Brad DeLong poses two questions about NGDP targeting
By Scott Sumner
Here’s Brad DeLong:
Two Questions for Scott Sumner: First Question: Why has nominal GDP targeting not already swept the economics community? It really ought to have. Second Question: I believe in nominal GDP targeting–especially if coupled with some version of “social credit” at or near the zero lower bound. But a look back at the history of ideas about a proper “neutral” monetary policy–Newton’s fixed price of gold, Hayek’s fixed nominal GDP level, Fisher’s fixed price-level commodity basket, Friedman’s stable M2 growth rate, the NAIRU targeting of the 1970s, Bernanke’s inflation-targeting–leads immediately to the conclusion that anybody who claims to have uncovered the Philosopher’s Stone here is a madman. How can you reassure me that I (and you) are not mad?
My first reaction was that the first question was too polite. Something I’d expect from my mother, not a skilled debater like Brad DeLong. But perhaps he’s just buttering me up for the kill.
Seriously, these are both really interesting questions, and I reserve the right to do a follow-up when I’ve had time to give them more thought. But here are some initial reactions, starting with the first question:
I’m not sure NGDP targeting has not “swept the economics community,” at least in a sort of “glass half full” sense. Let’s start with the initial position of market monetarists (MMs). I think I was pretty typical of my fellow MMs in not being very well known. Even today I can recall only being invited to two top 50 departments to present. One was DeLong’s own Berkeley, back in the late 1990s, and the other was Dartmouth. Not once at the Fed, other than when I was on the job market in the late 1980s. So the Dartmouth invitation is it in terms of invites since I started blogging. Paul Krugman has an interesting piece on the inner circle of various fields of economics, and I’m clearly not in one of those elite groups of scholars, who share NBER papers with each other.
Thus given the initial starting position of MM, I think endorsements of NGDP targeting by the likes of Woodford, Christy Romer, Jeffrey Frankel, and some other top people is pretty good. And of course there’s Brad DeLong, who clearly is in the elite group, especially in the intersection of macro/macro history/history of thought. Then there are also lots of prominent economists in the “it’s worth a shot” category, including (AFAIK) Paul Krugman. When I speak to various people at conferences and after talks, I find lots of people who tell me privately that they are on board. But they don’t necessarily announce it in the New York Times, (as Romer did). So given our humble beginnings, I do see a lot of progress.
I would add that in my view I’m not even at the 50% mark in terms of my effectiveness. The NGDP futures market has been slow to materialize, but it will happen in 2015. Recent discussion with various think tanks has suggested to me that there is still a lot of interest in the NGDP targeting idea, and people are looking for ways to help. Hopefully these discussions will lead to something soon. And note that it’s the conservative/libertarian think tanks that invite me—I see that as being really important, given that the names I mentioned above are all at least slightly left of center. Here’s a question to think about:
Is there any monetary policy proposal other than NGDP targeting that has substantial support in the Keynesian, monetarist and Austrian communities?
DeLong is surely aware that there is some important support in the Keynesian community, and knows about the MMs, plus people like Bennett McCallum in the monetarist community. But given the way Austrians have recently been perceived as being out on the fringes, I wonder if DeLong would be surprised to know that many Austrians tell me something to the effect, “You convinced me that if we must have a Fed, then NGDP targeting is the least bad policy.” I’ll take that! And there is a long history of interest in NGDP targeting in that group (Hayek, Selgin, etc., although perhaps Selgin is not a true Austrian.)
It’s really hard to change monetary policy, and indeed it should be at least somewhat difficult to change policy. If it was easy, then policy would have little or no credibility. Obviously if there is significant support from all the various schools of thought, on both sides of the political spectrum, it will be much easier to enact the proposal. When I speak to free market groups like Cato/Heritage/AEI/Mercatus, and in Britain IEA/Adam Smith Institute, and the CIS in Australia, people seem very receptive to the ideas. Most of them have published at least one of my policy papers.
If Ben Bernanke had been in academia during the recent recession I believe he would have endorsed NGDP targeting. Of course he is in a rather difficult position today, and naturally would not want to undercut the current Federal Reserve Board. Thus I predict that when he eventually discusses the idea he will neither endorse it nor be hostile, but rather suggest that it’s an interesting idea worthy of further study. In general, these sorts of ideas need to percolate around in academia for some time, and be extensively studied, before the central bank adopts the policy. In other posts I’ve discussed how NGDP targeting could be gradually phased in, leaving a residual 2% inflation goal, for a multi-decade transition period.
I also wonder whether some of the reluctance of elite macroeconomists to jump on board is due to the misperception that there is something “primitive” about NGDP. Many people seem to see it as an ungainly creature, the sum of two “fundamental” concepts, inflation and real growth. Readers of this blog know I think that’s nonsense, like claiming the price level is merely the weighted average of goods and services prices. NGDP is the real thing, and inflation is a construct of bureaucrats who lack any solid theoretical foundation for decomposing NGDP into prices and real output. If you put a gun to my head, I could make a very respectable case that there has been no inflation in the past 50 years, and I could also make a very respectable case that the entire increase in per capita NGDP since 1964 has been 100% inflation, with no real growth. Both arguments would be well-founded in utility theory. (My next blog post?) The big mistake in macro was to construct models using P and Y, not PY as a single variable. The second mistake was not to think pragmatically about the “welfare costs of inflation,” which on closer inspection are actually the welfare costs of unstable NGDP.
The second question is much easier. I believe I am mad, as is everyone else. It’s only a question of how mad. As the title of my other blog suggests, I’m a sort of amateur psychologist who likes to talk about cognitive illusions. And since that talk can be rather insulting, let me point out that I personally have more money illusion than most people I meet. I’ve wasted many, many hours of my life doing things to save money, not realizing that a $20 bill has less value than in 1965. (BTW, in 1965 a twenty was the largest bill typically carried in wallets, and still is.)
But I’m also an extreme pragmatist, and thus plead innocent to the specific type of madness that worries DeLong. Two points to consider:
1. I suspect NGDP targeting is not a good policy for non-diversified economies, especially commodity exporters like Kuwait. A country like Australia would be a borderline case. It works best in big diversified economies like the US. That means it might not start out with small country experiments, as inflation targeting did in New Zealand, Canada, Chile, etc.
2. Even in the US, I suspect that some other target is slightly superior. It might be total labor compensation, or total compensation per working age adult, or average nominal hourly wages. I see NGDP as a good compromise in a world of uncertainty, which is a better focal point for Keynesians, monetarists and Austrians than a more controversial idea like wage targeting.
Obviously I didn’t invent NGDP targeting, so I don’t feel as possessive about the idea as say NGDP futures targeting, which I arguably did co-invent with Hall/Thompson/Hetzel/Glasner, etc.