In the WSJ blog. It shows the behavior of the Fed’s preferred inflation measure, the year-over-year percent change in core consumer prices in the GDP deflator, over the past several years. Early in 2007, it was 2.6 percent. It is now at its low point, of 1.1 percent. In between, there was a local trough of 1.2 percent late in 2009 and a local peak of 2.0 percent, about a year and a half ago.
If in 2006 you had given this data to practicing macroeconomic forecasters and asked for a prediction about the behavior of unemployment, what would have been the response? My guess is that the majority would have predicted no rise in unemployment at all. The remaining forecasters would have predicted (or inferred, based on an estimated Phillips Curve) a small increase in unemployment in 2009, followed by another small increase in 2012 and 2013. No one would have predicted or inferred an enormous increase in unemployment late 2008 and early 2009, followed by a gradual decrease and then a more pronounced decrease this year.
Let me re-state my concern with measuring aggregate demand as nominal GDP. If inflation remains absolutely constant, then any fluctuation in nominal GDP is arithmetically a fluctuation in real GDP. At that point, “explaining” changes in real GDP by changes in nominal GDP becomes completely circular.
If you had asked the same about output you would have had a similar response. Far from repudiating AS/AD, it repudiates that controlling inflation is sufficient to control demand or supply. What it doesn’t say is if ngdp is targeted, rgdp will respond or inflation will.
A straw man that the evidence more strongly debunks is that aribtrarily bad federal policy can be fixed by injecting cheap money. As well, the theory that we can have the feds spend on “infrastructure” and get a boost in the economy is also pretty dead.
The last 10-20 years have seen bad economic policy on a number of fronts. Minimum wage, unpaid internships, trade restrictions, bankruptcy regulation, marginal tax rates, large corporate handouts, and most recently, mandatory benefits that are both expensive and ill-defined.
Perhaps this is too obvious to say, but surely at some point it is just too much. People in very established businesses will keep doing what they do, and people with connections to the federal government will yield a bonanza. Everyone else would seemingly be in trouble.