That’s “progress”

This is from the WSJ:

WSJ: Has the Fed done enough work to explain to the public why low inflation is actually a problem? Most people hear “inflation’s low” and they say, “Great. Good job.” They hear you say, “Well, we want it to be a little bit high.” Have people done enough work to explain to people why actually this is a problem?

MR. KAPLAN [Dallas Fed President]: Well, the answer is I don’t think it is well understood out there. And this is why when I talk about low inflation, I prefer to talk about in the context of nominal GDP. People understand if nominal GDP is too low, why that’s an issue. They understand higher nominal GDP is better. I think I prefer to talk about lagging inflation in the context of nominal GDP. It is what pays the debt service on the U.S. debt. And we want to grow nominal GDP even though we, the published GDP numbers are [adjusted for inflation]. Nominal GDP is ultimately where it gives you the cash flow to service your debt and to spend on other priorities of the country. And so talking about low inflation in isolation, yes, it may be a challenge for us to do more communication to explain why that’s an issue. The way I’ve tried to explain it when I talk to people in my district and throughout the country is in the context of GDP. It’s important to have higher nominal GDP.

HT: Alex Schibuola, David Beckworth



26 Responses to “That’s “progress””

  1. Gravatar of Brian Brian
    30. November 2019 at 14:24

    It may be that there is reluctance to talk about weak inflation and it is connected to maintaining political capital.

    Some people in some positions cannot simply say we want to mitigate price stickiness by giving everybody a stealthy wage cut through higher inflation.

    Some people in some positions cannot say we want to stealthily revalue government debt through higher inflation so they talk about cheerful outcomes like not defaulting and meeting our spending “priorities”. Nobody would cavil over our priorities.

    The conversation to defend the idea of higher inflation becomes too long and difficult.

    I suppose this means we are not in the danger zone because he could have simply answered “avoid deflation”.

  2. Gravatar of dtoh dtoh
    30. November 2019 at 16:14

    If Kaplan actually believes that investors aren’t smart enough to demand higher nominal returns if inflation is higher, than he is not too bright.

  3. Gravatar of ssumner ssumner
    30. November 2019 at 16:55

    dtoh, I’d guess he understands that fact.

  4. Gravatar of Benjamin Cole Benjamin Cole
    30. November 2019 at 17:02

    I think this explanation of Kaplan misses the point.

    I think the best explanation is, “When a modern economy operates on all cylinders, and we have robust employment, we must expect a small amount of inflation, a friction inside the economy. Some rapidly growing sectors of the economy will experience resource shortages, and higher prices will result to pull more resources into those sectors. But 2% to 3% inflation is a small price to pay to have a healthy and prosperous economy.”

    In the modern-day US, the whole inflation picture is also heavily colored by housing costs. Housing has become such a large structural impediment that discussions about inflation ( or even real living standards) are always deficient unless housing is specifically and prominently addressed.

    If you read Kevin Erdmann’s blog, you know that the CPI core sans housing is running at about 1%. Really, that is probably within measurement and methodological error of 0%.

    Although the orthodox macroeconomics profession incessantly jibber-jabbers about inflation, what the US today actually faces is widespread housing shortages, largely due to property zoning, and resulting inflation as measured.

  5. Gravatar of dtoh dtoh
    1. December 2019 at 08:03


    You said, “I’d guess he understands that fact.”

    If so, then Kapan is deliberately trying to mislead the public.

  6. Gravatar of Brian Donohue Brian Donohue
    1. December 2019 at 13:12

    Too wonky.

  7. Gravatar of Michael Rulle Michael Rulle
    2. December 2019 at 06:52

    He speaks on NGDP so naturally, it appears that the entire FED thinks the same way. I wonder if that is true.

    Nominal GDP should be easy to understand, after all, in our personal lives we live in a nominal world. In fact, it is so natural we are not aware there is anything but a nominal world. It’s the “other” real world that has to be explained.

    Therefore, the Fed should speak in terms of GDP growth in nominal terms, and what the FED’s objectives are. They currently do it backwards. They speak in terms of “inflation adjusted” and “2015 constant dollars” etc.

    Just switch the order of the narrative. Aim at the general public. Let us all get used to it. It is something we all can understand. And it would be nice if we all understood what it is trying to do. Right now, the FED is perceived as some group of Talisman seeking hard to understand objectives.

    To quote a famous scientist, “All models should be as simple as possible, but no simpler”. NGDP fits that well.

  8. Gravatar of Michael Sandifer Michael Sandifer
    2. December 2019 at 07:59

    There’s an interesting contradiction in the claim that interest rates are currently low primarily due to real factors, like the baby boomer retirement glut, which was anticipated decades ago. While there was possibly a shock regarding lower population growth, beginning in 2006, it was not nearly large enough to account for the difference between long-term interest rates then and short-term rates now(implied difference in RGDP growth). The 20 year rate exceeded 5.5% at times during 2004.

    And the Fed’s had a pretty consistent problem hitting its Inflation target since a recession in which even nominal GDP growth never came close to returning to trend. Hmmm.

  9. Gravatar of Randomize Randomize
    4. December 2019 at 15:54

    Dr. Sumner,

    I believe you’ve made this comment before, but it’s worth repeating: It would be more politically palatable to talk about Income targeting (NGDI) as opposed to NGDP targeting. Nobody is going to complain if the Fed says they’re targeting stable income growth. They have basically fungible growth rates anyway…

  10. Gravatar of ssumner ssumner
    4. December 2019 at 22:20

    Randomize, I agree.

  11. Gravatar of Michael Sandifer Michael Sandifer
    5. December 2019 at 03:21

    Here’s a short blog posts on why it’s silly for economists to constantly ask why inflation undershoots:

    They’re ignoring the econ 101 SRAS/SRAD model. The most straightforward explanation for undershooting inflation is that we’re on a flatter part of the SRAS curve than most think, and hence RGDP is higher than most think. Also explains why nearly everyone had NAIRU estimates that were too high.

  12. Gravatar of Michael Sandifer Michael Sandifer
    5. December 2019 at 03:22

    RGDP potential is higher than most think, that is.

  13. Gravatar of Michael Sandifer Michael Sandifer
    6. December 2019 at 12:01

    Ramesh Ponnuru apparently agrees with me that money’s been too tight over the past few years.

  14. Gravatar of Christian List Christian List
    6. December 2019 at 13:38

    The US is mostly progress. This can also be seen if you compare the US to Europe. There is a lot of talk about supposedly right-wing populist parties that allegedly have a lot of power. Well, they don’t. And even if it were true, they are not the biggest problem Europe has.

    The really big players in Europe are the green movements and their political parties, who also enjoy massive support from opinion makers, media people, officials, teachers, and so on.

    Their idea of NGDP looks like this: It must under no circumstances continue to rise. It would be best if NGDP would fall.

    The pretty influential green economists say things like:

    Not only do we need an economy without growth, but also a dismantling program. Less growth is not enough, we need zero growth, which is also not enough, we need dwindling, we need contraction.

    With regard to food, they say: Small organic farms only would be best, managed on the basis of solidarity, and of course: production for their specific region only. No bananas anymore, but pickles are okay.

    With regard to the housing market, they say: Every additional square metre of housing and living space that we create is an ecological catastrophe.

    I am not joking. I’d like to but I don’t.

  15. Gravatar of Michael Sandifer Michael Sandifer
    6. December 2019 at 15:49

    Econ Twitter exploded today with many economists pointing fingers to the Fed, asking why they chose to raise rates at all in this recovery, while a minority of economists made excuses for the Fed.

    It’s nice to have a lot more company, suddenly. My model aside, not too hard to understand that if Inflation target is usually undershot, unemployment keeps surprising on the downside, NGDP growth is low, and money velocity mostly falling over a period, that money is and has been too tight. Most of the economics profession has greatly overstated secular stagnation, real though the phenomenon is.

  16. Gravatar of Suman Lama Suman Lama
    8. December 2019 at 08:48

    Why a normal day citizen has to be worried about the debt that fed took in order to bail out their buddies??

  17. Gravatar of Doug M Doug M
    8. December 2019 at 14:15

    I can remember reading an interview with Alan Greenspan in the early 90s where after finally driving inflation down to 2% he expressed the idea that we should be targeting as small of a positive number as possible.

    Inflation creates distortions, and less inflation is always better. It creates income tax bracket creep. It creates capital gains that are not real. I forget the other distortions he brought up.

    Of course inflation also allows for prices and wages to adjust in real terms without anyone have to make the “hard decisions” to actually make a cut.

    And, not all prices move in lock step. We have seen massive deflation in some sectors, i.e. tech, and inflation in others (education and healthcare).

  18. Gravatar of Benjamin Cole Benjamin Cole
    8. December 2019 at 19:31

    Well, as I banned from Econlog, I will comment here on Scott Sumner’s musing whether the business cycle is dead or close to it.

    I thought about this really hard for a really long time.

    You know, what we are seeing is the globalization of capital markets, and remember money is a fungible commodity. So, long-term interest rates, and the amount of new money creation is a global topic, and we need a global lens to look at capital markets.

    So, what is happening is the PBoC, the BoJ, The Fed, the ECB, perhaps the Bank of England and even at times the Swiss National Bank are undertaking actions that effect the big blob, the global capital market. This globalization and unification of capital markets seems to be lending some stability to the entire system.

    In past eras, maybe the Fed could choke the US economy, but it lacks the ability to so so anymore, at least within acceptable policy parameters. The Fed did recently error in being too tight, but other global bank were easing, so US capital markets, which are globalized, did not become too tight.

    In any event, monetary macroeconomic analysis that begins and ends with, “The Fed did this, and so the US economy did that” seems outdated. If there is a US business cycle, it must take place within globalized capital markets, and also a somewhat globalized economy.

    BTW, Mark Carney, BoE, more or less said the BoE has lost control of interest rates, they are set by global market forces.

  19. Gravatar of Gene Frenkle Gene Frenkle
    8. December 2019 at 20:59

    Benjamin Cole, you are correct about GLOBAL capital markets. In fact I have an interest in the 2000-2008 period in which a dysfunctional global oil market led to oil profits that wreaked havoc in global capital markets. So Americans often talk about the Housing Bubble as if it was something that only took place in America, but it was a global phenomenon caused by oil profits searching for yield which led to malinvestment. So I contrast the Housing Bubble in the context of global capital markets with the S&L Crisis in which the underlying cause was a dysfunctional global oil market but capital markets were regional…so Texas and adjacent states had a real estate bubble that popped and caused a regional recession. Oh, and Volker tried to stop inflation in the early 1980s but Houston’s commercial property bubble continued to inflate.

  20. Gravatar of Benjamin Cole Benjamin Cole
    9. December 2019 at 03:03

    Gene Frenkie:

    Thanks for your comments.

    The St Louis Fed has issued studies indicating US QE would have to have been four times as large to have much effect on US interest rates or inflation.

    This supports the view that Fed, when trying to inflate the US economic balloon, must resort to trying to lower air pressure globally, under current arrangements.

    More and more, I think the new default position going forward will be money-financed fiscal programs—-hopefully implemented through tax cuts on productive people (employees and employers) and not give-aways or dubious federal welfare and warfare programs.

  21. Gravatar of Benjamin Cole Benjamin Cole
    9. December 2019 at 03:48

    Add on for Gene or anyone else:

    This is from the Peterson Institute for International Economics

    Again, we see “mainstream” economists calling for money-financed fiscal programs aka helicopter drops, or maybe even a variant of MMT. Peterson joins Pimco, Blackstone, Ray Dalio, Stanley Fischer, and others.

    Now, when I put on my tin-foil hat to genuflect to the Helicopter-Totem inside the Temple of Orthodox Macroeconomic Theology, I am elbowed aside by throngs.

  22. Gravatar of Gene Frenkle Gene Frenkle
    9. December 2019 at 09:21

    Benjamin Cole,
    I knew the Great Recession wasn’t going be as bad as many economists were predicting when fracking for natural gas was proven economical in 2009. So according to the Bush administration we were in a “quiet” energy crisis from 2000-2008 and we finally solved it in 2009. QE did fuel a bubble but it turned out to be a positive bubble which was fracking for oil which I attribute to “luck”. So fracking for oil finally resulted in lower oil prices in 2014. The other thing that happened at the end of 2013 was the Obama stimulus was stopped by Republicans. So the Obama stimulus was too big and too long in light of our energy crisis being solved, so after 2010 it was counterproductive for the reason you state—welfare spending going to able bodied adults without babies which undermined the job market. So the Obama Council of Economic Advisors published a report in December 2013 predicting the Republicans would tank the economy but instead our strong economy started in Q2 2014 before the price of oil even started falling.

  23. Gravatar of Benjamin Cole Benjamin Cole
    9. December 2019 at 17:17

    The US becoming energy-independent is a fascinating development. I think it has positive economic ramifications for US living standards, often overlooked.

    BTW, here is a puzzler: The global orthodox macroeconomics community will scale to the very pinnacles of righteous indignation regarding Trump’s tariffs on communist China. The Trump tariffs (all $60 billion of ’em) will tip the global economy into recession, if not another Great Depression!

    Okay, so Saudi Arabia and OPEC have just concluded another Vienna meeting in which they overtly agree to reduce oil production to order to artificially keep oil prices high. It is a cartel in action, to gouge consumers globally. This results in the transfer of many times $60 billion to OPEC coffers every year. A tax, if you will.

    No one cares.

  24. Gravatar of Gene Frenkle Gene Frenkle
    9. December 2019 at 17:37

    $50-$75 oil is now a net positive for America because of fracking for oil. So Moody’s Analytics election model failed in 2016 because it placed a positive value on low gasoline prices, however due to fracking low gas prices resulted in Texas having .3% GDP growth which also negatively impacted manufacturers in the Rust Belt which supplied frackers. The only thing is in 2016 everyone knew lower oil prices would be positive over the long term as long as they weren’t too low. So the proper way to view the GDP growth in 2016 is it was very positive under the circumstances, and quite frankly Texas’ .3% GDP growth was phenomenal. That said fracking for natural gas is what gives America a competitive advantage and it is why global manufacturers started announcing new North American factories in 2015.

  25. Gravatar of Benjamin Cole Benjamin Cole
    10. December 2019 at 16:56

    Gene- thought of the day: the Gulf States, including Saudi Arabia, need about $80 a barrel to break even on their national budgets.

    As they are one-trick ponies, those nations are addicted to higher oil prices.

    Meanwhile, I think the electric vehicle becomes commercially viable within 10 years.

    Keep on frackin’!

  26. Gravatar of Gene Frenkle Gene Frenkle
    10. December 2019 at 21:19

    Benjamin Cole, I would argue that the first law of thermodynamics should have been taught in macroeconomics 101 from 1945 to 2014. Fracking and the inevitable development of EVs and solar power and wind power have taken the first law of thermodynamics out of macroeconomic equations. So with respect to “progress”—in the 1960s supersonic commercial aircraft were developed and helicopter airlines were hatched all to fail in the 1970s. Fast forward to today and helicopter airlines are being started up and supersonic passenger jets are being developed. Plus civil VTOL aircraft are being developed from the V-22. All of this is possible because fracking has tamed the energy market so it behaves like other commodity markets and Fortune 500 companies can make long term investments with more certainty.

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