Thursday, May 15, 2014

Marcus comes up empty


Marcus Nunes:

The fact is that in after 2007 the poor man was doubly penalized. On the one hand his nominal income took a plunge and insult was added to injury when his job was taken away! The chart compares nominal income growth (NGDP) during the two cycles. Is it hard to see why consumer spending (and all the other components of GDP) and employment crashed?

The chart shows a big drop in Nominal GDP during the Great Recession.

Looking at that big drop, Marcus says it is easy to see "why consumer spending (and all the other components of GDP) ... crashed".

Marcus says, in other words, that the reason all the components of GDP crashed is that GDP crashed.

Sir, that explains nothing.

11 comments:

João Marcus said...

What does the Fed control? Nominal spending. So when it allows that to crash, the whole "House of Cards" comes down.
Why didn´t it happen in Australia, also with a lot of housing debt? Check what happened to Australia´s NGDP.

geerussell said...

It's always amusing to see someone say the Fed controls nominal spending. For what sector does the Fed set the budget? Households? No. Firms? No. Foreign sector? No. Government? Still no.

So the Fed doesn't control any individual component of nominal spending but the Fed controls nominal spending. It's nonsense on stilts yet some economists cling to it like barnacles on the hull of a sunken wreck.

João Marcus said...

geerussell, suggested reading:
http://www.themoneyillusion.com/?p=274

João Marcus said...

geerussell, in just a few words: The Fed does not set the budget of any sector, but it certainly helps determine the expectations about the future of all the sectors and, thus, influence their decisions of how to set their respective budgets.

geerussell said...

First I have to note that moving from this flat, unequivocal statement:

What does the Fed control? Nominal spending.

To this much squishier, carefully hedged claim:

it certainly helps determine the expectations about the future of all the sectors and, thus, influence their decisions

...amounts to an epic retreat. On the scale of "oops, shouldn't have invaded russia in winter".

Claiming a distant, indirect, hoped for "influence" is a far cry from having control. Yet, the economic position staked out by Sumner and his ilk is the latter. As though the Fed chair has a knob on her desk that can dial NGDP up and down at will.

More egregious still is the idea that these indirect and unquantifiable influences supersede and/or completely offset changes in the activity among the components of NGDP.

The basic flaw is in assuming that because expectations are a powerful transmission channel for something the Fed directly controls (rates) that expectations are equally effective for things the Fed only indirectly influences from a distance (NGDP). Absent a tangible policy lever, the expectations channel amounts to wishful thinking.

João Marcus said...

geerussell. the Fed does not "control" rates either. He "influences" them.
How do you think the Fed, or any central bank "controls" inflation?
Ans: Through generating expectations of future mometary policy.
And if you want a "tangible policy lever", how about an NGDP level target? How do you think the Fed could use it to influence expectations and, hence, outcomes?

geerussell said...

the Fed does not "control" rates either. He "influences" them.

The Fed directly sets, directly controls the overnight rate which is a benchmark for other short term rates. The fact of this direct control is why the expectations channel is effective for interest rates. In this case, Chuck Norris is real and he will punch you.

In addition to that, should the Fed see fit to do so they have the capacity using open market operations to do the same thing at any point out along the yield curve. They can choose to exert pressure up or down or even target a particular rate as they see fit.

Here too, expectations have teeth because the policy levers are tangible, direct and easily identifiable. Chuck Norris is standing right there.

How do you think the Fed, or any central bank "controls" inflation?

The same way they "control" nominal spending: they don't. They target inflation, they use the rate and liquidity tools at their disposal to indirectly influence inflation, but they don't directly control it.

Ans: Through generating expectations of future mometary policy.
And if you want a "tangible policy lever", how about an NGDP level target? How do you think the Fed could use it to influence expectations and, hence, outcomes?


The basic point I'm getting at is that in contrast to rates, the Fed has no direct, tangible policy lever to force inflation or NGDP to go where they want, therefore the expectations channel is a pure bluff and ineffective. The expectations channel requires tangible policy to give it teeth.

I go to the paper Mike Woodford presented at Jackson Hole in 2012 for support on this.

Methods of Policy Accommodation at the Interest-Rate Lower Bound

I find it interesting how everything he provides to make the case for expectations is in terms of the relationship between expectations and rates. Then in conclusions, he basically concedes the point on monetary accommodation failing to gain traction without fiscal support.

Oilfield Trash said...


When you listen to Sumner and follow his MV=PQ thinking you are on the same page as him.

But when you rearrange as PQ=MV your are a heretic.

The Arthurian said...

OT, I don't read Sumner a lot. Sounds like maybe you have something specific in mind? ...Got a link?

Oilfield Trash said...

Art

But when you rearrange as PQ=MV your are a heretic.

This this IMO is the root of debate with Monetarism. Are they the dog of the economy or are they the tail.

Sumner thinks they are the dog and using Monetarism policy they can wag the economy into equilibrium.

MV=PQ as used by most Monetarist theory assumes the causation at a very basic level flows from the left to the right hand side of the equation.

I do not agree, which is why IMO it should be rearrange as PQ=MV.

Of course this greatly reduces the importance of monetary theory as a policy choice for managing economic output.

The Arthurian said...

Understood, Oilfield. I have argued that "you don't start with 'real GDP'. You start with GDP at actual prices -- called 'nominal' -- and figure out real GDP." My topic was different, but my objection was similar to yours.

"IMO it should be rearrange as PQ=MV."

Reading that aloud, PQ=MV sounds soooo strange. That's how I know the "MV=PQ" version has been repeated into my head until it seemed right.

I like this equation inversion thing you've got going. In related matters, I have trouble with the concept of the "velocity" of money. I tend to think that the use of credit is the mechanism by which velocity is increased, and I don't see economists saying anything like that. Maybe they do, but I've not seen it.