Arnold Kling  

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He writes,


I think that one thing that separates me from other macroeconomists is that I see short run changes in NGDP as being powerfully impacted by changes in future expected NGDP. Thus if the expected level of NGDP one, two and three years out falls sharply, then current NGDP will tend to fall sharply.

This is where he and I disagree. But even if I am correct analytically, I could imagine that we would be better off if the Fed acted "as if" it could and should achieve a target of, say five percent growth in nominal GDP.

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CATEGORIES: Macroeconomics



COMMENTS (6 to date)
DW writes:

Sure it does.

What happens to the activity of the major companies tomorrow if their forecasts for next year suddenly crash?

They cut production. crunch.

Greg Ransom writes:

Thank God at some point builders and producers figured out that consumers and the banks and the financial companies were tapped out of debt and leverage and fake money -- if they continued to pretend that demand was coming from and exchange of real wealth rather than from a fake and impossible promise of an exchange of real wealth the inevitable train wreck in housing and cars and luxury goods and x,y and z would eventually have been twice as big as it already has been.

I'd suggest that Sumner is abstracting from the actual world of actual production process and labor inputs and time coordinated consumption and production decisions.

At some point, if the whole policy machine is aimed at blocking a collapse of a ever growing NGDP consisting overwhelmingly (and ever increasingly) of ever expanding Wall Street leverage and credit empire and a U.S. government spending empire, at some point the phony house of cards of leveraged finance and Goverment spending will engulf the entire economy -- and there will be no remainder real wealth production in the actual economy standing behind artificial facade.

That's were were we were going with 40% of all "economic growth" in the finance industry -- and much of the rest of it in government.

With no wealth production standing behind that -- only negative balance sheet production and luxury consumption -- no wonder we are forced to cut back on spending, we are forced to concentrate on increasing output, we are forced to de-leverage.

I.e. we by necessity must bust down the massive section of "NGDP" consisting of ever expanding Wall Street leverage -- and we have to bust down family consumption even more to pay for the continually expanding government consumption section of "NGDP"..

fundamentalist writes:

A few years ago when I was comparing gdp forecasting models it was clear that they were accurate only for the next quarter. The further out the forecast, the worse it was. I don't understand where Sumner gets his confidence in the Fed's ability to forecast ngdp two or three years out.

Greg Ransom writes:

Try this thought experiment:

Imagine a constantly expanding "NGDP" consisting of an ever increasingly expanding financial sector, with ever increasingly expanding credit and leverage, with ever increasingly expanding Wall Street incomes, with ever increasingly expanding consumer debt on housing, cars, and vacations, and ever increasing expanding debt to foreign nationals, etc., and an "NGDP" were all other production sectors increasingly shrink in size, with the only other grow section of "NGDP" being government spending.

Explain why this isn't the world Sumner would be giving us if the goverment continued to follow his policy vision over the course of this decade and the next. And where would it end?

Philo writes:

@ fundamentalist:

"I don't understand where Sumner gets his confidence in the Fed's ability to forecast NGDP two or three years out." Sumner would have *the market* do this, *via* a futures contract.

@ Arnold:

I think you wrongly dismiss the claim that easy monetary policy would have avoided the financial crisis, reducing the domino effect and the incentive for runs. After all, sufficiently easy money would have produced general inflation above trend, which would have kept even housing prices from falling very much (while other prices were increasing rather sharply). And it would have greatly reduced the rate of default by other borrowers besides mortgagees; widespread actual and expected defaults caused the crisis.

Gandydancer writes:

@ fundamentalist:

"I don't understand where Sumner gets his confidence in the Fed's ability to forecast NGDP two or three years out."

It's not a forecast. It's a target. The Fed is supposed to navigate to the target by buying and selling NGDP futures.

Ransom has, in this thread, identified the basic problem with this. It assumes that the real economy doesn't matter. Sumner's position, as I understand it, is that the recession was caused when the Fed allowed money to become "tight" (as measured by the return on TIPS in late '08), and that the recession would not have occurred had the Fed eased enough at that point. What caused the economy to reach that point is, Sumner says, a forensic question which economists are unsuited to answer. He says, however, that he has the tool which would have kept the economy thrumming happily along, if only it had been used.

This is obviously nonsense. Real misallocation of wealth took place. The government is still at it, in different (and not-so-different) ways, and increasing extent. The economy must, did, and will choke on this. It is not within the power of the Fed to prevent.

@ Philo:

"... sufficiently easy money would have produced general inflation above trend, which would have kept even housing prices from falling very much (while other prices were increasing rather sharply). And it would have greatly reduced the rate of default by other borrowers besides mortgagees; widespread actual and expected defaults caused the crisis."

Housing prices have fallen...what, about 35%? This despite $trillions invested in subsidized mortgages and keeping foreclosure-ready propertys off-market, etc. And ANY drop in prices makes the speculative mortgages of the bubble peak (option ARMs & no-docs) unrefinanceable. So you would appear to need inflation 20% above trend or more to prevent the mortgage crisis. A cure worse than the disease, I think, and properly dismissed.

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