Bruce Bartlett Wants the Fed to Target Nominal GDP

This is a good video with Bruce Bartlett, an economist and former Reagan/Bush 41 official. He comes out in favor of stimulus, both on the monetary and the fiscal side.

Here’s his basic argument.

  1. The problem with the US economy in the main is not regulation. That is a canard used by corporations who are talking their own book and their boosters to get even less regulatory oversight than we already have.
  2. The problem is a lack of aggregate demand, meaning people are simply not increasing spending as they did before the credit crisis.
  3. You can boost demand by fiscal policy. Bartlett would like to see a large-scale public works program because he believes that the cost of debt is so low and the cost/benefit of these projects would be greater than zero. He realises this is blocked by political considerations.
  4. He also likes the Scott Sumner/David Beckworth idea of targeting nominal GDP. His view is that the interest rate channel is dead because of the zero lower bound. And that means, if you accept the Milton Friedman premise of buying assets, the Fed should just start buying stuff to boost aggregate demand.

Personally, I agree with Bartlett that dealing with Medicare for the long-term gives fiscal space politically for boosting demand now. That won’t happen though.

I also think Mohamed El-Erian is right when he intercedes, commenting that the Fed is considered to have done too much rather than too little. That will constrain the Fed. And they won’t buy a lot of assets until recession has taken hold.

So that leaves me predicting slowing without policy stimulus until recession hits, at which point the loss of demand will blow the deficit out even more. And then we will have to see what the political appetite for policy responses will be since the banking system and the economy will both be under enormous stress much as they were in 2008-2009.


This post originally appeared at Credit Writedowns and is reproduced with permission.