The Joint Committee Economic Report that Scott Sumner posted has been bothering me for its ambiance of leaving monetary issues hanging. There were no recommendations for reforms. The only reason to be even remotely hopeful was the recommendation to keep an eye on it.
So, for my post today, having not been completely satisfied with the one I did on the RGDP gap earlier, I will be taking another look at it from a slightly different angle.
We’ve heard talk over the last few years about structural factors impacting the ability to grow. But as I was pondering these stories and this RGDP gap graph juxtaposed with the NGDP gap graph that says just about the same thing, two ideas came to mind.
- The neutrality of money. If we had a one-time episode of extremely tight money such as in 2008-2009, and then policy became either neutral or, as they say, “accommodative,” shortly afterward, then I’d expect to see the trend being pulled down during the tight money episode. But afterward in the accommodative portion, I’d expect to see some bounce back up toward the trend because once policy became accommodative people would get back to living perhaps at a lower price level. If I’m feeling particularly charitable, I could factor in the “boomers” story (but that really is just imagineering the meaning of the word is – whatever may be in the gap is unknowable because it encompasses all things that never happened), and I’d expect to see a bounce to a perhaps modestly lower trend that isn’t quite as steep.
- But that isn’t what these graphs show. The trend gets pulled down and then it goes a little less than sideways.
- From the looks of this gap and the “new normal”, one might suppose that there is something wrong with the concept of the neutrality of money or possibly even the equation of exchange because the graphs aren’t showing either of these being useful in describing reality. But I doubt it. What I think these graphs are indicative of, rather, is that there is something wrong with the M in M*V = P*Y. We didn’t have a one-time episode of tight money. We had a one-time episode of extremely tight money that bent the trend down and it has been chronically tight since as to cause the sideways motion.
- So all the imagineering on supply side stories about what this gap means as in the Joint Economic Report and on the natural rate of unemployment is pretty much beside the point because even if we had all of the non-monetary resources we could ever need at the ready, people, locations, tools, tech, and so on, the essential ingredient to doing anything at all – money – is chronically limited to scarce, or as in the PB&J sandwich of potential example I’ve been using, we have PB&J squishing out all over the place under the weight of the soft NGDP cap that is used to control P.
I earlier pointed to what a monster this gap is: ~ $11,500 per capita (back of the envelope) and growing. And this is all that is knowable about the word is. Even if one could reasonably imagineer this down to only 75% or even 50% of that, it’s still quite a whopper of choking on nickels only to have thousand-dollar bills shoved down your throat.
Now you can probably imagine my surprise that the “accepted” cause of the practically no recovery is the boomer story and other supply side follies. It’s completely laughable and I really am disappointed in the politicians being so interested in hanging the lion’s share of the blame on the Obama Admin while ignoring the elephant in the room that is the real thing upsetting everyone. Pun intended.