Robert Lucas has been taking some heat around the blogosphere for a lecture he gave at the University of Washington. Scott Sumner responds:
In a recent talk, Robert Lucas argued that a decline in “spending” (i.e. NGDP) produced the severe contractions of 1929-33 and 2008-09. He argued that the slow recoveries were caused by adverse supply-side polices. This is not “classical” or RBC economics, it’s AS/AD. I think he’s right about the the Great Depression and the recent contraction, but only about 30% right about the current recovery (I attribute 70% of the slow recovery to lack of NGDP growth.) Oddly, Paul Krugman and Matt Yglesias seem to think that Lucas denies that demand shocks cause recessions–which is clearly not Lucas’s view.
Let me add to this discussion by noting that recently I met Robert Lucas at a conference. We started talking and, among other things, he expressed his support for nominal GDP targeting because it would have given the Fed more flexibility in responding to the severe spending shocks. That is, it would have allowed the Fed to have been more aggressive with monetary policy while still being systematic. He was also sympathetic to my view that currently there was too much concern about inflation. At a conference dominated by inflation hawks, I found him to be a refreshing breath of fresh air.
PS. We also talked about his former student Scott Sumner and Sumner's proposal for NGDP futures targeting. He was intrigued by it and compared it to Lars Svensson's work on targeting the forecast.