Scott Sumner is still my idol, as far as macro is concerned anyway, and that is probably why he frequently ends up my scrutiny list so often. In his case, pouring over every sentence is a sign of affection; though, coming from me, the affection somewhat bear-like.
In Sumner’s new post on Econlog, he asks, Is Fed policy too easy or too tight, and then says:
I don’t have strong views either way on this question, as current policy seems reasonably appropriate to me. But I also thought it might be useful to sketch out a few reasons why I’m fairly content, relative to some other observers.
For reason number one, he seems to back away from previous statements about the implications of the low unemployment rate to policy, to say that wage growth is a factor of NGDP growth.
Some people take a “Phillips Curve” perspective, and argue that tight labor markets will lead to higher inflation. The current low rate of wage growth is viewed as a sort of mystery, given the very low rate of unemployment. In my view there is no mystery at all, as wage growth is determined largely by NGDP growth, not the tightness of labor markets. TIPS spreads still don’t show much risk of higher inflation.
This small point is so much larger than the very few words it took to write it. I’d be satisfied if we could consequently say that the NIARU theory as applied in Fed estimates has not quite matched the hype and instead use this observation as jumping off point to stop talking about inflation because, at least in my opinion, there’s been a considerable opportunity cost inflicted over the last handful of years (see Nunes’s RGDP gap – that I calculated to be as much as $11,200 per capita) as undue deference and a considerable amount of policy angst was laser-beam focused on the “what-if’s” of inflation while NGDP was held down, floating somewhere between 2.5-3.5% as to render this consternation somewhat logically inconsistent and meaningless (not to mention the simultaneous threats to pull off scorched earth policy reactions if the inflation rate started to rise – even with microscopic NGDP growth!).
In this case Sumner’s observation point #1 has some meaning toward the judgement of the appropriateness of policy in the present. Unless there has been a consensus to forget about the recent stretch of relative policy tightness and let the bygones be just that, I believe that policy is still tight even though many of us feel more comfortable than we have in a very long time.
With the applicability of NIARU estimates to the current situation in some degree of shambles, the current unemployment rate is not really that great of an excuse to not make up some portion of recently lost NGDP ground, and I am unsure of what a reasonable alternate excuse for not doing so could be. We have yet to be presented with one that has some correlation to realistic facts, and I am very interested in what those facts might be that are worth a real tradeoff of $11,200 per person or even half of that, and this is what it would take for me to join any consensus to allow the bygones of neglect regardless of intent.