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.
READER COMMENTS
Gabriel
Apr 24 2022 at 2:56pm
“But no matter how many conservatives say otherwise, fiscal stimulus did not cause the high inflation.”
I’m not sure this is correct, and it seems counter to the evidence that suggests the American Rescue Plan increased inflation.(https://www.frbsf.org/economic-research/publications/economic-letter/2022/march/why-is-us-inflation-higher-than-in-other-countries/).
I understand your point that even if fiscal policy is too expansionary, the federal reserve can offset it. When you assert that the fed can offset expansionary fiscal policy to avoid its inflationary impact, you assume the fed will act and raise rates. We have not seen this, and the fed has waited too long to act. I think some insight from Mankiw and Bernanke is needed to make my point.
In warning about the American Rescue plan, Mankiw wrote, “Stimulus proponents argue that the Federal Reserve can deal with inflation by raising interest rates, which would slow spending. True, but it would be a mistake to put too much faith in the prescience and skill of central bankers.” In 2017, Ben Bernanke wrote a post about how the fed factors fiscal policy in its policy actions. He said, “In the face of substantial uncertainty, Fed policymakers often opt for a cautious approach.” We saw this “cautious approach’ earlier last year with the fed waiting to see what happens with coronavirus and the impact of the ARP.
It is incorrect to say that fiscal policymakers had no role in current macroeconomic conditions. The American Rescue plan was irresponsible, increased inflation, and the federal reserve, following the “cautious approach,” didn’t raise rates fast enough. Yet, I think you are correct that the federal reserve holds final responsibility for increasing inflation because of its expansionary policy. Beyond assuming the federal reserve will act in a timely matter to offset overzealous fiscal policy, fiscal policymakers, by expanding aggregate demand, put the fed in a situation where inflation is now off-target, and as Bernanke says “Developments that push the forecasted path of the economy away from the Fed’s employment and inflation objectives require a compensating policy response.”
By “throwing” the economy off from its target, fiscal policymakers put the federal reserve in a situation where interest rates have to increase significantly (as we see now) and risk a recession, which not only puts the fed in a tight situation but risks politicians persuing other irresponsible policies to fight inflation (ex: price controls)
https://www.brookings.edu/blog/ben-bernanke/2017/01/13/the-fed-and-fiscal-policy/
https://scholar.harvard.edu/files/mankiw/files/biden_economy.pdf
marcus nunes
Apr 25 2022 at 9:57am
Gabriel, US inflation higher than in other countries Because monetary policy in US was more expansionary!
https://marcusnunes.substack.com/p/the-age-of-inflation-again?s=w
Scott Sumner
Apr 25 2022 at 11:28am
“By “throwing” the economy off from its target, fiscal policymakers put the federal reserve in a situation where interest rates have to increase significantly (as we see now) and risk a recession”
I strongly disagree with this. The risk of recession would be just as severe with less fiscal stimulus and more monetary stimulus. What matters is total nominal spending, not the extent to which that spending is generated by fiscal or monetary policy.
As for the Fed’s supposedly “cautious” interest rate policy, I’d say setting rates at 0.5% when inflation is 8% is not cautious.
Blaming fiscal policy for the inflation is like blaming a turn in the road for a traffic accident, not the fact that the driver fell asleep at the wheel.
Carl
May 2 2022 at 4:26pm
“Blaming fiscal policy for the inflation is like blaming a turn in the road for a traffic accident, not the fact that the driver fell asleep at the wheel.”
I don’t know that that’s the right analogy. It seems reasonable to assume that it’s easier for the Fed to do its job when fiscal policy is reasonable than when it is reckless. The Fed does not have to concern itself with the interest burden on debt or the risk of triggering a recession by tightening money as part of a policy of monetary offset.
Maybe a better analogy for reckless fiscal behavior is one where a reckless fiscal authority is like a municipality doesn’t shovel its streets. A good driver will still avoid a crash by slowing things down when he drives through town. That doesn’t change the fact the city made a crash more likely by leaving the roads in a treacherous state. Nor does it change the fact that the bus will lose time while navigating the city’s treacherous roads.
marcus nunes
Apr 24 2022 at 3:11pm
Scott, yesterday I published a version of this comment on “JF is right”, but maybe it went straight to moderation and did not show up.
In my view, JF is (and was) wrong. And that´s because as you found out, he eschews NGDP.
He say´s “It is common when talking about GDP to talk about how rapid growth has been: Faster than the past, faster in US than in other countries, faster than forecasters expected, just plain fast.
But this is in serious tension with the supply-side arguments people make on inflation.”
I try to show in this post there isn´t one and that the Fed can correct the mistake it made in mid-21 in a less traumatic fashion!
https://marcusnunes.substack.com/p/a-definitive-breakdown-of-inflation?s=w
Scott Sumner
Apr 25 2022 at 11:31am
I think Furman is saying that both supply and demand side factors played a role in inflation, but that excess demand is the major policy mistake. Do you agree?
Rajat
Apr 25 2022 at 8:40pm
Thanks Scott! I should really focus on supporting my footy team more; but until then, it’s Team MM all the way!
I think Furman can take some credit for accurately predicting in June 2021 (as noted in the Macromusings transcript) that there was likely higher inflation ahead, in spite of bond breakevens not signalling much at that time. Where I think he went wrong was first, in arguing for the inclusion of a real variable like the unemployment rate in the Fed’s mandate, even though inflation was already high in mid-2021 in spite of unemployment being above 5% at the time and above 4% for virtually all of 2021; and second, in dismissing the value of NGDPLT in June 2021 because it was suggesting the need for the Fed’s interest rate to tighten policy in or by Q2 2021. Someone listening to the interview now could be forgiven for thinking that under Furman’s framework, the Fed should only have responded to high demand-driven inflation in late 2021 when unemployment was falling rapidly towards 4%. All this means is that it comes across as a bit rich for him to claim any authorship over the idea that strong NGDP growth in 2021 is the reason why high inflation in 2021 was demand-driven.
Scott Sumner
Apr 26 2022 at 12:11pm
Good points.
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