Scott Sumner: belief

Transcript context

…Say real GDP was going to fall by 2 percent. You see, that’s what I don’t accept. See, I believe that the fall in real GDP was mostly due to the fall in nominal GDP. We know that the trend rate of growth in nominal GDP had been 5 percent a year going into the slump, and it fell to -3. It’s like an eight-point decline in the growth rate. Now, in a counterfactual where they keep nominal GDP growing at 5 percent a year, let’s say, most of the difference shows up in stronger real growth, and only a small part of the difference shows up in higher inflation. The inflation rate in 2009 was actually around zero. It might have been no more than 2 percent or 3 percent, if nominal growth had been that much higher. Real growth might have been 5 percent higher. This is a point where I think I disagree with you, even though I agree with much of what you’ve said up until now. I worry that by attributing the decline in real GDP to a decline in nominal GDP, that it’s on the verge of being tautologous. Not a literal tautology, given prices don’t move that much — that you’re explaining a thing by itself, and I think it would have been quite possible for real GDP to fall by a few percent. If we had stabilized the growth path of nominal GDP, we would have had price inflation of, say, 5 percent, which I would have greatly preferred to what we did, to be clear. I think it’s one reason why central banks are reluctant to institute your kind of advice, because they know they’ll be blamed for a price inflation rate of 5 percent. Do you see what I’m saying?…

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