Sam Bell and Skanda Amarnath on Gross Labor Income Targeting

A Macro Musings Transcript

David Beckworth: Our guests today are Sam Bell and Skanda Amarnath. Sam and Skanda along with Kim Stiens are part of a new organization called Employ America, a new research and advocacy organization that aims to get better labor market outcomes. Sam was also known on FOMC Twitter as an influencer when it comes to nominations for the Board of Governors, we'll come back to that in a bit. And Skanda is a former hedge fund economist and a New York Fed research economist. Welcome Sam and Skanda. 

While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

Skanda Amarnath: Thank you. 

Sam Bell: Thanks for having us. 

Beckworth: Yeah, it's a real treat. Of course, we know each other through Twitter, online. I've actually interacted with Sam in person many times before. 

Beckworth: First time to have Skanda here in person, so it's great to have you on and you guys have a great story to tell. Before we get into the great economics we want to talk about today though, I noticed something else that we have in common besides Fed and economics, is a love of basketball. 

Beckworth: And I know that was Sam and I have talked before, we both played varsity basketball, we both liked to play pickup basketball in our old age still and we follow the NBA. And I think that's true for you too. Because in fact your handle on Twitter was Irving Swisher, right? Which is a play off of Irving Fisher, correct? 

Amarnath: Yes, yes. I’m a big NBA head, I am. 

Beckworth: Okay. Well I know we're supposed to talk about economics today, but can I ask who you guys are rooting for in the championship game, NBA? 

Amarnath: I'm rooting for the Warriors. 

Beckworth: Warriors? 

Bell: I'm rooting for the Raptors. 

Beckworth: Okay. 

Bell: Kawhi… Fred VanVleet is a beautiful player and I encourage all the young listeners out there to model your game... Even if you don't have the athletic prowess of Draymond Green or Kawhi Leonard you can just take some hope in Fred VanVleet who makes all the right plays and is by no means an athletic specimen. 

Beckworth: Okay, well I'm going to have to go with Sam. I apologize Skanda. But I live in Texas for five years and I was big Spurs fan. There's two Spurs with Toronto, so Danny Green and Kawhi Leonard. So any event, fun series. And let's move back to the economics and the Fed. Now you both are part of a new organization called Employ America. So tell our listeners, what is Employ America? What are you trying to do? 

Bell: So cast your eyes on the horizon, David, and just imagine tight labor markets stretching out as far as you can see. 

Beckworth: Nice. 

Bell: And that's our north star is, better labor market outcomes, so more employment, higher wages, better quality jobs. And we are doing research, we'll talk about Skanda’s paper, we're doing advocacy. At present, we’re interested in, focused on Fed nominations. Obviously personnel is hugely important. But we want to get involved in fiscal policy. You've had other guests talk about automatic stabilizers. Hopefully there'll be some legislation on that in the coming years. And all things labor market. I think we also want to be a hub for there's this boisterous, diverse crew of people on Twitter and elsewhere who are interested in better labor market outcomes. 

Bell: And we sort of want to be one of the hubs, one of the homes for those folks channeling some of the great ideas, some of the great discussion papers, et cetera. So North Star, tight labor markets. 

Beckworth: Okay. Very nice. And you have another colleague, Kim Stienswho’s not here, but she's a part of the organization as well, I want to mention her. And so you've got projects already. We'll mention Skanda's research project here, his proposal for new target, which probably many of you have seen already, but we'll get to that in a minute. And just briefly, Skanda you also testified to Congress yesterday is that right? 

Amarnath: Yes, so at least for subcommittee, we presented on sort of what the Feds currently reviewing through its framework review and the conference in Chicago. And comparing that with how the Fed probably ought to be held accountable, especially on labor market outcomes. So especially in terms of how they've defined maximum employment, how that's changed over time. So we were presenting there yesterday. 

Beckworth: Yeah. So one of your pushes I think is to take the dual mandate seriously, right? Not just one part of it. Right. So, yeah. Okay. Very nice. Well, let's go back to you guys individually. Sam, let's start with you and I'd like to hear about your career path to becoming FOMC Twitter influencer for governor nominations. And for listeners who don't know, Sam has been pivotal in dethroning some nominations along the way and I think Greg Ip called you a national treasure one time because of all the... Tell us what you do because it's a really interesting process you go through in terms of checking up the background of these nominations. 

Bell: Okay. Well, so I guess I'm not a trained macroeconomist, but I got really interested in macro issues after the Great RecessionObviously we had an unemployment crisis. It got me trying to figure out how is this happening and what can we do about it. And so I got really engaged on Fed policy debates. And in 2016, I started working halftime helping the ”Fed Up” campaign with some research. And in December of 2016, I went to Hoover event that included Kevin Warsh. And this was obviously after the election and I was talking to somebody who was sort of singing Warsh’s praises. And I said, well my understanding is he actually had a pretty hawkish record during the early years of their recovery. And since then, and this person who I respect greatly sort of wasn't clued into that. 

Bell: And over the following months, I got the sense that people who were gunning for Fed chair appointment, were going to be evaluated on the whole, I mean, the conversation seemed to be more about what are their current views of policy and who do they know, where do they sit? Are they close with Mike PenceAre they supported by Wall Street? And for me, it started with Warsh. I really wanted to make sure people were paying attention to the past record of nominees. So in the summer of 2017, I wrote a huge long piece about Kevin Warsh and his record through the years, what he was saying in 2009 about inflation coming and his objections to quantitative easing. And anyway- 

Beckworth: Was that in Politico? 

Bell: No, that was on Medium. You can find it at “Jared Kushner for Fed Chair on Medium. It got a little bit of coverage. Paul Krugman retweeted it and- 

Beckworth: Right, I remember it. 

Bell: Adam Tooze did a blog post about it and the FT featured it. Anyway and actually it got around Wall Street a bunch because there was for all of these nominees there's a huge demand for information about them, when there's news, oh, Kevin Warsh is going to meet with president Trump. There's a huge all of a sudden demand. 

Beckworth: Sure. 

Bell: But there's few people who have the time or inclination to actually have chased down all the information about, well, what was their record? And so that's sort of the public service. I don't know if I have any influence, but to the extent I do, the public service I'm trying to provide is what's the record and specifically around what I feel is like a great crisis that we had in this country around unemployment in '09, '10, '11, '12. 

Bell: So my process is very straightforward, read everything. I'm in DC, so I can go to the Library of Congress and get every media clip, they have the databases. So I can read every media clip, read every paper, read every speech. And- 

Beckworth: Is that where you do most of your research at the Library of Congress or do you do some from my computer in an office or? 

Bell: Yeah, for each I mean, I've been engaged on three nominees in particular. So Warsh, Marvin Goodfriend, who was nominated in 2017 for one of the open governor positions. And then Stephen Moore who was rumored to be nominated, but was never actually nominated. And yeah, for each of those I spent a good deal of time at the Library of Congress, but I also watched the whole Stephen Moore CSPAN archiveSo I did that late at night and while I was making dinner… 

Beckworth: So if someone works at the Library of Congress and they see you walk in, they say, Oh, someone's been nominated to the Board of Governors, huh?” 

Bell: Yeah, well, I don't know the folks at the Library of Congress that well, but yes. Yes. 

Beckworth: Okay. Now you were pivotal, at least somewhat important in like Marvin Goodfriends failure to get passed the Senate. Is that fair? 

Bell: I don't know if I was in particular, I mean, on two past shows David, you've said that Rand Paul was actually responsible for blocking… 

Beckworth: You listen too well to the show. 

Bell: I listened to all the episodes and I want to correct the record. So Rand Paul was opposed to Goodfriend on the issue of negative interest rates. Goodfriends long time written about negative interest rates, how would you make it feasible. But Rand Paul has only voted, in his entire Senate career, he's voted for a single Federal Reserve nominee, Randy Quarles. So of the whole board right now, he's only voted for Randy Quarles. 

Bell: So if you need Rand Paul's boot and you're a Fed nominee, you are- 

Beckworth: Already in trouble. 

Bell: A lot of trouble. 

Beckworth: Okay. 

Bell: So basically yeah, not a lot of attention was paid to the nomination. Marvin Goodfriend, he's not Eric Trump's golfing buddy. He's a serious scholar. But when you look at his actual record and what he was saying in 2009, he was already saying the Fed should be thinking about interest rate increases. In 2011 he gave Wall Street Journal interview where he says inflation scares are going to be a much bigger thing. The Fed has already sort of too easy. The thing that really I focused in on was when the Evans thresholds were announced. And to me the Evans thresholds were already sort of a lukewarm proposal. I mean the conversation at the Fed started with NGDP targeting actually in November, 2011 and they said, well, we're not going to switch to that yet. 

Bell: Maybe we should do these thresholds that Charlie Evans was talking about. And then they watered them down a little bit more because originally the thresholds were more like, I think five and a half [percent] unemployment, three percent inflation, ended up being six and a half [percent] unemployment two and a half [percent inflation]. Anyway, so I think it was a useful policy intervention. I'm not sure it was like the most aggressive thing they could have been doing, especially in retrospect. But Marvin Goodfriend went on Bloomberg and just blasted the Evans thresholds. This is irresponsible. Even if they by some heroic effort, got unemployment to seven percent. He said, we can't be sure that that's not beyond NAIRU. In other words the natural rate of unemployment may be above seven percent, which to me is like just a major failure in judgment. So a lot of the senators use the stuff I'd uncovered in the confirmation hearing and he never sort of explained himself. He never said, Well, in retrospect I was wrong. That's not true, he did say in retrospect I was wrong, but he never really explained himself. 

Beckworth: Well, I think, yeah, it was the tone, the way he carried himself, just a little bit of humility goes a long ways, right? 

Bell: Totally. 

Beckworth: Yeah. I mean just saying, “Look, I messed up. You're right. I messed up. And I think he didn't seem prepared in general for that. So maybe he was his own worst enemy in some ways. But the point is you brought to the surface these comments he had made and everyone was aware of what he had said during this period. 

Bell: Yeah. And I think, I mean, the thing that was in my view was really encouraging about the hearing was for so long the congressional hearings, the dynamic was people yelling at Ben Bernanke and Janet Yellen for doing too much, taking too many risks with inflation or trying too much in the way of stimulating the economy. And it was like the first hearing where the members were coming back at a Federal Reserve official or potential Federal Reserve official and saying, why were you so conservative? Small c conservative. Why are we so hawkish on this? Which I think is part of a more general mood in Congress these days. But from where I sit was encouraging that that was the direction. 

Beckworth: Okay. Well, let me ask this question then. So there were several people you've been involved with, you mentioned Stephen Moore, which was a great roller coaster ride while it lasted. But, have any of these people ever like, reached out to you and said, “Hey, give me a break, or have you got any blow back, maybe indirectly even. 

Bell: Oh yeah. I mean not folks directly but friends of people saying... A few categories of complaints, I mean, one is we could do so much worse than the person you're sort of tweeting about. Right? So why are you giving Marvin Goodfriend a hard time? We could end up with Stephen Moore, right? A Trump crony or something. Right? So that was one category of complaint. Another category of complaint is don't you ever, like, does everyone have to agree with you? Isn't there space for people to have been wrong but still be good nominees? In which case, and Skanda and I were just talking about this, but we have an example of someone who did that well, Narayana Kocherlakota who was very hawkish, maybe the most hawkish person on the committee in '09, '10 and the facts didn't end up justifying his position. 

Bell: So he changed his position. So we're embracing of converts, we are embracing of people who changed their mind with the data and we were the last people to say we have all the answers. So that was the second one. And then I guess the third one was around like, is this just a partisan exercise? In which case don't you just hate all of Trump's nominees? But I think Richard Clarida is doing a lot of great things. I didn't do a whole tweet storm about his nomination because even though there were pieces of it where he objected to Fed policy in ways that I didn't think were right on, overall, his body record was like really solid and I thought he was a good nominee. So those were the three sort of categories of complaints people had about my tweeting. 

Beckworth: Okay. One thing I remember about Richard Clarida from you is that he's a singer. I wouldn't have known that he has this entire recording album. He has an album. So listeners out there- 

Bell: We’re hoping for the Bank of Jamaica-Richard Clarida mash-up on inflation. 

Beckworth: No kidding. Just tell our listeners what that means if they don’t know the Bank of Jamaica. 

Bell: The Bank of Jamaica has a very creative communications strategy of making YouTube videos where reggae performers are basically singing about inflation targeting. And we're hoping that the outcome of this Fed review is also like a new Richard Clarida album where we get some monetary policy content. 

Beckworth: Okay. We'll look forward to his next album. Alright, let's go to you Skanda. Let's talk to you for a bit and before we get into your proposal, just, you worked on Wall Street during much of this period we've been talking about, the weak recovery, the slow growth. What was your sense of what the Fed was doing? Was your sense the Fed was being too timid? Was it being too cautious? What was your take because you were an economist from the frontlines. 

Amarnath: So, as you said, I worked as an economist at hedge fund, and I recently obviously joined Employ America, but I worked there for four years. But I've been following this pretty actively probably since sort of the fall of 2007 or something, or summer of 2007. And I think the bias that I think you've had that a lot of people have a lot of different stripes have had correctly was that this has been too slow of recovery. The errors have been one sided in terms of hawkishness, in terms of not pushing for stronger growth. Not recognizing the jobs crisis of 2009, '10, '11, '12 that we had really low rates of nominal and real growth and that we could've been doing better. 

Amarnath: Obviously there have been times that monetary policy has really stepped up to the plate, but there have also been other times that maybe have not been as keenly focused on where monetary policy could have done better. And so in that sense this has been one long story in sort of policy not quite getting it right and it's all been in one direction. It hasn't been a case of there've been times when the Fed was two dovish versus too hawkish. I think it's been a pretty systematic error at this point. 

Beckworth: Yeah, I completely agree with that. And of course I get push-back but I think over a decade, and I go before 2012 when I look at the inflation record because implicitly they were targeting two percent before then. And so to be generous, be charitable from the recovery to the present, it’s been close to 1.5 percent inflation. And the people were like, well, what's 50 basis points? Well to me, 50 basis points compounded as a symptom of short fall of demand growth, which, hysteresis effects, all kinds of effects in the labor market. So I do think this is an issue and I'm glad you guys are kind of maintaining attention on it, but I want to go back to kind of Wall Street view. So you got it. But in general, did Wall Street get it? I mean are economists and traders on Wall Street, are they as cognizant of this issue? 

Amarnath: So my previous role at a hedge fund, was sort of a hybrid role, is market economist and strategist. And so my job is to guess what the Fed will do. Right? And when you get into the game, and from the Wall Street perspective, there's a sort of, it's fun in the sense of trying to anticipate what the Fed's going to do. You look at their framework, you look at what they say, and then you just say, okay, financial conditions are here are the unemployment rate versus NAIRU is here. Okay, this is their bias and they're going to try and normalize here. That's a different set of questions than what they should do, right? So when you get really focused on getting the call right, there's a certain set of muscles you don't exercise either. 

Beckworth: So you lose sight of the big picture, then. 

Amarnath: Yeah. Or you're focused on your P&L day to day, which is important obviously, because that's how you get paid. But it's not necessarily the most important from the standpoint of actually criticizing the Fed, market participants are always going to complain, “Oh you misled me. You told me this, you did that.” But from the Fed's perspective, they're supposed to get things right for society, get things right for businesses and workers just as much or moreso than for market participants themselves. 

Beckworth: So the incentives aren't there to kind of have this big picture thinking, discussion. I mean some people do, but day to day you're focused on- 

Amarnath: From what I observed of sort of sell side economists in the early parts of the recovery there was the split of those who are really focused on inflationary pressures from QE, from a big balance sheet. 

Amarnath: And I think obviously that stuff didn't play out the way people were predicted. And then there were those who I guess like Goldman Sachs econ research group, those highlighting [that] there's a lot of slack in the labor market. And so in that sense they proved to be right in terms of the fact that Fed policy was easier. There was no inflationary pressure. More recently, especially at the hedge fund, it's been a different set of sort of failures in terms of the calls that this is the moment when we're going to see the inflation and the wage growth because unemployment rates have gotten so low, like there's clearly no more slack. Even if I do U-6, it's still very low. And yet those predictions have been also false. And I think now is also the time for a reckoning on that side too, which is that we need to update our priors and rethink the specifications by which labor markets and inflation to the extent they are related, how are they related? So this is an opportune time for that as well. 

Beckworth: Okay. Well that's a nice segue then into your proposal because you have a new proposal, new target for the Fed. And it's very interesting because it does kind of look at labor markets in a way that the Fed isn't currently doing. So tell us, what's the name of it and tell us all about it. 

Amarnath: Yeah. So I guess by a Twitter hashtags is FloorGLI. The idea is to put a floor under the gross labor income growth rate. Gross labor income refers to every employed person’s compensation cumulatively in this country, so the nation's paycheck. And so this is, I guess in some ways a variant on sort of national income. But it's focused on labor income, one because of the dual mandate since maximum employment is part of the dual mandate. 

Amarnath: And then also because it's actually pretty easy to measure. We get core PCE each month and we obsess over the different components and what they're doing. And is this transitory, is it not? And there's some really important information that's also in that same release that tends to not get played as much, which is a compensation of employees received, which is gross labor income. So the proposal is to really focus on putting a floor under that growth rate. That would be a better way to actually pursue maximum employment. So it really addresses that part of the mandate. I think it ends up being a much more robust indicator than inflation itself. So while we don't say don't look at inflation there's a time and a state of the economy where inflation sensitivity is important. In terms of robustness of indicators, inflation has the lag. 

Amarnath: Inflation's not very cyclical. Inflation methodology is always changing. And so in that sense you want to pick actually things for policymakers to focus on that are robust, right? That are things that are sensitive to the business cycle in real time. 2008, inflation was rising, 2011, inflation was rising. It was proved to be false signals in this grand scheme of things. We saw a pretty serious economic deterioration in 2008. And gross labor income growth was showing that in real time, month by month, same thing in 2011 and would have given them more timely signal for policy response as opposed to inflation, which a lot of people were getting sidetracked by. So this sort of obsession with inflation in some ways is, it sort of matters in a big picture sense. I don't want to minimize the costs of inflation, but we need to be very clear about, from a policymaker's perspective, what are robust indicators to look at for the purposes of calibrating policy. 

Amarnath: And then finally I'd say the floor aspect of it is also meant to really appreciate the asymmetry of policy and the political constraints. I had a discussion with Scott Sumner, I'm not sure he remembers is it now, but in 2011, one of the points he made that really stuck out to me was the superiority of nominal GDP targeting over inflation targeting when you're at low rates of nominal growth, which is.. it’s politically superior to say I want a faster output growth, faster income growth than it is to say I want higher inflation. 

Amarnath: So this takes it sort of the next step, which is to say what are the sort of politically superior targets and nominal anchors for different states of the economy?” So the way we've placed it as sort of a state contingent, nominal anchor. In low rates of nominal growth, you should be shooting for higher GLI growth. 

Amarnath: In high rates of nominal growth, you're shooting for sort of making sure the inflation target is met. So one of the criticisms obviously sometimes if nominal GDP targeting is, what if we have the late 90s scenario where we have high nominal growth but also higher real growth, right? Inflation was rather tame in '99 and 2000. We don't want to be tightening in that scenario. 

Amarnath: I know you guys have a reason for why that still makes sense, but from our perspective, we want to make sure that the costs of different states of the economy are appropriately considered. So it's a low nominal growth state. You want to focus on making sure that you're pursuing faster job growth and wage growth. In high nominal growth states, you want to be more sensitive to inflation, which may or may not show up and you kind of take it case by case, but it's still you're always sensitive to some nominal anchor, but it's a little bit more state contingent. 

Beckworth: So your proposal has two elements in it. It has inflation if the economy gets too hot, inflation gets more weight, it gets picked up, right? But it also has labor income or maybe it's wages, right? Kind of an aggregate measure of total labor income earned, right? And that provides the floor, if that gets too low, that takes more weight. And is that right? 

Amarnath: Actually, right. So especially we've been in a low nominal growth state for the last 20 years, really, or since maybe about 2000, 2001. That was when we've really seen that nominal growth rates have consistently shifted down for a variety of reasons, but that also puts more emphasis because that will inevitably imply you're going to have lower interest rates, you’re going to be closer to the zero lower bound. That naturally takes up more sensitivity. The '70s were marked by a period, obviously, of strong labor income growth, strong nominal output, nominal spending growth as well. 

Amarnath: In those environments obviously inflation makes sense and you're going to be in a different state of the world where that sensitivity makes a lot more sense. And from the political communications perspective, right, if the Fed needs to get new tools that have traction at the zero lower bound, because I think there is a decent amount of debate about how much traction they're going to have next time around when some of the things- 

Beckworth: Absolutely, yeah. 

Amarnath: -What's the better argument for having those tools? Is it that you're trying to pursue faster income growth, faster job growth, faster wage growth or is it that you're trying to pursue higher inflation? I think even for, whether the Democrats or Republicans, I think that message is probably going to be more politically effective that you're actually pursuing sort of the maximum employment side of that mandate in that circumstance as opposed to the academic exercise of we need to get inflation expectations anchored and that's why we need higher inflation itself. It's a technical argument, but it's a different one. 

Beckworth: Yeah, it's hard to tell people who have already lost their jobs, there’s uncertainty in the economy. Hey, we want to get inflation up. It's good for you. And they're like, “What? 

Amarnath: Yeah, we want a higher- 

Beckworth: “What are you smoking? And then Ben Bernanke saw this in Congress, right? In 2010, I believe 

Amarnath: Exactly. 

Beckworth: He got grilled because he said we can't get inflation up. In fact, he's using low inflation to justify QE2. 

Amarnath: Yeah. 

Beckworth: And he couldn't get anywhere. Okay. Very nice. So again, I may butcher this, but it's kind of a labor income target that it kicks in varying degrees based on the state of the economy, right? 

Amarnath: It's asymmetric in nature, right? 

Beckworth: A symmetric labor income target. 

Amarnath: Yes, so one of the things that I know people who've been at the Fed who have said, well, if you target wages, well, what happens when wage growth is strong? And our answer is okay, fine, but that's when you should look at inflation, right? That's when you should look at the costs of a high pressure economy, right? That it actually reflects the bad stuff of each economic state. Right? 

Amarnath: That's a state of the world where we should be sensitive to inflation. It may or may not show up. In the '70s it did show up in the late '90s it did not show up I would say. So that's where trying to balance those in a way that is easy to communicate I think the other thing that's hopefully advantageous about gross labor income is that it's reasonably straight forward to understand. It is the cumulation of each person's paycheck. Inflation is actually a very complicated beast. 

Beckworth: No, it is. It's all these and there's lots of debates around it. Right. Because you mentioned and lots of cynics out there too, like shadow stats and others it's open to misinterpretation and stuff where this is not. 

Amarnath: Yes, I and I understand why the BLS and the BEA are making the changes they're making. They're trying to capture something economically consistent, but the state of the world is constantly changing that how much is my unlimited data plan worth for telecommunications prices, once you quality adjust them, there's a lot of sources of error and variance that you add in. 

Amarnath: I think from a policymaker's perspective, the question is how much should I be fixating over that? I feel bad for Jay Powell when he has to sort of explain the, oh, we think these components are transitory and these ones maybe there's something to them. It's getting so much into the weeds that I'm not sure it's effective from a monetary policy strategy. 

Beckworth: Right. When you get really low inflation, you do get hung up on these what's the relative change in this or that. So what has been the reception of your proposal? You've talked to people I know a lot, so what have they said? 

Amarnath: So I think that generally the feedback's been positive so far in terms of glaring errors, we haven't been pinned down of any sort. But I obviously people who are more experienced to have seen more naturally have a little bit more skepticism are trying to feel out some of them. 

Amarnath: There's a lot to sort of digest. We put a lot into the article he published and it's hard to capture everything all at once. So we're going to try and in various ways communicate these ideas differently hopefully in a little more digestible format. We wanted to make sure everything was all in one place. But now it's also about having sort of proper paper or having sort of slide decks to actually cover the communication strategy. But generally speaking, most of the concerns were about is this going to be a symmetric GLI target? There was some concern about whether this was actually sort of too asymmetric in nature because there's no sort of focus on sort of what do you do when you're in high rates of GLI growth? 

Amarnath: So I think generally speaking, we're pretty encouraged by the response we've received. It's a little, there's some complications when you're trying to talk about state contingency. And so the communication is always challenging. That's just the nature of monetary policy though too. So we're hopefully trying to keep it simple enough but appreciate the nuance. 

Beckworth: Okay. 

Bell: If I could add one thing? 

Beckworth: Sure. 

Bell: We've started the conversation with Congress as well. So we started talking to members yesterday and I'm relatively encouraged as Skanda said about the ease with which members can really wrap their because people are already asking Jay Powell about wages. If you watch a Humphrey Hawkins hearing, people are not asking about the inflation target, they're asking about jobs and wages so this sort of framework I think is going to be, I think, easy for members to sink their teeth into. 

Beckworth: Let me ask this question, why not just have a pure GLI target where you say, look, we're going to target gross labor income at a certain rate. And if it goes above it, we tie in and goes below. We tighten. Why have inflation and labor income? 

Amarnath: Yeah, so this is where I bring up the late '90s example. I think it's a little, and this is one that I've heard from, especially when I was an analyst working for economists at the New York Fed. And that's where I definitely heard it for like why the nominal GDP targets were a little bit... We've treated a little bit more lukewarmly in terms of a lukewarm manner, was that the late '90s example of where you have high nominal growth but also low inflation. Is that really in an environment where we want to tighten? The Fed actually did tighten in that environment too. 

Amarnath: So maybe that's a misgiving that in practice as an end up occurring. 

Beckworth: I see your point though. 

Amarnath: But it's like who are we to take away sort of potentially real growth in that process because inflation is lowShould we be pursuing a deflationary strategy when we have high nominal growth? We haven't had this search. This is an area last for very long. So it's- 

Beckworth: Of an academic question. 

Amarnath: More of an academic question. I do think it helps from the communications perspective, if the Fed wants better tools, the Fed should also be thinking of political positioning. I realized that they're politically independent, they are operationally independent, but they also don't exist in a political vacuum. And if they want to be able to communicate their policies clearly and not be accused of sort of shortchanging the labor market or even the past where it's about inflation itself, that they're clear with their communications about why they're tightening and why they're easing. And each macroeconomic variable does have certain value judgments embedded in them. We want faster output growth, we want faster income growth. We don't want faster inflation generally speaking, outside of economists, probably at the Chicago conference. 

Beckworth: Well let's go a little bit more on the politics. So you mentioned the political appeal of your proposal. Sam, you follow the politics closely. You've already touched on this a bit and you mentioned earlier how they are now questioning at least Fed nominees about whether they were too hawkish, but in general, what has changed in the Senate and in Congress? How has the tone changed since like President Trump? I had Adam Ozimek on the show. I remember you had a follow up comment. One things Adam said on the show was maybe Trump will make Republicans less averse to like an inflation overshoot or more flexible inflation targeting. And you were a little skeptical, but is there any change you see? 

Bell: Yeah, I think I do see a change. I mean, well first of all, 2017 Republicans held the House, the Senate and the presidency. And if you had been watching monetary policy hearings in 2011, '12, '13, you would have thought that the day that the Republicans got unified control, they would pass the format, they would legislate the Taylor Rule, they would take discretion away from the Fed. And that didn't happen. And I think it didn't happen. I don't know quite why it didn't happen. I don't think it's totally Trump. I think that's clearly a part of it. But there's very striking about face from many members of Congress. I mean, I'll point you to perhaps the most striking, which was in April the Senate Banking Committee chair who was pretty hawkish. I mean, he voted against Yellen because she was too dovish when she was nominated for chair in 2013 and this is Mike Crapo and he's had strong questioning of Bernanke and Yellen and he's, he's also like small c conservative in the sense that he's just... But in April he called for a 50 point rate cut, which I was shocked. 

Bell: And if you look at, or if you track Senator Shelby who was often one of the great Fed critics and you look at what he was saying in February he was celebrating Powell and not criticizing the pause. And at the same time you don't have Democrats. Well anyways, so I think Republican Party has switched big time with maybe the exception of Pat Toomey and maybe they exception in the Senate and maybe the exception of Andy Barr in the House. But I think overall there's been a pretty noticeable shift. 

Beckworth: One with their shift on deficits, it seems like. 

Bell: Yeah. One thing on the politics. I mean, I'm not sure how long we'll have both parties sort of pointing in the same direction for more dovish policy. But my hope with the review, I mean, one of the reasons I was excited about the Fed review happening and it coinciding with this dovish turn, right, where Republicans have shed some of their hawkishness and we haven't seen Democrats, for example, we didn't see in February, Democrats criticizing Powell for the pause. Right? So both parties more dovish this is the time for the Fed to stake out the ground it needs. So in the next downturn it can say, “Well, you guys already signed on to this. We had the Fed review. You didn't object. That's why we proposed these aggressive tools. That's why we updated our framework. Now's the time to claim that ground so you can use it later. So I hope the Fed realizes that the politics have shifted and that they- 

Beckworth: Now is the time to act. 

Bell: ... Opportunity, yeah, yeah. Really. 

Beckworth: Well, just to be clear to our listeners who don't know, I know many do, the Fed is doing a yearlong review of its strategy, tools, communication, and we're six months in. In fact, this is called the listening stage and right now as we speak, they're finishing up a conference at the Chicago Fed has been mentioned already and this conference is kind of a culmination of various papers, academics, practitioners talking about tools, communication strategies. So six months of listening and then the next stage is six months I guess of internal debate. They're going to come out more, I guess talking about their different views. And so I want to ask, what is your take you just said this is a great opportunity for them to be bold, right? This is a great politically, and I'll just remind our listeners in 2011 you mentioned this earlier too, they were thinking similar questions, nominal GDP level targeting. I got real excited back then and I was disappointed. And they decided to go with an inflation target. 

Beckworth: And the concern back then is we're coming out of a deep recession, we're kind of implicitly, we're doing inflation targeting. We don't want to do something to radical because the economy is unstable. Fair point. But now we're in a very different environment, now politically, economically, all the stars are aligned for some change to take place. And what is your take? Can we be hopeful of some kind of meaningful change, either of you? 

Bell: Well Skanda is the big cynic, so I'll let him be cynical. I think it's good that the Fed is doing the review. And I think there are a number of both Powell and Clarida have questioned the Fed's models, predicting inflation. Clarida has been talking about different aspects, labor share, et cetera, which I think are good. I think the narrow conversation about price level targeting versus average inflation versus status quo feels too narrow to us. I don't know if you want to say more on that score, but. 

Amarnath: Yeah, I think that it's narrow. I second Sam's thoughts though on the fact that it's good to have the review. It is a good opportunity for the Fed to think strategically about really if we have another recession for some exogenous reason, what's the Fed going to do? How are they going to have enough policy space to respond as it is, we are not that far from the zero lower bound and even now after 10 years of recovery after some "normalization" nevertheless their policy space is constrained. Inflation outcomes have undershot. 

Amarnath: I think inflation outcomes of undershot for a variety of reasons. Some of them are within the Feds control, some of them are without. But bigger picture nominal growth has still remained very low and that I think is where the focus should really be, which is we should be trying to solve that problem and the human costs that are associated with not solving that problem now. 

Amarnath: I think the discussion has been too narrow in the sense that we've been talking mostly about average inflation targeting. If you think about the papers that are presented in terms of their focus I would have hoped they'd been a little more ambition, at least in terms of how they more critically think about maximum employment. How they think more critically about pursuing more ambitious goals on the maximum employment side where I think they have generally focused instead on the fact that it's only 50 basis points of difference. How do we get that 50 basis points up in a manner that is sustainable? I think that's sort of too narrow and not really describing the problem well. 

Beckworth: Yeah. So I'm going to share with you a tweet by our friend Ryan Avent who's a columnist for The Economist magazine. He's been on the show a few times. He's also a big fan of nominal GDP targeting. And so he went on Twitter recently to commemorate the conference. And he starts with this tweet. I'll just read the first one and the second one. He goes, “Let's all take a moment to applaud the Federal Reserve for hosting a conference this week at which various experts will offer a critical look at the Fed's monetary policy framework.” And his next tweet, “This conference comes a mere 20 years after it became clear the zero lower bound might present difficulties for central banks, 10 years after the zero lower bound began to bind in the US and only just after the Fed inverted the yield curve with short rates under 2.5 percent. 

Beckworth: So good to see responsible technocrats responding with their appropriate urgency to serious problems. It's a very cynical take. I won't go that far and be that cynical. And in fact I replied, I said, this is far better than what the Fed did with the Great Depression. I mean it was Ben Bernanke in 2002 who said, we screwed up. We made a mistake. So on timescales is actually a vast improvement. But so where I'm concerned is that I see kind of a baked in outcome already. I think average inflation targeting is where they're going. It seems to be that the most of the discussions surrounding it, am I being fair or do you think something more ambitious will come along? 

Amarnath: That is consistent with my sources as well that average inflation targeting is the clear front runner for now and that this has been a bit of a race that feels like it's already been run behind the scenes. 

Beckworth: Yeah. And I understand politically why they might go to average inflation targeting. It's an easy next step. It's not that different if they go to Congress they can say, hey, we're still doing inflation targeting, but gives them the opportunity to make it. But I agree the lack of boldness maybe going outside the status quo thinking. 

Bell: I think there's an interesting... I was at an event recently where Sam Fleming from the FT asked Ben Bernanke why the recovery was so slow and he was defensive about it and sort of defended the pace at which there were job gains and in a way that was a little painful for me to hear because I wanted a stronger, quicker recovery. At the same time, I think it's useful to step back. And if you're in Ben Bernanke's shoes think about like, where were all of you in 2011 where I was just taking incoming fire and it felt like all the political forces were, maybe not all the Twitter forces, but all the political forces that he was up against were pushing the opposite way and that's part of why we're starting Employ America. 

Bell: Like we never want to be in a situation again where we have that sort of unemployment crisis and the political dynamics and the broader atmospherics are “”Oh, the debts out of control. Oh, the Fed's doing too much. Oh, this and that.” Because I have some sympathy for Bernanke now that we're down below four percent unemployment saying well, being a little defensive about it because we're in a different situation now politically and the atmospherics than we were in 2011. So at the same time, I think the Fed is too defensive about the recovery and I would just like them to make the simple statement that we could have done better on jobs and incomes. 

Beckworth: Well, we have to maybe wait a few decades based on the Great Depression. 

Amarnath: Yeah, I mean just to follow up on Sam's point, as far as 2011, obviously it was a time when there was a lot of political conflict and in terms of how Democrats, Republicans perceived the Fed and now is actually a moment when incrementalism should not be sort of satisfactory, I think. Right? This is the time when the political moment is ripe. You've had plenty of time to evaluate the recovery, the Fed's own performance, how their forecasts have had to deviate, how their estimates of different parameters have changed. So that's I think the bigger picture. This is a moment they could really seize. And they might still seize it, there's plenty of time in terms of their review, but we hope they do well. 

Beckworth: They got six months still so Employ America needs to get to work in the next six months. As you know I've been beating the drum here, Macro Musings and other places as well. Let's go to the present and in step back from this discussion about this review and talk about what they are actually doing in real time. So last December they raised rates may think it was a mistake in retrospect. The yield curve appears to be inverting and now there's more talk about the Fed possibly cutting rates pretty soon. At this conference, Jay Powell gave a talk where he used the phrase to act as appropriate that the market's interpreted it as we're going to be their support. 

Beckworth: Here's an article from Bloomberg. It says, Fed Inches Toward Rate Cut as Trade War Frays Patience. Do you see the Fed becoming more nimble, more agile, is it something that we should be thankful for? I mean even if they don't make a big radical change in strategy, are they becoming more sensitive to market conditions, to developments around them? 

Amarnath: I mean I think that if to the extent they do, and I think they are doing that now to some extent that's a positive development. It's also you can have the strategy and the framework, but ultimately it's about practice. It's about the actual implementation. So they can't really afford not to be negatives there, but they can't afford to sit on the sidelines here. Growth is slowing at least by a lot of different metrics. And in this situation you're seeing enough indicators to suggest that risks are emerging and the Fed has only limited policy space. So error on the side of caution is what I would- 

Beckworth: Be very explicit, explain to the listeners what you mean by limited policy space. We've touched on this several times, but explain like in concrete steps. Why are they limited? 

Amarnath: Yes. So I would say conventional policy space and by conventional policy, I'm talking about the Fed funds rate and where they feel comfortable lowering it. 

Amarnath: They feel comfortable lowering it to zero to 25 basis points. And beyond that negative rates are not a discussion for the Fed. For a variety of reasons that I can appreciate that it's a lot. There are a lot of other costs that might emerge in terms of pursuing a negative rate policy and even in terms of QE or forward guidance, these tools are, it's not quite clear how well they work. The reliability is just not as obvious as it is for lowering the Fed funds rate itself. 

Amarnath: So when you get to these more unconventional tools, obviously use them at to the extent you can, but it is obviously a much more straightforward question of what does 50 basis points mean to economic activity than it does how many assets you buy or how much you make in terms of a promise to keep rates low for a given period of time. 

Amarnath: Helpful policies but harder to calibrate. So conventional policy space is pretty valuable from that standpoint, but it's only valuable to the extent you also use it and use it efficiently. So I would say if there is a side to err on. I think the side to err on is the side of dovish business because let's say that they cut rates, but really the economy's fine. We really misjudged things. The room to actually raise policy rates back again because we have some surprising inflation that deserves some tightening is a reasonably straightforward calculation. 

Beckworth: Lots of space. 

Amarnath: Lots of this infinite space on the upside. But if, the Japanese mistake, which is one where you do not move fast enough to the downside is a pretty costly one because it's not clear even now, what's the sufficient set of tools that gets you out of this state of the effect of lower bound. So without those sorts of tools available, I think that at least until we have a sense of how to get out of that and Europe is now struggling with that as well as the Eurozone also has rates low for a very long time now. Until we figure that side of that out, I think the risks are asymmetric. 

Bell: Agree with all that.  


Beckworth: Okay. 

Beckworth: So in short, what you're saying is the Fed typically lowers it short term interest rate as a way to stimulate the economy whenever there's a recession. And usually it's around five percentage points. It has usually cuts and we're close to 2.5 percent. So it's going to run out of ammo pretty quick. And so that's kind of a crude way of saying it. It doesn't have much traditional ammo left in its weapons, guns. So we are in a bind that resort to QE faster and one of my fears resorting to quantitative easing faster is going to start taking out a lot of important Treasury securities that serve as collateral for the financial system. Let me ask this question. So I'm a little critical of the Fed for the December rate hike and I know in real time it’s hard to know what's right, what's wrong making these decisions and now we're seeing what looks like a sustained inverted yield curve. 

Beckworth: And what role did the Fed play in that? And I bring that up because the Fed itself was talking up inverted yield curve, no big deal last year. John Williams was kind of dismissing it out of hand even Governor Lael Brainard suggested it was okay. 

Beckworth: And if you look at the summary of economic projections, it kind of implied one. Obviously the yield curve inverted today has to do with the trade war most recent developments. But the Fed itself I think has some guilt in the yield curve inverting. Am I being too harsh? 

Amarnath: No in the sense that the Fed obviously controls one side pretty clearly of the yield curve, which is the short end through its policy rate. In the end, the term structure is meant to game out the expected path of policy. So right now we're anticipating cuts are on the horizon and day by day bringing in the time horizon for those cuts. 

Amarnath: I think that naturally will happen regardless of like whether the Fed decides to tighten or not. If market participants anticipate that growth's going to slow down, whether for reasons related to the Fed or otherwise. We've gotten to this lower growth state or we're seeing growth slowdown for a variety of reasons. 

Amarnath: Some within the Feds control, I'd say some may be a little more exogenous in nature. So I think that naturally happens, but the Fed should pay attention. I think that's the point you're making is we've seen this actually multiple times now where the yield curve inverts. They take an estimate based on a level slope term, premium model and say, oh, well this is all risk premiums and actually expected policy. Once you take into account the risk neutral rates, which is saying the expected path of policy, once we remove all this other noise is actually not inverted, right? The curve is not actually inverted. This is some exogenous…in a 2006, it was about all the sort of money flowing from petro, from oil states in the Gulf. They're the ones who are buying Treasurys. The Chinese are buying Treasurys, they're suppressing the long end of the curve. Otherwise we wouldn't have an inverted yield curve. So there's all these stories we say each time. 

Beckworth: It's different each time. Right? 

Amarnath: It's different this time our estimates show otherwise, but in the end, the market's actually just telling you that they're anticipating that the Fed's going to have to cut or the Fed has a preference to cut. I think he's a little bit of both in this case, right, that they're getting more open minded about the reaction function and the environment does look a bit ominous right now. Maybe not financial crisis level, but it's like financial conditions are still tightening in the sense that credit spreads are widening. We are seeing that signs of risk premium are sort of showing some of that stress a little bit. 

Bell: Now one thing about the December 2018 hike. I think it's interesting to think back to what you were saying earlier in the conversation about the Fed being nimble. I think one of the challenges is in 2018, I mean it seemed like we had the stars aligned for overheating. I mean many Fed officials were talking about the risks of overheating earlier in the year and even into the summer, trade tensions, synchronized global growth, loose fiscal policy, low unemployment. 

Bell: It seemed like... I mean Lael Brainard was talking about a year or two more of hikes. I think she gave that speech in April 2018. So it's a hard pivot to go from that seven months later to actually where we're pausing, right? But I think hopefully the Fed gets that and that's the sort of nimble, I mean, maybe there's a lesson to be learned about predetermining overheating and whatever, but even if you accept that that was a legitimate story, I think there's maybe a lesson and being nimble and being willing to flex between stories. 

Beckworth: Okay. And the time we have left, I want to go back to the Chicago Fed conference. They're having papers presented. It's kind of a who's who of American central banking there. If you been watching the live feed since I'm not there, that's what I've been doing, watching the live feed. I see my colleague Scott Sumner somewhere sitting in the back. 

Beckworth: But I'm here in DC with you guys watching the live feed. Maybe we should go to a sports bar and make it a thing. 

Bell: Yeah. 

Beckworth: In fact I have to mention our listeners Sam is organizing an FOMC watching event at some local bar at some point. The next meeting, right? 

Bell: Yep. The next meeting, I think it's June 18th or 19th. DM me if you're interested, it's going to be an interesting press conference. Maybe they'll cut rates, maybe they won't. But either way it's going to be entertaining. And I figure we all watch it anyway at our computers. Why not be together watching it and talking about it and digesting it together. 

Beckworth: Yeah. We all have that interest in watching FOMC live and doing so together, breaking bread and fellow-shipping. So well going back to the Chicago Fed conference, they've had a number of papers presented and again, you've heard my cynical take on the whole thing. But with that said, there's been some papers presented. Anything of interest that strikes you Skanda about the conference papers? 

Amarnath: Yeah, I think so on a big picture take away while there were some focus on maximum employment and Katherine Abraham's paper itself, I found it interesting. Still I think the focus has been on price stability to the point of there was a paper by Stock, Eberly, Wright about how the Fed could have tried to be more ambitious, but the ability to actually move inflation and inflation expectations would have still been challenged. 

Amarnath: At the same time I think when I said we could have you in certain sort of counterfactuals they wouldn't really have moved the inflation rate, but they could have achieved at least more labor market gains in terms of for a few tenths of a percentage point on the unemployment rate. And it's kind of viewed as a sort of like small thing in the grand scheme of the paper because it's not raising inflation expectations sufficiently. 

Amarnath: And to me to sort of, the mission of our organizations, that's actually still a big deal, right? That you could still get gains in terms of jobs, in terms of people who are earning labor income. That's still a win, right? That's still something that's important to highlight. I'd say obviously one of the other papers is from Lars Svensson is focused on the validity of sort of different inflation targeting approaches. How do you make up for past misses? And again, these strategies are very focused on inflation as if obviously they're all focused on the idea that Fed needs to get inflation up to target and keep it at target to get expectations two percent. I feel like we're still again missing the maximum employment side. We’ve had the Fed persistently and cyclically, I'd argue, bring down their long run unemployment rate projections. 

Amarnath: So the natural rate of unemployment keeps moving down in a rather cyclical manner. So we think about the estimates of structural unemployment are actually moving cyclically. I think that's something that the Fed does need to address. And it's not just a question of a parameter problem. There is some kind of specification problem at play here when you make these kinds of cereal errors. There's not really been much discussion of that. There's some discussion to maximum employment but I think there's still more room for discussion there that I wish we could have had at this conference. 

Beckworth: And that is why we have Employ America. Am I right? 

Bell: That's right. 

Beckworth: All right. Well, our time is up. Our guests today have been Sam Bell and Skanda Amarnath. Gentlemen, thank you for coming on the show. 

Bell: Thank you for having us. 

Amarnath: Thank you for having us. 

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app. And while you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening. 

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.