Insufficiently Expansionary Economic Policy Watch
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Scott Sumner: The Recovery Has Been Jobless Because It Has Been Absent

FRED Graph  St Louis Fed 2

Well, yes and no. That nominal demand growth has been slow is in part due to the facts that this is a financial crisis-caused recession and that there are strange things going on in the labor market that have, as one consequence, reduced monetary velocity. It is not quite right to say that the Federal Reserve can set the path of nominal GDP growth wherever it wants, so that whatever nominal GDP does was as intended by the Federal Reserve.

Scott Sumner:

Economics: There's been no jobless recovery, because there's been no recovery:IT'S been rather dismaying to see economists devote so much effort to explaining the recent trend toward “jobless recoveries”. Yes, there are some slight anomalies in the labour market, which suggest that job growth might be a bit less than expected, but most of these analyses overlook the bigger problem—there has been no meaningful “economic recovery” at all.... In the first 6 quarters of recovery we’ve seen 2.8% annualised growth in real GDP, which is roughly the trend rate of GDP growth.... Under those conditions one would not expect a significant change in the unemployment rate.... The only other post-war recession to see double-digit unemployment occurred in 1981-82. During the first 6 quarters of recovery from that slump we saw 7.7% annualised real GDP growth. Not surprisingly, the unemployment rate fell sharply (by more than 3 percentage points over 6 quarters).... The real question is why have we seen such sluggish growth in real GDP?... During the first 6 quarters of recovery from the 1982 recession we saw 11% annualised growth in nominal GDP. That rapid expenditure growth was associated with 7.7% real growth and 3.3% inflation. In the more recent recession we have seen 3.9% annualised nominal GDP growth, associated with 2.8% real growth and 1.1% inflation. This is completely consistent with mainstream demand-side models. Fast recovery in nominal expenditure leads to a fast recovery in real output, and vice versa. Not only is the so-called "jobless recovery” exactly what we should have expected from slow RGDP growth, but the slow RGDP growth is exactly what we should have expected from slow NGDP growth.

Modern macroeconomics tells us that it is the Fed’s job to keep NGDP growth at a rate consistent with macroeconomic stability and low inflation. They did that for about 15 years (with roughly 5% NGDP growth), and then let NGDP fall sharply in late 2008. At that time, most macroeconomists seemed to assume that the Fed was “out of ammunition”, despite dozens of academic papers by people like Ben Bernanke pointing out that the Fed still has many unconventional tools when rates hit zero....

Lars Svensson showed that monetary policymakers need to equate the policy goal with the policy target. If the captain of a ship hopes to reach New York, but expects (given wind and currents) to end up in Norfolk, then he needs to adjust the steering. If the Fed hopes for 5% NGDP, but expects a decline in NGDP (as was the case in late 2008) then they need to radically adjust monetary policy until their internal forecast unit expects NGDP to grow at the desired rate. Rumours of QE2 in the fall of 2010 boosted all sorts of asset prices, and depreciated the dollar, in direct contradiction to the late 2008 and early 2009 predictions of the "liquidity trap” Keynesians. The programme should have been done 2 years earlier and in much larger amounts. And it should have been combined with a switch to level targeting (of prices or NGDP) and a lower interest rate on bank reserves. The Fed should have done whatever it took to ensure on-target NGDP growth expectations. I.e. they should have done what Bernanke recommended that the Japanese do in 2003...