I’ve already faulted Fama for misuse of the macroeconomic identity GDP=C+I+G+NX. Now TheMoneyIllusion takes the War On Misleading Tautology to a new level:
When I discuss the effect of monetary stimulus on aggregate demand with
other economists, I notice that they often want an explanation couched
in terms of the major components of GDP. I find this very frustrating,
as this approach does more to conceal than illuminate. Suppose you
were policy czar in a liquidity trap (such as right now), and you were
asked to increase nominal GDP by 3-fold (i.e. 200%) in the next five
years. If you were given a choice of only one tool, which would it
be-monetary or fiscal policy? Any economist with an ounce of common
sense would take monetary policy. OK, so how would you explain its
effect in terms of the 4 components of GDP?
How indeed? The post re-analyzes not only the Great Depression, but also the panic of 1920-1, about which it says:
The sharp fall in the base caused the sharpest 12 month deflation in
modern American history between 1920-21. And it also caused the
sharpest one year increase in real wages in modern American history
between 1920-21. And real output plummeted. What does the C+I+G+NX
approach add to this story? Nothing. Of course investment usually
falls more sharply than consumption in a depression, but that would be
true almost regardless of what caused the depression.
I hadn’t heard of TheMoneyIllusion before, but it looks like it’s already got a good stock of quality content. See for yourself.
READER COMMENTS
David R. Henderson
Feb 27 2009 at 1:31pm
Bryan,
A comment on one of my pet numeracy peeves. This is on the person you quoted, not you. A 3-fold increase in nominal GDP is a 300% increase, not a 200% increase. Increasing nominal GDP to 3 times its current level is a 200% increase.
Best,
David
Scott Sumner
Feb 27 2009 at 5:28pm
Bryan, Thanks for the mention. I am relatively new to blogging and am gratified that people I respect like yourself, Arnold, and Tyler have read my blog and enjoyed at least parts of it. It so happens that a few years ago I began thinking about the distinction between what I called the “commonsense view” and the “economistic view”. Later I discovered that you had already published work in this area. I argued that changes in the plausibility of each view (driven by events) drive changes in what is loosely called “liberalism.” I will try to post something on this topic soon. (My current focus is obviously monetary economics. I will also add you to my blogroll soon.
Bill Woolsey
Feb 27 2009 at 5:30pm
My answer to Sumner’s question is that I would expect all of them to increase roughly in proportion.
Dezakin
Feb 28 2009 at 5:51am
With all the discussion on Keynesian stimulus, why is there so little focus on monetary solutions like quantitative easing to this liquidity trap? I’m beginning to fear the paranoia of inflation will lead us to repeat Japan’s trip into stagnation.
Comments are closed.