Ezra Klein recently included this blog in his annual awards:
Most influential-yet-obscure economic blogger: Scott Sumner. Be honest, how many people had even heard of Nominal GDP level targeting before this year? No one. But as the economy stagnated, and policymakers seemed increasingly incapable of mitigating the pain, many analysts started reading Sumner’s blog with interest. So far, the Federal Reserve has rejected his idea for NGDP target—under which the Fed would essentially target a combination of real output plus inflation rather than focus on curbing inflation alone—but the notion has attracted support from everyone from Paul Krugman to Tyler Cowen to Goldman Sachs. And much of that has to do with Sumner’s near-monomaniacal focus on the topic.
Klein presumably included the term “near” as a courtesy; I’m obsessively monomaniacal about NGDP.
Back around 2007 the US had lots of problems; income inequality, a rapidly declining home building sector, and according to some we were already well into The Great Stagnation. But one problem we didn’t have is high unemployment. Indeed unemployment was still only 4.9% in April 2008, by which time the great home building crash was already 70% over.
In the long run NGDP is of no importance at all; Japan’s NGDP is nearly 40 times larger than America’s. But sudden unexpected changes in NGDP matter a lot. Because nominal wages are sticky, a sudden downshift in NGDP growth will cause fewer hours worked and (except in Germany) a sudden upswing in the unemployment rate. More than enough reason for me to be monomaniacal about NGDP.
But there’s more, debt contracts are also denominated in nominal terms. During most recessions that’s not a big problem. However this time around there were two factors that made the NGDP downshift have a much bigger impact than usual. First, the decline in NGDP growth was unusually large. And second, both debtors and financial institutions were already greatly stressed by the sub-prime fiasco, even before the NGDP crash occurred. The NGDP crash then made the debt crisis much worse.
When I made this argument in early 2009 I don’t recall finding many takers. It seemed obvious that “the” debt problem was due to reckless practices of US banks and GSEs. But then the crisis spread out of the sub-prime ghetto and engulfed other types of real estate debt. Then municipal debt came under stress. And now we have the euro-debt crisis. Is it just a coincidence that all these separate debt crises flared up at about the same time? Is it just coincidence that they all occurred just after the biggest drop in NGDP since the Great Depression? Given that economic theory predicts that a sudden drop in NGDP growth will make it much harder to repay loans, my monomaniacal focus on NGDP doesn’t seem quite as crazy as in early 2009.
HT: Tyler Cowen, David Levey, Christopher Mahoney