I did a highly critical post of Simon Wren-Lewis a while back (mostly in retaliation to a highly critical post he did on my former adviser, Bob Lucas.) Today I’m happy to be able to do a positive post. Here’s Wren-Lewis:
It is of course interesting to speculate why this is. Perhaps it is, as John Kay suggests, an obsession with credibility, involving a misreading of the theoretical literature. Perhaps they suspect, like Chris Dillow, further QE will be ineffective, so there is nothing they can do. (But if it is that, they should say so.) Perhaps it is because policymakers are really serving particular economic interests, as Steve Waldman suggests. Perhaps Rogoff was right, and central bankers really are ‘conservative’, in the sense of caring much less about unemployment than the rest of society. But whatever it is, it is not producing good policy for society as a whole. So we should think about moving to a monetary policy target that better reflects social costs. Maybe, as Britmouse in the UK and many others elsewhere suggest, that is a nominal GDP target, or maybe it is something else, but the status quo is not looking too good right now.
Inflation targeting is being rapidly discredited (see my previous post) and more and more people are attracted to NGDP targeting. It looks to me like the momentum is almost unstoppable; and as Europe goes downhill NGDPLT will look better each day.
What’s causing this re-evaluation? Probably lots of things, but I see this as the most important:
1. Almost everyone thinks the US, UK, EU, and Japan could use at least a bit more AD.
2. The Fed, BOE, ECB and BOJ say they won’t do more, for fear of inflation.
3. NGDP proponents point out that NGDP is way below trend.
Ergo NGDP targeting looks better right now.
But that’s not the only reason. Most macroeconomists recognize the advantages of NGDP when there are supply shocks or VAT changes. Most understand the beauty of a single target, which addresses the dual mandate. It’s got lots of support from both liberals and conservatives. Indeed one could write a long article on all the advantages. So I don’t believe that interest in NGDPLT will disappear when it no longer seems expedient to favor the policy.
Every economic crisis yields a sea change of attitudes in the field of macroeconomics. Why would this one be any different?
BTW, Britmouse pointed out that blogs have more influence than you might expect:
Will Hutton has outed Business Secretary Vince Cable as a supporter of NGDP targeting. The Guardian have Hutton interviewing Cable this weekend. Will Hutton frequently advocates for an NGDP target in his Observer/Guardian columns; it was also known that Cable’s Special Advisor, Giles Wilkes, was a reader of Scott Sumner’s blog and supporter of NGDP targeting. The influence of blogs on policymakers is revealed!
And they laughed when Tyler Cowen said this in my first month of blogging:
Here is the excellent Scott Sumner: an open letter to Paul Krugman. It’s also the best recovery plan I’ve seen so far, by far. It’s too good to excerpt, so you’ll have to click through and read the whole thing. From my point of view, right now the whole world should be beating a path to Scott Sumner’s door.
Too bad I never got an opportunity to explain the importance of those empty Fed seats to President Obama.
PS. The “they” who laughed included me.