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Fascinating! Thanks for that, Mr. P!
I’m not sure what to make of this – Being as inflation is a purely monetary phenomenon, simply increasing the supply of money relative to the size of the goods and services produced in the real economy will result in inflation. Sure, you may grow the GDP by brute force, but it will be grown in devalued dollars! The notion that printing additional green paper which isn’t backed by anything real in the economy until something breaks loose is a recipe for a Weimar-style inflationary cycle.
Let me see if I’ve got this straight. An air pressure gauge is the best means of telling if I’m adding air to my tire. (NGDP is the best measure of how tight or easy monetary policy is.) If I’m pumping like mad (the Fed has cut interest rates to zero and expanded its balance sheet tremendously to increase the stock of money), and the gauge isn’t moving much (NGDP isn’t growing fast enough), the problem must be that I’m not pumping hard enough (the Fed is too tight). The solution is to commit to the targeted air pressure. (The Fed just needs to adopt a NGDP strategy and it will happen.)
Or, the problem might be that the inner tube has a hole, the pump isn’t connected to the stem or the pump isn’t working. In other words, monetary policy may have nothing to do with our slow growth, which is why the Fed’s tremendously easy policy isn’t having any effect.
You were right to focus on transmission–what can the Fed do that would actually affect NGDP. More quantitative easing was his only real answer.
I think I get it. Real (inflation-adjusted) GDP growth is what you want. Nominal GDP growth is essentially RGDP plus inflation. Sumner wants a system where: when the economy falters (RGDP slows), the fed will immediately and automatically respond with a moderate easing of the money supply. We’ll get some inflation but it won’t be unreasonable and we won’t get the glitches that can happen when you combine a faltering economy with a tight money supply.
When times are good, real GDP will grow quickly and inflation will be squeezed out.
So far. I’m thinking this is brilliant… not because it will work better than a good Chairman of the Fed but because of the secondary effects. It will be fast, predictable and transparent.
I’d love to hear some analysis from the Ron Paul school of thought. Does this deliver 80% of the benefits of a gold standard without the difficulties of trade distortion?
I agree with several of the other comments here. The fact that nominal GDP correlates with a good economy, does not mean that nominal GDP CAUSES as could economy. Second, if I understood his point, he suggested that the Fed increase money supply to keep NGDP on a linear growth path and if they dropped below the path, they should increase the monetary growth to make up for it. This is a positive feedback system, and in physical systems results in unstable systems that show increasing occilations when perturbed. This would be bad.
I’m pondering Sumner’s argument as well. His most persuasive argument to me was about stable expectations regarding borrowing and lending. Stability in nominal GDP growth allows people to form reasonable expectations as to the ability to repay debt. Deviations one way will favor creditors, another way will favor debtors. I don’t think that this monetary solution is a panacea, nor is it intended to be. Other things are advisable (I’m looking at you, Regulatory Reform). But the argument is that, in aggregate, lenders are sitting on top of capital while borrowers are in trouble, and the continued imbalance is, in effect, deflation. Inflation and deflation are monetary issues. Sumner is making what sounds to me like a Milton Friedman argument.
This is not the gold standard of Ron Paul. The gold standard sets inflation to zero and lets the GDP fluctuate around it. As booms and busts happen we go through times of easy job markets and hard. What the guest is saying is that we can stabilize the job market and go through periods of inflation and deflation. This would be easier on the working man. If it could really work this way, I’m surprised.