Over the years my critics, and even some of my supporters, have said; “Sumner is basically proposing higher inflation as a solution.” That was never really true, I was proposing 5% NGDP, level targeting. And even though inflation would have been above 2% in the 2008-11 period, a stable NGDP policy would have prevented that inflation from having the sort of negative effects that economists see as resulting from high inflation. My plan would not have hurt savers, in aggregate.
Even so, there was a grain of truth in the claim. The inflation rate would have run above 2% for a number of years under my proposal. But now even that is no longer true. There have been enough wage/price adjustments to the lower NGDP growth rate that the SRAS has been shifting to the right. This means that today even a 2% inflation rate would produce a robust recovery. But we aren’t even getting that inflation rate, indeed Bloomberg reports that the rate has fallen to 1%:
Bond investors are signaling they expect the Federal Reserve to lose its battle against disinflation, even after inundating the U.S. economy with more than $3 trillion in the past five years.
While central banks around the world are trying to spur demand and boost prices, signs are emerging that a slowdown in inflation is becoming entrenched. Treasury Inflation-Protected Securities are suffering unprecedented losses after inflation in the U.S. rose 1 percent last month, the smallest increase since 2009. Known as TIPS, the bonds have plunged 8.8 percent this year, the most since they were introduced in 1997, according to Bank of America Merrill Lynch indexes.
“The idea that central banks can always get the inflation rate they want is something that’s going to pass away,” Peter Fisher, the former Fed official and undersecretary for domestic finance at the U.S. Treasury, who now serves as senior managing director at BlackRock Inc., said in an interview on Dec. 9. “We could be at a 1 percent inflation rate for a long time.”
In a recent post Andy Harless suggested that it was obvious that nominal interest rates were lower than expected NGDP growth. I’m not sure why he makes that claim. NGDP has been growing at 4% during a period when the unemployment rate is falling at 0.7% per year. Once unemployment stops falling (around 2016) the growth rate of NGDP will likely slow even further, to below 3.5%. And 30 year bonds are currently yielding about 3.85%. Yes, the inflation rate may rise a bit at that point, but it’s not at all clear to me that 30 year bond yields exceed 30 year NGDP growth expectations. The markets seem to have read The Great Stagnation.
PS. That doesn’t mean Andy is wrong. It’s quite possible that countries would benefit from issuing more safe assets and using the funds to buy global stock index funds. Or subsidizing low wage jobs. I’m agnostic on that question.
HT: James