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I ... WSJ's died ... I'm Kelly Evans and my guest here is that Lee University economics professor Scott Sumner Scott will ... thank you for inviting me I hear best-known recently at least a forest of thing this nominal GDP target but let me rephrase that ... you seem to have a ninety year for the Fed Reserve can do to get us out of its current crisis and ... what is ... that's right but they were having them target nominal GDP rather than inflation or inflation and unemployment ... I think it's a it's a clear target and is also better able to cope with supply shocks and things that make the ... inflation rate sometimes misleading in terms of what the economy actually means what it mean if the Fed did something like this right now ... well it sort of depends where they set the target I would like to see them being for a little faster nominal GDP growth in the markets currently expect ... um long-term five percent the year has been the trend ... prior to the Great Recession I think that's unreasonable trended huge about three percent real growth ... two percent inflation ... but right now I would say a little more than five percent asserted catch on her way to all the GDP we lost in the preceding three years were really about ten percent below our trendline ... sold perhaps the need for six or seven percent for couple years and then five percent thereafter and I must or six when people get what we mean by buying ... nominal or an AllThingsD done ... that's that that too is looking at the total value of spending the economy and dollar terms ... or basically the total incomes earned by Americans in dollar terms ... said during the recession ... people are spending a lot less and are also earning a lot less and it's an aggregate big issue the total dollar value the Holy conomy ... Sosa away the best single statistic from looking at things like on ... spending and incomes ... and the reason why we typically talk of real GDP like when we get the figures every quarter is so that people have a sense what the economy's portable really doing so we're not looking ... at just inflation changes but what you're basically talking about is that ... this gauge of what ... the entire economy is and this nominal GDP gauge fell quite sharply during the recession ... and has remained well below where we work beforehand and what the Fed should do is basically say that people ... were going to you in gauging policies to is quickly as possible close this gap ... and get us back to pre recession attract ... that's right and it's ... it's really a ... son of an indicator of the business cycle in the sense of picking up all the real girl and you're a real GDP is will we also care bout ... was also picking up inflation and the Fed has is dual mandate to keep inflation under control ... but also worry about unemployment ... but they can just harder real GDP or that would allow inflation to go out of control ... so what nominal GDP does is allows us to certain balance these two goals that keeps inflation long-term under control ... but allows some fluctuation with things like supply shocks that the Fed can control ... it also reduces the severity of the business cycle ... so that's the basic idea in right now this would imply that federal serve as a pretty aggressive in its ending nearly aggressive enough ... because that gap is still large unemployment is still high ... on but but especially that day and GDP remains well below its trend so what what in practice with this ... that's a good question there's a several ways of thinking about it one thing the Fed needs to do just be more explicit Bahl where wants to go ... we can't really get expectations moving right direction ... and as long as the Fed is so ambiguous about what their target is so I'd like to see them settle higher explicit target ... for a nominal GDP second ... to make it happen the Fed probably has to buy securities through the open market purchases ... but they probably don't have to buy them any ... because the big problem now is not that there's not enough money in the economy ... but the money is mostly sitting in the banks in excess reserves ... still having a higher target for nominal GDP would create expectations of faster growth ... and people more inflation ... or inflation in either one of those actually tends to increase the demand for credit ... because people feel better about investing in there if they think ... will have real growth in which case new business ventures will do better ... when even a little bit more inflation because that means the hosts you buy it might be expected to rise a little and prices to fall ... and that would make you more optimistic about buying a house why doesn't matter on to this idea ... of which you've been pushing for ... years the mean you're really well known ... for this issue you're blind the money legion dot com is kind of part of a lot of this ... and certainly we've seen everyone from Goldman Sachs the Wall Street firm to Christina Romer the former chief economist ... of prison Obama well-known economist yourself and I basically endorsing your idea and saying in fact this is exactly what the Federal Reserve needs to do right now and it's interesting because ... all the Yukon the server weight weenie economists he went to the Chicago School your Phd in all that this is an idea that scrimmage and Brees by people on the left right now so ... a lot of people or for that said ... there are many concerns Val what this would mean ... is it plausible is a practical one of the things that that seems to be in issue here is why doesn't matter ... what the mix is between real GDP and inflation ... that's a good question um ... I think that a lot of people focus too much on inflation a lot of the Proms we associate with inflation are actually when you look very closely morsels to fall in ... nominal incomes ... and union example there was some confusion last year when the Fed announced it was going to try to increase the rate of inflation ... to most Americans that seem like a completely silly idea because it was raising their cost of living ... oh what the Fed was really trying to do was to raise ... their real incomes of Americans by having more aggregate demand the economy and they were expecting some inflation with the ... company is still the stimulus the economy ... and what nominal GDP Charting does is the sort of separates out two types of inflation ... there's the supply side inflation you like the oil shock ... and then there's Demio inside inflation to the economy overheating ... and what of ... nominal GDP targeting allows you to do is to keep the demand side inflation under control because essentially nominal GDP is holding the man in the economy ... so it keeps rising a fairly steady rate ... the menu allows some fluctuations due to supply shocks ... if you didn't suppose you kept inflation rigidly fixed a two percent ... that means if oil prices skyrocket and that that would have to depress the price of non oil goods to keep the balance right ... but that would push the economy into recession having to China forced down these non oil prices salt ... actually what you really wanna do is not target all inflation two percent the son of UA's monetary policy to control the median inflation which the Fed can control through nominal GDP targeting ... unless some variation inflation occur when there are supply shocks the lead ... in relative prices just naturally according market conditions ... but it still allows you long term to keep wall inflation ... through this steady growth in nominal GDP ... because our long-term real GDP growth of fairly steady rate and you just have a little margin above that for your inflation target one concern on because as you say this works on both sides said this would imply that the Fed meets be more aggressive when it's fallen short on SN GDP target ... on the lashes and more aggressive in terms of easing the economy more Chris in terms of bringing in and ... of course mensch EPS growing above target in the one of the problems cure seems to be that if you look throughout the whole period up to that the period right before we entered the financial crisis so through two thousand and seven ... NGP was never above trend ... it never was implied that the Fed chief Ben more aggressive ... so are you saying that there is nothing wrong that the Fed should you would not or should not have done anything differently during the whole period ... um yes and no for monetary policy I believe it was actually pretty good ... but I think for the Fed and the Federal Government more broadly fell down on the job was in regulation ... I think the big problem with the housing bubble was not monetary policy ... but then regulation to encourage much too much risk taking in the financial system ... and as a side also too much borrowing by the federal government so we do have this debt problem in America ... fiscal deficits and we had too much borrowing up in the subprime mortgage areas along ... but I don't think you can fix that problem through monetary policies to blunt an instrument ... essentially what you really need to do is to ... tailor monetary policy to the overall economy ... in use regulation ... whatever relator ... prefixes are appropriate to deal with a specific excesses in the financial system and I think it's in the regulation area of the federally fell down on the job if we were going to blame them ... um back in the twenties the Fed President Strawn use the analogy ... to I have to think all my children if one of the misbehave ... and that's the basic problem with using monetary policy to stop a problem in one sector ... is such a blunt instrument they she tried to stop opposing boom ... with tight money you may drive the economy into recession so it's better to use monetary policy to have the appropriate overall weak economic performance ... in use regulatory problems to address ... over borrowing by the public records fiscal reforms to address government-owned of our Regulation I think you would admit this yourself is in perfect timing is markets function more efficiently in the government can never be fully aware of serve every awful problems in subprime which as you say it it was unclear caught up on a Qantas is often quoted what was happening in the center how bad the problems we're ... still ... that this is as we get the time neither monetary policy should abandon any differently we didn't necessarily know enough about what was happening ... on in terms of subprime to be able have presented it with regulation the first place so that basically leaves us ... it ... without any differing outcomes so then are you saying that ... that there is nothing wrong with what was happening ... serve through that period or ... are you basically saying that even though there were things that were wrong should still try to get the economy back to a size that would ban on ... how to continue growing in Everbread intercession for splice no good point well ... I mean they didn't understand that the Fannie and Freddie were on ... him from my point of view behaving irresponsibly but it's true I didn't really fully understand how much private banks were engaging in excessive lending ... Wellesley we can learn from each crisis and ... look I mean I'm a premarketing columnist sold for me the ideal would be complete de regulation know bailouts and have monetary policy use to stabilize the economy ... but I recognize that's not really realistic for our system within a hair of ... government backstops to depositors and perhaps in other areas rescuing big banks in it we have these protections to depositors and creditors ... we really need to do something to try to restrain um excessive risk taking ... and I just don't think monetary policy can do that in the week and possibly say ... we must drive the economy and are recessions so that there's not excess borrowing ... is better to do the best we can learn from our previous mistakes ... learn from best practices in other countries like Canada ... as we've had three major banking crises a hundred years ... Canada has been on so ... we can also learn from other countries about best practices and regulation ... but I agree that's a very imperfect answer you know ideally you'd want Markets to work freely ... but once we've already intervene so much in terms of protecting people against losses ... I think we do have to regulate to discourage risk taking by banks and just ... learn as much as we can from each disaster and ... other countries and ... what do you think that this idea ALM of targeting nominal GDP I there is a level or free is is plausible break now and you expect this is something ... that the Federal Reserve can actually put into practice ... technically they could of I'd like to see them do it but realistically um ... it's ... too big a change for such a conservative institution in such short notice ... so I wasn't that disappointed by Denver NetEase recent statement that they decided not to go that way at the meeting I didn't expect it to happen that fast I think it's something they would Hoeppli consider long-term as a study of more what he did say we discuss this the on during our two-day meeting but we think for now that our dual mandate is fine Morales The ... notice I have to say I was the Fed makes a decision he has those little stand behind the decision of the press conference I understand that ... and I don't know his private views on the loan GDP targeting I mention he favors ... probably the ... traditional ... policy will more right now ... but I also think there's some things the Fed could do ... um even without nominal GDP targeting something called level targeting which is a little bit technical and further explained that basically means ... if you've undershot your inflation target which we've actually done over three years inflation's ... average ... by one point two percent last three years ... you could allow a little more inflation to catch up to the two percent trend line in the know or think they they would be okay if people got all of its bid to buy this because that would help the Fed accomplish its goal here ... that's right so it that that promise to return to the ... price level trendlines starting from of the time Lehman failed September of always ... we would actually have done a little bit more inflation than people currently expect to get back on the trendline as we actually inflation into thousandnine so were were behind that trendline ... and I think a little bit higher expected inflation would be okay that would help ... restore law more confidence the property market ... but the idea of level targeting is that you still don't change or underlying two percent target which would be very controversial if you raise some people in the polls three or four percent ... I understand the reasoning behind higher inflation targets to spur the economy but ... of politically the Fed is reluctant to go back ... even in formal commitments that have ... stepped in for around two percent ... so the level targeting technique of catching up to that old trendline ... is one way for them to generate a little more Whirlpool more inflation without ... actually changing the headline number of two percent what happens if they can't and I know this seems crazy because the veteran center bank into an ever at once with regards to inflation theoretically believes that we saw Japan do extremely ... accommodative monetary and fiscal policy measures that did not really good and inflation ... good question I do think the Japanese case was a little bit misunderstood ... um ... the Japanese ... of the Bank of Japan and did attempt to of ... implement some expansionary policies but the minute things started moving upward at all ... they raise interest rates in both two thousand in two thousand six ... and two thousand six they also put the money supply ... so it seems if we look at their behavior not their words ... very clear that the Bank of Japan is actually trying to keep inflation close to about zero ... they're not really aiming for ... anything above zero inflation ... or else they would behave differently than women titan ... so I don't think the Japanese case should be too much of concern instead ... what I would point to is that when countries really are determined to raise prices even in the war circumstances they can find a way ... of FDR did this in the Great Depression by devaluing the dollar ... there's other techniques that can be used ... and you know when we have a system of the of money were we rely on paper money ... there's really in principle no limits the amount of inflation ... the Fed could create now of course I would not recommend high inflation ... that would be even more of a problem but ... um ... there's it's only a question determination the Fed itself ... interesting Lee in sales ... that they're not out of ammunition Denver Nanking is made several statements the effect that ... the Fed has other tools that they could use him throughout his career ... he's been very skeptical of the so-called liquidity trap argument that the Fed runs out of ammunition ... and I think a lot of the people the Press haven't taken those remarks seriously enough ... there's a tendency to serve a way that the way why did he basically ... get what he's trying to communicate is that ... they're not out of bullets that he just feels he can deploy them ... yet in the heels of difficult communication problem um on the one hand he wants to assure the public that we will go into deflation ... so he wants to reassure investors the public that they have the tools necessary to prevent a real steep downturn ... on the other hand heals another PR problem if the Fed can do more why are they doing more ... in Seoul um he's walking ... a fine line in and I've been interested in ... he hasn't really been pressed too much of by the press on this seeming contradiction ... for instance were also doing fiscal stimulus ... which is very costly runs up large debts they have to be paid by future generations ... no one question this interesting is that the Fed says they can do more ... why is that we're not having the Fed do more in the fiscal authorities to last in terms of deficit spending wouldn't that be better in terms of our public debt ... in what I talk to other people their first reaction is usually well ... the feds out of ammunition interest rates are zero they can do more ... and then I point out the Fed itself even insist they can do more ... and then that starts to get people thinking I think there's really think of monetary policy is one of the reasons that ... of nominal GDP targeting another stimulus ideas are becoming aam or before this we've seen the recent Christina Romer are trailing write some other people ... that are certain doors nominal GDP targeting I think it's a ... sense of frustration that ... fiscal policy hasn't been enough ... while we clearly need more demanding Ikon release most people believe that ... in the Fed says they're not out of ammunition nice to put all this together and you ask why is that the Fed then doing more last question is there not a sense that central banking in reserve should be about leaning against the way and to some degree I'm sure you've heard this before this concept that look ... in maybe should be the fiscal side of the equation until it pushing keep things to boost employment to boost growth and that the Fed Reserve keeps an eye and things to make sure that it is not getting out of whack that they're not doing too much or or whatever ... ALM so what what is what your arguing sort of go back implying ... it is really the theory here for the read every Zangana rationale for the central bank to be doing what it's doing trying to ... say bring unemployment rate base when making almost that ... its single target instead of inflation ... what I wanna go that far breaking a single target I think they have to keep an eye on both aspects the dual mandate ... only do think that you know prior to this recession ... the profession and economists were moving towards the idea that the Fed should focus on certain smoothing out the business cycle that Sweeney against the wind was overheating contract a little ... and when were underperforming give the economy a boost in instead that the school authorities should ... focus more on long run growth issues ... not barring too much to keep interest rates under control ... tax reform you know supply side initiatives things that promote long run real economic growth ... so you've ... got I think the the way to divide up the policy is this have ... fiscal authorities focus on the long run growth issues ... are healthier structural ... structure to the economy and monetary policy focus more on smoothing out the cycling keeping inflation ... low and stable Internet us accomplish what you're suggesting they should be right now under this and all because I think we're we're too low now so that the Brazilians and end with the pushing rival in the right now that last question ... you're an economist at the University your neck and Spencer family ever see due sense that ... some of the feelings preserve the mainstream economics profession on Cesar communicators or or or handle the crisis or fail to see it coming or whatever ... the last two years basically G think their reputation has been dented is there an opportunity here for you ... to kind of come out of what may seem to be nowhere ... to the fore with the policy and people aren't or six instate yet maybe what we're thinking hasn't worked in maybe we should be listening to some people who were formally on the French and now seem to have ... in a reasonable ideas ... well I'd like to think so um ... also Citi may be one quick example of how one might have seen some things that others miss um ... most of the elite ... becomes have a better understanding of the technical side of Economics nineteen ... but let's take when burning key announce Kiwi to ... in two thousand ten ... at that time burning key was worrying place was too low going towards ... deflation ... so he announced ... that the Fed was going to try to raise inflation through quantitative easing ... and this turned out to be very controversial he ran into a firestorm of criticism because the public wondered why with the Fed watcher raise our cost of living in the middle of a ... recession ... to most people that sounds like a very bad policy a bad idea ... what I argued is the Fed really has the communications of failure here ... the Fed world wasn't really trying to raise inflation so much they're trying to raise growth in the economy in the saw inflation as the school for doing that ... if instead they are targeting nominal GDP the Fed The said ... to Americans ... Americans' incomes are too low right now because of the recession we're going to try to raise the growth rate of Americans nominal incomes were nominal GDP to a healthier level for the economy ... and we think this would provide more jobs and make it easier for people to repay their ... housing debt ... I think that would've sold much better than a would've been essentially the same policy ... so I think part of what the more sophisticated technical e-commerce missed is maybe the political dimension of the crisis and ... I've done a lot of research on the great Depression in Japan is likely to focus more on so the real world ... examples and a lot of my colleagues are better a mathematical models ... and they they have it all worked out a model sense but ... it doesn't always fit the exact circumstances of what's going on in the country ... so perhaps that was the slight advantage and ... yet and will see now it's an advantage and that pushing this in GDP target the thank you for coming and explaining it to me and again Warren Scott spike at the money list and got ... things under the very much ...