From a Woodford interview

I found an interview with Michael Woodford, by the editor of the Minneapolis Fed publication The Region. Here is the gist of the discussion at one point:

Region: ... What are the advantages of the latter, of a nominal GDP target policy?
Woodford: One advantage is it would be a single criterion; whereas, the thresholds that the Fed announced were two different criteria.
Region: Perhaps dueling criteria, at times.
Woodford: Right. There was a threshold for the unemployment rate, but there was also a threshold for inflation expectations. The question of whether those could be in conflict was being sidestepped.

The question of what to do if the inflation target and the unemployment target come into conflict was not addressed. Or not even. The question of whether the targets could come into conflict was not being addressed.

It's a good point in favor of NGDP. Or not really, but at least it's a good point against the current system. It doesn't mean NGDP targeting would be better; that's wide of the mark. But the idea of "what we need to happen with inflation" being in conflict with "what we need to happen with unemployment" is certainly a point worth pondering deeply.

If things get so bad that we have "dueling criteria" then I'm not confident even NGDP targeting can solve the problem. It leaves me confident only that somewhere along the way, our understanding of the economy went wrong. What we need is a massive re-think of all the things we are sure about.


In 1977 I wrote:

The solution to inflation is "less money." The solution to unemployment is "more money." This is a magnificent answer for an either/or problem. But when the problem is "both," the logical solution is to increase and decrease, at the same time, the country's money supply...

Our economy is facing a both problem. The solution to that problem is to do two contradicting things to the money supply.

Woodford and I both focus on the possibility that to solve the economy's problems we may need self-contradictory policy. But no: It was Woodford in 2014 who said we may run into that problem. Almost 40 years earlier I said we were already facing that problem. But at least we both recognize conflict within policy as a problem. (Apparently some people don't?)

Woodford's concern was that

"The question of whether those [policies] could be in conflict was being sidestepped."

I'm not sure sidestepping is the big issue here. Inflation and unemployment are our two main economic concerns, and getting them on target is the whole heart and soul of policy. If our economic policies are in conflict, this is no small thing.

Inflation was too high back in the 1970s. So was unemployment. Remember "stagflation"? It was a "both" problem, and the standard prescription called for self-contradictory policy. If that's the situation, doesn't it make you want to question our understanding of the economy? What -- We should wait for a financial crisis to raise such concerns?

Maybe there is something wrong with our understanding, and maybe our error is the source of our troubles. That's easy for me to say, of course, because I'm not an economist and I don't have the big investment in understanding the economy. It would be costly for economists to take the view that I take. So maybe we should expect their concern to be only "sidestepping". And maybe we should expect that their resolution to the conflict in policy would emerge from their conflicting conclusions, rather than from a rethink that begins at initial assumptions.


"Almost 40 years earlier I said we were already facing that problem."

The problem was that unemployment was too high, but also inflation was too high. It was a manufactured problem. We had created high unemployment by using recessions to fight inflation. And we had created high inflation, either by leaving old Keynesians in charge or by failing to address the cost-push issue that was being generated by a growing financial sector.

Well, we got rid of the old Keynesians. That didn't help...