Tuesday, August 30, 2011

The Natural Rate of Shostak per Hour

Looking at my recent Unspeakable Practices, Unnatural Rates...

Recalling my older post on Frank Shostak on Velocity. From that post:

"Velocity Does Not Have an Independent Existence," Shostak says:

...velocity does not have a "life of its own." It is not an independent entity--it is always [one number] divided into [another number]..."

I think I know what Shostak was complaining about.

You take two economic measurements -- GDP and the quantity of money, or inflation and unemployment -- divide one by the other, and then treat the result as though it has a life of its own. It really doesn't.

I must say, though, that if GDP increases and the quantity of money does not, then people must be spending faster. There's no other way those things could happen.

It's not the same with the unnatural rate, the natural rate of unemployment. If unemployment falls while inflation fails to rise, there must be reasons for this. You can't just look at the ratio and say, "Well, that explains it."

The velocity of money is something you can feel: slow when you're standing on the unemployment line, fast when you go to the Fair. Used to be anyway, fast at the Fair.

Unemployment? Yeah, you can feel unemployment. But you cannot feel the natural rate of unemployment. That is just a story somebody made up.

1 comment:

Jazzbumpa said...

Velocity can be GDP or NIPA by money supply. I'm not sure what FRED uses as the numerator in this graph.

Except for '76, velocity stalls or falls in recessions. That makes sense.

Growth looks exponential through the 60's and 70's. Appears that reaganomics stifled velocity.

Clinton supercharged it, growing GDP with a nearly constant money stock.

Bushian reganomics stifled velocity again - for a while. Then in the later naughts, money stock was flat, and GDP grew slowly.

Now, money supply is greatly expanded, and GDP is in the sewer, so velocity is falling.

Still - it's greater now than at any time before the mid 90's. What are we to make of that?

JzB the puzzled trombonist