Benjamin Cole Sets James Pethokoukis Straight

In the January issue of Commentary magazine, financial journalist James Pethokoukis wrote an article attacking the idea of NGDP targeting. The article was a bundle of silly arguments whose common thread was that NGDP targeting would lead us down the road to inflation and currency debasement. For example, Pethokoukis warned that targeting 5% nominal GDP growth would cause consumers and businesses to worry that inflation would get out of control, thereby undoing the “30 years of startlingly low inflation due to the visionary anti-Keynesian efforts of Paul Volcker in 1981 and 1982.”

How interesting.  The inflation record of Paul Volcker was about 3.5% a year measured in terms of the CPI, once the recovery from the 1981-82 recession got under way. From Q1 1983 through Q2 1987 when Volcker was replaced by Alan Greenspan as Fed Chairman there were only two quarters (Q1 1986 and Q3 1986) when nominal GDP grew at less than a 5% annual rate. For five consecutive quarters, from Q2 1983 through Q2 1984, nominal GDP increased at more than a 10% annual rate. And Mr. Pethokoukis is horrified at the prospect of allowing nominal GDP to grow at a 5% annual rate?

On his blog, David Beckworth responded to Pethokoukis’s article, having been singled out for special attention by Pethokoukis for a piece he wrote with Ramesh Ponnuru in the New Republic advocating NGDP targeting.

I received the April issue of Commentary in the mail yesterday and I was pleased to find a letter to the editor sent by none other than our very own Benjamin Cole commenting on Pethokoukis’s article. Here’s what Benjamin had to say about the article.

James Pethokoukis worries that allowing a bit of inflation could easily “get out of hand,” thereby harming economic growth. But keeping inflation low doesn’t seem to be doing any good, either, which undermines the fear of inflation to which Mr. Pethokoukis subscribes. According to the Federal Reserve Bank of Cleveland, “its latest estimate of 10-year expected inflation is 1.34 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average the next decade.” And whata is this low-inflation-as-far-as-they-eye-can-see forecast doing for growth?

Inflation is not the problem. Inflation is dead. And judging from Japan, inflation is not likely to be a problem.

Growth is the problem — or, rather, lack thereof. The Fed should get aggressive (and not through fiscal stimulus). Really, would not five years of 5 percent real growth and 5 percent inflation do wonder for the economy. Is a slavish and peevish devotion to fighting inflation worth sacrificing prosperity?

Here’s Pethokoukis’s response.

Benjamin Cole makes a point with which I agree. Growth is the real problem. And it has been for a long time. That’s why the United States needs policies that create a fertile environment for stronger long-term growth via more innovation and productivity. Stable prices are a key part of that formula. Higher inflation makes investment less rewarding and creates massive uncertainty. There’s no doubt inflation is low today. Good. Let’s check that box and get to work on reforming the tax code and creating an education system that prepares Americans for the careers of tomorrow. I have a lot more faith in that working to create sustainable growth than in the ability of Ben Bernanke or his successors to precisely dial inflation up or down on command.

Well, the three months since Mr. Pethokoukis published his piece have evidently passed with little sign of any improvement in the ability of Mr. Pethotoukis to formulate a coherent argument. Is it too much to expect that a financial journalist writing in one of the premier opinion magazines in the US be able to distinguish between a strategy for speeding up a cyclical recovery, about which we have a fair amount of economic knowledge, and a strategy for increasing the long-term trend rate of growth of an advanced economy, about which we unfortunately have not much knowledge at all? And how on earth did a policy of stabilizing the rate of nominal GDP growth at 5 percent get transformed into having “Ben Bernanke or his successors . . . precisely dial inflation up or down on command?” Good grief.

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13 Responses to “Benjamin Cole Sets James Pethokoukis Straight”


  1. 2 greghill1000 March 20, 2012 at 9:06 pm

    Thank you for this! I force myself to watch “Jimmy P” on TV sometimes, which is especially difficult since it’s a one-way communication. But you said it for me. Best, Greg

  2. 3 Bill Woolsey March 21, 2012 at 4:26 am

    I don’t think 5 years of 5% inflation would do wonders for the economy.

    I think 5 years of 5% real growth would be great. .

    Am I just imagining things, or is there a neo-conservative fixation on fixed exchange rates?

    By the way, I favor a 3% growth path of nominal GDP. I hope this would generate zero inflation on average and, at worse, lower trend inflation that today.

    Such a system does allow inflation to vary, and if nominal GDP falls below trend, more rapid growth in nominal GDP to catch up. And it is possible and maybe likely in those scenarios that the more rapid growth in nominal GDP that is a return to target would generate higher inflation.

    Still, I think describing this as aiming for higher inflation or a claim that higher inflation is desirable is a mistake.

    I see it as an unfortunate side effect of a desirable policy–keeping spending on output on a stable growth path, growing at a rate consistent with the growth rate of productive capacity.

  3. 4 Benjamin Cole March 21, 2012 at 8:49 am

    I am red-faced in embarrassment at being headlined in Uneasy Money, one of my very favorite blogs—scratch that, one of my very favorite written commentaries anywhere.

    Yes, the James P. idea we can stimulate economy quickly only through structural reforms is weak. His unhealthy obsession with inflation is only so much sanctimonious sermonizing.

    Every sensible economist agrees that taxes and regulations should be as light as possible. We all know hyper-inflation is bad. To pompously pettifog to that effect is to tub-thump.

    BTW, if James P. is so concerned about structural impediments, he might ponder why the GOP is deadset on keeping out as many hard-working immigrants as possible, or why we devote 7 percent of GDP to Defense, Homeland Security, and the VA, a far greater slice of the GDP into economically parasitic defense-related activities than any of our economic competitors devote. I won’t even mention the USDA (a topic Gingrich says he won’t touch either.)

    Why is it the GOP’s idea of structural reforms always seems to be lower taxes on the very richest citizens? Even when we enjoy global capital gluts?

    I am no Democrat. Obama’s energy and monetary policy has been very weak (yes, I understand that the Fed controls monetary policy, but Obama doesn’t even bother to make timely and good appointments to the Fed). I have lost faith in large organizations to accomplish much good (social or military).

    But GOP apologists such as James P. get us no closer to economic prosperity either, while preening about their gimlet eyes when it comes to programs intended to help the middle class or poor. Gimlet eyes with tunnel vision.

    Thanks to Uneasy Money for such excellent blogging, and for recognizing me.

    And to James P.: The GOP is a hopeless confederacy of feckless poltroons, craven in their political allegiances and bought by money. The D-Party may be no better. Come join us in the Market Monetarism movement, you may actually help America as part of our group. Despite past indiscretions, we welcome all new hands.

  4. 5 Will March 21, 2012 at 11:53 am

    “Let’s check that box and get to work on reforming the tax code and creating an education system that prepares Americans for the careers of tomorrow.”

    This is weak, weak sauce!

    Dr. Pethokoukis has a patient with a bleeding wound. Another doctor has advised application of a bandage. Dr. P objects, “A bandage smothers the skin and cuts off its oxygen! The bandage will create fear of suffocation! Instead, it would be better for this patient to stop smoking and drinking, lose 100 pounds, adopt a more positive spiritual outlook, stop living by a busy thoroughfare, change his diet drastically, and find a life partner who will care for him. That’s the only way for him to have sustainable health!” A brilliant substitution of a difficult, improbable solution in favor of a simple, feasible one that addresses the problem at hand.

  5. 6 BSEconomist March 21, 2012 at 1:06 pm

    I don’t mean to rain on everyone’s victory parade, but didn’t anyone on this supposedly monetarist blog notice that this (from James P.) is completely wrong:

    “Higher inflation makes investment less rewarding and creates massive uncertainty.”

    The incentive to invest is rising in the inflation rate, since the real interest rate is falling. This is a macro principles level mistake. From a famous financial journalist. I weep for the future and not least because no one noticed.

  6. 7 Tas von Gleichen March 22, 2012 at 12:30 pm

    yes growth would be the answer to most of our problems. Lot’s of innovation is coming out of silicon valley thanks to entrepreneurs and genius alike. If there is the political will to cut spending and give entrepreneurs even more freedom this country will be back on track.

  7. 8 Mitch March 22, 2012 at 2:39 pm

    Commentary is “one of the premier opinion magazines in the US”?!
    Puhleeze!

    Their circulation is a mere 33,000 according to Wikipedia. This blog probably has more readers than that.

  8. 9 David Pearson March 22, 2012 at 2:44 pm

    David,
    You write, “a strategy for speeding up a cyclical recovery, about which we have a fair amount of economic knowledge…”

    It strikes me that this is an ambitious statement. If we can “speed up” recoveries, then we should have quite shallow recessions. If actors know only shallow recessions will occur, they will hedge less against them (i.e. they will take on more leverage, less liquidity). If they hedge less against them, the amplitude of any downturn will be greater, and so we will have to work harder to “speed up” that recovery. That “hard work” eventually creates the preconditions for high and variable inflation: chronic high fiscal deficits and an economy and fiscal budget addicted to negative real rates.

    That about describes the evolution of the last twenty years or so.

  9. 10 Jasbo March 22, 2012 at 6:08 pm

    Disappointing tone and approach on this issue. No flag for JP, but snarky ad homs and controversial claims such as
    “a strategy for speeding up a cyclical recovery, about which we have a fair amount of economic knowledge”

    delivered from on high do not imply the sort of thoughtful, evidence-driven views I expect here.

    I also find it odd that BC can slag off the GOP and the Dems yet do so with the same sort of rhetorical devices he seems to abhor in their discourse.

    You generally serve up better than this.

  10. 11 David Glasner March 24, 2012 at 8:33 pm

    Marcus, Yes!

    Greg, I rarely watch TV, so I haven’t had the pleasure. Reading is enough for me.

    Bill, I’m not sure where your impression that neo-conservatives favor fixed rates come from, unless you consider the Wall Street Journal a neo-conservative publication. John Taylor is popular with neo-conservatives, and he doesn’t favor fixed rates. In general, I don’t think that neo-conservatives have any well-developed views on economic policy beyond some very general conservative presumptions about free markets and low taxes and that sort of thing.

    I agree that in general we should not be aiming for a specific rate of inflation. On the other hand, I think that it would be a good thing to set a price level target 10 to 20 percent higher than the current price level as part of a transition to an NGDP or wage-level targeting regime. I take Benjamin’s proposal for 5 percent inflation and 5 percent growth as a rhetorical ploy rather than as a serious policy proposal.

    Benjamin, Get used to it. You are so right. Pethokoukis makes it sound as if structural reform and monetary expansion are mutually exclusive, a total non-sequitur. If anything monetary stimulus would make structural reforms more, not less, likely.

    Will, That sums it up nicely.

    BSEconomist, Yes, he got that wrong, and it wasn’t the only one. But in fairness, whether the real interest rate falls when the inflation rate rises depends on whether the inflation is anticipated, so the analysis is a bit more complicated than you imply. Try not to give up hope.

    Mitch, What does circulation have to do with it? This blog is freely accessible on the internet and Commentary readers pay to read it. I also don’t know how to compare the number of visitors to this blog with the number of subscribers to a magazine.

    David, I am not so sure that your description is all that accurate. Where is the high and variable inflation?

    Jasbo, Sorry to disappoint. As for snark, when a target puts a “hit me” sign, the temptation to comply is sometimes nearly irresistible. Check out some of my posts about the Wall Street Journal editorial page.


  1. 1 Links for 2012-03-21 | FavStocks Trackback on March 21, 2012 at 12:25 am
  2. 2 Links for 2012-03-21-Economic Issue | Coffee At Joe's Trackback on April 2, 2012 at 1:41 am

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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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