Must-Read: Gavyn Davies: Technology, Inflation, and the Federal Reserve

Must-Read: Here Gavyn Davies falls into the trap noted by Matthew Yglesias. Underestimation of quality changes and of surplus has effects on the gap between measured GDP and societal welfare. But it has equal effects on the gap between estimated potential GDP and currently-attainable full-employment societal welfare. To first order, as best as I can see, it has no implications for any macroeconomic policy or macroeconomic performance debates.

Gavyn Davies: Technology, Inflation, and the Federal Reserve: “Martin Feldstein argued that both the productivity growth rate and the level of real GDP are actually much higher…

…than shown in the official statistics, because the inflation rate is really much lower than the consumer price index figures are reporting… official statisticians are underestimating the rate at which technological change is improving the quality of what consumers are buying…. This argument is also made by Ken Rogoff, who thinks that future economic historians, perhaps using more sophisticated techniques, might view the current era as one of much more rapid growth in middle-class consumption than is currently believed…. If the genuine inflation rate, properly measured, is lower than the reported rate, monetary policy should stay easier for longer…. Fed chairwoman Janet Yellen mentioned productivity in passing at the end of her speech last Friday, but the FOMC needs to debate this much more seriously than it has done so far…