Monday, May 25, 2015

The natural rate of output

Okay, so when I googled it I got 180 million results for the natural rate of output. I thought maybe I'd show them all here. (chuckle chuckle)

Number one on the list, from SparkNotes:

Natural Rate of Output - The rate of output when the factors of production, capital and labor, are used at their normal rates.

"Normal rates". Number one on the list. Plus they had big colorful circles, and pictures of cute girls and stuff.

From one extreme to the other, the second of those 180 million results is from Wikipedia:

In economics, potential output (also referred to as "natural gross domestic product") refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. The existence of a limit is due to natural and institutional constraints. If actual GDP rises and stays above potential output, then (in the absence of wage and price controls) inflation tends to increase as demand for factors of production exceeds supply. This is because of the limited supply of workers and their time, capital equipment, and natural resources, along with the limits of our technology and our management skills.

More than I wanted to know. (If the wikiparagraph seems unfocused, that's probably because it's a compromise written by people who disagree with each other. Everybody gets to say a little of what they want to say.)

So, per Wikipedia, when Sumner writes

... monetary stimulus that boosts output closer to the natural rate.

I should read

... monetary stimulus that boosts output closer to potential.

That makes more sense to me.

I worked with a guy years back who said that if the progress of the world had depended on him, we'd all still be living in caves. I always took him to mean he didn't think of himself as part of what Arnold J. Toynbee called "the creative minority". But anyway: Living like cave men, that's natural. I have no trouble with "potential output" as an economic concept, but I don't think you want to equate it with the cave man rate of output.

Oh, and I didn't bring this up in the earlier post, but what is that awkward construction supposed to mean? "The natural rate of output." Rate of output growth? You'd think. But if Sumner meant "boosts output closer to potential" then I think he means the level, not the rate. But he said "rate". That's just casual conversation, sloppy ... natural conversation.

Sloppy conversation is out of place in a post like Sumner's. Unless he meant the whole thing as a joke.


Nah. My response to Sumner, my whole response was a joke, because his argument didn't deserve to be taken seriously; that was my whole point. But Sumner wasn't making joke. He was having a serious disagreement with Rajan, with Nick Rowe, and others.


What else we got?

The third hit of those 182 million is from the Fed. That's good. They often have the best answer.

Well, they offer two definitions:

  •  potential output: "the level of output that would prevail under perfect competition"
  •  natural output: "the level of output that would prevail with flexible prices and wages"

I'm not comfortable with either of those definitions. That's how you know when people are economists: They use definitions and terms and names that are supposed to have definite and particular meaning, and nobody outside the clique knows what the fuck they're talking about. Pardon my French.

The fourth hit is for the natural rate of unemployment. So we're done here.


Jazzbumpa said...

I think rate of output makes sense.

Output is a flow, not a stock. It flows out at some rate.

Widgets/hour; hogsheads/fortnight; $ equivalents/year; etc.


The Arthurian said...

I thought his big thing was NGDP Level Targeting.

Jazzbumpa said...

Is targeting a level really different from targeting a rate?

You're at level x at T(0) and want level x+y at T(1).

So you want rate y/t.


The Arthurian said...


Sumner, 26 Sept 2012: "In 2009 I advocated going all the way back to the old trend line. I currently favor going about 1/3 of the way back. If we keep on the same track for a few more years I’ll through in the towel and advocate starting a new 5% trend line from where we are."

I'm thinking Sumner has thrown in the towel.

// omg, he spelled "throw" wrong.

Jazzbumpa said...

Unless the context [that i didn't bother to read] changes things, that sure looks like he's talking about a rate.

But, still, a desired rate will get you to a desired level in a desired time.

I very much dislike Sumner, but I'll give hime a pass on "through."

My brain and fingers often disconnect in ways that I cannot comprehend, so i actually sympathize with him.

Just this wonce.


The Arthurian said...
This comment has been removed by the author.