I had an interesting email exchange with Scott Sumner that he agreed I could share with you. In addition to talking about monetary policy and the zero lower bound, Scott and I figured out that we grew up less than a mile away from each other in Madison, Wisconsin. I am leaving out the actual addresses because security questions sometimes ask them, but I looked them up on Google Maps: the two houses Scott grew up in were 7/10 and 8/10 of a miles from mine. And Scott was in an elementary school class with my older brother Chris! (Chris has one guest blog post on supplysideliberal.com:

“Big Brother Speaks: Christian Kimball on Mitt Romney.”

Miles: 

I think you might be interested in my latest post:

“Monetary vs. Fiscal Policy: Expansionary Monetary Policy Does Not Raise the Budget Deficit.”

Scott: 

Thanks Miles, I’ll do a post in reply in the next few days.

Miles:

Wonderful! Thanks, Scott.

Scott: 

Sorry to get back to you so late, but I did this post in reply about a month ago:

“Miles Kimball on the Good, the Bad, and the Ugly”

I saw you grew up in Madison.  The West side by any chance?  And did you have any older siblings?  The name is familiar.

Miles:

I am so far behind on my email I am only reading this now. Thanks for your post. My main reaction is that the mechanisms you mention might be enough at 2% inflation, but not at zero. To safely have 0 inflation, I think we need to eliminate the ZLB.

Yes. I went to Nakoma (later renamed Thoreau) for elementary school. My older brother was Christian Kimball. Paula and Mary are other siblings. I also had cousins David, Kent and Tim Kimball.

Scott:

It’s a small world, I recall that Chris was a classmate of mine in elementary school.  That’s 50 years ago!

I think we should keep the NGDP target path high enough to keep nominal rates above zero; not because I think zero rates prevent us from hitting our target, but rather because low rates might force the Fed to buy a lot of stuff, and I don’t think an enormous balance sheet is desirable.  So I agree about zero inflation being undesirable, but for different reasons.

Another reason to say away from the zero bound is to stop Williamson from writing more crazy posts.  :)

PS.  My first blog post after the intro (in early 2009) suggested that the Fed might want to look at negative IOR–but it fell short of your proposal.

Miles:

That is really cool to realize that you knew Chris! I’ll see him next week.  

Actually, I was going the other way, saying that absent the ZLB, zero inflation has definite benefits as compared to 2% inflation. So if eliminating the ZLB by the kind of thing I am proposing allows us to have 0 inflation instead of 2%, that alone would make it worth doing. You probably saw this, but I lay out the detailed argument here:

“The Costs and Benefits of Repealing the Zero Lower Bound … and Then Lowering the Long-Run Inflation Target.”

Scott: 

My memory is poor, but I vaguely recall he was a more serious and mature student than the other boys.  And I think he had glasses (as did I.)  That’s all I recall.  I suppose I should ask which street you lived on—we lived in Huron Hill then Seneca Place.  My brother was 3 years younger–closer to your age.

I do get your point about negative rates on money making it easier to have zero inflation.  In my view 90% of the cost of raising inflation from 0% to 2% or 3% comes from the taxation of capital, and I think right now it would be easier to switch to a progressive consumption tax than to deal with paper currency in your system.  But we are going to all electronic money in a few decades anyway so you’ll be right in the long run.  And then you’ll just have to convince the Krugman’s of the world that zero inflation is not bad for the labor market (money illusion and all.)

Miles:

I would like to make a blog post out of our exchange (leaving out our exact addresses of course!) I think the discussion about monetary policy in particular will be of interest to people, as well as the fact that we grew up only about a mile from each other.  Would that be OK?

Scott:

That’s fine.

BTW, I don’t really care, but people will get the impression that I grew up in an upper middle class family, when were were actually middle class.  My dad told me in the 1970s that he’d never made more than $10,000 in his life, which might be $50,000 or $60,000 today.  But he was clever with real estate and got us into a nice neighborhood, until they divorced when I was 11.  Don’t know if you are planning to discuss the affluence of Nakoma, if so you are free to use this info about me, or not, as you prefer.

Miles: 

Thanks, Scott.