The recent surge in interest in Nominal GDP Targeting, as an alternative to money targeting or inflation targeting if the central bank is to commit to a nominal target of some sort, has prompted some pushback. This is not surprising. But one of the responses is most peculiar. This is the allegation that the surge comes from liberals opportunistically adopting an idea that was originally proposed by conservatives, and that they will not stick with this “fad” in the longer run because it is only designed to fit current circumstances of high unemployment and low output. Remarkably, every component of this argument is wrong.
I have in mind, especially, the views of Benn Steil and Dinah Walker of the Council on Foreign Relations, as expressed in “Why Nominal GDP Targeting is a Fad”: “NGDP targeting having once been the intellectual stomping ground of economists on the right (notably Scott Sumner), its newest supporters come overwhelmingly from the left (such as Christy Romer)…. We think the rage will be short-lived. The reason is that NGDP targeting’s newest supporters are bad-weather fans. That is, they like it now, when NGDP is well below its 2007 “trend” line, meaning that the policy implies extended and more aggressive monetary loosening. But what happens when NGDP goes above its target, as it eventually will? NGDP targeting then requires tightening….”
Let’s consider the analytics first, and hold off awhile on the less edifying political labels. The nominal GDP proposal was originally studied and supported by many prominent economists in the 1980s. The problem at the time was a need for monetary discipline, anchoring expectations, and reducing inflation. It was not designed as a way of getting easier monetary policy, but rather the opposite. It is equally good for either purpose: the target can be set high or low, depending on the times.
Originally, the leading competitor as a monetary anchor was money supply targeting (monetarism), which was the regime adopted in the early 1980s by the central banks of the largest economies. Later on, the leading competitor became Inflation Targeting. The general argument for nominal GDP was then, and remains now, that it is robust to a variety of shocks, positive and negative. It dominates money targeting in that it is robust with respect to velocity shocks. It dominates inflation targeting in that it is robust to supply shocks.
In other words, Nominal GDP Targeting is not a short-term expedient but is fit precisely for the long run.
It is true that a major reason why the nominal GDP proposal has been revived over the last two years is that it could help deliver easy monetary policy in the short run, which is what the economy has needed recently. Some supporters may indeed view it as a short-term expedient, to be jettisoned when the economic recovery has become better established. And I can see the attraction of the one-time proposal that the Economist magazine has made for the UK: that the Bank of England commit to keeping interest rates low until nominal GDP has re-attained a level 10% higher than today’s level. But I personally favor keeping it as the framework in the longer term, with loose nominal GDP targets set annually at a horizon of two years. The width of the bands and the degree of commitment could be similar to whatever it would be under the alternative of inflation targeting.
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The targeted nominal GDP growth rate would not be the same every year, let alone every decade. If the US were to adopt the framework now, 4 ½ % would not be a bad number for the center of the target range. (A lower number would be appropriate for some, like Japan, and a higher number for others, especially emerging market countries.) Steil and Walker support their argument that the proposal is not fit for the long run with an attractive graph. It shows that in many of the years since 1981 when the rate of growth of nominal GDP was above 4 ½ %, which they claim would imply monetary tightening under the proposed regime, unemployment was above 5 ½ %, prompting the Fed to loosen (wisely, in the authors’ view, if I understand them right).
The problem with this argument is that of those eight years when the Fed is shown loosening in response to unemployment above 5 ½ % (by my count), seven of the years came during the first part of the sample: 1983, 1985, 1986, 1987, 1990, 1992, 1993. (The only year from the more recent half of the sample is 2003.) Why is this a problem for the argument? In the 1980s and even the 1990s, it seems to me that nobody would have set a target so aggressive as to require monetary tightening when nominal GDP reached 4 ½ %. Back then we were coming down from high levels of inertial inflation and this process was understood to be gradual. Furthermore, the rate of growth of potential output was higher than today as well. Thus the numbers chosen for the nominal GDP target would have been higher than today. They would not have forced the Fed to tighten when unemployment was 7%.
Now to the political labels. Recall that Steil-Walker claim that the nominal GDP proposal was originally put out by economists on the right and has recently been adopted opportunistically by economists on the left as a short-term fad. But the originator of the nominal GDP proposal in the UK was Sir James Meade (1978, 1982), who (it turns out) was an “interventionist” and member of the Social Democratic Party. The earliest proponent in the US was James Tobin (1980, 1983), also a Nobel Prize winner and also on the left. (I am trying to avoid the confusing word “liberal” which in the US usually means on the left but in the UK continues usually to mean pro-free-market.)
The recent revival of Nominal GDP Targeting came from a group of bloggers who describe themselves as conservatives (ScottSumner, LarsChristensen and DavidBeckworth,) Even those now proposing a one-time threshold for the level of nominal GDP are not noticeably clustered on the left of the political spectrum. The current British chancellor is, of course, a Conservative. Perhaps what is confusing some observers is the reflexive, but wrong, assumption that Labor/Democrats always favor more expansionary policy than Conservatives/Republicans. (Compare Presidents Nixon, Reagan and Bush, who pressured the Fed for easier money, with Carter and Clinton.)
In other words, it would be more correct to say that the idea was a proposal of the left picked up by the right than the other way around, as Steil and Walker claim. But there are plenty of nominal GDP proponents from each side of the political spectrum, currently as in there were in the 1980s, as well as many whose political views are not immediately apparent. That is all to the good. This proposal is neither liberal nor conservative. Nor is it one that I, personally, will be abandoning as soon as the economy returns to full employment. With money targeting and inflation targeting discredited, Nominal GDP Targeting is left. Right?
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The recent surge in interest in Nominal GDP Targeting, as an alternative to money targeting or inflation targeting if the central bank is to commit to a nominal target of some sort, has prompted some pushback. This is not surprising. But one of the responses is most peculiar. This is the allegation that the surge comes from liberals opportunistically adopting an idea that was originally proposed by conservatives, and that they will not stick with this “fad” in the longer run because it is only designed to fit current circumstances of high unemployment and low output. Remarkably, every component of this argument is wrong.
I have in mind, especially, the views of Benn Steil and Dinah Walker of the Council on Foreign Relations, as expressed in “Why Nominal GDP Targeting is a Fad”:
“NGDP targeting having once been the intellectual stomping ground of economists on the right (notably Scott Sumner), its newest supporters come overwhelmingly from the left (such as Christy Romer)…. We think the rage will be short-lived. The reason is that NGDP targeting’s newest supporters are bad-weather fans. That is, they like it now, when NGDP is well below its 2007 “trend” line, meaning that the policy implies extended and more aggressive monetary loosening. But what happens when NGDP goes above its target, as it eventually will? NGDP targeting then requires tightening….”
Let’s consider the analytics first, and hold off awhile on the less edifying political labels. The nominal GDP proposal was originally studied and supported by many prominent economists in the 1980s. The problem at the time was a need for monetary discipline, anchoring expectations, and reducing inflation. It was not designed as a way of getting easier monetary policy, but rather the opposite. It is equally good for either purpose: the target can be set high or low, depending on the times.
Originally, the leading competitor as a monetary anchor was money supply targeting (monetarism), which was the regime adopted in the early 1980s by the central banks of the largest economies. Later on, the leading competitor became Inflation Targeting. The general argument for nominal GDP was then, and remains now, that it is robust to a variety of shocks, positive and negative. It dominates money targeting in that it is robust with respect to velocity shocks. It dominates inflation targeting in that it is robust to supply shocks.
In other words, Nominal GDP Targeting is not a short-term expedient but is fit precisely for the long run.
It is true that a major reason why the nominal GDP proposal has been revived over the last two years is that it could help deliver easy monetary policy in the short run, which is what the economy has needed recently. Some supporters may indeed view it as a short-term expedient, to be jettisoned when the economic recovery has become better established. And I can see the attraction of the one-time proposal that the Economist magazine has made for the UK: that the Bank of England commit to keeping interest rates low until nominal GDP has re-attained a level 10% higher than today’s level. But I personally favor keeping it as the framework in the longer term, with loose nominal GDP targets set annually at a horizon of two years. The width of the bands and the degree of commitment could be similar to whatever it would be under the alternative of inflation targeting.
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The targeted nominal GDP growth rate would not be the same every year, let alone every decade. If the US were to adopt the framework now, 4 ½ % would not be a bad number for the center of the target range. (A lower number would be appropriate for some, like Japan, and a higher number for others, especially emerging market countries.) Steil and Walker support their argument that the proposal is not fit for the long run with an attractive graph. It shows that in many of the years since 1981 when the rate of growth of nominal GDP was above 4 ½ %, which they claim would imply monetary tightening under the proposed regime, unemployment was above 5 ½ %, prompting the Fed to loosen (wisely, in the authors’ view, if I understand them right).
The problem with this argument is that of those eight years when the Fed is shown loosening in response to unemployment above 5 ½ % (by my count), seven of the years came during the first part of the sample: 1983, 1985, 1986, 1987, 1990, 1992, 1993. (The only year from the more recent half of the sample is 2003.) Why is this a problem for the argument? In the 1980s and even the 1990s, it seems to me that nobody would have set a target so aggressive as to require monetary tightening when nominal GDP reached 4 ½ %. Back then we were coming down from high levels of inertial inflation and this process was understood to be gradual. Furthermore, the rate of growth of potential output was higher than today as well. Thus the numbers chosen for the nominal GDP target would have been higher than today. They would not have forced the Fed to tighten when unemployment was 7%.
Now to the political labels. Recall that Steil-Walker claim that the nominal GDP proposal was originally put out by economists on the right and has recently been adopted opportunistically by economists on the left as a short-term fad. But the originator of the nominal GDP proposal in the UK was Sir James Meade (1978, 1982), who (it turns out) was an “interventionist” and member of the Social Democratic Party. The earliest proponent in the US was James Tobin (1980, 1983), also a Nobel Prize winner and also on the left. (I am trying to avoid the confusing word “liberal” which in the US usually means on the left but in the UK continues usually to mean pro-free-market.)
The recent revival of Nominal GDP Targeting came from a group of bloggers who describe themselves as conservatives (Scott Sumner, Lars Christensen and David Beckworth,) Even those now proposing a one-time threshold for the level of nominal GDP are not noticeably clustered on the left of the political spectrum. The current British chancellor is, of course, a Conservative. Perhaps what is confusing some observers is the reflexive, but wrong, assumption that Labor/Democrats always favor more expansionary policy than Conservatives/Republicans. (Compare Presidents Nixon, Reagan and Bush, who pressured the Fed for easier money, with Carter and Clinton.)
In other words, it would be more correct to say that the idea was a proposal of the left picked up by the right than the other way around, as Steil and Walker claim. But there are plenty of nominal GDP proponents from each side of the political spectrum, currently as in there were in the 1980s, as well as many whose political views are not immediately apparent. That is all to the good. This proposal is neither liberal nor conservative. Nor is it one that I, personally, will be abandoning as soon as the economy returns to full employment. With money targeting and inflation targeting discredited, Nominal GDP Targeting is left. Right?