What if the headline CPI rose 5.5% over the next 15 months?

In that case, the Fed would have fallen short of its 2% inflation goal over the past 5 years.  That’s right, if the CPI rose by a total of 5.5% (an annual rate of 4.1%) over the next 15 months, the CPI would still have risen by less than 2% per year between July 2008 and July 2013.   (April 2012 is the latest reading, that’s why I say 15 months.)

That means that even if we were to have an extraordinary burst of inflation over the next 15 months, monetary policy over the past 5 years would have been too tight even if the Fed didn’t give a damn about the millions of unemployed.  It would have failed to hit its explicit 2% inflation goal over the past 5 years.  Something for the Fed to think about at its June meeting.

How can that be?  Simple, inflation has average 1.22% over the past 45 months.  That’s headline inflation; I’m not tricking you by excluding food and energy.  Why do I start at July 2008?  Because that’s when NGDP started plunging fast, and unemployment starting rising fast.  And the Fed does in fact have a dual mandate.  One can debate exactly what the dual mandate means, but here’s something we can be 100% sure it does not mean.  It can’t mean that the Fed should always act as if it had a simple 2% inflation mandate, with no concern for jobs.  That would clearly violate the law.

Some might argue; “But that low inflation is in the past, the Fed has to look to the future.”  OK, but TIPS spreads show less than 1% inflation over the next 2 years.

Sometimes when I read my fellow economists I simply can’t imagine where they are coming from.  They seem so uninterested in monetary policy.  Where’s the outrage?  Are they just apathetic, or are the ignorant of the data?

Let me make the point even more forcefully.  If the unemployment rate were currently 5.6%, instead of the current 8.2%, I could easily walk into the next FOMC meeting and demand easier money, based on the inflation data alone.  That’s because if we were at the Fed’s definition of the natural rate (5.6%), then monetary policy decisions would hinge on one factor, and one factor only—inflation.  I’d walk into the meeting and say:

1.  Inflation averaged 1.22% over the past 45 months

2.  The markets expect that to fall further to less than 1% over the next few years, based on current policy.

3.  That means it’s a slam dunk for further easing. There is no conceivable argument that even the fiercest Fed hawk could use in opposition.

And that’s if unemployment was 5.6%, but it’s actually 8.2%!!  Are people completely crazy, or am I the one who is missing something?

Yes, I know that this isn’t how things work in the real world.  We have very complete minutes from the Riksbank meetings, and each time Lars Svensson comes in and very clearly explains what the board has to do to meet their legal mandate.  And each time they totally ignore him.  It’s basically a response of; “Facts? We don’t base our decisions on facts; we go with our gut instinct.”

Just thinking about the irrationality of monetary policy makes my blood boil.

Keep telling everyone you know the following:

Even if the Fed drove the CPI up 5.5% over the next 15 months, inflation would have averaged below 2% over the past 5 years.  Policy would have been too tight even if the Fed didn’t care at all about the unemployed.

See what the inflation hawks say in response.

Bernanke says the Fed would cut rates right now if it could.  That means Bernanke agrees with me that money is too tight.  So don’t just sit there, do something else please.

PS.  The previous 5 years (before July 2008) inflation averaged 3.6%.  And how did the Fed react to that high inflation, which occurred when unemployment was really low?  They cut rates sharply in late 2007 and early 2008, despite less than 5% unemployment.  And does anyone recall any Congressmen other than Ron Paul bashing the Fed back then?  Seriously, is they any respectable argument for the hawkish position right now?  An argument that isn’t transparently political?  I sincerely want to know.

PPS.  Inflation has averaged 1.3% over the past 45 months using the PCE.

PPPS.  Ryan Avent has a much more thoughtful and diplomatic post showing the folly of our monetary policymakers.

PPPPS.  But Johnleemk share my exasperation.

PPPPPS.  And Karl Smith gets it too:

As it stands the current policy of engaging in large asset purchases but then signaling that the Fed will keep core inflation below 2% seems to have a bit of the worst of both worlds.


Tags:

 
 
 

86 Responses to “What if the headline CPI rose 5.5% over the next 15 months?”

  1. Gravatar of Morgan Warstler Morgan Warstler
    4. June 2012 at 10:01

    Joe Gagnon:

    “The general view is that you do not make up periods of being above or below target, you simply always strive to get back to the target. The problem is that the Fed is not taking this approach equally to unemployment and inflation.

    Some have argued for a price path target or a nominal GDP path target. In that case you do make up for past deviations in inflation. But I think it is difficult to explain to the public how the specific path is chosen. Why should the CPI be 105 in 2013, 107 in 2014, 109 in 2015, and so on indefinitely? People care about the inflation rate not, some arbitrary price level. And it means that after booms you must have deflation. Indeed, if one had started the path in the early 1990s, the late 1990s boom would have put us way above it. Then the Fed would have had to make the 2001 recession much more severe to get us back on the path. That would have been a tough sell politically.”

    http://www.nextnewdeal.net/rortybomb/what-constrains-federal-reserve-interview-joseph-gagnon

    We have no way of saying that the sub 2% isn’t make up for past sins.

    We owed the 5.5%!!!

    —–

    Ultimately, you HAVE to sell this on the “less government” pitch, everything else dribble.

  2. Gravatar of dwb dwb
    4. June 2012 at 10:08

    the gdp deflator is more relevant unless we can control import prices.

    excellent, excellent blogging. Print more Bernanke Bills! stop taking unemployed people hostages or inviting collateral damage.

  3. Gravatar of Integral Integral
    4. June 2012 at 10:20

    The two-year TIPS spreads are truly terrifying. I wasn’t paying attention to TIPS in 2008 (my mistake, I know!) so this is my first experience with collapsing inflation expectations in real-time.

  4. Gravatar of Nick Nick
    4. June 2012 at 10:21

    But how could the Fed loosen now and not be perceived as being bullied around by the unemployment rate? Your alternative 5.6% unemployment scenario would be much easier for them to raise inflation because there would be no problem with losing credibility. At 8.2%, no matter what the actual inflation rate is, everyone will assume the Fed is goosing the economy to lower the unemployment rate, especially in an election year.

    It is a paradox where it would be easier to have a better policy if unemployment were already going down (although then better policy would be less necessary). Face-saving and optics appear to be the drivers of the marginal Fed voter now.

  5. Gravatar of Saturos Saturos
    4. June 2012 at 10:26

    C’mon Scott, everyone knows inflation targeting is about getting inflation low. Why on earth would you want higher inflation.

    Or at least, the public “knows”. And that’s what matters in the end for institutions like the Federal Reserve.

  6. Gravatar of ChargerCarl ChargerCarl
    4. June 2012 at 10:27

    “But how could the Fed loosen now and not be perceived as being bullied around by the unemployment rate?”

    If the fed is worried about that perception then we are truly, truly, doomed. High employment is part of their mandate, they absolutely should be letting unemployment drive their policies.

  7. Gravatar of Saturos Saturos
    4. June 2012 at 10:27

    Yeah, Nick’s right, that’s a problem too. Everyone knows monetary policy only produces artificial booms, you need fiscal policy to create jobs.

  8. Gravatar of Martin Martin
    4. June 2012 at 10:32

    “Just thinking about the irrationality of monetary policy makes my blood boil.”

    Time to abolish the Fed/ECB and go with free banking.

    I’ve been hearing more and more often that the current crisis shows the failure of deregulation etc. All seem to be concerned with PY instead of MV.

    Even if free banking would be more unstable than perfect central banking, if it would prevent the damage done to PY through the advocacy of regulation and the move away from neoliberalism, then it would be more than worth it.

  9. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 10:35

    The two-year TIPS spreads are truly terrifying.

    “This groundbreaking framework represents two years of development work by a team of modelers headed by Jeremy Primer,” said Alan Brazil, head of mortgage and ABS research at Goldman Sachs. “This is an innovative, state-of-the-art model that we believe is without equal on Wall Street, as it is rooted in a very thorough, sophisticated and current analysis of today’s MBS market. By incorporating new insights into mortgage valuations and behavior, this model offers our clients a cutting edge tool for pricing and relative value analytics for mortgage backed securities.” – Goldman Sachs, July 24, 2002.

    Lesson: Market prices are the best information we can possibly have, but it doesn’t mean they are always “right” when it comes to future events.

  10. Gravatar of Evan Soltas Evan Soltas
    4. June 2012 at 11:09

    Scott,

    Isn’t the problem with your point here that before July 2008, the CPI rose significantly faster than 2 percent year over year? (http://bit.ly/M6QNeV, from FRED) It’s a little misleading in that respect, to argue that the therefore-elevated price level path should be continued from the July 2008 level, instead of resumed at the 2005 level, or however far back you need to go to return to the 2 percent path. It seems to me that after the abrupt disinflation in 2008, the price level has tracked the path pretty well. (http://bit.ly/KxSd7k, again FRED).

    I’m not defending their behavior in 2008. Just saying that I think the way you’re positioning this issue is not entirely fair.

    – Evan Soltas

  11. Gravatar of flow5 flow5
    4. June 2012 at 11:29

    The controversy is finally all over. Time to go trout fishing.

  12. Gravatar of Mike Sax Mike Sax
    4. June 2012 at 11:33

    “Market prices are the best information we can possibly have, but it doesn’t mean they are always “right” when it comes to future events.”

    Wow Major you actualy admit the market can be mistaken with it’s ablity to read price signals?

    So you claim we will have galloping inflation over the next 15 months?

  13. Gravatar of ssumner ssumner
    4. June 2012 at 11:44

    Morgan, So why did the Fed cut rates in 2007?

    dwb, Thanks.

    Integral, They are actually slightly less scary then they look, as the big swings are heavily influenced by oil prices. But the 5 year average is more meaningful, and that shows the Fed was too tight, even if they don’t care at all about the unemployed.

    Nick and Saturos, Unfortunately you may be right.

    Martin, Free banking might be a good idea, but you still need a “medium of account” policy.

    Evan, According to the Fed mandate, they should aim for high inflation when unemployment is high, and low inflation when unemployment is low. Instead they do exactly the opposite. I picked 2008 because that’s when unemployment became high. You can argue that inflation was too high before that period (and I’d agree), but then why was the Fed cutting rates in late 2007, when unemployment was below 5% and inflation was high? If inflation has been too high, the optimal policy is to run below 2% inflation during periods of low unemployment, but they’ve done the exact opposite.

    I would add that even if you choose a different starting date, I’d make the same argument. Inflation is expected to be below 1% over the next year, and yet they refuse to ease.
    Here’s my challenge to the hawks. Explain the model that says you cut interest rates when inflation is way above target and U is below 5%, and you refuse to do additional stimulus after nearly 4 years of 1.2% inflation, and even lower inflation expected in future years, and very high unemployment. What’s the hawk’s argument? What’s their model? I’m willing to discuss any starting point, any model, forward looking or backward looking. And I’m confident I can easily destroy any such argument. I just want consistency.

    What they do is play whack a mole. They say “look at this 12 month period when inflation was above 2%.” Then when a low inflation stretch comes along they say “no, you have to take the long view, it’s just a temporary fall in inflation.” They keep cheating. But they don’t tell you their model. What are they arguing for? When push comes to shove they simply want low inflation, the lower the better. There’s no commitment to the 2% policy goal. Richard Fisher would be demanding easier money now if he really wanted 2% inflation over the next 2 years, but we know he doesn’t. They are refusing to put their cards on the table.

    Sorry for the tirade, you actually asked a very good question. That would be the only plausible counterargument to my post. But it doesn’t hold up on close analysis.

  14. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 11:48

    ssumner:

    That means that even if we were to have an extraordinary burst of inflation over the next 15 months, monetary policy over the past 5 years would have been too tight even if the Fed didn’t give a damn about the millions of unemployed.

    It is precisely the Fed giving a damn about the millions of unemployed that is a root cause of their becoming unemployed in the first place. Congress is the root cause of them remaining unemployed.

    Why do I start at July 2008? Because that’s when NGDP started plunging fast, and unemployment starting rising fast.

    “Fast”? Why does the fall in employment have to be “fast”? Why can’t it just be a fall in the first place?

    So let’s look at that. Let’s look at when employment started to fall.

    Employment started to fall BEFORE NGDP started to fall.

    Employment peaked in late-2007, then started to fall.

    NGDP didn’t peak until mid-2008, then started to fall.

    If there is going to be causation here, then it is that a fall in employment caused the fall in NGDP.

    Not all NGDPs are equal. An NGDP that is the result of employees being paid, and them using their earnings on consumer and investment spending, is far different from an NGDP that is the result of inflation of money coaxing investors and consumers in spending more simply because money is now worth less.

    NGDP plunged starting mid-2008 for the same reason employment was already plunging by that time, and since late 2007. It is because there was something seriously wrong with the economy’s capital structure.

    If there is causation, it is that the fall in employment causes the fall in NGDP. And why does the causation have to be in this direction if there is going to be causation at all? It’s because almost every worker is paid out of saving and capital (the few other workers are not producing anything, but are rather like personal servants out of the consumption spending of their exchange partners), NOT out of spending on output. Spending on output is what employees do AFTER they have earned money.

    So if we have to select whether or not A causes B, or B causes A, and both are consistent with the empirical data, then we select the more logical one. In this case, the more logical explanation is the one that recognizes wages are financed out of saving and capital, NOT spending on final output. Spending on final output will not hire a single worker, because spending on output is spending on what has already been produced in the past, the production of which required saving, and NOT spending on output.

    To claim that NGDP plunging caused the plunge in employment is implicitly claiming employment is financed out of spending on output. That’s false. Employment is financed almost exclusively out of savings and capital. If employment falls, then it is because saving and capital plunged. But why would saving and capital plunge? You can’t say it’s because aggregate demand plunges, because that would just repeat the same false causation direction that employment is financed out of spending on output. You have to go prior to the fall in NGDP.

    So why did saving and capital plunge? It is because the investments made up to that point were discovered as being unsustainable in the physical sense, which manifests itself in a perceived lack of liquidity from the producers in the division of labor. You misinterpret the lack of liquidity as not enough money, when it SHOULD tell you not enough economic coordination in the real sense. It’s like you’re a bunch of mad doctors who perceive lack of drunkenness and hang over headaches as not enough alcohol.

    Problems in a monetary division of labor economy, since they appear as a problem of “not enough money spending” has had the unfortunate side effect of confusing the hell out of economists, including market monetarists. They just don’t understand the concept of economic calculation, and so they cannot help but blame lack of inflation. Of course when pressed about this, they totally switch the context and say something rhetorical like “You mean there won’t be any problems created if aliens steal 90% of people’s money?”. They say this, completely oblivious to the context at hand, which is why spending falls DESPITE money not being destroyed by the central bank, DESPITE the Fed continuing to print money for the banks.

    This perceived lack of liquidity didn’t exist in the past during the boom, but it exists during the bust. Why is that? After all, there is more liquidity now compared to then, and yet we’re supposed to believe the problem is caused by a lack of liquidity? That’s crazy. The perceived lack of liquidity is in fact just a manifestation of real problems in the area of saving and capital, and NOT because the Fed didn’t print enough money. The calculations of costs made in the past were wrong, and the calculations of expected future prices made in the past were wrong. That’s why actual demands in the present are insufficient. But this doesn’t mean the Fed failed to print as much as investors expected. It’s because investors were MISLED by the Fed changing interest rates in the past, which then made investors miscalculate cost prices and expected future output prices.

    This particular problem is not solved by inflation, and in fact inflation could only hamper the correction process of this problem. This problem can only be solved by investors and consumers having access to a totally unhampered and unadulterated price system. Yes, this makes progressives mad, and it makes “pragmatic” market monetarists mad. But that is the only solution to the problem of distortions in the price system.

    Why did investors suddenly start to lay off their workers starting in late 2007, despite NGDP not falling, despite the Fed and virtually every mainstream economist, including market monetarists, saying everything was OK?

    Again, the “myth with a kernel of truth” creeps in again that it’s because investors weren’t receiving sufficient dollars to cover their investments, and the non sequitur is made that this problem is a problem of not enough money printing by the Fed, which of course is an implicit call for the Fed to print more money.

    It’s one thing to say that an individual firm can solve its problems by earning more money. It’s quite another to claim that entire economies can be helped in this way. It is the fallacy of composition to believe what is true for an individual firm is also true for the entire economy. Aggregate spending for an entire economy is not like an individual firm’s revenues for that individual firm. Aggregate spending is just a statistical artifact of all individual firm revenues added together. It has no reality outside of this.

    If an individual firm’s revenues fall, it’s because people changed their valuation of cash and that firm’s output at that price. They value the cash as higher. Yes, this makes market monetarists rage, to have to accept that people can and do value cash more than they value a particular good at a given price, but one of money’s most important properties is its storage value. If the whole economic structure is wrong, we’ll see that manifested by an increase in demand for cash and decrease in consumer and investment spending on the given structure. Of course market monetarists then misinterpret THIS as somehow being a desperate plea by a hapless public for the benevolent Fed to print more money to “satisfy” this increased cash preference that they can’t do on their own. After all, they can’t print their own money, right? Of course if market monetarists only clued in to the fact that people aren’t trying to increase their cash and that’s it. They’re trying to increase their purchasing power. This cannot be solved by devaluing the currency through inflation. It can only be solved by increasing the value of the currency through falling prices.

    There is so much wrong with market monetarism, but as all evolution tested doctrines go, there is a kernel of truth to the claims, so it misleads people into accepting it. Market monetarism is essentially economics for dummies.

  15. Gravatar of dwb dwb
    4. June 2012 at 11:52

    That would be the only plausible counterargument to my post. But it doesn’t hold up on close analysis.

    i would only add that the past is irrelevant, it’s a sunk cost. All that matters is that over the next 2 years the expected inflation rate is sub-1% and over the next 5 its sub 2%. They have not even established any credibility for the target they have.

  16. Gravatar of Saturos Saturos
    4. June 2012 at 11:58

    Ironic that Scott is asking others for their model….

    (He really is the successor to Friedman)

  17. Gravatar of Saturos Saturos
    4. June 2012 at 12:02

    That’s weird, MF’s graph does show employment tanking before NGDP. I’m used to seeing graphs where employment doesn’t collapse till after July. Could he be right? Am I going to have to change all my views? Am I going to be converted to MFism? Lord help me.

  18. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 12:10

    ssumner:

    I picked 2008 because that’s when unemployment became high. You can argue that inflation was too high before that period (and I’d agree), but then why was the Fed cutting rates in late 2007, when unemployment was below 5% and inflation was high?

    Because they expected inflation to become too low of course. The Fed doesn’t raise and cut its baseline rate based on current prices. They do so based on their expectations of prices. Monetary policy has a time lag.

    The Fed raised the rate 2005 when they expected prices to rise above 2%. Unemployment was falling at that time.

    The Fed cut the rate in 2007 when they expected prices to fall below 2%. Unemployment was rising at that time.

    If inflation has been too high, the optimal policy is to run below 2% inflation during periods of low unemployment, but they’ve done the exact opposite.

    Except unemployment was already rising in 2007.

    I think you picked late 2008 SOLELY because NGDP began a secular decline at that time, and you’re just reasoning ex post facto to justify the NGDP targeting framework.

    You’re completely ignoring the decline in employment that had already been underway since 2007, because it constitutes inconvenient “unexplained” counter-evidence.

    Why did unemployment YoY start to rise early 2006, despite the fact that NGDP didn’t start falling until mid-2008?

  19. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 12:15

    Saturos:

    That’s weird, MF’s graph does show employment tanking before NGDP. I’m used to seeing graphs where employment doesn’t collapse till after July. Could he be right? Am I going to have to change all my views? Am I going to be converted to MFism? Lord help me.

    In addition, notice how the rate of increase in employment was declining since the beginning of 2006. Jobs were being created each year, but over time the increase dwindled, until it hit a peak in late 2007. Then the rate of new jobs turned negative. THEN almost a whole year later, we see NGDP starting to fall.

    If this evidence “converts” you Saturos, then I’m really interested in where you got your data, because this stuff has been out for years.

  20. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 12:18

    Oops. That link for

    “Except unemployment was already rising in 2007.”

    Should link to this:

    Except unemployment was already rising in 2007.

  21. Gravatar of Morgan Warstler Morgan Warstler
    4. June 2012 at 12:21

    “I would add that even if you choose a different starting date, I’d make the same argument. Inflation is expected to be below 1% over the next year, and yet they refuse to ease.
    Here’s my challenge to the hawks. Explain the model that says you cut interest rates when inflation is way above target and U is below 5%, and you refuse to do additional stimulus after nearly 4 years of 1.2% inflation, and even lower inflation expected in future years, and very high unemployment. What’s the hawk’s argument? What’s their model? I’m willing to discuss any starting point, any model, forward looking or backward looking. And I’m confident I can easily destroy any such argument. I just want consistency.”

    The question is WHY is the Fed being Hawkish.

    The answer is because Obama did stimulus, because Obama did Obamacare, etc. etc.

    ——

    Fiscal Stimulus as tax cuts – acceptable

    Fiscal Austerity as spending cuts – acceptable

    Fiscal Stimulus as spending increases – not acceptable

    Fiscal Austerity as tax increases – not acceptable

    —–

    Scott, this is BUILT IN construct, if you don’t start out here you don’t see how the Fed can now think we have nearly FULL employment.

    If the shifts above… all of it, no pipeline, fiscal cliff, obamacare, etc.

    IF they look at that and think it it raises the % that is natural unemployment.

    Then they figure they have been doing a good job swimming harder while Obama threw weights on the economy’s neck.

    —-

    Ultimately, the question becomes when you personally Scott Sumner, just accept the reality for what it is and get over the fact that even if we can use Monetary to float Obama, we aren’t GOING TO.

    p.s the fed made a mistake in 2005, not just 2007 – they should have been raising rates to ruin Barney Frank’s day much, much earlier.

    and that is according to YOUR NGDPLT starting at 2000.

  22. Gravatar of dwb dwb
    4. June 2012 at 12:22

    hat’s weird, MF’s graph does show employment tanking before NGDP. I’m used to seeing graphs where employment doesn’t collapse till after July. Could he be right? Am I going to have to change all my views? Am I going to be converted to MFism? Lord help me.

    no: keep in mind that Sept 2008, the Fed kept rates on hold at 2% despite miserable business conditions, tight credit, housing recession, and sub-zero TIPS that were forecasting deflation. oh and Lehman had just collapsed. Had the Fed been more aggressive In Q2/Q3 2008 the subsequent collpase might not have happened (rates were still at 2%…).

  23. Gravatar of TA TA
    4. June 2012 at 12:22

    Karl Smith makes a point in the post you reference that large scale asset purchases would suck collateral, and thus liquidity, out of the system. I wish someone would explain that one to me. The purchases would replace assets with bank deposits. That’s not liquidity?

  24. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 12:26

    dwb:

    no: keep in mind that Sept 2008, the Fed kept rates on hold at 2% despite miserable business conditions, tight credit, housing recession, and sub-zero TIPS that were forecasting deflation.

    You didn’t even address the unemployment before NGDP empirical data.

    Had the Fed been more aggressive In Q2/Q3 2008 the subsequent collpase might not have happened (rates were still at 2%…).

    But why was there collapsing employment before collapsing NGDP?

  25. Gravatar of Wonks Anonymous Wonks Anonymous
    4. June 2012 at 12:56

    I got Steve Williamson to acknowledge that the Fed can provide a boost through the effect of announcements on expected policy, if not the actual mechanics of QE.

  26. Gravatar of dwb dwb
    4. June 2012 at 13:30

    “But why was there collapsing employment before collapsing NGDP?”

    policy was too tight and businesses knew there was no Bernanke put. The gdp deflator was running under PCE during the period indicating imports, not doestic inflation was to blame.

  27. Gravatar of ssumner ssumner
    4. June 2012 at 13:49

    Dwb, Yup. It’s too tight if we are doing growth targeting, and too tight if doing level targeting.

    Saturos, I should have said “criteria” not model. 🙂

    Employment and NGDP collapsed at the same time, if his graph shows something different, it’s wrong.

    MF, You said;

    “In addition, notice how the rate of increase in employment was declining since the beginning of 2006. Jobs were being created each year, but over time the increase dwindled, until it hit a peak in late 2007. Then the rate of new jobs turned negative. THEN almost a whole year later, we see NGDP starting to fall.”

    Ah comparing growth rate of jobs to level of NGDP . . . well done!!!

    TA, I wondered about that too.

    Wonks Anonymous, Good work.

  28. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 14:19

    dwb:

    “But why was there collapsing employment before collapsing NGDP?”

    policy was too tight and businesses knew there was no Bernanke put.

    Even according to market monetarists, who look at NGDP, monetary policy was not “tight.” NGDP was rising at 5% well into 2007, and yet unemployment was rising.

    The gdp deflator was running under PCE during the period indicating imports, not doestic inflation was to blame.

    I am not blaming inflation or deflation. That’s precisely the excuse for unemployment being argued AGAINST. Whatever the reason, it wasn’t NGDP collapsing.

  29. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 14:29

    ssumner:

    Employment and NGDP collapsed at the same time, if his graph shows something different, it’s wrong.

    Hahahahahaha, so what you’re saying is that if the empirical data refutes your theory, we should say the empirical data is false?

    I got my data from the St. Louis Fed FRED website. It shows a peak of employment in late 2007, after which there is a decline. THEN, almost one year later, we see a peak in NGDP.

    You can look it up yourself.

    “In addition, notice how the rate of increase in employment was declining since the beginning of 2006. Jobs were being created each year, but over time the increase dwindled, until it hit a peak in late 2007. Then the rate of new jobs turned negative. THEN almost a whole year later, we see NGDP starting to fall.”

    Ah comparing growth rate of jobs to level of NGDP . . . well done!!!

    You’re hilarious. Here I am comparing employment and NGDP to show that unemployment started to fall BEFORE NGDP started to fall, and you can only say I am comparing them.

  30. Gravatar of CA CA
    4. June 2012 at 14:30

    Johnleemk and Daniel Kuehn are having a good back and forth in the comments here:

    http://marginalrevolution.com/marginalrevolution/2012/06/from-johnleemk.html#comments

  31. Gravatar of Jim Glass Jim Glass
    4. June 2012 at 14:45

    That’s weird, MF’s graph does show employment tanking before NGDP. I’m used to seeing graphs where employment doesn’t collapse till after July. Could he be right? Am I going to have to change all my views? Am I going to be converted to MFism? Lord help me.

    Never fear. Weekly initial unemployment claims rocketed up exactly as NGDP plunged, after declining somewhat during the prior three years.

    Heed not false prophets nor let them lead you astray.

    You’re welcome.

    — Lord.

  32. Gravatar of JSeydl JSeydl
    4. June 2012 at 15:23

    Hi Scott,

    I wrote up a follow-up post: https://plus.google.com/u/0/111643364718750270983/posts/AbCpo11BbmT

    I’m getting closer to favoring NGDPLT, but I’m still not entirely convinced. Seems like the policy is mostly targeted toward countering large shocks. If so, then why not just force the Fed to become more cognizant of asset bubbles?

    -Joe

  33. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 15:32

    Jim Glass:

    Never fear. Weekly initial unemployment claims rocketed up exactly as NGDP plunged, after declining somewhat during the prior three years.

    No, it wasn’t “exactly” as NGDP fell.

    The increase in initial claims PRECEDED the fall in NGDP, as can be seen here.

    The increase in initial claims began in 2007, BEFORE NGDP plunged in mid-2008.

    Speaking of false prophets leading us astray…

  34. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 15:34

    Sorry, bad link

    Here is a better link.

  35. Gravatar of Morgan Warstler Morgan Warstler
    4. June 2012 at 15:38

    I defy anyone to read Ezra Klein, remember the Bernanke Put and agree with this:

    “Romney and the Republicans are not likely to reach 60 seats in the Senate, but they won’t need them. The major issues on the table are budgetary. That means they can be considered using the budget reconciliation process, which can’t be filibustered. So if Republicans can maintain party unity “” and they usually can “” they’ll be able to govern effectively. And there’s no way that they’ll permit the Bush tax cuts to expire or the debt ceiling to lapse. Investors, knowing that, would likely stop worrying about the debt ceiling the moment a Romney win became clear.

    Now, Republicans could still push the economy into recession if they pass an immediate austerity budget that slashed spending in 2013. And, given Republican rhetoric about how slashing the size of government will lead to more growth because the confidence fairy will come out and persuade businesses to spend more, you might think that’s exactly what they’ll do.

    But Romney, though he often buys into that sort of nonsense while criticizing Obama, knows better. Time magazine asked him about cutting spending in 2013. “If you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5 percent,” Romney said. “That is by definition throwing us into recession or depression. So I’m not going to do that, of course.” You couldn’t have gotten a clearer definition of Keynesian budgeting from Obama.

    http://www.washingtonpost.com/blogs/ezra-klein/post/the-keynesian-case-for-romney/2012/06/04/gJQAIETuDV_blog.html

    —–

    EXCEPT!!! Under the Bernanke Put (more so under NGDP) Ben will continue to keep inflation at 2% which means MASSIVE QE to make sure that 5% cut to GDP doesn’t happen.

    Eventually, this dynamic must be played out.

    What’s more it is a positive feedback loop.

    1. Hey let’s cut $200B
    2. Hey Ben is keeping NGDP on track.
    3. Hey let’s cut some more!

  36. Gravatar of anon anon
    4. June 2012 at 16:10

    JSeydl, “If so, then why not just force the Fed to become more cognizant of asset bubbles?”

    Under NGDPLT, the Fed would automatically act to stabilize demand-side (NGDP) growth, even in the absence of pressure on the price level. This would probably have moderated NGDP growth in the late-1990s and early-2000s and avoided a likely unsustainable expansion. If you accept a reasonable version of the EMH (as Scott does), then that’s the best one can do: it makes no sense to think that the Fed can spot asset bubbles in the specific and “prick” them.

    (Price-level deflation can result from strong RGDP growth, but this is “benign” deflation, to be distinguished from a collapse in nominal expenditures. Even such variables as average wages and interest rates are more closely linked to NGDP than the price level per se).

  37. Gravatar of Jim Glass Jim Glass
    4. June 2012 at 16:14

    Maybe not square on topic for this thread, but…

    Larry Summers really just doesn’t like monetary policy. He explains:
    ~~~~

    Many in both the US and Europe are arguing for further quantitative easing to bring down longer-term interest rates. This may be appropriate given that there is a much greater danger from policy underreacting to current economic weakness than from it overreacting.

    However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate.

    Can’t push on a string!

    There is also an oddity in this renewed emphasis on quantitative easing. The essential aim of such policies is to shorten the debt held by the public or issued by the consolidated public sector comprising both the government and central bank.

    Any rational chief financial officer in the private sector would see this as a moment to extend debt maturities and lock in low rates – exactly the opposite of what central banks are doing. In the US Treasury, for example, discussions of debt management policy have had exactly this emphasis. But the Treasury alone does not control the maturity of debt when the central bank is active in all debt markets.

    So, what is to be done? Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more not less…

    From there he keeps going on saying that by spending on road repairs and infrastucture, all good stimulus things happen — neglecting that all of 0.6% of the ARRA [.pdf] was for federal infrastructure spending (with comparably small amounts at the state and local level). So it now would become a whole lot more … how?

    It gets more and more obvious what smart economist taught Obama that “It’s clear monetary policy has shot its wad” and instructed Obama on how to deal with the Fed.

    I’m still calling this economy the Summers Stagnation. If the credit rating of the USA by 2030 lurches down to CCC, I’ll be calling them the Summers “Can’t have enough debt” Downgrades.

  38. Gravatar of Daniel Kuehn Daniel Kuehn
    4. June 2012 at 16:52

    Jim Glass –
    Ummm… I’d think people would applaud Summers for not making much of the interest rate channel!!

  39. Gravatar of Bonnie Bonnie
    4. June 2012 at 17:02

    “…monetary policy over the past 5 years would have been too tight even if the Fed didn’t give a damn about the millions of unemployed.”

    I’ve been wondering if it really does care about its mandate, especially when the sometime members of the FOMC come out and talk about monetary policy not being able to do anything about employment, except through price stability; which isn’t entirely true in all circumstances, like when monetary policy errors are largely responsible for high unemployment to begin with.

    The amendment to the Federal Reserve Act that added the full employment policy goal says that the Fed:

    “shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

    Because this isn’t a particularly technical amendment, I take it as implying a social/economic responsibility to maintain adequate levels of liquidity, without undue focus on any one particular set of statistics. Considering that this amendment was made in 1977, more information can be gained from what isn’t there than what is since it wasn’t done in a vacuum, disconnected from what was happening with monetary policy at the time. Inflation was a real problem, and congress didn’t make an amendment saying that the Fed needs to keep a lid on inflation at the cost of everything else. It says ‘we want balance’.

  40. Gravatar of Jim Glass Jim Glass
    4. June 2012 at 17:11

    Jim Glass: No, it wasn’t “exactly” as NGDP fell. The increase in initial claims PRECEDED the fall in NGDP, as can be seen “here.” The increase in initial claims began in 2007, BEFORE NGDP…

    MF, I hate to break this to you, but NGDP started falling in 2007 — at the same time as initial claims started going up.

    NGDP started falling from a peak and initial claims started rising from their low both in Q3 2007 — and moved in opposite directions in very nice proportion to each other from then on. As the initial fall in NGDP turned into a plunge, the at-first gradual rise in initial claims took on a rocketry trajectory. In fact, the accelerating movements in initial claims followed accelerating movements in NGDP with a slight but clear lag.

    http://research.stlouisfed.org/fredgraph.png?g=7Kb

    Speaking of false prophets leading us astray…

    Oh, stop digging. Tell your master Beelzebub that while he and his minions such as yourself may turn the weak-minded, the ignorant masses, Redditors, gold bugs (but I repeat myself) and politicians, y’all cannot turn the truth.

  41. Gravatar of Dan Dan
    4. June 2012 at 17:24

    Perhaps the Fed does not pursue 5% inflation because they are scared to death of where the inflation would actually be manifest and how the citizenry and politicians will respond.

    It is easy for Sumner to sit in his ivory tower and see no problem with a little aggregate inflation. I think he is being intellectually lazy. What he needs to imagine is the reality of energy inflation being 10% and food inflation being 20%. No one will care that aggregate inflation is 5%. They will care about the prices they notice and what they will notice will scare them and make them very angry.

    If I am not wrong, Mr. Sumner, was it not the same ivory tower economists who derived the Black-Scholes formula? Remind us all, if you may, how did the real world implementation of that concept pan out? Oh, that’s right, in the real world prices can remain out of equilibrium longer than investors can stay solvent.

    The same disconnect exists with your rally cry for 5% inflation. Great theory but the lack of predictability of which prices will actually increase means it is politically untenable.

  42. Gravatar of JSeydl JSeydl
    4. June 2012 at 17:28

    anon,

    “it makes no sense to think that the Fed can spot asset bubbles in the specific and “prick” them.”

    I don’t buy this. Greenspan could have pricked the housing bubble if he wanted to. All he had to do was speak publicly about the bubble, and it would have deflated itself. There was evidence as early as 2002 that real home prices were deviating from trend. The problem was that Greenspan didn’t notice the housing bubble; not that he didn’t have the ability to prick it.

  43. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 17:38

    Jim Glass:

    MF, I hate to break this to you, but NGDP started falling in 2007 “” at the same time as initial claims started going up.

    No, it didn’t Jim. You’re either blind, or you refuse to accept data that contradicts your theory. NGDP didn’t peak until mid-2008, well after initial claims started to go up.

    Let me make this obvious for you.

    By the time NGDP peaked, and was starting its downward trend, initial unemployment claims were already well into their upward trend.

    NGDP started falling from a peak and initial claims started rising from their low both in Q3 2007 “” and moved in opposite directions in very nice proportion to each other from then on. As the initial fall in NGDP turned into a plunge, the at-first gradual rise in initial claims took on a rocketry trajectory. In fact, the accelerating movements in initial claims followed accelerating movements in NGDP with a slight but clear lag.

    Sorry, these just aren’t the facts. I don’t know what else to say.

    Oh, stop digging.

    You stop digging.

    Tell your master Beelzebub that while he and his minions such as yourself may turn the weak-minded, the ignorant masses, Redditors, gold bugs (but I repeat myself) and politicians, y’all cannot turn the truth.

    ??? What is this craziness?

  44. Gravatar of Bonnie Bonnie
    4. June 2012 at 17:39

    Adding a little more history to my previous comment, it gives quite a bit more context to it.

    The full employment policy goal came from the Humphry-Hawkins Full Employment Act, and the summary of the act is as follows:

    “An Act to translate into practical reality the right of all Americans who are able, willing, and seeking to work to full opportunity for useful paid employment at fair rates of compensation;

    “to assert the responsibility of the Federal Government to use all practicable programs and policies to promote full employment, production, and real income, balanced growth, adequate productivity growth, proper attention to national priorities, and reasonable price stability;

    “to require the President each year to set forth explicit short-term and medium-term economic goals; to achieve a better integration of general and structural economic policies; and to improve the coordination of economic policymaking within the Federal Government.”

  45. Gravatar of Dan Dan
    4. June 2012 at 17:50

    To JSeydl,

    Greenspan was such a great bubble spotter he saw a stock market overvaluation in December 1995. Then he pursued easy money policies the next 4 years as the Nasdaq increased in value by 400%

    The truth about Greenspan is he believed in the free-market so much he was willing to bail it out any and every time it looked like it might falter.

  46. Gravatar of OGT OGT
    4. June 2012 at 17:52

    Somewhat on toic, interesting discussion from joe gagnon on Fed policy;

    http://www.nextnewdeal.net/rortybomb/what-constrains-federal-reserve-interview-joseph-gagnon#.T8zMYYml-k4.twitter

    Gagnon on NGDP level targeting:

    Some have argued for a price path target or a nominal GDP path target. In that case you do make up for past deviations in inflation. But I think it is difficult to explain to the public how the specific path is chosen. Why should the CPI be 105 in 2013, 107 in 2014, 109 in 2015, and so on indefinitely? People care about the inflation rate not, some arbitrary price level. And it means that after booms you must have deflation. Indeed, if one had started the path in the early 1990s, the late 1990s boom would have put us way above it. Then the Fed would have had to make the 2001 recession much more severe to get us back on the path. That would have been a tough sell politically.

  47. Gravatar of Jim Glass Jim Glass
    4. June 2012 at 18:20

    “What if headline inflation rose…” however much.

    Stock prices would go up.

    http://soberlook.com/2012/06/equities-vs-inflation-expectations.html

    Equity prices vs. inflation expectations

    In recent years we’ve seen a clear indication that inflation expectations and US equity prices are correlated. Certainly once inflation reaches a certain level (by some estimates 4%) the relationship will break down and even reverse. However in the current environment deflationary risks drive this relationship.

    In other words we have an aggregate demand problem rather than any supply constraints. Expectations of price increases are a sign of a potentially stronger demand growth and higher margins, which is a positive for shares.

    The scatter plot below shows the relationship between the US equity prices and TIPS-implied (2×2 breakeven) inflation expectations over the past 3 years. The correlation has been surprisingly stable (around 0.86)….

  48. Gravatar of Mike Sax Mike Sax
    4. June 2012 at 18:57

    “People often ask me what would have happened if the US had done 5% NGDP targeting, level targeting, in 2008. I suggested we would have had stagflation. A very mild and short recession, with above normal inflation. Maybe 6% or 6.5% unemployment.”

    Sort of like the 1975 recession-without all the stimulus it could have been a worlwide depression according to Minsky. The trouble is that most policy makers today came of age during the 70s and still seem to thitnk that it was the ulitmate nightmare scenario rather than the 30s

  49. Gravatar of Mike Sax Mike Sax
    4. June 2012 at 19:06

    “??? What is this craziness?”

    Major you’re asking what is this craziness?

    “NGDP didn’t peak until mid-2008, well after initial claims started to go up.”

    Of course NGDP was still rising in 2008 because of the commodity boom. When it crashed in July 2008 that was when NGDP crashed.

    But what earth shattering point do you think you’re making Major?

  50. Gravatar of Jim Glass Jim Glass
    4. June 2012 at 19:17

    Jim. You’re either blind, or you refuse to accept data that contradicts your theory. NGDP didn’t peak until mid-2008, well after initial claims started to go up.

    Let me make this obvious for you…

    Let me make it more obvious to everyone — except you, as you no doubt will keep stamping your foot in denial:

    http://research.stlouisfed.org/fredgraph.png?g=7Kb

    Do you see that peak in the NGDP growth rate in Q2 2007, followed by the sharp fall in Q3 … exactly matched in time by the low in initial claims in Q2, rising in Q3? And the corresponding simultaneous ups and downs of both following? Including the dramatic reversal upward in NGDP growth rate, promptly followed by the like reversal in initial claims?

    Well, maybe you don’t — and if you do I’m sure you won’t admit it. But all the rest of us can see it.

    Let me make *this* obvious too:

    You having your chart give NGDP in *dollar amounts* is mere silliness — made only the more so by all the red arrows you add for emphasis.

    Dude, if NGDP locked steady at a fixed-dollar amount for three years with zero growth, then as unemployment went up and up you’d be saying “NGDP hasn’t fallen at all! Not at all!! Yet look how unemployment is rising! This refutes all claims…” Ha, ha. LOL.

    The *rate of NGDP growth* right there before your eyes ties tightly and near-simultaneously to initial unemployment claims. That’s the fact, Jack. It’s plainly visible to be seen by all. Try to deal with it as best you can (which I’m sure will not be well).

  51. Gravatar of Morgan Warstler Morgan Warstler
    4. June 2012 at 19:35

    OGT, thanks for reposting my gagnon note.

    MF / Jim, let’s be clear the reason for NGDPLT is because once we set it at 4.5%, even with no make up – which Scott WILL ACCEPT – unemployment is now structural. No question. It just is.

    Around these parts I piss off Sax and FEH when I say the Ben and fed have free market biases…

    But NGDPLT has even worse biases – it is BRUTAL in how much it doesn’t care about unemployment.

    The most productive can get far more productive and richer keeping NGDPLT at 4.5% and the ZMP workers can be starving on street and Fed has no role, the futures market says rase rates and…. F*CK THE POOR!!!

    Idiots.

  52. Gravatar of Pacemaker Pacemaker
    4. June 2012 at 20:17

    JSeydl,

    Scott doesn’t believe that the Fed can spot bubbles because of the EMH, which says that past prices (including housing prices) can’t predict future prices. In particular, similar bubble-like phenomena happened in many other countries but they turned out NOT to be bubbles: https://www.themoneyillusion.com/?p=3906

    Consequently, I believe Scott favours regulation such as higher capital requirements over a strategy of spotting bubbles. Furthermore, I think the larger point is that asset bubbles don’t have to be relevant to meeting the Fed’s goals. If the financial crisis happened without decreasing aggregate demand as much as it did, the Fed would have done a better job. With NGDP level targeting, the economy would be able to shrug off a rapidly shrinking sector since the rest of the economy would expand more to maintain the growth path of NGDP. Sadly, what actually happened was that growth in the other sectors also declined because of the fall in expected NGDP.

  53. Gravatar of johnleemk johnleemk
    4. June 2012 at 20:47

    The comments over at Kevin Drum’s are priceless. Anyone arguing that left-leaning economic bloggers have successfully convinced their audience of the viability and usefulness of monetary policy, behold: http://www.motherjones.com/kevin-drum/2012/06/left-and-right-are-not-equally-crazy-part-794

    One commenter: “Fiscal stimulus is much preferable to monetary stimulus, in my opinion. There are 2 possible types of monetary stimulus: 1. Lowering interest rates. … 2. Buying bad debts from large banks.” (Yeah, I guess Friedman’s recommendation of buying more government debt is impossible.)

    Another: “The real issue, in my mind, is how the commenter in question imagines a purely monetary policy might suffice, given that we are up against a zero lower bound. That’s the position that impresses me as ungrounded and incoherent.”

    The comments suffice to answer Drum’s question of where I’m coming from. Whatever left-leaning economists may believe about the efficacy of monetary stimulus, the message is simply not getting out of the ivory tower “” unless the message is precisely that monetary policy should be ignored, which, I’ve been repeatedly assured, is not the case.

  54. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 21:03

    Jim Glass:

    Let me make it more obvious to everyone

    Let me make this even more obvious than the more obvious you have tried to make it.

    Do you see starting in 2001, and lasting until late 2003, employment fell despite the “growth rate” of NGDP remaining positive, indeed growing? Do you see that beginning late 2005, the rate of change in employment began to decrease, despite NGDP growth remaining as it was from late 2003 to late 2005 when employment was rising?

    Maybe covering your eyes with your hands isn’t the best response.

    Do you see that peak in the NGDP growth rate in Q2 2007, followed by the sharp fall in Q3 … exactly matched in time by the low in initial claims in Q2, rising in Q3?

    Yes, I do. But I don’t see how this new chart of 4 week moving average and rate of change in NGDP proves your theory correct.

    Your new chart is entirely consistent with the theory that NGDP changes are caused by employment changes.

    A positively correlated relationship between NGDP and 4 week initial claims does not prove that changes in the former causes changes in the latter. For it is also consistent with the theory that changes in the latter causes changes in the former.

    If you want to argue that changes in NGDP growth rates drive changes in employment, rather than NGDP levels, then that’s fine, but you can’t prove that using charts.

    Remember, my usage of charts was ONLY to show that your theory isn’t the only possible theory that is consistent with the data.

    If we are going to talk about growth rates of NGDP, I could argue that when employees get laid off, or have greater fears that they are going to get laid off, then their consumption and investment spending falls, thus causing a call in NGDP growth rate, and that when employment rises once again, or when existing employees no longer have as high a fear in getting laid off, that consumption and investment spending from employees rises once again, thus causing a rise in NGDP growth rate. This is just as consistent with your chart as your theory.

    I see no valid explanation for why I should accept your theory and reject mine.

    You having your chart give NGDP in *dollar amounts* is mere silliness “” made only the more so by all the red arrows you add for emphasis.

    What’s wrong with dollar amounts?

    Dude, if NGDP locked steady at a fixed-dollar amount for three years with zero growth, then as unemployment went up and up you’d be saying “NGDP hasn’t fallen at all! Not at all!! Yet look how unemployment is rising! This refutes all claims…” Ha, ha. LOL.

    Uh, no. I’d ask you why you are claiming that stable NGDP is causing unemployment to go up. I’d ask why a fixed 0% NGDP growth leads to rising unemployment, whereas a fixed 5% NGDP growth leads to falling/low unemployment. I’d ask you this because it even violates market monetarist theory that the key driver is that NGDP growth remain STABLE.

    I think you need to do some more research, because what you’re saying isn’t even what market monetarists are saying.

  55. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 21:13

    Mike Sax:

    “??? What is this craziness?”

    Major you’re asking what is this craziness?

    Yes, I asked what craziness that was.

    “Tell your master Beelzebub that while he and his minions such as yourself may turn the weak-minded, the ignorant masses, Redditors, gold bugs (but I repeat myself) and politicians, y’all cannot turn the truth.”

    That is craziness.

    “NGDP didn’t peak until mid-2008, well after initial claims started to go up.”

    Of course NGDP was still rising in 2008 because of the commodity boom.

    There’s always an excuse isn’t there? Why didn’t the commodities boom encourage more employment there, the way NGDP rising is supposed to encourage employment? NGDP is just the total spending at all firms and industries.

    When it crashed in July 2008 that was when NGDP crashed.

    Yet unemployment was rising before that time.

    BTW, July 2008 was almost exactly around the time M2 growth went from double digits down to 1%.

    But what earth shattering point do you think you’re making Major?

    Unfortunately I think the point I am making is being misinterpreted. I am not trying to argue that my theory is proven by the data, for it is the case that competing, mutually exclusive theories are consistent with the data. For example, NGDP and employment. One theory is that changes in the former cause changes in the latter. Jim Glass showed a chart that shows consistency with that theory. But the theory that changes in the latter causes changes in the former, is also entirely consistent with that chart.

    So with a correlation between A and B, how are we to agree on whether A causes B, or B causes A, or that neither A causes B nor B causes A, but rather that a change in C causes changes in both A and B? You can’t make conclusions on this by looking at the correlation alone.

  56. Gravatar of Major_Freedom Major_Freedom
    4. June 2012 at 21:18

    Morgan:

    MF / Jim, let’s be clear the reason for NGDPLT is because once we set it at 4.5%, even with no make up – which Scott WILL ACCEPT – unemployment is now structural. No question. It just is.

    That isn’t true. You’re implicitly claiming that NGDP drives employment. What about employment driving NGDP?

    Look at ,a href=”http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=GDP,PAYEMS&transformation=pc1,pc1&scale=Right,Left&range=Max,Custom&cosd=1947-01-01,1947-01-01&coed=2012-01-01,2012-01-01&line_color=%230000ff,%23ff0000&link_values=,&mark_type=NONE,NONE&mw=4,4&line_style=Solid,Solid&lw=1,1&vintage_date=2012-06-05,2012-06-05&revision_date=2012-06-05,2012-06-05&mma=0,0&nd=,&ost=,&oet=,&fml=a,a&fq=Quarterly,Monthly&fam=avg,avg&fgst=lin,lin”this chart.

    The correlation between NGDP and employment is pretty tight.

    Why can’t I conclude that my theory “Changes in employment are the primary driver of changes in NGDP” is confirmed by this data?

  57. Gravatar of Vivian Darkbloom Vivian Darkbloom
    4. June 2012 at 22:43

    The Summers post reminds me of this recent blog entry by Greg Mankiw (“some pundits” pointedly, but in a gentlemanly way, includes Brad DeLong):

    “About a year ago, I pointed out a fashionable trend: Some pundits were saying that long-term interest rates couldn’t go much lower. Since then, the yield on a 10-year Treasury bond has fallen from 3.18 to 1.65 percent.

    Just think: Had Summers advised Obama to hold up on that fiscal stimulus for a year or two, the financing cost would have been cut in half, if not more. And, he probably locked in his 30 year mortgage at 4.5 percent (a mistake Krugman also made several years ago when warning of runaway inflation due to budget deficits during the Bush II administration).

    Greg concludes:

    “The lesson: Don’t try to time the market.”

    http://gregmankiw.blogspot.fr/

  58. Gravatar of Saturos Saturos
    4. June 2012 at 23:30

    OGT, thanks for reposting what I already posted on the previous post (and didn’t get a reply to.)

    I know, there’s a lot of comments, Scott isn’t Superman. He’s only got the most interesting blog in the world.

  59. Gravatar of RebelEconomist RebelEconomist
    5. June 2012 at 01:44

    “here’s something we can be 100% sure it [the “dual mandate”] does not mean. It can’t mean that the Fed should always act as if it had a simple 2% inflation mandate, with no concern for jobs. That would clearly violate the law.”

    The obvious counter to this was given many times by European central bankers: apart from uncertain mechanisms such as hysteresis, the central bank has only a short-term (and mean zero) influence on real activity including employment. Therefore, the best contribution that the central bank can make to lowering unemployment is to keep inflation low and stable.

    As I am sure you really know, Scott, the Fed’s dual mandate is macroeconomic nonsense, with the unemployment bit added by politicians. The only intellectually honest sustainable employment objective that the central bank can be given is to reduce its VOLATILITY. The reason you get off lightly with the arguments you make in your blog is that, outside Germany, there are very few evangelical central bankers left who will forcibly argue their case.

    Ironically, you should be pleased that the Fed does not forcefully answer your criticism. It is a sign that, outside Germany, where people like Weber and Stark still resign when their advice is rejected, central bankers are less principled than they used to be. From the 1990s, central banks have been gradually taken over by grey, calculating academics whose career success is based on keeping their heads down and delivering what is expected of them. They are careful not to let themselves get tied to any particular debating position. If today’s senior central bankers sense that the wind is blowing in the direction of higher inflation, especially under cover of some intellectual clothing like NGDP targeting, most of them will reposition themselves to go along with it. I fear that you will get your way.

  60. Gravatar of Mike Sax Mike Sax
    5. June 2012 at 02:03

    “You can’t make conclusions on this by looking at the correlation alone.”

    I’ll give you that one Major. Of course a correlation may be interesting or thought provoking but it’s not enough by itself to prove causation. To do that more is needed.

  61. Gravatar of Mike Sax Mike Sax
    5. June 2012 at 02:12

    Major let me make on point clear. I peronaly at least am not an apostle of NGDP targeting. I mean I find it an interesting idea, quite intiitive but do I feel like I know for a fact it’s got it all right and will totallly work?

    Honestly no. I think there are many here who are more convinced-and they’re smart people and may well be right.

    But for me I see lots of correlation but still don’t feel I totally can vouch that I see the causation. At least not yet.

  62. Gravatar of Saturos Saturos
    5. June 2012 at 02:12

    NGDP targeting is not higher inflation. The problems caused by inflation are actually problems caused by persistently high NGDP growth, which Scott does not advocate.

    Is what the Fed has done to employment over the last 4 years considered to be “short-term”. God help us.

  63. Gravatar of Saturos Saturos
    5. June 2012 at 02:14

    I was replying to RebelEconomist there. Goodness knows what he’s rebelling against. (Maybe the reckless inflationism that has taken over the profession.)

  64. Gravatar of Mike Sax Mike Sax
    5. June 2012 at 03:05

    “The only intellectually honest sustainable employment objective that the central bank can be given is to reduce its VOLATILITY.”

    Well Rebel that seems to have already been done. And yet the world economy is haning from a thread for reasons that have nothing to do with inflation.

    The Fed doesn’t necessarily have to focus only on inflation-the pre-Volcker Fed didn’t

  65. Gravatar of JSeydl JSeydl
    5. June 2012 at 03:16

    Pacemaker,

    “Scott doesn’t believe that the Fed can spot bubbles because of the EMH, which says that past prices (including housing prices) can’t predict future prices.”

    That’s fine. But this is where I sort of leave the debate. I guess you could say that I’m like Soros in that I’ve always thought the assumptions for the EMH are so unrealistic that I never bothered to study them. The events of the past few years — especially with regard to Europe — have only worked to further discredit the EMH, in my mind.

    “With NGDP level targeting, the economy would be able to shrug off a rapidly shrinking sector since the rest of the economy would expand more to maintain the growth path of NGDP. Sadly, what actually happened was that growth in the other sectors also declined because of the fall in expected NGDP.”

    I don’t buy this either. It was totally predictable that the collapse of the housing bubble was going to ripple through all sectors of the economy. At its peak, the housing bubble generated about $1.4 trillion in annual demand; roughly $700 billion directly through construction activity, and roughly $700 billion indirectly from the effect that housing wealth had on consumer spending. Once we lost that demand, the direct consequence was job losses in manufacturing, trade and transportation, financial services, and construction; the indirect consequence was job losses in retail trade and leisure and hospitality. That’s pretty much the entire economy. Again, all of this was totally predictable.

    It would be nice if some form of private-sector demand would immediately emerge to replace that lost from the collapse of the housing bubble, but the world does not work this way — as Keynes told us 80 years ago. I understand that NGDPLT is a way to sort of “test” whether the world truly does not work this way, but I’m skeptical to say the least.

  66. Gravatar of RebelEconomist RebelEconomist
    5. June 2012 at 03:37

    “…..yet the world economy is hanging from a thread for reasons that have nothing to do with inflation”

    Yes, and nothing that can be permanently fixed by pursuing inflation either. In fact, I would say eg here http://reservedplace.blogspot.co.uk/2008/06/greenspan-put.html that a key reason (for the world economy now “hanging from a thread”) was central banks’ willingness to compromise their monetary policy objectives to mitigate previous (incipient) financial crises. Present calls to generate a bit more inflation to ease the present crisis are no more than a progression of that desperate and failed approach.

    It was, by the way, this failed approach that I was originally rebelling against when I started to engage with blogs back in about 2006 and chose that nom de plume. The present disaster was baked in the cake long before the Fed’s reaction to the 2008 intensification of the crisis that it suits Scott to blame.

  67. Gravatar of RebelEconomist RebelEconomist
    5. June 2012 at 03:50

    As an example of my “rebellious” prediction of the outcome of repeated monetary policy bailouts, see here: http://blogs.cfr.org/setser/2006/12/29/i-guess-i-am-not-the-only-one-who-sometimes/#comments (on January 1, 2007 at 7:47 am)

  68. Gravatar of Saturos Saturos
    5. June 2012 at 04:07

    Here we are – this is why MF is wrong: http://macromarketmusings.blogspot.com.au/2011/12/what-really-caused-crisis.html

  69. Gravatar of Morgan Warstler Morgan Warstler
    5. June 2012 at 04:12

    MF,

    I said this:

    MF / Jim, let’s be clear the reason for NGDPLT is because once we set it at 4.5%, even with no make up – which Scott WILL ACCEPT – unemployment is now structural. No question. It just is.

    You said this:

    That isn’t true. You’re implicitly claiming that NGDP drives employment. What about employment driving NGDP?

    Let me explain:

    The point isn’t that there can’t be unemployment at 4.5% NGDPLT, the point is that we have LOCKED DOWN the target, and will no longer allow the Fed to be concerned with unemployment.

    It disappears from radar.

    NOW we know for sure if unemployment is going up, it is the govt. getting int he way somehow.

    This is Sumner’s position.

    ——

    This is why I care so much about keeping the LT lower than 5%.

    That’s 2% inflation + 2.5% RGDP

    So really good policy means we’re running at 4.5%+ RGDP and <0% on inflation (deflation).

    Really bad policy is the reverse.

    Now we judge govts by the unemployment they create inside that boundary.

  70. Gravatar of ssumner ssumner
    5. June 2012 at 12:03

    Jim Glass, Yes, and MF doesn’t realize that if NGDP grows far below trend the economy will shed jobs–big surprise.

    And I did a post on Summers.

    JSeydl, Last time the Fed tried to pop an asset bubble (1929) we had a Great Depression. In 1987 they avoided doing so, and we had no recession at all.

    In any case, if the big banks didn’t see it coming, how in the world is the Fed going to out guess them?

    Dan, You said;

    “If I am not wrong, Mr. Sumner, was it not the same ivory tower economists who derived the Black-Scholes formula? Remind us all, if you may, how did the real world implementation of that concept pan out? Oh, that’s right, in the real world prices can remain out of equilibrium longer than investors can stay solvent.
    The same disconnect exists with your rally cry for 5% inflation.”

    Oh yeah, well didn’t people like you who disdain ivory tower economics bring us the North Korean economic model? That’s about as relevant as your post. BTW, I don’t favor 5% inflation.

    And God know what Black-Scholes has to do with any of this.

    OGT, Yes, that was an interesting interview.

    Vivian, We think alike! I have that in my new post.

    Rebeleconomist. You said;

    “The obvious counter to this was given many times by European central bankers: apart from uncertain mechanisms such as hysteresis, the central bank has only a short-term (and mean zero) influence on real activity including employment. Therefore, the best contribution that the central bank can make to lowering unemployment is to keep inflation low and stable.”

    That’s a complete non-sequitor, as any NK economist can tell you. You are confusing averages and variances. Usually if someone is going to be as cocky as you are, it helps to know a bit of macroeconomics so you don’t look like a fool.

  71. Gravatar of RebelEconomist RebelEconomist
    5. June 2012 at 12:50

    I am baffled as to what you are objecting to in that statement, Scott. I thought it was generally accepted that monetary policy – eg a one-off monetary stimulus – has no long run effect on real variables. I say “mean-zero” to rule out the argument that the monetary stimulus can be repeated ad infinitum to give it a permanent real effect. Presumably you agree that there are some costs of inflation and inflation variability in terms of economic efficiency, which is why central bankers commonly say that price stability is the best contribution that they can make to economic welfare. For example the ECB: “Price stability contributes in several ways to achieving high levels of economic activity and employment” ( http://www.ecb.int/ecb/educational/facts/monpol/html/mp_003.en.html )

    This curtailed discussion provides a good example of why I think you ought to spend more time on comments and less on new posts, as I write in response to your question in a more recent post.

  72. Gravatar of JSeydl JSeydl
    5. June 2012 at 14:21

    Scott,

    “Last time the Fed tried to pop an asset bubble (1929) we had a Great Depression.”

    By 1928, when the Fed began to raise rates, it was already too late; P/E ratios in the stock market were already way out of whack. Simiarly, if the Fed had popped the housing bubble in 2004/2005, the aftermath would have still probably been severe. Real home prices started to deviate from trend around 2000. If the Fed had noticed this and taken action then or shortly thereafter, things would have been different.

  73. Gravatar of GlibFighter GlibFighter
    5. June 2012 at 20:34

    From the same series, if you compute inflation as the percentage change from one year earlier, the average over the same period is 1.8%.

  74. Gravatar of ssumner ssumner
    6. June 2012 at 06:56

    Rebeleconomist, Obviously there is no long run effect, but short run costs from output instability are very important, and don’t get minimized with an inflation target. They get minimized with a NGDP or nominal wage target.

    Jseydl, No, the P/E ratio wasn’t too high in 1928 (if you had bought stocks and held them to today you would have made a fortune), and in any case we learned from 1987 that stock bubbles and crashes have ZERO effect on the real economy.

    GlibFighter, Yes, under almost any method inflation has been too low. The irony is that a financial crisis is exactly when you should run above trend. They should have had below 2% inflation during the boom years.

  75. Gravatar of RebelEconomist RebelEconomist
    6. June 2012 at 09:43

    That’s a good point Scott, thanks.

  76. Gravatar of JSeydl JSeydl
    6. June 2012 at 11:42

    Scott,

    “we learned from 1987 that stock bubbles and crashes have ZERO effect on the real economy.”

    I agree. Changes in stock market prices have only small effects on consumer spending, because stocks are primarily owned by only the wealthy. But changes in home prices have big effects on consumer spending.

    Here’s a chart: http://img818.imageshack.us/img818/7448/negativeequitygap.png

    When aggregate housing equity fell below aggregate housing debt, the saving rate jumped and consumer spending stalled. This outcome was totally predictable.

  77. Gravatar of Jim Glass Jim Glass
    6. June 2012 at 13:11

    When aggregate housing equity fell below aggregate housing debt, the saving rate jumped and consumer spending stalled.

    I dunno, from that it looks to me like the savings rate was a lot more responsive to NGDP and RGDP, jumping up exactly when they fell. For two full years before then housing equity plunged and housing debt rose, shrinking the gap between them rapidly, with the savings rate actually falling a little bit.

  78. Gravatar of JSeydl JSeydl
    6. June 2012 at 13:57

    Jim Glass,

    The saving rate reached its mini trough in Q3 2007. Here’s the series from that quarter forward:

    Q3 2007 = 2.13
    Q4 2007 = 2.47
    Q1 2008 = 4.20
    Q2 2008 = 6.10
    Q3 2008 = 4.87
    Q4 2008 = 6.23

    NGDP didn’t start falling until Q3 2008. RGDP fell in Q1 2008, but then grew in Q2 2008, before falling again in Q3 2008. So the saving rate started rising before NGDP and RGDP started falling. Sure, the chart shows that the saving rate stayed low even as $5 tillion in housing equity was wiped away, but it was when housing debt started to exceed housing equity — putting many homeowners into a negative equity position — that the saving rate jumped. Again, all of this happened before NGDP and RGDP started falling.

  79. Gravatar of "If the CPI rose 5.5% over the next 15 months, the Fed would have fallen short of its 2% inflation goal over the past 5 years. Monetary policy over the past 5 years would have been too tight even if the Fed didn’t give a damn about the million "If the CPI rose 5.5% over the next 15 months, the Fed would have fallen short of its 2% inflation goal over the past 5 years. Monetary policy over the past 5 years would have been too tight even if the Fed didn’t give a damn about the million
    7. June 2012 at 07:01

    […] Source […]

  80. Gravatar of Major_Freedom Major_Freedom
    7. June 2012 at 10:59

    Mike Sax:

    “Market prices are the best information we can possibly have, but it doesn’t mean they are always “right” when it comes to future events.”

    Wow Major you actualy admit the market can be mistaken with it’s ablity to read price signals?

    Of COURSE!!!! Humans aren’t perfect. Having said that, it does not in any way whatsoever imply justification for state intervention in money or spending, because the state is composed of humans as well. They are just as ignorant as your average Joe, when it comes to the marginal utilities, preferences, and plans of millions of other individual market participants.

    So you claim we will have galloping inflation over the next 15 months?

    Did I? Where?

    “You can’t make conclusions on this by looking at the correlation alone.”

    I’ll give you that one Major. Of course a correlation may be interesting or thought provoking but it’s not enough by itself to prove causation. To do that more is needed.

    And what more, pray tell, is needed, besides historical data observations of variables that you agree can’t show causation?

    I’ll give you a hint: It’s non-empirical.

    Major let me make on point clear. I peronaly at least am not an apostle of NGDP targeting. I mean I find it an interesting idea, quite intiitive but do I feel like I know for a fact it’s got it all right and will totallly work?

    It’s your mess. You want it. You accept partial intellectual responsibility for its consequences.

    Honestly no. I think there are many here who are more convinced-and they’re smart people and may well be right.

    Yet you want it anyway.

    But for me I see lots of correlation but still don’t feel I totally can vouch that I see the causation. At least not yet.

    You’ll never see any causation because causation is actually unobservable. You can see events taking place, and there may very well be causation taking place, but you won’t be able to see it using your perceptions. Perceptions give you data, they don’t give you integration of the data. In order to integrate data into a meaningful “picture”, you need something besides your perceptions. You need an intellectual faculty, one that you understand at least the basics of how it works. You need to ground all sensory experience onto a personal element, your mind. If your conclusions violate the necessary logical constraints of your own existence, then you can be sure it’s wrong, since you are a part of reality as well.

  81. Gravatar of Major_Freedom Major_Freedom
    7. June 2012 at 11:02

    ssumner:

    Jim Glass, Yes, and MF doesn’t realize that if NGDP grows far below trend the economy will shed jobs-big surprise.

    I cannot understand what has not been established!

    I could just as easily look at the correlation between employment and NGDP and say “you don’t understand that if employment grows far below trend then NGDP will decline-big surprise.”

    How do you know NGDP is what is driving employment, rather than employment driving NGDP? You can’t tell me one is right and the other is wrong by looking at the correlation alone.

    If I hold the theory that NGDP goes up and down due to employment going up and down, on the basis that when employees are laid off, they spend less, and when employees are hired, they spend more, then you can’t say this is wrong unless you show me a conclusive economic theory that is separate from the empirical data correlation.

    If A is correlated with B, then how do you know A is causing B, rather than B causing A?

    The truth is you have no economic theory for why NGDP is the driver for employment and output. You just ad hoc adopted that belief from Keynes.

    How do you know NGDP drives employment, rather than vice versa?

  82. Gravatar of ssumner ssumner
    7. June 2012 at 11:40

    Jseydl, I’m not at all concerned about a plunge in consumer spending. As long as the Fed targets NGDP a plunge in consumer spending will simply boost investment.

  83. Gravatar of JSeydl JSeydl
    7. June 2012 at 13:33

    Scott,

    “I’m not at all concerned about a plunge in consumer spending. As long as the Fed targets NGDP a plunge in consumer spending will simply boost investment.”

    Entrepreneurs like Nick Hanauer certainly aren’t going to boost investment during a plunge in consumer spending: http://roundtable.nationaljournal.com/2012/05/the-inequality-speech-that-ted-wont-show-you.php

  84. Gravatar of JSeydl JSeydl
    7. June 2012 at 18:34

    Scott,

    Some more food for thought: https://plus.google.com/u/0/111643364718750270983/posts/NUUeKj6HBuT

    Delinquency rates (and most likely aggregate negative equity) started to increase well before NGDP even began to weaken — and even when NGDP was running above trend.

    -Joe

  85. Gravatar of Misaki Misaki
    12. July 2012 at 10:42

    Job creation without higher government spending, inflation, or trade barriers:

    /ɯoɔ˙ʇodsƃolq˙uɐlduoıʇɐǝɹɔqoɾ//:dʇʇɥ

  86. Gravatar of Major_Freedom Major_Freedom
    12. July 2012 at 10:45

    Misaki:

    What I thought of when reading your post:

    ɯoɔ˙sʞɹoʍʎɯouoɔǝǝɥʇʍoɥɟoʍǝıʌʎɯ˙ʍʍʍ//:dʇʇɥ

Leave a Reply