Was Hayek a Supporter of Nominal GDP Targeting?
Senior Editor, CNBC.com
Last night I spent a few very enjoyable hours listening to a panel debate whether Hayek or Keynes offer the best counsel for our current economic disaster.
The event was hosted by Reuters and loosely based around Nicholas Wapshott’s book "Keynes Hayek: The Clash That Defined Modern Economics"
There should be video of the event here, although I couldn't get it to work.
One of the surprising things I learned at the debate is that Lawrence White, a huge critic of central banking, is a supporter of targeting nominal GDP . What's more, he says that Hayek was also a supporter of NGDP targeting.
I'm not sure why this was such a surprise to me, but it was. Perhaps I have been listening too much to anti-Hayekians rather than Hayek himself.
White actually first explained that Hayek supported NGDP targeting back in 2008.
The Hayek-Robbins (“Austrian”) theory of the business cycle did not in fact prescribe a monetary policy of “liquidationism” in the sense of doing nothing to prevent a sharp deflation. Hayek and Robbins did question the wisdom of re-inflating the price level after it had fallen from what they regarded as an unsustainable level (given a fixed gold parity) to a sustainable level. They did denounce, as counterproductive, attempts to bring prosperity through cheap credit.
But such warnings against what they regarded as monetary over-expansion did not imply indifference to severe income contraction driven by a shrinking money stock and falling velocity. Hayek’s theory viewed the recession as an unavoidable period of allocative corrections, following an unsustainable boom period driven by credit expansion and characterized by distorted relative prices. General price and income deflation driven by monetary contraction was neither necessary nor desirable for those corrections. Hayek’s monetary policy norm in fact prescribed stabilization of nominal income rather than passivity in the face of its contraction.
When I pointed this out on Twitter last night, Krugmanite economist Brad DeLong pointed out: "The Obama Administration is now to the right of Larry White." And, for that matter, Hayek.
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