There’s an interesting cross-blog discussion going on about Robert Hetzel’s new book, The Great Recession: Market Failure or Policy Failure. Bill Woolsey summarizes the discussion so far. He remarks:
Is Hetzel really saying that the apparent 5% trend for nominal GDP was an illusion and that during the nineties, the goal remained zero inflation? In the end, there was a plan for additional disinflation that was only rejected 10 years ago? And worse, is Hetzel claiming that it was that shift that led to problems?
In Marc Nunes contribution to the discussion there’s something that leaped out at me. About halfway down the post he produces two graphs, presumably from the book, one of the “NGDP Gap” and the other the familiar one of nominal GDP and trend. The conclusion:
What the 2 charts above indicate – they show the same thing in different ways – is that the policy “error†took place in 1998/99. Spending “overshot and then “undershot†the level target. 2003-05 show the Fed trying to bring spending back to trend, something the Fed should be trying today, but isn’t (even if you assume the trend level has lowered somewhat).
I’m not as convinced you can draw that conclusion. There were all sorts of things other than monetary policy going on at that time including revisions to the treatment of capital gains under the tax code, the dot-com bubble, the “Clinton surplus”, and on and on. Can everything be isolated to monetary policy? Or is monetary policy one aspect of a much more complicated problem?
Additionally, there’s an aspect of this discussion of what caused the financial crisis and Great Recession that I find concerning, broadening things a bit to include the newspaper columns of the last half dozen years. One side’s heroes are the other side’s villains and vice versa. The policies that were lauded under a Democratic administration are condemned under a Republican administration and vice versa. Was Clinton a hero or a goat? Bush? Greenspan? Bernanke? Is tribalism the only operational force?
@Dave Schuler
“What the 2 charts above indicate – they show the same thing in different ways – is that the policy “error†took place in 1998/99. Spending “overshot and then “undershot†the level target. 2003-05 show the Fed trying to bring spending back to trend, something the Fed should be trying today, but isn’t (even if you assume the trend level has lowered somewhat).”
See, this is where your criticism of the concept of “output gap” has teeth: this guy is literally drawing a line from the crest of the previous business cycle and saying it’s a trend, then asserting we can and should somehow use monetary policy to return to that trend. But NGDP targetting is nothing new and has no special capacity to control aggregate demand. Everything in economics cannot be broken down to Federal Reserve policy.
Is tribalism the only operational force?
Do you really have to ask?