Back in May 2003 The Economist said that many countries were in the midst of a housing bubble:

A SURVEY in The Economist in May predicted that house prices would fall by 10% in America over the next four years, and by 20-30% in Australia, Britain, Ireland, the Netherlands and Spain. Prices have since continued to rise, so have we changed our mind?…

I’ve already discussed the US; in this post I’d like to examine some foreign markets.  Nick Rowe has an excellent post on bubbles, and he argues that Canada did not experience a housing bubble.  Before considering Nick’s assertion, take a look at this graph of average Canadian housing prices (you must click on the graph link on the right.)

Nick argued that if there had been a bubble then you’d expect that once prices stopped rising and began falling, then people would worry that the bubble had burst and prices would fall sharply.  Prices did fall a bit when the worldwide recession hit Canada in late 2008, but then began recovering in the second half of 2009.  So he concluded there was no bubble.  My hunch is that he is right, although as they like to say on Wall Street “past performance is no guarantee of future success.”

[Note; while working on the post I noticed that Nick’s co-blogger Stephen Gordon has a very informative post on the Canadian housing market.]

My theory all along has been that the US housing bubble was widely misunderstood, and that if NGDP had kept growing at a 5% rate after mid-2008 then the US housing bust would have been far milder.  More specifically, in heartland markets like Texas there would have been no housing bust at all.  Most of the damage would have occurred in 4 key sub-prime states, and even in those states the price declines would have been far smaller.

One implication of my hypothesis is that in most other countries the housing crash should have occurred later than in the US, and should have been far milder.  The Economist, which ironically is the publication that I most strongly disagree with on this issue, has published a graph that strongly supports my hypothesis.  If you click on the link you will see an interactive graph that shows global housing trends since 1990.  I found it easier to read by moving the starting point to 2000:1, and go up to 2009:3, the last observation.  And I used real housing prices, which should make it easier to spot bubbles in countries that have inflation.

Many countries experienced no unusual increases (Germany, Switzerland, Japan, Hong Kong, China, Netherlands, etc.)  Other countries like France experienced a sharp increase, but only a very small decline.  Australia and (to a lesser extent) Canada also fit this pattern.  Furthermore the timing of the decline is clearly associated with the 2008-09 recession, which reduced NGDP in the US, Europe and Japan.  Also note that where housing downturns eventually did occur, they were generally more severe in countries that had severe recessions (UK and Ireland) and relatively mild in countries where the recession was much milder (Australia and Canada.)  So it looks like we can say there was (at best) a housing bubble in the US, and to a lesser extent a few other countries like Spain and Ireland.  But no global housing bubble.

I believe that portions of the US market, and perhaps to a lesser extent the Irish and Spanish market, became overvalued in early 2006.  The other English-speaking countries also saw large increases in real housing prices, just as in the US.  But because they experienced much milder declines, and because those declines were closely associated with the severe global recession, I don’t see how you can call them bubbles.  A severe recession is a fundamental factor that would be expected to reduce housing prices even if the EMH explained 100% of house price changes.

While my falling NGDP story explains most foreign downturns, The Economist’s bubble story seems inconsistent with these inconvenient facts:

1.  Prices in most other “bubble” markets did not decline when the US market turned down in 2006.

2.  The declines in other markets were generally much milder, even when the preceding price increases had been just as rapid as in the US.

3.  Housing prices turned up recently in places like Australia and Canada, despite their being “overvalued” according to The Economist.

So you shouldn’t believe people who tell you that we are in a bubble, and who defend that hypothesis by merely pointing to fast rising prices.  Ex post, people like Krugman and Shiller were right, but only about the US.  In many other countries large price increases did not lead to a major collapse, and prices are still quite high in early 2010.

Of course if you wait long enough prices will eventually fall in any country, that’s how markets work.  But it turns out that it is much harder than most people imagine to predict which prices are “obviously overvalued,” and hence bound to fall sharply.  We all know about confirmation bias.  Because most elite economists live in the US, and pay little attention to countries like Australia, they tend to assume that recent events have provided decisive support to their bubble hypotheses.  Yet from a global perspective bubble theories haven’t done well at all.  Indeed they performed quite poorly over the past 10 years.  Outside of the US and Ireland, you would have been better off if you had ignored The Economist’s bubble warning of 2003, and instead had gone out and bought a house.  But what about those who base their forecasts on fundamentals, and not merely the rate of price appreciation?

If you look at the specific countries cited in The Economist’s famous prediction, the results are far worse than even for the US.  Recall that in May 2003 The Economist predicted 20% to 30% prices declines in 5 foreign countries.  If you set the starting point at 2003:2 and use nominal prices, then you will see that prices rose by more than 10% in the Netherlands, and by anywhere from 30% to 55% in other 4 countries.  Not exactly the 20% to 30% price drops they expected.  Some of my commenters claimed that The Economist was right in the long run, because prices did eventually fall.  I don’t think that argument is right—surely you must be held to the terms of your prediction, otherwise there is no way to ascertain how good you are at forecasting.  But even with those very generous assumptions, they were still far off base.  Even today the Netherlands continues to show a greater than 10% gain.  Spanish, British and Australian housing prices are still up by 30% to 50% over 2003 levels.  Only Ireland is even remotely close, with its price appreciation having fallen to about 10%.  But even that prediction is far from the 20% to 30% price drop forecast by The Economist.  The most generous assumption of all would be to use real housing prices.  But even in that case none of the 5 showed price declines over the following 4 years, and only Ireland experienced a tiny decline between 2003 and late 2009.

So The Economist’s predictions of 10% to 30% price declines over 4 years were spectacularly off base.  Even over a 6 1/2 year time frame, only the US (the country they thought was the least overvalued) experienced a significant decline in house prices.  And then only in real terms.  So in all 6 countries their predictions were wildly inaccurate for the 4 year time window they specified.  And even under the most generous assumptions, using real housing prices and a 6 1/2 year time frame, The Economist’s predictions were still highly inaccurate in 5 of 6 countries.  What an awful record of forecasting housing prices through the use of “fundamentals.”  This shows just how difficult it is to identify bubbles in real time.

The Big Think has just posted an interview with John Taylor, and he provides some very interesting answers to my questions on monetary policy.  Before I try to systematically demolish his response, let me first say that I agree with John Taylor on most things, including most of his answers to questions raised by others:

1.  Fiscal stimulus was not very effective, and led to a counterproductive increase in the national debt.

2.  The Fed should focus on monetary policy, rather than supporting the housing market.

3.  The big mistake was not the failure to bail out Lehman, but rather policy errors a few weeks later.

4.  The State of California needs to curb the growth rate of spending.

5.  The Fed should not focus on asset bubbles.

So we agree on most things.  But with all due respect I think his attachment to a backward-looking Taylor Rule has led him into all sorts of blind alleys.

Taylor responded to two of my questions.  I will quote in full, breaking occasionally to interject my own views:

Question: Is it better to have price level targeting or inflation targeting in a liquidity trap? (Scott Sumner, The Money Illusion)

John Taylor: I think the distinction between price level targeting and inflation targeting, which has had a huge amount of attention in the academic literature and has been referred to in the past, such as Ben Bernanke before he became Chairman. I think those distinctions in practice get blurred by the realities, quite frankly. It of course would be good to have a price level targeting other things equal that would sometimes require deflation, however, and a lot of evidence that that’s not such a good thing to have; even occasionally.

So, I’ve always been of the view that an inflation target makes more sense, it’s easier for people to understand, we’ve had a lot of practice with it. And while there is this problem of lack of a drift, the drift of the price levels sometimes called base drift, overall seems to me if we were able to keep the inflation rate at a very low level, then we would effectively get similar results to price level targeting.

What do you think?  It doesn’t seem to me that he addresses any of the reasons Woodford puts forth for price level targeting in a liquidity trap.  Just to review, Woodford argues that with an inflation target, monetary policy has no traction in a liquidity trap.  Assume the inflation target is 2%, but also suppose inflation keeps coming in under 2%.  How does the Fed react?  Under inflation targeting the only answer is “try the same thing again, and hope for better luck next time.”  With price level targeting, if you undershoot the 2% price level growth trajectory the target inflation rate automatically rises.  If nominal rates are stuck at zero, sub-target inflation automatically lowers the real rate.  Does Taylor’s response address Woodford’s argument?  Maybe I missed something, but it seems to me that Taylor’s answer referred to the opposite situation, where inflation has exceeded the target.  Next question . . .

Question: Should the Fed have been more aggressive with monetary stimulus in September-November 2008? (Scott Sumner, The Money Illusion)

John Taylor: I think the Fed cut interest rates during that period just about right. I think it was basically coming down, it could have been a little faster at that point, and of course, GDP did fall tremendously. But I think if they had kept the interest rates along the same path it would have been fine.

Now stop right there.  I didn’t ask whether the Fed should have had lower interest rates, I asked whether their policy should have been more stimulative.  Of course Joan Robinson would say that nominal interest rates and monetary policy are one and the same.  Joan Robinson would say that monetary policy was not easy during the German hyperinflation, after all nominal rates weren’t very low.  Am I being unfair to John Taylor?  In one sense yes.  The inventor of the Taylor Principle clearly understands the distinction between nominal and real interest rates as well as any person alive.  But then when I asked about the stance of monetary policy, why did Taylor not criticize the Fed for dramatically raising real rates between July and November 2008?  Why did he merely talk about changes in nominal interest rates, as if they provided meaningful information about changes in the stance of monetary policy?

A few months ago I had a series of posts basically calling out the entire monetary economics establishment.  I accused them of throwing around terms like ‘easy money’ and ‘tight money’ without assigning any coherent meaning to the terms.  Taylor’s answer is a perfect illustration of what I was complaining about.  I still await an answer as to what these terms mean.  I might have to offer a $200 reward as a cheap stunt, just to generate some interest.  How hard can it be to define the stance of monetary policy?  How hard can it be to explain what we mean by ‘easy money’ and ‘tight money?’  Apparently it’s pretty hard, because no one has yet been able to answer my question.

Taylor continues . . .

The problems I see at that period was the tremendous amount of uncertainty added by these new effects, if you like, the quantitative ease, and sometimes I’ve called somewhat **** industrial policy to where the actions went well beyond the usual interest rates. And I don’t think they were appropriate. We’re still studying them. Some of them were inappropriate. I just finished a study on mortgage interest rates.

I agree that we wasted precious time focusing on non-monetary issues during September-October 2008.  Taylor continues . . .

So, the question about whether the policy could have been even easier going into the panic, it is certainly something to examine, but I think basically, it’s about all it could do at that point. The problems I saw were not so much a monetary policy at that stage, but the really ad hoc chaotic interventions that occurred around the time of the rollout of the TARP, not clear kind of actions with respect to what happened to Lehman Brothers. So, a lot of surprises and ultimately a lot of panic. And I think that panic was induced as I’ve argued in other places by government actions. I think some of the actions of the Fed after the panic began were constructive to be sure. But I don’t see that in terms of a faster reduction in interest rates.

I absolutely agree that the government was creating a lot of panic.  If I was running a highly leveraged commercial or investment bank, and I saw NGDP growth expectations rapidly plunging into negative territory, and I saw the Fed making no effort to adopt a more stimulative policy, but instead adopt an interest on reserves program to prevent reserve injections from having any effect, well then I’d panic too.  But those aren’t the actions that Taylor thinks created the panic.  Rather it was Bernanke and Paulson’s admittedly clumsy efforts to save the banking system.  The reason we both felt that late September and early October was important was that it was during this period that asset markets showed panic.  And we even agree that it was related to Fed actions.  But Taylor (and Cochrane) seem to think it was what they said that was causing panic, whereas I think it was the fact that they got distracted from monetary stimulus.  Throughout history there are many examples of tight money policies severely depressing the stock market.  I simply don’t think it is plausible that a few clumsy regulatory moves that were quickly reversed under political pressure could have severely depressed equity prices.  There’s no precedent for that.  That’s not how the stock market works.  It is not that sensitive.  Oddly, on this point I agree with Paul Krugman (as does Tyler Cowen.)

Taylor continues . . .

In fact, if I could just add. One thing I think people should recognize is that while the federal funds rate target of the FOMC came down gradually in the fall of 2008, the actual rate came down quite a bit more rapidly. In fact, each of the FOMC decisions effectively ratified what the rate was already at. And that rate came down so rapidly because of the large expansion in the reserves. So, it’s hard to see how measured in terms of interest rates policy could be much easier in the October, November, December period.

The fact that the Fed was scrambling to catch up to market rates is one indication of just how far behind the curve it was in the fall of 2008.  But the last sentence was a big disappointment.  Taylor previously indicated that policy was fairly expansionary in late 2008, and ended his answer by suggesting that there wasn’t much more the Fed could have done.  In contrast, I think monetary policy was highly contractionary, and that the Fed could have and should have been much more stimulative.

So how does the Taylor Rule hold up in the crisis of 2008?  The first question to be answered is which version of the Taylor Rule?  I seem to recall that Taylor likes to cite the “Marshall McLuhan” scene in the old Woody Allen movie, so I’ll assume the Taylor Rule is whatever the hell John Taylor says it is.  Here’s how I see things:

1.  In October 2008 I was running around calling for a much more expansionary monetary policy.

2.  John Taylor seems satisfied with the stance of monetary policy in October 2008.

3.  In 2009 NGDP fell at the fastest rate since 1938.

In retrospect, would you say I was right in calling for more monetary stimulus, or was Taylor right?

I do think the Taylor Rule works reasonably well when you are not in a liquidity trap, although even in that case I think NGDP futures targeting is superior.  But if there is one thing we have learned in the past two years it is that the Taylor Rule provides absolutely no guidance to policymakers when interest rates approach zero.  Indeed I believe it quite likely that the “panic” Taylor refers to in early October 2008, which was very real, was caused precisely by the fear that the Fed would adhere to the Taylor Rule, and would not adopt the sort of policies that Bernanke had recommended the Japanese try once their rates hit zero.

PS.  If you haven’t read my earlier posts on monetary policy, I should clarify a few things.  I know full well that Taylor and others understand the distinction between real and nominal rates.  But they insist on continuing to discuss the stance of monetary policy with reference to nominal rates.  As long as they keep doing so, I will keep needling them with my insulting Joan Robinson comparisons.

I am not saying that real interest rates are a good indicator of monetary policy.  Rather that’s what others often say when I point to the flaws with nominal rates.  My point is “OK, if real rates are the right indicator, then why no criticism of the Fed’s extraordinarily contractionary policy during July to November 2008, when 5-year real rates jumped from 0.5% to 4.2%?”

In my view the only meaningful indicator of monetary policy is the expected growth in the policy target variable, which I think should be NGDP.

The recent election of Scott Brown is just one more opportunity to ruminate over the excessive size of the US government.  In earlier posts I have argued that there are big diseconomies of scale in governance.  Small countries like Singapore, Denmark and Switzerland seem to be more effectively governed that bigger countries like Germany, Britain and Italy.  Why is that?  I am not really sure, but I’d guess it is partly related to the principal/agent problem.

The US appears to be an exception, but I think we are coasting on our past (decentralized) success.  I wonder how much longer we can maintain our position near the top of the global PPP income rankings.  Today the Heritage Index of Economic Freedom came out, and we continued to slip, down to number 8.  All of the countries ahead of US are small, not just relative to the US, but relative to the UK and Italy.  It’s also interesting to note that all but one were colonies of Britain when Britain was one of the most democratic countries in the world.  The only exception is Switzerland, which is currently the most democratic country in the world.

Right behind us is Denmark.  When you consider that Heritage views taxes and size of government as big negatives in their rankings, what does Denmark’s near-tie with the US tell you about how effectively our “small government” is currently governing.

Just yesterday I thought of one piece of evidence for the inefficiency of big countries.  I was reading an article about how Poland’s new income tax is a model of simplicity compared to the US.  Just two rates (18% and 32%) and far few loopholes.  I don’t know the details, but something tells me that Poland does not require taxpayers to practice their high school math by calculating numerous “worksheets” that have no discernible purpose.

[As an aside, I have to think that the average taxpayer believes the government “must have some good reason” for these worksheets.  If they knew, as I know, that the only purpose is to give work to tax accountants, that they serve no purpose, there would be a revolution.  And please don’t insult my intelligence by telling me that these worksheets add progressivity to the tax system.  An identical degree of progressivity can be achieved by eliminating all the worksheets (and the AMT for that matter) and then fiddling with the tax rates.]

Then I started to think about our system.  I have argued that if we were to adopt the European model then all activities done by our Federal government would be downloaded onto the states.  And I recalled that my state tax form is dramatically simpler than the Federal form.  I spend at least 5 times as much effort on the federal form as the state form.  Now you might argue that the federal form must be more complex, because they raise much more revenue.  But it is just the opposite.  Peter Lindert is one of the most intelligent defenders of the welfare state.  And he argues that the higher the tax level, the more important it is that the tax system be very efficient.

For the most part our Federal government does completely different things from the state governments.  The federal government does national defense, space exploration, Social Security, etc.  States do police, fire and schools.  So it’s hard to compare efficiency.  But both do income taxes, and the state income taxes are far more efficient than the federal income tax, just as the income taxes of small countries like Estonia and Iceland are models of simplicity.  (Oops, maybe not a good time to argue for the small country model.  Oh well, you have to take the long view.)

Back to Scott Brown.  This country does not have any sort of consensus as to what sort of health care system it wants.  Libertarians want less government, liberals want more, and the health industrial complex wants expensive health care.  Americans say they are happy with their health insurance, but only because they have no idea how much they are paying for it.

Because we can’t agree, we end up with a federal tax system and a health care system that are like a giant Rube Goldberg devices.  It’s even worse when the two systems interact.  There is a provision in the tax code that lets you prepay “medical expenses” in before-tax dollars.  But you first must decide at the beginning of the year how many health emergencies you are going to have, and then set aside the money to pay for those health emergencies.  What?  You say you don’t know how many heart attacks you are going to have next year?  Come on, you need to start planning your life more carefully.  Of course in reality people don’t use these expenses for health care, because if you set aside money and don’t use it then you lose the money.  And some people fear they might fail to get sick.  So I use $720 of the money for purely cosmetic purposes, to buy disposable contact lens.  By the way, I appreciate your support; you guys are picking up 40% of the bill.  Even worse, the seller understands the system so rather than giving you a simple price cut, they force you to fill out complicated forms to get a $30 dollar rebate.  This means the taxpayers are actually picking up more than 40% of the net cost.

Sometimes I wish I lived in a small country like Australia or New Zealand (3 and 4 on the Heritage list.)  I am sure they have lots of problems, but surely their tax/health care system can’t be as maddening as ours.

PS.  I don’t know if you guys are interested in the Scott Brown race, but perhaps I should say something about our strange politics in Massachusetts.  Unlike southern states, in Massachusetts the richest towns tend to vote for liberals.  Coakley won Boston (which is a mix or rich and poor) and nearby towns like Cambridge and Brookline by huge margins.  She also won most of the affluent suburbs to the west, even including posh Wellesley, home of Greg Mankiw.  She won affluent Newton (where I live) by 2 to 1.  OK, so Coakley won huge victories in the most urban areas, and also won in the affluent suburbs to the west of Boston.  Then given that metro Boston is 75% of the state, how in the world did a Republican win by 5%.  Not by winning the far west of the state, all those towns also went for Coakley.  The plot thickens.  There are two answers.  Brown won the middle class suburbs north and south of Boston, and also the exurbs further out.  The margins were often large, and the turnout was much higher than in Boston.  And most importantly, he fought Coakley to a near draw in many of the gritty blue collar towns where a Democrat should have a large advantage.  Places like Revere and Worchester are normally Democratic, but have some populist anti-tax instincts.  A number of them voted to completely repeal the state income tax in a referendum held about 10 years ago, even though the proposal was viewed as so wacky that even the Republican Party opposed it.  It came surprisingly close to passing.

Here is a map of the state and vote totals by town, for you political junkies.

Here is Tom Friedman in yesterday’s NYT:

There are actually two Chinese economies today. There is the Communist Party and its affiliates; let’s call them Command China. These are the very traditional state-owned enterprises.

Alongside them, there is a second China, largely concentrated in coastal cities like Shanghai and Hong Kong. This is a highly entrepreneurial sector that has developed sophisticated techniques to generate and participate in diverse, high-value flows of business knowledge. I call that Network China.

And here is China expert Yasheng Huang:

Today, Shanghai cannot claim any large-scale, well-known private-sector businesses. In addition, the city is at the bottom of the country in terms of entrepreneurial measures.

A recent article by Josh Barro called for a freeze on public sector wages.  I don’t disagree with anything in the article, but I also think it is important to take a step back and put this issue in a broader context.  Let’s start with this interesting observation:

Since the end of 2006, hourly total compensation (wages plus benefits) has risen 6.5% for private sector workers, essentially keeping pace with inflation. But state and local government workers saw their hourly compensation rise 9.2%.

Federal civilian workers (about 10% of the public sector civilian workforce) are excluded from the above measure, but they did even better, receiving Congressionally-approved wage rises totaling 9.9% over the same period.

Why have public sector wages grown so fast? In some cases, it’s because employees are receiving scheduled raises under contracts negotiated before the economic crisis. New York public employees will see a 4% pay increase in April, under a contract negotiated in the middle of the last decade.

Talk about sticky wages!  Here’s the way I see the problem.  Public employees and employers both know that for several decades the Fed has been allow roughly 5% NGDP growth.  They also know that the workforce grows at about 1% per year, meaning average incomes can grow at about 4%.  So they negotiated pay contracts on that basis.

Now suppose the Fed reduces NGDP 8% relative to trend.  If all wages and prices are flexible, then you would see an 8% reduction in all wages and prices relative to trend, and output wouldn’t be affected.  But wages and prices aren’t very flexible in the short run, and thus output will fall sharply.  You might think that once wage contracts are renegotiated, this problem would be solved.  But you would be wrong:

But in other cases, governments have agreed to pay increases during the recession, or been forced into them by arbitrators. Transit agencies in New York and Washington, D.C., have seen their budget crises exacerbated by arbitrator-mandated pay increases, leading to service cuts. And Congress just approved another 2% pay increase for federal workers, effective this month.

Why don’t public employees get an 8% pay cut relative to trend, once their contracts are renegotiated?  Because that would mean a big cut in their real wage.  Why should employees with secure jobs accept a sharp real wage cut?  In other words, there is a coordination problem.  If you are a factory worker you can’t save you job merely by making your wage flexible, you need to make all wages flexible.  And it will not be easy to get public employees to share your wage cut, unless all companies also reduce all prices 8% below trend.  But why should companies cut prices if workers haven’t cut wages?  More coordination problems.

Is there an easier way out of this mess?  It seems to me we have two choices:

1.  Inflict enough pressure on workers to accept wages rates that are 8% below trend.  This can be accomplished with threats of layoffs, union busting, high unemployment, cuts in unemployment benefits, cuts in the minimum wage, pressure on public employees, etc.  It will also require much lower prices.  The entire process will be painful and will take many years.

2.  Use monetary policy to boost NGDP back up to trend, or more precisely close enough to trend so that with the wage cuts that have already occurred we can regain reasonably full employment.  The entire process will seem much less painful, and will show results almost immediately.

In some ways the two adjustment programs are quite similar.  Indeed the term “money illusion” was coined to describe the inability to see that they were quite similar.   But I think the second option is much easier to accomplish, at it merely requires that we change one price—the price of money.  In addition, my commenter “statsguy” likes to remind me that option 2 also makes it much easier to address the debt crisis.

This isn’t a criticism of Josh Barro, if my bailiwick was fiscal policy I’d be making the same recommendation.  He probably views the downshift in NGDP as a fait accompli, and he is probably right.  But there is a deeper question that we still haven’t addressed, what is our policy toward NGDP?

It seems to me that we have to make up our minds about which way we want to go, lower wages or higher NGDP.  It also seems to me that we haven’t even come close to doing so; indeed most people don’t even know we face this dilemma.  How often have you heard a Congressman (or the President) angrily call on the Fed to sharply boost NGDP, or even the price level for that matter?  I haven’t either.  And have you ever heard a Congressman (or the President) angrily scold the public for making excessively high wages?  Me neither.  They think there is a third way, but there isn’t.

BTW, if you are thinking “Sumner’s just one of those right-wingers who thinks wage cuts are the answer,” then you haven’t understood anything I have been saying.  If you are a liberal, then you have probably read Krugman’s arguments that wage cuts aren’t the answer.  Does that contradict what I am saying here?  Not really, I am not trying to make a causality argument here (although in another setting I’d love to make that argument) rather I am trying to make an accounting argument.  And I very much doubt that Krugman would disagree with my accounting.  Indeed, Krugman is one liberal who has made some very pointed criticism of the Fed, and who clearly understands that there is a problem, and that monetary stimulus is the best way out of the crisis.

Krugman and I do disagree on wages, but we share a sense of exasperation that most of the country, and most policymakers in both parties, are pretty clueless about the situation we face.  You can’t have NGDP downshift 8% and keep the old wage structure.  And yet as far as I can see most politicians and policymakers want to do exactly that, they want to have it both ways.  You may not like what I have to say, or what Krugman has to say, or what Josh Barro has to say, but at least we are all in our own way trying to provide a solution to this problem.   The policymakers in Washington just seem to be crossing their fingers and hoping that the problem will magically go away.

Maybe we will get lucky in 2010 and NGDP will start growing fast, eliminating the need for further wage cuts.  Even if that occurs, I will still be asking this question:

Wouldn’t it have been better if the Fed had boosted NGDP back in October 2008?

BTW,  Tyler Cowen did a post that listed some policies that might be able to help Haiti.  At the end of point 3 (which discussed ways of injecting money into the Haitian economy), came this cryptic remark:

Stabilize Haitian nominal GDP!

What do you guys think?  Is he subtly mocking my increasingly single-minded insistence that NGDP is a magic bullet than can solve all our problems?  If so, lord knows I deserve it.  Or is my paranoia just a disguised form of arrogance?  What makes me think that every time someone mentions NGDP they are thinking about me?  Bennett McCallum, James Tobin and Robert Gordon have all proposed NGDP targeting, what’s so special about me?

I figured I am too close to the issue, so I was wondering what came to mind when you guys read something like that—do you perceive it is a sly dig at this blog, or am I wrong in assuming that the entire planet now revolves around me?

PS.  If I find out he wasn’t making fun of me, I will be very disappointed.