Many thanks to Joe Weisenthal for throwing some much-needed cold water on the NGDP fandom which is currently sweeping the blogosphere.
I’m a fan of NGDP myself; I was one of the 37% of econobloggers who voted for it in the Kauffman survey this quarter. But the fact is that switching to NGDP targeting would be a decidedly marginal move: the Fed is, simply, out of credible ammunition right now. And so Ben Bernanke is being rather sensible when he says that if you want to create jobs, then fiscal policy is going to be a lot more effective than monetary policy.
If you want a good introduction to NGDP, Christy Romer helpfully provided one in the NYT last week. But at heart, the argument seems to go a bit like this:
Ramesh Ponnuru and David Beckworth actually say this, pretty explicitly, when they talk of how “the mere announcement that the Fed will buy assets until nominal spending hits a target, for example, could raise expectations for nominal-spending growth”.
But what’s missing here is the actual mechanism by which the Fed will change expectations about the state of the economy. In the latest issue of the Milken Review, which is stupidly behind a registration wall, Clark Johnson has a 10-page article (idiotically enormous 46MB PDF alert) complaining about how the Fed isn’t doing enough to jumpstart growth. It’s full of stuff like this:
Monetary policy works best by guiding expectations of growth and prices, rather than by just reacting to events by adjusting short-term interest rates… Instead of assuring the market that growth will be restored, the Fed has set interest-rate targets or promised to undertake specific volumes of open-market operations over defined periods. Much more could be done to create the expectation that the liquidity needed to sustain high rates of growth would be provided.
Johnson quotes Lars Svensson, deputy governor of Swedish Riksbank, admiringly:
It is now generally acknowledged that monetary policy works mainly through the private-sector expectations of future interest rates and future inflation that central-bank actions and statements give rise to. Those expectations matter much more than the current interest rate. That is, monetary policy is "the management of expectations."
Well, OK, it’s hard to oppose managing expectations so that everybody believes that we’re going to have strong growth going forwards. But the Fed already has a full-employment mandate, and it’s clearly failed at that. Simply announcing that you’re working towards some stated end can be a good idea — but only if you can credibly meet that end. And it’s far from clear that the kind of things that Romer and Johnson are talking about — extensions of QE, basically, in one form or another — would suffice to get nominal growth back to where Romer would like to see it.
QE’s been good at goosing markets; it’s been less good at goosing the economy as a whole. And yet the likes of Ryan Avent are seriously disappointed that Bernanke hasn’t done, um, “something”.
Here, then, is Joe:
The biggest problem facing the economy is that the private sector is in too much debt. Americans are trapped in their homes, where they owe huge mortgages, and are generally paying off the big credit boom from the last few decades…
If you can accept that this needs to come down, it seems ludicrous to think that the answer to the debt crisis is: cheaper loans! People don’t want (and can’t utilize) cheaper loans: What people need is more income to pay off this debt.
And there’s a place that more income can come from, and that’s government spending…
The real impediment to wage inflation isn’t that the Fed hasn’t set a big enough number, it’s that we have massive unemployment and excess capacity creating slack in the labor market. Get rid of that slack by putting people to work doing anything, and you start to get the wage firmness (inflation) you desire.
And beyond that, it’s just intuitive. If you take the average person, ask them what will cause them to spend more money: A policy announcement from Bernanke, or the promise of a well-paying job for years to come. The answer is obvious.
Sadly, there’s zero chance of the kind of fiscal stimulus which can actually put millions of unemployed Americans to work. Obama, it turns out, is no FDR. And without strong backing from the White House, the Fed simply doesn’t have the credibility needed to make everybody believe that we’re emerging into a halcyon world of strong growth and high employment. Because, frankly, we’re not. No matter what Bernanke does.
We probably disagree a bit on FDR (I suspect I think he looks more like Hoover than you do), but that aside, FDR’s jobs programs were pretty low-tech. Sure, the civil/structural engineering piece was critical, but I think the steepening of the skills-productivity curve plus globalization over the last century has made a New Deal employment expansion fairly impossible. I agree that NGDP is not a magic bullet. But a negative interest rate regime seems worthy trying. My bigger fear is that Obama will be more like Carter than Reagan, if and when inflation pops.
“the mere announcement that the Fed will buy assets until nominal spending hits a target” AKA “The price of real estate always go up – we’ll all be rich, rich, rich selling houses to each other!!!!”
With study after study showing stagnant wages, greater poverty, decreasing consumer spending power for the 99%, what is this belief that if we only have “the FED” conjure money and raise prices, we will all be better off? How does this theory work in real estate – keep house prices high, increase unemployment, and more houses get sold?
We have had FED worship for about 30 years now, and it appears to have dug us into a big hole.
I recommend Nick Rowe:
http://worthwhile.typepad.com/worthwhile _canadian_initi/2011/10/engdp-level-path -targeting-for-the-people-of-the-concret e-steppes-.html
Felix… you and Paul Krugman need to cut Obama some slack. FDR didn’t have to deal with Fox news, Right wing talk radio, and most imporntantly a permanent standing army of lobbiests working every day to further the goals of the “1%.”
Barak is pure of heart though… after he wins his last election the deplomacy will end. The governing from the middle will cease. Barak is a legal scholar he realizes that controling 1 house of congress and the presedency you can get whatever you want in the 2nd term if you’re willing to throw your veto around.
To meaningfully raise taxes on the rich remember all he has to do is NOTHING. They all sunset 12/31/12!
“But what's missing here is the actual mechanism by which the Fed will change expectations about the state of the economy.”
felex, read nick rowe at worthwhile canadian & andy harless at employment interest & money…
Felix, I understand where you’re coming from, because the NGDP advocates tend to be frustratingly vague about policy levers. Sumner is the worst of the lot – he’ll start by saying “negative interest rates on reserves”, and when someone points out that the Fed lacks authority to do this, he’ll just say that it’s not an issue because the Fed has already done things that it has no clear authority to do. But it is an obvious logical fallacy to assume that all illegal actions are equivalent; in his calmer moments, I’m sure Sumner knows this. Sumner also gets muddled about whether his NGDP futures proposal is feedback to the Fed or a policy lever. Even Nick Rowe’s “People of the Concrete Steppes” post was amusingly lacking in concrete steps.
But as Noah Smith points out, it’s actually pretty simple: the Fed can make NGDP has high as it likes by printing money and buying stuff. The issue, then, is not the lack of a concrete policy lever but the lack of political support for applying it.
Note that you personally are part of the problem, not the solution. Remember how you gushed over that idiotic “Bernank” Fed video?
i’m surprised to read this weak argument from the usually sharp Mr. Salmon.
Are you denying that the Fed is unable to generate the inflation level it wants? Imagine if the Fed announces tomorrow that it will buy ALL of Manhattan. Remember, it can print all the money it wants, so it can do it. Now, imagine that everybody believes the Fed will actually do this. What do you think would happen to real estate prices? I would say that before it has even bought one building, the prices would jump immediately.
That’s what people mean when the say the Fed can achieve a lot just by communicating its intentions clearly. Because it has this magical infinite money printing machine, it has basically absolute power over inflation.
Now, why create inflation? Because (1) it reduces people’s debts in real term; (2) it nudges investors out of cash or low-yield positions, and into riskier stuff like business ventures (jobs); and (3) it encourages people to spend now rather than later, when their cash will be worth less.
Re: Fed buying stuff
If inflation expectations increase, wouldn’t that juice the yield on treasuries?
If that’s the case, I’m fine with moving my cash to a CD, assuming the increase in interest gets partially passed on to me from the bank.
Home prices may increase, but does that add participants to the real estate markets? Perhaps speculators, but again, you’ll have to pay a higher rate to get a loan.
The big advantage is number 1, but you could accomplish this via loan forgiveness / mods (not that I agree with that), without the nasty side effects of inflationary policy like this.
Funny that you should bring up FDR. If you had been paying attention to Sumner/Beckworth/Yglesias/Avent/et al for the past 2 years rather than jumping into the fray only when NDGP targeting is gaining some popular attention, you’d know that there’s consensus among economic historians that what fueled the robust recovery in 1933-36 wasn’t FDR’s fiscal policies but rather his commitment to a price level target (i.e. returning prices to pre-depression levels). I’ll link to Yglesias since I assume you’d immediately discount anything by Sumner or Beckworth. http://thinkprogress.org/yglesias/2011/1 0/30/356683/christina-romer-joins-team-n gdp-level-targeting/
Funny that you should bring up FDR. If you had been paying attention to Sumner/Beckworth/Yglesias/Avent/et al for the past 2 years rather than jumping into the fray only when NDGP targeting is gaining some popular attention, you’d know that there’s consensus among economic historians that what fueled the robust recovery in 1933-36 wasn’t FDR’s fiscal policies but rather his commitment to a price level target (i.e. returning prices to pre-depression levels). I’ll link to Yglesias since I assume you’d immediately discount anything by Sumner or Beckworth. http://thinkprogress.org/yglesias/2011/1 0/30/356683/christina-romer-joins-team-n gdp-level-targeting/
What about no policy at all! When will people realize that monetary policy is just a sophisticated word for legal counterfeiting! What do we do with counterfeiters? We put them in jail. why you ask? because, they get real goods and services with something that masquerades as something obtained by providing a real good or service. Central banking is the same. The entire logic of 2% inflation target is total nonsense. if apples and oranges are trading at $1, and the desire for oranges relative to apples goes up, inflation (the average price) could go up, down, sideways. It all depends on elasticity of demand and supply. So why would you have a target of 2% on millions of prices that are moving up or down to reflect society’s demands. Such nonsense!
I thought Joe Weisenthal’s piece was pretty dumb, and I’m a bit more sanguine about the prospects for NGDP targeting than you, but the point that it’s not a magic bullet is one I’ve been making in my little corners of the world as well. I think it would very nearly solve one class of economic problems, leaving others to be dealt with.
FYI, the market monetarists smashed the WSJ editorial page pretty hard when they first tried to tackle nominal GDP targeting until that lady actually read more about it and posted a more honest appraisal.
I don’t understand. The post seems at points to say that the Fed would seek to target NGDP growth by managing expectations, and then objects that Fed has no credibility.
But isn’t the idea that the Fed simply sets NGDP to whatever it wants. This is the method by which the Fed manages expectations, not the result of managing expectations.
And if you know that NGDP growth will be at least, say 7%, then one expects (by defintion of NDGP) that either growth or inflation will go up. At first you might think only inflation will go up. But then a moment of thought reveals that higher inflation will cause higher growth. So then you expect growth to increase.
Or does Salmon think that a group of people with the power to buy anything at any price they want cannot cause inflation? That would be a weird thing to believe, but it would at least explain the blog post.
“Imagine if the Fed announces tomorrow that it will buy ALL of Manhattan. Remember, it can print all the money it wants, so it can do it.”
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