The Great Moderation Was Not Panglossian

     I was reading something Sumner wrote back on November 5 in defense of his NGDP targeting entitled "Simple Models and Simple Minded Reasoning." He is arguing against by Laurence Ball which purported to show that NGDP targeting wouldn't work.

     http://www.themoneyillusion.com/?cat=5

     Now as I've made clear in the past, NGDP targeting-the best I can tell-sounds like a good idea. At the very least, it would seem to take the Fed away with it's simple minded obsession with inflation. And as Sumner correctly argues part of the problem is that if you have a 2% inflation target if it goes too far beneath it this should be seen as equally problematical as well but it isn't. Then too there's the fact that the inflation target is 0-2 percent as opposed to say 2-4.

     The trouble as I see it with a 2% target is that this is even lower than the average rate during the period of the Great Moderation. At a minimum what they should do is determine what the average rate was during that period and that should be the target-guessing it's probably considerably over 3%.

     So I have no problem with Sumner's cause. Still every now and again he says things that seem highly dubious. One is his feeling that the minimum wage at $7.25 an hour is unacceptably high. Another example is when he claimed that fiscal policy during the 20s was optimum and the Depression wouldn't have happened if Benjamin Strong hadn't died-such a literalist cause and effect as that is simply too facile to be plausible.

    Here he is again in his argument for NGDP-which I for one tend to support-making a comment that I just have to push back on:

   "I don’t work with toy models; I try to stay grounded in the real world.  I notice that periods of above 5% NGDP growth (like the 1970s) are viewed as periods where monetary policy was too expansionary.  And when NGDP plummets, like in the 1930s, money was too tight.  And when NGDP grew at a steady rate of 5%, we achieved the best macro performance in history, the so-called “Great Moderation.”  And when we let NGDP collapse in late 2008 and 2009, we had a very severe recession."

   I'm sure he doesn't work with "toy models" I mean who does? The MMTers don't either but criticise those who do. Someone uses them but who? Sumner claims this Laurence Ball fellow does.

   But I have to question that during the Great Moderation we had the best macro peformance ever. Not true. It was a time that saw considerably higher unemployment and a stagnant standard of living for most Americans. Far better was the period from 1948-77. This might seem like quibbling but it isn't. It needs to be understood-as I doubt Sumner does-that things were far from all right in 2007 prior to the implosion of 2008.

   We had some tough structural changes in the US economy and most Americans struggled in the height of the Bush Boom (2003-2007). This boom was skin deep built upon the credit and housing bubbles. If he thinks that the 20s were an economic utopia that could have gone on forever if only Strong had lived, presumably he thinks that with the right Fed policy we can return to the golden age of 2003-2007.

   Fact is for most Americans it was a  bronze age. We saw the worst level of job creation during the Bush Administration in the postwar era.

    The recession of 2001-wrongly called short and shallow by Allan Greenspan-was actually the worst recession in the postwar years-even than the recession that Volcker deliberately caused. While it's true that the Volcker Recession saw 11.3% unemployment this was short lived and the recovery was better, even though the unemployment level under Reagan never got as low as it did during the W. Bush years.

   The disconnect was the kind of employment-millions of white collar workers were relegated to low paying service jobs where they could only approximate their former middle class lifestyles by credit cards and the housing boom.

  With the 2001 recession the American Dream is dead. Just like Nietzsche said of God, some took longer to realize it than others. Sumner may still not know this. But it is what it is. If the American Dream is to come back we will have to reclaim it.