Ramesh Ponnuru Says Fix the Jobs

This is part of the series highlighting supporters of pro-jobs policies. An updated list of supporters can be found here.

Ramesh Ponnuru is a National Review editor and AEI Scholar studying the future of conservatism, specifically health care, economic policy, and constitutionalism. He has advocated for loose monetary policy and NGDP targeting.

Ramesh’s view the Fed policy as a failure during the onset of the crisis and lacking during the recovery stating:

“Tight money by the Fed was a major cause, and maybe the major cause, of the financial crash. Its officials spent the summer of 2008 worrying about the nonexistent threat of inflation, and their first monetary-policy decision after Lehman Brothers Holdings Inc. collapsed was to discourage bank lending, a contractionary step. They let the economy’s total spending level fall at the fastest rate since the Great Depression.

Since the economy hit bottom, spending has risen slowly and recovered no lost ground. The demand for money balances remains higher than normal, a symptom of continued tightness.

For five years, inflation and inflation expectations have consistently been below the Fed’s target, and unemployment has been above it. Fed policy — set by a board of governors that now includes six Obama appointees among its seven members — has therefore been too tight, and its attempts at loosening have been insufficient.”

Ramesh sees the solution to the jobs crisis being a Fed policy of stoking higher inflation through NGDP targeting:

“faster inflation today is a way to reduce real interest rates when nominal rates, being roughly zero, can’t fall. Faster inflation should also spur spending on both consumption and investment because it raises the price of just leaving money idle. These effects would stimulate the economy in the short run.”

“Instead, the Fed should target nominal spending so that the total amount of dollars spent in the economy grows by about 5 percent a year. How much of that spending growth would represent inflation and how much would represent real economic gains is out of the Fed’s control, so it shouldn’t seek any particular mix.

Compared to an inflation-rate target, a nominal-spending target would respond better to changes in productivity. If the Fed were following a strict inflation-rate target, reduced productivity would force it to tighten money when the economy is suffering, and higher productivity would force it to loosen money when the economy is booming. If the Fed were following a nominal-spending target, it would neither loosen nor tighten: All that would change is the ratio of inflation to real growth.

The arguments for higher inflation are actually better arguments for higher nominal spending. People consume and invest more when they expect higher inflation, but also when they expect higher rates of real economic growth. In other words, it’s higher expectations of nominal spending that stimulate them.”

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