Archive for January 2018


The increasing popularity of NGDP targeting

There seems to be an increasing groundswell of support for NGDP targeting.  At the recent AEA meetings in Philadelphia, David and Christina Romer presented a paper that endorsed the concept.  A couple days later Larry Summers touted the idea at a Brookings Conference on monetary policy.  At the same conference, Jeffrey Frankel presented this slide:

Sam Bell directed me to a copy of the Fed minutes from 1995, where Lawrence Lindsey endorsed the idea:

…one of the things we all taught in economics was that, if we have one instrument, we can only work with one target. I don’t think it necessarily follows that the target should be price inflation. I think it should be nominal GDP, and I believe that is somewhat in line with what Governor Yellen said. But once we pick nominal GDP as our objective function, it begs a second question that has to be answered. It is that a nominal GDP target probably has to be consistent with some desired level of inflation. So, having this process and having Congress tell us some desired level of inflation, I think is probably good. But our target should not be the desired level of inflation; our target should be nominal GDP.

Lindsey is a leading candidate for the position of vice chair of the Fed:

Other names linked to the position at the time include former Fed Governor Lawrence Lindsey, head of an economic advisory firm, and Mohamed El-Erian, a columnist for Bloomberg View and chief economic adviser at Allianz SE, Pimco’s parent company. Neither could be immediately reached for comment on Monday.

Unfortunately he does have one downside:

In contrast to Chairman Greenspan, Lindsey argued that the Federal Reserve had an obligation to prevent the stock market bubble from growing out of control. He argued that “the long term costs of a bubble to the economy and society are potentially great…. As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst that bubble becomes overwhelming. I think it is far better that we do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights.”

I don’t think you want to point to the late 1920s as an example of why central banks should pop stock market bubbles.

(In this post I discussed El-Erian.)

Here’s another interesting slide from Frankel’s presentation:

Here are a few thoughts on those three points:

i.  I believe the Fed can hit an NGDP target, or an inflation target.  The Fed also believes that, or they would not be raising interest rates right now.

ii.  I believe that people actually understand NGDP targeting better than inflation targeting.  Ask 100 people back in 2010 why the Fed was trying to raise the inflation rate.  Ask them why the Fed thought it was a good idea to raise the cost of living for American citizens at a time when they were struggling with high unemployment and heavy mortgage debt.  I bet less than 3 out of 100 could answer the question.  Then ask them why the Fed might want to raise America’s total national income during a deep recession.

iii.  I wonder if the data revision issue implies that we should be targeting something like total labor compensation.  Am I correct in assuming that this variable is revised less significantly than overall NGDP?  It might also correlate better with labor market stability.

HT:  Sam Bell, Scott Freelander, Tyler Cowen


Updates on previous posts

1.  In this previous post, I was skeptical of the claim that the opioid epidemic was caused by poverty, citing the extremely high rates of opioid abuse in highly prosperous New Hampshire:

So what makes New Hampshire so special?  Why so many deaths of despair? Perhaps because it has arguably the most successful economy in the entire world, with extremely high income, high education and extremely low rates of poverty.

Tyler Cowen links to a new NBER study by Christopher Ruhm that is also skeptical of the view that poverty causes “deaths of despair”:

The contribution of economic factors is even less when accounting for plausible selection on unobservables, with even a small amount of remaining confounding factors being sufficient to entirely eliminate the relationship. These results suggest that the “deaths of despair” framing, while provocative, is unlikely to explain the main sources of the fatal drug epidemic and that efforts to improve economic conditions in distressed locations, while desirable for other reasons, are not likely to yield significant reductions in drug mortality.

2.  In numerous previous posts I suggested that Trump was utterly incompetent.  I was told that my rhetoric was unwise, as it would prevent me from having a job in the Trump administration.  That was amusing on so many levels, starting with the fact that I wouldn’t want any government job, even if my ideal candidate had been elected President.  But now we find out that thinking Trump is an idiot, moron, or immature child is practically a requirement for working in the Trump administration.  A new book written by someone who spent months hanging around the White House confirms that almost 100% of staffers have exactly the same view of Trump that I do:

Author Michael Wolff said Friday that ‘100 percent of the people around’ President Donald Trump question his intelligence and fitness for office, with some calling him a ‘moron’ and an ‘idiot.’

Even Jared Kushner and Ivanka Trump, the president’s son-in-law and elder daughter, both of whom are senior White House advisers, have moved out of the way to let the bus roll over the former Trump Organization executive, Wolff said.

‘They all say he is like a child. And what they mean by that is he has a need for immediate gratification. It’s all about him,’ Wolff told ‘Today’ on Friday. ‘They say he’s a moron, an idiot.’

I can already hear some people crying fake news, and that I should rely on Breitbart, not the New York Times or Wall Street Journal.  But here’s the problem.  Steve Bannon was one of those trashing Trump in this book, and he has not denied the comments attributed to him.  And again, the author says that these views are virtually unanimous within the White House.  In fact, DC reporters have known this for months, as they are able to talk to the staff off the record.  But many Trump supporters are still in denial, unwilling to face up to the fact that our President is completely unqualified for the job.

3.  Now the good news.  I’ve often suggested that Presidents have far less power than people assume, and that events tend to follow the “zeitgeist”, or the prevailing mood in the country.  That’s why Obamacare was not repealed, and it explains why Trump has not been very consequential, despite his obvious personal flaws. Again, Tyler links to a post that points to this distinction:

How is one to think of a president who is unfit for office in his rhetoric and presentation yet mainstream in his policies and actions?

I speak, of course, of Donald Trump.  Who doesn’t?  As an impossibility come true, the president offers a cosmic riddle to any analyst worth his salt.

There’s no riddle here at all; the mistake is to think that US presidents have a big impact on policy.  They don’t.  Judging the quality of a President by how the country is doing is like judging the quality of my blogging by looking at how monetary policy is doing.  And that’s really good news.  All you need to do is look at a country like Venezuela to see what happens when Presidents are hugely consequential.  We don’t want that here.

The one possible exception is foreign policy, where Presidents might be influential, in certain cases.  But even there I don’t really expect much change.  Rather the problem is that Trump’s recklessness makes a miscalculation with countries such as North Korea slightly more likely.

4.  I also suggested that Trump was a racist, and the new book provides evidence for that.  For instance, in private conversation Trump defends people who join the KKK.

And then there’s this:

As Durbin explained how deal would impact ppl from Haiti, Trump said, “Haiti? Why do we want people from Haiti here?” Then they got Africa. ‘Why do we want these people from all these shithole countries here? We should have more people from places like Norway.”

Actually, many African immigrants have done quite well in America.  Maybe we should focus on the characteristics of the immigrants, and not the color of their skin.  (And yes, let’s be real, Trump did not have in mind African immigrants like former Fed vice-chair Stanley Fischer–he’s talking about race.)

Update:  When Trump says he wants Norwegians like my grandmother and not people from “shitholes”, like Haitian immigrant and Utah GOP Congresswoman Mia Love:

he’s implicitly suggesting that dark skinned people are inferior.  Mia Love was not impressed.  Seems the GOP to trying to move from being a 2% black party to being a 0.02% black party.

Now we are beginning to discover why Trump was so obsessed with proving that Obama was not born in the US.

But hey, libertarians in my comment section say everything’s fine because the big corporations got a tax cut.