The NGDP futures market believes in the Great Stagnation

[Update:  Since Tyler linked to this I should clarify that I do understand that NGDP growth is a demand-side concept.  In earlier posts I’ve suggested that RGDP trend growth is now about 1.2% and trend inflation about 1.8%.  So the drop in NGDP growth from a 5% trend to 3% trend is mostly a RGDP (supply-side) story.]

For several years I’ve been arguing that we are in a Great Stagnation, and that trend NGDP growth is about 3%, not the 5% to 5.5% from before the crisis.  Just to be clear, I am referring to Tyler Cowen’s supply-side theory, not the Summers/Krugman demand-side secular stagnation, which I do not accept.

The NGDP futures price in the Hypermind prediction market has fallen from the 4.0% to 4.5% range earlier in the year, to its current value of 3.6%.  The 10 year bond yield has also been trending lower in recent weeks (although it’s quite erratic.) You might argue that 3.6% is still higher than 3.0%, but that’s the wrong way to think about it.  The 3.6% forecast is for an expansion year, a year when the unemployment rate is expected to decline.  The trend rate of growth includes both expansion years like 2015 and recession years like 2009, and the next recession. Thus if the nominal economy is expected to grow by 3.6% in an expansion year, the actual trend rate of growth is surely lower.  My 3.0% estimate is probably not far off from market forecasts.

Some implications:

1.  Very low nominal rates are the new normal, as I’ve been saying for many years.

2.  The Fed policy regime is bankrupt, as it is based on interest rate targeting and growth rate targeting, a combination which simply doesn’t work at the zero bound. They need to do NGDPLT.

3.  The Fed needs to raise wage inflation to 3% to hit its 2% PCE inflation target. Although wage growth has accelerated a tiny bit in recent months, it is still at only 2.136% over 12 months, far below the wage growth required to hit their inflation target. (Of course I oppose inflation targeting, but if they are doing it then they should do it.)

4.  While the Fed says they target 2% inflation and unemployment near the natural rate, their actions are not consistent with that target.  They run low inflation during period of high unemployment, whereas their mandate calls for the exact opposite.


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57 Responses to “The NGDP futures market believes in the Great Stagnation”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. April 2015 at 06:53

    The Ironman has more bad news;

    http://politicalcalculations.blogspot.com/2015/04/dividends-us-economy-contracts-for.html#.VR6pBfDEaPU

    ‘For the fourth month in a row, the number of publicly-traded U.S. companies announcing that they are reducing cash dividend payments to their shareholders has remained elevated at levels that are consistent with periods of economic contraction and recession in the U.S. economy.

    ‘In March 2015, the number of firms acting to cut their dividends climbed back up to 56, over five and a half times the maximum number that we’ve observed is consistent with a healthy, growing economy, and more than double the level where we’ve previously observed that some degree of economic contraction has occurred, outside of periods when changes in U.S. tax policies drove changes in the dividend policies of U.S. firms.’

  2. Gravatar of Becky Hargrove Becky Hargrove
    3. April 2015 at 06:56

    Thanks for the clarification in the first paragraph. The difference is important.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. April 2015 at 07:14

    And the new jobs report isn’t good either;

    http://www.forbes.com/sites/samanthasharf/2015/04/03/jobs-report-u-s-economy-added-126000-jobs-in-march-unemployment-steady-at-5-5/

    ‘Weaker than expected March job gains are the latest in a string of lackluster economic data caused by a combination of the cold weather, the strong dollar and the decline in the price of oil. [I’ll have the combo!] The balance of these factors remains to be seen, so while the report may give the Federal Reserve another reason to keep interest rates low past June what happens beyond that date is still unclear.

    ‘Employers added 126,000 jobs in March, according to the latest payroll report from the Bureau of Labor Statistics. Out Friday morning the figure is the weakest since December 2013 and far lower than the 250,000 new jobs economists were forecasting.’

  4. Gravatar of Britonomist Britonomist
    3. April 2015 at 07:21

    What is the size of the NGDP Hypermind prediction market? It’s fairly volatile, which I assumed represented not many participants yet. I also don’t see why a supply side stagnation implies lower NGDP growth specifically (RGDP growth certainly), since aren’t you of the opinion that NGDP is central bank determined, and thus lower NGDP growth just represents insufficiently expansionary monetary policy?

  5. Gravatar of bill bill
    3. April 2015 at 07:32

    Can you describe more what you mean by:
    “trend NGDP growth is about 3%, not the 5% to 5.5% from before the crisis. Just to be clear, I am referring to Tyler Cowen’s supply-side theory,….”

    It seems to me that if the Fed wanted a 5% average NGDP growth rate, then we’d have one. And since the 3% NGDP growth rate is primarily (solely?) the result of Fed policies, what do you mean that it’s a supply-side result?

    Thanks.

  6. Gravatar of TallDave TallDave
    3. April 2015 at 08:12

    I’m not sure I believe in TGS except as an effect of phenomena like Parkinson’s Law and the growth of regulatory burden; most low-hanging fruits only seem obvious after large number of failures have been discarded. Ceteris paribus, I don’t believe real risk-adjusted returns have changed significantly.

    Put me firmly in the 4-5% NDGP target camp.

  7. Gravatar of benjamin cole benjamin cole
    3. April 2015 at 08:24

    Excellent blogging.

    1. I still say the big question that no one wants to answer is whether QE becomes conventional policy. Certainly we must consider QE as conventional policy if we cannot get away from ZLB…and they still have not gotten away from ZLB in Japan.

    2. What does the “supply side” mean for a single country like the United States, that operates with a global supply side?

    3. Even more, what does the “supply side” mean for the United States that has an international reserve currency? We can print money and import goods and services and capital equipment.

    4. Is demand-pull inflation even possible anymore in the US, now that we have a global supply side? Is it not likely that more demand just creates more supply?

  8. Gravatar of Njnnja Njnnja
    3. April 2015 at 08:42

    I’ve been noticing the Hypermind bug on the website going down lately and was hoping you would comment on it. And with the mediocre employment report today…why is the Fed even talking about raising rates?! I mean, I know why – political pressure. But it would be nice if there was more political pressure the other way to counteract it. I guess promoting better monetary regime to encourage healthy rate of national income growth is in nobody’s best interests (except workers, but who cares about them).

    If Jeb Bush calls, please help him out.

  9. Gravatar of collin collin
    3. April 2015 at 08:57

    That trend NGDP growth is about 3%, not the 5% to 5.5% from before the crisis. Just to be clear, I am referring to Tyler Cowen’s supply-side theory.

    Has something changed about geo-social-economic-politics shocking the decrease in NGDP levels here? I find both supply and demand side views not explaining this fully. In the US over the last 2 decades, what has slowed down on the supply or demand side to create the situation. Items that might have altered the slowdown:

    1) Peace dividend. Less military spending and wars (compared to decades ago not ten years ago.)
    2) Population slowdown.
    3) Capital (esp. IT capital) is more productive.
    4) Global labor glut.

  10. Gravatar of ssumner ssumner
    3. April 2015 at 08:57

    Britonomist and Bill, Good question, and I didn’t explain that well. Previously I’d argued that the 3% growth would be 1.2% RGDP growth and 1.8% inflation. So what I’m actually claiming is that NGDP growth has slowed primarily because RGDP slowed for supply-side reasons. But yes, they could have 5% NGDP growth if they wanted, they just don’t want it.

    I believe Hypermind is quite small, but don’t have the data. I went short at 4.1% (but I don’t claim any forecasting ability based on my theories, I was just having fun.)

    Njnnja, Yes, I’ll help Jeb whenever he calls.

  11. Gravatar of Matt McOsker Matt McOsker
    3. April 2015 at 09:17

    Agree with your assessment, but still feel we need a serious fiscal boost as well. On a 10 hour drive it was clear what crap shape our basic infrastructure is in. Basic stuff likr roads, bridges….

  12. Gravatar of bill bill
    3. April 2015 at 09:20

    I think I get it. Changing demographics has knocked about a percentage off of trend RGDP growth. And for the last 30+ years, the Fed has used each recession to ratchet down inflation expectations instead of countering it (ie, instead of trying to be counter-cyclical and maintain a steady NGDP target).

  13. Gravatar of BC BC
    3. April 2015 at 09:21

    “The trend rate of growth includes both expansion years…and recession years.”

    Maybe, the market expects that the Fed will keep NGDP growth very steady at 3.6% so that we will have neither (demand-side) expansions nor recessions, just very stable nominal growth. Ha.

  14. Gravatar of E. Harding E. Harding
    3. April 2015 at 09:28

    I think the Fed is holding to a common-sense “misery index” view of the situation; the idea that a point of inflation and a point of unemployment are basically equivalent. This leads to the view that by 1980, stagflation was almost as bad as the Great Depression:
    http://research.stlouisfed.org/fred2/graph/?g=16qI
    The Fed wants a stable-ish misery index. NGDP targeting would lead to a highly volatile misery index.
    BTW, in February, we had the lowest misery index since 1959. Thus, the Fed considers itself to have done a fine job and that there’s no huge problem with raising rates.

  15. Gravatar of dw dw
    3. April 2015 at 09:53

    i dont see how we can not have a demand side problem. i know you dont believe in wage stagnation, but some of have seen exactly that for years, where no increase in wages was seen. how do we avoid that demand side problems if the majority dont get wage increases.

  16. Gravatar of E. Harding E. Harding
    3. April 2015 at 10:03

    @dw -The AHETPI series went up by $2 per hour since 2009. That’s certainly not negligible.

  17. Gravatar of sourcreamus sourcreamus
    3. April 2015 at 11:10

    If I understand correctly you are arguing the RGDP went down for non-monetary reasons. Since NGDP is RGDP plus inflation doesn’t that mean if the central bank was targeting NGDP and RGDP went down that inflation would then be too high unless the target was moved? How would the central bank know when to move the target?

  18. Gravatar of ssumner ssumner
    3. April 2015 at 11:29

    Collin, Mostly slower population growth, but also slower productivity growth.

    Matt, I propose that my city (Boston) divert funds from the Boston Olympics to filling potholes.

    E. Harding, No, NGDP targeting does not make the misery index less stable. (BTW, the misery index is a really silly idea.)

    dw, We’ve had a demand problem in recent years, but that’s cyclical. Long term growth slowdowns are structural.

    sourcreamus, Central banks should ignore inflation and target NGDP. It makes no difference whether inflation rises or falls, only NGDP matters.

  19. Gravatar of Ray Lopez Ray Lopez
    3. April 2015 at 13:14

    @Becky Hargrove – does what Sumner say make sense to you? Sumner: ” Just to be clear, I am referring to Tyler Cowen’s supply-side theory, not the Summers/Krugman demand-side secular stagnation, which I do not accept.” Exactly what is ‘demand-side secular stagnation’? Is Sumner denying demographics? If anybody could decode this cryptic statement it would be nice for we ignoramuses.

  20. Gravatar of Rajat Rajat
    3. April 2015 at 14:11

    Scott, if you can just clarify for us slowcoaches:
    1. You consider Summers-Krugman secular stagnation to be primarily a demand-side phenomenon because it’s all about ways of generating higher demand in developed countries to match the global savings glut. Indeed, it seems to me that the debate is a proxy way for how we should address developed country demand shortfall at the ZLB.
    2. But anyway, in your view, demand-side SS doesn’t really exist because central banks could inflate if they wanted to.
    3. Bernanke doesn’t believe in demand-side SS either, but not (apparently) for the same reason as you. He says it’s because of the scope for international transactions. He dodges the issue of whether CBs could inflate their way out of SS if they tried harder.
    4. Krugman rejects Bernanke’s solution because exchange rates will not fall by enough in developed countries to address the demand-side imbalances. To which Tyler Cowan has blogged that they will fall by enough.

  21. Gravatar of ssumner ssumner
    3. April 2015 at 14:21

    Rajat, They have suggested that it’s a demand-side secular stagnation, similar to what Keynes said occurred in the 1930s.

    2. Yes, the central banks could inflate, and in any case the unemployment rate is close to the natural rate, and still falling.

    3. I can’t speak for Bernanke, but obviously if the Fed is planning on raising rates then Fed officials like Janet Yellen don’t see any demand-side problems.

  22. Gravatar of Rajat Rajat
    3. April 2015 at 14:37

    On your fourth and final implication: “They run low inflation during period of high unemployment, whereas their mandate calls for the exact opposite.”

    This takes me back to your post on Calomiris back in January https://www.themoneyillusion.com/?p=28518

    I maintain that most economics commentators and Fed watchers, etc, see the dual mandate not in the way you do (and in the way it makes most sense – ie allowing for supply-side shocks), but as allowing greater freedom for CBs to err in response to the inevitable effectiveness lags of monetary policy.

    Perhaps a better way of expressing this idea is that most see the dual mandate as differing from pure IT in that reflects a ‘Misery Index’ objective. So high UnN is more acceptable/ excusable/ bearable if it is accompanied by below-target inflation. And high inflation is more excusable if it is accompanied by low UnN. High UnN and above-target inflation would be seen as a very bad thing – harking back to the failures of the stagflation 70s. Most people don’t get supply and demand.

    Underlying this perspective is a view that below-target (but still positive) inflation is a ‘good thing’ rather than a bad thing, as opposed to your view that below-target inflation is symmetrically as bad as above-target inflation.

  23. Gravatar of Steve Steve
    3. April 2015 at 16:54

    The Hypermind NGDP forecast seems to be tracking the Atlanta Fed GDPNow forecast down.

    https://www.frbatlanta.org/cqer/researchcq/gdpnow.cfm

    There are a few basis points out there for any macro arbitrageur who wants to figure out if any components of GDPNow are leading indicators.

    Oh, and the jobs report today was lousy.

  24. Gravatar of TravisV TravisV
    3. April 2015 at 17:08

    Look at the bright side, the stock market increased today (0.35%)!

  25. Gravatar of E. Harding E. Harding
    3. April 2015 at 17:27

    @ssumner
    -Could you elaborate your previous reply to me? It’s certainly not intuitive. Wouldn’t an NGDP targeting regime lead to a positive relationship between inflation and unemployment?

  26. Gravatar of Thiago Thiago
    3. April 2015 at 17:41

    Every day, the Hypermind answer to “What will be the growth rate of U.S. Nominal GDP in 2015?” falls further. It is really sad.

  27. Gravatar of TravisV TravisV
    3. April 2015 at 17:51

    Lars Christensen has a lot of links in this new post:

    http://marketmonetarist.com/2015/04/02/brad-ben-beckworth-and-bob

  28. Gravatar of TravisV TravisV
    3. April 2015 at 18:02

    Prof. Sumner’s brief new podcast at CATO:

    http://www.cato.org/multimedia/daily-podcast/plea-market-monetarism

  29. Gravatar of TravisV TravisV
    3. April 2015 at 18:07

    Prof. Sumner,

    After listening to the podcast, one thing I wonder about is why it’s preferable for the Fed to purchase U.S. government debt rather than a basket of foreign currencies. You said you want the purchases to be “neutral” (non-distortionary) and it seems like a basket of foreign currencies would accomplish that…..

  30. Gravatar of ssumner ssumner
    3. April 2015 at 18:12

    Rajat, I don’t doubt that some see it the way you describe, but that’s not a logical or rational way of looking at things, and it’s hard to believe the Fed itself could be so clueless. If you start with pure inflation targeting, and then add employment as a second goal, the only logical conclusion is you want monetary policy to be more expansionary than an inflation only target, when unemployment is high.

    If they really had a misery index goal they’d set the inflation target at zero, and minimize the absolute value of inflation/deflation.

    Travis, Weren’t markets closed today?

    E. Harding, Yes, but I meant that the misery index would be no more unstable. That’s because while inflation would be less stable than with inflation targeting, unemployment would be more stable.

    Thiago, Yes sad, but I’m not really surprised. This “recovery” has had lots of false dawns. THIS will be the year . . . until it isn’t.

  31. Gravatar of ssumner ssumner
    3. April 2015 at 18:13

    Travis, I’m not sure they are allowed to buy foreign bonds. Does anyone know?

  32. Gravatar of dtoh dtoh
    3. April 2015 at 18:22

    Is everyone on this board daft? How can you have a discussion about N/RGDP trend growth rates with no mention of the 60% increase in the capital gains tax rate? If you assume asymmetric returns on capital for new business formation (a few big winners and lots of losers,) the impact on expected after tax returns is even bigger.

  33. Gravatar of TravisV TravisV
    3. April 2015 at 19:01

    Prof. Sumner,

    Haha, thanks for letting me know the market was closed. Was studying for the Level III CFA exam today and just came up for air!

  34. Gravatar of Steve Steve
    3. April 2015 at 19:15

    ssumner: “Weren’t markets closed today?”

    S&P 500 futures dropped 20 points (1.0%) after the jobs number came out.

  35. Gravatar of TallDave TallDave
    3. April 2015 at 20:00

    A liquidity trap is one of those illusions that can actually exist if sustained by belief — to the extent a CB does not believe it can inflate, it will not try to, and markets may not expect them to try to. I suspect the potential delta in RGDP from an idealized policy that breaks the current expectations regime is larger than generally believed.

    TC posted a very interesting link to a study showing that corporate returns have also achieved a wider distribution, I believe it was something like 1 in 7 companies has 50% returns vs 1 in 100 50 years ago. Although Orszag looked at only four years total, that’s still a pretty striking picture of increasing returns to top value-creators.

    The low-hanging fruit may be gone, but we’re pulling bigger and bigger branches down to our level.

  36. Gravatar of Ray Lopez Ray Lopez
    3. April 2015 at 20:39

    Seems like the conversation here is moving at warp speed between savvy PhD-level students and professional economists, or, people are talking past each other, or, I’m really ignorant about economics. [update: it’s #2]

    For example, Rajav asks in his bullet point 1: “You consider Summers-Krugman secular stagnation to be primarily a demand-side phenomenon because it’s all about ways of generating higher demand in developed countries to match the global savings glut. Indeed, it seems to me that the debate is a proxy way for how we should address developed country demand shortfall at the ZLB.”

    To which Sumner seemingly replies on this point: “Rajat, They have suggested that it’s a demand-side secular stagnation, similar to what Keynes said occurred in the 1930s.”

    I don’t recall Keynes ever saying what Rajiv suggests (FT’s Martin Wolf has however, and he is an old-style Keynesian). And in fact entering “keynes demand side secular stagnation” in Google will give you three links, one of them Cowen on Sumner, entitled “Scott Sumner on demand-side secular stagnation”, the second is “Secular stagnation and the bastardisation of Keynes” (OT: I found this to be a good article, and implicitly faults high debt as the culprit to slower growth, and hence implicitly advocates a debt writeoff), the 3rd is: “Secular stagnation: The second best solution | The Economist”. (Sorry no links, but you cannot post this many links in WordPress post without generating potential errors).

    None of these links seems to me to support the idea of a ‘global savings glut’ that must be matched to higher developed country demand. Instead, demand side secular stagnation is simply exactly what you expect it is: a shortage of demand caused by a collapse in demand, which possibly is also from increased unemployment / underemployment, after 2008’s financial bubble bursting.

    The point of this long-winded exercise? That our host, though interesting and entertaining, is like a leopard that can change its spots, and slippery too. A leopard eel. In fairness, Sumner does not adopt expressly Rajiv’s first point, but by replying Sumner gives the impression he is responding to Rajiv’s first point and adopting the logic therein. This is clearly misleading. (True, in Sumner’s post on this topic, Sumner does not make this misleading mistake, and we can’t expect him to be clear in the comments section, since he tries to respond to everybody, but I’m just pointing out the error).

    Finally, though space here dissuades it, I source my posts, unlike most here, who just shoot from the lip/hip.

  37. Gravatar of Rajat Rajat
    3. April 2015 at 21:39

    Scott, I don’t think the Fed is really that clueless, but it can suit them if other people are. Here is the RBA’s Glenn Stevens pushing back against the idea that the RBA should do more to support growth:

    “…the Reserve Bank is doing that, and will continue to lend what support it can, within the limits of its powers and consistent with its mandate…. But we have always said we cannot hope to fine-tune this transition, however much we may wish otherwise.”

    http://www.businessinsider.com.au/rba-governor-stevens-just-admitted-the-bank-cant-solve-all-the-australian-economys-problems-2015-3

  38. Gravatar of Vivian Darkbloom Vivian Darkbloom
    3. April 2015 at 23:59

    Section 14(2)(b) of the Federal Reserve Act (“Powers”) allows the purchase of obligations issued or guaranteed by foreign governments:

    “To buy and sell, at home or abroad,…obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof, such purchases to be made in accordance with rules and regulations prescribed by the Board of Governors of the Federal Reserve System.”

    http://www.federalreserve.gov/aboutthefed/section14.htm

    The language does not support the purchase of private foreign obligations (unless guaranteed as to principal and interest by a foreign government or agency). The provision was added by the Federal Reserve Act of 1980. However, Small and Clouse note that:

    “At that time, the Federal Reserve made commitments to use this authority to purchase foreign government securities only to invest the System’s excess holdings of foreign currency obtained from its normal activities in the foreign exchange market and not to “bail out” foreign governments.”

    It is not clear what the nature or form of those “commitments” consisted of or how one might define a “bail out”.

    http://www.federalreserve.gov/pubs/feds/2004/200440/200440pap.pdf (footnote 72)

  39. Gravatar of dtoh dtoh
    4. April 2015 at 00:31

    Folks, this is simple.

    Higher tax rates on capital > Lower returns on capital > Less investment > Lower growth.

  40. Gravatar of Ray Lopez Ray Lopez
    4. April 2015 at 03:51

    @dtoh – simple, as in simple minded. We tried trickle down economics and it failed. Tax is irrelevant to businesses; California has some of the highest tax rates yet they have Silicon Valley (and Boston is high tax and has Rt 128). As for your equations, “>” means ‘greater than’ so you are advocating high taxes on capital, Piketty would agree.

  41. Gravatar of dtoh dtoh
    4. April 2015 at 04:53

    Ray, you ever run a business? And you may not know this but you can actually invest in companies incorporated or operating in States other than the one in which you live.

  42. Gravatar of benjamin cole benjamin cole
    4. April 2015 at 06:08

    Ray Lopez—Have you ever considered a numerological interpretation of the Gnostic books if the Bible, as applied to nominal US GDP 1945 to 2015?
    A lot to be learned there. This is the secret, turn-key clue to the new golden chamber of your life.

  43. Gravatar of Anthony McNease Anthony McNease
    4. April 2015 at 06:59

    I eagerly await Bullard’s follow up interview where he argues that we still need to raise rates so we can lower the.

  44. Gravatar of Anthony McNease Anthony McNease
    4. April 2015 at 06:59

    “them” not “the”

  45. Gravatar of Ray Lopez Ray Lopez
    4. April 2015 at 07:35

    @dtoh – yes, I have my own incorporated business. I chose California actually, though I toyed with the idea of Nevada.

    @benjamin cole – forget the Illuminati, what do you think of this proposal by Iceland? (HT: TC at MarginalRevolution). I bet Sumner likes it, as it’s a step towards his NGDLT in a way (I think, though with Sumner you never know what he’s thinking), though it’s a 100% reserve ratio scheme. http://www.zerohedge.com/news/2015-04-01/iceland-stuns-banks-plans-take-back-power-create-money

  46. Gravatar of Jim Glass Jim Glass
    4. April 2015 at 08:06

    “Tax is irrelevant to businesses….”

    Ha! ha! ha! Keep ’em coming, Ray. Don’t know facts, don’t know theory, don’t know famous events of tax history… doesn’t have a doubt in his head about his most absurd beliefs that contradict all three!

    There’s even a scientific name for this: the Dunning-Kruger Effect. It results from the fact that those who don’t know how to think can’t think well enough to know that they don’t know how to think, so their self-esteem rules and they think they have superior intellects.

    In one famous study people who scored at the 12th percentile in a logic skills test self-reported their opinion that they were at the 68th percentile. Then, after they were shown the correct answers of others, their opinion of themselves went *up* to the 77th percentile! “Look at all the stupid answers of all those other dumbbutts, we were too modest!”.

    I used to think this could be called the Usenet Effect, but the Obsessive Blog Commenter Effect will certainly do.

    “…California has some of the highest tax rates yet they have Silicon Valley”

    An example off that very logic test!

  47. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. April 2015 at 08:07

    Scott has a new post up at Econlog, mainly about Bernanke’s blogpost on Germany’s trade surplus.

    http://econlog.econlib.org/archives/2015/04/germany_is_bala.html

    I’m amazed at how dopey Bernanke is being on his new blog. No wonder we’ve had such a lousy economy since he became head of the Fed.

  48. Gravatar of Michael Byrnes Michael Byrnes
    4. April 2015 at 08:20

    George Selgin on the Fed’s role in the recovery:

    http://www.alt-m.org/2015/04/02/the-fed-and-the-recovery-or-qe-not-d/#disqus_thread

  49. Gravatar of ssumner ssumner
    4. April 2015 at 09:20

    Ray, I will provide a complete list of all the people in the universe who believe these three things:

    1. Money is neutral and superneutral in the short run.
    2. Taxes have no incentive effects.
    3. There can be a “shortage of demand.”

    Complete list:

    Ray Lopez.

    Rajat, That’s just central bankers being vague, as usual.

    Vivian, Interesting. I was in DC recently and asked a bunch of experts on monetary policy, and they said the Fed was not allowed to buy foreign bonds. Thanks for that info, I need to double check.

  50. Gravatar of Assorted links Assorted links
    4. April 2015 at 11:31

    […] 2. The ngdp futures market believes in the great stagnation. […]

  51. Gravatar of Assorted links – Freedom's Floodgates Assorted links - Freedom's Floodgates
    4. April 2015 at 11:44

    […] 2. The ngdp futures market believes in the great stagnation. […]

  52. Gravatar of Thiago Thiago
    4. April 2015 at 16:25

    “Thiago, Yes sad, but I’m not really surprised. This ‘recovery’ has had lots of false dawns. THIS will be the year . . . until it isn’t.”
    THAT is even sadder. The new normal is not even new anymore.

  53. Gravatar of George Selgin George Selgin
    5. April 2015 at 04:13

    “The drop in NGDP growth from a 5% trend to 3% trend is mostly a RGDP (supply-side) story.”

    Scott, I think this clarification needs clarification. It makes it sound like NGDP isn’t entirely in the command of the monetary authorities. Yes, the decline is more y than P, but NGDP is still a demand-side quantity.

  54. Gravatar of ssumner ssumner
    5. April 2015 at 06:52

    George, Yes, they completely determine NGDP growth. But if they are targeting inflation (as they are) then lower RGDP growth will lead to lower NGDP growth. Or if you prefer, will lead the Fed to change its policy in such a way as to produce lower NGDP growth.

  55. Gravatar of Michael Byrnes Michael Byrnes
    5. April 2015 at 07:28

    “[Lower RGDP growth] will lead the [inflation-targeting] Fed to change its policy in such a way as to produce lower NGDP growth.”

    Given the influence of nominal income on short-run RDGP growth, isn’t the above a procyclical monetary policy that will have a negative impact on real growth? Both from inappropriate easing when real growth picks up and from inappropriate tightening when it falls. Given what the past 7 years suggest about the limitations of procyclical inflation-targeting, it’s hard for me to buy that current policy is not having a demand-side imapact on RGDP growth. (Which is not to say that there are not supply-side problems as well, more that we still have a mix of both).

  56. Gravatar of ssumner ssumner
    6. April 2015 at 05:34

    Michael, Exactly right, and that’s why NGDP targeting is better than inflation targeting.

  57. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    6. April 2015 at 09:49

    All, I think the FED is thinking on tightening (and given the long and variable LEADS concept it is already tightening) because the commitee thinks at some point during the next few quarters the output gap will be lowered to zero or close to it. Inflation target requires the estimation of potential output gap, an elusive concept. NGDP is a better indicator for AD. Those with low potential estimate want tightening, those with higher potential RGDP estimates want more stimulus. NGDP targeting, just because it does not have embeded in it such ambiguity, is a better choice …

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