Martin Feldstein is more hopeful than Steve Hanke. Unfortunately Hanke is right

Martin Feldstein believes that “America moves to faster growth”:

Last December, I speculated that GDP growth in the United States would rise in 2014 from the subpar 2% annual rate of the previous four years to about 3%, effectively doubling the per capita growth rate. Now that the US economy is past the impact of the terrible weather during the first months of the year, output appears to be on track to grow at a healthy pace.

The primary driver of this year’s faster GDP growth is the $10 trillion rise in household wealth that occurred in 2013According to the Federal Reserve, that increase reflected a $2 trillion increase in the value of homes and an $8 trillion rise in the value of shares, unincorporated businesses, and other net financial assets. As former Fed Chair Ben Bernanke explained when he launched large-scale asset purchases, or quantitative easing, that increase in wealth – and the resulting rise in consumer spending – was the intended result.

Steve Hanke things very differently. In “Don´t be fooled by taper talk“:

The U.S. is still in the midst of the Great Recession. Yes, there have been recent encouraging economic reports. But, the U.S. economy remains weak and vulnerable. Aggregate demand tells the tale.

The picture shows that while during the “Great Moderation” of 1987-07, nominal aggregate demand (NGDP) grew at an average rate of 5.6%. After tanking in 2008-09 it has grown at only 4% during the so called “Great Moderation” of 2010-14!


As Steve Hanke says:

Just why is the U.S. nominal aggregate demand so weak? It’s all about money. Money dominates.

The next picture complements the picture above showing how the economy has been ‘downshifted’.


And the next picture shows the role of money, here given by the broad (M4) Divisia Index (which differs from the common simple sum M4 by giving different weights to its different components according to their degree of ‘moneyness’, where, for example, a money market fund deposit weighs less than a current account deposit).


Note that at the exact time money demand rises for very ‘reasonable reasons’, money supply growth turns negative. Nominal aggregate demand picks up again when broad money growth turns up. Unfortunately it hasn´t grown at a rate sufficient (given money demand) to ‘direct’ nominal spending towards the level of nominal aggregate spending experienced during 1987-07, or even to somewhere closer to it than the level in which it is stuck!

Update: Peter Ireland & Michael Belongia argue along the same line in “Money still matters

One thought on “Martin Feldstein is more hopeful than Steve Hanke. Unfortunately Hanke is right

  1. I will go even further. The 5.6 percent NGDP growth of the Great Moderation could have been punched up to 6 percent or so…inflation was not a problem….

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