Real Life is Incremental, and Other Nominal Growth Targets

For those who aren't around macroeconomic dialogue every day, "supply shocks" may seem an odd sort of phrase, especially in that it covers quite a bit of territory in meaning. Plus, it refers both to what would be interpreted as positive and negative effects in both the marketplace and everyday life. Something happens and one sees the effects ripple out, from what could be anything from a weighty governmental decision to the discovery of a valuable new mine. Such a multitude of activities are occurring constantly, and one could tear their hair out trying to understand how each ripple may affect others.

If one wants to juggle these multiple effects, it's a complex job and not always rewarding. Certainly we need to understand how supply side effects work with demand side effects because one depends on the other. But there is a chance that we are making the job even harder that it has to be, for interest rate targeting has to constantly contrast at one factor against countless others to ascertain what is most important. Consequently the best thing interest rate targeting can do, is put a "lid" on the pot and hope that everything "cooks" well. Right now what's cooking, economically speaking, is a good reason to stay out of the kitchen.

For all the complexity and minds "hard at work", why then should the fact that someone makes the "wrong" decision make it even more likely that we may not have a job to go to, next week?  Is there any one factor in all those variables that could possible make the process a bit easier? There is, and what's more it isn't "all over the map" in terms of potentially available decisions or resources. It is the aggregate or nominal capacity of our own time, with the potential measure of hourly equivalents. What's more, our economic capacity is incremental in nature, which means with a little TLC, can grow at a reasonably steady rate. Don't get me wrong, for not everyone dwells on supply side realities like I do, as a contributing factor for economic health. I just don't think supply side realities are a good reason to continue with interest rate targeting which - in the present - basically wants to open the spigot for loans when supply side factors are good and close the spigot when times aren't so good. Economies need to be thought through a bit more carefully than that.

To be sure, I'm glad when Ben Bernanke considers all angles, even if I want to do a face palm when he talks about the economics of happiness. Something about the fact that he doesn't always sleep well at night, given the number of unemployed, is a bit comforting...perhaps it's the way in which he caters to various aspects of multiple realities that is the problem. For in his earlier research and writings it was clear that he "got it" - he knew exactly what the nominal anchor should be. How could anyone - who studied the Great Depression to any degree - not see that it was the tenacity of people to survive which was the only true constant? It was only when he took his present job, that the "trees" made it impossible for him to consider the whole "forest".

Why is it so hard to think of the logical targeting of incremental growth in the first place? While we think of herd mentalities in the marketplace, they also exist in the daily surroundings we create for ourselves. It's just profitable to sell the most substantial product possible, so this is what more and more providers focus on, and more municipalities (housing) for tax capture. Only everyone finally reaches a point where the middle classes can no longer reasonably buy the standard product without government help. The old ways of moving ahead incrementally in life and business can be forgotten, when the good times not only go for decades but do so by leaps and bounds. Somewhere along the way to greater prosperity, our institutions decide we should live like supermen and superwomen, capable of jumping over buildings and obstacles with a single bound. Sure, some people no longer have monetary equivalency anymore but hey I'll ignore that if you will...wink wink. Meanwhile we can just play the game of thrashing one another as to why the losers constantly lose. That game has been getting a little "old" lately, no? Nevertheless in the EU it's become the primetime that drives out all other viewership.

Our real lives have lots of expectations and big dreams too, which is why we're willing to sign on to the contracts our institutions demand of us even if they require the selling of our soul, to do so. We really don't know how to stop making the sacrifice, even if it has been formulated in increasingly unreachable terms. By the time another Great Depression rolls around, people have long forgotten what the world actually looked like when enough flexibility actually existed for people to "grow" their lives, educations and businesses in incremental ways. That's why governments rescues banks yet again, which afterward still want to offer our contracts in the same superhero terms, even after we couldn't clear the building the first time around.

We need to leave plenty of spaces in our lives for incremental growth, because otherwise the tendency is invariably to maximize potential gains right out the gate, every time. Business claims government does this (spends too much in the good times), but business does the exact same thing, i.e. they will see just how much they can get from their customers in the good times as well. NGDPLT shows this relation of income to consumption so that one knows when the line is becoming stretched, and that can only promote a far better understanding for long term growth.