Friday, January 4, 2013

David Altig: "A lack of confidence in the path of real GDP"


The first half of Mark Thoma's Skeptical Davids:
If you want to argue against nominal GDP targeting, David Altig of the Atlanta Fed has some ammunition for you. Here's his conclusion:

Nominal GDP Targeting: Still a Skeptic, macroblog: ... To summarize my concerns, the Achilles' heel of nominal GDP targeting is that it provides a poor nominal anchor in an environment in which there is great uncertainty about the path of potential real GDP. As I noted in my earlier post, there is historical justification for that concern.
Basically, anyone puzzling through how demographics are affecting labor force participation rates, how technology is changing the dynamics of job creation, or how policy might be altering labor supply should feel some humility about where potential GDP is headed. For me, a lack of confidence in the path of real GDP takes a lot of luster out of the idea of a nominal GDP target.

I immediately took the words "a poor nominal anchor" there to mean "a poor nominal anchor for inflation". The thing is, NGDP separates out into RGDP and prices. So if we use "level targeting" to push NGDP up, but there is "great uncertainty" about the path of RGDP, the difference must work itself out as price increases.

Given a fixed high-growth path for NGDP, and given an economy that no longer wants to grow, the widening gap between NGDP and RGDP will be filled with inflation.


Altig's last sentence is his best: "For me, a lack of confidence in the path of real GDP takes a lot of luster out of the idea of a nominal GDP target." For me, too.

Altig identifies three key concepts that offer him little optimism:

1. How demographics are affecting labor force participation rates
2. How technology is changing the dynamics of job creation
3. How policy might be altering labor supply

1. Demographics is something beyond the scope of economists and policymakers, unless we want to get into state-directed family planning. Best simply to say that demographics is beyond the scope of economists and policymakers.

2. Technology. But surely we do not wish to rebuff the advance of technology.

3. Policy and the labor supply. But how about policy and other things? Altig works at the Federal Reserve. How about policy and money? How about policy and debt?

I don't care if Altig wants to bring in demographics and technology and labor supply. But I wish he would get around to the burden of debt -- private debt -- and the quantity of money out of which debt must be paid. And I wish he'd look at the balance between money and debt -- the imbalance, really, between money and debt.

I wish people who work at the monetary authority would focus on monetary matters.

7 comments:

Greg said...

Hey Art

Would you consider signing this petition to end this debt ceiling nonsense?

https://petitions.whitehouse.gov/petition/direct-united-states-mint-make-single-platinum-trillion-dollar-coin/8hvJbLl6

Wish you would ....... thanks

Benjamin said...

I enjoy your blog, just getting into it.

Actually, I like NGDP targeting as the best the Fed can do under circumstances.

Targeting inflation...Japan's BoJ did that for 20 years. The results are a catastrophic failure of monetary policy, and an asphyxiation of the real economy.

Of course, sustained QE pays down debt, by printing money and exchanging it for debt.

Other than that, we could make dividend income tax free, but tax interest income and no longer allow interest as a deduction on home mortgages.


The Arthurian said...

Hi Benjamin. Glad you like the blog. (I can't get enough feedback like that :)

If we say QE pays down debt, it only pays down Federal debt. It doesn't reduce private debt. So QE doesn't solve the problem that hinders economic growth. That's my focus.

Yes definitely, tax preferences are the way to change economic forces. When the tax deduction for interest expense (other than mortgage interest) was eliminated, 1986 I think, it had a huge effect on the increase of debt.

I do think the economy remains fragile since the 2008 crisis, and eliminating the mortgage interest deduction would do more harm than good to a fragile economy.

Maybe we could trade the mortgage interest deduction for a policy that reduces personal income tax when we make "extra" payments on the debt we owe. Or something like that.

Anonymous said...

David Altig's criticism is simply uninformed. Advocates of NGDP level targeting are well aware of the challenges RGDP instability creates for monetary policy, but these challenges make NGDPLT more desirable, not less. Under inflation/price level targeting, an unexpected supply-side/RGDP shock creates nominal disturbances which lead either to a monetary-induced assets boom (in case of a positive shock) or to a secondary recession (in case of a negative shock). Under nominal incomes targeting, by contrast, supply-side shocks lead to compensating adjustments in the price level path. For a detailed argument about the merits of this choice, see George Selgin, Less than Zero.

The Arthurian said...

Nicely put, Anon. Okay, I found the PDF at Mises.

http://library.mises.org/books/George%20A%20Selgin/Less%20than%20Zero%20The%20Case%20for%20a%20Falling%20Price%20Level%20in%20a%20Growing%20Economy.pdf

Looks like a lot of reading. I'll give it a go, Thanks.

The Arthurian said...

Yeah, no, didn't read that. Is there a relevant quote you could give, or a page number or something in the PDF?

Also, I don't think the problem is RGDP "instability" but rather the lack of growth.

The Arthurian said...

(Note to self)

In the comments on Altig's of 28 December, linked above, Anon writes:
George Selgin (in "Less than Zero") advances a rather complex argument that because variations in RGDP are generally due to firm- or sector-specific changes, nominal income targeting interacts better with price stickiness and similar imperfections.

In general, resiliency to supply-side instability is generally seen as a key _benefit_ of NGDPLT: and this should be all the more true when the RGDP path is uncertain.


I still reject the approach that takes lousy growth as a given.