The Emerging 'NGDP Coalition'
NGDP targeting is rising as an intellectual force in the monetary policy debate. We know this. But what's really fascinating to me is how this rise is happening. It's not only organic -- Lars Christensen in The Economist called market monetarism "the first economic school of thought to be born in the blogosphere" -- but it's begun to unite the varying factions of economists in a way I find truly remarkable.
This is one of the signs of a world-changing idea: that everyone who has seriously considered it has lined up behind the idea, regardless of their other intellectual leanings.
The Left is coming around. Brad DeLong, one of the loudest voices of the economic blogosphere, wrote: "Target the path of nominal GDP, people!" DeLong also endorsed it at the Economic Bloggers Forum in Kansas City, which I covered here. Paul Krugman gave it the thumbs-up in a blog post here, too. Christina Romer also wrote in The New York Times calling for NGDP targeting, telling Ben Bernanke that it's time for his "Volcker moment." Matt Yglesias of Slate is also solidly behind NGDP targeting. I'm sure there are legions of others, but the point is that NGDP targeting has won (or is winning) the Left solidly.
The fascinating part is that NGDP targeting is also winning the Right. Scott Sumner, first and foremost, leads the charge -- even while he disagrees with the Left on other issues, especially income and capital gains taxation. David Glasner, Ramesh Ponnuru, Josh Barro, and yours truly. Greg Mankiw and Robert Hall also have old favorable papers in support of nominal income targeting, and even F. A. Hayek supported NGDP targeting.
So what is it about NGDP targeting that gives it this ability to transcend intellectual divides? It's not that it's merely a good idea -- there are many such good ideas which remain the province of more or less exclusively the Right or Left, or dwelled on one side for long periods of time. What makes this idea immune?
I think it's because NGDP targeting has (perhaps accidentally) stumbled upon the one common point between the macroeconomic philosophy of the Left and Right. This means that both sides like it for different reasons; in particular, Left and Right market monetarists use noticeably different language to argue the idea to their respective sides, but when we come together, we share a common vocabulary.
The Left likes it, I think, because they see it as a means to realize Keynes' desire for aggregate demand stability. NGDP falls when AD falls; it need not change from real shocks, i.e. those which change aggregate supply. What's also going on is an understanding that additional fiscal stimulus won't be happening anytime soon. Given that NGDP targeting embraces the goal of aggregate demand stability, it really isn't that much of a jump for the Left. It's merely a question of which means -- monetary or fiscal policy -- is better purposed to that end.
The Right likes it because (1) it's a monetary policy rule and (2) it solves the recession problem without fiscal policy. Rules-based monetary policy has been one of the greatest goals of the Right for the last fifty-odd years: first Milton Friedman's monetarism, focused on stable growth in monetary aggregates like M1; then inflation targeting, now in effect at the Fed; and now NGDP targeting. And rules, properly done, make sense -- expectations trump everything during the medium-run, and so unstable nominal income expectations are ruinous, and the central bank's commitment problem proves deadly for monetary policy in liquidity traps without a rule. Second, I think it's fair to say that the Right loathes activist fiscal policy -- we think it's wasteful and corrupting, worry about big government "ratchet effects," and think it creates policy uncertainty.
NGDP targeting is here to stay in the policy debate, even if it takes years before central banks officially embrace such rules. Many good ideas are owned by one side, but the reason why NGDP targeting has built (and continues to build) such a coalition is because in its message, both sides hear their own.