The Corner

The American Conservative Botches Monetary Policy

Charles Smith has an article against NGDP targeting, or what he thinks it is. But he doesn’t seem very familiar with the concept or the arguments for it.

Here he in the second graph:

It’s called nominal GDP targeting, and the idea might seem too obvious to be profound: rather than pursue its twin mandates of limiting inflation and boosting employment, the Federal Reserve should focus on raising the nation’s nominal gross domestic product (GDP), a broad measure of economic growth, to a target high enough to get the country moving again.

NGDP targeting isn’t an alternative to following the Fed’s twin mandate; it’s a way of following it. And NGDP isn’t any type of measure, broad or narrow of “economic growth”; it’s a measure of economic output.

If we scrape away the econo-speak, we find that nominal GDP targeting is simply code for “let’s stop worrying about inflation and crank up the printing press, baby.” While its proponents are coy about exactly what they’re suggesting the Fed do after targeting nominal GDP growth of, say, 5 percent per year, the basic idea is to flood the economy with even more low-interest money.

Not true. If the Fed had consistently followed an announced policy of 5 percent NGDP growth per year, the money supply would probably be smaller today (because the credibility of the policy would have dampened velocity shocks). Interest rates would almost certainly be higher since nominal returns would be expected to be higher, too. Most nominal GDP targeters would not mind, and none of them would have good reason to mind, either of these outcomes.

The hidden assumption here is insidious: once inflation kicks up—and at 3.9 percent it is already well above the Fed’s “comfort zone” of 3 percent—then Americans will stop trying to save or pay down debt and will instead go back to borrowing and spending freely.

In other words, instead of Americans acting prudently to lower their unprecedented levels of debt and build some capital, the advocates of targeting GDP want us to go back to the go-go days of the housing bubble and borrow and spend more, more, more, all because they believe the key problem is lack of consumer demand.

No. Most supporters of NGDP targeting believe that stable NGDP growth will help Americans reduce their debt levels, both by reducing the burden of fixed nominal debts compared to a rising nominal income and by boosting asset values. We believe spending should increase, true, but the proportion of consumption and investment in that increase is not something Fed policy can or should determine.

Rather than explore why demand has declined, GDP targeters want to bulldoze American consumers back into taking on more debt. Their plan is twofold: one, keep interest rates so low that savers are punished, and two, crank up inflation so that households are forced to spend money before it loses value.

Savers are being punished by low returns; higher nominal-income growth would help them. Some NGDP targeters have said that higher inflation would have the valuable side-effect of encouraging consumers to spend, but few NGDP targeters have argued that this would be the main advantage of adopting NGDP targeting now. (And there is no reason to expect a level NGDP target to raise long-term inflation rates, anyway.)

Proponents also seem blind to what is painfully obvious to everyone else: Americans are already so heavily indebted, they can’t afford to take on more debt, even at low rates of interest.

Higher NGDP would lower their debt burden.

The entire notion that incentivizing more borrowing will lead to growth is suspect.

Again, this is not what most NGDP targeters are advocating.

Smith concludes by suggesting that the economy has structural problems that NGDP targeting can’t fix. That’s true. No Fed policy can increase the economy’s long-term potential growth rate, and the Fed shouldn’t try to do that. The point of NGDP targeting is merely to keep nominal shocks from disrupting the real economy. If we must have a central monetary authority, that’s quite enough for it to do—and what it should have to do.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.


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