A little late, perhaps, but according to the BEA, first quarter growth in real GDP in the US was 2.7%, revised down from a previous 3%. This poses a problem for two reasons; the first is that weak growths obviously means weak recovery. Weak recovery, of course, means that cyclical unemployment turns into structural unemployment — and that is a much bigger policy problem. The second problem (and this is much bigger) is that the long-run trend rate of growth rate from the Great Moderation was around 5%, with +-3% real growth and +-2% inflation. Right now, we are 5-8% below the level of growth we would be at had the recession never happened. The imperative for policymakers is to get the economy back to this level of nominal output as quickly as possible, and 2% real growth (plus near-zero inflation) per quarter is not going to cut it.
Not to mention, the revision puts a bigger dent in the prospects of a “V-shaped” recovery.
This all brings me around to the “new normal” hypothesis. People around where I work and live seem to be very interested in the prospect that we won’t ever recover to our previous NGDP trajectory, and (like the 1970′s) this represents a new normal of lower growth rates (a statement that is usually followed by “higher taxes, and more regulation”). Economists are still debating what caused the shift to lower growth rates in the 70′s; but looking around today there is only one sector in which we should consider lowering output for an extended amount of time, and that is housing. Other than housing, I don’t see any reason to accept the “new normal” hypothesis, other than that it is a choice of the central bank. However, as Scott Sumner points out today, it’s seemingly only a choice of a few members of the central bank, namely: Thomas Hoenig, Charles Plosser, and Jeffrey Lacker. Here is Scott:
Just like in the Great Depression, the regional bank presidents are the biggest problem. And just like in the Great Depression, the British press had a better understanding of the deflationary impact of US monetary policy than did the American press. Funny how things never seem to change.
I hope repeating their names here, in bold, will draw a lot of attention to them.
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Friday ~ June 25th, 2010 at 9:51 pm
dWj
Less than 1% growth in “final sales”.
Friday ~ June 25th, 2010 at 11:49 pm
Apex
so zero percent interest, putting trillions in toxic mortgages on the fed balance sheet, and funding huge fiscal stimulus via large bond offerings is a deflationary monetary policy?
I realize inflation has showed up but that seems to me to be a function of structural economic imbalances such as high unemployment and low end user demand. I would like to see those imbalances corrected quickly but I am not sure what would do it and from a monetary stand point not sure what more they could do. But perhaps I don’t understand all the potential monetary tools.
So from a monetary policy what would you propose that is less deflationary (i.e. more inflationary) Surely not the helicopter option?
Friday ~ June 25th, 2010 at 11:51 pm
Apex
Sorry, that should have said inflation has NOT showed up.
Saturday ~ June 26th, 2010 at 8:45 am
Niklas Blanchard
I don’t want to say that the Fed’s current policies are DEflationary, because they’re obviously attempting to take an expansionary stance…however as Woodford (and other new Keynesians) has pointed out, it is not so much the current actions of monetary policymakers which determines the stance of policy, but the expectation of future policy. In that light, if people see a large bloc of the FOMC loudly decrying a low interest-rate policy, and agitating for the Fed to start tightening soon, the the effect is that monetary policy tightens — the Fed doesn’t even have to actually *do* anything.
However, I do view the current Fed policy as being too tight relative to the needs of the economy. As far as I can tell, the Fed hasn’t adjusted it’s output target from the implied 5% growth path — at least it hasn’t sent any signals that it has — and that is a problem, given the current output gap. I think that the Fed should set an explicit nominal target (price level, or NGDP), and promise to do whatever they need to hit that target (and make the promise symmetrical). I view interest rates (as monetary policy) as mostly a red herring, and the focus on them an error of judgement.
There has never been a central bank in the history of the world that was unable to hit a nominal target, so it shouldn’t be that hard to do.
Tuesday ~ August 10th, 2010 at 7:17 pm
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