Wherein I contradict myself on GDP accounting
Over at Noahpinion, in a discussion on a Matt Yglesias post as to the conceptual limitations of various macroeconomic indicators, I wrote the following charitable interpretation of Matt’s position (it’s not beautiful prose, as I penned it very quickly during my lunch break but a lot of my phrasing was deliberate)
I think Matt’s point can be quite succinctly summarised by saying that there is a ‘fact of the matter’ as to what NGDP is, because there is a ‘fact of the matter’ as to how much money is exchanged for final goods and services (whatever those goods are). The disambiguation of NGDP into Real GDP + inflation is the output of an essentially contestable model of what ‘really’ constitutes that set of good and services – i.e. what makes one good the same as another, what makes one different and how to value those differences (as well as substitution effects). NGDP targeting fans (of whom I am one) don’t want to the Fed to target 5% nominal gdp growth(/level growth) because nominal gdp growth is good, but because we believe it is the monetary rule most conducive to maintaining full employment and higher long-run (real!) GDP growth. And we think this (in part) because while NGDP is subject to potential mismeasurement it doesn’t have the potential for additional model error like inflation does (see Scott Sumner on housing costs in CPI).
However, I regret to say the always entertaining and challenging Bob Murphy has (quite without his knowledge) caught me contradicting myself. I said at Noah’s blog that there is a fact of the matter as to what NGDP is, but I have written previously about the conceptual issues with GDP accounting in the context of government spending – even expressing frustration with ‘the ease with which we bandy about numbers with precious little thought as to what they actually mean‘. Mea culpa*. NGDP is also a contested concept, because what constitutes a final good and service is a contested concept (in particular, how to distinguish an intermediate from an investment good seems pretty problematic to me).
As an avid believer in pursuing the argument wherever it takes you, it’s worth thinking about this for a minute even if it is a conceptual challenge to my overall position as an NGDP-targeting fan (especially so, as this is how I learn). First, it seems to me that the ability to purchase quality second-hand goods is an important factor in standards of living. For example, if cars start lasting longer before falling apart, then we are better off in ‘car’ terms. But this benefit would not be captured in GDP, and indeed it seems to me an improvement in the second handcar market would exert downward pressure on GDP as second-hand cars and new cars are substitute goods.
But more importantly, the reasons that Sumner et al think stable nominal expenditure growth is important for macroeconomic stability seem to me to apply to second hand or intermediate goods as well as final goods and services. A lot of people make a living buying and selling second hand things or making intermediate goods, and they will have entered into contracts with implicit expectations about future nominal variables. Nominal expenditure on these goods matters too for the ability of people to service their nominal liabilities, no? I can see that these are obviously going to be correlated with NGDP, but nevertheless from a macro-stability point it intuitively seems to me that any variations would matter.
As I said in the post I wrote a few months ago, GDP accounting does my head in, and there is a good chance that what I wrote above is in some way mistaken. If anyone would be willing to teach me the intricacies of GDP accounting, then I’m all ears. But I would also say that the fact that there are conceptual issues with NGDP doesn’t change the fact those issues get severely compounded by disambiguating changes in NGDP into a real and nominal component. Hence its being a reason that I prefer a central bank to target NGDP rather than inflation remaining a valid one (although limited purely to the inflation vs NGDP debate, rather than broader questions over the role of central banks).
An aside: Bob, in the unlikely event you a) made it to my humble blog and b) read down this far, can I ‘bask‘ you something? When I was even more of a youngster than I still am, I pretty quickly dismissed the Austrian explanation of the business cycle because I thought that in that world people would eventually clue up as to what was going on. I seem to recall you saying at some point Mises had a response to this argument – if you could find it that would sure be dandy. Then again, the fact that on my own (Sumner-ian) view the vast majority of people don’t understand basic points of monetary policy, maybe I’ve answered that question myself.
*It’s also pretty rich of me to claim that NGDP targeting is conducive to long-run real GDP growth on the basis of critiquing that there is a fact of the matter as to what real GDP growth is…