Will Bernanke Take Aim at G.D.P.?

It’s a safe bet that the hottest topic in monetary policy is going to be raised when the Federal Reserve chairman, Ben S. Bernanke, takes questions from reporters Wednesday afternoon.

That would be nominal G.D.P. targeting, a concept lately endorsed elsewhere on this very Web site by the liberal economists Christina Romer and Paul Krugman (separately, and with very different degrees of enthusiasm) and long embraced by a diverse group of other economic thinkers.

It’s actually a pretty simple idea. The Fed has developed a policy of seeking to maintain inflation — the growth of prices and wages — at an annual rate of roughly 2 percent as the best way to meet its legal objectives of maintaining stable prices and maximizing employment. Proponents of G.D.P. targeting argue that the central bank instead should seek to maintain a steady rate of increase in the dollar value of the nation’s economic output, the nominal gross domestic product, an alternative measure that combines the rate of inflation and the rate of economic growth.

The Fed’s current policy, they argue, has failed to stimulate growth sufficiently, leaving more than 25 million Americans unable to find full-time work. A G.D.P. target, by contrast, would require the Fed to take more aggressive steps, like another round of asset purchases.

“It would work like this,” wrote Ms. Romer, a professor at the University of California, Berkeley, who was chairwoman of President Obama’s Council of Economic Advisers. “The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.”

As I wrote in Monday’s paper, this idea has garnered little apparent support inside the Fed.

One fundamental reason is that Mr. Bernanke and other Fed officials believe that the current system is working pretty well. Not well enough to heal the economy, of course, but in their view that is beyond the Fed’s power.

“My guess is that the current framework for monetary policy — with innovations, no doubt, to further improve the ability of central banks to communicate with the public — will remain the standard approach, as its benefits in terms of macroeconomic stabilization have been demonstrated,” Mr. Bernanke told a Boston audience in October.

The focus of that policy, which Mr. Bernanke described as “flexible inflation targeting,” is the Fed’s commitment to maintain inflation at about 2 percent a year. The Fed views the public belief that it will do so as perhaps its most valuable asset because it creates a stable environment for sustainable economic growth.

A switch to G.D.P. targeting would amount to a declaration of comfort with higher levels of inflation.

Many proponents regard this as the basic point of the proposal, arguing that the Fed has become overly fixated on the rate of inflation when it should be focused on the health of the economy, and that allowing — indeed, encouraging — a higher rate of inflation in the short term would help to stimulate growth.

Calling for a G.D.P. target rather than simply proposing an increase in the Fed’s inflation target, as some other economists have done, amounts in this sense to a marketing device, a piece of packaging.

“As far as I can see, the underlying economics is about expected inflation,” Mr. Krugman wrote in a mid-October blog post, “but stating the goal in terms of nominal G.D.P. may nonetheless be a good idea, largely as a selling point, since it (a) is easier to make the case that we’ve fallen far below where we should be and (b) doesn’t sound so scary and antisocial.”

So far, that sales pitch has failed to budge the Fed.

Podcast: European Debt, Settlement Talks, Fed Policy and Jim Collins

European leaders reached agreement this week on a far-reaching package aimed at resolving the Greek debt problem, recapitalizing vulnerable banks and bolstering the euro zone’s financial rescue fund. Stock markets around the world rallied on the news.

But in the new Weekend Business podcast, Nelson Schwartz, a Times financial writer, says that the details of the plan are vague — and that many questions remain. There have been several European rescue packages, with euphoric reactions in the market, but the mood has dampened after each one, he says, and it may well do so again.

Gretchen Morgenson discusses the settlement talks under way between financial institutions that may be responsible for mortgage foreclosure misconduct and, on the other side, state attorneys general and the federal government. As she writes in her Sunday Business column, actual cash payments of $1,500 are envisioned in a possible settlement for people who were erroneously evicted from their homes. This may strike people who have lost their homes as a low figure, she suggests.

In a conversation with David Gillen, Jim Collins discusses a new book, “Great by Choice: Uncertainty, Chaos, and Luck — Why Some Thrive Despite Them All,” which he wrote with Morten T. Hansen. An article adapted from the book appears in Sunday Business.

And Christina Romer, the Berkeley economist who was chairwoman of the Council of Economic Advisers, discusses her suggestions for a new approach at the Federal Reserve. In the Economic View column in Sunday Business, she recommends that Ben S. Bernanke, the Fed chairman, take bold action, much as Paul Volcker did when he was the chairman years ago. Mr. Volcker began to target the growth of the money supply in his fight to curb inflation. Now, she says, the Fed should begin to target nominal growth of the gross domestic product in an effort to restore vitality to the economy.

You can find specific segments of the podcast at these junctures: Europe’s debt accord (35:33); news headlines (28:22); Jim Collins (25:16); the mortgage settlement talks (15:17); Christina Romer (10:06); the week ahead (2:01).

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

Podcast: On the Fed, Christine Lagarde and China

The Federal Reserve started Operation Twist, but the stock market was unimpressed.

Although the markets stabilized on Friday, global stock prices fell sharply after the Federal Reserve announced on Wednesday that it would shift its bond portfolio toward longer-term maturities, in a reprise of a 1960s maneuver known as Operation Twist. In a conversation on the new Weekend Business podcast, Floyd Norris says that the Fed’s initiative was overshadowed by concern over the Greek debt crisis and its threat to banks in Europe and elsewhere around the world.

The International Monetary Fund has been playing a prominent role in the crisis, with Christine Lagarde, the agency’s new director, openly urging European governments to be much bolder. David Gillen talks to Liz Alderman in Paris about the former French finance minister’s surprisingly independent stand in her first weeks as I.M.F. chief.

The rapid growth of China’s economy has been one of the major developments of the last few decades. David Barboza, a reporter based in Shanghai, says that while China is likely to continue growing at a rate that many other countries would envy, the chances of a major setback appear to be growing as well.

And in a separate conversation in the podcast, Christina Romer, the Berkeley economist and former Obama economic adviser, says that the president’s current jobs plan is sound, though she says it should, perhaps, be even more ambitious.

You can find specific segments of the podcast at these junctures: Floyd Norris on the Fed (36:43); news summary (28:22); Liz Alderman on Christine Lagarde (24:56); David Barboza on China (17:41); Christina Romer on the jobs plan (9:11); the week ahead (1:42).

As articles discussed in the podcast are published during the weekend, links will be added to this post.

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

Podcast: Bonds, Markets, the Economy and History

The markets are being whipsawed. How severe has the volatility been? One statistic tells the story: for the first time in its history, the Standard & Poor’s 500-stock index moved up or down by at least 4 percent on four consecutive days.

In the new Weekend Business podcast, I talked to Floyd Norris and Julie Creswell, two veteran financial reporters for The Times, about the turmoil in the markets. Ms. Creswell has been covering the impact on individual investors and says many have been rushing to sell their stock holdings.

Of course, selling in a downturn is not always the best approach, Mr. Norris pointed out, especially if markets rise again soon. A big issue at the moment is whether we are experiencing a repeat of the 2008-9 crisis, when markets fell far more steeply than they have in recent weeks, or whether the current situation is more benign. Unfortunately, there are no firm answers.

One reason for the plunge in asset values is a global economic slowdown. In a separate conversation on the podcast, Christina Romer, an economist at the University of California, Berkeley, says the Great Depression and World War II supply some important lessons for dealing with the current crisis. In the Economic View column in Sunday Business, she says that expansive monetary and fiscal policy worked well back then to promote economic growth. In addition, the United States took on a far heavier debt load in the war years than it has so far, and still managed to pay it down when the economy was stronger.

Reconciling economic stimulus with a prudent long-term fiscal policy can be done again, she says, but the logic for these intertwined approaches needs to be conveyed forcefully to the American public.
I also chatted with Steve Lohr, a Times technology reporter, about a new approach to corporate social responsibility. In the Unboxed column in Sunday Business, he says academic theorists are proposing a concept known as shared value, in which companies profit by taking on tasks that result in public good. One example is General Electric’s “ecomagination” program, in which the company has invested in technology to lower the energy consumption of its products and to reduce the use of water and other resources in manufacturing. The company says its sole motive has been profit; the social benefits are ancillary.

And in another podcast conversation, Phyllis Korkki interviewed me about the implications of the downgrading of United States Treasury debt, the subject of my Strategies column in Sunday Business. Treasury bonds have been the linchpin of the world financial system, and the center of myriad calculations in business, portfolio construction and capital markets. The 10-year Treasury yield has been plugged into countless algorithms as the putative “risk-free rate of return,” against which other cash flows are compared. Now, the rate for a risk-free investment may need to be approximated, and the center of the global financial structure seems much less solid than it was just a few years ago.

You can find specific segments of the podcast at these junctures: Floyd Norris and Julie Creswell (37:06); news headlines (27:41); Steve Lohr (23:14); Christina Romer (16:01); Strategies column (8:51); the week ahead (1:57).

As articles discussed in the podcast are published during the weekend, links will be added to this post.

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.