Macroeconomic Identity Politics

I’ve already faulted Fama for misuse of the macroeconomic identity GDP=C+I+G+NX.  Now TheMoneyIllusion takes the War On Misleading Tautology to a new level:

When I discuss the effect of monetary stimulus on aggregate demand with
other economists, I notice that they often want an explanation couched
in terms of the major components of GDP.  I find this very frustrating,
as this approach does more to conceal than illuminate.  Suppose you
were policy czar in a liquidity trap (such as right now), and you were
asked to increase nominal GDP by 3-fold (i.e. 200%) in the next five
years.  If you were given a choice of only one tool, which would it
be-monetary or fiscal policy?  Any economist with an ounce of common
sense would take monetary policy.  OK, so how would you explain its
effect in terms of the 4 components of GDP?

How indeed?  The post re-analyzes not only the Great Depression, but also the panic of 1920-1, about which it says:

The sharp fall in the base caused the sharpest 12 month deflation in
modern American history between 1920-21.  And it also caused the
sharpest one year increase in real wages in modern American history
between 1920-21.  And real output plummeted.   What does the C+I+G+NX
approach add to this story?  Nothing.  Of course investment usually
falls more sharply than consumption in a depression, but that would be
true almost regardless of what caused the depression.

I hadn’t heard of TheMoneyIllusion before, but it looks like it’s already got a good stock of quality content.  See for yourself.

The post appeared first on Econlib.