and thus move asset prices), "
"Romer agrees that the first two installments of QE did only that, yet it seems to me that MM doesn't expect more than that either. Sumner has said he doesn't think QE does much on its own but its all about expectations. Williamson thinks it can do that but that this is not enough. MM if I have it right think this is enough.
Here though I think he really gets to the crux of the matter:
"NGDP targeting does not do anything other than specify the Fed's ultimate goals. As such, there are two problems with it. The first is the absence of a sound theory to justify NGDP targeting. It is unclear why an economy in which NGDP grows at a constant rate is an economy in which the central bank is doing what is optimal. Second, one can imagine circumstances under which particular NGDP targets will not be feasible."
I think he really nails it here. I mean these are the two questions that must be answered. Most discussions among the Market Monetarists is on teh line of "can it work?" with the MMers explainin why it will work and to a lesser extent how it will. But very little time is spent on why "an economy in which NGDP grows at a constant rate is an economy in which the central bank is doing what is optimal."
In the comments section some MMers made their case. As Sumner observes:
"In the comment section someone mentioned Evan Soltas’s recent defense of NGDPLT, and Williamson responded:
http://tinyurl.com/7k8db4f"Charming. I’d recommend Williamson read Milton Friedman, if he wants to see partial equilibrium analysis that blows away 99.9% of the GE stuff churned out by our grad schools today."
You realize that was written by a high school student?
“Perhaps not all of these arguments are wrapped up in one tight analytical model, but these general concepts should not be difficult to model in chunks.”
How do I model in chunks?
Yep. No question Williamson's bedside manner can be quite "charming." This like his rhetorical excesses in ripping in to Romer is rather gratuitous and again shows him in a rather poor light. As if some of the greatest prodigies having done their best work by high school age or younger. This sort of gratuitous condescension and elitism makes it easy to root against him. Sumner who can have his enlist moments though I would say their not that common is able to take advantage of this. Sumner goes on:
"But Williamson is right about his main point; Romer doesn’t present a rigorous model that would justify NGDPLT. Perhaps such a model doesn’t exist. But here’s the problem, no one else has a rigorous model that would justify any monetary policy, at least not a model that passes the laugh test. Just imagine if Steve Williamson walked into the FOMC with his favorite GE model and said; “Here’s the correct model of the economy; this tells you how you should conduct monetary policy.” People would literally fall on the floor laughing."
No rigorous model justifies any monetary policy. This is kind of where the rubber meets the road. Williamson has to push back against that. He leaves this comment at Money Illusion:
1. “Williamson is highly critical, but doesn’t seem to fully understand the distinction between policy instruments and policy goals…”
"I think you need to tell us what the operating procedure is that you are recommending. In your writings you seem to be saying that the Fed came somehow wish to hit their NGDP target, and it will be so. Under a NGDP target, how does the Fed use the information it has on actual NGDP to issue a directive to the open market desk, and what exactly is the nature of that directive?"
2. “I’d recommend Williamson read Milton Friedman, if he wants to see partial equilibrium analysis that blows away 99.9% of the GE stuff churned out by our grad schools today.”
"Actually, I think I’ve read about 90% of Friedman. Friedman was brilliant, but unfortunately limited by his technical knowledge. Sometimes he was “right,” for example with the Friedman rule (zero nominal interest rate in all states of the world). That’s something you can flesh out in many standard monetary models, though we think there is something wrong with the Friedman rule as practical policy. Sometimes Friedman was wrong, for example with the 100% reserve requirement. He didn’t understand financial intermediation. You shouldn’t take Friedman as an example of why we shouldn’t do math. Friedman could have been much better if he had known as much math as Lucas does.
3. ” If you read the minutes of the Fed meetings, you’ll see exactly the same sort of non-technical pragmatic arguments that Evan used. The debate at the Fed almost never rises above the sort of simple, natural rate AS/AD model used in intro econ classes.”
"Have you ever talked to anyone who has been to an FOMC meeting? Bernanke, Kocherlakota, Lacker, Plosser, Evans, Rosengren, Bullard, at least, are sophisticated economists with excellent technical skills. Natural rate AS/AD models would actually get the guffaws in that room.
4. “Here’s the type of argument that economists find persuasive:”
"When you say “economists,” I think you mean the readers and writers of blogs. You should understand that not everyone in the economics profession takes the blogosphere seriously. The quote from my blog post is just a piece of information which might suggest something, but it’s not serious economics. If you show up at the SED meetings in Cyprus next week, you’ll actually see “economists” doing serious work."
Number 4 was particularly "charming"-economists as readers and writers of blogs. Again, he obviously loses the popularity contest-he's basically telling all the readers that they aren't on the level of real economists and maybe aren't even worth being in the conversation. What leads to such condescending-and you might think, counterproductive comments at least if he hopes to persuade any of these blog readers he's writing for? One thing is vanity-he feels that Sumner's who project carried out here for the unwashed somehow diminishes what he does at his institution-the Fed. It's kind of like when the poker pros let in amateurs. Pros hate to admit that amateurs can play their game, it diminishes what they do.
Still while 4 is gratuitous and basically pointless, the first three do have varying levels of validity. This is the challenge in such an argument-to shift out good arguments and bad and putting the meaningless snark on ice. Of course number 4 really hurts Williamson and Sumner's able to come back strong:
"Ever since the late 1980s I’ve been publishing papers advocating the Fed rely in NGDP futures (or CPI futures.) I’d have them adjust the base to keep NGDP expectations growing along a steady 5% growth track, level targeting."
"I have a paper in the Berkeley journal “Contributions to Macroeconomics” in 2006 that lays out the general approach. Interestingly, Narayana Kocherlakota (and economist you seem to like) just endorsed my proposal last Friday (as I discuss in my new post.) John Cochrane endorsed it a couple years ago, after I explained the idea to him. So it looks like we low tech guys are sometimes ahead of the curve."
"I didn’t say you shouldn’t do math, I’ve also published mathenmatical models. The point was that math isn’t the be-all-and-end-all of macroeconomic analysis. Friedman’s views of business cycles (as for instance the Monetary History–still the most influential applied macro book ever written) have held up far better than Lucas’s monetary misperceptions model. I’m a huge fan of Lucas, but mostly for rational expectations/Lucas critique reasons; he wasn’t able to come up with a persuasive macro model. BTW, Lucas thought The Monetary History was the best empirical study of the effects of money, despite it being very low tech."
"Friedman was an extremely intelligent guy, he learned whatever math he felt he needed to get this points across."
Yes, Scott will brook no criticism of The Milt. He didn't need any more math than he did have.
“Have you ever talked to anyone who has been to an FOMC meeting? Bernanke, Kocherlakota, Lacker, Plosser, Evans, Rosengren, Bullard, at least, are sophisticated economists with excellent technical skills. Natural rate AS/AD models would actually get the guffaws in that room.”
This is a complete non-sequitur, which has no bearing on the point you just quoted. I was describing the sorts of arguments used in the FOMC, it’s 99% applied AS/AD. Sure these guys know much more than that, I never claimed otherwise. So do I. But I read the minutes, and they basically talk about demand shocks, supply shocks and changes in the natural rate of output/unemployment. That’s how they make their decisions."
"Regarding “serious” economics, I’d suggest you read Deirdre McCloskey on methodology. The myth that there are two types of economics, serious and popular, is very attractive to many economists, but doesn’t hold any water. Economics is 100% about persuasion, sometimes highly technical arguments are helpful, sometimes they aren’t. I see even the most highly technical economists being swayed by trivial stylized facts all the time. It’s how things work in the real world.
Ultimately people like Plosser and Kocherlakota are judged not on their scholarly papers, but rather on whether they can make cogent arguments for their policy recommendations."
Scott gets some nice spikes in there. Again, Williamson kind of makes it easy for him. In many ways his argument is more appealing. After all what does Williamson offer the interested layman? Nothing-he seems to hold him as beneath contempt. On mathematical models though we get some clear difference-on Friedman at least. Williamson thinks he would have profited from being stronger technically, Sumner loves him just the way he was. Sumner argues that there isn't two types of economics-serious and popular. This is appealing and sounds good I'd like to believe this. Yet I do think Williamson makes some valid points if you read deep beneath the attitude.
Williamson goes at it one more time with another comment:
"I’d have them adjust the base to keep NGDP expectations growing along a steady 5% growth track, level targeting.”
"That’s not an operating procedure. The people who are doing open market operations at the New York Fed can’t see “NGDP expectations.”
“I didn’t say you shouldn’t do math, I’ve also published mathenmatical models.”
"That seems to be the flavor of what you’re saying, though. The gist of your argument is that the real world does not need formal modeling, and you’re claiming that in practice that’s what happens. Neither is correct. We do the formal modeling for a reason. It helps to make our ideas precise, and sometimes surprises us. An FOMC discussion is informed by a lot of formal, hard work, that is done by the people who work in the Fed system, and that goes into briefings before the meeting takes place. The participants carry that formal analysis in their heads when they are in the room, but of course they have to communicate that information in terms that most people in the room will understand. That said, I’m assured by the people I know who actually attend this things currently, that the level of discussion is very high – much above AS/AD, thank you".
"I like McCloskey’s arguments about persuasion. I learned a lot from Don/Deirdre when he/she was my colleague. But I think McCloskey would include the formal modeling as part of the persuasion. I certainly do. If you want to persuade me, and I think most mainstream economists, you’re going to have to show how this works formally. Don’t give me this bullshit about how models are useless."
Ouch! At this point Sumner hasn't answered again-maybe he hasn't gotten around to it yet, maybe he doesn't want to escalate any further yet. I think Scott's point about a false division of between serious and popular economics is strong. Yet I think Williamson may be right about the models. No doubt he has a chip on his shoulder-again, we're amateurs and surely there must be some difference or Williamson feels diminished. But maybe he's right that most professional economists want to see the model. Think of it this way this could be why NGDPT hasn't made it yet.
Then again who knows-think about it this way. When you want to talk about the great economists of history the guys we talk about for hundreds of years we can certainly think of many who didn't have any highly technical model--the ad hoc Keynes, Friedman, did Adam Smith have a model?
But most important, I'd say that while Williamson can definitely be guilty of snarky condescension he nevertheless does ask two important questions that I don't know that Sumner and the MMer have answered satisfactorily:
"there are two problems with it. The first is the absence of a sound theory to justify NGDP targeting. It is unclear why an economy in which NGDP grows at a constant rate is an economy in which the central bank is doing what is optimal. Second, one can imagine circumstances under which particular NGDP targets will not be feasible."
In particular the first question.