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Friday, October 7, 2011

Economic Growth is all that matters. Everything else is just a side show.




Click on this graph. What I have done here is create a graph of the future path of our GDP at two different rates of growth. One is at around 3% and the other around 2% and then let them compound for 50 years. Look at the difference. One economy is 50% bigger than the other. How many of all the entitlement promises we have made can we pay for in the future if our long-run rate of growth were to fall by 1%. Not pretty is it? Well this is what I fear most (other than the ghosts of my sordid past). Well, think of the top graph as the US economy between 1980 and 2008. Think of the bottom economy as France and the growth paths match up pretty well. Still think 1% doesn't mean much?

10 comments:

Sumner's Army said...

I agree! So the solution would have to be NGDP targeting? Amirite?

Randall Parker said...

That graph is Real GDP.

Randall Parker said...

I thank you for your civil discourse whether you are right or not. Or I am right or not. Thanks

Sumner's Army said...

No, I'm saying that the solution to economic growth is NGDP targeting......... I realize what your graph displays.


I'm not sure if your comment on civility is genuine or sarcastic.

Randall Parker said...

I assure you, it is genuine. And thanks again.

Randall Parker said...

I wish NGDP targeting and Real GDP targeting were one and the same. If money is neutral in the long run then I don't see how targeting NGDP is any different than inflation targeting. But I'm guessing I will soon find out. Remember now, be nice.

Sumner's Army said...

I hope that you aren't relating the equation of exchange (tautology) with the quantity theory of money (theory).


I would support issuing NGDP futures (like Robert Shiller's idea of "trills") with the the Fed purchasing/selling these to influence $base.

Sumner's Army said...

You pretty much said why it's different - because money isn't short term neutral. Aren't policy actions (primarily) about affecting short-term issues? But yes, in the LR, both (NGDP or price level targeting) would produce the same rates of inflation. But, it isn't about preferences for (long-term) inflation rates, it's about NGDP. Right? Isn't that the issue? Aren't "recessions" (primarily) about output? And wouldn't the other recession issue, employment, have a higher marginal probability of being affected by such a policy?

Thanks for the discourse. And I look forward to your video post of the recent symposium. And did you go see RPaul?

Randall Parker said...

I did not go see Ron Paul. I was out of town. Even so, any talk of the gold standard would have me headed for the door. The video should be up soon.

Randall Parker said...

I worry about the link between the quantity theory (tautology) and the quantity theory (theory) and the link is foreknowledge of the behavior of velocity. These things are all well known. I must say though I have been looking at the behavior of the monetary aggregates lately and there is no doubt in my mind that this behavior accounts for some of this slowdown everyone is now fretting about and indeed may have been a precursor to the bubble popping. As you might guess Robert Hetzel argued that when he was here last week. (Of course I'm referring to M2 and not the monetary base.) But I'm a "bubblehead" as someone called me recently and saying that the financial crisis was unimportant or is a misdiagnosis of what happened is a bridge too far for me.

I invite you to email me and to let you "guest post" on this blog if you want to get your "NGDP targeting" message out to a wider crowd. I promise the readers will listen to you and you will always be our friend.