## Wednesday, June 17, 2015

### Another Four Percent

When Jeb Bush announced his presidential candidacy on Monday, he made a bold claim. "There's not a reason in the world we can’t grow at 4 percent a year,” he said, “and that will be my goal as president.”

You can pretty much guarantee that whenever a politician claims "there's not a reason in the world," plenty of people will be happy to provide one, and this case is no exception. Those reasons aside, for now, where did this 4 percent target come from? Jordan Weissmann explains that "the figure apparently originated during a conference call several years ago, during which Bush and several other advisers were brainstorming potential economic programs for the George W. Bush Institute...Jeb casually tossed out the idea of 4 percent growth, which everybody loved, even though it was kind of arbitrary." Jeb Bush himself calls 4 percent "a nice round number. It's double the growth that we are growing at." (To which Jon Perr snippily adds, "It's also an even number and the square of two.")

Let's face it, we have a thing for nice, round, kind of arbitrary numbers. The 2 percent inflation target, for example, was not chosen as the precise solution to some optimization problem, but more as a "rough guess [that] acquired force as a focal point." Psychology research shows that people put in extra effort to reach round number goals,  like a batting average of .300 rather than .299. A 4 percent growth target reduces something multidimensional and hard to define--economic success--to a single, salient number. An explicit numerical target provides an easy guide for accountability. This can be very useful, but it can also backfire.

As an analogy, imagine that citizens of some country have a vague, noble goal for their education system, like "improving student learning." They want to encourage school administrators and teachers to pursue this goal and hold them accountable. But with so many dimensions of student learning, it is difficult to gauge effort or success. They could introduce a mandatory, standardized math test for all students, and rate a teacher as "highly successful" if his or her students' scores improve by at least 10% over the course of the year. A nice round number. This would provide a simple, salient way to judge success, and it would certainly change what goes on in the classroom, with obvious upsides and downsides. Many teachers would put in more effort to ensure that students learned math--at least, the math covered on the test--but might neglect literature, art, or gym. Administrators might have incentive to engage in some deceptive accounting practices, finding reasons why a particular student's score should not be counted, why a group of students should switch classrooms. Even outright cheating, though likely rare, is possible, especially if jobs are hinging on the difference between 9.9% improvement and 10%. What is changing one or two answers?

Ceteris paribus, more math skills would bring a variety of benefits, just like more growth would, as the George W. Bush Institute's 4% Growth Project likes to point out. But making 4 percent growth the standard for success could also change policymakers' incentives and behaviors in some perverse ways. Potential policies' ability to boost growth will be overemphasized, and other merits or flaws (e.g. for the environment or the income distribution) underemphasized. The purported goal is sustained 4 percent growth over long time periods, which implies making the kind of long-run-minded reforms that boost both actual and potential GDP--not just running the economy above capacity for as long as possible until the music stops. But realistically, a president would worry more about achieving 4 percent while in office and less about afterwards, encouraging short-termism at best, or more unsavory practices at worst.

Even with all of these caveats, if the idea of a 4 percent solution still sounds appealing, it is worth opening up the discussion to what other 4 percent solutions might be better. Laurence Ball, Brad Delong, and Paul Krugman have made the case for 4 percent inflation target. I see their points but am not fully convinced. But what about 4 percent unemployment? Or 4 percent nominal wage growth? Are they more or less attainable than 4 percent GDP growth, and how would the benefits compare? If we do decide to buy into a 4 percent target, it is worth at least pausing to think about which 4 percent.

1. Well, as the Republicans don't care about unemployment as such, and are actively opposed to any wage growth at least among the 99%, I suspect that a 4% economic growth target (with all the benefits going to the 0.1%, natch) is the best you can hope for from them.

2. After some 20 years of low investment spending, low utilization, and recently lots of underemployment, 4% should be pretty easy to reach if we were determined to reach full a tight labor market. It's the growth after that point that may be hard.

John

3. Target nominal wage growth per Josh Bivens:

"Specifically, for a 2 percent price inflation target, 1.5 percent trend productivity growth is consistent with nominal wage growth of 3.5 percent."

or nominal GDP growth per Scott Sumner and others like Woodford(?). That would be 5 percent or whatever the CBO and others determine it to be. It would be helpful to have a nominal GDP futures market where people can bad on how bad the Fed is failing to meet its target. It would be a blinking red signal to the press and Congress.

The Fed is supposed to target maximum employment but they either aren't very good at it or it really isn't much of a priority.

4. What no one addresses in the econ discussions I have followed, is that 4% or any % growth YOY cannot lead to a desirable steady state outcome.

The question is, how do we prosper and persist as a species without hitting two very nasty outcomes -- either continuous wars and population crashes, or outright destruction of our biosphere.

The alternative, if it is even possible, is to find ways of limiting ourselves -- our appetites, our demands, our populations.

"Controlled deflation" -- now there's a campaign slogan for you.

5. "Even outright cheating, though likely rare, is possible, ..."
Ha! You make the comedy.

6. Hey, why not 5%? 5 is obviously a rounder number than 4.

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