Amity Shlaes vs. NGDP Targeting
Amity Shlaes’s column against NGDP targeting doesn’t engage the main arguments in favor of it over inflation targeting–e.g., its superiority in responding to supply shocks. Instead her argument comes down to two points. 1) Milton Friedman sometimes said things incompatible with it, and John Taylor’s against it. (Has anyone claimed otherwise?) And 2):
Under NGDP targeting, it’s possible for the Fed to get a growth rate of 4.5 percent, of which 3.5 percentage points are inflation and only 1 percentage point real. That hardly accords with the spirit of the line in the Fed statute about increased production.
In short, the big vulnerability of NGDP targeting is that it’s a license to inflate. It will inevitably undermine the Fed’s mandate to maintain price stability.
That’s her whole argument on this point. And it’s true: With NGDP targeting you could have a year now and then with the 1/3.5 percent split she’s talking about. But a year now and then of 3.5 percent inflation is not a disaster–we have had that rate plenty of times. Does anyone recall 1989 as a year of economic meltdown? The Fed doesn’t and can’t determine the extent to which inflation and real economic growth contribute to nominal growth. If you think we’re in for year after year of 1 percent real economic growth that would be a real problem. But it’s not one that any Fed policy can solve. And of course a nominal target of 4.5 percent growth does set a practical limit on inflation. If real growth averages 2.5 percent and you hit the target, inflation averages 2 percent, which is lower than we have had for most of the last few decades. I’d be perfectly happy to move slowly to a lower nominal growth target that implies even lower inflation. But first we have to re-establish a stable trendline.
Update 2: See the second chart here for a sense of how badly the Fed has fallen short of an appropriate target.