Nominal Growth Is Declining

You don’t have to be a market monetarist to recognize the urgent need for a higher level of nominal growth in the US economy. Higher nominal growth would result in lower unemployment, higher government revenues, lower social expenditure, a lower deficit, and a higher denominator for the debt ratio. Most importantly, it would create private-sector jobs, something our leaders supposedly care about.

If we would like to see, say, 4-5% real growth, then we need 6-7% nominal growth. The US economy performed at that level for most of the past thirty years. Recessions occurred, but were followed by a resumption of strong nominal and real growth. That isn’t happening this time.

We have heard many reasons suggested for the weakness of the current recovery. We can debate that subject. But what we can’t debate is the fact that nominal growth has been slowing for the past 18 months:

1Q12: 5.2%

2Q12: 4.5%

3Q12: 4.8%

4Q12: 3.8%

1Q13: 3.1%

2Q13: 2.9%

As I have said before, you can’t get 4-5% real growth with 3% nominal growth--not in this universe. The current level of nominal growth is dangerously low, and falling. Here is what the Fed has to say about this situation: “The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.”

That complacent forecast is surprising, considering the fact that economic growth is declining, and that neither of the Fed’s mandates are anywhere near being achieved after four years of “recovery”. The Fed’s prescription is to do more of the same, or maybe a bit less. These cycles are natural; be patient.

There is no acknowledgement that weak economic growth is a result of incorrect monetary policy. It is amazing to me that in all the public drama about the next Fed chairman, there is almost no discussion of the fact that the Fed has dropped the ball, and what it might do to get things moving again. Fed policy is a much more important topic than whether Larry Summers needs gender sensitivity training. The Fed needs a wake-up call.

“There is compelling evidence that the Japanese economy is suffering today from an aggregate demand deficiency. If monetary policy could deliver increased nominal spending, some of the difficult structural problems that Japan faces would no longer seem so difficult.”

--Ben Bernanke, Tokyo, 1999