David Beckworth on the Facts, Fears, and Functionality of NGDP Level Targeting

Episode Summary

Executive Summary: The episode centers on David Beckworth’s case for nominal GDP level targeting (NGDPLT) as a superior monetary framework to inflation targeting. The discussion explains how it could better handle supply shocks, reduce boom-bust cycles, and improve financial stability—while also confronting major objections about credibility, communication, data delays, and the need for a fiscal backstop.

Main Topics: What NGDPLT is and how it differs from inflation targeting (Priority: 5/5): NGDPLT aims to stabilize total nominal spending in the economy—essentially incomes and sales—rather than focusing narrowly on consumer prices. The hosts contrast this with the Fed’s current inflation-targeting approach. Supply shocks and macro stabilization (Priority: 5/5): Beckworth argues NGDPLT is better than inflation targeting because it lets the central bank “see through” temporary inflation changes caused by negative supply shocks and avoids overreacting to positive supply shocks that raise real growth but lower inflation. Financial stability and debt dynamics (Priority: 5/5): The conversation links stable nominal spending to lower leverage, fewer bubbles, and less debt-deflation stress. NGDPLT is presented as helping both debtors and creditors by keeping nominal incomes predictable. Credibility, expectations, and the zero lower bound (Priority: 4/5): A core defense of NGDPLT is that if credible, it would shape private expectations so households and firms do more of the adjustment themselves, reducing the odds of hitting the zero lower bound. Practical objections: public understanding and data lags (Priority: 4/5): The hosts discuss whether the public can understand NGDPLT, whether revised GDP data undermine it, and whether targeting forecasts rather than current data could make it workable. Fiscal backstop and helicopter drops (Priority: 3/5): Beckworth says a Treasury/Fed backstop could strengthen credibility, especially if conventional monetary tools become less effective in a low-rate world. Direct transfers are seen as a backstop, not the main target mechanism. Alternatives and refinements to NGDPLT (Priority: 3/5): The discussion compares NGDPLT with wage-income targeting, domestic-demand targeting, and potential adjustments if trend real growth shifts permanently.

Key Arguments: NGDPLT stabilizes total spending, which is a better macro target than consumer prices because it keeps nominal incomes and sales on a predictable path. Inflation targeting can induce inappropriate policy responses to supply shocks: tightening during negative shocks or easing during positive shocks, both of which can amplify instability. Stable nominal spending reduces the chance that debt contracts become unsustainable in downturns and can also make creditors better off in booms by preserving real value. By preventing nominal collapses, NGDPLT may reduce the severity of recessions and keep the economy farther from the zero lower bound. If people believe the central bank will keep nominal income on path, households and firms should spend and invest more normally, with less precautionary hoarding. The public does not need to memorize the phrase NGDPLT; calling it a total-spending or current-dollar-spending target may be more intuitive. Because GDP data are revised and noisy, a forecast-targeting version of NGDPLT could be more practical than relying on initial releases. A Treasury backstop or helicopter-drop option could strengthen credibility, but the key is still the rule/level target, not direct transfers alone. If trend real growth changes permanently, policymakers face a tradeoff between maintaining credibility and adjusting the target path; gradual updates may be the practical compromise. Empirical evidence from advanced economies suggests that countries with more stable nominal spending experienced more stable credit, housing, equity, and banking conditions during the Great Recession.

Data Points: Paper title: "Facts, Fears, and Functionality of NGDP-Level Targeting" - The episode is framed around Beckworth’s new paper on NGDP level targeting. Fed framework review timeline: Ends at the end of the year; report expected early next year - Beckworth says he is trying to influence the Fed’s framework review before it concludes. Nominal GDP growth example target: 5% - Used several times as an illustrative NGDP level target path. Inflation target: 2% - Current Fed inflation objective referenced throughout the discussion. Inflation target range in Israel: 1% to 3% - Israel is described as having a de facto NGDP-like pattern under an inflation-targeting regime. Advanced economies studied: 21 - Beckworth cites an empirical paper examining 21 advanced economies. Potential real GDP examples: 2% to 3% - Used to illustrate how a permanent rise in trend growth might require target-path adjustments over time. Long-run inflation example under trend change: 1% to about 4% - Beckworth argues inflation would have been more variable but not extreme if the Fed had updated NGDP-style targets since 1960. Early-2000s productivity boom: 2002 to 2004 - Referenced as a period when total factor productivity surged and inflation targeting may have encouraged excessive easing. Period of Fed review / target alternatives: Average inflation targeting, price-level targeting, NGDP level targeting - The Fed is said to be considering several frameworks, with NGDPLT treated as the neglected option. Potential target path update cadence: Every 5 years - Attributed to Jeffrey Frieden as one possible way to adjust for gradual changes in trend growth.

Pivotal Quotes: "“This is my last inning. Last-ditch effort.”" — David Beckworth: He explains why he wrote the paper now, as the Fed reviews its policy framework. "“The Fed is trying to stabilize your incomes.”" — David Beckworth: His plain-language description of NGDPLT for nontechnical audiences. "“The key is a level target which promises a return or reflation tied to the credibility of the backstop of a helicopter drop.”" — David Beckworth: He argues direct transfers matter mainly as a credibility-enhancing backstop, not as the core policy mechanism.

Implications: If adopted, NGDPLT could make monetary policy more resilient to shocks, reduce debt-driven instability, and improve recession management. But success depends on credibility, clear communication, and possibly fiscal support in extreme downturns.