I’m still in a state of shock after reading the newest PowerPoint slides by James Bullard, sent to me by Bill Woolsey. He seems to think monetary policy was right on target during 2008-09, despite the biggest fall in NGDP since the Great Depression. For some miraculous reason that is not stated, the 4% drop in NGDP between mid 2008 and mid-2009 didn’t cause any unemployment. Rather for some mysterious reason there was a huge downshift in the natural rate of employment, and the natural rate of output. Why did this occur? He doesn’t say. We know it wasn’t housing, as most of the housing collapse occurred well before mid-2008, and was not accompanied by any fall in RGDP, and only a trivial rise in unemployment. Rather for some mysterious reason the trend rate of output and employment in industries all across the economy plunged in 2009. And so there was no “output gap,” we stayed right near full employment, it’s just that the definition of full employment changed radically. Here’s one graph:
And here’s the graph for real GDP:
Even many of the conservative critics of market monetarism concede money was too tight in 2008-09, when NGDP plunged. Bullard says it wasn’t too tight, and the plunge did not raise unemployment. He’s not a conservative, he’s ventured into radical RBC territory. Bullard keeps citing Rogoff and Reinhart. I’d love to hear what they think of what Bullard has done with their model.
Believe it or not I think there might actually be some people at the Fed who are receptive to this view. After all, it suggests the Fed was not to blame. Some sort of financial crisis hit the US in 2008 for reasons having nothing to do with falling NGDP, even though throughout history falling NGDP almost always triggers financial crises (think of the US in 1931, Argentina in 2000, Europe in 2009, etc.) In his view the post-Lehman crisis just happened for some mysterious reason in the fall of 2008, unrelated to the crash in NGDP that began in July 2008.
It’s too bad Bullard could not go back in a time machine and warn FDR against devaluing the dollar in early 1933. After all February and March 1933 saw the worst banking crisis in American history, so trend output must have fallen to a new and lower level. All FDR would get is inflation, with no real growth. And it’s too bad he couldn’t go back in time and warn the Argentines not to devalue in 2002. It would just cause inflation, not real growth.
And finally, we have a graph showing NGDP is right on track:
I do agree with Bullard on one point. If you draw the trend line to reflect wherever the economy happens to be at any given time, then the economy will always be right on track. And how could it be otherwise, as that would imply the Fed had made a mistake. All those stock market investors who (since 2008) seem to suddenly favor higher inflation? They’re simply deluded, they haven’t had the good fortune to study Bullard’s PowerPoint slides.
PS. There’s lots more. He says the price level was way too high in mid-2008, so at the time Lehman failed we needed a deflationary monetary policy to bring prices back to the trend line. Mission accomplished.
PPS. If this is a satirical prank that some grad student posted on the internet to mock the Fed then I apologize to Mr. Bullard for all the snark. If not . . . well I’d rather not even think about that possibility.
Update: Tim Duy sent me an email suggesting that Bullard seems to have abandoned the hp-filter approach he used earlier. See this Tim Duy post for a good discussion of Bullard’s earlier proposal. I think that one was also wrong, but it was somewhat more defensible.