Friday, September 14, 2012

Knew him before he was our savior

Scott Sumner, the blogging face of Market Monetarism comes in for a little hero worship (well deserved);

Have you heard of Scott Sumner? Unless you're an economist, an economic blogger, or a student at Bentley University, where Sumner is a professor, you probably haven't. And that's a shame. Because there's an outside chance that he just saved the economy.
Except for the little detail that this isn't a good explanation of Scott's idea;
Sumner is the author of The Money Illusion, an excellent blog that has relentlessly made the case since 2009 for an eccentric policy called "NGDP targeting." This is a complicated sounding plan with a simple idea at its heart. If the equation that solves the economic crisis is "GDP growth + inflation = 5%" then the solution to low GDP growth is inflation that brings us up to 5%. Therefore, the Federal Reserve should announce that it will do everything in its power to raise inflation expectations until we're back to where we want to be.
It's hardly eccentric.  As Scott has said many times, the idea has been around for years. most often credited to Bennett McCallum .  Nor is it that inflation expectations need to be raised--though it might not hurt if they were--if inflation were 5% and GDP growth zero, that would not be a good thing.

What Scott does believe is that 5% NGDP growth would usually be composed of about 2% inflation and 3% real growth.  Which is why the target should be 5%.

But, it has been said, any publicity is good publicity.

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