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People in the economics blogosphere (e.g., Krugman, Sumner) all talk about a lack of aggregate demand since the 2007-9 recession. Yet, they never seem to try to test that claim using the same graphics they were taught in Econ 101, which can be easily generated in Excel using data from FRED.

X-axis is Real GDP; Y-axis is Price Level (the GDP deflator). Blue line is historical data points.

Now, for the big reveal:


The red Aggregate Demand curve is for Q2 2009 and is based on Scott Sumner’s assumption that AD=NGDP. The blue line is still historical data points. As you can see, using the Sumner NGDP/Aggregate Demand curve, most (62.7%) of the change in Real GDP during the 2007-9 recession was caused by supply-side phenomena.

Now, let’s look at the U.S. recession of 1990. The recession was caused by a credit contraction, not the oil price shock of the Gulf War-oil shocks don’t cause recessions these days; credit contractions do. And there was a credit contraction in America by April of 1990.


The red AD/NGDP curve is for Q1 of 1991. The blue line is historical data points. As anyone can see, there was hardly any AD/NGDP decline at all in 1990-91- certainly not enough to spark a significant decline in Real GDP. The decline in Real GDP was pretty much entirely supply-side. Indeed, AD/NGDP was slightly higher at the bottom of the recession than when the recession began.

So Scott Sumner is right: NGDP targeting regimes would create stagflation in all recessions because recessions in modern economies are mostly supply-side phenomena. This might seem counter-intuitive to most New Keynesians, who think of the Great Depression of the 1930s as the ur-example of recessions, but when you’re an Austrian, thanks to ABCT, you’d think most recessions would be inflationary and would be very surprised at the highly unusual Great Depression of the 1930s, which was clearly a demand-side phenomenon, as the American price level was higher in March 1921 than in June 1932 (both months had the same level of real output), thus indicating a movement of the Aggregate Supply curve to the right between these months.