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.