Mr. Goodhart, famous for Goodhart’s Law, came out against NGDP targeting yesterday, citing the principle behind his law that any nominal aggregate selected as a target will collapse by virtue of being selected as the target.
My knee-jerk reaction was, “Ok so what makes inflation a better target then?”
But after thinking about it more thoroughly, my guess is that he was probably alluding to the selection of inflation as an explicit target that has caused the monetary mayhem. If that is the case, I beg to differ.
I don’t believe it was the selection of inflation as an explicit target that tightened monetary policy too much and left it that way. Rather, I believe the core of the problem is twofold: 1) sheer hubris; and 2) vague legislative mandates and the notion of central bank independence without accountability. That’s right – I do not believe any technical flaw in the theory behind inflation targeting caused the majority of the crisis. It was all cockpit error.
Remember that Mishkin quote from yesterday:
I feel strongly that the one thing a central bank can never afford to do is to lose its nominal anchor. If we do that, it’s a disaster. With that viewpoint, I should say that, if shocks occurred such that recession was going to occur and the only way we could stop a recession from occurring was to inflate the economy, we couldn’t allow that to happen. We actually have to preserve the nominal anchor because, in the long run, the pursuit of price stability is what makes good monetary policy…
Translation: The markets can go to hell (which they did) as long as that 2% target is not breached
Is that really a commitment to “price stability” to allow volatility in the downward direction? Because that is just what he is saying given the kinds of panic that sets in from losses resulting from recession.
There is more to it than just that, however. Recalling the semantics of the Full Employment and Balanced Growth Act, he is basically repealing it, flushing it down the toilet in favor of his pet theory that preservation of the nominal anchor (in the upward direction only) is the key to economic stability. Of course he was wrong – but who has paid the price for the central bank stepping out of the confines of “just shut up and print money to keep the economy stable” that is more or less what the law laid down. You know those central bankers and, as Scott Sumner declared, elite macroeconomists know so much more than those stupid congressmen of 35 years ago – they are at liberty to take what they want from the law and leave the more unaccommodating to the ego things as artifacts of a bygone era created by mere simpletons. The simpletons knew what caused the Great Depression – too bad Mishkin has forgotten it after spending so many years studying his own image in the mirror.
It wasn’t a commitment to price stability that caused the chatter about “cost and risks” to reflating the economy after they stood by and watched as it crashed down like a spectacular display of flaming meteors. Prior to September of 2012, the Fed missed every opportunity to undo the damage the blundering of its polcymakers created, trying to foist responsibility for the monetary fiasco on some other branch of government as rightfully angry protesters crowded outside the stately Federal Reserve building screaming “F*** the Fed!”
Not to worry, they are just peasants with pitchforks doling out the very deserving punishment for being wrong that the law left out.
PS: If I had had the money to go, I would have been out there with these people. Not screaming at the Fed for the same reason, but at least we can agree on some very high level things.