David Beckworth posted the following diagram regarding U.S. nominal expenditure. This shows the growth rate of nominal expenditures as measured by final sales to domestic purchasers.
The basic pattern is clear. Nominal expenditures were growing at a growing rate during during the sixties and seventies, a period where inflation became a growing problem--The Great Inflation. Nominal expenditure growth came down and "stabilized" during the nineties, the so-called "Great Moderation." Recently, the growth of nominal expenditures turned very negative--the Great Recession.
Some time ago, I picked a nit with Beckworth, arguing in favor of an alternative measure of nominal expenditure, total final sales. The difference between the two is exports. Final sales to domestic purchasers ignores the spending of foreigners on domestic output. David agreed this is a better approach. Scott Sumner advocates using nominal GDP as the more appropriate measure. He argues that nominal output is what really counts.
The difference between final sales and the measures of nominal output is inventory investment. Goods that are produced but not sold are counted as being "purchased" by the firms that produced them. While Sumner and I went back and forth on whether it is better to count that sort of expenditure as something whose aggregate value should be stabilized, all three of the series look pretty much the same with a 50 year time horizon.
Beckworth also looked at nominal expenditures for the OCED.
It is interesting that the pattern is so consistent. He shows the growth rate of nominal GDP here. Leaving aside trade between the OCED and the rest of the world, when aggregated, final sales to domestic purchasers and total final sales should sum to the same amount. The nominal GDP figures include inventory investment.
Beckworth's diagrams have generated a good bit of attention on the blogosphere. Even Paul Krugman took notice! Unfortunately, he used the opportunity to make bad arguments regarding the liquidity trap.
Well, the first step is for economists to understand that stable growth of nominal expenditure is the goal. Convincing them that appropriate monetary institutions can accomplish it is the next step.
Thanks Bill for the plug. If only the IMF would create a quarterly world nominal GDP series. They have an annual series that goes back to the 1970s. I do hope more folks start thinking about stabilizing nominal expenditures as goal.
ReplyDeleteDo you recommend any great introductory articles on this topic? I am about to get into nominal income targeting with my class and have assigned them an article from the St. Louis Fed (link is on my recent blog post)but was wondering if there were any other papers directed toward a more general audience.
"Well, the first step is for economists to understand that stable growth of nominal expenditure is the goal. Convincing them that appropriate monetary institutions can accomplish it is the next step."
ReplyDeleteMeh, I am not convinced that nominal is what matters.