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.
Mr. Ponnuru, therefore, thinks that it's worth a 4.5% inflation rate to reinstate growth.
Reply to this commentLinkReport AbuseWhy? We know how to have growth with lower inflation.
And 4.5% inflation under the current CPI formulas would hit consumers as hard as Carter Era inflation did.
I'll bite as I think the opportunity to respond to Ramesh's condescension should never be wasted. Ramesh is right that inflation was high in 1989 (as it had been in 1988). I'll note that 1989 was also the year before the 1990 recession. Interestingly, one of the things the Fed was doing by late 1988 was raising interest rates (Mar 1988 to Mar 1989 saw the fed funds go from 6.7% to 9.9%) in an attempt to--wait for it--battle inflation. So I'm not sure I'd pick 1989 as a great example to make your case. Because the easy money that generated inflation led to the ultimate fed tightening in a classic policy mistake cycle.
Oh, and as of September 2011, CPI inflation is 3.8% year over year (the GDP deflator--which is used to convert nominal to real GDP is still under 3%, but trending Ramesh's way). So good news for 2012, we have real GDP growth forecasts that are being marked down as inflation forecasts that are being marked up, so we should hold our nominal GDP growth, though the combination (not Ramesh's concern) won't be what people hope for (if you need a job or purchase items; every one else should be great).
Reply to this commentLinkReport AbuseThe Fed does not create production, PERIOD.
At some point, Mr Ponnuru developed an incurable, statist fetish. This disappoints me greatly. First he wanted to use the Tax code to "encourage" people to have more babies- despite the fact that living childless is a perfectly legal activity. Now he wants to use the Fed to "encourage" people spend more money, despite the fact that prudently saving money is often considered wise (in addition to being completely legal).
Reading Mr Ponnuru's and Mr Beckworth's article, I was struck by this paragraph:
"If debtors expect higher nominal income as a result, they will devote fewer resources to deleveraging. If investors expect higher nominal spending, they will rebalance their portfolios away from cash and toward higher-yield assets such as stocks, bidding prices up. Higher asset values then lead to increases in spending on both consumption and investment."
In other words, Mr Ponnuru wants to shift the Fed away from directly keeping prices stable to influencing peoples' behavior. To him, the galling problem is that people aren't spending enough, and they need to be coaxed in the "right" direction.
Whatever happened to the conservative viewpoint that it isn't the Government's (or by proxy, the Fed's) job to fine-tune our behavior? Let people be, for crying out loud! We don't need nanny's telling us what to eat. We don't need speech police telling us what to say. And we sure as heck don't need the Fed encouraging us to reach into our wallet. I don't put my money in certain investments because they ARE BAD INVESTMENTS. Coercing me to take more risk with my money out of fear of inflation is absurd and a strident departure from conservative values.
What has happened to NR?
Reply to this commentLinkReport Abuse"What has happened to NR?"
Frumification.
Not the cause, just a description of the symptoms.
Reply to this commentLinkReport AbuseWhat?
I don't agree with him all that often, but Mr. Frum is a moderate, thoughtful, fair-minded conservative. That doesn't describe anyone writing at NRO.
Reply to this commentLinkReport AbuseFrum just went liberal.
Ponnuru and other GOP insiders have done something worse. They've been seduced by their days in politics to believe that politics are the end-all-be-all solution to the country's problems.
A few years back, Cass Sunstein and Richard Thaler came out with a book called Nudge, which encourages the government to set all sorts of policies that encourage people to "do the right thing". Most conservatives looked at the book for what it was- an attempt to re-define nanny-state paternalism as benign nudging.
But not Ramesh, evidently.
Reply to this commentLinkReport AbuseRamesh, you wrote:
"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."
You totally missed her point. If the nation achieved a GDP growth of 4.5% year over year, but inflation from that growth is 3.5%, there is little real growth ( 1%). It's the 1970s all over again. Essientially, the Fed is creating an illusion - an illusion that will most certainly be used by politicians. Shales also wrote that the real danger is that the Fed's original mission - monetary stability will be subverted by this new mandate (don't think for a minute that it won't be).
Reply to this commentLinkReport AbuseIf central planners can achieve a targeted nominal growth rate in GDP, why stop there? Why not abolish markets entirely and establish independent planning boards to target specific growth rates in educational attainment, auto manufacturing, and corn crop yields? The sky's the limit if wise central planners are given the right tools and choose the right targets.
Reply to this commentLinkReport AbuseWell, this long day of posts finally gets easy for me: anytime Ramesh Ponnuru and Amity Shlaes get into a debate on economics, I don't even have to read anything to know Ms. Shlaes is correct.
Unfortunately for the rejoinder, I *did* read everything... nope, she's still correct.
Reply to this commentLinkReport AbuseIt is posts like this from the lovely and gracious Mr. Ponnuru--longing for real growth of 1 pct and fake growth of 3.5 pct and thinking that makes sense---that make me much prefer the news reading of the lovelier and more gracious Uma Pemmaraju, who at least has some contact with reality.
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