The Problem With Zero

Imagine for a moment, regime change at the Fed. Not just any regime change, but one that would include the adoption of NGDPLT. What next? Even though nominal targeting has a wide variety of advocates, that's where the agreement ends. How so? Agreement would need to be reached in terms of a growth level trajectory. Hence even though there would be agreement regarding a monetary policy rule, by no means would the process be complete. In terms of economic outcome, a zero to five percent growth level is a vast difference, which represents a wide set of expectations for future potential.

As Scott Sumner recently noted, many opinions would come into play, and any resulting growth target would not be lightly determined. Can the present stagnation be overcome? What might ultimately happen to economic access, should group consensus settle on either zero level growth or a close approximate? Due to present circumstance and political gridlock, a no growth future remains a possibility. Indeed, much of the present interest in NGDPLT comes either from a no growth or a low growth consensus.

Whether a monetary no growth future would also mean less economic access, however, depends on political and supply side factors. Consider why a stronger growth trajectory continues to be needed, for instance in the present. Instead of sufficient monetary printing, the Fed has tried to "make do" with a bloated balance sheet. As George Selgin indicated in comments to the above linked post, the Fed is supplanting more productive economic endeavor. The means are not only extremely inefficient, but government and supply side intransigence are major factors in this scenario.

Even with a nominal target rule, the good intentions of a zero or low growth path might still lead to bad deflation. How so? The production norm which was advocated by George Selgin in his book "Less Than Zero", would respond to the good deflation of lower price levels, which have been a gradual result of traditional manufacture and production.

Unfortunately, other areas of the economy still present a deterrent to the benefits such a standard would hold, as their relative price points have instead moved higher over time. Without (reasonably equivalent) gains in innovation to bring down costs in services formation and building components, a zero growth path would still mean lost economic access for a growing percentage of the population over time. What's more, zero growth in these circumstance could possibly bring about bad deflation, by cutting into production potential at arbitrary levels to make up for the difference in price points.

If primary equilibrium actually reflected the production advantages of a falling price level from traditional manufacture, a present day zero growth path would not be problematic for the maintenance of economic access. But there have been few falling price levels or technological gains in sectors such as housing, healthcare and education. How much economic potential would be lost, should a low growth level target fail to take into account the lack of a falling price level from non tradable sectors?

Without substantial innovation in non tradable sectors, there would be losses for both production and consumption in this marketplace, with some degree of knock on effects in tradable sectors as well. In other words, far more than labor force participation levels are at stake. Presently, it is impossible to know the full impact that non tradable sectors actually have on equilibrium price levels. Real supply side reform needs to occur in non tradable sectors, before a (potential) zero growth trajectory could be safely considered.

Another problem with pinning down an "ideal" growth rate, is the interminable problem with data interpretation. Regarding economic statistics, Diane Coyle wrote in a recent post that some things really haven't changed very much. She references an updated version of a 1950 book from Oskar Morgenstern, "On the Accuracy of Economic Observations":

Morgenstern also notes the strong incentives many 'creators' of economic data have to give misleading responses to survey questions. What's your income? What price do you charge for this service, oh oligopoly provider? What is the level of your GDP, oh Greek government? "'Strategic' considerations play havoc with reliability."

None of this is to suggest that a better context for growth needs to be determined before a nominal target is a reasonable proposition. On the contrary. However, some of the confusion now coming from the Fed, appears as though inflation targeting mostly serves as a cover for the fact they are not in agreement about future economic potential.

At the very least, agreement regarding a specified rule would set the stage for the kinds of discussions regarding growth which need to follow. Ongoing directives for growth potential need more support: not just in terms of theoretical framing, but also the pragmatic perspective of populations as a whole. After all, George Selgin had the right idea for a productivity norm. However, it needs more precise application in terms of services and other non tradable sectors, both for economic access and marketplace vitality.