Sunday, January 13, 2013

Lars Christensen vs. Krugman on Monetary Policy

    Bob Murphy rather snarkily on "two" visions in economics."

     "==> On the one hand, you can listen to Danny Glover and write-in Paul Krugman for Treasury Secretary."

    "==> On the other hand, you can sign up for Joe Salerno’s 6-week Mises Academy class on Austrian macroeconomics."

      Obviously that's not really apples to oranges-Krugman's position is given by Danny Glover who's obviously not an expert-though someone whose opinion could be just as lucid as anyone else's, and an Austrian scholar gives Murphay's position

      To have an apples to apples look we should put Glover up against say Clint Eastwood. If we want a contrast, however, the place to go could be in comparing the vision that Christensen put up today on monetary policy vs. Cullen Roche's approving quote of Krugman. First Lars.

      For him, being a Market Monetarist is not about being a 'hawk or dove' on monetary policy-supporting 'easy or tight money' nor is it about any particular proposal even. While the MM school is more or less synonymous with NGDP targeting in terms of a proposal he argues that this is not what defines you as a MMer or not.

     What counts is that you believe in the end to discretionary monetary policy. He draws the analogy with James Buchanan of Public Choice Theory who just recently died who believed in a "constitutional approach" to policy.

      Christensen sees this as important as many Right of Center economists wrongly see MM as a Keynesian school as they have been calling for easier policy during the Great Recession. This is false he claims, he defines a "Keynesian" position as discretionary and MM as rules based.

       "Obviously Market Monetarists have been arguing in favour of monetary easing in both the US and the euro zone, but the argument is made within the framework of NGDP level targeting. We not always “dovish”. In fact most of us would probably have argued that monetary policy in the US and in most Europe have been overly easy for the last 40 years. But that is besides the point. The point is that we really should not have a discussion about easier versus tighter monetary policy. We should debate the rules of the game – James Buchanan would have told us that."

       "I am not trying to say James Buchanan was Market Monetarist – he was not and I am sure he would not have liked that label. But I do think that Market Monetarists’ call for a rule based monetary policy is completely in the spirit of James Buchanan."

       "However, many of the economists who would normally be on the same side of the argument as Market Monetarists today see us as allies of the keynesians because they see the Market Monetarist call for easier monetary policy as meaning that we are keynesians – because they equate being keynesian with easy monetary policy and therefore if you are anti-keynesian you will have to be a “hawk”.

       "Take some of the “hawks” on the FOMC – for example Charles Plosser. Plosser of course academically comes from an economic tradition (Real Business Cycle theory) that should lead him to stress the importance of rules. However, over the last four years I have heard very little from Charles Plosser about the need for a rules based monetary policy. Instead Plosser has been speaking in the language of discretion. In that sense he has a lot more in common with the keynesian Federal Reserve officials of the 1970s than Market Monetarists have."

       "That said, Market Monetarists certainly have a problem as well. If somebody wrongly sees us as the monetary version of discretionary keynesian fiscalists like Paul Krugman then we have a problem. Then we need to explain ourselves. We need to explain that we want a monetary policy based on the constitutionalist thinking of James Buchanan. We don’t care about hawks and doves – the only thing we care about is limiting the central banks ability to mess us things by introducing clear and transparent monetary policy rules that limits the discretionary powers of the central banks. In that sense we have a lot in common with Austrian gold standard proponents despite the fact we strongly disagree on the causes of the Great Recessions."

      "So concluding, Buchanan was right – we need a monetary constitution that limits the discretionary powers for central banks. Now lets discuss what that rule should be instead of the continued fruitless discussion about easier or tighter monetary policy and stop identifying yourselves as hawks or doves. The questions is whether you believe in a monetary constitution or not."

    He then calls out Krugman for not being rule based:

    "I use the term “keynesian” here in a certain way that I think that most of my readers understand and agree with. However, the New Keynesian traditions would certainly be as strongly against discretionary monetary policies as Market Monetarists. I would not place for example Paul Krugman in that New Keynesian tradition as he seems very happy to endorse all kind of discretionary shenanigans."

    I don't think Krugman would have any problem with being identified as not in the rules or "constitutionalist" school. Christensen also distances his "constitutionalist" approach with any conservative U.S. position-"Originalism", etc.

    "The term “constitutionalist” is not meant to mean the US Constitution and it is not some fringe US populist tradition. It a form of economic thinking."

     I think in fact the same problems with the Right wing constitutionalist position in the U.S. are present in Christensen's monetary constitutionalism. The idea that there will be no discretion in monetary policy is shear illusion-no less an authority agrees with this than Ben Bernanke, incidentally.

       He actually calls for "constrained discretion" in a valiant attempt to halve the loaf.

        Here is Krugman on discretion vs. rules in monetary policy.

I really liked this piece by Paul Krugman on money in general. Of particular importance is this paragraph:
“For people like me, on the other hand, the economy is a social system, created by and for people. Money is a social contrivance and convenience that makes this social system work better — and should be adjusted, both in quantity and in characteristics, whenever there is compelling evidence that this would lead to better outcomes. It often makes sense to put constraints on our actions, e.g. by pegging to another currency or granting the central bank a high degree of independence, but these are things done for operational convenience or to improve policy credibility, not moral commitments — and they are always up for reconsideration when circumstances change.”

           The idea of money as a social construction is wholly denied by folks like Christensen and Bob Murphy and is the locus of so much of the problem. The belief that we should adhere to a rule for its own sake-the Monetarists often seem to think that any rule will do, so that what matters is simply that we are following a rule without question suggests a fetishizing of a rule into a kind of moral imperative. This is not an economically sound way to think about policy.




  1. Let's say we accept Christensen's claim that monetary policy should be rule based and that NGDP targeting is a rule-based system. What actions will the Fed take to alter NGDP? Interest rate adjustments? OMOs? If so, for what assets and durations? Even though NGDP targeting provides a rule, the actions taken by the Fed remain highly discretionary.

    Now imagine that Congress sets an RGDP target to make fiscal policy rule based. The manner by which funds are spent remains highly discretionary. Would Christensen and other MMers really accept that type of system as being rule-based? I doubt it.

  2. So the target could-in theory-be wholly rule-based but not the means to achieve it...