Does nominal targeting work for other problems?
December 12, 2012 27 Comments
I gather the Fed announced yet more stimulus** (**which is a Latin word so you know it’s totally scientific) so I just thought I’d say that the concept of ‘NGDP Targeting’ makes me giggle.
Look, I don’t know. Maybe it’ll help. But to me it just sounds like, your car’s engine has a serious problem and as a result you can’t even get the car up to a 50mph speed, but instead of, y’know, taking the car into a shop for an overhaul to get its engine fixed, you ceremonially announce your ‘intention’ to do some iterated combination of
1) Press on the gas pedal harder
2) Relabel the numbers on your speedometer a bit higher
until the needle gets to “50″. In other words, you are ‘targeting’ a Nominal Speed of 50.
Will this work? Sure, I can’t imagine why it wouldn’t.
Will this help your car? I must admit, I have my doubts.
But it gets even worse. In their latest announcement the Fed says they’ll keep interest rates low until the jobless rate gets to such-and-such. I guess that’s fine and dandy if there is some sort of predictable hard and fast functional relationship between the jobless rate and interest rates:
jobless_rate = f(interest_rates)
Is this really what all the Smart Economists believe? Because such an announcement is retarded if it’s not the case. Isn’t it?
I mean, I wonder if I could ‘target’ an annual income of $10,000,000/year via playing the computer game Dark Forces 2: Jedi Knight on my computer for as many consecutive hours as it takes. Should I try that? Would it matter whether my announcement of such an intention was ‘credible’?
At best, such an announcement might be an announcement of an intent to do X until Y happens, when Y was gonna happen anyway. “I declare my intention to Make The Sun Rise by playing Jedi Knight.” The sun will, indeed, rise. Thanks to me? Unemployment will, likewise, get below 6.5% at some point or another. Thanks to Bernanke?
I don’t know, maybe this all makes sense and I’m just too dumb – not Smart enough – to see it. I’d say I’d read Scott Sumner’s blog more closely, overcoming the boredom that usually prevents me, until this all finally clicks into place in my brain and the sense of it all dawns on me. But that would be a lie. You know it and I know it.