Kelly Evans with Scott Sumner on Nominal GDP targeting
I don’t have the bandwidth to discuss this topic but the last time I showed you the first Scott Sumner video on this, I said this would be a hot topic and it is now. Brad DeLong, Paul Krugman, and Christina Romer, amongst other leading economists have since come out in favour of nominal GDP targeting at the Fed. I am going to have to defer getting in on this again. But I have tried to present the differing views on this in the links in lieu of pushing one view myself. Expect more links in the weeks ahead.
It is amazing how we are moving more and more towards a centrally planned model. Now a band of merry men(Fed Reserve) want to target how fast an economy of 300 million people performing millions of transactions a day grows?
correction: I’m sure they meant–how fast an economy of 300 million people performing millions of transactions a day grows NOMINALLY
That being said their arrogance is laughable
Sumner speaks intelligently and presents his ideas thoughtfully and patiently. But I have to say that targeting NGDP strikes me as simply money printing, asset reflation, and currency debasement–under a more palatable (or confusing) name.
What are the unintended consequences? There are always some. For starters, Sumner would like to see 6-7% NGDP over each of the next two years. The mix would surely be mostly inflation, given the lack of domestic and global demand. Would long-term interest rates not increase by 3/4/5% as a result?
How much swelling in excess reserves result? It would have to double or triple seemingly to drive that kind of NGDP growth. It is already unclear what the Fed’s excess-reserve-drawdown exit strategy is once the economy eventually picks back up–this would seem to magnify that problem several times over.
And as with most government policies, intentional reflation is guilty of picking winners and losers. The winners would clearly be those who are in debt. The losers would be savers, retirees, and near-retirees–especially those who are playing retirement catch-up (which is the majority). I realize the country is awash in debt and so forcing excess inflation would help mitigate that, but I simply don’t see this as a “fair” policy when it comes at the expense of savers and retirees.
Ed,
I am not an accountant or CPA…just a humble layman. If equity is determined by the difference between Assets and Liabilities and the formula works if you have price “discovery” but that is forbidden by the govt. So lets take stated equity and an appropriate ROE industry % and do the math and subtract that number from the income statement. If we did that, after all adjustments for reverve drawdowns and profit on “demise” insurance..I think we would find a real number on bank equity……that would be way to scary……..
Having read Summers and other proponents of nominal GDP targeting, it is my understanding that the efficacy of targeting nGDP rests with expectations; expectations is the primal casual agent.
Expectation One: The policy may only need to be established as policy, and not necessarily implemented, to be effective.
Expectation Two: The effectiveness of the policy hinges on the degree to which inflation is anticipated as an outcome of the policy.
Expectation Three: High expectation of consumer price inflation will result in higher prices. As prices rise, expectation of ever increasing prices spurs purchases before prices go even higher.
Expectation Four: But consumer price inflation won’t really go very high, but will instead very likely be moderate. On the other hand, rising asset prices will go high, thus re-enforcing the impression of generalized consumer price inflation, as commodity prices such as gas go up.
So inflation really won’t be very high, but the nGDP targeting proponents wish for the public/financial asset buyers to think otherwise — that inflation will be high.
So we have an obvious contradiction: target nGDP only works with high expectation of high prices but in reality they are likely to be moderate, at least as far as consumer prices is concerned. Financial assets, on the other hand . . .
So in actuality consumer price inflation will be moderate, yet at the same time we have a false consciousness of ever rising prices.
OK, perhaps I’m way off here, but if not, then I’d say we got some magical thinking going on here, pregnant with the arrogance of social engineering of mass psychology.
Real growth runs the hazard of an income and power redistribution…via free choice and personal equity. That is a threat to status quo. Of course academia would favor inflationary growth with NGDP targeting….how else could you do $155,000 Stanford pensions and stay “on camera”? So sad…….love this country….so discouraged……
Is he confusing relative price increases (supply shocks example) with the creation of money and credit when he uses the word inflation? The rate of change in aggregate prices will always be the effect of monetary expansion via deficit spending or bank lending, correct?
I find his remarks that future generations pay for current spending also very troubling considering how our monetary system works as a currency issuer under a flexible exchange rate regime.
Also, a lack of aggregate demand and unemployment are effects of this weak economy not the cause. The high level of private sector debt is the cause.
Finally, how would one use policy to increase nominal incomes without causing unemployment or currency depreciation?
Will we always live in a world of extreme central planning? When will planners appreciate the impossible they are trying to undertake when attempting to mobalize the entire world with the goal of continuous optimal outcomes? This would require not only perfect foresight, but also a perfect understanding of reality. Even if a set of humans did exist they would need to also be perfectly good.
Atleast a free system of voluntary exchange where the government’s sole purpose is to protect property rights, does not need such perfection. Ironically, this system will result in the most productive members of society controlling the most capital as opposed to the current system where we are at the mercy of politians.
Even if you thought that NGDP targeting was a good idea, the starting point is rather key. Romer and others suggest that you should start from some “normal” time, but then they pick 2007 as the starting point. It’s just nuts to use the peak of the bubble as the starting point.
If we instead picked 1984 as the starting point, the Fed would probably need to tighten in order to bring norminal growth back down to the 4.5-5% target.
It is just mindboggling to hear Sumner say that he is a “free market economist” and then have him propose yet more central planning. Not picking on Sumner, he actually seems much more rational than most, but the inability of economoists to recognize the contradiction is amazing.