No visible difference in the behavior of inflation, which remained closer to “target” during Greenspan´s last decade.
There´s a big difference in the behavior of unemployment, much lower during Greenspan´s tenure.
The defining difference is in the behavior of nominal spending (AD or NGDP) growth, which translates into a significant difference in the growth of real output.
Note than in 2001, when Greenspan allowed NGDP growth to drop below trend, unemployment goes up and stays up until NGDP growth returns to trend. In 2008, unemployment soars when NGDP growth tanks and becomes negative. The yellow bar shows that when NGDP growth stops falling, unemployment “levels off”, beginning to fall when NGDP growth becomes positive once again.
Unfortunately, the Fed this time around chose an inadequate level of spending growth. The result is that the economy got stuck in a “Great Stagnation”, defined by a level of real output and employment well below the previous trend level!
To get out of this trap, the monetary policymakers have to start thinking outside the “interest rate box”! From all the nonsense we hear from them, that is not likely.
Hello, Marcus, I have to comment on this because it comes from your own graphs, from 2003 to 2006 it is clear that despite relatively constant NGDP growth, RGDP was already declining and inflation was slowly rising. Maybe 4% unemployment was “too low” after all. And maybe 6% NGDP growth would produce no higher real growth, just more inflation. I get a little uneasy when you guys say NGDP drives RGDP, as if a higher NGDP growth inevitably would lead to higher RGDP growth. Also, you guys keep saying money is neutral, and NGDP only drives real variables for short periods os time, but sometimes that notion goes away in your posts. What is clear from the data, without doubt, is that changes in the rate of NGDP growth (2nd NGDP derivative) are correlated with negative developments in real variables, specifically RGDP growth and unemployment. Money do seem to not be superneutral after all. I think it is reasonable to believe that, since nominal variables are controlled by the monetary authority (and because there is an expectations channel), constant NGDP growth prevents disruptive negative changes in real variables. But, to start from this simple evidence and end with the conclusion that higher NGDP growth drives higher RGDP growth is a leap of faith.
JRR,First, NGDP growth CYCLICALLY drives RGDP growth. Second, in 2003-08 (not just 06), there was an oil shock going on, something that reduces real growth and increases inflation. As I argued in another post, the growth effects of the oil shock during Greenspan´s last years was more muted exactly because, as Bernanke argued in 1977, a significant effect on growth from an oil shock depends on how restrictive monetary policy becomes. The fact that NGDP growth was rising (“positive 2ond derivative”) back to trend when the oil shock hit was the “luck of Greenspan”.
Bernanke forgot his own counsel and almost immediately “stepped on the brakes”. Look at the unemployment rates in the two charts. There´s simply no correlation with inflation, but a lot of correlation with the behavior of monetary policy (NGDP growth).
Marcus, Mr. Cole, that unemployment changes are not correlated with NGDP changes is clear from the graph, stable NGDP growth appears to create conditions under which unemployment gradually goes lower. The point is how sustainable that is. Marcus has defended a NGDP trend growth of 5.5%. But Greenspan kept it around 6.5% from the second half of 2003 to mid 2006. Marcus has argued that this policy stance was justified by a level targeting with base in the end of 2000. NGDP growth was below average from 2001 to mid 2003, therefore, it was justifiable to “play catch up” from 2003 on.
But what if RGDP growth potential did fall to 2%, starting sometime circa 2001 ? Scott Sumner has defended that if NGDP LT was ever adopted, he would recommend two things: slightly lower target, and a target review process every 5 years. If that is correct, maybe around 2003 it would be wise to adjust to a slightly lower target, say from 5.5 to 4.5. It is easy to criticize Bernanke now, with hindsight, by arguing that he stepped on the brakes to strongly in 2007. Greenspan might have done the same, were he in office, because if he kept NGDP growth at 5.5% and RGDP went back to 2%, we would have 3.5% inflation, and pressure would mount for he to act against it. I am not saying this is right or wrong, I am just saying that there would be pressure from a lot of people if that level of inflation happened for a long time. It looks that defining a proper target is a rather tricky task.
JRR, You wouldn´t think potential growth dropped from something like 3.2% to 2% in 2001 by looking at the behavior of inflation going forward!
Anyway, I´m not saying it´s easy to get the level of NGDP right. That calls for more experimentation (and less estimation). the “optimal” growth rate at that level will also be subject to analysis.
In their own jargon, the Fed should be worried about “normalizing” the level and growth rate of NGDP, not the level of interest rates!
Also, the charts reveal weak connection between inflation and unemployment.
Fighting inflation by higher unemployment is peevishly sadistic.
You or Ben Cole might be interested in attacking this analysis in Bloomberg View…….
Travis, Bonnie has written a very good comment/response: