NGDP Targeting is NDG

The latest craze in manipulating the economy comes via Goldman Sachs. They propose that the Federal Reserve target Nominal Gross Domestic Product. GS writes:

With short-term interest rates near zero and the economy still weak, we believe that the best way for Fed officials to ease policy significantly further would be to target a
nominal GDP path.. indicating that they will use additional asset purchases to help bring actual nominal GDP back to trend over time.The case would strengthen further if deflation risks reappeared clearly on the radar screen.

Aside from the fact that NGDP is issued only roughly 25 days after a quarter, and then revised twice, the proposal, of course, ignores the fact that the Fed shouldn't be manipulating the money supply in the first place. That manipulation is at the heart of the business cycle.

But there are all kinds of levels to nuttiness to the targeting of NGDP. CFR economist Amity Shales explains another:

In practice, NGDP targeting means the Fed will create money by a variety of methods, such as purchasing bonds, until the U.S. growth rate hits the magic level on paper. The extra money pours into the hands of consumers and companies, who spend. Voila: 4.5 percent growth.

The “on paper” part is important. “Nominal” means the Fed may disregard, at least for the moment, what share of that growth is real and what share is inflation... Everyone wants stronger growth. By “4.5 percent growth,” however, we generally mean real growth. Under NGDP targeting, it’s possible for the Fed to get a growth rate of 4.5 percent, of which 3.5 percentage points are inflation and only 1 percentage point real. That hardly accords with the spirit of the line in the Fed statute about increased production.
In short, the big vulnerability of NGDP targeting is that it’s a license to inflate.

Got that? Goldman wants the Fed to target a GDP number that can be, for all practical purposes, simply price inflation.

Again, it should be kept in mind that the Fed doesn't do anything to increase growth in an economy. It merely shifts the flow of funds to different sectors, but to openly target price inflation via Nominal GDP growth as some kind of progress is really as absurd as it gets.