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.