I don’t know what can convince folks that the Fed isn’t “loosey-goosey” and has never been that way since Bernanke took the Chairmanship, or that money is ultra tight relative to trend if this pair of graphs that I have shamefully lifted from fellow Market Monetarist and blogger Marcus Nunes cannot.
The NGDP Gap in this graph illustrates the difference between trend nominal gross domestic product (NGDP) and actual. You care about NGDP because it’s represents all nominal spending in the economy; and one person’s spending is another’s income.
This next graph illustrates where NGDP is relative to trend. You can see a huge dip in 2008-9, and then it levels off with very slow gains, probably never enough gain to fully close the gap, not even after a few decades. Hence either very slow or no recovery.
Lately, there’s been a discussion going around some of the econ blogs about the Cantillon Effect. Regardless of where one stands on the correctness of the assumption, my personal take on it is that it doesn’t really matter. It doesn’t matter because it’s the trend in inflation and NGDP that matters to nominal stability; and basically what happened, according to the first graph is that NGDP took a huge plunge into deflationary territory. And if you’ve been wondering about your income lately, noticing that it’s basically flat, it should not be. If all wages and prices were flexible, you would see shrinking nominal income. You haven’t seen that because wages and prices are sticky; and so when the entire income pie is made smaller, as shown in the graph, it creates a lot of unemployment instead. You are, for lack of better term, lucky that your income is flat (that is if you still have a job and have had one throughout the Great Recession).
Mentions of the Cantillon Effect and other kinds of inflation scare tactics are diversions, simply spin from people who think they can have their cake and eat too at the expense of their neighbors; with some of them even having subscribed to the notion of raising all boats by making the “pie” larger in the past. Apparently, they forgot how we make the pie larger.
In reality, restoring NGDP to trend would only put us back to where we would have been anyway if that large dip had not occurred. I suppose that believers in the Cantillon Effect would say that doing so would have distributional consequences. But as we can see, the status quo also has distributional consequences; ones that they don’t talk about because it would hurt their cause. One of them is the problem concerning what happens to the burden of debt in deflation. Debtors still owe the same nominal amount, which in real terms is more than they expected to repay. Perhaps these people like repaying more valuable dollars than they were expected to be versus the ones they borrowed. Whatever they happen to say about people who get new money first, it’s not even worth being concerned about when you’re making some mortgagor fatter and happier than he would have been every time you make a payment. The status quo hurts you, has been hurting you, and will continue to hurt you if you had existing debt when the plunge occurred.
If you didn’t have existing debt, the status quo still hurts you because of the bearish conditions of the employment market. Not happy with unreasonable demands of your employer who thinks he/she has leverage over you because there are 100s of applicants just waiting for you to be fired? I’ve been around enough lately to understand the brutality of the employment market, where people with the power to hire and fire act more God-like and have little toleration for mere mortals. Let’s face it; when it comes down to dollars and cents, no one is irreplaceable in these conditions – and they let you know it. Or maybe you’ve hit the glass ceiling and you want to branch out. Good luck with that.
There are so many other things to point out as consequences of the status quo; some of the bad things we’ve been hearing about lately, like public debt and taxes. All this unemployment has taken a big bite out of the revenue government expected to have at this point in time when it spent money. Additionally, the problem that deflation amplifies existing debt burden still applies – even for government. And now, because it appears we’re dealing with a permanent reduction in national nominal income, governments at all levels want to raise your taxes.
The reality that we can’t get more purchasing power out of our dollars by running tight monetary policy has a very funny way of coming around to bite us all in the rear. Whatever we do with monetary policy, it all comes out in the wash. Still think a little more NGDP in the short run is a terrible thing? There is nowhere to run from having to pay one way or another, and it would have been much better to have taken the corrective monetary medicine up front instead of putting it off – and of course there’s still more problems with putting it off.
The other problems are almost all political. I happen to think that if we had not had plunging NGDP, we wouldn’t have had the financial crisis, and wouldn’t have gotten Obama and a Democrat supermajoity in Congress. If we had taken the corrective medicine instead of obsessing about inflation and who might get money first, we might have reelected John McCain in 2012, instead of Obama. These things make a difference when we think about alternate possibilities – and the more we drag our feet about doing the right things and the longer we try to help ourselves at the expense of our neighbors, the more marxist ideals will stay at the forefront of American politics.
PS: If you still think money is easy, check out this David Beckworth post “ Money Still Matters: Part XIV“