Several commenters sent me the following by Michael Sankowski, insisting it raised serious questions about my NGDP futures targeting idea:
I never wanted to write this post.
I might not be the world’s biggest fan of monetary policy, but I like NGDP level targets. A NGDP level target would be superior to our current dual mandate structure.
But NGDP level futures contracts are a very bad, even terrible way to moderate the level of NGDP. I thought the fascination with NGDP level futures would have played out by now, without me doing a full on smackdown. But that hasn’t happened.
Instead, we get Noah Smith arguing trading is volatile. It’s not a great reason to avoid NGDP futures. It’s a bit thin.
So I am compelled to write a post I did not want to write.
NGDP level futures would almost certainly hand Goldman Sachs and hedge funds a payday worth over $500bn, while giving almost nothing else to the rest of the economy. Either that, or NGDP level futures would never be traded by anyone.
I wish Michael hadn’t written that post, as I don’t like having to keep replying to criticism by people who have never even studied the proposal.
Noah Smith pointed out that if NGDP futures traders were much dumber than the Fed, they might inject extra volatility into NGDP. I pointed out that I’d have no objection to the Fed doing its own trading to offset suspicious trades.
Now Michael raises the opposite concern. The traders might be so smart that they steal $500 billion from the Fed. I wonder why he didn’t pick $500 quadrillion? Seriously, I’d argue the market need be no larger that $100 million, maybe $10 million. And I’ve published proposals where the Fed would not take a net long or short position. So under those versions any $500 billion earned by GS would be offset by losses to other traders. And I don’t care if no one trades the contracts, as long as the central bank ensures liquidity and a low cost of trades.
More generally, the futures targeting idea has been around for a quarter century, with many articles published by myself and others. There have also been critiques, the best one by Bernanke and Woodford (JMCB 1997.) Garrison and White also did a good critique. But those critiques only apply to one version, which is not the one currently being pushed by people like me and Woolsey.
I would add that the “futures” market being proposed is unlike any real world futures market. It is set up not to provide forecasts of future NGDP, but rather to forecast the setting of the policy instrument likely to result in on-target NGDP. So any knowledge one has of actual futures markets is likely to be very misleading when applied to this policy regime.
There may be a deadly flaw. But if no one has found it after 25 years and endless debate, I wouldn’t count on it.