Our GDP numbers are notoriously unreliable, so keep that in mind as you read the following. There are two ways of estimating GDP; income and expenditure. The income numbers are considered more reliable, so naturally the press ignores them and reports the expenditure numbers. The estimated expenditure growth rate fell from 4.4% in the 3rd quarter to 3.2% in the 4th quarter. The income numbers aren’t in yet, but from preliminary data it looks like GDP growth increased from 2.6% in the 3rd quarter to about 4% in the 4th quarter.
BTW, you notice I don’t specify “real” or “nominal” GDP. Obviously when people don’t specify an economic variable, they mean nominal. If you mean real wages or real interest rates, you say so. That’s how it should be for GDP. If it was, perhaps the Great Recession would never have happened.
So the mystery of the slow recovery continues to be no mystery at all. Tight money hasn’t allowed the sort of robust NGDP growth you’d need for a brisk recovery. Period. End of story.
Or at least it should be the end. In the comment section people complain I’m merely stating a tautology, as a fall in NGDP is a recession. No it’s not. Zimbabwe had the fastest NGDP growth in the world a few years back, and was deep in recession.
A more sophisticated argument is that the correlation between NGDP and RGDP doesn’t imply causation, and/or the Fed can’t control NGDP.
There have been a variety of natural experiments throughout US economic history that show how NGDP shocks impact RGDP. A sudden fall in NGDP that is due to a decline in the monetary base (say 1920-21, or 1929-30) will also tend to reduce RGDP. When an expansionary shock like dollar devaluation raises NGDP, then RGDP also tends to rise. That does not mean they are always correlated—as we saw in Zimbabwe, supply shocks can also impact the economy.
As far as the Fed’s ability to control NGDP, I don’t see how that can be seriously questioned. Economic theory says that permanent increases in the (non-interest-bearing) monetary base are inflationary. And there is no example in all of world history where a fiat money central bank tried to inflate and failed.
To summarize, the Fed can control NGDP, and a more stable path for NGDP will produce a more stable path for RGDP. The best post showing that link was produced by Marcus Nunes (graphs 11&12).
Marcus also pointed to a recent NGDP targeting endorsement by John Quiggin. Naturally I agree with him, but at the risk of seeming picky I’m going to contest one small part of Quiggin’s essay:
Last but not least, a nominal GDP target would create room for fiscal policy as well as monetary policy. What is needed now is the abandonment of counterproductive austerity policies as a response to the slump in Europe and the US. Austerity should be replaced by a combination of short-term fiscal stimulus and long-run measures aimed at a sustainable budget balance. That can only be achieved if central banks co-operate with pro-growth fiscal policy, instead of seeking to counteract it in the name of inflation targets.
He’s right that inflation targeting makes fiscal stimulus ineffective. But I’m afraid the same applies to NGDP targeting. The good news (as Nunes pointed out) is that fiscal policy is not needed if central banks target NGDP.
Bill Woolsey sent me a very nice NGDP endorsement from Sven Wilson at the website PileusBlog.com.