The new David Glassner paper

His claim is that the crash was all about sudden deflationary concerns starting in mid 2008.  The evidence is the sudden correlation between the S&P with inflation expectations. Sumner and Yglesias jump on this as advocacy for NGDP growth.

We sure did have a demand collapse with oil at $140 near the peak, and that certainly got the attention of traders. What does that tell us about the Sumner theory on NGDP growth?  We can grow NGDP when oil is no longer a constraint.

Looking further in the paper:

The response of nominal and real interest rates to expected deflation becomes problematic when nominal interest rates fall toward zero while the expected rate of deflation is increasing. As nominal interest rates approach their lower bound, further increases in expected deflation cannot cause the nominal rate to fall.

No, it is not problematic at all.  A rank reduction occurs in the economy and the S&P traders recognize the new normal and their trading pattern adapts to a new, simpler economy.  What is crazy is that after 80 years since Fischer economists still think the economy counts large changes in smooth proportions and Fischer, 250 years after the invention of industrial specialization, couldn't figure it out.

Scott sumner wants us to determine why traders change correlations like this. Economists have aslo been asking themselves what to do about heteroskedacity since they started doing regressions, and that question is equivalent to Scott's, and also at the heart of the Zero Bound canard.

Economies of scale dictate that we cannot make large changes smoothly. Traders change their regression variable, en mass, because they are subject to economies of scale.

And that brings us to Mark Perry who celebrates productivity growth.  Yes, if we hold the current, post crash production chain then we can become top heavy exporters and rebalance the current accounts.  Mark misses one point, we still have very substantial changes in the economy required to sustain an export mentality, and those changes involve something close to a revolution in political thinking, namely massive cuts in the government burden or much greater government efficiency.  The consumer demand does not pick up until we make these changes.

Which brings us to Ben and the Fed.  Why does it take a massive infusion of printed money to force restructuring?  Because government is not cooperating with the new effort to rebalance to an export  economy.  Government will not cooperate as long as Ben is willing to  fund their debt.  Ben should change is tune and demand that the debt limit become a political football for it is the only tool Ben has in making Congress cooperate with his goals.

And that brings us back to growth statistics.  About 40% of the new growth since the bottom has come from changes in government spending.  This could be coming from a good rebalancing of the total government channel with total government spending smaller overall.  But more likely, this is growth in government spending with an impending  GDP revision downward, likely to happen in a few quarters when economists get enough time to average out the heteroskedacity issue.