RGDP, for a change

The GDP release was cause for some “celebration” due to the fact that, finally, RGDP regained the level of the previous peak. However, in per capita terms, it´s still about 2.5% below!

Assuming that trend (potential) real growth is something around 2.5% from 2007 onwards, the level of RGDP now, absent the “crisis”, would be close to 14.7 trillion or 9.7% higher than the 13.4 trillion observed!

It´s not the “Great Depression” but anyway a “Deep Depression”. One of the interesting comparisons with all other post WWII recessions is that this one only regained the previous peak after 15 quarters, almost double the time taken by the second longest (8 quarters for the 1973-75 recession) and three times the average of 5.1 quarters for the set of previous post WWII recessions. Ironically, the longest and the shortest stand side by side on the graph (the Mutt & Jeff recessions):

So, no matter how you look at it, the situation is “miserable”, going a long way to explain the dismal employment situation. Maybe that´s the reason behind the indication that the Fed is set to occupy most of the discussion time in the meetings next week debating “communication”. This is from David Beckworth commenting on an FT piece by Robin Harding:

A long and contentious debate on communications is set to occupy most of the Federal Reserve’s time when it meets on Tuesday and Wednesday next week… Three different issues are tangled together. The first is whether to clarify the Fed’s goal by agreeing on a clear inflation objective. Second is explaining how the Fed is likely to change policy in the future to reach that goal. Third is whether to use communication to ease policy now with, for example, a pledge to keep rates low until unemployment falls to 7 or 7.5 per cent.

A working group is attacking the problem from first principles, with every option – including innovations such as setting a target for growth in nominal gross domestic product over time – up for discussion.

That must be a pretty difficult thing to agree on. Otherwise why is it that almost 6 years into his tenure Bernanke is still trying to settle the “communications” issue, something that was all “figured out” in his mind 12 years ago, when, as a full time academic, he wrote with Mishkin and Posen a prescient (it turned out) op-ed in the WSJ titled: “What happens when Greenspan is gone?”:

U .S. monetary policy has been remarkably successful during Alan Greenspan’s 121/2 years as Federal Reserve chairman. But although President Clinton yesterday reappointed the 73-year-old Mr. Greenspan to a new term ending in 2004, the chairman will not be around forever. To ensure that monetary policy stays on track after Mr. Greenspan, the Fed should be thinking through its approach to monetary policy now. The Fed needs an approach that consolidates the gains of the Greenspan years and ensures that those successful policies will continue—even if future Fed chairmen are less skillful or less committed to price stability than Mr. Greenspan has been.

We think the best bet lies in a framework known as inflation targeting, which has been employed with great success in recent years by most of the world’s biggest economies, except for Japan. Inflation targeting is a monetary-policy framework that commits the central bank to a forward-looking pursuit of low inflation—the source of the Fed’s current great performance—but also promotes a more open and accountable policy-making process. More transparency and accountability would help keep the Fed on track, and a more open Fed would be good for financial markets and more consistent with our democratic political system.

As our research on the use of this approach around the world documents, successful inflation targeting requires that the central bank and elected officials make a public commitment to an explicit numerical target level for inflation (usually around 2%), to be achieved over a specified horizon (usually two years). Equally important, the central bank must agree to provide the markets and the public with enough information to evaluate its performance, and to understand its reasoning when policy and inflation deviate from the long-run goal–as they inevitably will at times.

Faultless and the kind of statement about which Nick Rowe would shout “Bulls…eye”, except for the fixation on “inflation targeting”, but that´s another story.

Maybe the difficulty in agreeing on “communication” has to do with the title of this Scott Sumner post: “The natural human revulsion against unconventional monetary stimulus”. At the end he writes:

Now it just so happens that right now money is tighter than when interest rates were 8% in the 1970s, but you me and about 23 other people are the only humans on the planet who realize that.  Hence it seems like I’m proposing Zimbabwe, whereas I’m actually proposing a monetary policy far tighter than the one implemented by Paul Volcker.  And that’s one of many reasons why we are where we are.

One can easily think “he´s lost his marbles”. But the set of figures below show very clearly what he means. They compare NGDP, RGD growth and inflation (CPI-Core) in the recovery from the deep 1981-82 recession and the present one. Yes, Paul Volker´s MP was much more expansionary than anything seen at present. What Scott is saying is “Loosen up (a bit) guys; try to bring NGDP back as close as possible to its 20 plus years level!”

Will the Fed come around to that idea next week? Very unliklely!