Ramesh Ponnuru sent me this article from Time:
Indeed, Ponnuru and Beckworth aren’t the only conservative proponents of this policy. The most vocal supporter of NGDP targeting, Scot Sumner, is also a conservative, and Mitt Romney economic advisor Greg Mankiw wrote a paper in the 1990s extolling the virtues of targeting nominal GDP.
Not everybody in on the right would be keen on this kind of regime, however. In the past couple of years some factions within the Republican Party, led by Ron Paul, have veered increasingly towards the Austrian school of economics, which is highly skeptical of central bank meddling in the economy and of governmental stimulus of any kind. This cycle’s Republican presidential primary was rife with tough words for Ben Bernanke’s unconventional policies, and Mitt Romney himself has opposed further quantitative easing from the Fed.
Of course, if Ben Bernanke and the rest of the Fed aren’t on board, it doesn’t matter what politicians think. And up to this point, Bernanke has resisted expanding the Fed’s balance sheet further – which would be the whole point, in the short run, to switching to NGDP targeting.
A couple quibbles.
1. I don’t really consider myself a conservative, as I’m more libertarian on non-economic issues. But if I was a reporter I might use the term anyway, as it’s more recognizable to most readers.
2. The whole point of NGDP targeting, level targeting, is to reduce the demand for base money so that the Fed doesn’t have to increase the base (or at least as much as otherwise.) But that’s also a minor quibble, as readers of Time aren’t going to understand all the bizarre counter-intuitive aspects of monetary theory at the zero bound.
3. It would be more accurate to say “Romney supports QE, but says he opposes it so that he can win the Ron Paul supporters in the general election.” Market monetarist policies would help tens of millions of Americans (including me), but unlike the Austrians, market monetarist can’t deliver any votes in November.
The article also quotes Ezra Klein:
A scary interpretation of Bernanke’s position is that he doesn’t believe the Fed could do much more to help the economy, but he doesn’t want the market to know that, and so he keeps not doing more but telling the markets he could do more if he wanted to.
I get frustrated with this view although I understand it’s widespread. I’ve followed Bernanke’s research for decades, and I know exactly how he thinks about this issue. And I’m telling you there is ZERO chance that Bernanke believes the Fed is out of ammo. I don’t even think he believes they are out of “semi-conventional” ammo, like QE. And he certainly believes less conventional options like a higher inflation target would work, albeit too well in his view.
Steve Chapman of the Chicago Tribune has an excellent article.
Inflation hawks have been predicting a severe outbreak for years. But David Henderson, an economist at Stanford University’s Hoover Institution and the Naval Postgraduate School, has been skeptical enough to put his money where his mouth is.
In December 2009, he publicly bet economist Robert Murphy of the Pacific Research Institute $500 that by January 2013, there would not be a single point at which the CPI would be up 10 percent or more from a year before. So far, it hasn’t been, and it shows no sign it will.
Another economist who thinks inflation is the least of our worries is Scott Sumner of Bentley University in Massachusetts. He says the increase in the money supply has not unleashed inflation because the demand for dollars has risen as well.
When banks or individuals hold on to cash, he notes, the effect is the same as if the Fed were shrinking the money supply. By refusing to spend or invest, they stifle economic activity.
That effect is apparent in the slowing of the economy, which was not exactly galloping to start with. Job growth is on a glacial pace. Three years after the recession officially ended, we have 5 million fewer jobs than we had before it began.
The Fed’s past quantitative easing programs have helped, but they haven’t been big enough or lasted long enough. Sumner argues that the central bank should commit to sticking with the tactic as long as it takes to get growth back to a healthy pace “” backing off only if there are signs that inflation is likely to rise significantly.
Of course I’d prefer my argument be stated in terms of NGDP, but in this case I won’t quibble at all, for two reasons:
1. Chapman was nice enough to send me the quote for comment, and I realized it would be more understandable to the general newspaper reader if I stayed away from NGDP.
2. He titled his article: “Strangled by tight money: Inflation is the least of our worries”
Tight money!!! That’s a breakthrough. I had completely given up on the idea of ever convincing my fellow economists that money has been tight over the last 4 years, although it is even using Ben Bernanke’s own criteria. I had even less hope for convincing the press. I can just see some conservative Austrian-type who works in the financial industry spitting out his coffee when he reads that headline in the morning. Thank you Steve Chapman.
And here’s Catherine Hollander writing in National Journal:
The Federal Reserve has a two-pronged mandate to promote price stability and maximum employment. “Part of having a dual mandate is, you can be criticized on both sides for losing the inflation goal or falling short of the employment objective,” said Vincent Reinhart, Morgan Stanley’s chief U.S. economist and a former head of the Fed’s monetary division. “We’re hearing it on the one side even though we don’t have a lot of evidence of inflation taking off. But we’re not hearing on the other side, even though the unemployment is well above the Fed’s estimate of the natural rate.”
So, why are the inflation hawks the loudest? There are a few theories.
One is a difference in economic thought. Scott Sumner, an economist at Bentley University who has urged the Fed to be more aggressive, says if you consider monetary policy through the lens of interest rates, as he believes Democrats tend to do, then you probably don’t think the central bank can do much more; interest rates are already at rock-bottom levels.
If you focus on the money supply side of monetary policy, however, as Republicans do, you will be concerned that future easing will cause inflation to soar. The reality, of course, is between the two: The Federal Reserve’s actions affect interest rates as well as the money supply.
Reinhart’s right that the Dems have been silent on the need for monetary stimulus. In early 2009 I wrote an open letter to Paul Krugman practically begging the left to get on board the crusade for monetary stimulus, but he brushed me away. Now I fear it’s too late.
The National Journal article is behind the paywall. It’s entitled “Silence From the Left as Fed Mulls Choices.”