Optimal policy rules and close substitutes

About 20 years ago I published a paper arguing that the Fed should use futures markets to target a nominal hourly wage index.  The intuition was as follows:

1.  Recessions are basically sub-optimal employment fluctuations.  They occur due to sticky wages.

2.  When the aggregate wage rate falls, the wage rate rises above its equilibrium value.  That’s because some wages are sticky.  So when wage growth declines (as in 2009) equilibrium wage growth is falling even more sharply, but some wages are sticky.  Hence (paradoxically) the average wage level is actually “too high.” The opposite is true when wage growth accelerates.

3.  In a large diverse free market economy, the law of large numbers assures that a monetary policy that keeps average hourly wage growth steady is likely to keep aggregate nominal wages close to the equilibrium level (think of “equilibrium” here as being analogous to the Wicksellian equilibrium interest rate.  The one that provide macro stability)

4.  More recently Greg Mankiw and Ricardo Reis reached a similar conclusion, for similar reasons, but much more rigorous modeling.

I’ve never seen an hourly wage target as being politically feasible, so I gravitated toward NGDP targeting, which had already been proposed by people like Bennett McCallum, and seemed most likely to replicate the good effects of a wage target. Here is how they are similar:

1.  Suppose you target nominal wage growth at 4%.  Now assume that the public’s preferred growth rate of hours worked is pretty steady, say about 1%/year.  Then a policy targeting 5% growth in aggregate nominal labor compensation should get you similar results.  Even better, it is much easier to measure, because many jobs do not have hourly wage rates.  So it might be better.

2.  And a NGDP target is likely to be similar to a total labor compensation target, as labor compensation is much more than 50% of GDP, and other key components like depreciation and indirect business taxes are non-volatile.

Those who find a wage target unrealistic, or who reject sticky wage models because of a misreading of the wage cyclicality data, are likely to move in a different direction, toward inflation targeting. And yet the logic of stabilizing the stickiest prices is so powerful that they may not move all that far away.  Here is Miles Kimball:

Since oil prices are flexible, the quickest way to get to the relative prices that will prevail in the medium-run is to have those flexible oil prices adjust, while the short-run price index emphasizing sticky prices stays unchanged. (This is why I am in favor of the Fed’s emphasis on “core inflation,” though I think the Fed does too little to focus on the especially important prices associated with especially interest-rate-sensitive goods.)

At first glance a core inflation target seems quite different from a NGDP target. But I see both as imperfect compromises–substitutes for wage targeting.  Indeed core inflation is heavily influenced by wage inflation, as it excludes the prices that most strongly deviate from wage inflation–food and energy.

Why do I trust NGDP more than core inflation?  I don’t think the inflation rate measured by the government is a particularly good proxy for the inflation rate that produces macroeconomic stability (when stabilized.)  Indeed Kimball alludes to that problem with his comment on interest rate sensitive goods.  Between 2006 and 2012 the core inflation rate showed housing prices rising about 10%, and housing is 39% of the core index.  Over the same period Case-Shiller showed housing prices falling 35%.  The official index looks at rental equivalent, not the price of newly constructed homes. Which one better explains what was happened to housing output?  Or employment in housing construction?

In an imperfect world I trust NGDP much more than core inflation, partly for reasons identified by Kimball:

Actually, contrary to conventional wisdom, I am not persuaded that there are many events commonly called “recessions” that have supply-side causes, except when supply shocks led to inappropriate monetary policy responses.

I agree.  NGDP includes RGDP growth, which is (by definition) highly cyclical.  The NGDP signal would have definitely told the Fed that money was too tight in 2008-09.  The core inflation signal?  Yes, but to a lesser extent.  And when you get to level targeting there is the possibility of mischief.  Core inflation had previously overshot the target, and thus a passive central bank could excuse inaction with a core inflation rate that had fallen 1% below trend in 2009 much more easily that a central bank with a NGDP target.  NGDP had fallen 9% below trend between 2008:2 and 2009:2. Note that the Fed’s preferred PCE inflation rate has averaged almost exactly 2% since June 2003. But only 1.2% since July 2008.  And if you don’t do level targeting of core inflation, there is the possibility of a Japanese situation, where year after year they claim they tried but failed to achieve price stability.

The case for NGDP is very much a pragmatic case.  You won’t find any DSGE models spitting out “NGDPLT” as the answer.  It’s a good compromise target that is robust to a wide range of flaws in our models, and our monetary policy apparatus.

BTW,  Miles Kimball’s post was a reply to a very good Bill Woolsey post.  Here’s an excerpt from the Woolsey post:

While I wouldn’t describe this as a reason why the price level should be kept stable, I might see this as a reason why stabilizing the growth path of wage income is better than stabilizing total nominal income.   Glasner and Sumner both have argued for stabilizing the growth path of a wage index for much the same reason.  These are the sorts of reasons why most of us understand that nominal GDP level targeting is not perfect, just better than inflation or price level targeting.

Exactly.

Jeffrey Frankel also sees NGDP as a robust target:

This is yet another instance of a long-standing point: if central banks are to focus attention on a single variable, the choice of NominalGDP is more robust than the leading alternatives. A target or threshold is a far more useful way of communicating plans if one is unlikely to have to violate it or explain it away when things change later.

PS.  I have a new post over at Econlog that is loosely related to this one.

PPS.  Here is a presentation that I did at an IEA conference in London.


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42 Responses to “Optimal policy rules and close substitutes”

  1. Gravatar of ZHD ZHD
    15. February 2014 at 20:09

    Scott have you considered outsourcing the contract specifications for the NGDP product to someone who knows about trading?

    It’s been a while since I took a look at how you designed the product, but I rememberit being pretty dismal.

    have you thought more about it?

  2. Gravatar of lxdr1f7 lxdr1f7
    15. February 2014 at 20:28

    “I don’t think the inflation rate measured by the government is a particularly good proxy for the inflation rate that produces macroeconomic stability (when stabilized.)”

    What if the core inflation index was rectified so it included price of new homes instaed of rental equivalent. Do you still think NGDP targeting would be superior to inflation targeting if the inflation measure was improved?

  3. Gravatar of TravisV TravisV
    15. February 2014 at 20:54

    Could someone please explain Prof. Sumner’s argument below to me?

    http://www.themoneyillusion.com/?p=3316

    “The failed Fed open market purchases, which were cited by Keynes in the GT as an example of a liquidity trap (called absolute liquidity preference in the GT) were actually an example of the constraints of the international gold standard.”

    Fascinating but very difficult to understand.

  4. Gravatar of Major_Freedom Major_Freedom
    15. February 2014 at 21:16

    Why is unemployment “suboptimal”? I would think that it is optimal for workers to move from lines of work no longer worthwhile and sustainable, to those lines that are, which of course is associated with temporary increases in unemployment, as it takes time for people to learn, plan, and execute new business ventures.

  5. Gravatar of Tom Brown Tom Brown
    15. February 2014 at 21:37

    TravisV, I’m afraid I can’t help you, but thanks for posting that link. That was really interesting. Did that post precede the invention of the name “Market Monetarist?”

  6. Gravatar of Morgan Warstler Morgan Warstler
    15. February 2014 at 21:55

    This is Scott from Econlog

    “3. The third problem with the Fed policy is that inflation is the wrong target, they should target NGDP growth, level targeting. It turns out that the NGDP growth rate that kept inflation right at 2% over the past 10 1/2 year was only 4%, well below the 5.4% rate of 1990-2007. And yet, at the very moment when they needed to downshift NGDP growth to 4% to keep inflation on target, the Fed upshifted to more than 6.5% NGDP growth during the housing boom of 2003-06.

    The third mistake allows us to better understand the mild dispute between some market monetarists over whether Fed policy was too tight in 2003-06. David Beckworth says yes, growth was above 5%. Marcus Nunes says no, there was some catch-up from the 2001 recession, and it’s level targeting that matters.

    In my view there is no answer to this question. If the Fed had continued along the level target path that Marcus suggests, then he would have been right, the policy would have been fine. Given the Fed wanted 2% inflation, Beckworth’s advice would have been better in retrospect. If the Fed went even further and switched to 4% NGDP growth in 2003, then the recovery would have been agonizingly slow, John Kerry would have won Ohio and the Presidency in 2004, and there would have been no Great Recession of 2008. It would have looked like a bad Fed policy in retrospect because of the very slow recovery. The policy would have been condemned by many people, but it would have been far superior to the actual policy.”

    Scott first, is GREAT you finally are looking at this time, the 4% from 2003 onward was exactly right.

    Bush would have been fine.

    TECH WAS COMING BACK BY 2004.

    That’s my second point, the real story here that needs to be understood is:

    95-2000 – Internet goes boom

    2000-2003 tech needed to get our bearings

    2004 to 2008 – tech is fine.

    2009 – tech deals with crisis better than any market

    2009 till now – tech has become now the dominant sector of the economy

    2014 onward tech takes over everything: agriculture, transportation, mining, government

    —–

    Tech nearly ruins GDP measures. It’s virtually impossible for someone to credibly argue GDP accurately reflects quality of life.

    Tyler was wrong. And we all now know it.

    EVERYONE chooses smartphones over toilets, they choose them over cars, and airplanes.

    In the past 6 years, the top #1 invention of all time since fire has been discovered and distributed to 1B people.

    And with it, we’ll now use it to change how people do EVERYTHING

    And every single change will require less middlemen, less velocity, and will leave more people unable to cover their old way of life, they will need to work, but they will need wage subsidies.

    Every movie, song, game, lecture, 3D printing design – all for free.

    No office buildings, government buildings, personal cars, college debt, government debt – no where for capital to go and get a return.

    The ONLY real high ROI investments will be the tech ones which are more deflationary than the last.

    There’s NO REASON not to say:

    1990-2005: 5.4%
    2003-today 4%
    today till 2026 – 2.3% GDP
    and then 1%.

    If you imagine that capital has to slowly unwind, because ALMOST ALL REAL GROWTH is negative GDP.

    NGDPLT is still the right answer. Because RGDP is a real negative number.

    Meaning “it’s amazing college is free!” = smaller GDP

    “it’s amazing we don’t buy 1/3 of the cars we used to” = smaller GDP

    The only insane thing is setting the target too high – we need inflation JUST TO KEEP NGDP AT $18T.

  7. Gravatar of Tom Brown Tom Brown
    15. February 2014 at 21:59

    re: Travis’ link to early-Sumner-blogging… I’ve never seen so many unqualified Sumner references to “bubbles” … if I didn’t know better I would have assumed that in 2009 he thought they actually existed.

  8. Gravatar of James in London James in London
    15. February 2014 at 23:26

    Slightly off topic. What if a country’s major businesses and government adopts inflation indexation of wages? Not so common in the US, but fairly common elsewhere.

  9. Gravatar of Prakash Prakash
    16. February 2014 at 03:53

    Prof Sumner, quick question, Do you prefer nominal average wage targeting or nominal median wage targeting?

  10. Gravatar of Benjamin Cole Benjamin Cole
    16. February 2014 at 06:07

    Excellent blogging.

    As a practical and political matter, I think it is better to be roughly right with NGDP targeting, than leaning the wrong way with any other policy.

    Both the left- and right-wing will go bananas if they think you are 1) propping up wages, or 2) using inflation to cut wages. Better to sidestep that miasma.

    Really, with NGDP targeting the serious flaw is this: Will the Fed still be too tight, and constantly undershoot, or shoot accurately but for a too-low target (as in 4 percent NGDP growth resulting in 2 percent real growth, when 3 percent is doable).

    The culture of the Fed is very much attuned to obtaining a zero inflation rate. They can do that with NGDP targeting too–just shoot really low.

  11. Gravatar of ssumner ssumner
    16. February 2014 at 06:47

    ZHD, Although the market is called a futures market, it’s actually a prediction market. Someone needs to be willing to subsidize the market. But anyone is free to set it up if they wish.

    lxdr, Probably, but the advantage would be smaller.

    Travis, It wasn’t that more money failed to boost GDP because of the zero bound, it was because open market purchases failed to boost M because of an outflow of gold.

    Morgan, To be more specific, 4% is a fine target path, but if they wanted to do that they went about it in the wrong way. 5% would also have been a fine target path, if they’d kept it up.

    Tom, Even in 2009, when I said bubble I meant “bubble” with scare quotes.

    James, I would help some, but would not completely solve the problem.

    Prakash, Haven’t given that much thought, I’m not sure. My first hunch would be median, to maximize the number of workers whose wage is near the equilibrium wage. What do others think?

  12. Gravatar of Morgan Warstler Morgan Warstler
    16. February 2014 at 07:35

    Scott, I know your point I get it.

    And I agree with you on the larger subject, what I don’t agree with it:

    “Any target path is ok”

    What I’m trying to get across is, a point that bond guys I talk to all seem to get right away, and econ guys all just let it float by:

    There’s nowhere left to put the money.

    I don’t mean there aren’t any good investments, I mean that the best investments, that deliver the highest returns, reduce the need for capital in the future at a macro level.

    Bond guys are chasing returns, they live and die on paper and derivatives from govt. borrowing, edu loans, home loans, commercial office loans, car loans…

    The DEMAND for loans is decreasing bc LOANS are backed up by ATOMS, first position collateral is physical assets, yes there are derivatives, insurance, based on financial assets, but if you dig down you eventually run into SOMETHING ATOMIC. Even the government, with the power to tax, is literally promising to take physical assets from you to pay debts, if you stop working, they can drain your bank account.

    But every year, more and more of our investments are DIGITAL.

    And there’s NO real digital property. You literally cannot “own” digital stuff. We can discuss this later, but for a second just grant it.

    This isn’t any collateral behind digital businesses – they are paid for in cash, equity is sold off, LOANS don’t really factor into them.

    Anyway, I think you think this sentence can’t logically be said:

    Most Real Growth now shrinks RGDP.

    I know you know that “some” productivity gains are deflationary, but I think you assume OVERALL RGDP is a positive nominal thing.

    Here’s my question to try and sort this out…

    If we add up annual NGDP since 1929:

    https://docs.google.com/spreadsheet/ccc?key=0Ane2Ben-R2XZdFloLUF4bHB6VUFDSDV6RUllMWlpTEE&usp=sharing

    $339 Trillion

    Now this is RGDP same period chained to 2009 dollars:

    $530 Trillion

    How is it that we think the total overall Real Growth in today’s dollars is LARGER, than the total of Nominal GDP which includes all that inflation?

    It seems like Real GDP is a negative number, no?

    Did $530T in RGDP (weighted for inflation) lose $191T when we count nominally?

    Could that be $530T in Inflation and -$191T in RGDP?

  13. Gravatar of TravisV TravisV
    16. February 2014 at 08:43

    Woo!

    Jan Hatzius: “The Fed Should Target Wage Growth Instead Of Inflation”

    http://equitablegrowth.org/2014/02/16/1951/lunchtime-must-read-sven-jari-stehn-and-jan-hatzius-fed-should-target-wage-growth-business-insider

    http://www.businessinsider.com/goldman-fed-should-target-wage-growth-2014-2

  14. Gravatar of TravisV TravisV
    16. February 2014 at 08:54

    Boo!

    Larry Summers: (@LHSummers)
    2/16/14, 9:31 AM
    “We would be doing much better if the spur to economic growth was coming from govt spending.” Inter w @FareedZakaria airs again at 1pm @CNN

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. February 2014 at 09:38

    TravisV,
    I had forgotten all about Scott’s “Austrian zeitgeist” post. In retrospect it was a truly great one.

    Alas, over four years later the Austrian zeitgeist is still with us.

    Today I noticed the following line in Pragmatic Capitalism:

    http://pragcap.com/5-things-to-ponder-cash-qe-investing-1929

    “The hope is that by stimulating more borrowing and spending, lower interest rates can jumpstart the economy.”

    This was part of a summary of Yellen’s February 11th Semiannual Monetary Policy Report to the Congress that Lance Roberts copied from Bill King. Where did Bill King get it?

    Five days ago that line was released as part of a CNN news story:

    http://www.ozarksfirst.com/story/d/story/yellen-too-many-americans-remain-unemployed/14965/DNibfaiCD0eAMabczTqpYg

    Evidently Bill King just cut and pasted the line from CNN.

    (Incidentally my cat can write better news copy than the financial “journalists” working for CNN. And as for investment “analysts”, evidently they just cut-and-paste their “analysis” from financial “journalists” and other investment “analysts”, so beware.)

    Within three days Lance Roberts’ post, which of course included Bill King’s cut-and-paste summary, was up and was posted by Zero Hedge. (Naturally.) A day after that Investment Watch posted that summary line with the headline “Economy Dead. RIOTS in Every Major City!”

    By now of course Austrian heads are exploding everywhere, because they’ve read that Yellen thinks *more borrowing* will jumpstart the economy.

    But here’s the thing. Go and actually read Yellen’s formal testimony for yourself. Yes, she says:

    “Prior to the financial crisis, the FOMC carried out monetary policy by adjusting its target for the federal funds rate. With that rate near zero since late 2008, we have relied on two less-traditional tools–asset purchases and forward guidance–to help the economy move toward maximum employment and price stability. Both tools put downward pressure on longer-term interest rates and support asset prices. In turn, these more accommodative financial conditions support consumer spending, business investment, and housing construction, adding impetus to the recovery.”

    That’s standard boilerplate for a room full of half interested US congresspeople. But nowhere, and I mean NOWHERE, does she explicitly say anything about *more borrowing*.

    The Austrian zeitgeist means people will see and hear what they want to, no matter what.

  16. Gravatar of TravisV TravisV
    16. February 2014 at 09:39

    Economist Debate: Should we restrict the growth rate of cities?

    http://www.economist.com/debate/days/view/639

    Remember: Lorenzo from Oz had a very insightful comment about this!

    http://www.themoneyillusion.com/?p=26140#comment-318563

  17. Gravatar of TravisV TravisV
    16. February 2014 at 09:43

    Noah Smith on a debate between Krugman, Chris House and Stephen Williamson:

    http://noahpinionblog.blogspot.com/2014/02/is-macro-doomed-to-always-fight-last-war.html

    “This seems to be the overwhelming consensus in academic macro these days. It seems obvious to most people that the Great Recession was caused by stuff that happened in the financial sector; the only alternative hypothesis that anyone has put forth is the idea that fear of Obama’s future socialist policies caused the recession, and that’s just plain silly.”

    What about Scott Sumner’s alternative hypothesis: tight money?????

  18. Gravatar of TravisV TravisV
    16. February 2014 at 10:03

    Mark Sadowski,

    Reading the comments section to this post makes me nostalgic! Here are a couple things you said:

    http://www.themoneyillusion.com/?p=3316#comment-11413

    “It will take me a little time to render my minor and (possibly from your viewpoint) insipid verdict. We here are currently stuck in a blizzard. I’m busy stuffing logs in our fire place. Talk to you later.”

    And there’s this: http://www.themoneyillusion.com/?p=3316#comment-11456

  19. Gravatar of John Becker John Becker
    16. February 2014 at 11:44

    Scott,

    You said “NGDP had fallen 9% below trend between 2008:2 and 2009:2. ” Well yeah, but NGDP had also been above trend from 2003-2008. A central bank could say that the contraction was a return to a 5% growth trend. It all depends how far back you wanna say they should have started the trend. If you say 1968, we could be in for a very long period of low NGDP growth to get “back to trend.”

  20. Gravatar of Major_Freedom Major_Freedom
    16. February 2014 at 12:10

    Mark Sadowski:

    That’s standard boilerplate for a room full of half interested US congresspeople. But nowhere, and I mean NOWHERE, does she explicitly say anything about *more borrowing*.

    “Prior to the financial crisis, the FOMC carried out monetary policy by adjusting its target for the federal funds rate. With that rate near zero since late 2008, we have relied on two less-traditional tools-asset purchases and forward guidance-to help the economy move toward maximum employment and price stability. Both tools put downward pressure on longer-term interest rates and support asset prices. In turn, these more accommodative financial conditions support consumer spending, business investment, and housing construction, adding impetus to the recovery.”

    It’s right there Mark.

    “Asset purchases” are made to increase lending.

    “Supporting business investment” means more lending.

    Just because Yellen didn’t explicitly say the term “borrowing”, it doesn’t mean her preferred policies do not consist of more borrowing. You have to look at people’s actions, not just their words.

    But apart from this, if more borrowing did not result from more Fed inflation, then that would mean that the entirety of money that leaves the banking system, must take the form of something other than lending. What are the odds of the Fed buying asset upon asset from the banks, and the banks not lending a single dollar more? It’s not likely. The kind of “stimulus” Yellen has in mind, whether she understands it or not, and whether you understand it or not, is more lending from the banks.

  21. Gravatar of Cory Cory
    16. February 2014 at 12:30

    Professor Sumner,

    You mention that you don’t think a wage target could be politically achievable. I imagine this is because people might say this is the Central Bank centrally planning wage growth or something along those lines.

    However, suppose we eliminate the hodge-podge welfare state and adopt something similar to Morgan Warstler’s Guaranteed Income scheme.

    We might suggest that the Guaranteed Income distribution is supposed to target some level of non-discretionary income. Seems to me, that a target of “nominal non-discretionary income” through this Guaranteed Income scheme might be politically feasible as it is sold as a guaranteed rise in non-discretionary income as opposed to some kind of “centrally planned” limit on aggregate nominal wage growth (or whatever else detractors would say)?

  22. Gravatar of Morgan Warstler Morgan Warstler
    16. February 2014 at 13:12

    The commenters at this blog are geniuses. Cory welcome!

    Mark,

    Can you please look at the google doc I linked to and tell me why you think CPI Weighted RGDP is $191TRILLION more than NGDP since 1929.

  23. Gravatar of Don Geddis Don Geddis
    16. February 2014 at 13:55

    MF(/Geoff): You’ve raised your silly unemployment scenario numerous times in the past, it’s been explained to you each time why it’s not relevant to the current economy, but you continue to state it again and again, as though it were a new thought that nobody had considered before. Can you at least pretend that you’re capable of learning something from day to day, and the conversation might progress?

    Re: borrowing. You misunderstand the monetary transmission mechanism. It’s the HPE across the economy, not increased lending from banks. But since you can’t imagine any other mechanism, of course you misinterpret Yellen’s words, via the only macro model you seem to understand.

  24. Gravatar of Major_Freedom Major_Freedom
    16. February 2014 at 14:12

    Don Geddis:

    “You’ve raised your silly unemployment scenario numerous times in the past, it’s been explained to you each time why it’s not relevant to the current economy”

    Each time it’s been “explained” there have been problems and errors. It is by the way “relevant”, as I have explained multiple times.

    “but you continue to state it again and again, as though it were a new thought that nobody had considered before.”

    You keep repeating the same claims without substantiation, as if they can be so substantiated with enough repeating.

    “Can you at least pretend that you’re capable of learning something from day to day, and the conversation might progress?”

    Look in the mirror.

    “Re: borrowing. You misunderstand the monetary transmission mechanism. It’s the HPE across the economy, not increased lending from banks.”

    It gets “across the economy” mainly by bank lending. That is the main transmission mechanism of inflation. The Fed increases reserves, and those reserves become either direct sources of lending, or the insurance for making new loans unbacked by existing deposits.

    You misunderstand our banking system. Lending is the overwhelming mechanism by which the banks bring about more money and spending.

    “But since you can’t imagine any other mechanism, of course you misinterpret Yellen’s words, via the only macro model you seem to understand.”

    Since you don’t understand the inflation transmission mechanism, it’s no wonder you can’t see more borrowing in what Yellen said.

  25. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. February 2014 at 16:07

    Morgan,
    The numbers in your spreadsheet are all off by minor amounts but of course that’s entirely beside the point.

    The magnitude of RGDP over 1929-2013 relative to NGDP depends on the base year used. For example, if you use 1929 prices (CPI) then RGDP from 1929 through 2013 totals about $46.4 trillion which is less than the NGDP sum of $339.3 trillion.

  26. Gravatar of Jason Jason
    16. February 2014 at 17:35

    Random Bennett McCallum related: the other day I used his “QTM = homogeneity of degree zero” alongside some physics to motivate a pretty good model of the price level:

    http://informationtransfereconomics.blogspot.com/2014/02/i-quantity-theory-and-effective-field.html

    Essentially, P ~ b MB^(b-1) with b ~ 1.4 to 1.6. (In a follow up I use the EMH to justify the same results.)

  27. Gravatar of Morgan Warstler Morgan Warstler
    16. February 2014 at 20:28

    I understand that, but this is weighted to 2009. If I could have found it weighted to 2013 I would have used it.

    Shouldn’t at 2013 weighted the numbers be the same? Precisely bc in 1929, thats as far off as they could be?

    The NGDP # for each year includes inflation.

    Doesn’t weighted RGDP for each year: remove the inflation for that year and remove the nominal inflation of all years since?

    And how is it possible to have MORE total RGDP than NGDP even if weighted? Doesn’t that mean the weighting is broken?

    Shouldn’t it be $46.4T weighted to 1929 dollars
    And close to $339.3T weighted to today?

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. February 2014 at 04:46

    Morgan,
    “Doesn’t weighted RGDP for each year: remove the inflation for that year and remove the nominal inflation of all years since?”

    It assigns a value to the output for a given year in terms of the dollars of the base year.

    “And how is it possible to have MORE total RGDP than NGDP even if weighted?”

    For the sake of argument let’s say we were using 2013 dollars. The purchasing ability of 2013 dollar is less than in any previous year. Thus the RGDP in any previous year is greater than its corresponding NGDP. Consequently the sum of RGDP in 2013 dollars must exceed the sum of NGDP.

    “Doesn’t that mean the weighting is broken?”

    No, it’s working exactly as intended.

    “Shouldn’t it be $46.4T weighted to 1929 dollars
    And close to $339.3T weighted to today?”

    To get the RGDP values and NGDP values to be approximately equal you would need a base year in which the aggregate price level is equal to the average price level for all the output produced from 1929 through 2013. The closest base year that I can find is 1989.

  29. Gravatar of Morgan Warstler Morgan Warstler
    17. February 2014 at 11:20

    What I’m trying to understand if we have an index of 100 in year 1, we are measuring NGDP we have both inflation and RGDP, then the following year we are at say 102 on index, but now when we measure RGDP we are using dollars inflated into NGDP, and so on into future.

    So was your first answer what I’m looking for? What is the sum of RGDP (without any inflation) weighted to 1929? is $46.4T?

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. February 2014 at 11:30

    Morgan,
    “So was your first answer what I’m looking for? What is the sum of RGDP (without any inflation) weighted to 1929? is $46.4T?”

    Yes, I think so.

  31. Gravatar of ssumner ssumner
    17. February 2014 at 16:58

    John Becker, What matters most is the trend line that was expected when wage and debt contracts were signed. The 1968 trend line doesn’t matter in that sense.

    Cory, Sorry, I don’t follow that. Do you want the Fed or the Treasury to target the guaranteed income?

  32. Gravatar of Morgan Warstler Morgan Warstler
    17. February 2014 at 17:10

    US States should deploy GI/CYB online with settings appropriate to their geography, skills, unique cultural, etc.

    If we do GI/CYB we won’t need Fed for unemployment.

    We’ll need Fed to keep some low amount of NGDPLT, like 3% now, while we continue to unwind capital markets.

    To support GI/CYB, the fed should use the futures market first and foremost as a transmission mechanism that allows SMB owners – like the ones hiring lots of GI/CYB labor to hedge monthly.

    This will be helpful bc the Fed needs to learn to run MP without buying T-Bills.

  33. Gravatar of Morgan Warstler Morgan Warstler
    17. February 2014 at 17:15

    Mark,

    I have a big favor to ask, could you show me RGDP since 1929 weighted to 1929?

    My general thesis is that RGDP is a negative #, or is becoming one as each new profitable digital investment makes more things free as atoms become unnecessary.

    Meaning Real Growth isn’t just deflationary, It deletes it from the paradigm. Free things cannot be be counted in dollars.

    Instead we could cap NGDP, and every year be printing money just to keep NGDP from shrinking.

  34. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. February 2014 at 18:10

    Morgan,
    It’s no problem at all. Here’s a FRED link to RGDP scaled to 1929 CPI:

    http://research.stlouisfed.org/fred2/graph/?graph_id=161261&category_id=0

    I assume you have Excel. Personally I would use the GDP implicit price deflator rather than CPI but this is your project.

    If you want I can also cut and paste the data into a comment. I would recommend getting a FRED account of your own for stuff like this. All you need is an email address.

  35. Gravatar of Morgan Warstler Morgan Warstler
    17. February 2014 at 19:13

    Thanks!

    https://docs.google.com/spreadsheet/ccc?key=0Ane2Ben-R2XZdFloLUF4bHB6VUFDSDV6RUllMWlpTEE&usp=sharing

    I think I got it right. Let me know if I missed it.

    Again it most unsatisfying as much as to to piss me off;

    I’m concerned with 96 onward.

    What I wanted to see is that the way the count RGDP, leaves them with small gains recognizing that they more free being consumed.

    Instead its like they put a high price on free, which is not allowed. Free is zero or negative, and there should be something that breaks when free enters the picture, and I can’t find it.

  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. February 2014 at 05:53

    Morgan,
    To be frank I don’t really understand what you are trying to do. But the math appears to be all correct.

  37. Gravatar of John Becker John Becker
    18. February 2014 at 06:56

    Scott,

    How the heck do you determine “when wage and debt contracts were signed?” There a new debt contract signed every time someone swipes a credit card. Which of these transactions is most relevant for selecting the trend line? NGDP expectations would probably be slightly different at almost every credit card swiping!

  38. Gravatar of Morgan Warstler Morgan Warstler
    18. February 2014 at 09:34

    Mark,

    Think about Tyler’s argument about Great Stagnation:

    – wages stagnant since 1970’s
    – all the good inventions (low hanging fruit) taken

    I of course scream WTF, the Internet & smartphone is greatest human invention of all time. And overtime we find out people agree, they’ll give up all tyler’s favorite inventions to use mine.

    But, I also assume that all things digital eventually are free except for energy costs, and all things atomic eventually cost next to nothing.

    So I think RGDP, counted in dollars, basically has to shrink bc the the total amount spent for X stuff is decreasing, and the hunan value of X is increasing, but we can’t measure it since it costs nothing.

    Imagine I got paid for every tweet I sent, and paid someone else for every tweet I read. That’s what paper and ink used to be. Now I consume and produce 1k’s more and if we priced it at paper and ink from way back when, GDP would be MASSIVE.

    This isn’t just passing money back and forth to inflate GDP, this is recognizing that ATOMS are the key point of GDP.

    (Ultimately, I prefer consumption based targeting, even over wage based, but we won’t get there for a while.)

    So, I thought maybe by looking at weighted RGDP, I could find negative growth in there.

    Now instead I look at the official numbers and see RGDP WAY ABOVE AVERAGE:

    97-99
    2003-2006
    2012-2013

    And it seems off, bc there has been a ton of downward price pressure, the growth has all turned into lower prices (lots of free)

    It certainly doesn’t justify Tyler’s GS. What was he possibly thinking?

  39. Gravatar of dbeach dbeach
    18. February 2014 at 16:53

    I wonder if you could elaborate on why you prefer NGDP targeting as a “practical alternative” to wage level targeting. Is it really so difficult to measure aggregate nominal labor compensation?

    My concern is that NGDP growth may not track wage income growth for long periods if the share of income to labor is not stable.

  40. Gravatar of ssumner ssumner
    18. February 2014 at 18:10

    Morgan, Is you point that prices are falling sharply for internet services, and hence inflation is lower than estimated, and hence RGDP might be rising faster than NGDP? That’s possible, but I don’t think the internet is a big enough share of the economy where you can say we have outright deflation. Not yet.

    John, I’m not saying the government should actually try to do that, it’s too complicated. Just target NGDP. My point was that 1968 trend lines don’t matter, because there are no wage contracts from 1968. No way actual NGDP was above trend by 9% in 2007. Maybe slightly above, but if you were able to ascertain all the contracts and expectations I’d guess 1% or 2% too high, at most.

    I would not have complained if NGDP fell 2% or 3% below trend in 2008-09, but 9%?

    dbeach, I have an open mind, but here’s two concerns:

    1. Many workers are paid annual salaries, not hourly wages.
    2. The political controversy associated with the Fed trying to control wages.

    But I’d be happy to be proved wrong, as I said I once advocated the idea.

  41. Gravatar of Morgan Warstler Morgan Warstler
    19. February 2014 at 02:12

    “Morgan, Is you point that prices are falling sharply for internet services, and hence inflation is lower than estimated, and hence RGDP might be rising faster than NGDP? That’s possible, but I don’t think the internet is a big enough share of the economy where you can say we have outright deflation. Not yet.”

    I think thats what I mean, but I don’t know “how” we call it increasing RGDP.

    Scott tonight on twitter, Marc Andreeson, started down the rabbithole too. I promise more will follow, Matty took stab and missed wildly on Slate.

    What was fun was that all the econbloggers all kind seem to get stuck on the notion of some kind of illusion, but I don’t know what it is.

    When you say RGDP is growing.

    To me that means a bunch of people are making up prices willy-nilly for free things while simultaneously discounting the amount of consumption that is free.

    To me it is obvious that REAL GDP can shrink while everyone consumes 50% more next year.

    But they are consuming digital stuff, which is better than atomic stuff, but all digital stuff costs nothing.

    And you can’t price digital stuff, you need to just basically say it is free. The electricity isn’t free, but we get 100x as much digital stuff every year for the same amount of electricity, so imaging Zimbabwe style deflation :)

    Long before the singularity… let me show you the next 50 years:

    2063+

    50 years from now is “I don’t want lots of stuff, bc printing 3D stuff is just like downloading and printing articles” age.

    Mark and I start with sooner than you think, you are jacked into a Virtual Reality rig (not wires to your brain, just think google glass / oculus rift 50 years from now) and you only consume electricity and calories. You can still read Internet, make blog posts, make marvelous 3D chairs, but we don’t even print them out anymore, you only need one chair to sit in, but the designs are still basically free. And you never really leave your house / room.

    By 2063, nobody ever really wants to do anything but sit in a room using their VR rig. WHY jump out of plane, when you can jump out of one being chased by dragons and you can FLY and shoot spiderman webs at them?

    2033

    The “WOW 3D printing is great!” age. You are starting to really use VR rigs, but human traditions still get you out in still out in the big room (real world) some too.

    But the big shift is localized material recycling. How much copper, gold, iron does Austin need collectively where all our old stuff is dismantled and reprinted only for the cost of energy cost of manipulating the raw materials. Long haul trucking? Cargo container ships? How much of that do you really need?

    During this age it finally becomes apparent that the ONLY THING that is property is atomic. The digital IP plans to to make / print / view things are impossible to protect, government couldn’t if it wanted to.

    And yes sure atomic property is real, but the NOMINAL COST OF ATOMIC THINGS is falling faster than ever in human history, bc there is nothing but raw materials and a robot and a network connection.

    And what can be stolen from you? Just raw materials.

    Which brings us to 2014

    For the next 20 years…

    Edu jobs and buildings get gutted and turned into Internet video and smart phone / tv / tablet apps.

    Government jobs and buildings get gutted and turned into online software. This means no more government borrowing is necessary.

    Commercial office buildings go away faster than retail is going. No commercial paper, bc telecommuting.

    Cars / trucks become driverless, meaning we share them and no more car loans.
    Need less infrastructure, not more.

    For the next 20 years, the question is where does capital go? Atomic stuff is built for debt, you use it for collateral.

    Digital companies don’t really have debt, or use debt, they work on equity, and the remaining capital chasing returns is trading for equity in digital companies, thats where ROI is.

    So IF 50 years from now, no one ever eaves their room… and each year until then you are going to consume less atoms and go pure digital.

    The counting of GDP and monetary policy as we think about it, FEELS ALIEN.

    I could really get behind the quality of compression X bits transferred as an economic indicator.

    I could really get behind, # of hours of video, video games, and audio and text consumed as an economic indicator.

    I could really get behind innovator / creator status as capital as a new type of economics.

    But I can’t figure out WHERE the money goes.

    If technologists are right about trend of next 50 years, how do you increase GDP, while velocity shrinks, and the nominal value of things PLUMMET, but consumption (of free digital stuff) explodes.

    FREE cannot be accurately turned into RGDP.

    And if you look at those numbers on that google doc – it appears to say that the explosion of free digital consumption is being turned into RGDP.

    HOW IS THAT POSSIBLE?

  42. Gravatar of Morgan Warstler Morgan Warstler
    19. February 2014 at 18:03

    Netflix: $25.6B
    Tesla: $23.7B
    Macy’s: $19.7B
    WhatsApp: $19B
    Whole Foods: $19B
    Gap: $18.9B
    Sony: $17.7B
    United Airlines: $15.7B

    Hypothesis: Digital Companies are flights to safety

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