More on the ngdp debates

Lots of content, here is Scott SumnerDavid Beckworth, Ryan Avent, and Angus (the most negative on ngdp theorizing of the lot).  There is no Bill Woolsey post as of yet.


That Bill is a cagey sort!

Actually, Bill Woolsey left a pretty good comment right here:

In the entire NGDP debate, the market monetarists have managed to successfully blur the important distinctions between the questions of :

1) Is NGDP a correct policy goal? Is level targeting a better regime than rate targeting?

2) Is a central bank theoretically always able to roughly hit its policy goal, especially when the policy goal is as broad as 'all the stuff bought and sold in the economy'.

3) Assuming that a central bank is theoretically able to hit its policy goal, is announcing the policy goal enough? Is the bazooka of asset purchases enough to credibly back the announcement? is that bazooka truly sustainable & non-redistributive, the way optimal monetary policy is in our theoretical models?

On the basis of the intuitive strength of a 'yes' answer to 1, the market monetarists have managed to run off without being seriously challenged on 2 or 3. The odd question is placed to them about structural factors, a question that can (and should) be extended to all demand-side interpretations. But when it comes to the rather extreme view of central bank potency that MM espouses, most people are happy giving them the hall pass.

It's all a bit fascinating really. The MMs/NGDPers are wonderful people, and one must thank them for widening the Overton window of the macropolicy debate. But I often wonder what explains the runaway success of their monomania. I can only think of

1) Monomania backed by prolific effort is the most effective form of intellectual persuasion. No one can fault the MMs on the sheer volume of their output.

2) American 'intelligentsia' has a strange fascination for views which are optimistic, centre-right, doff their hat to 'supply' every once in a while, and place technocratic decision making above democratic process, normatively as well as positively. With the shift of the Clinton era neo-liberal intelligentsia to the left, this natural gap has been filled in adequately by MMs and NGDPers. Hence everyone genuflects.

If the policy goal is in real rather than nominal terms (whether real GDP growth or unemployment), then the market monetarists don't think the central bank can reliably hit it.

That is the point Avent is making. The central bank can probably change inflation one way or another, but real effects, such as growth or employment are outside of their influence. Targeting inflation one way or another changes inflation. The 70's demonstrated that inflation and employment are not correlated.

I didn't read all of the links, but did anyone address the impossibility of targeting anything where you are measuring what happened 6 months ago and your policy levers show their effects in 18 -24 months? Sumner's description of what fell apart in 2008 is fine as far as it goes, but it is in hindsight.

Who collects the GDP data? The BLS? And what is their methodology? I read once around 15 years ago from the economist Gene Epstein years ago that the statistics were not being tallied correctly (because of budget constraints at the BLS).

Ray, the Bureau of Economic Analysis (BEA) publishes GDP, but they rely on many, many sources for the underlying data. Here's an accessible Journal of Economic Perspectives article on measuring GDP: and there's a wealth of information about the national accounts on the BEA's website. Measurement is never perfect, but it does evolve over time.

"The 70′s demonstrated that inflation and employment are not correlated."

The 70's was a supply shock. Please try to keep up with the conversation.

Ritwik, and it doesn't bother you that our current technocrats at the Fed have essentially run circles around our democratically imposed dual-mandate for the past our years?

And you are blurring the important distinction between targeting current NGDP and targeting current expectations of future NGDP. The case is much stronger for the latter.


It's just our money. I'm glad The Fed doesn't get to tweak gravity.


If they could, you can bet that the consensus would be that they must.

Compare economists with meteorologists. Both trying to understand complex systems. Meteorologists can tell you the degree of certainty behind their forecasts and recognize their inability to predict with any relevance into the future. Any suggestion that we should target weather by quantitative injections of energy into Manhattan would be met with derision.

I suggest the failure to meet these discussions with the same derision should be considered a failure in itself.

Haha, no, most of the inflation was demand-side.

Sorry, that was supposed to be a reply to dirk...

Blogs are fun especially when they start talking to (at/past/over) each other. There's a lot of content here, but how much can one reader really take away? Here is my 'hit(s) list' from this group including emoticons.

"NGDP is “the real thing,” whereas P and Y are simply data points pulled out of the air by Washington bureaucrats." ~ Sumner
: @ (grumpy) That sentence is wrong on multiple dimensions...oh and it's rude.

"Either way, the real Tyler Cowen would never have written this post." ~ Beckworth
>:o (curious) Well if someone else wrote it, I would like their RSS feed, please.

"macro is not that hard but macro is harder than that" ~ Angus (the post label)
:) (happy) I was already smiling by the time I got to the end, but that's going up on my wall at work.

Nominal is the real thing...head 'splodes.

The Money Illusion is aptly named

Claudia, NGDP is the total volume of spending on final output in the economy over 1 year. It's the total money-flow, which is directly measurable since a dollar is a dollar is a dollar.

RGDP is the total value of "real output". If the economy produced only bananas, and we assumed every banana to have the same value, then it would be easy enough to measure. Unfortunately rising total money flow, measured as a multiple of the $1 unit, pushes prices up. But prices also rise when things become more sense, or when people thing something has become more valuable. It is difficult and contentious to untangle these things, even with our chain-weighted base-price technique for measuring RGDP and the GDP deflator.

And you'll have a lot of trouble reading anything remotely political on the internets, if you find "Washington bureaucrats" to be rude.

things become more scarce, I meant.

Saturos, I have been a consumption economist at the Board since the summer of 2007, so I have a decent idea of how nominal and real spending differ and how they can both fluctuate. (I've spent more time lately on the accounting of iPhone5 than bananas, but I get your points.) I will not make light of the measurement challenges (see the link I gave Ray above), but at the end of the day what people care about is the stuff they consume. How much they spent is not unimportant, but it's not what drives them. And yet, I am a 'let a thousand flowers bloom' kind of person, so I don't have a problem with thinking hard about NGDP...I have a problem with *only* thinking about it in all states of the world.

Also I think you misinterpreted my manners gripe. Many of the people who put together the GDP statistics are PhD economists and they put a lot of thought and effort in their work (with very little personal recognition). Are there heroic assumptions behind some of their estimates? Sure, but show me an economic model (or economic argument) that doesn't make any leaps of faith. A macroeconomist of Sumner's stature should know how the NIPAs are put together. So both the "pulled out of air" and the "bureaucrats" bits were, I thought, rude. These people deserve our thanks...they are providing a public good of valuable information about the economy. Yes, it was just a blog post (and it's not the first time I've seen/heard a comment like it) but I still expect/hope for more.


The 'NGDP is what matters' is not a welfare-economics proposition. It is a macroeconomic framework proposition. Of course people ultimately care about the 'real' stuff that they consume. That matters for utility and thus welfare. That 'drives' people, as you say. But NGDPers claim that that is not themost fundamental wayto represent (and hence analyse) the aggregate economy.There's no way to aggregate 20 bananas and 2 iPhones, unless we first involve price.

So 'the GDP of the US economy at current prices was $15 trillion in 2011' is a statement of fact. The GDP of the US economy in 2011 was $11 trillion at 1980 prices' is an artificial construct. It could be a good construct, which means it provides a good approximation of the relative welfare between 1980 and 2011. But it's not the most fundamental macroeconomic construct.

This is especially important if you conceive of the economy as what people call M-C-M (money claims being exchanged for commodities resulting in new money claims) rather than as C-M-C (commodities being exchanged between people with money only acting as the go between).

Sumner's unnecessary disparaging of the index numbers sophistication of your colleagues aside, NGDP is genuinely 'the real deal' from a macroeconomic perspective.

More wisdom was displayed in recognizing the challenge of the incommensurability problem than is pretending the price mechanism makes it go away.

Ritwik, social welfare *is* the fundamental motivation of macroeconomic stabilization policy (pick your flavor)...why is stable NGDP growth (or stable prices and maximum employment) so important? I firmly disagree with your comment that NGDP is 'fact' and GDP is an 'artificial construct.' There's plenty of imputation in NGDP for things like housing services and furthermore expenditures are not necessarily the 'right' welfare concept when you have durable goods in the economy. I am not trying to undermine the usefulness of NGDP. I simply find the disaggregates and decompositions of it helpful too.

Also I am an end-user of the GDP statistics like most other economists. I ask questions, I critique methodologies, but I try not to insult and sometimes I even write thank you notes to individuals at those statistical agencies. The line between criticism and insult can fine and I have certainly crossed it (to my regret), but I think we (especially the big names to whom people look up to) should be more aware of it.

Cyrus, in my opinion, wisdom is born of humility, hard work, and patience...not resignation. It's one thing to say we don't need to measure RGDP (arguable), but it's another to say we can't (unconvincing).


Thanks for the reply. I'm sorry if I talked down to you, you clearly know a lot about how economies work already, and are familiar with the challenges of putting economic data into statistical form. I agree that Scott Sumner can take his "philosophical pragmatism" too far in evaluating economic and scientific ideas. However I also agree with Ritwik, that NGDP is the more fundamental concept in the macroeconomics of nominal fluctuations. (And in a world where money is non-neutral, this is a macroeconomics of real fluctuations as well.)

I'm sure you understand that when GDP is measured, what we measure is the quantity of a (effectively) single commodity (money) being exchanged for heterogenous final goods and services at different points, summed together. Now, most people think of GDP as being about the "real" side of that aggregate exchange. So what we are really doing in that case is evaluating the total value of all the "real" final stuff being exchanged for money. After controlling for the greater circulation of money in general, we can measure quantities of sales of particular things and the relative values of particular things based on their relative prices, and thereby arrive at RGDP, the total value of output.

I think people's mistake, which Scott unfortunately encourages, is to see the talk about NGDP as being similarly about a measure of output, but an inferior one, which does not control for increasing cheapness of money, just as a way of incorporating a nominal aspect into the real measurement. Hence the misconception that NGDP is "really" RGDP times prices.

In fact, we "NGDP-ers" are not talking about the total volume of the output itself at all. We are talking about the other half of the exchange, the total volume of the flow of money. This volume is determined by the supply and demand for the money stock. A better name for it would be "total nominal spending". It's the aggregate spending on the goods, not the goods themselves - the aggregate realized demand for goods (NGDP is really a monetarist proxy for the Aggregate Demand curve [as Tyler should well know!]). But of course this is necessarily equal to the aggregate realized supply of goods, hence the confusion, which Nick Rowe sorts through here:

Now, hopefully you can see how NGDP (total spending) can be an independent causal story. Suppose the price level is fixed in the short run (actually only sticky to demand shocks). And supposed aggregate expenditure on final output (and remember that it is a flow of money which must be used to buy output) is determined, not tautologically by C + I + G + NX, but rather by M * ("desired") V (which, contrary to popular opinion, is not tautological at all: Suppose that the Fed controls this value, partly by printing money but mostly by managing public expectations (threatening to print money). Then if the Fed drops NGDP, a lot of RGDP will go unsold, workers will be laid off etc. (This is very similar to the Keynesian story, of course, but as Nick Rowe has painstakingly explained it is actually an improvement on it.) So we should see supply-side recessions leading to prices and output going opposite ways, but in demand-side recessions we have the beautiful\frightening correlations between NGDP and RGDP that MMs are so fond of documenting. (Marcus Nunes has all the graphs you could want and more.)

Sumner is actually a more sophisticated economist than you give him credit for, as you'd see if you read more of his blog. Reports of his monomania have been greatly exaggerated. And here's where his pragmatism comes to the fore, as when he explains that NGDPLT is a good idea precisely because of all the uncertainties, including model-uncertainty. In fact this was also (sort-of) the conclusion of a debate between MMers and skeptics on Twitter recently:

Saturos, no sorries needed; I read Sumner's blog and respect his work; thanks for the links and comments.


“macro is not that hard but macro is harder than that” ~ Angus

That is exactly why Angus doesn't understand modern macro.

macrorealist, economic analysis always involves simplifying assumptions. We're often pretty breezy about the simplifications in our standard models...sometimes they're okay and sometimes they're not. It depends a lot on the question and the context (and the alternatives). I liked Angus' label since for me it captured that balancing act...I can see a lot of applications for it. (As a snarky aside, this is the comment section of a can spare us the modern macro snobbery. I'd take pre-historic macro if it told me what's going on with the economy.)

I tend to side with Angus. What NGDP targeters don't really have is a theory as to what shocks got us into this mess in the first place. What kind of shock would cause real GDP to crash and stay low, despite no sign of deflationary pressure and only slightly below-trend inflation? A nominal shock or a real shock? How would NGDP targeting fix things in the case that our current distortions are not caused by nominal shocks?

No sign of deflationary pressure? So Bernanke got all worried in 08/09 for no reason at all? Doesn't it disturb you that the Fed freaks out whenever inflation (not the price level, mind you, inflation) even threatens to go slightly above target, never mind the unemployment rate or its dual mandate - but is comfortable undershooting its target for four years straight?

And as Scott pointed out once again recently, real shocks are sometimes caused by nominal shocks. UI, minimum wages, stimulus packages, all are triggered when demand-side unemployment occurs. And it has long been known in the literature that NGDP targeting trumps inflation targeting when it comes to supply shocks - and when you don't know how much of a recession is supply-side or demand side. And George Selgin reiterates that NGDPLT keeps money neutral, which is wise regardless of what is going on with the real economy. The fact that there may be things going on on the real side doesn't excuse our chief money-neutralizers from falling down on the job.

The debate seems to be:

Pro: NGDP targeting will help the economy!

Contra: No, it won't!

Running a quick cost/benefit analysis on the above, it doesn't sound like a horrible bet to make.

In all seriousness, would you mind sharing that cost/benefit analysis?

Taking his "above" framing literally, this is no cost side. It will either help or do nothing.


Chris, I am totally agree with your thoughts. Keep doing these type of work.

Comments for this post are closed