An Implicit Argument for NGDP Targeting?
Every now and again you see people who blog mention how much they’ve learned from the experience, how much their audience has taught them. Hopefully this post will be another instance of that phenomenon.*
The Economist’s Free Exchange blog had a post up from Ryan Avent last week about mainly labor (sorry, labour) markets, productivity, and inflation (among other things – it covered a lot of ground). Also seemingly implicit in the piece is an argument for NGDP targeting as a short-term policy response to economic crises like the one we’ve just suffered. But this is where the learning bit comes in, because I’m not convinced I’ve got it remotely right. Avent writes:
If wages for existing workers are sticky then firms will respond to plunging demand by firing lots of workers. But they may also seek to wring more production out of existing staff so as to lower the effective real wage…The paper’s authors, Mark Bils, Yongsung Chang, and Sun-Bin Kim, find that in industries with stickier wages productivity is more countercyclical, rising above trend in downturns and below in booms. What’s more, they note that countercyclical productivity shifts have been a feature of American business cycles, but only for the last 25 years. They point to research from the Kansas City Fed, produced by Willem Van Zandweghe…Prior to the mid-1980s productivity was very pro-cyclical, falling in recessions and rising in recoveries. But this pattern began to shift in the recovery from Paul Volcker’s disinflationary recessions of the early 1980s. Thereafter productivity became sharply countercyclical, contributing to the “jobless recoveries” of the Great Moderation era. Mr Van Zandweghe considers several possible explanations for the change…Those stories are perfectly reasonable. But they are also perfectly consistent with a world in which very low inflation has made wage rigidities substantially more binding, forcing firms to fire or boost productivity.
But if the Fed had an NGDP growth target, the fall in real GDP during a recession would have to be offset by higher inflation (in order to meet the target anyway) which would, in real terms, make workers less expensive (thanks to sticky wages their salaries won’t contract instead) and therefore easier to keep on. At least, I think? This is another Ryan Avent post (from 2011) which, if I’m reading it right, seems to suggest I’m not entirely out to lunch. Perhaps our devoted readership can shed some light on the matter?
*Not that we have an audience in any real sense of the word, but the sentiment holds