Jason Furman is right
Or at least shares my view of the current macro situation.
Commentators have generally offered two arguments about advanced economies’ performance since COVID-19 struck, only one of which can be true. The first is that the economic rebound has been surprisingly rapid, outpacing what forecasters expected and setting this recovery apart from the aftermath of previous recessions.
The second argument is that inflation has reached its recent heights because of unexpected supply-side developments, including supply-chain issues like semiconductor shortages, an unexpectedly persistent shift from services to goods consumption, a lag in people’s return to the workforce, and the persistence of the virus.
Of course there are some supply problems that have contributed to inflation, but Furman rightly focuses on NGDP growth, which has been extremely high:
By definition, price growth equals the growth of nominal output minus the growth of real output (with a small difference due to compounding). Over the course of 2021, US real GDP grew by 5.5%, nominal GDP grew by around 11.5%, and GDP price growth thus came in at around 5.9%.
Unfortunately, the Fed is still behind the curve:
But households still have substantial excess savings, and the overall stance of monetary policy remains accommodative, suggesting that demand will continue to be strong.
Unlike Furman, I’m not a Keynesian. In market monetarist framing, the excess savings are viewed as a contributing factor making monetary policy more expansionary, not a separate factor. I measure the stance of monetary policy in terms of (expected) NGDP growth.
Overall, however, I’m thrilled to see an increasing focus from top economists on NGDP as an indicator of whether policy is too expansionary or too contractionary.
Economists need to talk much more about NGDP—it’s the key policy indicator for demand-side policy issues (monetary and fiscal policy).
PS. On the other hand, looking at NGDP doesn’t necessarily lead to the correct policy, if one stubbornly refuses to face facts. In the US, NGDP is already 3% above trend, and rising extremely rapidly. That calls for tight money, right? Not according to the FT:
Second, central banks should clarify how they think their monetary policy works. Presumably, the point of reducing monetary stimulus is to take the wind out of the sails of demand in the economy, so as to bring it down to the damaged supply capacity. This was already hard to justify, given that nominal spending had only barely returned to pre-pandemic trends in the US and still fell short in the eurozone and the UK — hardly “excessive” demand.
Huh? The accompanying graph in the FT shows NGDP rising well above trend in the US.
PPS. I have a new piece at The Hill which makes some related points.