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



16 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 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).

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