NGDP targeting: Hayek’s Rule

One thing I go on about on this blog is how nominal GDP targeting—a market monetarist policy proposal that has even won over a small group of New Keynesians—is also the kind of policy an Austrian should want in the medium term. Of course, in the long term we’d like to abolish the Bank of England altogether, but even then we’d get, with free banking, something like a stable level of nominal GDP, so it’s a pretty good target to work towards.

The economist Nicholas Cachanosky wrote a paper in the Journal of Stock & Forex Trading about a year ago, which I missed, called “Hayek’s Rule, NGDP Targeting, and the Productivity Norm: Theory and Application” which lays a lot of the Austrian arguments for targeting the level of nominal income in a very clear and cogent fashion. I include some key extracts below:

The term productivity norm is associated with the idea that the price level should be allowed to adjust inversely to changes in productivity. If total factor productivity increases, the price level (P) should be allowed to fall, and if total factor productivity falls, the price level should be allowed to increase. A general increase in productivity affecting the economy at large changes the relative supply of goods and services with respect to money supply. Therefore, the relative price of money (1/P) should be allowed to adjust accordingly. In other words, money supply should react to changes in money demand, not to changes in production efficiency.

The productivity norm was a common stance between monetary economists before the Keynesian revolution. Selgin [14, Ch 7,8] recalls that Edgeworth, Giffen, Haberler, Hawtrey, Koopmans, Laughlin, Lindahl, Marshall, Mises, Myrdal, Newcome, Pierson, Pigou, Robertson, Tausig, Roepke and Wicksell are a few of the economists from different geographical locations and schools of thought who, at some point, viewed the productivity norm positively.

One of the attractive features of productivity norm-inspired monetary policy rules is the tendency of the results to mimic the potential outcome of a free banking system, one defined as a market in money and banking with no central bank and no regulations. Among the conclusions of the free banking literature is that monetary equilibrium yields a stable nominal income.

Throughout Cachanosky distinguishes carefully between an NGDP target and a productivity norm, though I think these are overstated; and between ‘emergent’ stability in NGDP and ‘designed’ stability, which he (like Alex Salter) thinks are importantly different (I am not convinced).

Cachanosky believes that the 2008 crisis implies that NGDP growth beforehand was too fast, and led to capital being misallocated, but I still doubt the Austrian theory of the business cycle makes any sense when you have approximately efficient capital markets.

Despite our differences, I think that Cachanosky’s papers are very valuable contributions to the debate, and hopefully they can go some of the way to convincing Austrian economists that the market monetarist approach is not Keynesian.

Taxes, trade, and derivatives: stabilisers for Russia and Iran?

Both Russia and Iran are in a bind due to the oil crisis. The best thing for both countries to do is to enact some easy-to-implement, partially stabilising policy. Three measures can be taken:

1. Enhance taxpayers’ autonomy by allowing entities to pay taxes in a greater variety of currencies;
2. Let citizens and businesses trade in a greater variety of currencies; and
3. Deregulate derivatives markets in particular (and financial markets more generally).

An entirely destabilised Russia and/or Iran is in no-one’s interest. Although relations with NATO are sour, other prominent nations such as China and India have offered a helping hand (albeit a limited one). However, an alternative, mutually beneficial agreement can occur between these four nations.

First: enhancing taxpayers’ and trading autonomy. Russia should allow its taxpayers to pay taxes in the rouble, the Chinese renminbi, the Indian rupee and the Iranian rial whilst legally enabling trade in all these currencies. Similarly, Iran should allow taxes to be paid in Russian rubles, Chinese renminbi and Indian rupees as well as enabling trade in them. Since only being allowed to pay taxes in one currency artificially raises the cost of doing business in other monies, the enhanced autonomy of taxpayers will make it feasible for some exporters to sell in relatively cheaper money (thereby stimulating production and exports) and importers to buy with relatively stronger money (thereby combating inflation). It would also provide access to less volatile and less vulnerable monies. Another advantage is that tax revenues paid in different monies would allow diversified foreign exchange reserves and, therefore, the Russian and Iranian governments would be in a better position to defend their own national monies’ value in future (should they so wish to). This would enable Russians and Iranians to get on with their lives in a more normal way. Furthermore, since Russian and Iranian currencies would be accepted for trade and taxes in the other country, the mutual recognition may help bolster their value. The arrangement would also benefit China and India since the renminbi and rupee would make up a greater share of foreign exchange transactions.

For tax collection, a proportional system could be implemented; that is, if an entity earned (for example) 30% in rupees, 50% in roubles, 15% in rial and 5% in renminbi, a flat tax of 30% could be imposed such that the 30% rate is levied on each of the currencies according to proportions held (meaning 9% of the 30% comes in rupees, 15% comes in roubles, 4.5% in rial and 1.5% in renminbi).

Furthermore, extensive deregulation and liberalisation of the countries’ respective derivatives markets (especially with respect to interest rates, foreign exchange, commodities and equities) will enable domestic entities to better manage current and expected risks. Although inflows from NATO member-states may not be so forthcoming, both India and China have a vested interest in a stable Russia and a stable Iran; hence, it would not be surprising if (given the increased opportunity and ensuring a supportive climate for it) increased foreign direct investment in the Russian and Iranian derivatives markets for commodities, equities, interest rates and foreign exchange helped substantially manage expected risk of the oil crisis in these countries.

School choice: first evidence to prove long-term benefits

A report released this month by CESifo is the first evidence of its kind to prove the long-term social and economic benefits of school choice. Up until now, research conducted has explored life outcomes resulting from varying teachers’ quality, schools’ quality, classroom sizes and other school programs. Yet to be unravelled was the impact of school choice later on in life and how the effects of different types of post-secondary, varying by quality, persist far beyond attainment and standardised test scores. Adult employment, earnings and dependency on welfare are all examined in primary school students offered free school choice in the junction of transition to secondary school to determine which educational interventions best achieve the desirable long-term outcomes. 

Remarkably, students who had choice at primary school are 4.7 percentage points more likely to enrol in post secondary schooling, and to complete almost an additional quarter year of college schooling in comparison to controlled students. Further to this success was an estimated 5-7 percentage points increase in average annual earnings among treated students at ages 28-30. This explained by the improvement in academic outcomes resulting from the school choice program and post-secondary schooling attainment which are highly correlated to labour market earnings. Most surprising in the findings was that school choice led to reductions in health or mental disability rates at age 30 and to a decline in eligibility and recipiency of 3 disability welfare allowances.

Lessons learned from this study – which was conducted in Israel – can be easily applied to other educational settings due to different countries having very comparable and similar high-stakes exit exams. The school choice program also has similar features to related programs in the US, in Europe and in other OECD countries. As a result, variants of this school choice program have the potential to be implemented developed countries across the world.

A great advantage of this study is that it is also the first of its kind to present evidence that can easily be acted upon directly via policy. Whereas most related studies have looked at long-term outcomes of measures not easily manipulated by policy like teachers’ and schools’ quality.

All the evidence now suggests that allowing children to choose freely at age 13 which secondary school they will attend, not only improves sharply their high school outcomes six years later, but also influences their path to post-secondary schooling, enhances their earnings over a decade and a half later and reduces their dependency on the public welfare system. These results are important because the school choice experiment targeted a disadvantaged population in some of the more deprived parts of Tel Aviv. This is now the most potent contribution of late to the critical question surrounding what educational interventions are conducive to the best possible life outcomes. Now the empirical evidence provided by the paper creates a fuller picture of the individual and social returns from these interventions, and will equip educators and governments with the information required to make the most informed decisions as to which educational programs constitute the most beneficial use of limited school resources.

With increasingly prominent advocates of free school choice and more evidence exhibiting its merits, we can hope to see it embodied in policy in the near future. Standing in the way, unfortunately,  are politicians and educationalists with an unfaltering dedication to the taxpayer-funded state-monopoly of learning. Opponents of school choice are not home with freedom. For if you had the freedom to choose how to be educated, you would not choose their way.

Logical Fallacies: 4. Cum hoc ergo propter hoc

 

The latest in Madsen Pirie’s ongoing series on logical fallacies, in this video he explains ‘cum hoc ergo propter hoc’.

You can pre-order the new edition of Dr. Madsen Pirie’s How to Win Every Argument here

The best laid plans of mice and men gang aft agley

There’s an interesting reason why politics, the creation of laws and regulations, just isn’t very good as a way of doing things. That being that the world’s a complicated place. And so it is with this idea that every child should be safe from the terrors of pornography on the internet. The powers that be demanded that all such possible access be filtered out unless responsible adults deliberately asked for access to be possible.

And lo! the regulations were made and:

“But it’s very simplistic: URLs with Sussex or Essex in them, for example, are blocked.”

Rather less amusingly the websites of many charities and educational sites are also blocked. If all “porn” is blocked then so will be places that discuss how to escape the porn industry, what to do about an addiction to porn and, a memory so glorious that perhaps we should build a statue to it, the website of the MP who campaigned for there to be an internet porn filter.

The point being that this world of ours is a complicated place. Enough of us now understand Hayek’s point about economic planning, that we can’t for the only thing that we have that is capable of calculating the economy is the economy itself. It’s not possible to run a model and then direct it: what happens is emergent from the very method of calculation. What is less well understood is that this applies to all these other areas of life as well. It’s not possible for us to just gaily insist “porn filters for all!” and for that to be actually implemented.

Therefore, logically, we should stop trying to micromanage life in this manner and go off and do something more useful with our energies. And given that doing pretty much anything would be a more useful use of our energies that leaves us all with a great deal of choice over what to do.