Policy utopianism
Criticism of Sir Mervyn King for his role in the banking crisis and calls for a nominal GDP target have something in common. And it's something I'm a little uncomfortable about.
What I mean is that they both have - in their more extreme forms - a tinge of utopianism, in two senses.
First, there seems an optimism about what policy can achieve. This is questionable. For example, any form of bank regulation is prone to the problem of asymmetric information - regulators know less than insiders and cannot spot bubbles in lending - and, consequently, of regulatory capture. The idea that the banking crisis might have been prevented is idealistic. Criticizing Sir Mervyn for not doing so is no more enlightening than pointing out that he's only human.
Similarly, NGDP targeting is apt to fail because a target requires a forecast and forecasts go awry at important times simply because the economy is inherently unpredictable. NGDP fell in 2008-09 not so much because the Bank was targeting inflation instead, but because it just didn't see the slump coming sufficiently far in advance to loosen policy enough.
Secondly, there seems to me an implicit presumption that, if only policy were correct, problems within the private sector could be overcome. This too is doubtful. Banks did not fail merely because they were badly regulated, but because there were (among other failings) principal-agent problems between shareholders and managers that encouraged excessive leverage and risk-taking. In other words, there was a faultline in the private sector that (conventional?) regulation, at best, could only have painted over.
Similarly, reading some calls for NGDP targeting gives me the impression that it is all we need to get full employment. I doubt this. Unemployment exists not just because of deficient demand or sticky wages (which are less (pdf) important than thought) but for other, more intractable reasons: efficiency wages, signaling problems, the shortish-run non-fungibility of labour, lack of skills or the vested interests of capitalists.
Now, I realize that I might be attacking a straw man here. I'm quite open to the possibility that policy can be improved upon, and I don't doubt that more QE - the likeliest tool of an NGDP target - would create some jobs. What I don't like is the idea that there's some magic wand of policy that can solve our problems. And what I like even less is that such talk serves a nasty ideological function, of deflecting attention from the inherent shortcomings of private sector capitalism.
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