Jason Furman is right – Econlib

Or at least share my view on the current macro situation.

I have argued that the current high inflation is increasingly driven by over-demand and that monetary policy remains very expansionary. Here is the former CEA chair Jason Furman:

Commentators have generally put forward two arguments about the performance of advanced economies since COVID-19 hit, of which only one can be true. The first is that the economic recovery has been surprisingly rapid, surpassing what forecasters expected, and separates this recovery from the aftermath of previous recessions.

The second argument is that inflation has reached its peak due to unexpected supply-side developments, including supply chain issues such as semiconductor shortages, an unexpected sustained shift from services to commodity consumption, a delay in people returning to the workforce and the persistence of the virus.

Of course, there are some supply problems that have contributed to inflation, but Furman rightly focuses on NGDP growth, which has been extremely high:

Price growth is per. definition equals the growth of nominal output minus the growth of real output (with a small difference due to composition). During 2021, US real GDP grew by 5.5%, nominal GDP grew by about 11.5%, and GDP inflation thus came in at around 5.9%.

Unfortunately, the Fed is still behind:

But households still have significant over-savings, and the general stance of monetary policy remains accommodative, suggesting that demand will remain strong.

Unlike Furman, I’m not a Keynesian. In a market monetary framework, the excess savings are seen as a contributing factor that makes monetary policy more expansionary, not a separate factor. I measure the attitude of monetary policy in terms of (expected) NGDP growth.

Overall, however, I am thrilled to see an increasing focus from top economists on NGDP as an indicator of whether the policy is too expansive or too contractive.

Economists need to talk a lot more about NGDP – it is the most important political indicator for policy issues on the demand side (monetary and fiscal policy).

PS. On the other hand, looking at NGDP does not necessarily lead to the correct policy if one stubbornly refuses to face the facts. In the US, NGDP is already 3% above the trend and rising extremely fast. It takes tight money, right? Not according to theft:

Second, central banks should clarify how they believe their monetary policy works. Presumably, the purpose of reducing the money stimulus is to take the wind out of the sails of demand in the economy to bring it down to the damaged supply capacity. This was already difficult to justify, given that nominal consumption had barely returned to pre-pandemic trends in the US and was still falling short in the eurozone and the UK – hardly “excessive” demand.

What? The accompanying graph in FT shows that NGDP is rising well above the US trend.

PPS. I have a new piece at Bakken which makes some related points.

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