I was reading Scott Sumner’s blog and was moved to send him this email (with links added):
I was going to do a really smarmy post once I realized this, but I want to give you a chance to defend yourself. Here’s my problem:
(A) You have been arguing that income is a meaningless concept, and that people don’t use it to plan their consumption.
(B) You have been arguing that we are in a recession because national income did not grow quickly enough, and so people’s plans are all screwed up. In fact you want Bernanke to stop talking about inflation and start talking about income.
I’m sure you can see at least the apparent problem.
With permission, I reprint Scott’s reply:
Same word, completely different concept. When you say “income” you include stuff like capital gains, which is not a part of GDP. I am interested in production, not income, as the term is applied to individuals.
BTW, NGDP isn’t really the optimal monetary policy target, but on the other hand the optimal target (nominal wages) is not a good Fed target for all sorts of pragmatic reasons. So I use NGDP as a good compromise. OK, now fire away!
I don’t really have much else to say. If I understand him, Scott is saying that firms and households make long-term contracts based on their estimates of what national output will be, but don’t care how much their accountants say their own incomes will be.
If I have indeed correctly understood Scott, I guess all I have to say is, I don’t think that’s a useful foundation for a model on which to advise Bernanke.