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Here is a word cloud of words used by Bernanke during the press conference which was held today:

[Click Image to Enlarge]

As you notice, inflation was mentioned quite a bit, which, really, is something that you should expect from a QA with a monetary policymaker. Many are lamenting the fact that unemployment took a back seat, and Reuter’s itself challenges us to find the word “jobs” in the word cloud. Personally, I enjoyed the fact that Bernanke basically said jobs are someone else’s policy purview — which I view as the right response. However, the fact remains that monetary policy is not on target, and that is a problem for Bernanke. A bigger problem may be that 2% inflation isn’t a target at all! Could the US be following Japan’s lead into self-induced paralysis?

In any case, here is the question (and rest of the e-mail, references removed) that I sent to be asked, which did not get asked:

First, thank you for sending me your e-mail address. I’m tepidly excited about Bernanke’s press conference tomorrow…but I have a lot of reservations. You could probably call me old-fashioned, but I’m always leery of public policy “rock stars”, like the “Committee to Save the World”, and Ben Bernanke being “Man of the Year”. In any case, I think there is going to be a strong focus on grilling Bernanke on employment levels (I see that David Leonhardt wrote a column urging that to be so). I view this as very counter-productive.

But I did tweet you my question, which was this:

“As recently as 2003, Bernanke [You] championed price level targeting as a remedy for the ‘liquidty trap’. Many other economists also endorse this idea. Given the failure of monetary policy in preventing a sharp fall in GDP in Oct 2008 w/ inflation targeting, what are your thoughts on NGDP lvl targeting? Implementation challenges? Benefits or costs that you see?”

I wanted to provide some background for this question, because it can seem like it is kind of out of left-field, given a “mainstream” interpretation of events. As you may know, many prominent economists (Krugman, DeLong, Blanchard) have publicly advocated an explicit inflation of greater than 2%. A subset of this work was done by Lars Svensson[1] and Ben Bernanke himself[2], only instead of using inflation targeting, both economists have advocated setting an explict price level target in order to escape the “liquidity trap”. Another strain of this work that has been popularized recently by Scott Sumner, David Beckworth, Marcus Nunes, Josh Hendricksen, and myself, (among others!) involves monetary policy targeting nominal cash expenditures in the economy, or NGDP. More “academically”, Robert Hetzel[3] and Michael Belognia[4] have advocated that cash grow at a steady pace.

A common theme among those who push the “NGDP level targeting” view and others is that we tend to believe that causality in this recession runs (roughly) this course: mild supply shock (subprime) > tight money (Jun – Nov 2008) > large crash (Oct 2008) > inadequate Fed accommodation (2009/2010) > sluggish and “jobless” recovery. Indeed, even Christina Romer seems to be on board with something like this interpretation[5]. In my opinion, the Fed should target like a laser on the long-run growth path of NGDP, and keep it growing on a stable path (5% was the trend of the Great Moderation, but some economists advocate a transition to 3% nominal growth), making up for slack and overshooting when it happens by loosening or tightening money (respectively) such that the market forecast and the Fed’s forecast are basically one-in-the-same. This leaves little room for paying much attention to the level or rate of employment in the economy. The only time that should concern the Fed is if there is a large enough structural change that they should revise their NGDP target based on a sustainable increase (or decrease) in productivity (be it labor, capital, or TFP).

As an aside, David Beckworth has urged the Fed to target the cause of macroeconomic instability, and not symptoms of it[6]. Unemployment is one symptom, as is inflation/disinflation/deflation. From this perspective, NGDP level targeting is far superior to price level (and inflation) targeting.

I hope that gave you a brief (but adequate) overview to acquaint yourself with the NGDP level targeting position if you were unfamiliar, so you’re not shooting in the dark. I know you probably won’t get to the references. As a tactical request, if you see it fit to use my question, I’d work hard to get an answer out of Bernanke regarding NGDP targeting rather than price level targeting. The reason I bring this up is that if you mention “price level targeting” in the question, while you make the question more likely to get answered (price level targeting is more mainstream), you also give Bernanke an out in that he can simply muse about price level targeting and avoid the NGDP targeting question altogether, even though they’re different concepts. It’s a tricky pole to balance.

Thanks for allowing me to participate!

Niklas Blanchard

[2] and
[6] and

Sadly, there were no intrepid reporters in the audience venturing these grounds.

[h/t Paul Krugman]


Krugman has a recent post where he cites a SF Fed study regarding the unemployment rate among recent college graduates:

Mark Thoma leads us to new research from the San Francisco Fed showing that recent college graduates have experienced a large rise in unemployment and sharp fall in full-time employment, coupled with a decline in wages. Why is this significant?

The answer is that it’s one more nail in the coffin of the notion that employment is depressed because we have the wrong kind of workers, or maybe workers in the wrong place.

And asks:

The right question to ask, with regard to all such arguments, is, where are the scarcities? If we have the wrong kind of workers, then the right kind of workers must be in high demand, and either be in short supply or have rapidly rising wages. So where are these people?

Now, not to diminish the fact that what most people refer to as “The Recession” was, in fact, the result of a demand deficiency (or more aptly, a large increase in the demand for money not accommodated by the Fed), I’d like to point to some anecdotal evidence that in reality there is a problem a skill mismatch and “recalculation” that is proving difficult to tract. To the extent that this is the problem, rather than a problem, I’m not quite sure. From David Andolfatto:

For the 15 million Americans who can’t find jobs, the labor market is like an awful game of musical chairs. There are many more players than there are available seats.

Yet at Extend Health, a Medicare health insurance exchange firm in Salt Lake City, Utah, the problem is just the opposite—a growing number of chairs to fill and not enough people with the skills to fit the jobs.

“It seems like an oxymoron in this environment that you can somehow be challenged to find great workers,” CEO Bryce Williams admits, almost sheepishly.

Extend Health’s call center workers help retirees navigate the process of signing up for commercial Medicare Advantage and drug coverage plans.

For this fall’s Medicare Enrollment season, the firm will need close to a thousand workers. The ideal candidate is over 40, with a background of financial services in order to qualify for insurance licensing.

“They need to be able to pass the state of Utah exam, which is not easy,” Williams explains. “They need to have a background in comparing the financial metrics of trying to help someone compare and analyze and give great advice.”

Andolfatto has a link to another story along the same lines regarding manufacturing workers (a field which has become highly specialized). There is also the two facts that college degrees are large fixed investments in skills that may be reduced in demand. This is something that I’m largely familiar with, as I was in school for a prized IT career before the tech bubble burst. As I know Mark Thoma has noted (though I can’t find the link), we have a disproportionately high amount of graduates in business and finance, which is probably still true, and a low proportion of graduates in applied sciences. This of course leads into the next issue: the squeezing of efficiency out of a smaller workforce. How does that relate to the degree profile of our college graduates? Because it is comparatively easy to squeeze extra efficiency out of people who work “in business”. Much easier than, say, squeezing extra efficiency out of an existing construction or manufacturing worker. So if more people are specialized in business or finance, areas that took a major hit, and also an area where substitution is comparatively easy, then there is likely a skills mismatch between there.

So yes, I believe that there is more than trivial problem of skills mismatch, which I think was nearly the whole story up until late 2008, when the large fall in expected NGDP caused various financial obligations to be much harder to service (that tends to pin people down, and reduce employment options). That is a demand story. However, as we slog out of this recession, real job growth may remain low even as we return to previous trend NGDP. We should be at least prepared to discuss the supply side when that happens.

P.S. If anyone was wondering, I’m starting to feel better, though I haven’t gotten a diagnosis as to what is wrong with me, still. Been keeping busy with confusing insurance statements, school, and work. I think I’m at the point where I can end my hiatus from blogging, and write a few things. Glad to be back =].

P.P.S. For a long time I’ve been trying to find oddball diagnoses that fit my symptoms. Doctors hate that, by the way…but I do it anyway. In any case, I’ve been stuck on Whipple’s Disease for a while. Symptoms fit like a glove.

In response to Tyler Cowen’s semi-praise for job saving programs, Arnold Kling has this wisdom for us:

On the larger point, keep in mind that in an ordinary non-recession month 4 million jobs are destroyed and about 4.2 million jobs are created. Suppose that in a bad month of a recession, 4.0 million jobs are created and 4.5 million jobs are destroyed. Which of those 4.5 million jobs ought to be saved, because they might come back in a stronger economy? No one in Washington knows.

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