All I can do is shake my head

Jared Pincin sent me this gem from Reuters.  I don’t know the author, but it really doesn’t matter as he is probably just expressing the “conventional wisdom.”

Seeking to make good on past threats in Congress to rein in the Federal Reserve’s powers, a prominent Republican lawmaker said on Thursday he will introduce legislation to focus the U.S. central bank on a single mandate to fight inflation and protect the dollar’s value.

.  .  .

The Fed’s aggressive actions to fight stubbornly high unemployment rates in recent years have been seen by some as straying into fiscal policy – traditionally the responsibility of Congress – and Brady’s bill aims to clear up any confusion by stripping the Fed of its jobs mandate.

That’s right folks, fiscal stimulus creates jobs and monetary stimulus creates inflation.  Milton Friedman must be rolling over in his grave.  I think you’d have to go back to the price controls of the 1970s to find a time when there was such mass stupidity among the chattering class.  Make no mistake about it, stupidity was the cause of the 2008-09 NGDP crash.  Even if the policymakers themselves weren’t stupid, they had to contend with a zeitgeist that was totally clueless about AS/AD.  Even Ben Bernanke can only do so much.


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45 Responses to “All I can do is shake my head”

  1. Gravatar of Cthorm Cthorm
    24. February 2012 at 13:42

    “have been seen by some as straying into fiscal policy”

    ‘some’ = Plosser.

  2. Gravatar of Cthorm Cthorm
    24. February 2012 at 13:54

    Well I just called my Congressman, Ken Calvert. I can only imagine how strange the call seemed to the staffer.

  3. Gravatar of Morgan Warstler Morgan Warstler
    24. February 2012 at 13:54

    I blame you and you alone.

    Milton Friedman did what it took to make conservatives trust him.

    That’s what the man was about.

  4. Gravatar of Cthorm Cthorm
    24. February 2012 at 14:13

    That was hardly what Milton was about.

    Milton was a pure pragmatist. He was all about making incremental movements toward a freer economy. In a vacuum he would not support the EITC…but he proposed the idea. Why? Because he wanted to offer a compromise to liberals in exchange for dismembering traditional welfare. It didn’t work out in retrospect.

    Greenspan was the one interested in getting the trust of conservatives. And Greenspan was obviously heavily influenced by Friedman.

  5. Gravatar of Bill Woolsey Bill Woolsey
    24. February 2012 at 14:14

    For a small open economy on a gold standard, the key to monetary policy is to defend the exchange rate–maintain redeemability.

    Inerestingly, this does provide a restraint on an excessivily expansionary monetary policy. But it really says nothing about how much gold (or other foreign exchange) is accumulated. Perhaps it leads naturally to a perspective of whether “we” as a nation, banking system, or central bank should lend or else hold gold or other foreign exchange.

    Anyway, failure to defend the currency is the key problem, right?

    And that, I think, is the core of the WSJ theory of money.

    All of the things that monetary disequilibrium theorists worry about (or Keynesians or old monetarists) are things that apply to the whole world. For a small open economy with a fixed exchange rate it hardly applies.

  6. Gravatar of Cthorm Cthorm
    24. February 2012 at 14:16

    Wrong thread Bill?

    Unless of course you consider the US a ‘small open economy’ – but then I wonder what constitutes a large economy.

  7. Gravatar of CKE CKE
    24. February 2012 at 14:18

    Suppose that when you adjusted the hot water in your shower, it took six months before the water temperature changed. One could never learn how to turn the faucet, because no one would have the patience to wait that long to see. One would invariably tinker with the faucet in the intervening time. Even if one did not tinker, you still wouldn’t learn, as your hot water heater would likely fail to maintain a constant temperature output in the mean time.

    For similar reasons, it is difficult for the fed to learn how any adhoc policy adjustment works. Intelligent or stipid probably doesn’t matter when learning is so difficult.

  8. Gravatar of Floccina Floccina
    24. February 2012 at 14:30

    Once again I will say, to have a maximally effective central banking system requires that the median voter understand the monetary system. Conversely in a free banking system even the bankers do not need to understand the how the monetary system as a whole works, they just need to be greedy enough that when the value of their currency rises they float more of it.

  9. Gravatar of david david
    24. February 2012 at 14:38

    Conversely in a free banking system even the bankers do not need to understand the how the monetary system as a whole works, they just need to be greedy enough that when the value of their currency rises they float more of it.

    If you could rely on everyone to be maximally and perfectly profit-maximizing all the time, recessions would be a lot smaller.

  10. Gravatar of D R D R
    24. February 2012 at 15:25

    “Make no mistake about it, stupidity was the cause of the 2008-09 NGDP crash”

    Oh? It was stupidity, was it? Stupidity about what, pray tell? Was it stupid to double the monetary base during that time? Would a quadrupling have done the job?

    Obviously, there was a failure, but be specific, man! Name names! Whose call was wrong, and why should that person have known better?

  11. Gravatar of Cthorm Cthorm
    24. February 2012 at 15:46

    @D R

    Doubling the monetary base does not make a damn difference if velocity is cut in half. Paying interest on reserves decreases velocity.

  12. Gravatar of Morgan Warstler Morgan Warstler
    24. February 2012 at 16:06

    Friedman, HATED govt. and made sure everyone knew it.

    It was not acceptable to him, he spoke down to people who liked govt. He made them feel small, and inferior, and waved them off like lesser beings.

    THAT is what Scott should and ought do to find favor for his ideas with conservatives.

    Until he does such, he’s involved like the chicken’s eggs, not like the pigs bacon.

    When the first thing people think about Scott is “ANTI-GVT,” Scott won’t have to write posts like this.

  13. Gravatar of D R D R
    24. February 2012 at 16:09

    Cthorm,

    So it is your position that the decision to pay interest on reserves caused a recession which had already lost nearly two million jobs and was dated ten months before the decision was announced?

    And how much velocity could it possibly drain? What? Banks had nothing better to do with the money than pick up a quarter of one percent interest? Banks would lend but for those 25 basis points?

    No, I don’t think so.

  14. Gravatar of Becky Hargrove Becky Hargrove
    24. February 2012 at 16:52

    Let’s just hope that vote does not go the wrong way. Once again I am angry at a K-12 educational system that makes a travesty of youth by not teaching the things that matter most about our lives, and turns our political parties into nonsense.

  15. Gravatar of dwb dwb
    24. February 2012 at 16:55

    this would be one of those times I am glad for the 60-vote requirement to prevent a filibuster in the senate, the requirement that a bill be passed by both chambers (and with a veto-proof majority in this case since its likely to get vetoed). If we could only get some of those FOMC members to be elected too. A rules-based policy is nearly as good.

  16. Gravatar of dtoh dtoh
    24. February 2012 at 17:39

    Per the article “Many Republicans have derided the so-called quantitative easing [cnbc explains] program as “printing money” and say it has devalued the dollar, driving up commodity prices and setting the stage for a nasty bout of future inflation.”

    Scott this is one of the reason that I have been saying the primary tool of the Fed should be the ability to set maximum and minimum asset/equity ratios by asset class.

    If they did this it would entirely change the tone of the debate from “The Fed is printing money” to the “The Fed is forcing the greedy bankers to stop hoarding cash.”

    It would be a lot easier to sell (and also a lot more effective.)

  17. Gravatar of Bonnie Bonnie
    24. February 2012 at 18:12

    This is crazy. They appear to be suffering from fighting the fight of the 70′s.

    Congress should either revoke authority for IOR or start eliminating seats on the FOMC until we get monetary policy that is appropriate for the situation. For the first time ever, I actually agree with Barney Frank on something, when he came out in favor of removing regional presidents from the FOMC and replacing them with folks confirmed by the Senate. It might not be the best solution for the long run, but it might help get us out of the current mess.

  18. Gravatar of W. Peden W. Peden
    24. February 2012 at 19:37

    The Fed always succeeds: they beat the inflation of the 1910s in the 1930s, the deflation of the 1930s in the 1970s and now they’re going to beat the inflation of the 1970s in the 2010s. Presumably, in the 2030s/2050s they’ll beat the low inflation of the 2010s with double-digit inflation, though it’s probably too early to start buying inflation-indexed bonds.

  19. Gravatar of Benjamin Cole Benjamin Cole
    24. February 2012 at 20:07

    Scott is too polite to mention the buffoon in question. Not me.

    “Representative Kevin Brady, vice chairman of the Joint Economic Committee, said in a statement his “Sound Dollar Act” aims to “maintain the purchasing power of the dollar in order to foster long-term economic growth and stability.” He plans to formally introduce it in early March.”

    Brady (R-TX) probably means well, but he is an active menace to American security and prosperity. Japan here we come.

    It is sad when even “pro-business” right-wingers get it wrong.

    The left-wing wants fiscal stimulus, and the right-wing wants to suffocate the economy through tight-money.

    They tried that in Japan. For 20 years. It is still not working.

  20. Gravatar of DW DW
    24. February 2012 at 20:17

    The problem isn’t a stupid chattering class. The problem is that nobody understands inflation.

  21. Gravatar of Benjamin Cole Benjamin Cole
    24. February 2012 at 21:40

    Each night, on bended knee, I genuflect to the Satanic Inflation Deities, and I earnestly pray the Central Anal Bankers Associations’ worst nightmares come true, and that we have (gasp!) even four percent inflation. For material gain, I would even lust for five percent inflation.

    These evil desires of mine are spurred by my lust for material profits, for hedonistic good times, for the thrill of lucre and enjoyment money can bring. I admit it: I want boom times! There, I said it! Boom times baby to the moon!

    I know that true nobility is found in causes that do not reward those who only love money.

    The ascetic lifestyle of the prim and dainty anti-inflationist—the material sacrifices necessary to maintain stable prices—is truly noble. Those who worship gold and sound currency find their rewards in price stability, even deflation, and material and sensual sacrifice.

    Not in Fat City, where I long to be.

    I only want to make a lot of money and have a lot of sex. I have sold my soul to money and inflation.

    Even so, I am not sated. We never see this inflation Anal Moneymen keep promising. Where is the inflation predicted by Theo-Monetarists and Econo-Shamans?

    Indeed, we have seen record low inflation for years, and falling unit labor costs. Inflation has a long, long way to come back, if it going to liven our days. I am deeply saddened.

    We are suffering, but evidently not for any reason. Pain but no gain. The Theo-Monetarists and Econo-Shamans must approve.

    There must be a reason for flat interest rates, year after year. Pending hyper-inflation? That doesn’t seem to add up. No one buys long-term bonds for zilcho-yield if they expect any inflation.

    Could it be we are becoming a Japan?

    And then I will never know (nor most of my countryman) the thrill again of Fat City, of huge profits, of greasy meals and women of dubious sentiments, and trips to Las Vegas to blow the wad?

    These are dark times indeed.

    Come one Ben Bernanke. Put on a leather jacket, and some sunglasses. Toot some coke, have a few drinks. Go down tot he printing plants, and put the lever on high, and put the music on “max.” Set the damn house on fire, and print money until the plates melt.

    Bring us Boom Times, Bernanke. We are Americans. We will work 24/7 for a pile of money to the ceiling, then blow it on some trifles, oil daubs, baubles and big houses. That’s what we want.

    Let’s start the ball rolling again.

  22. Gravatar of Bill Bradbrooke Bill Bradbrooke
    24. February 2012 at 21:41

    Who’s spounting the conventional wisdom? James Bullard on CNBC TV, Friday, February 24th

  23. Gravatar of Dustin Dustin
    25. February 2012 at 00:23

    The left-wing wants fiscal stimulus, and the right-wing wants to suffocate the economy through tight-money.

    They tried that in Japan. For 20 years. It is still not working.

    Amen. Keep preaching that, brother.

    Some of us are listening.

  24. Gravatar of Major_Freedom Major_Freedom
    25. February 2012 at 01:34

    Stripping the Fed of its dual mandate to target only NGDP is just as head shakingly stupid as stripping the Fed of its dual mandate to target only inflation.

    Anyone who wants the Fed to target any “movement” based statistic is doomed to fail.

    Both inflation targeting and NGDP targeting ignore the economic significance of, and information signals sent by, increasing and decreasing cash balances, as well as how it relates to relative price changes, which is integral to coordinating investment and consumption.

    Money provides an indispensable economic function as a store of value, as well as acting an intermediary between investment spending relative to consumption spending.

    If consumers reduce their consumption spending, and accumulate cash, then consumers are signalling that they prefer that there are fewer consumer goods produced and sold in the present, and, because they are holding more cash rather than burning it, they are desiring to increase consumption in the future compared to what it otherwise would have been.

    This should be anticipated by entrepreneurs, and if it isn’t, then profit and loss will force the issue, but the net result will be a change in relative profitability between consumption and capital goods. If total spending is reduced by way of only a reduction in consumption spending, and investment spending goes unchanged, then capital goods profitability will increase relative to consumer goods profitability. This will bring about a relative reduction in consumer goods investment, and a relative increase in capital goods investment. This will reduce present production of consumer goods and increase future production of consumer goods. This is exactly what the consumers want by virtue of their decreased consumption spending and increased cash holdings!

    But because NGDP attacks all cash holdings, regardless of consumer preferences, what will end up happening is that the relative profitability changes will be short circuited. What should be a relative increase in capital goods profitability, will instead become less of a relative increase, or no increase at all, or even worse, a decrease, depending on where the inflation ends up going.

    Thus not only are individual consumers stripped of their desire to increase their purchasing power in general, they are also stripped of their desire to reduce their present consumption and increase their future consumption, to the extent that they desire, and would have in an unhampered market.

    Anyone who supports a single Fed mandate of targeting a monetary statistic that is based solely on money expenditures, who calls another wrong for targeting a different monetary statistic that is based solely on money expenditures, is a textbook example of a certain kitchen item calling another kitchen item a certain identical shade.

  25. Gravatar of Becky Hargrove Becky Hargrove
    25. February 2012 at 07:08

    Not long ago, Bryan Caplan had a post about scapegoats and I could laugh, because my own scapegoat episode was already in the reat view mirror. Right now the Fed is being scapegoated for hurts they did not cause, and it is not funny.

  26. Gravatar of Becky Hargrove Becky Hargrove
    25. February 2012 at 07:10

    Mispell – rear view mirror.

  27. Gravatar of OGT OGT
    25. February 2012 at 07:16

    I think this gets to my points about your ‘monetary reaction’ function. Any Fed reaction to congressional action has to be understood within the instutional power dynamics, ie the Fed exists and functrions at pleasure of the elected branches. If there was a political consensus for more AD, the Fed would be doing more.

    BTW, what did you think of Karl Smith’s recent post on Oil and Monetary policy.

    http://modeledbehavior.com/2012/02/22/the-fed-cant-print-oil-but-it-can-print-money/

  28. Gravatar of ssumner ssumner
    25. February 2012 at 08:17

    Cthrom, I think Plosser is making a different point, that fiscal policy should address bailouts, not monetary policy. that’s defensible (although I disagree with his views on inflation). But the article I cited said fiscal stimulus is the traditional tool for fighting high unemployment. That’s not defensible under a fiat money regime.

    Bill, Good point.

    CKE, Precisely why the market should set the money supply, not the Fed.

    Floccina, I’m afraid that moving to free banking doesn’t solve the underlying problem. You need a stable medium of account under free banking or Fed policy. Free banking cannot provide a stable medium of account.

    DR, I’ve named names many times. I’ve blamed the 99% of macroeconomists in America who weren’t complaining that money was way too tight in the fall of 2008. They are to blame. The Fed almost always does what the consensus of macroeconomists in America wants them to do. That consensus was ignoring the most basic principles of textbook macro in late 2008. For instance the texts we use to teach our students say that low interest rates don’t mean easy money, and yet almost all economists in late 2008 were saying policy was expansionary precisely because interest rates were low.

    dtoh, But you’d still need a NGDP targeting regime, even with your program. And if we had NGDP level targeting, we wouldn’t need your policy.

    Bonnie, It’s interesting that the GOP wants to add all the regional presidents, and Frank wants to eliminate them all.

    W. Peden, Well said!!

    DW, That too.

    Bill, Is there a link for the Bullard interview?

    Major freedom, You said;

    “Stripping the Fed of its dual mandate to target only NGDP is just as head shakingly stupid as stripping the Fed of its dual mandate to target only inflation.”

    You still don’t get it, the point of NGDP targeting is to fulfill the dual mandate, not strip it away.

    The rest of your post is all wrong.

    OGT, You said;

    “If there was a political consensus for more AD, the Fed would be doing more.”

    There most definitely is a political consensus for more AD, but only if done via fiscal stimulus like the recent bi-partisan payroll tax cut.

    That’s my point.

    I seem to recall Smith did a pretty good post, but defining the problem in terms of NGDP rather than inflation would clarify things.

  29. Gravatar of Steve Steve
    25. February 2012 at 08:39

    Bullard was the guest host on CNBC for a full hour. This was probably the best segment. If you search for Bullard there are at least four other segments.

    LINK TO BULLARD INTERVIEW
    http://video.cnbc.com/gallery/?video=3000075124

  30. Gravatar of Major_Freedom Major_Freedom
    25. February 2012 at 11:14

    ssumner:

    “Stripping the Fed of its dual mandate to target only NGDP is just as head shakingly stupid as stripping the Fed of its dual mandate to target only inflation.”

    You still don’t get it, the point of NGDP targeting is to fulfill the dual mandate, not strip it away.

    False. Targeting NGDP does not target prices, or employment. If employment is 0% or 100%, or anything in between, if inflation is 0% or 100%, or anything in between, targeting NGDP won’t be a targeting of prices or employment.

    You just have a misguided faith that targeting an “effective” NGDP will maximize employment and stabilize prices. But technically speaking, it does neither. It is NGDP for the sake of NGDP.

    The rest of your post is all wrong.

    No, it’s all right. Your post is all wrong.

  31. Gravatar of RebelEconomist RebelEconomist
    26. February 2012 at 03:43

    An inflation-targeting mandate for the Fed would be ideal. The one non-controversial role of a central bank is to supply the right amount of money to facilitate transactions, but there are other, more precise, less transient methods of promoting real activity than monetary policy, such as taxation-shifting, so it is better to get the central bank to focus on its essential task. Moreover, in the real world, where real growth is never as much as it “should” be, composite targets are liable to become corrupted. Simplicity helps accountability.

  32. Gravatar of ssumner ssumner
    26. February 2012 at 07:29

    Steve, Thanks. That was very depressing.

    Major Freedom. The mandate says nothing about “targeting” inflation or unemployment, so your comments make no sense.

    One goal of NGDP targeting could be less instability in P and Y.

    Rebeleconomist, You said;

    “An inflation-targeting mandate for the Fed would be ideal. The one non-controversial role of a central bank is to supply the right amount of money to facilitate transactions,”

    If you want to “facilitate transactions” then obviously it should be NGDP, not inflation.

    Regarding simplicity, there is only one NGDP whereas there are many different inflation rates–so NGDP is far simpler.

  33. Gravatar of Major_Freedom Major_Freedom
    26. February 2012 at 09:41

    Major Freedom. The mandate says nothing about “targeting” inflation or unemployment, so your comments make no sense.

    OK “targeting prices” and “targeting employment” is the wrong use of the word “target”, but I hope you get the point. I meant they take employment and price inflation as the goals, as the variables which they are attempting to control by way of their monetary inflation. I sloppily said target because it’s what they have their sights set upon when they create money and change interest rates. Bad word choice.

    The principle of what I said however remains. Targeting NGDP is not, contrary to what you say, also a successful dual mandate policy that “maximizes employment” and “stabilizes prices”, no more more than the Fed’s current policy a policy that “maximizes employment” and “stabilizes prices” a successful dual mandate policy.

    Targeting aggregate spending means employment can be anything, it means prices can be anything, it means cash holdings can be anything, it means that ANY variable – that can change along with another variable that changes inversely proportional to the first variable, such that the resulting “nominal spending” variable is unaffected – can be anything.

    For example, if the Fed ends up bringing interest rates down below market rates, as they inflate into the banking system trying to boost nominal aggregate spending because individual market actors are “hoarding” cash, then all the specific individual plans for cash/consumption/investment allocations, would still be replaced by arbitrary credit expansion financed consumption/investment “spending” by those who happen to receive the new money first before others, which will set about a revolution in the structure of production and make a correction (recession) inevitable.

    Or, what if the Fed believed that full employment required targeting an above 5% level/rate NGDP, but they couldn’t inflate more because their mandate is “5% level/rate NGDP” and no more? Wouldn’t the next generation of economic bloggers who have “the new new new best idea ever” start attacking and ridiculing and criticizing the “NGDP targeting” economists, that the Fed’s policy is “too tight”, that the Fed “fell asleep at the wheel” as unemployment and the economy “crumbled under their watch”, that the Fed is targeting/influencing “the wrong” variable(s)? That the Fed should instead target a new flavor of the month?

    You will end up being viewed as outdated and wrong just like you view current economists who favor the current policy as outdated and wrong.

    There will always be problems created as long as ANYONE in the economy is in charge of a communist central bank, trying to centrally plan the economy via inflation to bring about circumstances that are in opposition to what would result from pure unadulterated unhampered economic calculation based on private property rights and individual economic planning.

    I don’t think historians are going to agree with your self-image of “I’m just trying to make things better given we have central banks.” I mean, that’s not how historians view slavery apologists who although they stated they were against the practise, they nevertheless advised the slave masters how to “optimize” it given that it existed.

  34. Gravatar of NGDP level targeting and the Fed’s mandate « The Market Monetarist NGDP level targeting and the Fed’s mandate « The Market Monetarist
    26. February 2012 at 12:10

    [...] Reserve’s mandate – to ensure price stability as well as to maximize employment. Unlike Scott Sumner I don’t think the Fed’s mandate is meaningful. The Fed should not try to maximize [...]

  35. Gravatar of Major_Freedom Major_Freedom
    27. February 2012 at 03:49

    http://marketmonetarist.com/2012/02/26/ngdp-level-targeting-and-the-feds-mandate/

    “NGDP is everything that is produced times the current prices people pay for it. It is similar to “real” GDP, the measure of economic growth reported in the news, except NGDP isn’t adjusted for inflation. One appeal is that growth in NGDP is the sum of exactly two things: inflation and the growth rate of real GDP (the amount of actual goods and services produced). Thus, it captures both sides of the Fed’s mandate in a single variable.”

    Is it me or is every single explanation of NGDP from market monetarists this illogical?

    There are in this one paragraph alone two major problems.

    1. The most glaring is the notion that NGDP can be broken down into two sums, inflation and RGDP, where inflation is trivial and RGDP is the growth in real goods and services. The error here is that one cannot add together variables of different dimensions. Inflation is an increase in prices, or an increase in the money supply depending on how one defines it. This is monetary. It is in dollars. RGDP purports to measure real goods and services. But since real goods and services are things like computers, cars, and hamburgers, one cannot add this supply of real goods to a supply of money, or prices.

    There are two great variables in the economy, money and real goods. They are independent. They can move in opposite directions. If “real GDP” rises, and the supply of money and volume of spending remains unchanged, then while more will be produced, prices (and costs!) would be lower. NGDP remains unchanged, but real goods increased. If real goods increased by 5%, but NGDP remains unchanged, then it is tempting to break this down into “RGDP = 5%” and “inflation = -5%”. But this is silly, for two reasons:

    One, it presumes that one can compare current prices to last year’s prices to get an inflation rate, despite the fact that new goods that never existed before can enter the market in the meantime and thus have no past comparison. It would be like selling 100 t-shirts last year for $1 each, then selling 100 different t-shirts for $0.50 and 10 computers for $50 this year. What’s the rate of inflation?

    Two, RGDP is not actually a measure of real production at all. It just measures total prices for all goods, which is itself a reflection of aggregate spending which is determined primarily by the supply of money and volume of spending.

    2. The second major problem is that just because NGDP can be (misleadingly, fallaciously) conceptually broken down into RGDP and inflation, which is like saying we can break down $100 NGDP into $50 RGDP and $50 inflation, it doesn’t mean that NGDP targeting is a dual mandate policy. Mathematically “capturing” two variables does not mean that those variables are being specifically addressed or treated as the goals of interest. This year’s RGDP is just last year’s NGDP. This year’s NGDP is just last year’s NGDP at the time, plus the addition to the money supply and volume of spending in the meantime up to the present.

    If the Fed inflates by 5%, then this year’s NGDP will tend to be last year’s NGDP at the time plus 5% new money and spending in the meantime. Printing this money doesn’t mean employment or real production are boosted.

  36. Gravatar of Benny Lava Benny Lava
    27. February 2012 at 09:51

    Allow me to play devil’s advocate. This congressman knows full well the results of a single mandate. He knows about NGPD targeting and the lessons of Japan. What he wants is for a Republican to win in November. Kneecapping the economy now and then put in a dual mandate in January when the talks will again be on jobs and full employment.

  37. Gravatar of Joe C Joe C
    27. February 2012 at 11:56

    When I read this I could not believe they let someone write about economic issues that does not know the difference between fiscal and monetary policy. But, unfortunately these misconceptions still exist. When I worked in government I knew many people who viewed tax increases as fiscal policy and tax decreases as right-wing hogwash; not knowing that both tax increases and decreases are fiscal policy.

    The economics profession is fighting an uphill battle when there is so much misinformation about economics…even among those who are supposed to be the experts.

  38. Gravatar of ssumner ssumner
    27. February 2012 at 19:02

    Major Freeman, You said;

    “I don’t think historians are going to agree with your self-image of “I’m just trying to make things better given we have central banks.” I mean, that’s not how historians view slavery apologists who although they stated they were against the practise, they nevertheless advised the slave masters how to “optimize” it given that it existed.”

    You really think that’s a good analogy?

    BTW, The Fed doesn’t reduce interest rates below market rates.

    You said:

    “But since real goods and services are things like computers, cars, and hamburgers, one cannot add this supply of real goods to a supply of money, or prices.”

    As far as I know no one has ever suggested adding P and Y. They are multiplied. They suggest adding the rates of change. Since both rates of change are percentages, they most certainly can be added.

    I have many posts arguing that we should pay no attention to inflation, so you’ll get no argument from me there.

    But as long as people keep talking about inflation, I’ll keep advising slave owners how best to whip their . . . I mean I’ll keep advising the Fed how to minimize the damage it does to the economy.

    Benny, That’s very possible.

    Joe, Yup, there’s no shortage of stupidity.

  39. Gravatar of Major_Freedom Major_Freedom
    28. February 2012 at 10:47

    ssumner:

    “I don’t think historians are going to agree with your self-image of “I’m just trying to make things better given we have central banks.” I mean, that’s not how historians view slavery apologists who although they stated they were against the practise, they nevertheless advised the slave masters how to “optimize” it given that it existed.”

    You really think that’s a good analogy?

    Considering how much damage and destruction it unleashes against innocent people, tens of millions of whom lost their jobs and their homes, I’d say it’s an apt analogy.

    BTW, The Fed doesn’t reduce interest rates below market rates.

    Yes they do. By acting, via inflating bank reserves, the Fed brings about not only a reduction in the overnight rate, but also reductions in interest rates of all maturities that would have otherwise been higher. Once this money is spent into the economy, raising aggregate profits, then interest rates will rise. In order to combat this, the Fed has to again inflate bank reserves to bring interest rates back down, lest they lose control over their overnight target.

    It is not true to say that because the Fed doesn’t directly set long term interest rates in the market, that somehow they are not responsible for those lower interest rates. It would be like saying I am not responsible for your spending if I printed and gave you $10 billion. Yes, you actually make the choice to spend, but I am responsible for bringing it about.

    The Fed also doesn’t directly “control” the overnight lending rate, but it is still the case that they are responsible for it being what it is, since they inflate reserves at whatever the rate can influence primary dealers and the major banks to bring down the overnight rate themselves based on how much money they have gotten from the Fed.

    You said:

    “But since real goods and services are things like computers, cars, and hamburgers, one cannot add this supply of real goods to a supply of money, or prices.”

    As far as I know no one has ever suggested adding P and Y. They are multiplied. They suggest adding the rates of change. Since both rates of change are percentages, they most certainly can be added.

    No, that’s the problem. The rate of change in Y is ostensibly supposed to be a measure of real output, of cars, televisions, computers, etc. But the way Y is actually collected is by adding up all the money expenditures for cars, televisions, computers, etc.

    This is not an adding up of real production. It is adding up how much money is spent, and how much money is spent is determined primarily by the quantity of money.

    The claim I am addressing is the one that says NGDP can be “broken down” into “inflation PLUS RGDP.”

    Yes, if you fallaciously believe that RGDP totals up anything other than money expenditures, then of course by using the fallacious monetary expenditures as a proxy for real production, you can then take one single number (total expenditures at time = 0) and another single number (total expenditures at time = 1), both of which are primarily determined by the quantity of money by the way, then calculate the rate of change between the two, and after that add this to the rate of change in the rate of change in price inflation, which is also determined primarily by the quantity of money by the way, then it looks like you are successfully “breaking down” NGDP into “inflation PLUS RGDP” when in reality you are just breaking NGDP down into 1. a prior quantity of spending in the past, called RGDP, and the amount of new money spending and thus higher prices that has arisen since then, called inflation, to get today’s NGDP number.

    This is what is done in practise, and yes, one can add these numbers because they are both of the same units, namely dollars. Thus, the “R” in “RGDP” is not “real” at all. It is also nominal.

    NGDP = inflation + RGDP

    should just read

    NGDP(1) = NGDP(0) + inflation of quantity of money and volume of spending from time 0 to time 1.

    or

    $14 trillion NGDP in 2012 = $12 trillion NGDP in 2011 + $2 trillion inflation of quantity of money and volume of spending from 2011 to 2012.

    I have many posts arguing that we should pay no attention to inflation, so you’ll get no argument from me there.

    But as long as people keep talking about inflation, I’ll keep advising slave owners how best to whip their . . . I mean I’ll keep advising the Fed how to minimize the damage it does to the economy.

    But you’re not minimizing the damage. The Fed maintained a stable NGDP growth rate 2001-2007, and yet they blew up a housing bubble with below market interest rates and massive credit expansion, much of which went abroad and thus kept a lid on prices domestically. Even if the Fed took your advice of targeting NGDP, the housing bubble still would have taken place.

  40. Gravatar of D R D R
    28. February 2012 at 11:28

    Major, you are technically correct.

    If Y and Y’ are RGDP at times 0 and 1 and P and P’ are prices at times 0 and 1, then for relatively small changes in Y and P,

    (P’-P)/P + (Y’-Y)/Y = (P’Y'-PY)/PY

    that is, the percent change in NGDP is (approximately, for small changes) equal to the percent change in RGDP, plus inflation.

    Scott was just being unclear. He was just saying that if the growth rates are sufficiently small, one may add the growth rates– not that you may add the levels.

  41. Gravatar of D R D R
    28. February 2012 at 11:54

    “DR, I’ve named names many times. I’ve blamed the 99% of macroeconomists in America who weren’t complaining that money was way too tight in the fall of 2008. They are to blame.”

    Fine. How did you know “that money was way too tight in the fall of 2008″ as opposed to, say, May 2008?

  42. Gravatar of Major_Freedom Major_Freedom
    29. February 2012 at 10:56

    D R:

    If Y and Y’ are RGDP at times 0 and 1 and P and P’ are prices at times 0 and 1, then for relatively small changes in Y and P,

    (P’-P)/P + (Y’-Y)/Y = (P’Y’-PY)/PY

    that is, the percent change in NGDP is (approximately, for small changes) equal to the percent change in RGDP, plus inflation.

    But the percent change in RGDP IS already measuring inflation. It is measuring the increase in nominal spending for goods. If nominal spending for goods increases, the only thing that can bring this about is more money and spending in existence (inflation).

    Your “Y” is also just a nominal spending measure.

    All you’re doing is adding one prior absolute nominal measure to a change in nominal spending since then, to interpret the absolute current nominal measure.

    There is nothing outside of monetary inflation in “NGDP = RGDP + inflation”. It’s ALL inflation based. There is nothing “real” about it.

    Scott was just being unclear. He was just saying that if the growth rates are sufficiently small, one may add the growth rates– not that you may add the levels.

    The flaw is presuming that an increase in real goods production and selling, MUST accompany a growth in nominal spending for those goods. For example, the thinking goes if one computer sold for $100 in the past, then if we notice that 2 computers are sold today, then we must attach $200 “value” to it, as if more production of goods is somehow equivalent to more money and spending. In reality, an increase in production tends to decrease prices that are sold for a particular demand which is itself determined by the aggregate money supply. So a doubling of computers sold, given an assumption of unchanged demand (to isolate the effect of real supply on prices), then today’s computer prices would be $50 for the two.

    By understanding that an increased production of real goods (which is supposedly captured by RGDP) will tend to make prices fall by the extent of the increase in production (assuming constant money and spending), then adding an inflation component to things will make it clear that RGDP is just a measure for past quantity of money and volume of spending. It doesn’t measure real output at all. The “R” is a compete misnomer.

  43. Gravatar of Major_Freedom Major_Freedom
    29. February 2012 at 11:00

    ssumner:

    “DR, I’ve named names many times. I’ve blamed the 99% of macroeconomists in America who weren’t complaining that money was way too tight in the fall of 2008. They are to blame.”

    They AND you are to blame for the crash of 2008 when you weren’t complaining that monetary policy was too loose 2001-2007.

    They and you are also to blame for the soaring prices that are coming.

    They and you are also to blame for the tens of millions of people who lost their jobs and their homes.

  44. Gravatar of ssumner ssumner
    29. February 2012 at 19:30

    Major, I simply no longer know what to say to you—other then you are wrong about everything. I’m in awe.

    DR, You asked:

    “Fine. How did you know “that money was way too tight in the fall of 2008″ as opposed to, say, May 2008?”

    Because Ben Bernanke taught me that the definition of tight money, indeed the only valid definition of tight money, is low NGDP growth. So Ben believes it became a little bit tight in May 2008, and super tight in the fall of 2008. And if Bernanke believes they were running a super tight monetary policy, who am I to disagree?

  45. Gravatar of Major_Freedom Major_Freedom
    1. March 2012 at 22:04

    ssumner:

    Major, I simply no longer know what to say to you—other then you are wrong about everything. I’m in awe.

    You have a funny way of saying you can’t refute what I say.

    YOU are wrong about virtually everything. I’m not in awe because I know the Fed has almost entirely bought off the economics profession. You are just a victim/product of the system that’s all. You’re like the children of North Korea crying uncontrollably at the death of Kim Jong Il, because that’s what they were “educated” to do.

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