Saturday, December 28, 2013

"Potential growth" is real. We just don't know the number.


At The Case For Concerted Action, Ramanan quotes from Wage-led Growth by Marc Lavoie and Engelbert Stockhammer:

A standard objection to the consideration of the underconsumption thesis or the consideration of problems related to the lack of effective demand is that long-run growth – the trend rate of growth, also called the potential growth or the natural rate of growth – is ultimately determined by supply-side factors... Yet, since the advent of the global financial crisis, government agencies and central banks in many industrialized countries have lowered their forecasts of long-run real growth, thus demonstrating clearly that weak aggregate demand does have an impact on potential growth.

But a "forecast of long-run real growth" is not the same as "potential growth".

The lowering of forecasts does not demonstrate that weak aggregate demand has an impact on potential growth. It only demonstrates that forecasters are willing to contradict their own theories in order to push their predictions down where the actual numbers turn out to be.

1 comment:

Jazzbumpa said...

I'm going to play a little word game with you.

"Nominal" growth is real [so to speak] - it's what we measure.

"Real" growth is is a fudged number - nominal growth adjusted for inflation. [Which turns out to be assuming rather a lot.]

Potential growth is an abstraction - What growth might have been if certain conditions [involving even broader assumptions] had held - Which and they didn't, or we wouldn't be speaking in such terms.

Moving right along . . .

It only demonstrates that forecasters are willing to contradict their own theories

But they are supply side theories which are contradicted; and since demand side theories are all that are left, it really does demonstrate that weak aggregate demand effects potential growth.

Games can sometimes be quite serious.

[4:00 AM ?!? You are a mad man.]

Cheers!
JzB