What Could Derail A Return To Economic Growth

by: Scott Sumner

Becky Hargrove sent me this recent article about Bernanke:

The Fed, he said, believes inflation will remain near the central bank’s target of 2% or a little less. The economy can support an unemployment rate around 5% to 6% without fueling inflation, he added.

“I do believe we will return to a healthier growth rate. I don’t see any reason why we couldn’t,” he said.

It’s good to hear that Bernanke thinks the problem is demand side, not structural. Oddly, I actually think it’s more structural than he does. If we stay at 99 week maximum UI benefits, I’d expected the natural rate to be in the 6% to 7% range, especially if the minimum wage rate stays this high.

So Bernanke thinks easier money would help the economy even more than I think easier money would help the economy. But he fails to see one very obvious potential problem. There is something that could prevent a return to “healthier growth.”

Let’s assume inflation stays near at 2%. And let’s also assume that they allow NGDP to grow at a bit over 4%. Then we won’t get a “healthier” recovery. But why would I make such a pessimistic forecast about NGDP growth? Why expect it to be so low?

Maybe because it’s been low for the past several years. Maybe because private forecasters expect it to remain low. And maybe because the bond market seems to expect low NGDP growth (as far as we can tell.) Other than those three reasons, there’s no reason at all that the economy can’t have a healthier recovery with 2% inflation.

And who determines the rate of NGDP growth? There’s probably an answer somewhere in Bernanke’s intermediate macro textbook.