Jason Furman, head of the CEA, also falls into the “only growth matters” trap, forgetting the importance of the level path!

Benyamin Appelbaum writes in: “The Great Moderation Is Back”:

Perhaps you remember the Great Moderation, the comforting term economists pinned on the period of relatively steady growth that began in the early 1980s.

Perhaps you’ve even looked back and laughed at the very idea.

Jason Furman has a more complicated view. The head of the president’s Council of Economic Advisers argued in an interesting speech on Thursday that the Great Moderation is still in progress. The growth of jobs and economic activity over the last five years has snapped back into the same kind of steady pattern that prevailed before the recession, a pattern documented in the chart below.

Jason Furman

Including the Great Recession does not change the basic pattern. Economic volatility, on average, is still lower now than in earlier decades.

This is a hollow victory for those who championed the idea of a Great Moderation. They saw the trend as evidence that the economy was less likely to experience a dramatic downturn. Mr. Furman is essentially arguing that those economists were right in describing the phenomenon, but not its implications.

“The Great Recession certainly does reveal serious limitations of the concept of a Great Moderation,” he said. “After all, there is no sense in which the recession itself — which witnessed the largest peak-to-trough downturn in G.D.P. on record — was indicative of a more stable economy than in the 1950s or 1960s.”

Just as Mr Furman was speaking I was (quite independently) concluding a post commenting on the IMF´s High-Level Conference:

But we have been shown by events that even nominal stability is not enough. No one can question the fact that over the past 4 years (since 2010) nominal spending growth (NGDP growth) has not been stable or that inflation has not been low. But business and households have had a hard time planning and the economy is certainly not operating efficiently.

That´s where the ‘level’ in NGDP targeting, level targeting comes in. With level targeting what you do is avoid getting stuck-in-a-slump, thus remaining depressed, as the chart illustrates. But instead of objectively discussing a change in the monetary policy framework that would be effective in getting the economy back on the right track, what we see are efforts to explain (or even justify) why being “stuck-in-a-slump“ (Secular Stagnation) is the” new normal”! Very sad.


One thought on “Jason Furman, head of the CEA, also falls into the “only growth matters” trap, forgetting the importance of the level path!

  1. Jason Furman ignores the most obvious reason why the volatility of RGDP and employment growth decreased dramatically in the mid-1980s, namely that that’s about the same time that the Federal Reserve started systematically targeting the inflation rate. Thus I thought it might be helpful if Furman’s exercise with RGDP and employment volatility be repeated using NGDP and core PCEPI.

    Here’s the standard deviation of quarterly NGDP growth at an annual rate during expansion periods.


    And here’s the standard deviation of monthly core PCEPI inflation (which only starts in 1959) at an annual rate during expansion periods.


    Note that NGDP growth volatility is only just a hair above its previous record low, and that core PCEPI inflation volatility is at a record low. And note further that this has occurred despite the supposed fact the economy has been in a “liquidity trap” all of this time and has been buffeted by a series of fiscal cliffs.

    So if the Fed has been doing a better job of keeping NGDP and core PCEPI going in a straight line since the Great Recession, maybe all it really needs to do is to aim a little higher.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.