Arnold says
The ratio of nominal GDP to employment is NGDP/L, where L is the level of employment. This can be decomposed into:
NGDP/L = (NGDP/RGDP) x (RGDP/L) = the GDP deflator x productivity
. . .
The way I look at it, this means that the relationship between nominal GDP and employment has almost no theoretical import. In particular, it does not constitute evidence in favor of the AS-AD paradigm. The AS-AD story, as Scott Sumner tells it (and pretty much any mainstream macro would say the same thing), is that changes in nominal GDP cause changes in employment, rather than the other way around.
The PSST story is equally consistent with a correlation between employment and nominal GDP. It just interprets the causality as running the other way. If a bunch of workers are laid off, for whatever reason, nominal GDP will go down, unless productivity and/or inflation rise in order to compensate.
Defining aggregate demand as nominal GDP finesses such difficult issues as defining the money supply or justifying specific parameters of a macroeconomic model. But there is a priced to be paid. And that price is vacuousness.
Ok so the anchor in all of this getting us to a nob that everyone can agree the Fed controls.
So, the key question is do we believe that the Fed can indeed control NGDP? Or, put another way, can the Fed control the total amount of nominal spending in the economy.
If the answer is yes, the we can use that same relation to decompose Fed action into its consequences. If the decomposition shows – as is Scott and many other’s point – that employment moves, not just inflation or productivity then this is saying that the Fed controls employment.
So the crux of this is whether or not you believe that the Fed can set NGDP. And, if it can we have an important implication.
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Wednesday ~ January 25th, 2012 at 7:10 pm
Curt Doolittle
I don’t think that’s quite right. I think the question is whether the SET of policy levers, including both monetary and fiscal, if used to target NGDP, will require the development of PSST as a means of increasing productivity rather than redistribution from producers to non-producers.
It’s OK in your model to redistribute from one class to another. In the opposition’s model, it’s preferable to invest in one class for the benefit of both. In your model, demand prevails, and in Arnold’s productivity prevails.
Thursday ~ January 26th, 2012 at 7:56 am
teageegeepea
As far as I know, Kling is the only economist who has explicitly denied that the Fed can manipulate NGDP in the short or medium run. I’m not sure if he’s changing his position here or just granting some of Sumner’s theory for the sake of argument.
Curt, you’ve heard of the positive/normative distinction, right? Arnold has made a controversial claim in positive economics. Until that point of dispute is resolved, what “the opposition” (in this context) thinks is “ok” or “preferable” is moot.
Thursday ~ January 26th, 2012 at 8:50 am
Arnold Kling
See my subsequent post. If the Fed tries to manipulate nominal GDP, the relationship between nominal GDP and employment will change.
Thursday ~ January 26th, 2012 at 9:32 am
Curt Doolittle
@TeaGeaGeaPea. Yes I understand the error of positivism.
But do you understand that your conclusion is the result of your assumption, right? 
Its only a bit circular. 
In the face of necessary ignorance – largely because we lack the data and must rely upon questionable aggregates, both sides rely upon their preference – their cognitive bias: One for redistribution, one for productivity. Neither side denies this bias. Karl certainly doesn’t. Krugman avoids all possible discussion of it.
Friday ~ January 27th, 2012 at 5:10 am
reason
Arnolds problem is that he is looking ignoring the mechanism. He is perfectly correct that there is no obvious equilibrium connection – but we are not talking about equilibrium here. It may seem counterintuitive to him, but the relationship between the price level and productivity IS indeed the key. At the margin, making the world less deflationary (or more inflationary) does indeed make a difference if prices are sticky. (And note that when there is excess capacity and increase in nominal demand may in fact shift productivity up.
Tuesday ~ April 10th, 2012 at 5:32 pm
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