David Beckworth on Nominal GDP Targeting in the Wake of the COVID-19 Crisis

Episode Summary

Executive Summary: The episode centers on David Beckworth’s case for nominal GDP (nominal income) level targeting as a better monetary framework, especially in crises. He argues the Fed should stabilize total dollar spending/incomes and make up for past misses, and proposes a crisis rule that combines NGDP level targeting with a standing fiscal helicopter-drop facility at the zero lower bound.

Main Topics: David Beckworth’s path into economics and monetary policy (Priority: 2/5): Beckworth describes a nontraditional route into economics through macro courses, an MBA, Treasury work, and policy writing, which shaped his practical focus on monetary policy and the Fed. What nominal GDP targeting is (Priority: 5/5): Nominal GDP targeting is presented as stabilizing aggregate dollar spending or, equivalently, nominal income, so households and firms can plan around steadier cash flows and avoid contract/income mismatches. Why level targeting matters in recessions (Priority: 5/5): Beckworth argues the Fed should make up for past shortfalls rather than only targeting growth rates, so the economy can recover lost ground after recessions and avoid premature tightening. Why the Fed has not adopted NGDP targeting (Priority: 4/5): The discussion highlights communication difficulties, historical competition from inflation targeting, and policymakers’ reluctance to embrace a less familiar framework despite its appeal. Crisis proposal: NGDP targeting plus helicopter drops (Priority: 5/5): Beckworth outlines a practical plan: a nominal GDP level target, aggressive asset purchases at the zero lower bound, and a standing, rule-based fiscal facility for direct household transfers in emergencies. Risks, safeguards, and the need for a rule (Priority: 4/5): He emphasizes that any direct money transfer tool must be constrained by clear triggers and oversight to avoid abuse and inflationary excess, and argues rules make policy credible. Policy implications of the COVID-19 shock (Priority: 5/5): The conversation frames the pandemic as a shock that requires coordinated monetary and fiscal action to prevent secondary bankruptcies, income collapse, and a prolonged weak recovery.

Key Arguments: Stabilizing nominal GDP stabilizes both total spending and total income, which helps households and firms meet fixed obligations like mortgages, leases, and contracts. A level target is superior to a growth-rate target because it allows the central bank to compensate for lost nominal income after a recession instead of forcing immediate normalization. The current crisis is not primarily a supply problem the Fed can fix, but monetary policy can prevent the collapse from causing unnecessary insolvencies and debt defaults. The Fed is far from nominal income stability today, but over the post-2009 period nominal income tracked a relatively straight path compared with inflation targeting. Communication is one of the biggest barriers to NGDP targeting; policymakers may support the concept once it is framed as stabilizing incomes rather than using technical jargon. In a severe crisis, a standing fiscal facility for direct transfers could complement monetary policy when interest rates hit zero, but it should be tightly rule-bound and triggered only in emergencies. Rules are necessary both to limit abuse and to provide traction in downturns; they tell policymakers when to start and stop interventions. The broader policy goal should be to preserve the dollar size of the economy people expected before the shock, reducing avoidable bankruptcies and secondary damage.

Data Points: Zero lower bound: 0% - Beckworth says practical Fed rate cuts stop at zero, making additional tools necessary once interest rates reach that level. Current NGDP level: About $22 trillion - He references the pre-shock dollar size of the economy as the level policymakers should try to preserve. Typical nominal growth path: Roughly 4% annually - He describes a stable nominal growth path as around 2% real growth plus 2% inflation. Target inflation benchmark: 2% - The conversation contrasts NGDP targeting with the Fed’s familiar inflation goal. Forecast horizon in the NGDP gap measure: 20 quarters - Mercatus’s nominal GDP gap indicator compares current nominal income with 20-quarter-ahead forecast paths. College/old Fed toolkit challenge: 2011 framework discussion - He notes the Fed discussed nominal GDP targeting in 2011 but ultimately rejected it as too hard to implement then. Episode timing: Mid-March, during early COVID-19 crisis - The policy proposal is discussed in the context of the pandemic shock and related market disruptions. Interest rate threshold: 0% lower bound - The proposed rule activates when policy rates hit zero and nominal spending remains below target.

Pivotal Quotes: "“What a target for nominal GDP does, it says, let's keep that stable. Let's don't let it collapse. Let's avoid it growing too rapidly.”" — David Beckworth: He explains the core purpose of nominal GDP targeting in simple terms. "“You lose ground and you've got to make up for that lost ground by growing the economy a little more rapidly, a little hotter than normal.”" — David Beckworth: He uses the highway/traffic-jam analogy to explain why level targeting requires catch-up growth after recessions. "“We're fighting a war.”" — David Beckworth: He frames the COVID-19 macro response as an emergency requiring large, coordinated policy action under a clear framework.

Implications: Listeners are left with a case for a more systematic, rule-based macro framework that coordinates Fed and Treasury action in crises. If adopted, NGDP level targeting could reduce recessions’ lingering damage and improve recovery credibility.