Speaking to soldiers in Ft. Bliss, Texas last week, Fed Chairman Ben Bernanke said the Fed is “certainly falling short” of its goal of maximum employment.That may be the understatement of the year, according to Christina Romer, a U.C. Berkeley professor and former chair of President Obama’s Council of Economic Advisers.
“The Fed has a dual mandate … [and] right now it’s missing both those targets, especially the employment target by at least a factor of two,” Romer says.
“The Fed is absolutely failing terribly on the second target,” regarding employment.
At 9%, the unemployment rate is well above what anyone would call “full employment”. On its other mandate, price stability, the Fed is missing on the low end: it’s preferred inflation rate, core PCE, is up just 1.6% on a year-over-year basis vs. the Fed’s target of 2%.
Based on those metrics, Romer says the Fed’s current policies aren’t working and believes “it’s worth a try to do something bolder and more dramatic.”
Specifically, she is an advocate of the Fed targeting nominal GDP, which is the inflation rate plus real (inflation-adjusted) GDP. Nominal GDP is a technical term for the dollar value of everything produced in the economy and a proxy for our collective ability to service our debt.
“Adopting this target would mean that the Fed is making a commitment to keep nominal G.D.P. on a sensible path,” Romer writes in a recent NY Times op-ed. “It would work like this: The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 per cent 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 per cent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.”
In layman’s terms, adopting a nominal GDP target would commit the Fed to “taking very aggressive actions” to reignite growth and get America’s economy back to pre-crisis levels, Romer tells Henry and me in the accompanying video.
If the mere idea of nominal GDP targeting wasn’t enough to instill confidence in the economy, Romer says the Fed could “take other actions,” including “lots more quantitative easing” and jawboning to weaken the dollar. “If the currency were not quite as strong we’d be exporting more, something that’d be good for growth today,” she says, repeating a viewpoint expressed here previously.(See: Christina Romer: A Weaker Dollar Is Good For America)
Clearly, there are many observers who believe the Fed has already done way too much, including all the leading GOP Presidential candidates. The idea of the Fed doing more and overtly trying to weaken the dollar is heresy to anyone worried about inflation. (See: To Hell With What the Fed Says, “Inflation Is Already Here”: Mike Pento)
But Romer wholeheartedly disagrees with the hawks. “To my mind the real risk is the Fed doing too little,” she says. “I think they’re currently doing too little and worry they will continue doing too little.”