 This is Mises Weekends with your host, Jeff Dice. Ladies and gentlemen, welcome back once again to Mises Weekends. I'm sure you all know our guest, Professor Peter Klein. He is the Careuth Chair and also the Professor, a Professor of Entrepreneurship at Baylor University in Waco, Texas. And he was just with us here in Auburn a week ago. And that's one of the reasons we asked him to join. We had what we call our Rothbard Graduate Seminar last week where some masters and PhD level students from around the world come and spend a week going through a particular great book. In this instance, it was Mises's Human Action. But Peter, from what I'm told, I wasn't in on the session itself, but I'm told that during one of the sessions, the concept of what we'd like to talk about today, NGDP targeting came up. And for those of you who aren't familiar with it, obviously we're referring to nominal GDP and targeting of the rate of growth of GDP as a monetary policy or a particular monetary phenomenon. So Peter, maybe you could just start with sort of telling us the context in which this came up and give us your basic definition of NGDP targeting. Sure, we were talking in the session with these grad students about Mises's approach to money. Of course, Mises was known internationally as a great monetary theorist even before he wrote his work on socialism and several decades before his great book, Human Action. So monetary theory is really one of Mises's earliest and most important contributions. And in the discussion period, a lot of issues about contemporary policy came up. Of course, under the kind of monetary system that we have in the U.S., where we have a government body or a quasi-government body doing manipulation of interest rates and the money supply, the question often comes up, well, we Austrians would prefer a monetary system in which the government didn't play any role in trying to establish the quantity of, set the quantity of money or influence the quantity of money, try to manipulate interest rates and so forth. But since we don't currently live in that world, we have a Fed, most countries have some kind of a central bank. What should the central bank do? And lately in some kind of free market, some libertarian circles, there's a lot of talk about alternatives to the conventional Fed policy of trying to target the interest rate within a certain range, right? We just had the, just recent meeting where they've allowed the federal funds rate to go up by a quarter point. So some monetary economists have been saying, look, instead of trying to target interest rates, what the Fed should do is try to target some measure of overall economic activity, right? In nominal terms. So we should be looking at levels of inflation. We should look at whether the price level is rising or falling and pick some level of what they call nominal gross domestic product or NGDP, which is the monetary value of all goods and services in the economy. And so the idea is that, gee, wouldn't it be nice if this nominal GDP were kind of stable? In other words, if the economy is really productive and we're producing a lot more goods and services than we did before, it'd be great if the money supply worked to fall just a little bit so that the overall level of spending on goods and services stays about the same. By contrast, if the economy were sinking into a recession, if we were becoming less productive, a lot of unemployment and so forth, it would be okay for the monetary system to increase the money supply to keep nominal GDP constant. I think it was, I think Guido Holzman was the discussion leader at that time. And some student asks, what do you prefer nominal GDP targeting or interest rate targeting? And his answer, I've forgotten exactly, he said something like, well, that's like asking me, do I prefer arsenic or death by guillotine or whatever. They're both horrible solutions. And rather than focus so much on some marginal improvement that maybe the government could make, we should think more broadly about what kind of monetary system we want and how do we move incrementally towards a true kind of free market monetary system? Well, you bring up a couple of points I'd like to touch further on. One is that this is different than interest rate targeting, which probably the most well-known example, that would be the so-called Taylor rule. That's right. That's Professor John Taylor, I guess at Stanford, who's talked about having a targeted interest rate. But it sounds to me as a layman, a layperson, that NGDP targeting is a close cousin of monetarism. Am I correct here? In other words, monetarists say, well, let's control the supply of money to sort of try to keep the demand for money fairly constant. This sounds very similar. I think you're exactly right. It is based on kind of an older form of monetarism. And in fact is embraced by a lot of mainstream economists, even Christina Romer, who was one of President Obama's chief economic advisors, has come out in favor of NGDP targeting as opposed to interest rate targeting. Of course, that's not, I'm not using that as an argument against the idea. But Jeff, what I think is more interesting to us and to our listeners and viewers is that there's some advocates of laissez-faire who have defended NGDP targeting on the grounds that it more closely approximates what they think would happen in a kind of, in a freer system, in a kind of free banking regime, where you have fiat money and banks are free to increase or decrease the money supply. Or there are mechanisms that increase and decrease the supply of fiat money, according to what's going on in the economy. And these economists, who are kind of our close cousins, have argued that, well, the Fed should try to do something that looks more like what we think would obtain in a free market system. Well, let's accept for a moment that NGDP is an accurate or useful measure of growth or recession in the economy. Beyond wanting NGDP to be positive, therefore, I mean, per se, should we care about fluctuations in GDP? I mean, should we, I'd rather have 10% than 3% growth. Right. Yeah, it's a good question. And Jeff, it relates to something else that we discussed in the Rothbard Graduate Seminar, which I'll just briefly describe. At first, it might sound like I'm talking about a different issue, but I'll show how it connects to what we're talking about now. We were talking a lot during the seminar about what in conventional economics, people usually call microeconomics and macroeconomics, so macro being business cycles, monetary theory, aggregate growth, the sorts of things we're talking about now, and microeconomics being the basic determinants of pricing, supply and demand, marginal utility theory, and so forth. One of the points that came up in the discussion, it's a point that I've emphasized in some of my own writing and speaking, is that I think in some people who are very sympathetic to the Austrian school have tended to say, well, the unique contribution of the Austrian school is on the macro side, is Austrian business cycle theory and banking theory and free banking and so forth. On basic price theory, Austrian economics, while it doesn't use math, is really the same as sort of mainstream microeconomics. What I've argued, and some of our colleagues have argued, is that no, that's really not the case that Austrian economics also has a unique and kind of underappreciated approach to markets and pricing. The way this fits into our current discussion is sort of the following way. I think that some Austrian economists or fellow travelers of the Austrian school think that the best thing for entrepreneurs, the best thing for consumers and producers as they're making their daily decisions is a world in which money is kind of neutral. In other words, money doesn't really play a role except as a means of computation, as a numerair, as they used to say. We're really interested in real factors and exchanges of real things, and we want money to play as little role in the process as possible. That's why when economists like Milton Friedman argued for a very steady graduate 2% increase in the money supply, that was because Friedman thought that output was growing on average at about 2% per year. He didn't trust the Fed to do something fancy like the Taylor rule, so he said, look, if we increase the money supply by 2% a year, that's pretty close to how the economy is growing, so the price level will stay pretty constant. And for Friedman, having a stable price level was sort of an ideal. I think the people who favor NGDP targeting have the same basic framework in mind. They think that ideally money should be neutral and having a stable price level or rather a stable level of aggregate spending makes life better for consumers and for producers. It makes things easier for investors. It's easier for entrepreneurs to do their thing. What I've argued is that, no, that's not the case at all, that a stable price level doesn't mean anything. Nobody wants a stable price level. Nobody cares about a stable price level and it's perfectly fine for money prices, for the value of money itself to fluctuate from on a day-to-day basis, the same way that the prices of shoes and tomatoes and cars and so forth fluctuate on a day-to-day basis. We don't need stable prices or neutral money. We need money and prices to be whatever they are sort of organically in a free market. Well, I want to emphasize, though, what we're talking about here is a kind of planning, right? We're talking about using macroeconomic monetary policy to try to control fluctuations in GDP. So anything that comes, you know, people use the term rules-based Fed, which would include NGDP targeting or the tail route to contrast with a discretionary Fed where the Fed governor sort of make decisions on an ad hoc basis day-to-day. It isn't any kind of rule or any kind of target, by definition, a form of centralized planning for simple things like me, anyway. You're exactly right. I mean, at some level, having a government agency that's bound by a rule sounds better. It sounds less interventionist than having a government agency empowered to do whatever it wants. But as you point out, I mean, it is a form of intervention at another level, right? Essentially, we're tasking the government for formulating and implementing some kind of a policy that imposes an artificial constraint on the market. Again, from my point of view, there's no reason that we would expect nominal gross domestic product, that we would expect total spending or desire total spending to be constant from year to year, quarter to quarter, month to month. To me, that's an artificial restriction on an economy. There's no reason why we would expect that. Again, if you look at individual industries, we certainly don't want price stability. I mean, we like the fact that the prices of computers and other tech products, you know, in real terms have fallen dramatically over the last few decades. There's absolutely nothing wrong with prices in individual sectors and indeed the prices in the economy as a whole, which is just an artificial aggregate, right? To fluctuate in all kinds of ways. And I don't see anything specifically desirable about a stable price level. Well, you know, I was just in Walmart over the weekend, I'm gonna show my age here. I saw Guns N' Roses greatest hit CD. For five bucks and it wasn't that long ago that CDs were $17.99 or whatever they were. Sure. And I'm glad that price is not so stable. You know, when we're talking about rules and you say, you know, it sounds nice for a government agency or in this case a quasi-government agency to be bound by some kind of rule or certainty. We like the sound of certainty. But it seems to me, if we go back to the crash of 2008, wouldn't they throw the rules out the window? I mean, if commercial banks were tottering and insurance companies were tottering on the verge of insolvency because of a liquidity crisis, I mean, wouldn't the Fed say, well, okay, this is an extraordinary time, no one predicted this. The rule goes out the window and we're gonna do X, Y, and Z anyway. Yeah, that's a great point, Jeff, because before 2008, I mean, the Fed was constrained, right? So almost all of the sort of extraordinary measures that the Fed took since the financial crisis are things that it was statutorily really forbidden from doing, except there was this little escape clause, right? The Fed was strictly limited according to what sorts of assets it could hold in its portfolio and so forth. But there was this little, you know, one sentence in the relevant statutes enabling and governing the federal reserve system that, well, in extraordinary circumstances, in an emergency, you can do, you know, whatever you think is prudent and appropriate. And of course, you're right in practical terms, any legislation or formal mechanism that constrains the Fed to something like the Taylor rule is gonna have an out-clause. And as we have seen in the last 10 years, that out-clause is gonna be used, you know, in any way that people see fit. So devil's advocate to challenge you and Dr. Guido-Hosman a little bit would some kind of rules-based monetary system, whether that's NGDP or inflation targeting or monetarism in the older freemanite sense of the term, would that be preferable to Janet Yellen and the FOMC doing what they do now, which is kind of holding their finger to the wind and deciding things on an ad hoc basis? Yeah, I think it's a good question. And at some level, depending on the particulars, depending on what's going on in the system at that time, we might get better outcomes with that kind of constraint. The point that Guido is making and that I'm making now is that I think we're focusing on, that's sort of asking the wrong question, right? I mean, is it better to have a Fed that is empowered to do these things as opposed to a Fed that's empowered to do these things? I mean, it might be. There might be some circumstances under which adherence to some kind of a rule will give us less uncertainty and will further constrain the Fed, assuming it were possible from doing the kinds of things, prevent it from doing the kinds of things that's recently done. Okay, but fine. I mean, from our point of view, that's a very, very minor technical issue. It doesn't really address the fundamental problems with the monetary system. Now, some free market advocates of NGDP targeting have said, well, yes, that's true. It's not the first best option. It's a second best option, but it's a much more practical one. So instead of talking about complete laissez-faire or the gold standard or whatever you crankish people like to talk about, let's at least focus on something that mainstream people and government officials will take seriously. But again, that's kind of the catch-22, right? The old joke, if lobbying the government, for example, made any difference, they would have made it illegal by now, right? So yeah, it's true that Fed officials will listen to an argument about NGDP targeting, but my sense is from a political point of view, something like that would only ever be implemented if it really didn't make a difference. So I think people are free to work on whatever, to study whatever they want and to advocate whatever kinds of changes they want. But I personally don't think it's a great use of our kind of scarce time and intellectual effort as people who are trying to bring about monetary reform to focus on what to me seems like a gimmick. I'd rather us talk about sort of the more fundamental problems. The other thing, Jeff, too, is I think that some of our allies, some of our colleagues who favor this kind of approach, they underestimate how creative and flexible market participants can be, right? They're worried, for example, that if we don't have the money supply changing, whether it's by a free banking system of some sort or by the government, the economy is gonna run into all kinds of problems. For example, if people unexpectedly increase their demands for cash balances, if there's an increase in demand for money, then unless prices can sort of instantly and perfectly fall to match that change in purchasing power, we're gonna have unemployment, we're gonna have bankruptcies, we're gonna have dislocations. This was really the point that we talked about in our seminar about a proper Austrian understanding of how markets work. Then in fact, entrepreneurs, other market participants deal with price uncertainties all the time. Yeah, of course, it's true that prices are not perfectly flexible because people signed long-term contracts for employment. Big companies lock in prices for supplies in advance, but that's exactly something we want them to do, right? That's based on the desires and beliefs and expectations of market participants. So there's no reason that perfectly flexible prices and wages are somehow better than the imperfectly flexible ones we have in the real world and that therefore we need the banking system to adjust the supply of money, to balance changes in the demand for money to avoid dislocations. It's almost like, Jeff, the people who are worried about this and therefore favoring something like NGDP targeting, they come almost from a, there's a kind of a Keynesian set of assumptions in the background that the market economy on its own is fundamentally unstable and then it needs to be propped up and sort of rescued and fine-tuned either by a government monetary authority or by a free banking system which adjusts the money supply to accommodate the needs of the public. Murray Rothbard, by contrast, said there's never any good reason to increase the supply of money as long as there's enough money in existence to work as money, right? To constitute a medium of exchange. So we neither need the Fed, in my point of view, nor do we need the banking system to adjust the supply of money to match changes in its demands. Well, the final question, to wrap this up, elaborate a bit, Murray Rothbard in his very short and readable book, What Has Government Done to Our Money Has, to me anyway, a very famous paragraph where he says, it doesn't really matter what the supply of money is. Prices will adjust. I mean, just elaborate briefly on what he meant. Yeah, that's this point that, you know, we need a commodity like gold or silver or maybe seashells and Polynesia or tobacco in Virginia, whatever it might be to have certain properties to be useful as money, right? It has to be durable. It doesn't, you know, melt in your pocket. It has to be easily divisible so that you can use it to make different kinds of exchanges. You want it to have a high ratio of value to weight and bulk so you can easily transport it and safely store it and so forth. But Rothbard argued that, you know, once society has chosen some kind of a commodity like this to serve in the money role, historically, gold and silver have been the commodities that societies have chosen. There's no social advantage whatsoever to having more money, right? I mean, of course, the supply of a commodity money is going to change if it's tobacco, you know, it's going to change as it's grown and used up. Even gold and silver is mined and some of it deteriorates, some of it gets lost and so forth. But Rothbard argued contrary to almost every other mainstream economist at that time and now, that really any supply of money is fine as long as there's enough of it and it has these properties we're discussing to satisfy as money. With an increase in the supply of money, you get the kinds of problems that Austrian economists sometimes worry about, especially if it's a government agency trying to increase the supply of money. You get these problems that generate sort of the Austrian business cycle. So we ought to let the market choose a commodity to be money and then let the supply of that money be moderated by the normal market factors of supply and demand. There's nothing else that, you know, there's no benefit to trying to fix that or stabilize it or add to it. That was Rothbard's point. And I think you're right, it's kind of controversial. But if you think it through carefully using the kind of theorizing that Rothbard is using, I think it makes pretty good sense. Here I was thinking it wasn't controversial. But with that ladies and gentlemen, if you haven't read what has government done to our money, you need to do so. It's available at Mises.org in both, I think PDF and HTML format, less than 100 pages, easy read. Dr. Peter Klein, I want to thank you for your time and for your thoughts on how not to reform the Fed. And with that, ladies and gentlemen, have a great weekend. Subscribe to Mises Weekends via iTunes U, Stitcher and SoundCloud, or listen on Mises.org and YouTube.