Comments on: My Least Favorite Macroeconomic Statistic

By: Rich Berger

Rich Berger — Thu, 15 May 2014 11:43:28 +0000

That seems like an obvious, yet still very important point. Potential GDP cannot be observed, only inferred. The other underlying assumption is that GDP would grow monotonically to infinity if only we had effective Keynesian policy. In human affairs, things go wrong and projects which seemed profitable at the start prove in the end to be misguided. The patterns of trade must be unwound and reconstituted as PSST. On an individual level, when a worker’s livelihood is destroyed by technological change, he must find another, which may entail a job search, retraining or acceptance of a lower income. His potential GDP is lowered, whether or not someone else’s is increased.

A person’s happiness may turn to unhappiness when a spouse or a child dies, or when he is divorced. He has to go through a period of unhappiness until he can recover. Maybe he sees a psychiatrist who prescribes an anti-depressant so the unhappiness can be alleviated or turned to happiness. Or maybe he just has to be unhappy and work through it until things are better. Maybe that Keynesian stimulant delays the necessary painful correction and makes things worse in the long run.

By: Andrew'

Andrew' — Wed, 14 May 2014 19:03:05 +0000

I don’t know:

http://en.wikipedia.org/wiki/Nominal_income_target#Level_Target

So if a recession pushes NGDP to 2% for one year, the bank should add the shortfall to the next year’s target to return the economy to trend growth.

I’m not going to say that doesn’t mean what you say.

By: Handle

Handle — Wed, 14 May 2014 18:21:38 +0000

NGDPLT does not have the same problem. There is no such thing as potential-nominal anything. The market monetarists tend not to draw lines extending RGDP trends as if those extrapolations mean anything.

By: Andrew'

Andrew' — Wed, 14 May 2014 15:08:20 +0000

Btw, in the back of my mind, I subliminally knew this would be your least favorite statistic.

Doesn’t NGDPLT have a similar problem? Maybe you’ve commented extensively on this already…but then again, bloggers blog.

By: Andrew'

Andrew' — Wed, 14 May 2014 15:03:53 +0000

I think there is some truth to the animal spirits idea. The question is what percent is it compared to the Keynesians belief. As I say all the time, in this case with housing finance, the trend is the only thing we KNOW can’t keep going.

By: Becky Hargrove

Becky Hargrove — Wed, 14 May 2014 14:47:11 +0000

Here’s a way to think about potential GDP. Consider the rights to produce, which government bestows upon special interests and the like. Do those rights impact the size of the marketplace? Quite often, they do. An apt example is medical devices, which is something that average Joe – as far as I know – is still not allowed to contribute to the marketplace in many instances. Okay, maybe that would not be such a big deal, if taxation occurred on those who are bestowed the kinds of special production rights that limit participation. But if medical devices are not taxed, aggregate supply and aggregate demand are both negatively affected, and nominal GDP has to follow the political dynamics in this regard.