07 - George Selgin on the Productivity Norm, Deflation, and Monetary History

Episode Summary

Executive Summary: George Selgin argues that monetary policy should stabilize nominal spending, not the price level, allowing prices to fall when productivity rises and to rise when productivity falls. He defends this “productivity norm” with historical evidence, links it to NGDP targeting, and claims the Fed’s pre-2008 focus on low inflation, sterilization, and interest on reserves kept policy too tight and worsened the Great Recession.

Main Topics: Productivity norm as a monetary rule (Priority: 5/5): Selgin explains that policy should let inflation move opposite productivity growth: faster productivity justifies lower inflation or mild deflation, while adverse supply shocks justify higher inflation. The goal is stable nominal spending, not a fixed price level. Good deflation vs. bad deflation (Priority: 5/5): The discussion distinguishes deflation caused by collapsing demand from deflation caused by rising productivity. Selgin argues economists overgeneralize from Depression-era bad deflation and wrongly fear all price declines. Historical evidence from the postbellum era and gold standard (Priority: 4/5): Selgin cites late-19th-century U.S. and gold-standard experience as evidence that sustained 1%–2% annual deflation can coexist with rapid growth. He argues financial crises were due more to U.S.-specific banking flaws than to deflation itself. Policy mechanics: NGDP targeting and forecasting (Priority: 5/5): Selgin says a productivity norm simplifies central banking by removing the need to forecast productivity changes. Under inflation targeting, central banks must predict both demand and productivity to keep prices stable; under NGDP targeting, they focus on demand only. Housing boom and early-2000s productivity surge (Priority: 5/5): He argues the Fed treated rapid productivity growth after 2001 as permission for easier money to keep inflation near target, helping fuel excessive credit creation and the housing boom. 2008 crisis, sterilization, and interest on reserves (Priority: 5/5): Selgin criticizes the Fed’s sterilized lending and later interest-on-reserves policy for preventing emergency lending from easing monetary conditions. He says these actions helped keep nominal GDP collapsing during the crisis. Distributional and technological implications (Priority: 3/5): The conversation extends the productivity norm to a future of rapid automation, suggesting that falling prices would help fixed-income and wage-dependent households share in productivity gains without direct redistribution.

Key Arguments: A productivity norm is really a rule for price-level behavior: prices should fall when economy-wide productivity rises and rise when productivity falls. Economists fear deflation because they associate it with the 1930s, but that was demand-driven “bad deflation,” not productivity-driven “good deflation.” Historical evidence suggests good deflation has been more common than bad deflation and can coexist with strong growth, as in the late 19th century. The postbellum U.S. deflation was not equivalent to depression; crises then were tied to the U.S. banking system, not to falling prices themselves. Under inflation targeting, central banks must forecast productivity changes to offset them; under a productivity norm, they can ignore productivity forecasting and focus on nominal spending. A stable NGDP path is a better macro anchor than a stable price level because it avoids monetary disturbances to real activity while allowing relative price signals to adjust. The Fed in the early 2000s saw productivity growth as room to ease policy, which likely made monetary policy too expansionary and contributed to credit excesses. In 2008, sterilizing emergency lending and paying interest on reserves kept liquidity from spreading through the system and maintained an overly tight stance when nominal GDP was collapsing. Interest on reserves mattered not because 25 basis points directly changed lending incentives much, but because it helped suppress the money multiplier and therefore nominal spending growth. A productivity norm could be especially beneficial in an automation-heavy future because gains would show up as lower prices rather than being captured only through nominal wage growth.

Data Points: Annual deflation during postbellum period: 1% to 2% - Selgin describes late-19th-century U.S. and other gold-standard countries as experiencing secular deflation alongside growth. Postbellum period discussed: 1870s to 1890s - The period of U.S. secular deflation before large gold discoveries reversed the trend. Gold standard inflation/deflation trend reversal: Late 1890s - Gold discoveries in the Klondike, South Africa, and elsewhere ended the deflationary trend. Fed inflation target referenced: 2% - Used as the conventional stable inflation target that Selgin contrasts with a productivity norm. Interest on reserves rate: 25 basis points - Selgin discusses the Fed’s initial interest-on-reserves policy and its role in suppressing the money multiplier. Interest on reserves change sensitivity: A few basis points - Selgin argues even small changes in reserve remuneration can alter relative returns and the multiplier. Housing boom productivity surge: Rapid growth after 2001 - Selgin says total factor productivity grew rapidly after the 2001 dot-com crash, lowering inflation pressure and enabling easier policy. QE balance sheet expansion: Trillions of dollars - Selgin notes the political-economy cost of needing very large balance sheet expansion to achieve modest NGDP gains. Turning point in crisis: October to December 2008 - Selgin identifies this window as the most important period for scrutiny regarding the Great Recession.

Pivotal Quotes: "The productivity norm ... refers to a norm for how the price level ought to behave." — George Selgin: He defines the core concept at the start of the interview. "There is such a thing as bad deflation ... However, there is also such a thing as good deflation." — George Selgin: He distinguishes Depression-style demand deflation from productivity-driven price declines. "If you're out of work, you'd rather be out of work with prices falling than with them staying the same." — David Beckworth: He frames the distributional logic of productivity-driven deflation in a future automation scenario.

Implications: The episode argues for simpler, NGDP-focused monetary rules and against reflexive fear of all deflation. For policymakers, it implies less inflation fixation, more tolerance for productivity-led price declines, and greater caution about tightening during productivity booms or crises.