Xxxxxxxxxxxxxxx Xxxxxxxxxxxxxxx Xxxxxxxxxxxxxxx 11 November Summary of the video clip The video clip is about Scott Sumner, an economist, giving his opinion on use of nominal GDP in helping U. S. economic recovery. There are various arguments that he gives on his support of nominal GDP as a parameter. Some of them are – 1- Nominal GDP has provisions to allow for a few supply shocks. He says that if there is an oil crisis which raises inflation then the under present system government ends up deflating the price of non petrol-linked products.
2- Nominal GDP is real indicator of an economic cycle. 3- It doesn’t incorporate inflation. Real GDP emphasizes on both Unemployment and Inflation. Scott argues that inflation is only a problem when nominal income decreases. On the basis of above points Scott says that the Federal Reserve should target the nominal GDP of 6-7 percent. Inflation shouldn’t be feared while achieving the target because the nominal incomes will rise as an effect of rise in nominal GDP. Apart from nominal GDP, the clip also discusses the role of Federal Reserve and its efficiency.
He says that the Federal Reserve should be specific about the parameters and the results it wants to achieve. There is uncertainty about the planning and so it should clarify its policies. In the extension to this argument Scott says that the American government should buy reserves because a lot of cash is lying idle with the banks. The Federal Government failed with the regulation of the markets. It is because of this failure, Scott argues, that the U. S. went into recession.
He says that lessons should be learnt from the failures. The monitory policy should focus on the overall economy. But regulation is equally necessary to avoid excesses as observed in the case of Fannie Mae and Freddie Mac. When asked about the implementation of nominal GDP for recovery, Scott says that this is technically possible but practically very hard. He further says that Federal Reserve has a PR problem. The reserve says that it is implementing policies for the recovery of the economy, but doesn’t come up with real solutions.
Since, throughout the interview Scott supports a rise in inflation, the interviewer Kelley Evans asks him about the failure of Japanese government to increase inflation. He replies by saying that the words and the actions of the Japanese government did not match. While declaring to increase the inflation, the government actually increased the interest rates. These two issues are conflicting and hence the Japanese government failed in increasing the inflation. At the end of the interview Scott talks about the challenges in implementing the nominal GDP plan. He gives the example of Franklin D.
Roosevelt’s success at increasing the inflation in the aftermath of the Great Depression of 1929. He says that economists don’t have to keep a single on the nominal GDP and inflation. He says that a healthy balance can be made and that rise in inflation shouldn’t be taken as a policy failure. In the end the interviewer asks him that whether the economists feel that they failed to avoid economic recession. Scott says that no one was sure of the magnitude of problem at Fannie Mae and Freddie Mac.
He then highlights a problem economists have to face. The problem is of economists not being able to handle the political dimensions of their economic policies. He says that in case of a policy which leads to rise in inflation, political pressure makes the economists nervous about the success of the policy. If this problem is solved then the policies of the government can be implemented without any fear of rise in inflation.