Kelly Evans’ Strange Case Against NGDP Targeting

The Wall Street Journal editorial page has always been full of funny ideas on monetary policy, and the fact that businessmen continue to subscribe to the paper is a great example of the fact that businessmen may be very smart about running their businesses without knowing anything about the macroeconomy. This Kelly Evans op-ed denouncing NGDP targeting, for example, makes almost no sense:

There are at least three problems with this strategy, however. First, it assumes that the Fed can sensibly determine the “right” trend for nominal GDP. Second, it isn’t clear that it can actually achieve any such target. And third, doing so would run a huge risk of conflicting with the Fed’s congressional mandate to promote “stable prices”—something that can’t unilaterally be rewritten.

The fact that this doesn’t state the statutory mandate correctly should tip you off that something has gone amiss. The Fed’s actual mandate is a mixed mandate to pursue stable prices and full employment. For decades, however, it’s been a little bit unclear what this should mean in practice. One of the great advantages of an NGDP target is that it combines prices and real output (which is to say employment) in a single index. The “dual mandate” has many virtues, but one problem with it is that it tends to lead to a breakdown of accountability since it allows the Fed to stay vague about what they’re trying to do. Mixing output and inflation in a single targeted quantity is very much in keeping with the mandate.

The other objections are worse. Having the Fed do anything assumes that the Fed can sensibly determine the “right” trend for whatever it’s doing. Similarly, any institution with any prescribed mission might fail to achieve the mission. Deploying this as an objection would be like a universal solvent. Police departments attempt to lower murder rates even though they can’t always succeed. Generally speaking, the idea is that the Chief of Police needs to ask the City Council for the tools he thinks he needs to fight crime, and the Mayor has to fire the Chief if he thinks the Chief isn’t doing his job properly. You don’t just say “this is hard, let’s not bother.”