It’s only logical; NGDPT is the next big thing

Let’s filter out the noise and look at three big turning points:

1.  The 1930s:  A deep and prolonged deflation from 1929 to 1933 was associated with sharply higher unemployment.  Economists drew the conclusion that policymakers needed to err on the side of expansionary policies, to prevent a repeat of the Great Depression.  They did.  And it worked.

2.  The Great Inflation (1966-81):  Higher and unstable inflation was associated with several problems such as unstable unemployment and distortions in capital markets.  Though not as bad as the Great Depression, economists agreed that the Fed needed to hold inflation at low and stable levels.  They continued to view business cycles as a significant problem, but noticed that the worst cycle in recent decades (the recession of 1981-82) was caused by a sharp slowdown in inflation. Thus inflation targeting should also stabilize growth, killing two birds with one stone.  They said we needed a Taylor-Rule type policy to stabilize inflation around 2%.  They succeeded.  No more Great Depressions and no more Great Inflations.

3.  The Great Recession:  Now economists noticed that even if inflation was pretty well anchored, we could have quite a bit of real instability.  Once low rates of inflation were achieved, it seemed like high and unstable unemployment was a much bigger problem than modest variations in inflation (say in the 0% to 4% range.)  Now we need a nominal aggregate that will stabilize output better than an inflation target, while still producing fairly well-anchored inflation over the business cycle.  That’s going to be NGDP targeting, or something closely related.   It will happen. And they will once again succeed.  And then no more Great Depressions and no more Great Inflations and no more Great Recessions.  That’s called progress.

Economists on both the left and the right are gradually moving to NGDPT.  Nick Rowe says that what convinced him is that it would have done much better in the recent severe business cycle. Severe problems are the problems you most want to prevent.  NGDPT does that.  Just today commenter W. Peden pointed to an endorsement of George Selgin’s (closely related) productivity norm by Allister Heath in The Telegraph.   He offers a conservative version of the idea, but center-left economists like Michael Woodford, Christy Romer and Jeffrey Frankel are also switching to NGDP targeting.

This isn’t rocket science–economists learn fairly predictable lessons from each major policy failure. This one is no different.  Central banks are conservative institutions so it will take a while for it to show up in the actual policy.  But you can be sure they are paying attention, and know that NGDPLT would have done better than IT in 2008-09. (Of course when I talk about central banks understanding what went wrong I am excluding the ECB.  There are in an entirely different category–still working on the lessons form the 1930s.)

The intellectual battle is almost over—time to consider what will go wrong under NGDPLT, and start working on the next improvement in monetary policy.  I vote for nominal aggregate labor compensation (per capita) targeting as the next iteration.

PS.  Check out Joe Leider’s blog, which makes some nice market monetarist arguments.



39 Responses to “It’s only logical; NGDPT is the next big thing”

  1. Gravatar of flow5 flow5
    14. January 2015 at 13:50

    AD does not equal nominal-gDp (only as Keynes defined it). Rates-of-change in monetary flows (our means-of-payment money times its transactions rate-of-turnover), = AD.

    You think oil, copper, etc. are falling because of supply problems? Nominal-gDp just collapsed. You can’t manage the money stock using interest rates.

    People are vacuous. It’s impossible. Interest rate manipulation won’t compensate for the distributed lag effect of money flows.

  2. Gravatar of Britonomist Britonomist
    14. January 2015 at 14:09

    “(our means-of-payment money times its transactions rate-of-turnover)” As in M*V, which is equal to P*Y, which is equal to NGDP…

  3. Gravatar of Philippe Philippe
    14. January 2015 at 14:11

    I think I agree with that, but I don’t think monetary policy can or should be the only policy tool.

  4. Gravatar of flow5 flow5
    14. January 2015 at 14:14

    Roc’s in the proxy for real-output fell by 1/2 from July to Dec 2014. Roc’s in the proxy for inflation have fallen by 2/3 from Jan 2013 until Dec. 2014.

    Combined, the proxies = nominal-gDp. You can’t change the policy rate to adjust for these sudden and dramatic variations at “zero bound” (QE is a misnomer, QE was contractionary).

    Yellen is just as ignorant as Bankrupt U Bernanke.

  5. Gravatar of E. Harding E. Harding
    14. January 2015 at 14:18

    I think not-as-great inflations will still happen under NGDPLT for Austrian Business Cycle reasons, though an NGDPLT regime would, if properly applied, have made the Great Recession more mild. Also, I’ve made a graph showing the CPI, NGDP, and RGDP over time:
    Notice the smoothness of the NGDP line under Greenspan.
    The 1970s stagflation really was a stagflation, in every sense of the term. An NGDPLT regime could have made the inflation less severe, but not the stagnation. I say the Great Stagflation was merely the beginning of the Great Stagnation, which the Fed only accommodated under Volcker. Notice that the trend NGDP growth rate had a tendency to increase between 1951 and 1981, thus contributing to 1970s inflation.

  6. Gravatar of Britonomist Britonomist
    14. January 2015 at 14:48

    “Roc’s in the proxy” excuse me?

  7. Gravatar of benjamin cole benjamin cole
    14. January 2015 at 14:55

    From Scott Sumner’ss lips to God’s ears.
    But to the ears of FOMC board members? Some are rhapsodizing about deflation. The central bankers are ossifying around single-mandate IT or even mild deflation. Thr Fed has maybe 1000 PhD economists in DC or branches, or on contract, and I think one likes Market Monetarism.
    I do see some hope. A 2016 GOP sweep might result in the GOP looking for intellectual cover for easier money and that will be Market Monetarism.

  8. Gravatar of Dan W. Dan W.
    14. January 2015 at 14:55

    In one corner is the NGDPLT monetarist and in the other corner is technology / productivity driven deflation. I suppose it could be a equal fight but the overconfidence of the monetarists will be its downfall.

  9. Gravatar of ThomasH ThomasH
    14. January 2015 at 15:03

    Probably good news, but just for fun, I do wish the Fed had actually tried to do inflation targeting not inflation ceiling targeting if only to have set a good example for the ECB.

  10. Gravatar of ThomasH ThomasH
    14. January 2015 at 15:17

    To go along with NGDPLT and its successor we probably need a “fiscal policy” rule,” as well to prevent the mistake of reducing expenditures when recession-created deficits rise (“austerity”) and to decrease expenditure when real borrowing costs rise. This means that changes in expenditures would be governed by changes in the aggregate value of projects with positive net present value over the business cycle. I wonder if an infrastructure bank might not help in this regard to avoid annual budget appropriations.

  11. Gravatar of Stable NGDP Growth (along a level target path) has been the best “stabilizer” | Historinhas Stable NGDP Growth (along a level target path) has been the best “stabilizer” | Historinhas
    14. January 2015 at 15:30

    […] Sumner writes: “It’s only logical; NGDPT is the next big thing”. “They will once again succeed” because it has already been […]

  12. Gravatar of Rajat Rajat
    14. January 2015 at 15:44

    There’s an oped in today’s Australian Financial Review by former RBA board member, Warwick McKibbin, supporting a shift from IT to NGDP targeting: (paywalled).

    McKibbin has long-supported NGDP targeting, but it’s the first time I’ve seen him write an op-ed for a mainstream newspaper supporting the idea. I’m taking the credit, having written to our Federal Treasurer before Xmas explaining the political and economic benefits of a shift(!!)

    Re the next iteration, Scott, how would you deal with secular changes in the participation rate, which you believe are happening now?

  13. Gravatar of Benoit Essiambre Benoit Essiambre
    14. January 2015 at 15:48

    That is interesting. Whereas NGDPLT makes nominal contracts effectively be a fixed proportion of the future economic pie, NALCPC would

    1.Make it a per capita thing. Which is logical because if you already have promised a fixed share of GDP to a group and the population grows, it might difficult to to pay new entrants. Making it per capita means adjusting to be able to share output with the new population.

    2.Make contracts be a share of the economy proportional to future labor income (what is the reason for excluding capital income from the calculation?) With this scheme, if the labor share of income shrinks, central banks will stimulate, past contracts will pay even less in real terms but this will push down unemployment (This seems almost procyclical but I guess is not since a lower share to labor must be correlated with unemployment)? If the labor share grows, central banks tighten, cause people to be paid even more in real terms, but raises unemployment?

  14. Gravatar of Don Geddis Don Geddis
    14. January 2015 at 16:01

    At the beginning, you write (in the title and first paragraphs), just “NGDPT”. At the end you write “NGDPLT”. Did you really mean to predict that NGDP targeting is coming, but NOT level targeting? And then, as a followup, you consider exploring per-capita income targeting. But surely level targeting is the obvious next followup to just NGDPT. Changing that to NGDPLT would make more of a difference than heading to per-capita income, right?

  15. Gravatar of ssumner ssumner
    14. January 2015 at 16:37

    Dan, Market monetarists have no objection to productivity driven deflation. Are you sure you actually understand NGDP targeting?

    Thomas, I can’t see how a fiscal policy rule would work in the US. After each election you’d get a completely different fiscal policy. The two parties don’t agree on much of anything. Even a monetary rule is hard to agree on, but fiscal is 100 times more difficult.

    Rajat, I have a open mind on the issue. In theory, you’d like to target NGDP divided by the workforce at full employment, adjusted for changes in the workforce that reflect non-monetary factors. As a practical matter these things change very gradually, so the exact target wouldn’t make much difference.

    Benoit, The goal is to stabilize labor markets.

    Don, That’s right, but I’ve already talked about level targeting in lots of other posts, and I don’t really know if the NGDPT regime adopted here first will be level targeting or not. Most modern advocates seem to favor the level targeting approach. So I wanted to discuss the next next step.

  16. Gravatar of Major.Freedom Major.Freedom
    14. January 2015 at 19:58

    The Great Inflation (1966-81): Higher and unstable inflation was associated with several problems such as unstable unemployment and distortions in capital markets.”

    Market monetarists must abandon the money illusion that they know the “correct” rate of inflation so to claim that there were distortions in capital markets during 1966-1981, but not other time periods.

    The socialist mentality leads to delusions of grandeur in knowing what an “optimum” is for economic aggregates such as spending, or the quantity of money, or price levels.

    It is only through the market process that anyone can know these things, and central banks make market driven monetary aggregates an impossibility.

    Market monetarism is an oxymoron.

  17. Gravatar of Philippe Philippe
    14. January 2015 at 20:03

    “delusions of grandeur”

    that is very funny.

  18. Gravatar of Philippe Philippe
    14. January 2015 at 20:18

    “Market monetarists must abandon the money illusion that they know the “correct” rate of inflation so to claim that there were distortions in capital markets during 1966-1981, but not other time periods.”

    Are you entirely self-taught when it comes to grammar and sentence construction?

  19. Gravatar of Major.Freedom Major.Freedom
    14. January 2015 at 20:30


    “delusions of grandeur”

    “that is very funny.”


    “Market monetarists must abandon the money illusion that they know the “correct” rate of inflation so to claim that there were distortions in capital markets during 1966-1981, but not other time periods.”

    “Are you entirely self-taught when it comes to grammar and sentence construction?”

    Missed “as” between “so” and “to”. As I mentioned before, I am typing on a tablet with autocorrect, and sometimes it does not type what I want it to type.

    No, I am not self-taught in grammar. I was sent to tax-payer funded, government run public schools growing up.

    I am the product of your ideal, lol.

  20. Gravatar of Philippe Philippe
    14. January 2015 at 20:38

    Scott, here’s a good motto for you, from Andre Gide:

    “One should want only one thing and want it constantly. Then one is sure of getting it.”

    continued… “But I desire everything and consequently get nothing. Each time I discover, and too late, that one thing had come to me while I was running after another”

  21. Gravatar of Ray Lopez Ray Lopez
    14. January 2015 at 20:57

    @Sumner – as Philippe says at 20:38, you show the typical unstable tendencies of an academic who wishes change for change’s sake if you now wish to go to the ‘next iteration’ before even NGDP has been adopted: “I vote for nominal aggregate labor compensation (per capita) targeting as the next iteration.”

    Please explain:

    1) how NGDP targeting is different from Selgin’s “productivity norm”

    2) Why you treat, magically, velocity as a dependent variable not an independent variable. Your theory seems to think velocity cannot stay low even when money is being printed. Yet the last few years, with a recovery but low velocity, belies that.

    3) Why your NGDP futures market will be immune to ‘animal spirits’ in speculation. Recall by analogy that the stock market has predicted 9 out of the last six recessions, meaning, it’s very volatile. I can see NGDP futures actually flip flopping between expansion and contraction in one week. How would the Fed respond with such a flip flop without looking like the clown?

    4) I would mention money illusion and sticky wages/prices being overrated, but I don’t want you to seize on this. I rather see answers to the above from you or your followers.

  22. Gravatar of Philippe Philippe
    14. January 2015 at 21:04

    “as Philippe says”

    I wasn’t saying anything similar to what you are saying, Ray.

  23. Gravatar of Ben J Ben J
    14. January 2015 at 21:37

    Ray, you have to understand the words you use in your questions if you want the answers to make sense to you

  24. Gravatar of ChrisA ChrisA
    14. January 2015 at 22:34

    @ThomasH – a good example in the UK of why the FED (and ECB) treat the 2% IT as a ceiling. UK inflation came in considerably lower than the target, but the Chancellor was trumpeting this as a success, as did many of the media outlets (cost of living falls!). This would not have been their reaction had the outcome been the same amount above the target. I conclude that the Central Banks are not just choosing to apply the IT as a ceiling, it is a political issue that they are trying to manage. So trying to change just the CB mind won’t solve the issue.

  25. Gravatar of Donal Pretari Donal Pretari
    15. January 2015 at 03:03

    “This is a fair assessment of the policy I favor of QE plus a Reinforcing Stimulus. However, whatever the Fed did, it didn’t do what I specifically called for, i.e., a permanent helicopter drop plus govt borrowing used for investment tax breaks, a payroll holiday, a sales-tax holiday, a dated coupon, infrastructure, aid to the needy, etc., in sufficient amounts. When the Fed did get higher inflation expectations, the economy spiked up, as in 2009 ( NB-DON ). You can look it up, and that is what I call causal, to the extent that causal has any real meaning. Otherwise, I suggested we’d get years of slow-motion debt-deflation, a new phenomenon we really did not want to have to address ( BTW, I still stick with my comments on blogs beginning in Sept. 2008 ). And that’s what’s occurred.”

    As best I can tell, Joe Leider is making similar points.

  26. Gravatar of Steven Kopits Steven Kopits
    15. January 2015 at 05:23

    One of the consultancies reported last night that US gasoline demand in December was up 7.2% on the same month previous year. Wow! Gasoline demand-that’s all road fuel.

    If I assume that vehicle efficiency is improving at a 1.5% pace, then that would translate into 6%+ VMT growth (including diesel)-essentially in one month! Wow! We’re on the move again.

    Let’s see how the dust settles, but right now, I would anticipate that low oil prices will light up the global economy like a Christmas tree.

  27. Gravatar of Dan W. Dan W.
    15. January 2015 at 06:19


    How does NGDPLT incorporate the value of “free”? Of course nothing is entirely free and there is always money to be made somewhere in a transaction. But the economics of a transaction are constantly being “creatively destroyed”. Consider the entertainment value of social media. Yes, Facebook does sell ads. But how much of the economic value of social media is NOT included in GDP calculations?

    How can you target something that you can not even count?

    You want to believe there is something magical about NGDP. But it is just a made up number. No sooner would you choose it as the keystone of economic policy than the debate would rage as to how to better calculate it and whether it was an accurate reflection of the economy. And as it concerns an NGDP futures market, Ray’s warning is correct. How would you differentiate between a real signal and a false one?

  28. Gravatar of Student Student
    15. January 2015 at 06:23


    What exactly is it you mean by socialist mentality? It seems as if you simply use that word as a pejorative.

    How is NGDPT in any way advocating government ownership of private enterprise? Although, I am not even sure that what you mean when you use the term socialist mentality. It seems like you are really getting at central planning, but that isn’t the same thing as socialist mentality.

    As well, a society (although the concept of a society itself is a concept of a socialist mentality) completely free of government is not devoid of some type of control. It would just take on a different form. Some group of people forming a powerful gang to bully everyone else, some large financial company controlling enough of the financial system to control aggregates.

    In a society free from any government, what would stop me (and a bunch of people I promise to share the bullion with) from coming over to your house and taking everything you own at gun point like a bunch of scurvy pirates. That freedom doesn’t sound very free.

    Look, humans are social creatures whether you like it or not. Some level of socialist mentality is a must. Our actions are not independent. We must cooperate in some way.

    Markets are great but they are not divine. They have inherent problems and require some level of cooperation and guidance to function. NGDPT is kind of like control rods in a nuclear reaction, controlling the chain reaction in such a way that the reactor functions in a useful way.

  29. Gravatar of Todd Ramsey Todd Ramsey
    15. January 2015 at 06:51

    Asking for instruction from Scott or any knowledgeable commenter here:

    Should the Volcker Fed have pursued different policies to end the Great Inflation? Could have it been ended more “gently”, or did the Volcker Fed need to act so boldly to establish credibility for expectations?

    And/or is the primary benefit of NGDPLT that we would avoid the Great Inflation in the first place?

  30. Gravatar of SG SG
    15. January 2015 at 06:57


    Your readers need a hot take on the SNB abandoning its euro peg and cutting interest rates to -0.75%!

  31. Gravatar of ssumner ssumner
    15. January 2015 at 09:07

    Ray, Under NGDP futures targeting the price of NGDP futures would not change while they are being targeted. After that it doesn’t matter.

    For your other question I’d need to teach a whole course in monetary economics. Selgin has a book explaining his plan better than I can.

    Steven, I think you made a mistake—8.7% more miles (but I don’t believe the numbers.)

    Dan, I’m advocating a NGDP target, not a real GDP target. What difference does it make if Facebook is free? I’m not targeting GDP, I’m targeting NGDP, which is completely unrelated to GDP.

    Todd, The policy mix (sharply lower inflation and sharply lower MTRs) was actually pretty good. The recovery was quick. But you can make the case for a bit more gradualism in 1981-82.

    SG, I have a new post.

  32. Gravatar of Ray Lopez Ray Lopez
    15. January 2015 at 23:01

    @Sumner – thanks for your reply. It seems others share my concerns too, perhaps at some point you can address them. See an example from Nick Rowe’s 2011 blog entry ‘Concrete Steppes’ below. It seems to me that if you (the central banker) set monetary policy by ‘pegging’ your target at some futures NGDP value or level, then ignore that value or level later, you are not only losing credibility, which apparently your scheme depends on (see ‘Chuck Norris’ in Rowe’s blog post), but also essentially abandoning targeting NGDP and instead relying on a non-mechanical, non-deterministic ‘discretionary’ policy, akin to what we have today, that simply depends on what NGDP level or value you choose to ‘peg’. In short the Fed framework is no longer ‘crowd-sourced’ or ‘expectations’ based, but simply discretionary, like we have today- RL

    Food for thought, exactly as I’ve said before: NGDP is too volatile to set monetary policy on.

    “Second, NGDP futures markets are fanciful constructs. If I recall correctly Abba Lerner proposed just this kind of market in the late 1970’s but his idea was to sell the rights to price increases in order to control inflation. His proposal and NDP Futures markets fail because they provide no concrete, tangible micro benefit. They do not allow you to lock in apple prices in April for sale in October, by way of comparison. At a micro level they are pure speculation. That kind of speculation has been known to be dubious since the 1770’s when the UK passed the Gambling Act, also known as the Life Insurance Act. Life Insurance is a hedge, but people were buying life insurance policies on celebrities as a form of gambling. The law then said that you couldn’t insure something that you don’t have a direct economic interest in, something that will cause you a direct loss. I am very wary of proposals to have monetary policy set by the actions of speculators. Determinant | October 25, 2011 at 07:40 PM”

  33. Gravatar of flow5 flow5
    16. January 2015 at 07:17


    “As in M*V, which is equal to P*Y, which is equal to NGDP…”

    MVt doesn’t = PY.

  34. Gravatar of ssumner ssumner
    16. January 2015 at 07:18

    Ray, The point is to provide macro benefits, not micro benefits. Stable NGDP growth is a macro benefit. Worst case it doesn’t work and you and I get even richer.

  35. Gravatar of Ray Lopez Ray Lopez
    16. January 2015 at 21:30

    @Sumner who says: “Ray, The point is to provide macro benefits, not micro benefits. Stable NGDP growth is a macro benefit. Worst case it doesn’t work and you and I get even richer.”

    I’m asking why you think targeting NGDP using a futures market is either: (1) not discretionary, (2) not volatile and (3) will work if it is discretionary and volatile. Perhaps it will work, as you suggest.

    What I propose however is that this discussion be tabled until your NGDP futures market is running (either the ‘voluntary one’ or the one I haven’t seen yet at iPredict, open to non-US citizens). Then we can see how stable NGDP future prices are. My hypothesis is that NGDP futures will flip-flop in a crazy manner, maybe changing sign in a week or in a day–but I could be wrong. Perhaps they are stable, like TIPS seem to be, and rarely change in price, in which case your target NGDP proposal might be stable after all, and maybe not a bad idea, but it depends on the implementation. “Nick” a reader here says you don’t favor increasing the money supply once NGDP futures show that an economy is expanding “on track with the NGDP target”, but I’m not sure he speaks for you. Perhaps you insist on ‘stepping on the gas pedal’ until actual NGDP figures show improvement, in which case I think your target NGDP framework is irresponsible as it will create inflation, stagflation, or hyperinflation. Good luck on your new job, I look forward to reading you there. Try and get a better blogging platform, like “Simple Machines” software, but I doubt the Mercatus people are flexible enough for this easy suggestion.

  36. Gravatar of Ray Lopez Ray Lopez
    16. January 2015 at 23:25

    Flashback from a Sumner post in 2012 below. So if current NGDP is 5% or so, which appear to be the case in the next revision, we can assume there’s no need for Targeting NGDP? If so, essentially Targeting NGDP is nothing more than a cry for help during a severe recession, and has no validity outside of that period? So much for a ‘revolution’! At least Selgin with his ‘productivity norm’ monetary framework was calling for it during the boom times of 1997, showing Selgin is less of a foul weather friend than Sumner. – RL (July 2012) – Sumner: “Because I think George’s point has some validity, I’ve gradually scaled back my calls for monetary stimulus. In 2009 I wanted the Fed to try to return to the previous trend line. Over the past year or so I’ve been calling for the Fed to try to go only about 1/3 of the way back to the previous trend line. That’s partly because some wage adjustment has occurred, and partly because even going 1/3 of the way back would call for significantly higher NGDP growth. Indeed if they even delivered 5% growth from here on out, with no trend reversion, I’d be pleasantly surprised”

  37. Gravatar of ssumner ssumner
    17. January 2015 at 06:57

    Ray, You said:

    “Flashback from a Sumner post in 2012 below. So if current NGDP is 5% or so, which appear to be the case in the next revision, we can assume there’s no need for Targeting NGDP? If so, essentially Targeting NGDP is nothing more than a cry for help during a severe recession, and has no validity outside of that period?”

    i thought it was obvious that the point of NGDP targeting is to stabilize NGDP growth during every single quarter, not just one quarter. Regarding discretion, the only discretion involved is deciding to go with (let’s say) a 5% NGDPLT scheme. Once you do that the market sets the money supply, interest rates, exchange rates, etc.

  38. Gravatar of ssumner ssumner
    17. January 2015 at 06:58

    The second paragraph of yours has to do with the discretionary decision about where to set up the original trend line. After that there’s no discretion.

  39. Gravatar of Ray Lopez Ray Lopez
    18. January 2015 at 04:15

    Friedman on monetary frameworks,why is yours any different? : “I do not believe anybody here, including myself, knows enough to do any better. Almost everyone is in favor of countercyclical monetary policy. However, when you ask each one what he means by that policy, you find that Mr. Jones’s policy is anathema to Mr. Smith, and Mr. Smith’s to Mr. Robinson. In point of fact, there is agreement only on the glittering generalities that the Reserve System should do the right thing in the right way at the right time. There is no agreement on how you know the right time and the right thing to do. The appearance of agreement dissolves, once you put it to the test.” – “A Program for Monetary Stability”* by Milton Friedman – In Readings in Financial Institutions, Marshall D. Ketchum and Leon T. Kendall, editors, pp. 189-209. Boston: Houghton Mifflin, 1965.

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