What might prevent a return to healthy growth

Becky Hargrove sent me this recent article about Bernanke:

The Fed, he said, believes inflation will remain near the central bank’s target of 2% or a little less. The economy can support an unemployment rate around 5% to 6% without fueling inflation, he added.

“I do believe we will return to a healthier growth rate. I don’t see any reason why we couldn’t,” he said.

It’s good to hear that Bernanke thinks the problem is demand side, not structural.  Oddly, I actually think it’s more structural than he does.  If we stay at 99 week maximum UI benefits, I’d expected the natural rate to be in the 6% to 7% range, especially if the minimum wage rate stays this high.

So Bernanke thinks easier money would help the economy even more than I think easier money would help the economy.  But he fails to see one very obvious potential problem.  There is something that could prevent a return to “healthier growth.”

Let’s assume inflation stays near at 2%.  And let’s also assume that they allow NGDP to grow at a bit over 4%.  Then we won’t get a “healthier” recovery.

But why would I make such a pessimistic forecast about NGDP growth?  Why expect it to be so low?

Umm, maybe because it’s been low for the past several years.

Maybe because private forecasters expect it to remain low.

And maybe because the bond market seems to expect low NGDP growth (as far as we can tell.)

Other than those three reasons, there’s no reason at all that the economy can’t have a healthier recovery with 2% inflation.

And who determines the rate of NGDP growth?  There’s probably an answer somewhere in Bernanke’s intermediate macro textbook.



33 Responses to “What might prevent a return to healthy growth”

  1. Gravatar of Neal Neal
    11. November 2011 at 06:54

    “… Let’s assume rate of decrease in real living standards stays near at 2% …”

    “Other than those three reasons, there’s no reason at all that the economy can’t have a healthier recovery with 2% rate of decrease in real living standards.”

    Fixed for you 🙂

  2. Gravatar of Morgan Warstler Morgan Warstler
    11. November 2011 at 07:09

    4% is a 2% increase in real living standards, with 2% loss to printed money.

    I think Ben’s just continuing to say we need to reform the tax code and stop spending money on public employees and entitlements.

  3. Gravatar of marcus nunes marcus nunes
    11. November 2011 at 07:19

    You could ask your (and mine)commenter Catherine Johnson, a “disinterested party” to pay a visit to Bernanke and help “set him straight”!

  4. Gravatar of Nevorp Nevorp
    11. November 2011 at 07:46

    Depends on what you consider “healthy” growth have we had any post 1980.


  5. Gravatar of JimP JimP
    11. November 2011 at 08:06


    A real clever euro idea……

    And a lesson in the power of credible commitment from a central bank.

  6. Gravatar of James in London James in London
    11. November 2011 at 08:09

    is this guy a market monetarist?

    he is an excellent blogger on mid-cap investment frauds, and always entertaining

  7. Gravatar of Becky Hargrove Becky Hargrove
    11. November 2011 at 08:30

    This post might set a record for links. Karl posted this the other day about “Chinese Currency Manipulation” that seems to address some of your concerns in an unexpected fashion:

  8. Gravatar of Morgan Warstler Morgan Warstler
    11. November 2011 at 08:48

    FINALLY Tyler gets down into the real weeds of Monetary policy:

    “I don’t think he and I disagree on the underlying economic theory, but I suspect this would be too little. At zero growth, that means five percent price inflation a year and basically an open fire hose to the Italian Treasury. That also means they never reform, noting that I accept the Keynesian point that at this time horizon fiscal reform is counterproductive. But “no reform” is counterproductive too!”


    The definition of what rate we should target is based on this question:

    How effective if current government fiscal policy?

    If it is shit, then the target must be low enough to put REAL PRESSURE on the govt. to change its behavior.

    And since Americans and more importantly those with both votes and money think the government is ineffective….

    IT IS RATIONAL for the MM crowd to support a low enough target that the deciders will see this as a tool to bludgeon government.

    Let’s get down to brass tacks man, how much for the ape?

  9. Gravatar of Benjamin Cole Benjamin Cole
    11. November 2011 at 08:54

    I sense defeatism is becoming the new norm, or perhaps partisan nihilism. For some reason we now expect lower growth out of the same workforce, infrastructure and technology (actually the technology is a little better) than five years ago. This is simple defeatism.

    There may be a large dose of partisan nihilism, and GOP’ers would love failure now. If you are well-set I guess another one to five years of economic poop is worth it to ruin Obama and the liberals.

    As a small business guy, I want lots of economic growth now, even yesterday. And every year, whether Bush or Obama is president.

    Give me five percent real growth for five years, and I will eat five percent inflation for breakfast. So will the whole country. This is obvious, btw.

  10. Gravatar of Morgan Warstler Morgan Warstler
    11. November 2011 at 09:39


    Shhh, you will make folks here uncomfy.

  11. Gravatar of Nevorp Nevorp
    11. November 2011 at 11:32

    Morgan, Oops, sorry. But the graph that matters


  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. November 2011 at 12:46

    James in London,
    I think the guy you posted “gets it” even if he doesn’t call humself a Market Monetarist (or a Quasimonetarist or whatever the heck the current term is).

    I’m not sure we can get Bernanke to wear a Hawaiian shirt and to hold a pipe (I’d even fill it for him if he promised to inhale) but perhaps pictures like the following could loosen his image up enough so that a healthy economic recovery becomes a real possibility:


    P.S. That picture is from the following Onion post:


    P.P.S. If I read my intermediate text on monetary economics correctly then the answer to the question contained in the title of this blog post is also apparently contained in that first link.

  13. Gravatar of Becky Hargrove Becky Hargrove
    11. November 2011 at 12:53

    It wouldn’t be fake demand and hopeless loans if we could unstick the markets that force low income people to buy “at the top” such as healthcare and housing. But whenever I argue for loosening restrictions that create those sticky markets I get shouted down in a hurry.

  14. Gravatar of B B
    11. November 2011 at 13:21


    Are you saying we shouldn’t restrict the practices of nurse practitioners and force the poor to visit more expensive MDs? And we shouldn’t force landlords and developers to meet strict building codes that price low income households out of the market?

    You’re one of history’s greatest monsters.

  15. Gravatar of ssumner ssumner
    11. November 2011 at 13:41

    Neal, Good point. Or should I have said “the so-called CPI inflation rate stays at 2%?”

    Morgan, You always think Bernanke’s secret agenda is your public agenda. But why? I’ve met him, I’ve read his research. He doesn’t remind me of you at all. And that’s not a knock on you. You have advantages like decisiveness and a clear-eyed vision.

    Marcus, Wow, the idea is really getting out there.

    Nevorp, That’s not GDP, it’s the change in GDP.

    JimP, Yeah, I thought that was quite clever too.

    James, Yes, entertaining, but that’s not my view.

    Becky, That’s one of the clearest presentations of the Krugman/Keynesian view that I have seen. I don’t agree of course, because I think the Fed is targeting inflation (even at zero rates.) But it clearly expresses the alternative view.

    And yes, those links make answering comments very time consuming!

    Morgan, Maybe your theory applies to Italy. It certainly applies to Greece. I don’t think it applies to the US.

    Ben, Yes, way too much defeatism.

    Mark, Maybe I shouldn’t have said I disagree–but I don’t think we need to go to that extreme. That will just frighten away the supporters we need.

    I didn’t follow your PPS.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. November 2011 at 13:56

    Scott wrote:
    “I didn’t follow your PPS.”

    Perhaps I stated that clumsily.

    I merely was suggesting that NGDP isn’t something that just happens like the weather. If anyone is responsible for its course it is Ben Bernanke himself. If he doesn’t the rate of recovery perhaps he should do something about it.

  17. Gravatar of Morgan Warstler Morgan Warstler
    11. November 2011 at 14:15

    Scott, you have to SELL the Tea Party or you won’t get what you want.

    Pure and simple. The 81-99% crowd OWN more stuff than everyone else put together. This is the comfy cozy fact that makes “we are the 99%!” only work if the 1-80% are FOLLOWING the 81-99%.

    You can’t get there without the Tea Party.

    The only interesting thing is when you turn the corner and sell your ideas on their flip-side.

    THIS IS EXACTLY WHAT BEN WANTS. An immediate pop with a clear meaningful reduction in the future.

    You NEVER talk about the natural effect of a a lower level target has on cutting government.

    You ADMIT it happens when I push it, but you don’t talk about it.

    Even in your WSJ chat, you don’t say, listen up, this will FORCE the government to do fiscal, you say you prefer it get done that way – that’s not the same thing.

    Put the meat in the window.

  18. Gravatar of Morgan Warstler Morgan Warstler
    11. November 2011 at 14:24

    “You always think Bernanke’s secret agenda is your public agenda. But why?”

    1. Because I believe in the final hegemony of the 81-99%. The bankers / oligarchs just bought off and ate up the Dem base, they did no damage to the A power.

    It is the difference between the OWS and the Tea Party.

    2. Because Alan Greenspan (who kept us at 5%) talks far more frankly than Ben does.

    3. Because Ben never says he wants fiscal anything without saying and big fiscal reduction in long term – which CATEGORICALLY means cuts to public employees and entitlements.

    4. Because I still fully expect Obama to be drummed out of office.

    Frankly, it is impossible to deny 3. For you to be right, Ben would have to say even we are not going to fix the long term, spend more now.

  19. Gravatar of Full Employment Hawk Full Employment Hawk
    11. November 2011 at 15:37

    “”I do believe we will return to a healthier growth rate.”

    Since he is not willing to give the economy the monetary stimulus needed to achieve this healthier growth rate, this is faith-based economics.

  20. Gravatar of Full Employment Hawk Full Employment Hawk
    11. November 2011 at 15:44

    “4. Because I still fully expect Obama to be drummed out of office.”

    Don’t count your chickens before they are hatched.

    Romney is going to get the nomination by default because all his would be opponents (with the exception of Huntsman, who does not have a snowball’s chance in hell of getting the nomination) are a pathetic bunch of clowns, and not because he is a strong candidate. The Obama campaign is going to have a field day exposing how totally Romney has been on every side of the issues and also all of the extreme right-wing things he has to say to get the nomination that will alienate the people at the center.

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. November 2011 at 16:02

    I agree. Rick Perry clearly has difficulty remembering his own talking points if they contain more than two components:


    The best part of that exchange (other than Ron Paul raising the ante) was that classroom smart@$$ Romney feeding the school dunce the wrong answer.

  22. Gravatar of W. Peden W. Peden
    11. November 2011 at 16:32


    I wouldn’t count Newt Gingrich out, because he has apparentely discovered a method of hypnosis where he can totally ignore whatever question he is asked and answer however he likes, without most people noticing. Obama might well buckle under pressure and hand over the presidency under the power of the Eye of Newt.

  23. Gravatar of Morgan Warstler Morgan Warstler
    11. November 2011 at 18:00

    Inflation Hawk,

    Just so we’re clear, IF Obama loses, Scott was wrong, and my arguments carry the day.

    I’m more than willing to admit that the defacto GOP strategy was misguided IF we hand a Dem a maxed credit card, he SPENDS MORE, and get re-elected.

    This is the fundamental disagreement between Scott and I, and I’m sure he’s just as comfy as I am with the deeply jarring effect a wrong assumption of this magnitude has on our past beliefs.

    If I’m wrong, Monetary is the best possible way to handle the obviously moderate modern American population. The winning gambit I have felt was unbeatable is beatable. I am humbled.

    If I’m right, Scott’s guys (egghead economists) are little bitches that do the bidding the powers that be – they cheer lead for the team WHEN they are told to, they appeal to WHO they are told to.

  24. Gravatar of Morgan Warstler Morgan Warstler
    11. November 2011 at 18:12

    Having been initiated into professional politics around Newt in 1994, back when I was a deep believer… it would do my scarred heart good to see him make it, but frankly I just can’t be that ideological, that hopeful again.

    When they shut the government down, I thought it was the final act. I thought we were finished, we could just let truth speak for itself, America would run just fine, that the GOP would go home and refuse to turn it back on until Clinton made truly GIANT cuts.

    But we (Newt) bent / blinked so fast, and I nave never quite forgiven him for not handling it better. If he wasn’t ready to win the public relations battle, it never should have happened – and it should have happened.

  25. Gravatar of John John
    11. November 2011 at 18:22

    I don’t get how Scott expects us to return to the 2007 growth path or get the kind of NGDP recovery we had in 1983 without real GDP growth. In 1983, real GDP growth was around 8%. I don’t see that happening today without serious supply side changes like the ones Reagan gave us back then. I really don’t think jacking up inflation to 8% is going to do much for us in real terms even if it puts us back on the old NGDP growth path.

  26. Gravatar of John John
    11. November 2011 at 19:33


    I just saw your interview with Kelly Evans. It answered my question above, but it raises another question in my mind; at what point does inflation fail to boost real growth? If you’re proposing higher inflation for several years in order to return to trend, a given inflation rate has to stop working to boost real growth at some point. That was one of Friedman’s biggest arguments. Another one of your tenets is that money is neutral (on growth) in the long run and your plan seems to butt up against that.

  27. Gravatar of John John
    11. November 2011 at 19:40

    Why aren’t economists focused on encouraging the real supply side measures that could get real GDP humming? Why are they all focused on boosting aggregate demand which is really just aggregate supply defined in money terms. Get America to start making more stuff by setting businesses free and we’ll all be better off. Friedman went out and railed against things like tariffs and regulation. I wish more guys like Scott would do the same.

  28. Gravatar of Scott Sumner Sees Sumnerites Everywhere Scott Sumner Sees Sumnerites Everywhere
    11. November 2011 at 21:04

    […] success has gone to his head so much that he thinks we’re all market monetarists now. In this post, Sumner first quotes from a news article about Bernanke: The Fed, he said, believes inflation will […]

  29. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. November 2011 at 22:47

    I don’t think Scott has ignored the supply side. (Nor have I as my dissertation is supply side in orientation.) But the major problems that the US and world economy faces right now are not supply side.

  30. Gravatar of John John
    12. November 2011 at 01:42


    One of the weirdest things I see in the mainstream economics profession is this idea of a rigid division between supply side and demand side at the macro level. There are two points I wanna make about that. First, aggregate demand is just aggregate supply defined in terms of money. AD= the total market prices of final goods or the total dollar value given to aggregate supply of final goods.

    The second is good old Say’s Law. In a very basic sense supply does create demand. The caveat is that the supplier has to supply something people want. By doing so, he can now demand issue a real demand equal to the market value of what he supplied. Ultimately in an economy, what is being traded is always goods of the first order (consumer goods and services) with money acting as an intermediary. This is why Say was correct to point out that when production is high society flourishes.

    So to sum it up, I wish you or Scott could explain to me how Aggregate Demand is an independent concept worth studying. What gives you the ability to say with such certainty that our problems are demand side? Aggregate demand looks to me like a baseless, hollow shell sort of like the labor theory of value, the concept of “just price”, or trade deficits.

    Full production seems like the correct goal of any economy. Full employment is just a necessary prerequisite.

    You and Scott may not have ignored the supply side, but Scott isn’t known for his work encouraging supply side reforms. He’s known for NGDP targeting and advocating easier money. It’s unfortunate because like I said earlier, if we had a government that focused on maximizing production by free market reforms, the made-up demand issues would resolve themselves.

  31. Gravatar of Nevorp Nevorp
    12. November 2011 at 06:42

    Yeah, sorry I was still on the “healthy” growth point, that graph seems to indicate that ever increasing debt had not provided equivalent ever increasing growth.

  32. Gravatar of Bill Woolsey Bill Woolsey
    12. November 2011 at 10:05


    Say’s Law is true if money counts as a good.

    A shortage of money implies a surplus of other goods.

    A surplus of money implies a shortage of other goods.

    While this is also true of shoes, entrpreneurs in the shoe market can adjust the quantity and price of shoes.

    For money, unless the quantity of money adjusts to meet the demand, there should be no adjustment in quantities and entrepreneurs in every market need to adjust prices and wages so that the real quantity of money adjusts to the demand.

    This is what aggregate demand is all about. Nothing more or less.

  33. Gravatar of ssumner ssumner
    12. November 2011 at 11:52

    Mark, OK, thanks for clearing that up.

    Morgan, I think the GOP is weaker than you assume.

    Full Employment Hawk, Good point.

    John, We can’t do 8%, but we can do more than 2%. It turns into pure inflation once the problem of wage stickiness is overcome.

    You asked:

    “Why aren’t economists focused on encouraging the real supply side measures that could get real GDP humming?”

    I am consistently doing so. I think both AS and AD matter—always.

    Nevorp, But that’s not surprising, when you compare levels to growth rates.

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