Home > Uncategorized > A problem with NGDP targeting (3 graphs)

A problem with NGDP targeting (3 graphs)

A well-known macro-economic accounting identity states that (total income) = (total expenditure) = (total production). If you don’t believe that please state it and I’ll explain it, it’s an emergent property of monetary market economies. And total income is (roughly) equal to (total wages + total profits), profits including the ‘mixed income’ of the self-employed but also the windfall profits of the banks caused by low central bank rates which lower funding costs (at least according to national accounting, google FISIM). At the same time, there is at this moment quite some talk about ‘Nominal GDP targeting’, which means that central banks have to target a certain growth of nominal GDP. Higher nominal GDP can in such a case be caused by rising (oil?) prices but also by lower central bank interest rates (which in the system of national accounting increases value added produced by banks!) or by increasing production of widgets and wadgets. That’s when we look at it from then production side. But we can also look at it from the income side and pose the question: do higher windfall profits for banks also lead to higher wages or more employment? According to Tyler Cowen, who links to Beckworth, nominal GDP growth is steady. Great. But does steady NGDP growth show in wages or employment? Hmmm.

The following graphs are from Business Insider, the Zeitgeist clearly is a-changing, I’ll try to reproduce them for the Eurozone: 
1. The share of profits in NGDP, USA

2. The employment/population ratio, USA

3. The share of wages in NGDP, USA

  1. December 7, 2012 at 7:27 pm

    The Royal Bank of Canada and the Bank of Montreal just recorded record profits. From what?
    Certainly not from sponsoring activity that generates employment. Rather, their gains were in the “capital markets”, i. e. buying and selling IOUs. Promises, promises that make up an ever growing percentage of “GDP”.
    This flight from reality will eventually stall.

  2. December 9, 2012 at 2:49 am

    Nominal GDP may be steady, but it is a flat line. At a minimum, the profitability of corporations is no indicator of current or prospective prosperity, and it should set to rest the invisible hand. But profits are high, too, because there is no investment, and companies are retaining profits as opposed to growing or developing (or employing people in high-wage occupations). So. high profits are a sign of illness, not health, as the other charts indicate.

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