Carola Binder on the History of Inflation, the Fed Framework Review, and the Promise of Nominal GDP Targeting

Episode Summary

Executive Summary: The episode covers Karla Binder’s Mercatus brief on nominal GDP (NGDP) level targeting and her new book, Shock Values, which traces the history of inflation, deflation, price controls, and monetary legitimacy in American democracy. Binder argues recent macro events—especially the Great Recession, COVID shock, and the 2021-23 inflation surge—strengthen the case for NGDP targeting and expose weaknesses in the Fed’s asymmetric average-inflation framework.

Main Topics: Why recent history strengthens NGDP level targeting (Priority: 5/5): Binder explains that the Great Recession showed the costs of NGDP falling below trend, while COVID showed the costs of NGDP overshooting. Together, these episodes support keeping nominal income on a stable path. Supply shocks and monetary discipline (Priority: 5/5): She argues NGDP targeting helps central bankers look through supply shocks like pandemics, oil spikes, and geopolitical disruptions while providing a clear nominal anchor and accountability mechanism. Communication and public acceptance of NGDP targeting (Priority: 4/5): Binder revisits whether NGDP targeting is easier or harder to explain to the public. She says it may have been easier before the recent inflation surge, but a symmetric framework similar to NGDP level targeting could be more politically feasible now. Core thesis of Shock Values: prices as a democratic and constitutional issue (Priority: 5/5): The book argues that U.S. history features many competing methods of price stabilization—gold, tariffs, controls, and monetary policy—and that inflation/deflation repeatedly raised questions about government authority, contracts, and democracy. Inflation vs. deflation across U.S. history (Priority: 4/5): Binder stresses that Americans historically disliked both inflation and deflation depending on the period, with farmers especially harmed by deflation because of nominal debts and falling crop prices. War, state capacity, and price controls (Priority: 4/5): The discussion shows that price controls were more feasible during large wars, especially World War II, because state capacity and public willingness to accept wartime sacrifice were much greater than in earlier eras. From the Fed’s informal price stability to explicit inflation targeting (Priority: 4/5): The conversation traces the evolution from the gold standard and the Greenspan era to Bernanke’s formal inflation target and the Fed’s 2020 flexible average inflation targeting framework.

Key Arguments: Recent macroeconomic history has strengthened the case for NGDP level targeting because both a prolonged NGDP shortfall (Great Recession) and a large NGDP overshoot (pandemic era) produced damaging macro outcomes. NGDP targeting is attractive because it allows the Fed to look through supply shocks rather than overreacting to events it cannot control, such as supply-chain bottlenecks or commodity price spikes. A nominal GDP target reduces the information burden on policymakers because it does not require precise real-time estimates of unobservable variables like r or u. The recent inflation surge has made the public more sensitive to the asymmetry of the Fed’s flexible average inflation targeting framework, which promises make-up for undershoots but not overshoots. A symmetric average-inflation framework would move the Fed closer to NGDP level targeting while still being easier to explain politically than a full regime switch. In American history, price stability has often been treated as a matter of justice and contract enforcement, not just macroeconomic efficiency. Inflation and deflation have both been politically disruptive, but the groups hurt most differ by era; farmers historically suffered from deflation, while modern consumers are especially angry about inflation. Price controls can work only under unusual conditions—especially wartime and strong state capacity—and even then they generate shortages, lobbying, and legality problems. The Fed’s post-Volcker credibility rested first on personalities and then on formal rules, showing why explicit frameworks matter for successors. The framework review matters because it is a chance for the Fed to clarify its objectives, restore symmetry, and improve forward-looking policy without necessarily adopting NGDP targeting outright.

Data Points: Recommended book title: Shock Values, Prices and Inflation in American Democracy - Binder’s new book discussed in the interview Mercatus brief title: Nominal GDP Targeting Lessons from Recent History - Binder’s essay for Mercatus Framework Review series UT Austin School of Civic Leadership: new school with dean and faculty - Binder describes her new academic appointment and institutional build-out PPE minors/majors: Politics, Philosophy, and Economics - New interdisciplinary degree offerings at UT Austin Book/course topic: Inflation and American Democracy - Freshman class Binder will teach in the fall Course topic: capitalism and democracy - Spring class Binder will teach Fed framework review previous year: 2019 - Referenced as the period when Binder thought NGDP targeting might have been easier to sell World War I return to gold standard: 1879 - Cited as the year the U.S. returned to the gold standard after Civil War-era greenbacks Civil War price-control/greenback litigation: several Supreme Court cases - Used to illustrate constitutional disputes over legal-tender paper money Great Recession / post-recession NGDP path: fell below trend and stayed below trend for a long time - Binder’s evidence that NGDP instability worsened recovery COVID recession NGDP path: quickly rose back to trend and then above trend - Binder’s evidence that NGDP overshoot contributed to inflation Fed inflation target: 2% - Used repeatedly in discussing average inflation targeting and public frustration with overshoots Fed framework update: 2016 - Mentioned as the update to the statement of longer-run goals making the inflation objective symmetric Federal Reserve Act mandate: dual mandate plus moderate long-term interest rates - Discussed in the 1970s great inflation section

Pivotal Quotes: "on net, recent macroeconomic has strengthened the case for NGDP level targeting" — Karla Binder: Her bottom-line assessment of the Mercatus brief and recent macroeconomic history "the recent high inflation episode that we experienced will probably have increased the public's frustration with that asymmetry" — Karla Binder: Her critique of the Fed’s asymmetric flexible average inflation targeting regime "if you don't have price stability, debtors and creditors are left in different positions than they originally thought they would be in" — Karla Binder: Her explanation of why inflation/deflation became a constitutional and contractual concern in U.S. history

Implications: The episode suggests the Fed may not adopt NGDP targeting outright, but it could move toward a more symmetric, forward-looking framework. For listeners, the key takeaway is that regime design, credibility, and communication matter as much as the inflation target itself.