After 1985 there was a definite moderation in NGDP (and RGDP) instability:

But this period of stability ended in 2008:

I am going to go out on a limb and predict that we are now entering a new Great Moderation, even more stable than the 1985-2007 period.  Let’s start with what we know.

We are only a few months away from being eight years unto the expansion.  This 8-year period will likely be the second most stable in all of American history, outdone only by the 10 years of stability from 1991 to early 2001.  As you can see from the second graph (YoY data), the recent stability of NGDP growth is about the same as during the 1990s, albeit averaging somewhat below 5%, rather than somewhat above 5%.

So why do I think we are entering an even greater moderation?  Seven reasons, none of which I expect people will find all that persuasive:

1.  No excesses yet.  I think it’s likely that this expansion will exceed the 10-year expansion of the 1990s.  We only need two more years to do so, and I don’t see any signs of the sort of excess that often occurs before recessions.  Not saying a recession cannot happen within two years (they tend to be unforecastable) just that it seems much less than a 50/50 proposition.

2.  Supply-side reforms.  I think it’s likely that there will be some sort of tax reforms, as well as deregulation, which will tend to slightly boost the supply-side of the economy. I don’t expect the sort of dramatic effects that true believers predict (a new long run RGDP trend of 3% to 3.5%) but I do see a small improvement as likely. Recessions are often preceded by adverse AS movements, which create inflation, leading to Fed tightening.  In addition, an adverse supply shock tends to lower the Wicksellian equilibrium interest rate, which leads to unintentional Fed tightening when the Fed believes a given rate setting to be more expansionary than it actually is.  (See 2008, for instance.)  But since Trump took office, it seems like the Wicksellian equilibrium rate has risen slightly.  This also gives the Fed more room to operate, relative to the zero bound.

3.  Spotlight on the Fed.  This one is hard to quantify, but I feel it’s important.  I became radicalized in late 2008 because I saw that pundits were totally ignoring the drop in NGDP growth expectations, and basically giving the Fed a free pass. Kevin Erdmann directed me to an absurd WSJ editorial from right after Lehman failed, which captures the mood of that period:

These columns have been tough on the Federal Reserve in recent years, so it’s only fair to praise the central bank when it does the right thing.  And that’s what it did yesterday by holding the federal funds rate stable at 2%, despite the turmoil in the financial markets and enormous Wall Street pressure to reduce rates further.

Face palm.  Yes, and Boston firemen took a brave stand against smoking in bed, by refusing to douse a house fire sweeping through East Boston tenements.  Hardly anyone was criticizing the Fed’s tight money policy in 2008.  David Beckworth noticed that interest on reserves was a potential mistake, but even that program was mostly ignored.

Now the blogosphere and academic economists are paying far more attention to NGDP growth than in the past. I am watching it like a hawk, and unlike in late 2008 I have a big mouthpiece to scream through if I see the Fed making the same mistake again.  I can’t even imagine the Fed letting growth expectations slip as they did after Lehman, without putting up a fight.

4.  Learning from mistakes.  I am not saying the Fed has adopted NGDP targeting—they haven’t.  Rather I’m saying the Fed is increasingly aware that they cannot allow highly erratic moves in NGDP growth. The Fed learned from the mistakes of the Great Depression.  They learned from the mistakes of the Great Inflation.  They didn’t learn as much as I would like from the Great Recession, but surely they learned something.

5.  QE works, and negative IOR hasn’t even been tried.  Some might worry that although the Fed would wish to keep NGDP growth fairly stable, they lack the tools to offset “shocks” when we are near the zero bound.  But the Fed did succeed in fully offsetting the fiscal tightening of 2013, even though we were at the zero bound.  When the next shock hits we probably will not be at the zero bound, giving the Fed even more “ammo”.

6.  Yellen is a cautious dove.  Janet Yellen understands that the best way to prevent a recession is to prevent the sort of excessive rise in AD that often leads to a recession (as tight money is then used to bring inflation back down.)  The Fed’s caution produced a substandard recovery, but it also means the expansion is likely to be longer than normal.

7.  No financial crisis on the horizon.  Although the Fed can offset shocks like the 2013 fiscal tightening, they still may not have learned how to do monetary policy in a major financial crisis.  And forthcoming GOP banking deregulation probably makes another financial crisis more likely, unless the GOP deals with the underlying moral hazard problem (and I fear they won’t.)  But this is partially offset by the fact that major financial crises are pretty rare, and the banks were burned so badly by 2008 that they are likely to be more cautious in even a deregulated environment.  I do think we’ll eventually have another financial crisis unless we adopt the sort of system the Canadians have (and even theirs is not perfect), but these major crises are rare events.  There is less than a 20% chance of one occurring in the next 2 decades.

Conclusion: By the year 2040 we will be more than 3 decades past the Great Recession.  I may not live long enough to see if this prediction comes true, but I’m going on record predicting only one US recession between now and 2040.  A thirty-year span with only one recession would be unprecedented, and even Greater Moderation.  The Aussies have done it, why can’t we?

So cheer up MMs of the world, we are winning.

And if I am wrong and you lose lots of money in the stock market, which was invested based on my prediction?  Then you are welcome to spit on my grave in 2040.

Update:

From Peter in the comment section:

Hi Dr. Sumner,

I was able to ask Loretta Mester, the Cleveland Fed President, what she thought of NGDPLT, and thought you might be interested in her response. Overall she was cautiously positive on the idea.

She started her answer by saying that she thought Inflation Targeting was probably good enough for stabilizing the economy, and that the inflation target has worked pretty well thus far. But, she said she saw the benefits of NGDPLT (and price level targeting) over IT, and mentioned that it would have been particularly effective in stabilizing the economy during the Great Recession. She was hesitant to endorse switching to NGDPLT in the very near future because they only just adopted the explicit 2% inflation target, and she worried that switching to another target so quickly would be too discretionary, and would damage the Feds credibility. As a result, she wanted to keep the inflation target for now, but felt that NGDPLT and PLT where promising directions to move in the future.

Hopefully Barnard puts the video from the talk up soon, so you can hear her answer for yourself. But, I think you can add her to the list of fed officials who are at least mildly supportive of NGDPLT.

http://bwog.com/2017/03/03/barnard-power-talk-with-loretta-mester-gets-economical-real-quick/

I actually think that’s a very reasonable answer.  From the beginning, I’ve understood that a sudden switch to NGDPLT would create a bit of a credibility problem for the Fed, as it only recently adopted the 2% inflation target (formally.)  I’m pleased that Fed people see how that policy might have done better during the Great Recession, which leads me to believe they might incorporate a bit on NGDP thinking in there response to the next crisis, if only informally.

Update#2:  From commenter MFFA:

About that comment from Peter

I once asked the exact same question to professor Kashyap (who’s just been appointed to an advisory role to the BoE) from the University of Chicago Booth school of Business and got almost exactly the same answer. So let’s not be too hasty in our desire to move to NGDPLT, we need to move at the right pace

Here’s Rich Lowry of the National Review, reporting on how the conservative CPAC group shamelessly kowtowed to Trump:

In the course of a few days, President Donald Trump showed how thoroughly he has conquered conservative activists and the Republican party.

At the Conservative Political Action Conference, the attendees would have carried him in on a litter if they had been afforded the opportunity, and Republicans applauded everything he said in his address to the joint session of Congress.

The GOP reaction to Trump’s speech was one of the night’s fascinating subplots: Would Republicans applaud protectionism? Of course. Would they give a standing ovation to an infrastructure program that would have had them scowling in disapproval if Obama proposed it? Yeah, why not? Would they enthusiastically greet talk of paid family leave and investments in women’s health? By all means, sign them up.

But it’s even worse.  Right-wingers have made a big deal about how hard it is for their voices to be heard on campus, with Milo Yiannopoulos serving a a sort of poster boy for conservatives victimized by PCism run amuck.  Commenters tell me that the 1st amendment does force CPAC to listen to Milo, but if you don’t see anything ironic in CPAC inviting and then uninviting the conservative PC victim du jour because he seemed to (but didn’t really) advocate an age of consent one year lower than in many European countries, but then wildly cheer a man who brags about grabbing women by the pussy (confirmed by a dozen women), then there is something wrong with the “irony register” in your frontal cortex.

And here’s Jonah Goldberg from the same publication:

Again, what is remarkable is not what he [Trump] said, but what people heard. Consider the Tea Party Express, the biggest of the tea-party PACs.

“Since 2012, Tea Party Express has hosted the official Tea Party response to the President’s address,” the group said in a statement. “Last night was the first night that our address wasn’t necessary. Not because the ideas of limited government and economic growth have fallen out of vogue — because they surely haven’t — but because that speech was delivered on the floor of the U.S. House of Representatives by the President of the United States.”

Maybe I’m crazy, but I’d bet that if President Obama (or a President Jeb Bush) had made a similar speech with similar spending commitments and no explanation of how to pay for them, the Tea Party Express would have mustered enough objections to respond.

No Jonah, you are not crazy.  You are one of the very few conservatives left who have not lost their marbles.

Here’s an even greater irony.  Immature alt-right brats sitting at their computer in their mom’s basement love to pin the label “cuckservative” on those conservatives who hold fashionably liberal views on issues like immigration.  These right-wingers don’t seem to realize that Trump will abandon them at the drop of a hat.  Trump will squeeze everything out of the GOP that he can, and then when they lose badly in 2018 he’ll toss them away like used tissue paper, and start striking big government deals with the Democrats. When you deal with the devil . . .

It’s going to be fun to watch.

Update:  File this under “Presidents are less influential than you believe”:

WASHINGTON (AP) — Facing a new wave of questions about his ties to Russia, President Donald Trump is telling advisers and allies that he may shelve — at least temporarily — his plan to pursue a deal with Moscow on the Islamic State group and other national security matters, according to administration officials and Western diplomats.

In conversations with diplomats and other officials, Trump and his aides have ascribed the new thinking to Moscow’s recent provocations. But the reconsideration of a central tenet of the president’s foreign policy underscores the growing political risks in forging closer relations with Russia, as long as the FBI investigates his campaign associates’ connections to Moscow and congressional committees ramp up their probe of Russia’s meddling in the 2016 election.

The controversy has already led to the firing of Trump’s national security adviser, Michael Flynn, who misled officials about his contacts with the Russian ambassador, and to calls by Democrats for Attorney General Jeff Sessions to resign after he failed to disclose his own meetings with the envoy.

Trump’s new skepticism about brokering a deal with Moscow also suggests the rising influence of a new crop of advisers who have taken a tougher stance on Russia, including Defense Secretary Jim Mattis and new national security adviser H.R. McMaster.

I began blogging in February 2009.  In early March the US stock market bottomed out, and has since soared more than threefold.  I’d like to believe that’s no coincidence, but I don’t see anyone claiming that I caused the rally.  OK, except Matt Yglesias:

The Scott Sumner Rally

As we look at the sharp rise in the US stock market following today’s important monetary easing announcement, I think we should all tip the cap in the direction of Scott Sumner whose influence is an amazing blogosphere success story.

But other than Matt (who is far too generous), no one seriously connects me with the stock market rally. So why do so many of my commenters link the recent rally to Trump?  And why (a completely separate question) do they think that a Trump generated stock market rally would somehow show his policies were good for the economy?

Here’s the Financial Times:

While equity market euphoria at the prospect of President Donald Trump’s spendthrift, deregulatory agenda remains undimmed, bond investors are sending a very different message.

US equity gauges have continued to climb this year, propelled by hopes of deregulation, tax cuts, government spending and more business-friendly policies. This week all four of the biggest stock indices achieved yet another “Grand Slam” of fresh records in the wake of President Trump’s speech to Congress earlier this week.

In contrast, there are few signs that fixed income investors think the new administration will be able to jump-start the economy, leading to a durable growth spurt and ultimately much higher interest rates.

“The bond market is taking a totally different view from the equity market. Blowing raspberries is a good way to put it,” says Jim McCaughan, chief executive of Principal Global Investors. “There’s no belief that the growth agenda will be dramatic.”

Before people jump all over me, let me point out that I am on the record predicting that the GOP victory will lead to a small rise in the growth rate, mostly from tax reform and deregulation.  Maybe a few tenths of a percent.  I also think that part of the stock market rally can be attributed to the GOP victory (both Trump and holding the Senate.)  But keep in mind that this was all priced in the day after the election.  If anything, people are becoming increasingly pessimistic about the pace that bills will move through Congress.  And global growth prospects have been rising in recent months, and this rally began before the election.  It’s not all Trump.

Also keep in mind that the stock market is not the “the economy”.  It’s easy to visualize bank deregulation boosting bank profits, or corporate tax reform boosting corporate after-tax profits.  It might also boost total wealth (I think it would), but that’s a much tougher argument to make.  If I were someone like Paul Krugman, I’d say the (supply-side) economic reforms will not boost growth, but will merely redistribute wealth from workers to corporations.  That’s why the stock market has shown more evidence of rising growth expectations than the bond market.  My own view is slightly more nuanced, somewhere between the supply-side denialism of the left, and the starry-eyed faith of the near infinite abilities of Mr. Trump on the alt-right.

Johnny Carson used to have a skit called something like “Kids Say the Darndest Things”.   I think of that when I read comments from Trump supports.  No idiotic statement by Trump is too ridiculous for them to defend.  “If you look at it at this angle from the sun, through this kaleidoscope, Trump was actually right”.  A new fav is commenters telling me that I’m a hypocrite because I like using market tests for policy shocks, and I’m not doing that with Trump.  I guess these people have never heard of event studies.  Or that markets immediately price in new information.

Update:  Art Linkletter, not Carson, although Carson did something similar.

Think back to all the times between 2009 and 2014 when I argued that the soaring stock market proved that Fed policy was right on course.

Think back to all the times when I said that skyrocketing stock prices proved that Obama’s big government instincts were doing a swell job of helping the economy.

On a given day, I sometimes gave a thumbs up to a specific Fed decision, based on the immediate stock market reaction, just as the day after the election I acknowledged that markets seemed to be predicting slightly faster growth.

Actually, this problem goes well beyond stupid commenters. In a genetic sense, none of us are that that far ahead of cave men.  We are hardwired to think in terms of human beings, and especially human leaders, not abstractions.  We are also hardwired to think in terms of small local problems that could do us great harm.  Like a nearby saber-tooth tiger.  Both of these traits cause us to lose all sense of proportion when it comes to politics and the economy.  The two big mistakes are:

1.  The Great Man Theory of History.

2.  Ignoring Smith’s maxim of there being a great deal of ruin in a nation.

The flip side of Smith’s observation is that even pretty significant reforms, which actually create a lot of wealth in dollar terms, have an utterly trivial impact on the overall GDP.  So we vastly overestimate the power of the President to change the course of history, and even where he does so, we vastly overestimate how much something like the Keystone pipeline will help the overall economy.

And don’t be fooled by my “passion” on Trump’s buffoonery.  If I get into a passionate argument over whether Harden of Westbrook deserves the MVP, or whether the Oscars are idiotic, it doesn’t mean that I view these issues are determining the fate of our republic.  Before the election I said Trump’s announced policies would be a disaster if enacted, but that there was no chance they would be enacted.  I’m passionate because I’m flabbergasted that other people don’t see that he’s obviously a buffoon.  That’s all.

Commenters will tell me with a straight face that the soaring stock market between 2009-16 had nothing to do with Obama, but the current (smaller) increase “proves” Trump is Making America Great Again.   It reminds me how Republicans will tell you about all the awful scandals the Democrats are involved with, but then deny the scandals on their own side, while the Democrats do the exact opposite.  I’ve always argued that politics takes 15 points off a person’s IQ (including mine), but I think with Trump we need to boost that to 30.  I’ve never seen such a dramatic case of mass self-deception in so many otherwise intelligent people in my entire life.  Or maybe I’m the one who’s self-deceiving, and all the Dems who think only the GOP is corrupt, and all the Republicans who think only the Dems are corrupt, are both right.  Maybe the rules of logic don’t apply to this universe.

So by all means continue to defend your “tribe” in the comment section, and I’ll continue to view you as a big hairy cave man holding a club.

PS.  How bad have things gotten?  Trump’s defenders will claim that his staff was lying about a possible amnesty for illegals, just to sort of mess with the press.  Yes, we’ve reached the point where calling Trump a liar is considered a defense of the man.  But I don’t think it was a lie.  My hunch is that Trump really does want to switch immigration from family re-unification to the more skills-based approach of Canada/Australia.  To do that he needs Congress, and to get Congress to agree he’d need to compromise on the illegals.  I doubt this will work, but I actually do think this is his thought process.  He can’t possibly believe that he can dramatically change our immigration policy without the help of Congress.  Even I don’t think he’s that dumb.

PPS.  Notice how I deny any role in the stock market rally, but still feel a need to link to Matt’s 2012 post

You need a sense of humor to read the news today:

Bloomberg:

Long a voracious consumer of cable news, Trump has cut back how much he watches CNN and MSNBC in recent weeks, having sworn off the latter network’s “Morning Joe” after criticism from its hosts, according to a senior White House aide privy to the president’s viewing habits.

Instead, the president now spends hours some mornings watching Fox News, switching occasionally to CNBC for business headlines, along with a daily diet of newspapers and press clippings, said the official, who asked not to be identified discussing private information. On the evenings when he doesn’t have a dinner or briefing, Trump will spend most of his TV-viewing time watching Fox News shows hosted by Bill O’Reilly or Sean Hannity, the aide said.

I always wondered what kind of person watches Sean Hannity.  Now I know.  (What would Scott Adams say?)

Yahoo.com:

On Wednesday night, The Washington Post was the first to report on a private meeting between Sessions and Russian ambassador to the US. Sergey Kislyak, which took place in the senator’s office last September. The discussions could fuel new congressional calls for the appointment of a special counsel to investigate Russia’s alleged role in the 2016 presidential election and the suspected hacking campaign, according to the Post.

All of the sudden, the news media isn’t talking about Trump’s speech anymore, as it seems the Attorney General lied under oath when asked about contact with Russian officials.

This one probably pre-dates Trump:

Americans should be forced to apply for visas to travel to Europe, the European Parliament has said, in response to Washington refusing to allow all Europeans to travel to the States visa-free.

The WSJ:

WASHINGTON—Republicans blocked a Democratic attempt to obtain President Donald Trump ’s tax returns late Monday.

In a 229-185 procedural vote, the House of Representatives stopped a resolution from Rep. Bill Pascrell (D., N.J.) that would have requested the president’s tax returns from the Internal Revenue Service.

All Democrats voted with Mr. Pascrell. All Republicans voted against him, except for Reps. Walter Jones (R., N.C.) and Mark Sanford (R., S.C.), who voted present.

Undoubtedly the vote would have been identical with a Democratic president, as all our Congressmen and women are principled solons.  And the response of my loyal commenters will be completely uncorrelated with their political affiliation.  “This is about privacy.”  “This is about getting to the truth.”  There are principles involved here . . . somewhere.

And this:

A young woman in the process of renewing her permission as a “Dreamer” to remain in the United States legally was arrested Wednesday by Immigration and Customs Enforcement after speaking at a press conference where she urged President Donald Trump to protect people like her. Now two Democratic senators want answers.

Daniela Vargas, 22, was detained by ICE agents who pulled over a friend’s car on a nearby freeway after she left a coalition of clergy members, civil rights lawyers and other advocates for immigrants at Jackson City Hall, according to one of her lawyers, Nathan Elmore.

Let’s see what tomorrow brings.

If your political views are pretty much the same as back in 2014, it might be time to switch parties.  CNBC recently reported some interesting poll results.  In 2014, Democrats were against free trade by a margin of 13 percentage points.  Today they favor free trade by 41 points.  A 54 point swing in just 3 years. In 2014, Republicans were against free trade by 3 points, today they oppose free trade by 26 points.  (This is from memory, I can’t find the link.)

Other polls show the parties switching positions on whether Putin is a threat to the US.

If you are a free trader who likes immigration and doesn’t like Putin, the Democratic Party is your home.  If you are a protectionist who doesn’t like immigration and likes Putin, then the GOP is your home.

This is one of the most rapid realignments that I have ever seen, but it’s not unprecedented.  What seems to be happening is that the GOP is increasingly becoming like those right-wing, nationalist, pro-Russian, anti-globalization, socially conservative, pro-coal, pro-social insurance parties in Eastern Europe.  And the Democrats are becoming increasingly like the “liberal” parties in Eastern Europe, which tend to be pro-trade, environmentalist, internationalist, socially liberal and anti-Russian.

Amirite?