Must-Read of the Day, non-NBER edition
Tim Duy body-slams St. Louis FRB President James Bullard:
Estimates of potential GDP are not simple extrapolations of actual GDP from the peak of the last business cycles. They are estimates of the maximum sustainable output given fully employed resources. The backbone of the CBO’s estimates is a Solow Growth model. So I don’t think that Noah Smith is quite accurate when he says:
So, basically, what we have here is Bullard saying that the neoclassical (Solow) growth model – and all models like it – are wrong. He’s saying that a change in asset prices can cause a permanent change in the equilibrium capital/labor ratio.
Bullard can’t be saying the Solow growth model is wrong because he doesn’t realize that such a model is the basis for the estimates he is criticizing. [first and last link in the original; Noah Smith link copied from elsewhere in the original post]
Go Read the Whole Thing. For those of you too lazy to do that without incentive, here’s the conclusion:
Bottom Line: Bullard really went down an intellectual dead end last week. He criticized the focus on potential output, but revealed that he doesn’t really understand the concept of potential output either empirically or theoretically. He then compounds that error by arguing against the current stance of monetary policy, but fails to provide an alternative policy path. And the presumed policy path, tighter policy, looks likely to only worsen the distortions he argues the Fed is creating. I just don’t see where Bullard thinks he is taking us.
Ken
as far as I know, I am the only reader here who regularly complains about “links.” I don’t know why you would want to insult the rest of your readers, but for my part, if you are too lazy to make your own argument, i am too lazy to click your links.
the tragedy here is not that i might very likely agree with you on substance, but that you encourage a kind of solipsism in which you end up talking only to yourself and to those “in the know.” well, fine way to spend time if that’s what you like.
I read this via Krugman, but I disagree with Krugman on this.
While it is true that the asset value we lost in 2007-2009 did not destroy actual wealth, I think both Krugman and this Fed clown are not accurately stating how much the 2002-2007 economy was dependent on the $1T/yr+ being redistributed via the housing boom/bubble and its associated credit flow.
This graph:
http://research.stlouisfed.org/fred2/graph/?g=4ZT
shows how wages were being artificially boosted by debt take-on.
(Thanks to the poster here who turned me on to Steve Keen, he’s the only one I’ve seen to actually make this argument, I’m about halfway through his revised edition and haven’t seen anything particularly objectionable.)