I am going to go out on a limb and predict that we are now entering a new Great Moderation, even more stable than the 1985-2007 period. Let's start with what we know.
We are only a few months away from being eight years into the expansion. This 8-year period will likely be the second most stable in all of American history, outdone only by the ten years of stability from 1991 to early 2001...the recent stability of NGDP growth is about the same as during the 1990's albeit averaging somewhat below 5%, rather than somewhat above 5%.He goes on to give seven reasons why he believes this could be the case, some of which are reasonably persuasive. Nevertheless, monetary stability is normally linked to political stability. If central bankers are within range of this goal, why so much political instability in the present? Plus: as market monetarist James Alexander wanted to know, has Scott given up on level targeting?
Granted, returning to the 2008 trend line is no longer a practical matter. Even so, I've plenty of sympathy for market monetarists who question whether nothing can be done re the present lackluster NGDP growth level. Even now, nominal income loss is an important factor in economic difficulties which continue unabated.
Which brings me to the post title: are hopes for a level target being dashed by open ended claims on nominal income? For one, open ended claims are indicative of firms which lack sufficient competition in the marketplace. According to Cyril Morong in a recent post "What Industries Have the Highest Profit Rates?""
For example, we expect firms in perfect competition to earn an average profit rate or rate of return because, if they are above average, more firms enter driving prices and the profit rate back down. When there is not enough competition, firms can stay above average.Morong then highlights a Forbes article re the most lucrative industries of 2016, which explains in part why these firms don't face normal profit margin constraints. What are the most lucrative? From the article: "The answer depends on how it's measured, but based on pre-tax net profit margin, the top money-makers include specialty service providers in accounting, law, health care and real estate."
Only remember the open ended claims on nominal income these activities consequently pose, and the level of relative inflation they generate in relation to the good deflation and productivity of many traditional firms in more normal competitive settings. Do the open ended claims of these competition constrained firms, keep the Fed (through crowding out) from printing sufficient nominal income for all concerned?
Indeed, this situation also poses problems for fiscal revenue availability, as governments are more inclined to seek revenue from firms they are not as closely associated with; firms which also tend to have more tangible forms of output and lower profit margins. For instance: retail has seen more than its share of problems in recent years. This sector would take a hard hit from border tariffs, regardless of how they may be defined.
Consider how the technological gains which augment professional service income, tend to maintain an already existing output level instead of contributing to growth. In aggregate, these dominant service sectors with their low productivity and secondary market position, mean fewer total output gains, but at the same time, reduced aggregate input particularly in the form of nominal income. In all of this, less revenue remains available for the hopes and dreams of further government economic activity, regardless of political party. Does anyone really wonder why immigrants who don't even come close to the definition of "bad hombres", are being chased out of the country?
As a market monetarist, I am grateful for the victories that have been achieved, in terms of the Fed becoming more careful about maintaining nominal stability. Still, I would be most hesitant to claim victory too soon, especially since some of the more important challenges have scarcely begun, in terms of true economic stability. We continue to live in a world which is losing labor force participation - an unfortunate circumstance that doubtless affects both nominal income potential and full economic engagement.