Home > Main > Aggressive NGDP Targeting gets us Recession levels of Unemployment!

Aggressive NGDP Targeting gets us Recession levels of Unemployment!

October 18, 2011

This recent note by Jan Hatzuis about NGDP targeting shows just how bad monetary policy is at getting unemployment down.  Scott Sumner is cheering this.   So is Matt Y.

If you just check out the charts, you’ll see that NGDP targeting does reduce unemployment.  The unpleasant part is: Unemployment gets down to 6% after years and years of targeting.

Now 6% seems like good days when we are at 9% unemployment.  But for most of the last 30 years, and most of U.S. history, 6% unemployment was recession level unemployment.   The only times we’ve been over 6% unemployment is when times were tough and we needed to get the economy moving.

I don’t know why people think 6% unemployment is a good target.  It’s a horrible level of unemployment that only looks good from the perspective of the aftermath of a gigantic global crisis.

We need fiscal stimulus, not more bank lending.

[Update:  Here is the paper   http://www.scribd.com/doc/69165529/Goldman-Sachs-Recommends-Fed-Boost-the-Economy

and nothing about how they might do this NGDP targeting.  Perhaps more talk? ]

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  1. October 18, 2011 at 11:38 am

    Do they say what they would do, other than announce a target? Negative interest rates?

  2. TC
    October 18, 2011 at 11:44 am

    haha – good one dansecrest! That’s funny.

    Nope. I just updated the post where you can find the entire paper.

  3. wh10
    October 18, 2011 at 9:03 pm

    This is OT, but I am curious to hear how you and other MMTers would respond to this article http://www.nationalreview.com/articles/print/278758 , aside from the portions, both implicit and explicit, ‘out of paradigm.’

    • beowulf
      October 19, 2011 at 1:25 am

      Thanks for linking the Peter Thiel piece, Interesting article. And yes he is certainly out of paradigm, and but at least he recognizes that things are amiss by approaching (and then brushing past) two serious problems we :
      1. Growing income inequality with stagnant real wages for the working and middle classes over the last 40 years. TC has written about this before so I won’t belabor the point, and while its nice Thiel acknowledges the issue (“there was a trend towards greater inequality”), he doesn’t suggest any solutions to deal with it.

      2. We are overinvesting in the FIRE sector at the expense of public investments (govt spending on infrastructure, education and R&D). Brad Delong points out this evening that between 1960 and now, real estate’s share of GDP has increased 3 points to 13.7% today, while finance and insurance’s share of GDP has increase 5 points to 8.7%. Thus FIRE sector has over time gained an additional 8% of GDP ($1.2T) to now comprise 22.4% of GDP ($3.36T) . Meanwhile the US spends far too little on public investments. For example, since 1960, transportation and water infrastructure spending has dropped in half, from 5.0% to 2.5% of GDP, meanwhile China spends 9% of GDP a year on infrastructure. Thiel does recommend we start spending more on public investments but doesn’t mention where the money (and college grads) has been going all this while instead.

      There’s a poignant scene in Ron Suskind’s Confidence Men (great book that I’m certain anyone reading this blog would enjoy) where an elderly Princeton civil engineering professor tells Paul Volcker that he’s the last one at Princeton and that Harvard just has two old geezers still teaching civil engineering, while Yale has already stopped. So within a few years, our nation’s three top universities will no longer be teaching any of its students how to build bridges, highways, levees or water treatment plants. They all want to work on Wall Street instead.

  4. beowulf
    October 19, 2011 at 12:16 am

    Hey I know, let’s throw money at Bank of America!
    “Bank of America Deathwatch: Moves Risky Derivatives from Holding Company to Taxpayer-Backstopped Depositors ”

    Don’t miss my throwing a flashbang grenade into the slumber party at the tail end of the comments (12:58am). :o)
    Seriously though, not sure what more QE gets you without more fiscal stimulus.

    • Art
      October 22, 2011 at 9:40 am

      “not sure what more QE gets you without more fiscal stimulus.”

      More disappointment?

      Unfortunately, this seems to be the idea at the margin. Bernie Sanders has opened the door for a post-Keynesian end-around though. Fingers crossed.

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