Despite my title, this is actually a post about Brad DeLong, where I’ve noticed this trend the most. Now despite the recent unpleasantness, I’m not even criticizing DeLong in this post. I’m simply pointing out a rewriting of history that I am watching unfold before my very eyes, and I want to point this out to fellow econ bloggers.
Here’s how DeLong introduced a recent panel titled, “STIMULUS OR STYMIED?: THE MACROECONOMICS OF RECESSIONS”:
DELONG: Between 1985 and 2007–the period of the “Great Moderation”–the Federal Reserve and the rest of the U.S. government on the west edge and the central banks and institutions of the European Union on the east edge of the Atlantic Ocean provided a broadly stable macroeconomic environment within which private-sector businesses, workers and investors could make their economic plans. In the U.S., on an annual basis: the rate of nominal GDP growth dropped below 4% for only 3 of those years and rose above 7% for only 2 of those 22 years; the rate of consumer price inflation rose above 5% for only 3 and fell below 2% percent for only 2 of those 22 years; and the civilian adult employment-to-population ratio remained between 60% and 64% for that entire period. And Western Europe experienced a similar “Great Moderation” with low inflation, relatively smooth growth, and diminishing unemployment.
As Robert Lucas put it in those halcyon days: “the problem of depression prevention has been solved”.
Then in 2008-9 the rate of nominal GDP growth in the U.S. crashed to -3%–a major, major downward surprise to anybody expecting and relying on a continuation of “Great Moderation” rates of nominal spending growth–the rate of consumer price inflation on an annual basis bottomed out at -2%, and the employment-to-population ratio dropped from 63% to between 58% and 59%, since when it has flatlined. [Bold added.]
DeLong is making it sound as if economists thought about the Great Moderation, and our sudden departure from it in 2008, in terms of nominal GDP growth. No no no, they/we absolutely did not. Yes, Scott Sumner and his five heroes thought like that for decades, but that’s not how anybody else thought about it. During 2008 and early 2009, barely anybody besides Sumner was thinking, “Holy cow! How can Bernanke be allowing nominal GDP to fall so much?!” At the time I had to convince myself of what “NGDP” was. (And by the way, it’s not “total spending” and it’s not “total income.” Those are three different things, even though market monetarists use them interchangeably. But I digress.)
Just to see if maybe I was the one with my head in the sand all these years–maybe I was out sick all the days in my doctoral program from 1998-2003 when everybody talked our ears off about NGDP trend growth–I went to the Wikipedia article on “Great Moderation.” As expected, nothing in there about nominal GDP. Then I looked at the Stock and Watson paper. Nope, nothing in there; they talk about the declining volatility in real GDP. Then I checked Bernanke’s 2004 speech on the topic; nothing in there either about nominal GDP.
In conclusion, let me be clear about what I’m saying in this post: If Scott Sumner has convinced you that the reason for the Great Moderation, and for our current woes, is all about the NGDP growth, the whole NGDP growth, and nothing but the NGDP growth, that’s fine–maybe you’re right. And of course, economists who were in macro all understood what NGDP was, and may even have been remarkably close to some of Sumner’s views (Bernanke being an obvious example).
But what is demonstrably wrong is to discuss the history of economic thought as if this is the way most economists have always thought about macroeconomic fluctuations. DeLong’s narrative above strikes me as coming very dangerously close to doing that. It is simply not true that economists thought of the Great Moderation as being about stable growth of NGDP, and that the economics profession was stunned at the NGDP fall in 2008-09. No we weren’t. It took Scott Sumner years to get some economists to think that way, and there are many of us who still don’t.