Jason Furman was wrong
Yesterday, I did a post entitled “Jason Furman is right“. In the comment section, Rajat points out that in the middle of last year Jason Furman was complaining that a policy of NGDP level targeting would have required the Fed to begin tightening monetary policy. While I still believe that Furman is now correct, last year he was wrong in opposing gradual tightening. Here’s Rajat’s very perceptive comment:
I have two responses to this post.
First, you are too kind to Jason Furman and I don’t like you being so generous to people who initially opposed your approach but eventually come around to it without admitting they were wrong, just because they are high-profile and influential. Maybe I haven’t followed Furman’s views closely enough, but on David Beckworth’s podcast last June, Furman criticised NGDPLT on the basis that it would have required higher/positive interest rates at a time when unemployment was still ‘high’ (nearly 6% but falling). At that time, as the transcript shows, Furman supported discretion over rules and argued that the Fed should look at unemployment as well as a nominal variable, which could be NGDP. He said:
You in 2019, put down a really elegant framework for nominal GDP targeting. If we were following it now, we would already have lifted off interest rates. And we’re going to, with extreme likelihood, overshoot the nominal GDP target we were on. So under your framework, you’d have to make up for that with a sustained period of lower than trend on nominal GDP growth.
I’m sure either by googling or going on your burner twitter account, you would also be able to find Furman’s tweets from August 5 where he crowed about how David’s estimate that the NGDP gap was closed in Q2/2021 was a reason why NGDPLT was inappropriate. For some bizarre reason that perhaps only a New Keynesian could understand, he went on to claim that “Under [David’s] forward-looking NGDP target rates should be well above neutral–maybe around 4% or more right now…. So would need very high interest rate for many years until NGDP got back onto its pre-pandemic path.” And then, just as he said in the podcast, Furman magnanimously added that none of what he was saying was to ‘pick on’ David. Yet now, he publishes a piece saying monetary policy was too loose in 2021 and somehow he is the prodigal son? Maybe, Scott, when I am your age I will be as zen as you about these sins, but for now I am still a (relatively) angry young man.
Second, once again I have to chide you for reading an FT article without checking the author’s name – here, Martin Sandbu. Start a ‘black list’ and keep adding to it!
In retrospect it’s 100% clear that monetary policy should have been tighter in the last half of 2021. If the Fed had tightened enough to keep NGDP growth close to trend, then we wouldn’t be worrying about a possible recession next year. Furman now says policy was too expansionary—does that mean he retracts his criticism of NGDP level targeting?
In my view, people obsess too much about who was right and who was wrong. Furman’s a great economist. And it wasn’t just Furman that underestimated the momentum of the economy in mid-2021, I also failed to anticipate the severity of the inflation problem. (I suspect David Beckworth would say the same.) So I’m not trying to defend myself or criticize others; I’m trying to defend NGDPLT, which is a much more important goal. Just as in 2008, we see NGDP providing the right signal to policymakers when lots of experts got things wrong. That should count for something, shouldn’t it?
PS. A few comments on Rajat’s second point. I have an excellent memory for statistical data and maps, but a horrifically bad memory for names. (Not a good trait in teachers.) But maybe that’s just as well, as in my early days of blogging I was much too critical of reporters, forgetting that they are people too.
PPS. People often ask me to comment on the many, many conservatives who say the high inflation was caused by reckless fiscal policy. My comment is simple. They are all wrong, and it’s not really even debatable in my view. The Fed’s job is to set monetary policy at the appropriate level for achieving their dual mandate, taking fiscal policy into account. Full stop.
I opposed the fiscal stimulus (except for the relief portion), which I regarded as a waste of money. But no matter how many conservatives say otherwise, fiscal stimulus did not cause the high inflation.