Or at least shares my view of the current macro situation.
I’ve argued that the current high inflation is increasingly driven by excess demand, and that monetary policy remains highly expansionary. Here’s former CEA chair Jason Furman:
Commentators have generally offered two arguments about advanced economies’ performance since COVID-19 struck, only one of which can be true. The first is that the economic rebound has been surprisingly rapid, outpacing what forecasters expected and setting this recovery apart from the aftermath of previous recessions.
The second argument is that inflation has reached its recent heights because of unexpected supply-side developments, including supply-chain issues like semiconductor shortages, an unexpectedly persistent shift from services to goods consumption, a lag in people’s return to the workforce, and the persistence of the virus.
Of course there are some supply problems that have contributed to inflation, but Furman rightly focuses on NGDP growth, which has been extremely high:
By definition, price growth equals the growth of nominal output minus the growth of real output (with a small difference due to compounding). Over the course of 2021, US real GDP grew by 5.5%, nominal GDP grew by around 11.5%, and GDP price growth thus came in at around 5.9%.
Unfortunately, the Fed is still behind the curve:
But households still have substantial excess savings, and the overall stance of monetary policy remains accommodative, suggesting that demand will continue to be strong.
Unlike Furman, I’m not a Keynesian. In market monetarist framing, the excess savings are viewed as a contributing factor making monetary policy more expansionary, not a separate factor. I measure the stance of monetary policy in terms of (expected) NGDP growth.
Overall, however, I’m thrilled to see an increasing focus from top economists on NGDP as an indicator of whether policy is too expansionary or too contractionary.
Economists need to talk much more about NGDP—it’s the key policy indicator for demand-side policy issues (monetary and fiscal policy).
PS. On the other hand, looking at NGDP doesn’t necessarily lead to the correct policy, if one stubbornly refuses to face facts. In the US, NGDP is already 3% above trend, and rising extremely rapidly. That calls for tight money, right? Not according to the FT:
Second, central banks should clarify how they think their monetary policy works. Presumably, the point of reducing monetary stimulus is to take the wind out of the sails of demand in the economy, so as to bring it down to the damaged supply capacity. This was already hard to justify, given that nominal spending had only barely returned to pre-pandemic trends in the US and still fell short in the eurozone and the UK — hardly “excessive” demand.
Huh? The accompanying graph in the FT shows NGDP rising well above trend in the US.
PPS. I have a new piece at The Hill which makes some related points.
READER COMMENTS
Bacon Wrapped
Apr 23 2022 at 2:00pm
Scott Sumner
Apr 24 2022 at 11:57am
I suspect he’s worried about triggering a recession. I don’t think he sees the situation in the same way that I do.
Nicholas Decker
Apr 23 2022 at 3:05pm
Hello – just wanted to say that new articles aren’t appearing on the front page of econlog. The last one to show up was the NIRA article.
Henri Hein
Apr 24 2022 at 2:41am
I had the same problem. I had to clear my browser cookies. Afterwards the front page worked fine.
marcus nunes
Apr 23 2022 at 5:33pm
In this post I present a breakdown of inflation between “Supply driven” and “Demand supported”, and suggest a strategy for the Fed to reduce NGDP growth (YoY) without causing “mayhem”! Jason F is mistaken when he concludes that:
@jasonfurman
“It is common when talking about GDP to talk about how rapid growth has been: Faster than the past, faster in US than in other countries, faster than forecasters expected, just plain fast.
But this is in serious tension with the supply-side arguments people make on inflation.”
I show there´s no “tension”.
https://marcusnunes.substack.com/p/a-definitive-breakdown-of-inflation?s=w
Jim Glass
Apr 23 2022 at 8:55pm
The second argument is that inflation has reached its recent heights because of unexpected supply-side developments, including supply-chain issues like…
Wasn’t “cost push” inflation finally debunked back in the early 1980s?
Is it that past learning if forgotten by new generations while ‘self evident’ bad ideas never die?
Rajat
Apr 24 2022 at 1:32am
I have two responses to this post.
First, you are too kind to Jason Furman and I don’t like you being so generous to people who initially opposed your approach but eventually come around to it without admitting they were wrong, just because they are high-profile and influential. Maybe I haven’t followed Furman’s views closely enough, but on David Beckworth’s podcast last June, Furman criticised NGDPLT on the basis that it would have required higher/positive interest rates at a time when unemployment was still ‘high’ (nearly 6% but falling). At that time, as the transcript shows, Furman supported discretion over rules and argued that the Fed should look at unemployment as well as a nominal variable, which could be NGDP. He said:
I’m sure either by googling or going on your burner twitter account, you would also be able to find Furman’s tweets from August 5 where he crowed about how David’s estimate that the NGDP gap was closed in Q2/2021 was a reason why NGDPLT was inappropriate. For some bizarre reason that perhaps only a New Keynesian could understand, he went on to claim that “Under [David’s] forward-looking NGDP target rates should be well above neutral–maybe around 4% or more right now…. So would need very high interest rate for many years until NGDP got back onto its pre-pandemic path.” And then, just as he said in the podcast, Furman magnanimously added that none of what he was saying was to ‘pick on’ David. Yet now, he publishes a piece saying monetary policy was too loose in 2021 and somehow he is the prodigal son? Maybe, Scott, when I am your age I will be as zen as you about these sins, but for now I am still a (relatively) angry young man.
Second, once again I have to chide you for reading an FT article without checking the author’s name – here, Martin Sandbu. Start a ‘black list’ and keep adding to it!
Thomas Lee Hutcheson
Apr 24 2022 at 7:54am
In a sense both are true. Recovery has been rapid and (partly) Fed set monetary instruments without taking account of the supply chain, sectoral shifts, COVID related slowness t=of the labor force to rebound. It a) probably mis estimated the effects of its instruments on NDGP and b) almost certainly misestimated the split between real GDP and inflation. Criticism of the Fed should involve what it should have known and when it should have known it. I focus on the rapid increase in TIPS in September as the warning sign that the Fed did not react to. More prescient observers (Summers?) may have seen earlier signs. How soon was (should have been) NGDP known to be above known real growth + 2%?
Spencer Bradley Hall
Apr 24 2022 at 11:25am
AD = M*Vt where N-gDp is a subset and proxy. The data shows that long-term monetary flows (its two-year rate-of-change), the volume and velocity of money, the proxy for inflation, remains historically, excessively high. As such, it is an incontrovertible fact that demand-side policies are responsible for the intolerable rates of N-gDp / inflation – irrespective of supply-side issues.
Comments are closed.