The modest case for nominal income targeting

I think monetary regime options are basically a two-axis question: they go from maximally politically likely and least desirable to maximally desirable and least politically likely.

The most politically likely monetary regime is the one we actually have: flexibly targeting CPI inflation at 2% per year. It’s not the worst target in the world—it will prevent a great depression—but it allows deep recessions and slow recoveries like those we’ve been experiencing recently.

The most desirable monetary regime is free banking and private supply of money. But it’s the least politically likely despite the evidence it lends itself to both monetary and financial stability. The monetary side of things—typically you see nominal income (total spending) grow stably or stay flat predictably under free banking, and a concomitant lack of harsh demand-side recessions and mass unemployment—suggests that we can find mid-points.

Thus, I spend my time advocating that we target nominal GDP—the total amount of spending/income/output in the economy measured without correcting for inflation—which I view as a spot in the middle. Less desirable than free banking but orders of magnitude more politically feasible and achievable.

There’s one very Hayekian reason for this. The basic Taylor Rule framework that New Keynesian-dominated central banks use performs well only if those central banks can make good guesses of the output gap—the difference between actual output and potential. If they have imperfect information, then targeting nominal income works better.

Or so says a new paper, “Nominal GDP Targeting and the Taylor Rule on an Even Playing Field” (pdf) by two of my favourite economists, David Beckworth & Josh Hendrickson:

Standard monetary policy analysis built upon the New Keynesian model suggests that an optimal monetary policy rule is one which minimizes a weighted sum of the variance of inflation and the variance of the output gap. As one might expect, the Taylor rule evaluates well under this criteria. Recent calls for nominal GDP targeting therefore must contend with Taylor rule as an alternative approach to monetary policy.

In this paper, we argue that the information requirements placed on a central bank by requiring policymakers to have real-time knowledge of the output gap need to be taken into account when evaluating alternative monetary policy rules. To evaluate the relevance of these informational restrictions, we estimate the parameters of an otherwise standard New Keynesian model with the exception that we assume the central bank has to forecast the output gap using lagged information. We then use the model to simulate data under different monetary policy rules. The monetary policy rule that performs best is the nominal GDP targeting rule.

Previously I’ve argued that we might call nominal GDP targeting ‘Hayek’s Rule‘ because it would achieve his preferred view of macroeconomic stability—a stable flow of payments. But I think we have another reason to call it Hayekian—it emphasises the importance of information-constrained central planners, in this case of money.

The progressive’s immigration dilemma

The freedom and wellbeing of all human beings should be important to us, regardless of their race or nationality. Because migration allows very poor people to dramatically improve their lives, often increasing their income by an order of magnitude, we should have a strong preference for more liberal migration laws in the developed world, particularly laws that favour low-skilled workers from the poorest countries.

The progressive’s dilemma is usually seen as being the fact that higher levels of immigration seem to make voters support redistributive domestic policies less. People are less happy to share with people who aren’t much like them. David Goodhart discusses this here. But this is a two-way street: the more redistributive your state, the more sceptical voters are of (at least low-skilled) immigration – this polling seems to reinforce that.

This might be aggravated in cases where immigrants don’t do much or even have a negative effect on the wages of low-skilled native workers. Not only are these guys competing with you for welfare, they’re driving down your wages too – even if theirs are rising by five hundred percent, yours falling by five percent still hurts.

But that isn’t usually what actually happens: immigrants to the UK generally don’t drive down native wages, even for low-skilled workers in the medium-to-long-run, and in Denmark they actually seem to have had a significant positive effect on low-skilled workers’ long-term earnings. In the US, there is a big positive link between immigration and native productivity (which eventually translates into higher wages). In the UK that link is also positive but is very small, almost zero.

However, in France, immigrants do seem to hurt work outcomes for natives – both in terms of jobs and, for short-term contract workers, wages.

What explains the difference? The authors of the Danish study say Denmark’s flexible labour market is what allowed the market to absorb immigrants to make everyone better off, and the author of the French study says the rigidity of France’s wage structure is what makes immigration harm natives. Incidentally, the UK, where immigrants have a fairly neutral impact on natives, is roughly halfway between those two countries in terms of labour market flexibility (according to the Heritage Foundation’s Index of Economic Freedom).

This trend seems to hold across Europe: the more rigid a labour market, the worse immigration is for native workers. That must be a factor in considering the costs and benefits of any given labour market regulation.

Poor people’s lives are made enormously better off by moving from poor countries to rich countries. Thanks to remittances, migrants also may have a significant positive impact on their home countries. For any progressive who wants to improve human welfare, facilitating more immigration from poor to rich countries should be an overriding priority.

Not only does a big welfare state reduce the number of immigrants that are politically accepted, a heavily regulated labour market seems to be associated with immigrants having a worse impact on natives. Even policies that seem like they would be good for Britons might still do much more harm than good if they make Britons less willing to accept higher levels of immigration.

This is a serious dilemma for any progressive who wants all humans to live good lives, not just ones of the same race or nationality. It means that these political concerns alone may demand a low regulation, low redistribution state.

Willy Hutton is starting to parody himself

Will Hutton’s managed to argue himself into a most interesting little corner. He’s been shouting for years that we need companies to be managed for the long term, not just for the short term interests of share traders. OK, not an argument we share (for the price of a share is the net present value of all future income, therefore it is a long term matter) but interesting in a manner. Hutton’s also one who shouts about how appalling all this inequality is. And the rich shouldn’t be allowed to own everything and other such generally lefty ideas.

And then we get to this:

In fairness, part of Tesco’s problem is that Britain’s retailing landscape is being transformed by two different challenges – online shopping and discount retailers Aldi and Lidl, whose market share has doubled in the past five years to more than 10%. Tesco’s grandiose out-of-town hypermarkets are now stranded behemoths no longer attracting, as they once did, shoppers who now prefer to go online. Tesco has recognised the reality, stopped building new stores, closed others and written down the value of its fixed assets by £4.7bn.

But Aldi’s and Lidl’s success is rooted in something more profound than just capitalising on newly cost-conscious, financially pressed consumers. They are privately owned businesses that think long term and whose business purpose, enshrined by the owners, is to focus on a very narrow range of goods they can sell at high volumes and thus price incredibly keenly. British supermarkets, having to please shareholders with no such commitment, can never price so keenly even if they could match Aldi’s and Lidl’s logistical capacity and focus.

He’s seriously arguing that it’s better for everything to be owned by a few billionaires than it is for all of us, in a rather more minor manner, to be capitalists and owning the businesses of the country through our own savings and or pensions.

How on Earth did anyone nominally on the left end up advocating such oligarchic policies?

It really is planning that is the problem with housing and house prices

We know, we go on about this almost ad nauseam. But it really is true that the basic problem with housing and house prices is the planning system. An interesting paper from the CEPR allows us, once again and via a different route, to prove this:

How have house prices evolved over the long‐run? This paper presents annual house prices
for 14 advanced economies since 1870. Based on extensive data collection, we show that real
house prices stayed constant from the 19th to the mid‐20th century, but rose strongly during
the second half of the 20th century. Land prices, not replacement costs, are the key to
understanding the trajectory of house prices. Rising land prices explain about 80 percent of
the global house price boom that has taken place since World War II. Higher land values have
pushed up wealth‐to‐income ratios in recent decades.

It is not that houses have become more expensive to build. The standard 3 bedder suburban semi can be put up, from scratch, for £120k and a little less than that in volume. What has become more expensive is that land. And, no, it’s not that we’re running out of land nor even that land itself has become more expensive. Even prime agricultural land in he SE tops out at £10k a hectare.

It is that land upon which you are allowed to build a house has become more expensive. And that of course is an entirely artificial shortage caused by the planning system itself.

So, if we want to deal with the “housing crisis” what we need to do is reform the planning system. Probably to the one we had before it caused this particular problem which was, essentially, to have no planning system at all.

An interesting idea to change copyright

We wouldn’t like to give anyone the idea that we think that the Green Party are anything other than somewhere between wildly misguided and entirely deluded on all matters. However, they have made one suggestion which is most certainly worthy of greater consideration. That’s to restrict the terms of copyright:

The Green party may be forced to backtrack on its proposals to limit UK copyright terms to 14 years after a howl of protest from prominent writers and artists including Linda Grant, Al Murray and Philip Pullman.

The Greens’ manifesto said the party aims to “make copyright shorter in length, fair and flexible” with the party’s policy website saying it would “introduce generally shorter copyright terms, with a usual maximum of 14 years”. Representatives of the party said on Thursday that length could be revised after a consultation.

There have indeed been howls of protest from just about everyone who has ever made a penny or two from stringing words together. As most of us here have made a penny or two from stringing words together as well perhaps we might add a little bit of grown up talk to the discussion?

The entire point of copyright (and also of patents) is to acknowledge that free markets, pure free markets entirely unadorned, are not the optimal solution to every problem. We’ll argue with anyone about the idea that they are the optimal solution to more problems than anyone currently allows them to be but we’re still insistent that this does not mean that they are perfect. And the issue of creation, whether of new ideas, new works of art or simply entertaining schlock is one of these areas. It’s difficult and time consuming, expensive in other words, to produce new material in any of these fields. It’s extraordinarily easy to copy it once that has been done.

This means that in a purely free market system it will be very difficult to profit from creation thus we think there will be less creation than we might want. So, we add protections for the creators. We have, simply, entirely invented this concept of “intellectual property”. That provides the incentive to create.

However, there’s also the point that we like derivative creation as well: someone creating atop the bones of what has gone before. And too long a, or too restrictive terms of, protection will limit and hinder this. So, some protection of creation is desirable and too much is not.

But note where this leads us. It is that original creation that we wish to encourage. And, if we’re honest about it, writing a book now is not influenced in any manner at all by the thought that a literary estate might still be earning from it 70 years after the authors’ death. The Sherlock Holmes stories only recently went out of copyright: does anyone think Conan Doyle was in the slightest influenced to write by what the stories might earn in the 1980s? Or take the lengthening of sound recording copyrights from 50 to 70 years just recently. Does anyone really think that Cliff Richard was incentivised to record “Living Doll” by how much it might make him in 2010? Sure, in 2010 he was very interested in the subject as he campaigned on the issue but what we want to know is what pushed him in the first place, not what he thinks post facto. Given that he did the recording under a 50 year protection does rather show that the 70 year protection was not necessary to encourage that original creation.

So, therefore, we probably shouldn’t have the longer protection.

14 years might be too short a period of time. From memory that was actually the time period in the early 18th century, and it could be renewed at least once. Full marks to the Greens for actually recognising this as an interesting area for discussion. But we would have thought that reverting to that 18th century was a bit odd for them. For they normally want us to fast forward to the Middle Ages don’t they?