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The TC Curve: Keith Moon Economics

May 14, 2011

I was out for lunch this afternoon with a friend.  We had a great lunch. It’s the first time I’ve been in a conversation that has been interrupted due to “a call from my gunsmith”.

But during the lunch we were talking a bit, and I expressed to him an idea that’s been brewing in my mind for a while.  What if the fed had a different set of mandates?

What if they threw out those old, stuffy mandates about price stability based on ideas a guy named Knut had 100 years ago?  Instead of these austere, prudent mandates, what if they embraced a Keith Moon style mandate?

Ya know, Keith Moon was the guy who drove a motorcycle down the hall of the hotel, more booze, more drugs, more girls. I guess the modern equivalent would be a Charlie Sheen mandate.

For economics, this would be Maximum Real Growth.

What if the mandate of the Fed and Treasury was Maximum Real Growth? No matter the inflation rate or unemployment pain, what if the job of the fed/Treasury would be to maximize real growth?

There could be a curve that looks like the one above. During our lunch, I drew it on a napkin. My friend wasn’t getting it and this diagram really helped.  It’s that easy to understand.   (It was not Dick Cheney who interrupted the meeting with a call from his gunsmith.)

There should be a tradeoff between inflation and real growth.  Higher inflation produces more real growth up to a point. After that maximum point of real growth, higher inflation produces lower real growth.

This idea is totally different than the potential GDP related to the natural rate of interest.  This is Keith Moon style economics, and seems like a fun idea to think about right now.

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  1. Clonal Antibody
    May 14, 2011 at 1:36 pm

    See my comments on “Risk Adjusted GDP growth and taxing the rich” thread

  2. gf
    May 14, 2011 at 2:42 pm

    This sounds a little like China.

    Or are you getting at something else completely, like a developed nation version?

    • TC
      May 14, 2011 at 3:05 pm

      You are assuming I had lots of time to think this through completely. 🙂

  3. beowulf
    May 14, 2011 at 5:18 pm

    But that just brings up back to Okun’s Law. Maximum Real Growth is exactly what the Old Keynesians meant by “full employment”. William Vickrey thought unemployment rate should be under 2%, and that the GDP should grow 8% to 12% a year until it did (after which, GDP would expand at the 3% or so rate of labor force and productivity growth).
    http://findarticles.com/p/articles/mi_qa5461/is_n2_v37/ai_n28633195/pg_12/?tag=mantle_skin;content

    See also Randy Wray’s review of Treval Powers’s book Leakage (“makes the outrageous claim that without leakages, the US economy could grow at a sustained rate of 13% annually.”).
    http://neweconomicperspectives.blogspot.com/2009/08/leakages-and-potential-growth.html

    • TC
      May 14, 2011 at 6:28 pm

      Yeah – but do they have a cool curve drawn on a napkin?

      🙂

    • TC
      May 14, 2011 at 6:42 pm

      A cool curve drawn on a napkin dominated our debate about taxes for 30 year.

      • beowulf
        May 15, 2011 at 7:38 pm

        Bill Vickrey almost certainly, that guy was like the McGyver of Econ. “Vickrey was challenged that the system he proposed [congestion pricing billed via radio transponder] was infeasible. He responded in typical fashion: in the mid-1960’s, he first built a rudimentary computer in his home… connected it to a radio receiver, then… built a small radio transmitter placed under the hood of his car. He could then show anyone who asked a printout of the times his own car went up or down his driveway…. he almost always took the train into Manhattan, then “commuted”… across Columbia’s campus to his office on rollerskates.

        Builds computers? Installs radio transponders? Commutes by roller skates? In the 1960s?!? I wonder if he solved crimes Murder She Wrote-style in his spare time. No doubt he had cool curves drawn on napkins…

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