Banana republic watch

The new DeLong and Summers paper looks impressive enough.  I don’t buy their argument for fiscal stimulus, but I am willing to listen respectfully to the hysteresis argument (which seems central to their self-financing stimulus argument.)  Obviously Brad DeLong would not listen respectfully to a conservative arguing tax cuts are self-financing due to long run output effects.  That would be “voodoo economics.”  So the following points should be viewed in this context; I’m not about to trash their paper, which seems excellent.  I’m about to trash the political culture that leads to this sort of paper.  Here’s D&S:

This paper focuses on policy choices in a deeply depressed demand constrained economy in which present output and spending are well below their potential level. We presume for the moment that monetary policy is constrained by the zero lower bound, and that the central bank is unable or unwilling to provide additional stimulus through quantitative easing or other means—an assumption we discuss further in Section V.

Now stop right there.  I want to throw a brick at the screen when I read “unable or unwilling.”  Here’s how things are in the real world.  No fiat money central bank ever tried to inflate and failed.  It will never happen.  It’s really, really easy to debase a fiat currency.  The Fed can engage in 5% NGDP targeting, level targeting, if it so chooses.   You create an NGDP futures market and buy assets until NGDP futures are right on target.  How many assets would you have to buy?  Under NGDP level targeting the monetary base would be less than 1/2 half its current level.  The Fed doesn’t want to do this, or any of the million other methods that would work.  So their entire paper boils down to what is the fiscal multiplier if the Fed chooses to “do the wrong thing.”

So let’s start over.  The Fed is unwilling to provide enough monetary stimulus.  OK, now what is the point of this paper?  Is this to train our future econ PhD students?  Are we trying to teach them the optimal policy regime?  Obviously not.  The optimal regime relies on monetary policy to steer the nominal economy, and fiscal policy to fix other problems.  So we are going to defend the model how?  A blueprint for failed states?  For banana republics?  Fair enough, but ask yourself the following question:  In a failed state, which is more incompetent branch of government; the central bank or the legislature?

Yes, the Fed is bad.  But Congress is downright ugly.  Deep down most economists are technocrats.  They see the central bank as being the best and the brightest, the guys who are above politics, who will “do the right thing.”  And how do economists view our Congress?  The terms ‘stupid’ and ‘incompetent’ don’t even come close to describing the disdain.  So are we supposed to change our textbooks in such a way that the fiscal multiplier is no longer zero under an inflation targeting regime (as the new Keynesians had taught us for several decades?)  And on what basis?  Because the Fed might be so incompetent that we need Congress to rescue the economy?  In what world does that policy regime actually work?  If you have a culture that has its act together, such as Sweden or Australia, the central bank will do the right thing.  If not, then all hope is lost.

[Check the previous post if you have any doubts about which institution is more incompetent.]

And it’s even worse than that.  DeLong and Summers seem to make the common mistake of assuming that as long as the monetary authority is not doing its job, we can assume the fiscal multiplier will be positive, as fiscal stimulus won’t be offset by monetary tightening.  But that’s not right.  It’s not enough for the monetary authority to be incompetent; they must be incompetent in a very special way.  Consider the follow two examples.

1.  After a financial crisis the central bank is completely passive, allowing severe deflation to set in.

2.  After a financial crisis the central bank is slightly thrown off course, and allows inflation to fall 1% below target, but no lower.

In case 1, the fiscal multiplier might well be every bit as high as the textbooks suggest.  But in case 2 the multiplier might well be zero.  If the Fed does just enough QE to keep inflation in the 1% to 2% range, but no more, then any extra fiscal stimulus will be offset by less QE.  I’m not saying that exactly describes the current situation, but surely it better describes recent Fed policy that case 1.

In fairness, in section V DeLong and Summers try to make a more sophisticated argument against the reliance on monetary stimulus:

Perhaps, though, as Mankiw and Weinzerl (2011) suggest, arguments for temporary fiscal expansion are even better arguments for expansionary monetary policy. Here too we are skeptical. While a much richer model would be necessary to fully address the issue, it seems to us that if fiscal policy is self financing it will be de-sirable to use as an instrument once it is recognized that (i) with uncertainty about multipliers diversification among policy instruments is appropriate as suggested by Brainard (1967), (ii) expansionary monetary policies carry with them costs not represented in standard models (including distortions in the composition of investment, impacts on the health of the financial sector, and impacts on the distribution of income), and (iii) the historically-clear tendency of low interest rate environments to give rise to asset market bubbles.

This is a very widely held attitude, but gets things completely backwards.  D&S implicitly make the very common mistake of assuming current Fed policy is expansionary, but not expansionary enough; and then assuming that the monetary policy needed to generate adequate NGDP growth must be much more of the same, and must produce even bigger distortions than this policy.  (Yes, that’s reading between the lines, but I think most readers would share my reading.)

Exactly the opposite is true.  As Milton Friedman pointed out, ultra-low rates are a sign that money has been very tight (driving NGDP far below trend.)  I’d add that a bloated monetary base reflects the same forces.  The base is 23% of GDP in Japan and 18% of GDP in the US because our NGDP growth has been really low in recent years.  It’s only 4% of GDP in Australia because they have a much higher trend NGDP growth rate (roughly 7%) and hence much higher nominal interest rates, and hence a much higher opportunity cost of holding ERs.  If you want an economy free of the “distortions” caused by low rates and the Fed buying up lots of assets–then set a more expansionary monetary policy target.

As far as asset bubbles are concerned, they don’t hurt at all when NGDP growth is maintained (1987), hurt slightly when NGDP growth falls slightly (2000), but they seem to hurt a lot when it isn’t maintained (1929, 2008.)  Actually, the pain of the latter two cases was caused by the falling NGDP, not the bursting bubble, but to the average person it looks like the bubble did it.

If we are going to teach our students how to “do the right thing,” we need to start by eliminating “depression economics” from the curriculum.  Start with the fact that what Krugman calls “depression economics” should actually be called “expected depression economics.”  That’s because fiscal stimulus acts with a lag that is just as long as monetary stimulus.   (Here and here I argued monetary lags are surprisingly short.)  So it doesn’t matter where the economy is right now, but rather where it will be in 12 months.  Monetary policy should always be set in such a way as to produce on-target expected NGDP growth.  That’s the Lars Svensson principle.  If you do that, there’s no room for fiscal stimulus, even if the economy is currently depressed.  With a central bank that targets expected NGDP growth along a 5% growth path, you are in a classical world.  Spending has opportunity costs.  Unemployment compensation discourages work.  Saving boosts investment.  Protectionism is destructive.  And so on.  That’s the policy we should be teaching our grad students.  The optimal monetary policy.  Not a policy mix that only has a prayer of making sense in countries where the central bank is even more stupid and corrupt than the Congress.  As far as I can tell, those countries don’t exist.

PS.  Just to reiterate, this post is a not a comment on the core of D&S.  I’m not qualified to judge their model, but it looks fine to me.  I just don’t buy the assumption that motivates the entire exercise.

PPS.  Marcus Nunes also has a post on the DeLong & Summer paper.


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135 Responses to “Banana republic watch”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2012 at 18:17

    1) Hysteresis is an argument for any form of stimulus, right?

    2) The Fed can’t fail to stimulate if it truly wants to. (Duh!)

    3) The problem is evil people like Plosser and Bullard. Right?

    4) I know you’re a film buff so allow be to bring up one.

    I saw the 1968 “Sweet November” version for the first time the other morning with Anthony Newley and Sandy Dennis and I literally could not controll my bawling when Newley got to the “Novembers forever” scene. What a great film! The remake totally sucks.

    http://www.youtube.com/watch?v=VhagrH9u2wY&feature=player_embedded

  2. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2012 at 18:31

    DeKrugman and Summers would want their kind of Fiscal Stimulus even if God told them it is a net loser, because Summers wants to regain his reputation with the left (since being outed as a policy wimp) and DeKrugman only cares about weakening the relative power of private sectors winners.

    Scott makes the same mistake with Monetary… failing to focus on the goodies that will flow to the haves… the ones who own stuff and vote… the ones who matter.

    What we end up with is a kind of intellectual circle jerk where everyone is idealistic and unrealistic, except Scott COULD draw blood and attention by questioning their motives, questioning them at a far more personal level – and doesn’t.

    Scott where is the Market Monetarist who, like Friedman, is known first as a rabid anti-government zealot who does economics in service to a cause greater than himself?

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2012 at 18:40

    Once again you deflate my bubble Morgan. I own (some) stuff. I also have voted absolutely consistently since I was old enought to in 1982.

  4. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2012 at 18:40

    Mark, anything with Keanu Reeves makes me smile.

    Things being what they are, I like actors who know what they don’t know and stick with what they know.

  5. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2012 at 18:43

    Morgan,
    Obviously Keanu Reeves doesn’t know much.

  6. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2012 at 18:44

    Mark, I’m not kidding there’s a giant gaping unserviced maw for a Market Monetarist who shoots gvt. first and asks questions later.

    You could could service that maw.

  7. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2012 at 18:47

    http://boxofficemojo.com/people/chart/?view=Actor&id=keanureeves.htm&sort=rank&order=ASC&p=.htm

  8. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2012 at 18:48

    I’m not sure I follow you. Are you saying you favor someone like myself? I highly dobt that. Thus I somewhat confused.

  9. Gravatar of Gabe Gabe
    26. March 2012 at 18:49

    Scott is creeping closer Morgan. I am hoping that being ignored and not engaged by the corrput Fed economists and lackeys for a couple more years will turn Sumner.

  10. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2012 at 18:54

    Morgan is the organ. He is the evil siren calling the tune. But it’s up to us to resist the call.

  11. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2012 at 19:07

    Mark,

    If tomorrow we clicked our fingers and every major musical act disappeared from the earth, in no time at all there would be another Eminem, Deadmau5, U2, Fatboy Slim, Britney, Madonna, etc. etc.

    They are each merely the best representation right now of a market demanded archetype, the foot that best fits the glass slipper created by the needful audience.

    Talent will only get you so far, eventually everyone must delivers what is wanted with unfailing consistent regularity people can count on like the sun rising in the morn.

    What’s more you can predict what is needed by seeing an audience that despises each other, and servicing the wedge.

    The giant crowd moved into the circle to enjoy the Beatles UNTIL the bad guys looked at the good guys liking the act, and the Rolling Stones were born.

    The Sex Pistols were great, but the angry smart political youth hated getting beat on by the angry violent fun youth and the The Clash was born.

    Look for an audience uncomfortable with each other being crammed together in the same standing room crowd, and service the wedge.

    Right now, MM does a truly shit job of doing what Uncle Milty did with rock star abandon; someone has to hate GVT the way DeKrugman loves it ON THEIR SLEEVE.

    MM is born from rabid capitalist DNA and it has yet no practitioner of the red meat arts.

  12. Gravatar of Jim Glass Jim Glass
    26. March 2012 at 19:08

    We presume … the central bank is unable or unwilling to provide additional stimulus

    Shame on Larry Summers. He was the #1 econ person in the Administration through the critical time — with the levers of power in his hands — and by all accounts seen so far, his own and others, he did nothing whatsoever to make the Fed willing to provide more stimulus.

    There were two empty seats to fill on the BoG and the Dems had a 60-seat filibuster-proof majority. He could have told Obama, “Fill those seats with appointees who will vote for additional stimulus, students of everything Bernanke said about Japan.” He could have made the Fed willing to provide more stimulus, it was his job to do that — but he did **nothing**. [1]

    To me this is impossible to fathom. He didn’t want those seats filled? How does one avoid thinking he advised Obama to *not* fill those empty seats? Why?? (I don’t want to indulge my cynical imagination here). I don’t see how this is so different from if Truman had left two seats of the Joint Chiefs empty during the Korean war. How is this not dereliction of duty?

    If the Fed was and is unwilling to provide enough stimulus during this recession, the #1 largest identifiable reason is: Larry Summers.

    Now he writes: “We presume the central bank is unwilling to provide additional stimulus”. Please. Shame on Larry Summers.
    ~~~

    FN: [1] Except write a planning memo to Obama saying there was only $300 billion of quality fiscal stimulus available “we do not believe it is feasible to design sensible proposals along these lines that go much beyond this total size”, with necessary amounts beyond that amount “not as effective as stimulus”. Now he is writing that deficits as large as one may desire are self-financing?

    (I’m wondering if DeLong will find some remote-control way to delete this comment. :-) )

  13. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2012 at 19:21

    Morgan,
    The greatest musical act that ever lived as far as I am concerned was the Grateful Dead. They’re no longer with us are they? But that doen’t mean there aren’t other musical acts that follow in their traditions at least loosely.

    The Dead never died, just as Uncle Miltie never really died.

    We are still alive and our tunes will haunt you forever.

  14. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2012 at 19:46

    Mark, 11 Dead Shows under my belt, and more than that in Phish shows.

    Its cool to me that the first pirated and networked act is your all time favorite.

    You always kind of thought they invented the Internet for you, huh?

    You are right that with every new generation, lineage iteration is important to history – almost as important as technical invention.

    But we aren’t to be haunted by our inferiors, and our grandfathers were cavemen.

    Still a discouraging fact – from Instagram (Scott, you’ll have to look it up) to the past 10 years of fashion (dressing in distressed clothing like we do real physical work), this weird idea that authenticity = yesterday sucks.

    Anyhoo, you can do it Mark, a couple hundred nasty libertarian tweets and you can be MM’s new Caligula.

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2012 at 20:03

    Not to brag, but I had over 30 shows Dead under my belt. And more than that in Phish shows.

    The Dead volunteered to be pirated and networked (I know, because I was there).

    The Dead practically invented free information (and Phish only added to it).

    The sad fact is that you are the caveman. Your grandfathers would be dissapointed.

  16. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2012 at 20:25

    50K years had free information.

    an idiot generation or two forgot it. They invented something else. that was normal to you.

    remember new tech > iterative design

    free info is stasis, anything else swims against the stream.

  17. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. March 2012 at 20:27

    Jim Glass: Understanding Larry Summers is simple–he is not as clever as he wants to think he is or as he wants to be seen to be.

    I am reminded of the comment about why Henry Kissinger retained a thick German accent and his brother did not: Henry never listens.

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2012 at 20:31

    I have access to a lot of information. I don’t know if that qualifies as what you desire.

  19. Gravatar of Benjamin Cole Benjamin Cole
    26. March 2012 at 20:45

    More superb blogging rom Scott Sumners.

    You would think Krugman and De Long would say, “Okay, the GOP has taken fiscal off the table. Ergo, we have to go great guns on monetary. What’s up with those Market Monetarist guys? They seem to be thinking of paths forward.”

    You know, if you can’t get exactly the policy you want, you look for a Plan B that might work.

    Maybe that is the way to approach Krugman: Given that the GOP will limit deficits in future years, then what? Go home and die? (Except you have cushy safe job and career). But for the rest of us—go home and die?

    Or try something new? Like Market Monetarism.

    I vote for something new.

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2012 at 20:53

    Plan A, Plan B Plan C.

    I hate the Market Monetarist Term.

    How about I kick you in the balls?

  21. Gravatar of Steve Steve
    26. March 2012 at 21:04

    Scott, I like it when you get fired up.

    DeSummers wrote: “We presume for the moment that monetary policy is constrained by the zero lower bound, and that the central bank is unable or unwilling to provide additional stimulus through quantitative easing or other means”

    I feel like we are currently learning that Bernanke saying “we care about the dual mandate” and singing Kumbaya with the doves is even more powerful than QE.

  22. Gravatar of Andy Harless Andy Harless
    26. March 2012 at 21:14

    Couple of comments.

    1. The DeLong-Summers condition for self-financing government purchases is a weaker generalization of the well-known r < g condition under which the government budget constraint becomes non-binding. But most of the data suggest that this stronger condition has tended to apply historically, and it surely applies today, at least if you allow a 30-year horizon as an acceptable approximation to perpetuity. (In other words, you can lock in r < g for 30 years, and after that, using history as a guide suggests that it will continue to be the case, and anyhow the present value of the stuff that happens after that is pretty small.) So the multiplier is just gravy. Let it be zero. Let it be negative even. Fiscal stimulus is a good idea even if it doesn't work.

    2. Surely, from Japan's experience alone, we could have concluded long ago that the zero lower bound can turn highly intelligent central bankers into blithering idiots, probably even dumber than Congress. And that should be even more clear now that we have the Fed and the ECB as examples. The problem is that the competence of various entities is state-dependent. Unconditionally, the Fed is much smarter than Congress. Conditional on the ZLB, not so much.

  23. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2012 at 21:14

    We presume for the moment that monetary policy is constrained by the lower bound. (Ooops!)

  24. Gravatar of Steve Steve
    26. March 2012 at 21:17

    Also, I think the DeSummers argument might be worse than you suggest. When they say “the central bank is unable or unwilling to provide additional stimulus through quantitative easing or OTHER MEANS” they affirmatively argue that the Fed *WILL* sabotage their stimulus. After all, one of the “OTHER MEANS” is a commitment to keep rates at or near zero even after the economy begins to recover and the Wicksellian rate goes positive.

    They are assuming that the Fed will sabotage their stimulus, and ignoring the contradiction in the result!

  25. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2012 at 21:18

    Based on the long run determinants. Andy Harless has no recollection of the future.

  26. Gravatar of Bonnie Bonnie
    26. March 2012 at 22:27

    Here’s what Bullard says about fiscal solutions to monetary problems (From “Seven Faces of The Peril” http://research.stlouisfed.org/publications/review/10/09/Bullard.pdf ):

    “The advice has a certain structure. It involves not changes in the way monetary policy is implemented, but changes in the fiscal stance of the government. By itself, this makes the practicality of the solution much more questionable. But it gets worse. The proposal is for the government to embark on an aggressive fiscal expansion should the economy become enmeshed in a low nominal interest rate equilibrium. The fiscal expansion has the property that total government liabilities— money plus government debt—grow at a sufficiently fast rate. Inside the model, such a fiscal expansion eliminates the unintended steady state as an equilibrium outcome. By this roundabout method, then, the only remaining longer-run outcome for the economy is to remain in the neighborhood of the targeted steady state.

    “The described solution has the following flavor: The government threatens to behave unreasonably if the private sector holds expectations (such as expectations of very low inflation) that the government does not desire. This threat, if it is credible, eliminates the undesirable equilibrium. Some authors have criticized this type of solution to problems with multiple equilibria as “unsophisticated implementation.”

    “Today, especially considering the ongoing European sovereign debt crisis, these proposed solutions strike me as wildly at odds with the realities of the global economy. The proposal might work in a model setting, but the practicalities of getting a government to essentially threaten insolvency—and be believed—seem to rely far too heavily on the rational expectations of the private sector. Furthermore, governments that attempt such a policy in reality are surely playing with fire. The history of economic performance for nations actually teetering on the brink of insolvency is terrible. This does not seem like a good tool to use to combat the possibility of a low nominal
    interest rate steady state.

    Beyond these considerations, it is questionable at this point whether such a policy actually works. Japan, our leading example in this story, has in fact embarked on an aggressive fiscal expansion, and the debt-to-GDP ratio there is now approaching 200 percent. Still, there does not appear to be any sign that their economy is about to leave the low nominal interest rate steady state, and now policymakers are worried enough about the international reaction to their situation that fiscal retrenchment is being seriously debated.”

  27. Gravatar of Ryan Ryan
    27. March 2012 at 04:31

    What I like about this post is that it has a little bit of a “John Cochrane flavor” to my (untrained) eyes.

    I literally had to stop reading DeLong because my view is that he doesn’t engage in an open, honest, good-faith debate. He likes to score points on the other side. FWIW, I think that put him a lot closer to Congress than The Fed, but that’s just my ignoramus opinion.

  28. Gravatar of ssumner ssumner
    27. March 2012 at 04:44

    Mark, Thanks for the tip.

    Morgan, You said;

    “except Scott COULD draw blood and attention by questioning their motives, questioning them at a far more personal level – and doesn’t.”

    That’s too nice. I’m blushing.

    The Sex Pistols/Clash comparison was very perceptive.

    Jim, That comment also made me think of that. Perhaps it’s worth a post.

    Ben, Yes, that would be the rational thing to do when more fiscal stimulus become politically impossible. But. . .

    Steve, Yes, yesterday we saw what just a tiny hint from Bernanke could do. Imagine the Fed used all it’s powers?

    Andy, You said;

    “Surely, from Japan’s experience alone, we could have concluded long ago that the zero lower bound can turn highly intelligent central bankers into blithering idiots, probably even dumber than Congress.”

    I strongly disagree here. The BOJ has raised rates at various times during this period (2000, 2006) so there is no doubt they oppose inflation. A few weeks ago the government dragged them kicking and screaming toward a 1% inflation target. But any government rational enough to do intelligent fiscal stimulus (and the Japanese government doesn’t fit that bill–their stimulus has been almost completely wasted) is rational enough to give the central bank a higher inflation target.

    Your first point is an interesting one, and I’ve argued the government should do whatever passes cost/benefit analysis. But that’s always true, and that’s not “stimulus.” I wonder about r being less than g. Don’t you also need to consider the marginal effect of changes in the deficit on r? What if r is less than g, but a positive function of the size of the deficit. Wouldn’t that change things? (I don’t know if my argument is clear; it’s analogous to the conservative argument that the marginal cost of an extra dollar of tax revenue is higher than the average cost, due to rising deadweight costs of taxation.)

    Steve, Your second point is good, they’ve never really thought out what a “neutral” monetary policy means.

    Bonnie, Thanks, That’s a very good Bullard quotation.

  29. Gravatar of Major_Freedom Major_Freedom
    27. March 2012 at 04:45

    No fiat money central bank ever tried to inflate and failed. It will never happen. It’s really, really easy to debase a fiat currency. The Fed can engage in 5% NGDP targeting, level targeting, if it so chooses.

    Since the Fed clearly does not so choose, doesn’t that mean the Fed is incompetent as per DeLong and Summers, as is Congress per you?

    You speak of the Fed the same way DeLong and Summers speak of Congress. They see Congress as necessary when the Fed fails. You see the Fed as necessary when Congress fails.

    In the “real world”, we don’t have perfect central banking.

    Sure, one can point to “better” central banks around the world, but there are “better” legislatures around the world too.

    You say Congress is incompetent? What do you call a central bank that lets NGDP fall to negativity?

    As Milton Friedman pointed out, ultra-low rates are a sign that money has been very tight (driving NGDP far below trend.)

    This is false. Ultra low nominal interest rates don’t signify anything specific about monetary policy. Ultra low interest rates can accompany tight or loose money, as long as market interest rates are higher or lower than nominal rates, respectively. We can’t even observe market interest rates in a central banking world. You therefore can’t say ultra low interest rates are a sign of tight money.

    What we can say is that if the Fed is creating new reserves in order to target a specific nominal fed funds interest rate, then whatever nominal interest rates exist, are lower than they otherwise would have been had the Fed NOT been increasing reserves. We can say this because, as you admitted a week ago, the Fed increasing bank reserves will lower nominal interest rates from where they otherwise would have been, via the liquidity effect. Now, once the banks expand loans on the basis of the additional reserves, and new “money” is created, spent, and respent throughout the economy, then as long as the Fed ceases to increase bank reserves, nominal interest rates will rise via the inflation/NGDP effect.

    But in the real world, the Fed doesn’t just engage in one time lump increases in bank reserves, especially when they are “fixing” recessions. What we see in the real world is the Fed continually increasing bank reserves, slower or faster, in order to hold down a lower or even lower fed funds rate.

    But the Fed cannot hold the fed funds rate below market forever by using increasing bank reserves. At some point, banks will be lending so much new money that holding the same low nominal rate will require accelerating growth in bank reserves. This then provides the fuel for even more loan creation. Prices will rise too much. So the Fed has to slow down the rate of bank reserve creation so as to avoid runaway inflation. This is what happened in 2005 going into 2006. The Fed started to slow down the rate of bank reserve creation, after increasing it prior. The Fed began to raise its target rate by slowing down the rate at which it created new bank reserves.

    This is when the inflation/NGDP effect on nominal interest rates took hold, and nominal interest rates ceased falling, and turned around and started an upward trend. A credit crunch began to develop, and financial institutions began to dip into liquid mutual fund accounts to acquire more liquidity. After those accounts were exhausted, this is when the 2007 banking crisis began. Mortgage lending dried up. That is when the housing bubble burst, and soon after, a deflationary correction set in. This is when you say the Fed “failed to maintain NGDP.” M2 was no longer increasing, and NGDP was falling.

    And yet, nominal interest rates on corporate debt were still on an upward trend deep into 2008. In late 2008, the Fed finally acted by massively increasing bank reserves once more, and do you know what happened then? Nominal interest rates plummeted, and began a downward trend that still persists to this day. Why? Because the Fed is creating new reserves at very high rates. Since the economy could never correct precisely because of the Fed’s record easy money, NGDP couldn’t “recover” either. Much of the newly created money is hoarded. This is why you are then misguided into believing the story “tight money results in lower nominal interest rates.”

    Of course in your equilibrium thinking mind, you ignore this entire process, and you jump straight to the inflation/NGDP effect on interest rates, even though an entirely different set of factors are the causes for the data you are seeing. How is that even possible? It’s due to you interpreting the same data using a flawed theory.

    As far as asset bubbles are concerned, they don’t hurt at all when NGDP growth is maintained (1987), hurt slightly when NGDP growth falls slightly (2000), but they seem to hurt a lot when it isn’t maintained (1929, 2008.)

    This ignores the costs of maintaining NGDP when the market wants to reduce it. NGDP being maintained when the market wants to reduce it, comes at the expense of more long term problems that result from artificially low interest rates and credit expansion that accompanied the maintaining of NGDP.

    The costs of inflation after 1987 was the recession of 1991. The costs of inflation after 2000 was the largest bubble in the history of the US that collapsed in 2007-2008. And now, despite you claiming the Fed isn’t inflating enough, the costs of the Fed inflating to maintain the “low” NGDP since 2008 is the largest sovereign debt bubble in the history of the world.

    The Fed cannot control where the inflation money goes, and it’s never exactly the same each time they engage in massive inflation to prevent economic correction. You are focusing only on the crude spending aggregates like the Keynesians, and you are failing to grasp what is going on in the details.

    Like I said before, people like you are going to be held by historians to have been intellectually responsible for a systematic meltdown in the world’s monetary system. Just like you people had no clue serious problems were building up prior to the housing collapse, that you believed everything was fine because “employment” and “output” and other crude aggregates were increasing, so too are you completely ignorant of the major problems building up right now, and no, not because the Fed isn’t inflating enough as per your insanity, but because the Fed is inflating in the first place. That inflation is positively wrecking the economy. The economy isn’t something that can be controlled by any single consciousness, even “simple” money printers who “only” ensure that “aggregate spending” doesn’t fall.

    The free market economists, the REAL free market economists, not you “market” monetarist poseurs, are going to again be proven right, and you are again going to be proven wrong. And yet, you will again believe you were right and everyone else was wrong because you will again be interpreting the same historical data with a flawed theory, the same flawed theory that prevented you from understanding the run up to the housing collapse.

    Maybe I should give you and your readers a real time, play-by-play series of occasional shout outs, just like I did from 2006-2008 with my family, friends and colleagues, just to show you, again, how incorrect Market Monetarism and Keynesianism really is.

  30. Gravatar of ssumner ssumner
    27. March 2012 at 04:46

    Ryan, Not sure if the John Cochrane comparison is a compliment, but since he’s a UC professor and is much smarter than me I’ll take it that way. Thanks.

  31. Gravatar of Major_Freedom Major_Freedom
    27. March 2012 at 05:25

    If we are going to teach our students how to “do the right thing,” we need to start by eliminating “depression economics” from the curriculum. Start with the fact that what Krugman calls “depression economics” should actually be called “expected depression economics.” That’s because fiscal stimulus acts with a lag that is just as long as monetary stimulus. (Here and here I argued monetary lags are surprisingly short.) So it doesn’t matter where the economy is right now, but rather where it will be in 12 months. Monetary policy should always be set in such a way as to produce on-target expected NGDP growth. That’s the Lars Svensson principle. If you do that, there’s no room for fiscal stimulus, even if the economy is currently depressed. With a central bank that targets expected NGDP growth along a 5% growth path, you are in a classical world. Spending has opportunity costs. Unemployment compensation discourages work. Saving boosts investment. Protectionism is destructive. And so on. That’s the policy we should be teaching our grad students. The optimal monetary policy. Not a policy mix that only has a prayer of making sense in countries where the central bank is even more stupid and corrupt than the Congress. As far as I can tell, those countries don’t exist.

    Since NGDP targeting fails to recognize, and indeed attacks, the vital importance of economic calculation, the price system, and individual cash holding in relation to consumption/investment, of prices over time, and, in general, the concept of money as a tool of individual action rather than of central planning, basically the entire foundation of economics, it is inevitable that indoctrinating new students with the above swill regarding NGDP targeting is only going to breed yet another generation of economically illiterate yahoos, just like the Fed financed Chicago School has been breeding economically illiterate yahoos for years. The Fed has bought off huge swaths of the economics profession (see Larry White), and so I don’t expect Sumner and other Chicago types to see that they have been taken for an intellectual ride of epic proportions. The tough pill to swallow is that “NGDP targeting” is just another untenable religious sect in the long line of central monetary planning theologies.

    Inflation is just another version of the recurring ancient mystical desire to turn stone into bread, and to end history. The sect called “NGDP targeting” is just a desire to make certain economic phenomena based on human choice to be “rigid”, so as to allegedly provide a “firm ground” upon which everything can grow.

    It’s funny. Just like Marx believed that raw communism, i.e. worker dictatorship, will inevitably be “negated” and spontaneously turned into stateless Utopia, so too do market monetarists believe that NGDP targeting will inevitably be “negated” and spontaneously turned into central bank-less Utopia. It’s the same age old desire to make things as rigid as possible, so as to call upon the inner forces of nature to spill into the human world to magically transform the rigidity into freedom. It’s truly a marvel to see how little times have changed. NGDP targeting proponents who believe that by getting it, central banking can eventually be abolished, are just like the communists who welcomed worker dictatorships because they believed it will only be temporary as well, and the stage right before Utopia.

    If the world adopted Australian NGDP targeting, then the world will suffer from what they are suffering from now, a one way ticket to an exponentially accelerating money supply aggregate. NGDP targeting has a cost. You are, just like the ancients, ignoring the cost. The cost is an exponentially accelerating variable that even a constant growth in NGDP requires, namely, the supply of money itself.

    The core problem with NGDP targeting is that NGDP targeting is a top down imposition, not a bottom up framework based on individual rights. Firm foundations are built from the ground up, not from the top to bottom. The firm foundation for individuals to get what they want in the division of labor, is respect for individual property rights, not a central planning monster that forces a specific aggregate statistic at the expense of other statistics that will blow the system up. Every central planning system, however well intentioned, is doomed to fail eventually. NGDP targeting is no different. It takes for granted, it requires, and is therefore based on, violations of individual property rights. It requires individuals to be constantly threatened, coerced, and manipulated, by a group of people who maintain, protect, and regulate the central planning agency.

    The truly ironic thing about Sumner’s disdain for Congress, is that Congress is the very body that created the Federal Reserve in the first place, the central bank that Sumner believes is the cat’s meow and can do what Congress is allegedly too stupid to do. Yet it is Congress that is maintaining the central banking system. They could all vote to revoke the Fed’s charter and abolish it by tomorrow if they wanted and the President could not veto it if 2/3 of Congress still vote to abolish it in the revote.

    In other words, if the Congress is “downright ugly”, then so too will “downright ugliness” spill into what they created, maintain, protect, and regulate, such as their central bank. Or is it a case of a diamond in the rough? Whereas everything else the Congress does is downright ugly, their central bank is beautiful? Or, what is more likely the case, maybe you have just been brainwashed by one of Congress’ ugly creations, and you just don’t know you’re spreading ugliness?

  32. Gravatar of dwb dwb
    27. March 2012 at 05:45

    i wish we could ban the word “inflate” for the next several years. We do not really know how much of the nominal income growth would be inflation or real output. I tend to think higher nominal income growth would be far more real than illusory.

  33. Gravatar of Negation of Ideology Negation of Ideology
    27. March 2012 at 06:07

    Scott,

    I don’t know if you’ve seen this paper on fiscal stimulus from NBER, “How Big (Small?) are Fiscal Multipliers”

    http://www.nber.org/digest/mar11/w16479.html

    It says the fiscal multiplier
    “is relatively large in economies operating under a predetermined exchange rate, but it is zero in economies operating under flexible exchange rates.”

    Also,
    “Indebtedness also matters: when the outstanding debt of the central government exceeds 60 percent of GDP, the fiscal multiplier is not statistically different from zero on impact and it is negative in the long run.”

  34. Gravatar of StatsGuy StatsGuy
    27. March 2012 at 06:22

    “Deep down most economists are technocrats. They see the central bank as being the best and the brightest, the guys who are above politics, who will “do the right thing.” … the Fed might be so incompetent that we need Congress to rescue the economy? In what world does that policy regime actually work?”

    That’s the guts of it – do we trust the economists, or the politicians? The economists, unsurprisingly, trust the economists. The same people who skewered public institutions as captured believe that _their_ public institution is free from capture. They likewise believe that _their_ academic journals are free from bias. That _their_ appointment processes are free from political taint. That in spite of their own theories (like Coase), the grease of money doesn’t lubricate their gears.

    Here’s the other story: Economists have been duped by those who have benefited from the theories they expound. Economists have found that by accepting grants from think tanks, their work suffers the same biases they have accused others of falling prey to. That as their profession increased in prestige and income, they attracted ambitious folks who were motivated by prestige and income. So-called “liberatarian” think tanks have found their work censored, and their donors threatening to restrict funds – the most principled of them have left, but those with mortgages and kids in school have kept their heads down and suffered silently. The public, in general, has turned against deregulation – the good and the bad – because it was carried to excess and has been abused. However, this doesn’t mean they like or believe in regulation.

    So the public now hates everyone and all things – economists and politicians, regulatory agencies and deregulated corporations.

    Scott, if you believe in Coasian mechanisms, tell me precisely why the Fed (taking into account its appointment process and institutional framework, including the regionals) should be freer from inappropriate influence than Congress? Why?

    Deep down, Scott, you are still one of the most idealistic authors I’ve read.

  35. Gravatar of D R D R
    27. March 2012 at 06:31

    “I’ve argued the government should do whatever passes cost/benefit analysis. But that’s always true, and that’s not ‘stimulus.’”

    Corollary: Stimulus with a fiscal multiplier larger than 0 will still fail cost/benefit analysis.

    Proof: If it passed cost/benefit analysis, it is not stimulus. Therefore contradiction. QED.

    Corollary: Stimulus with a fiscal multiplier larger than 1 will still fail cost/benefit analysis.

    Proof: If it passed cost/benefit analysis, it is not stimulus. Therefore contradiction. QED.

    Corollary: Stimulus with a fiscal multiplier larger than 1,000,000 will still fail cost/benefit analysis.

    Proof: If it passed cost/benefit analysis, it is not stimulus. Therefore contradiction. QED.

  36. Gravatar of John John
    27. March 2012 at 06:52

    It’s worth adding that those “depression” economic concepts are worthless pieces of intellectual trash that don’t apply no matter how bad the economy gets.

  37. Gravatar of Morgan Warstler Morgan Warstler
    27. March 2012 at 07:00

    Ben continues to play the Morgan Hypothesis Game:

    http://ca.reuters.com/article/businessNews/idCABRE82P0GZ20120326?pageNumber=2&virtualBrandChannel=0

    One bite at apple to try and benefit Obama, when do you pull trigger and what do you do?

  38. Gravatar of Morgan Warstler Morgan Warstler
    27. March 2012 at 07:01

    Also Ben speaks today at 1245:

    http://www.ustream.tv/federalreserve

  39. Gravatar of Major_Freedom Major_Freedom
    27. March 2012 at 07:02

    Negation of Ideology:

    Also,

    “Indebtedness also matters: when the outstanding debt of the central government exceeds 60 percent of GDP, the fiscal multiplier is not statistically different from zero on impact and it is negative in the long run.”

    Check out this chart.

  40. Gravatar of Peter N Peter N
    27. March 2012 at 07:09

    Major Freedom, what you say about reserves seems to be the conventional wisdom, but it appears to be wrong.

    “The amount of reserves held by the U.S. banking system reached $1.5 trillion in April 2011. Some economists argue that such a large quantity of bank reserves could lead to overly expansive bank lending as the economy recovers, regardless of the Federal Reserve’s interest rate policy. In contrast, we show that the size of bank reserves has no effect on bank lending in a frictionless model of the current banking system, in which interest is paid on reserves and there are no binding reserve requirements. We also examine the potential for balance-sheet cost frictions to distort banks’ lending decisions. We find that large reserve balances do not lead to excessive bank credit and may instead be contractionary.”

    http://www.newyorkfed.org/research/staff_reports/sr497.pdf

    I see no reason to doubt that they know what they are talking about.

  41. Gravatar of D R D R
    27. March 2012 at 07:37

    “‘The continued weakness in aggregate demand is likely the predominant factor. Consequently, the Federal Reserve’s accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well,’ he said.”

  42. Gravatar of e e
    27. March 2012 at 07:54

    If you take the conclusions of this paper seriously would that imply that it would be desirable for the fed to tighten and have it offset by fiscal expansion? I read the paper as finding some kind of macro arbitrage where as expansion restored full employment the fed should desperately tighten to preserve this self financing condition.

    That can’t be right but if fiscal expansion dominates monetary expansion it should also be preferably to not tightening. What am I doing wrong?

  43. Gravatar of D R D R
    27. March 2012 at 08:13

    Major,

    If you think that chart is in any way interesting, you should see what happens when you update it with the most recent data.

    Not to mention going back earlier.

  44. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. March 2012 at 08:16

    ‘So their entire paper boils down to what is the fiscal multiplier if the Fed chooses to “do the wrong thing.”’

    Exactly. DeLong has mastered this technique (aka, circular reasoning).

  45. Gravatar of Becky Hargrove Becky Hargrove
    27. March 2012 at 10:32

    Just about the time you’ve convinced us there’s nothing to get excited about in terms of monetary activity, then you write a post with words like ‘Banana Republic’, hysteresis (couldn’t they have come up with a better word?!) and ‘throwing bricks at screens’. So once again I’ll take a deep breath and jump into the fray. Clearly, one concern is how much more of a hit can unemployment take, with confused rationale as to solutions. But let’s suppose, in a perfect world, that reason rules the day and NGDP targeting further clarifies the dialogue. What happens next for employment?

    It would still continue to be scaled back dramatically over time, if it continues to be defined only in monetary terms, thereby forcing further cutbacks in paid services. In political terms this might come down to things such as a return to more ‘traditional’ familial arrangements (women staying home) and more ‘suboptimal’ guys being placed into prisons. NO! Let’s not go there. Instead, let’s bust right through that stupid zero bound and find the inverse of money defined productivity, which is the wealth of knowledge and human skill. There does not have to be any ‘race to the bottom’ for corporations to survive, nor ‘productivity curse’ or ‘lump of labor’ fallacies. All that is needed is to more directly capture knowledge and human skill, than is actually possible through the residuals of monetary production.

    There are two components to this dynamic: the knowledge component has the capacity to be infinite in the aggregate, much as labor/skills time is scarce, or a fixed quantity. Because of that fixed quantity, it serves as a measuring point, and it becomes possible to increase production directly from ever greater degrees of knowledge utilization. Thus, greater productivity becomes possible because of the focused acquisition and use of human skill in community ‘wealth capture’ settings. (individual as knowledge and skills entrepreneur) With this capture of human productivity in non-monetary terms, the monetary production process can also become stabilized and used primarily for the physical resources which it so aptly represents.

  46. Gravatar of The missing equation « The Market Monetarist The missing equation « The Market Monetarist
    27. March 2012 at 10:34

    [...] policy strongly dependent the monetary policy reaction to fiscal tightening or fiscal easing (Even today Scott has a discussion of the fiscal multiplier). In fact I don’t even think it is meaningful to [...]

  47. Gravatar of PJ PJ
    27. March 2012 at 12:09

    This is one of my all-time favorite posts on The Money Illusion.

    My favorite part of the DS paper is the last paragraph in which the authors argue in favor of fiscal expansion because “expansionary monetary policies carry with them costs not represented in standard models (including distortions in the composition of investment…)”

    Since DS assert that fiscal policy is LESS distortionary than monetary policy, I assume that the fiscal stimulus they have in mind is tax cuts. Or do they assume that congress will allocate spending efficiently?

    Jim Glass: Well said. Maybe the administration was too fixated on getting ACA through? When Bernanke writes his memoirs, I sure hope he includes some candid comments about the BOG vacancies.

  48. Gravatar of Brad DeLong Brad DeLong
    27. March 2012 at 12:12

    Re: “Obviously Brad DeLong would not listen respectfully to a conservative arguing tax cuts are self-financing due to long run output effects.”

    Don’t be stupid. Sometimes tax cuts are self-financing due to long-run output effects. A hell of a lot of tax cuts in the Middle Ages were self-financing. I teach them. Reductions, or rather regularizations, of corruption are typically self-financing tax cuts. Reductions in tariffs, or in taxes on any other commodity where marginal rates of substitution are high, are self-financing.

    You can do better than this.

    You should try.

  49. Gravatar of Peter N Peter N
    27. March 2012 at 12:27

    You omit the possibility of fiscal and monetary policy working together – monetarizing the deficit or “printing money”, yet this is by far the most interesting one.

    You’ve said, IIR that government should make those investments that are worth making on their own terms. Our incredible lack of a capital budget makes these decisions political, but normally capital investments are evaluated on ROI, and ROI depends upon cost of funds.

    So the Krugman argument that we should invest in infrastructure while the cost of funding it is low has force. If you believe the De Long-Summers argument about hysteresis (which you claim to – “I’m not about to trash their paper, which seems excellent.”), then the case is compelling without any need for ugly words like stimulus or multiplier. Let’s go fix some bridges – we’ve got a 30 year backlog.

  50. Gravatar of Major_Freedom Major_Freedom
    27. March 2012 at 12:36

    D R:

    If you think that chart is in any way interesting, you should see what happens when you update it with the most recent data.

    Yes, and if I said the same thing back in 1990, about the trend up to 1989, you’d say the same thing. “It’s levelling off!”

    Of course the exponential rise won’t be perfectly continuous and gradual. There will almost certainly be temporary blips.

    M3 is levelling off, and now housing credit is at a 35 year low. If current trends continue, they’ll continue to correct.

    But the drive for inflation is relentless when the machine is controlled by people. My guess is that soon enough, printing will accelerate once again.

    Major Freedom, what you say about reserves seems to be the conventional wisdom, but it appears to be wrong.

    “The amount of reserves held by the U.S. banking system reached $1.5 trillion in April 2011. Some economists argue that such a large quantity of bank reserves could lead to overly expansive bank lending as the economy recovers, regardless of the Federal Reserve’s interest rate policy. In contrast, we show that the size of bank reserves has no effect on bank lending in a frictionless model of the current banking system, in which interest is paid on reserves and there are no binding reserve requirements. We also examine the potential for balance-sheet cost frictions to distort banks’ lending decisions. We find that large reserve balances do not lead to excessive bank credit and may instead be contractionary.”

    I see no reason to doubt that they know what they are talking about.

    I didn’t actually say that increasing reserves WILL increase nominal lending. The logic goes the other way. Increasing lending arises by virtue of increasing reserves. The logic the other way depends on human choice.

  51. Gravatar of Major_Freedom Major_Freedom
    27. March 2012 at 12:59

    Is that the real DeKrugSummers posting here?

    Sometimes tax cuts are self-financing due to long-run output effects. A hell of a lot of tax cuts in the Middle Ages were self-financing. I teach them. Reductions, or rather regularizations, of corruption are typically self-financing tax cuts. Reductions in tariffs, or in taxes on any other commodity where marginal rates of substitution are high, are self-financing.

    Speaking of middle ages, hopefully one day when you finally evolve your political ideology beyond crude middle age statist brutality, you’ll realize that ALL tax cuts (accompanied by equivalent spending/borrowing cuts) are “self-financing.”

    Individuals who can use their own earnings the way they see fit, in the context of market behavior, be it to increase their purchasing power or to invest/consume, create gains in and of themselves that do not deprive anyone else of their own property.

    Yes, yes, I know, money is “really” supposed to be a tool of self-sacrifice, where the true owner of money is “society”, where everyone should be manipulated into “spending” that money “on others”, or else they are “harming” people and the economy. Blah blah blah.

    Hey, maybe the state should monopolize food production too. Food is more important than money. Right now, there are many people, like some economists, who are clearly hoarding and eating way too much food for themselves, and not giving enough to others via charity. Since nutrition needs are “sticky downward”, the state should make private food counterfeiting illegal, monopolize it, and make sure that they and their friends get more food whenever the populace runs low on food, and through the food charity multiplier, the rest of the people can get the remaining scraps.

    If you don’t agree that the state should monopolize food production, if you are so dogmatic so as to believe that it should be left to private producers, which I will tell you is prone to food hoarding and starvation deaths, then you must be against people eating food! You right-wing fascist corporatist pig! Who’s paying you? The Koch Brothers?

  52. Gravatar of dwb dwb
    27. March 2012 at 13:04

    Don’t be stupid. Sometimes tax cuts are self-financing due to long-run output effects.

    In fairness, maybe DeLong would listen but if you post anything on a Krugman/DeLong blog including the words “supply side” you get “we’ve had enough of the supply side you leukemia inducing benzene promoting glock carrying oil-bank-gun corporate scmuck”. occupy corporate america!”

    I guess i should only have an opinion if the govt gives it to me.

  53. Gravatar of D R D R
    27. March 2012 at 13:11

    “Yes, and if I said the same thing back in 1990, about the trend up to 1989, you’d say the same thing. ‘It’s levelling off!’”

    No, because I would not have arbitrarily cut off the series in the early 1960′s when I could go back another decade.

    But the larger point is I don’t think that it means much at all. The series turns negative every time nominal GDP falls. Big whoop. Debt is not productive at all, so the “marginal productivity of debt” is zero.

    The change in GDP over the change in debt is equal to the percent change in GDP over the percent change in debt… divided by the debt-to-GDP ratio. So which of these drove your trend? The ratio. The elasticity hasn’t seen much of a trend. It was around 1 in the 1950s, 1960s, 1970s, 1990′s, and so far the 2010s.

    Admittedly, it’s been volatile, turning negative three times (twice in the 1950′s, nearly again in the 1960′s, and then in the 2000s. Why? Because those were the three times nominal GDP fell.

    Now, I would argue that debt does matter but not in this way. I would argue that NET sectoral debts matter. Not gross non-financial-sector. It’s silly to think simply that the gross level of debt itself matters– if you and I each owe each other $1 trillion at 15% interest, there is no reason we can’t service our debts, even if we sit on our asses all day long. But if you owe me $2 trillion at 15% interest, I don’t care how hard you’re working you’ll never service that debt.

    But that graph is ridiculous.

  54. Gravatar of Bonnie Bonnie
    27. March 2012 at 13:43

    Major Freedom:

    “Hey, maybe the state should monopolize food production too. Food is more important than money. Right now, there are many people, like some economists, who are clearly hoarding and eating way too much food for themselves, and not giving enough to others via charity.”

    Maybe you shouldn’t give DeKrugmanSummers any ideas. They use the fact that some people can only afford ground beef while other gorge on steak to justify (demagog) any kind of intervention/government takeover, yet there seems to be a problem identifying the point at which we’ve gone too far and actually violate the General Welfare clause by causing more macro harm than good. Certainly in Europe, and particularly Greece, they couldn’t tell when they crossed over that threshold, were doing more damage to their economy, leaving the entire country markedly poorer from too many public goods because nothing ever more expensive than when its free.

  55. Gravatar of Major_Freedom Major_Freedom
    27. March 2012 at 14:05

    D R:

    If you think that chart is in any way interesting, you should see what happens when you update it with the most recent data.

    “Yes, and if I said the same thing back in 1990, about the trend up to 1989, you’d say the same thing. ‘It’s levelling off!’”

    No, because I would not have arbitrarily cut off the series in the early 1960’s when I could go back another decade.

    D R, I apologize. I thought you were referring to the Australia M3 chart when you said that. My mistake. I got things mixed up with another thread.

    Forget everything I said past that comment.

  56. Gravatar of dwb dwb
    27. March 2012 at 14:09

    @MF
    you are too focused on the trees (more like the ants). There are all kinds of near-money and non-money substitutes (bitcoin comes to mind). Plus, its not particularly difficult to get a bank account in Euros, Yen, pounds, loonies…. This is all part of the reason money measures are so unreliable. banks have tons of reserves but capital is scarce (find me a time series on aggregate bank capital, that would be enormously interesting).

    you are way too focused mechanics. “merit raises” are going out(or already did go out) nationwide to large corporate american employees (most got them a week or two ago). On average it was in the neighborhood of 2%. that had nothing to to with the money supply. It was because CFOs everywhere got it into their heads, along with employees, that 2% is the right “cost of living adjustment.”

  57. Gravatar of D R D R
    27. March 2012 at 14:14

    Major,

    Apology accepted!

  58. Gravatar of D R D R
    27. March 2012 at 14:15

    “bitcoin comes to mind”

    Particularly on account of its volatility!

  59. Gravatar of TheMoneyIllusion » Jim Glass on Larry Summers TheMoneyIllusion » Jim Glass on Larry Summers
    27. March 2012 at 14:16

    [...] commenters are much tougher on Larry Summers than I am.  Here’s Jim Glass discussing a quotation from the recent DeLong and Summers paper: “We presume … the central bank [...]

  60. Gravatar of Major_Freedom Major_Freedom
    27. March 2012 at 14:18

    Bonnie:

    Maybe you shouldn’t give DeKrugmanSummers any ideas. They use the fact that some people can only afford ground beef while other gorge on steak to justify (demagog) any kind of intervention/government takeover, yet there seems to be a problem identifying the point at which we’ve gone too far and actually violate the General Welfare clause by causing more macro harm than good. Certainly in Europe, and particularly Greece, they couldn’t tell when they crossed over that threshold, were doing more damage to their economy, leaving the entire country markedly poorer from too many public goods because nothing ever more expensive than when its free.

    I agree with your sentiment, but I think the threshold was already passed with the idea “This group of people can take property from all other people against their consent, as long as the group is supported by the majority of people.” The Constitution just legalized it all over the US. The general welfare clause just happens to be the historical weakness of an imperfect document, that statists like DeKrugSummers use to grow the state.

    Greece is like a habitually abused person finally showing very obvious signs of being abused, that all the other lesser abused people take notice of.

  61. Gravatar of Major_Freedom Major_Freedom
    27. March 2012 at 14:27

    dwb:

    you are too focused on the trees (more like the ants). There are all kinds of near-money and non-money substitutes (bitcoin comes to mind). Plus, its not particularly difficult to get a bank account in Euros, Yen, pounds, loonies…. This is all part of the reason money measures are so unreliable. banks have tons of reserves but capital is scarce (find me a time series on aggregate bank capital, that would be enormously interesting).

    Money measures are not unreliable. They are crucially important. They are what underlie spending, and they can tell us where the economy is headed if there are changes in it.

    Bitcoins are a very small market. When they become universally accepted, we’ll talk about it being a MONEY.

    Euros, Yen, Pounds, etc, all can be analyzed in the same way I am doing for US and Australian dollars. They are all applicable in their respective countries.

    you are way too focused mechanics. “merit raises” are going out(or already did go out) nationwide to large corporate american employees (most got them a week or two ago). On average it was in the neighborhood of 2%. that had nothing to to with the money supply. It was because CFOs everywhere got it into their heads, along with employees, that 2% is the right “cost of living adjustment.”

    The cost of living is going up precisely because spending is going up precisely because the money supply is going up!

    You’re just proving my point.

  62. Gravatar of D R D R
    27. March 2012 at 14:32

    “Money measures are not unreliable. They are crucially important. They are what underlie spending, and they can tell us where the economy is headed if there are changes in it.”

    You know, like if the price of Treasuries goes up, we ought to supply more!

  63. Gravatar of dwb dwb
    27. March 2012 at 14:53

    The cost of living is going up precisely because spending is going up precisely because the money supply is going up! the Fed created a 2% inflation target and made us all believe it.

    money measures are not reliable which is why Volcker abandoned money supply targeting in the 80s and why the “money supply” is at best a D list market-moving economic indicator (most people cannot when its released, unlike the jobs reports).

    However when Bernanke speaks about faster growth, the market goes up 1.5%. I guarantee nothing interesting happened with the money supply yesterday.

  64. Gravatar of Nathan Smith Nathan Smith
    27. March 2012 at 15:29

    I commented on this paper at Brad DeLong’s blog, but he deleted it. I agree with an earlier commenter that DeLong’s comments policy– anyone who cogently disagrees with him is a troll– has led me to boycott his blog. He’d lose the arguments, so he dodges them.

    Anyway, I thought I’d post a few thoughts here.

    First of all, on hysteresis. I’m not that familiar with the literature, but I regard the idea with a lot of skepticism. If it amounts to a claim that “unemployment being X% higher today predicts that it will be, in expectation, pX% higher tomorrow,” where 0<p<1, then that's surely true, but it need not follow that higher unemployment today *causes* higher unemployment tomorrow; rather, it may be that some other factor Y is causing higher unemployment today, and will continue to cause it tomorrow. An empirical test for hysteresis would have to control for the relevant Y, which seems very hard. And you don't have that many macroeconomies to work with to tease this out. I suspect no one has really managed to do that. Hysteresis seems like a way for Europeans to blame high unemployment on bad macro management in the past, rather than admitting that it's because of creeping growth of social welfare states and unions.

    Of course, you can see a theoretical reason why hysteresis might be real: unemployment today means you're not accumulating work experience which will make you more employable tomorrow. But it's easy to specify reasons for the *opposite* of hysteresis: maybe if you're unemployed today, you spend more time building skills and searching, and also, the wage and job desirability thresholds that you demand in order to accept work fall. In that case, unemployment today would, all other things equal, mean *less* unemployment tomorrow.

    Furthermore, even if hysteresis works for private sector jobs– more private sector employment today means more tomorrow– it seems quite plausible that holding a make-work government job wouldn't have the same effect. If, as the paper presumes, the stimulus spending is temporary, then the government job you get today will disappear. Will government make-work leave you more qualified and/or motivated to get *other* jobs? The claim seems questionable. Of course, if Keynesian "multipliers" work in the short term then stimulus today will mean more private sector jobs today, but the best empirical research on stimulus does not support the idea that fiscal stimulus leads to an increase in private sector employment.

    The second big criticism is that DeLong and Summers assume that G can be increased today without affecting expectations of future G. If it does affect expectations in future G, it would imply permanently higher tax rates. In practice, though, when the government starts spending money in a certain way, it creates a constituency for persisting in that kind of spending. So G is inertial. This then feeds back, via rational expectations channels, to the investment decisions taken by businesses today.

    There's a reason that Keynesian macroeconomics is considered an analysis of the "short run." Attempts to extrapolate to the long run on the basis of a Keynesian analysis of the short run are suspect.

  65. Gravatar of Major_Freedom Major_Freedom
    27. March 2012 at 15:32

    dwb:

    The cost of living is going up precisely because spending is going up precisely because the money supply is going up! the Fed created a 2% inflation target and made us all believe it.

    Price inflation cannot be had without an increase in the money supply (or else supply has to fall). You’re falsely presuming people have sufficient cash balances from which to raise and lower spending to any degree based on nothing but words from central bankers.

    money measures are not reliable which is why Volcker abandoned money supply targeting in the 80s and why the “money supply” is at best a D list market-moving economic indicator (most people cannot when its released, unlike the jobs reports).

    You keep saying this and yet you haven’t actually substantiated it with any arguments.

    However when Bernanke speaks about faster growth, the market goes up 1.5%. I guarantee nothing interesting happened with the money supply yesterday.

    It doesn’t have to have happened yesterday. It could have happened last year.

  66. Gravatar of Major_Freedom Major_Freedom
    27. March 2012 at 15:36

    D R:

    “Money measures are not unreliable. They are crucially important. They are what underlie spending, and they can tell us where the economy is headed if there are changes in it.”

    You know, like if the price of Treasuries goes up, we ought to supply more!

    Don’t see how that follows.

    Anyway, without inflation of money, an increases supply will just make the prices fall.

  67. Gravatar of dwb dwb
    27. March 2012 at 16:01

    You’re falsely presuming people have sufficient cash balances from which to raise and lower spending to any degree based on nothing but words from central bankers.

    no i am not. right now tens of millions of employees are getting their annual base pay “merit raises,” about 1.5-2% on average, depending on evaluation.

    Most people work in the service sector, and CFOs dont dole out approve annual wage increases based on money supply charts, they do it based on a bank or economist presentation that said to them “inflation will be 2.2%” (or whatever).

    They do it because thats what they expect inflation to be (and, of course, employee costs have to be in line with expected revenues and margins).

    Those cost of living adjustments apply from now until next year, so they give increases well in advance based on nothing but a business forecast. Social Security or other govt cost of living adjustments are not driven by the money supply either.

    The merit raises going out this month have absolutely positively nothing to do with any money supply chart or anyones cash balance during the month of March.

  68. Gravatar of Major_Freedom Major_Freedom
    27. March 2012 at 16:06

    Speaking of “downright ugly” institutions, William Dudley just admitted that the Fed is now buying Euro debt, thus violating the Federal Reserve Act.

    http://www.zerohedge.com/news/its-official-fed-now-buying-european-government-bonds

    Paging Dr. Sumner, will you now admit the Fed is as corrupt as Congress, if not more?

  69. Gravatar of Major_Freedom Major_Freedom
    27. March 2012 at 16:09

    dwb:

    no i am not. right now tens of millions of employees are getting their annual base pay “merit raises,” about 1.5-2% on average, depending on evaluation.

    These are subject to the constraints of inflation dwb.

    Businesses are experiencing an upswing in revenues and profits, because of Ben CTRL-P Bernanke’s money printing.

    Most people work in the service sector, and CFOs dont dole out approve annual wage increases based on money supply charts, they do it based on a bank or economist presentation that said to them “inflation will be 2.2%” (or whatever).

    No, they do it on the basis of profit expectations, which are demand driven, which is money supply driven.

    It doesn’t matter if businesses are not actively looking at money supply. Their revenues they can see.

    They do it because thats what they expect inflation to be (and, of course, employee costs have to be in line with expected revenues and margins).

    Yes, and inflation is based on money supply growth.

    Those cost of living adjustments apply from now until next year, so they give increases well in advance based on nothing but a business forecast. Social Security or other govt cost of living adjustments are not driven by the money supply either.

    Sure they are, indirectly.

    The merit raises going out this month have absolutely positively nothing to do with any money supply chart or anyones cash balance during the month of March.

    False, they have everything to do with it. The reduction in unemployment, the upswing in spending, and prices, is due to inflation of the money supply.

  70. Gravatar of dwb dwb
    27. March 2012 at 16:36

    @MF

    no: businesses forecast revenue based on growth (inflation) expectations (and expected profit margins) and approve pay increases well in advance of those forecasts being realized.

    The reduction in unemployment, the upswing in spending, and prices, is due to inflation of the money supply.

    money supply growth reduces unemployment. nice. print more money to reduce unemployment. If Ron Paul caught you saying that he’d fire you on the spot. lol. i rest my case.

  71. Gravatar of D R D R
    27. March 2012 at 17:02

    “Don’t see how that follows.”

    Hm. Price signals being important to the economy… what could I have meant?

    Let’s see, when the price of something goes up, that is usually interpreted to mean there is some sort of demand for it. Particularly when the price of close substitutes are also rising. Even if the demand is merely speculative. Usually, we say that rising prices serves as a signal to suppliers to increase supply. Isn’t that why you want the Fed to stop printing money? Because the price of money is falling (that is, the price of other goods measured in money is rising?) Similarly, when the price of government debt rises, the government ought to supply more government debt.

    I mean, there are hopefully close substitutes. I’d be thrilled if private companies also increased their supply of highly-rated bonds and undercut the government on price. But they don’t seem terribly interested.

  72. Gravatar of MDrew MDrew
    28. March 2012 at 03:48

    You call these guys assholes in not so many words every time you talk about them. So I’m going to just say something that maybe will give you pause: in actual fact, you’re a bigger, or at least as big, an asshole than they are, and I think you know it. At least they’re straightforward about it.

  73. Gravatar of MDrew MDrew
    28. March 2012 at 03:49

    Also: by all means, please decline to publish that if you like. The point is just that you read it.

  74. Gravatar of Browsing Catharsis – 03.27.12 « Increasing Marginal Utility Browsing Catharsis – 03.27.12 « Increasing Marginal Utility
    28. March 2012 at 04:02

    [...] Sumner, among other things, plays public choice and asserts central bankers in Sweden and Australia …. “Yes, the Fed is bad.  But Congress is downright ugly.  Deep down most economists are technocrats.  They see the central bank as being the best and the brightest, the guys who are above politics, who will “do the right thing.”  And how do economists view our Congress?  The terms ’stupid’ and ‘incompetent’ don’t even come close to describing the disdain.  So are we supposed to change our textbooks in such a way that the fiscal multiplier is no longer zero under an inflation targeting regime (as the new Keynesians had taught us for several decades?)  And on what basis?  Because the Fed might be so incompetent that we need Congress to rescue the economy?  In what world does that policy regime actually work?  If you have a culture that has its act together, such as Sweden or Australia, the central bank will do the right thing.  If not, then all hope is lost.” Well not really but I liked saying that. [...]

  75. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 04:31

    dwb:

    no: businesses forecast revenue based on growth (inflation) expectations (and expected profit margins) and approve pay increases well in advance of those forecasts being realized.

    No dwb, wages are not financed out of future revenues. They are financed out of CURRENT savings. Wages cannot increase now unless the demand for labor increases now. The demand for labor increases now when businesses have more cash to spend now. They have more cash to spend now when they acquired more cash in the past, via inflation of the money supply.

    Now of course businesses forecast future revenues and price current factors accordingly, but for many businesses, they need more cash before they feel comfortable hiring more people. This is why we empirically see wage increases tending to lag profit increases.

    The reduction in unemployment, the upswing in spending, and prices, is due to inflation of the money supply.

    money supply growth reduces unemployment. nice. print more money to reduce unemployment. If Ron Paul caught you saying that he’d fire you on the spot. lol. i rest my case.

    It wasn’t an advocacy, dwb. It was a description.

  76. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 04:44

    D R:

    Hm. Price signals being important to the economy… what could I have meant?

    Sorry, I just didn’t see how “We ought to supply more treasuries!” follows from what I said. Maybe I misunderstood. Were you talking like you are a Treasurer? If so, I see what you mean.

    I guess it’s because I myself don’t think the Treasury ought to borrow more, and since I see no contradiction with this and the stuff about prices, I concluded “We ought to supply more!” isn’t necessary.

    Let’s see, when the price of something goes up, that is usually interpreted to mean there is some sort of demand for it. Particularly when the price of close substitutes are also rising. Even if the demand is merely speculative. Usually, we say that rising prices serves as a signal to suppliers to increase supply. Isn’t that why you want the Fed to stop printing money? Because the price of money is falling (that is, the price of other goods measured in money is rising?) Similarly, when the price of government debt rises, the government ought to supply more government debt.

    Yes, I understand you now. I think you’re right. With interest on government debt at very low levels, the Treasury and Congress have a huge incentive to increase borrowing.

    I mean, there are hopefully close substitutes. I’d be thrilled if private companies also increased their supply of highly-rated bonds and undercut the government on price. But they don’t seem terribly interested.

    For debt issuance, companies cannot possibly compete with the Treasury that can sell its debt directly to the Fed, or “in the open market” to the Fed’s stooges.

  77. Gravatar of dwb dwb
    28. March 2012 at 04:45

    @MF:
    i’ve done business forecasting and asset valuation in several large companies. you are completely wrong.

    Anyway you said: “money supply growth reduces unemployment.” Description or not, case closed.

  78. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 05:30

    dwb:

    i’ve done business forecasting and asset valuation in several large companies.

    Well that explains why you are a FORMER employee. You recommended pay raises for employees using money the company doesn’t have.

    you are completely wrong.

    Telling me your job description isn’t a proper rebuttal or response to what I said.

    If that’s all you got, consider yourself refuted.

    Anyway you said: “money supply growth reduces unemployment.” Description or not, case closed.

    What case?

    It doesn’t take a rocket scientist to realize that Bernanke’s money printing is what is responsible for the last half year’s worth of employment growth. This again is not an advocacy.

    Sorry dwb, you’re wrong.

  79. Gravatar of dwb dwb
    28. March 2012 at 06:02

    @MF

    It doesn’t take a rocket scientist to realize that Bernanke’s money printing is what is responsible for the last half year’s worth of employment growth. This again is not an advocacy.

    alert! alert! monetary policy works! and no hyperinflation!

    Only now at the end do you realize the power of this fully armed and operational central bank.

    See, they’ve been able to steer the nominal economy and close the output gap.

    The only difference really, is that i argue most of the effect of QE has been through expecations not the “usual” money transmission mechanism of lending.

  80. Gravatar of ssumner ssumner
    28. March 2012 at 06:20

    MR, You are completely wrong about NGDP, it doesn’t disrupt the price system at all.

    Negation, Thanks, I discussed that in an earlier post–it’s exactly what I’d expect.

    Statsguy, You said;

    “That’s the guts of it – do we trust the economists, or the politicians? The economists, unsurprisingly, trust the economists.”

    That’s exactly what I think. I can’t imagine why you think I believe otherwise. You know full well that I don’t think the Fed should be given any discretion–I don’t trust them.

    Idealistic? Me? Don’t make me laugh. Read my newest post “Why no sorry?”

    DR, I hope you don’t really believe what you wrote. I obviously meant it should be judged on a cost benefit basis under the assumption it doesn’t boost GDP. The classical assumption.

    e, I can see why you’d say that, but my hunch is that it wouldn’t go that far, I doubt that’s an implication.

    Becky, I think you are making things too complicated.

    PJ, Thanks, I’m not sure how they feel about taxes and spending. I’d guess they favor both options.

    Brad, Are you the real Brad DeLong?

    Peter N, Fine but I want the states doing that, not the federal government.

    Nathan Smith, Those are good points, I’m surprised they were deleted. FWIW I think the main cause of hysteresis is programs like the 99 week extended UI.

    I’ll take the rest later today–running out of time.

  81. Gravatar of Doc Merlin Doc Merlin
    28. March 2012 at 08:52

    “MR, You are completely wrong about NGDP, it doesn’t disrupt the price system at all.”

    Er… not quite, an NGDP targeting regiem can disrupt prices, if it makes the targeted NGDP growth path too small (results in not enough liquidity) or too large (results in bubbles).

    As our money is centrally planned, we have the problem all central planners have. We cannot properly price money. Even in an NGDP targeting regiem we have the problem of what growth path is “best.”

  82. Gravatar of kebko kebko
    28. March 2012 at 08:52

    I thought this was funny:

    SS: Obviously Brad DeLong would not listen respectfully to a conservative arguing tax cuts are self-financing due to long run output effects.

    “Brad DeLong’s” response: Don’t be stupid….

  83. Gravatar of ssumner ssumner
    28. March 2012 at 10:16

    Mdrew, You said;

    “You call these guys assholes in not so many words every time you talk about them. So I’m going to just say something that maybe will give you pause: in actual fact, you’re a bigger, or at least as big, an asshole than they are, and I think you know it. At least they’re straightforward about it.”

    Try this sort of comment at DeLong’s blog and see if he deletes it.

    I’m not sure what made you think I was being so mean to them, perhaps when I called their paper “excellent.”

    You said;

    “Also: by all means, please decline to publish that if you like. The point is just that you read it.”

    As you know (or maybe you don’t) I never delete comments unless they libel someone else or use obscenities. I welcome criticism.

    Doc Merlin, Yes, but I’d say those are very much second order effects. A five percent NGDP target path is intended to minime price distortions.

    Kebko, Oddly, I meant that as a sort of joke (Like when DeLong asks “Is Scott Sumner losing his mind?”). But now that I reread it I don’t think I have much of a sense of humor, it doesn’t seem very funny.

  84. Gravatar of D R D R
    28. March 2012 at 10:40

    “DR, I hope you don’t really believe what you wrote. I obviously meant it should be judged on a cost benefit basis under the assumption it doesn’t boost GDP. The classical assumption.”

    So… it should be judged on a cost benefit basis in which we do not consider all the benefits? Odd.

    Should NGDPLT be so judged as well?

    Furthermore, this would suggest that you didn’t mean “that’s not ‘stimulus’” but rather “that’s not necessarily ‘stimulus’”

  85. Gravatar of Kevin Donoghue Kevin Donoghue
    28. March 2012 at 10:43

    “Hello Rabbit, is that you?”
    “Let’s pretend it isn’t”, said Rabbit, “and see what happens.”

  86. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 17:12

    ssumner:

    MR, You are completely wrong about NGDP, it doesn’t disrupt the price system at all.

    That’s a big falsehood.

    The price system is founded upon not only spending, but cash balances as well. Fundamentally it is founded upon individual property rights and free trade.

    Sometimes people want to increase their purchasing power by seeking more cash, by abstaining from certain purchases, which would otherwise make those particular prices fall. For example, if consumers choose to hold onto their earnings for longer than before, and delay their consumption, thus reducing profitability in consumer goods by a particular amount relative to capital goods profitability, then the price system will regulate scarce resource allocation via profit and loss changes in the particular way consumers are behaving.

    Now if the Fed responds to this by printing money and buying securities, hoping to boost NGDP back up to where it was before, as if there is something magical in the status quo, then the price system will in fact be messed up, because the profitability of various goods and services throughout the economy will be changed APART from what individual market actors are bringing about through their voluntary spending habits in the system of exchanges and cash holding.

    NGDP targeting distorts the price system by bringing about changes in relative prices and relative profitability that are very much external to what individuals in the market are bringing about with their economic actions in exchanges and cash holding.

    The price system is unhampered only in a free market based on individual property rights, top to bottom, left to right, for EVERY good and service.

    Just like an illegal counterfeiter will distort prices throughout the economy by what he is doing, which is a sending of false profit signals to investors apart from individuals within the sphere of the free market, so too does the Fed distort the price system by printing money. Just because the Fed is targeting a specific aggregate demand, it doesn’t mean their actions do not distort the price system.

    Focusing on crude aggregates like “aggregate spending” and “average aggregate prices” completely ignores the relative spending changes and the relative price structure WITHIN those aggregates. That’s where the price system has the most to say.

    You are falsely equivocating stable NGDP with stable prices, as if prices are even supposed to be stable in an unhampered price system. Prices are NOT supposed to be stable in a world of individuals who have unstable paths of learning, unstable preferences, unstable actions, and unstable spending/investing/hoarding habits.

    Yes it just “feels” nice if the real world were one where everyone were like automaton robots, so that NGDP targeting can “work behind the scenes”, but in the real world, where cash holding changes are paramount in the greater sphere of the price system, targeting a constant NGDP is introducing a virus into the price system. It misleads people by preventing them from knowing fully what other individual market actors value.

    If consumers value holding onto their money for longer periods of time, in such a way that would bring about only a modest increase in the relative profitability of capital goods, then investors will have a good idea on just how much capital to redirect to capital goods and other assets. But with the counterfeiter in the mix, which prints money and buys securities in order to reverse the fall in NGDP, the sellers of which then buy assets, this will change the relative profitability of capital goods, and assets, and it will change relative prices in a way totally apart from what the sovereign consumer is actually bringing about.

    How in the world can you possibly claim that this is not a distortion of the price system? It is a perfect example of price system distortions.

    Maybe you don’t want to have this on your conscience, maybe you just cavalierly hand wave away any notion that what you’re calling for brings about economic distortions, but the truth of the matter is that central banking, even one that targets NGDP, very much distorts the price system.

    No investors and no sellers care a lick about NGDP. They only care about the profitability and prices in their own affairs. If I am a seller of assets, and my profitability is boosted because of what the Fed does, and not because of what the consumers have done, then sorry, but the price system is being distorted. I am being sent price signals that do not match what the consumers have brought about themselves. I am seeing signals that are the result of an economy with a legalized counterfeiter who doesn’t represent the consumers in any way.

  87. Gravatar of Bob Murphy Bob Murphy
    28. March 2012 at 17:29

    Try this sort of comment at DeLong’s blog and see if he deletes it.

    My sources say yes.

  88. Gravatar of Xerographica Xerographica
    29. March 2012 at 02:45

    “And how do economists view our Congress? The terms ’stupid’ and ‘incompetent’ don’t even come close to describing the disdain.”

    +

    “Individuals who can use their own earnings the way they see fit, in the context of market behavior, be it to increase their purchasing power or to invest/consume, create gains in and of themselves that do not deprive anyone else of their own property.” – Major_Freedom

    =

    http://pragmatarianism.blogspot.com/2012/03/magna-carta-movement.html

  89. Gravatar of D R D R
    29. March 2012 at 02:53

    That second quote demonstrates a very real disconnect from the world in which we live– one in which negative externalities actually do exist and cannot be extinguished irrespective of the quality of our institutions.

  90. Gravatar of dwb dwb
    29. March 2012 at 04:39

    @MF

    For example, if consumers choose to hold onto their earnings for longer than before, and delay their consumption, thus reducing profitability in consumer goods by a particular amount relative to capital goods profitability…
    …Now if the Fed responds to this by printing money and buying securities, hoping to boost NGDP back up to where it was before, as if there is something magical in the status quo

    No: your error is that expenditures on capital goods and investment count in gdp. So if the relative price between consumer goods and capital goods changes (because people want to save more) then gdp could well the same, go up, or go down.

    in fact, expenditures on capital goods tend to be pro-cyclical so the Fed is probably more likely to tighten. Now, all those people and corporations who built the capital goods earned “income” so the Fed steers so that that total nominal income remains the same (but your are right the relative price will change).

    And: the changes in relative prices are non “distortionary” or external. quite the opposite.

    people want to “save more” or dissave for specific reasons (retirement, college, boat,…) or buy more of this (“ipad”) and less of that (“pink slime” eew). those things happen no matter what. when inflation is HIGH the changes in relative prices are masked by the change in overall price level.


    Focusing on crude aggregates like “aggregate spending” and “average aggregate prices” completely ignores the relative spending changes and the relative price structure WITHIN those aggregates. That’s where the price system has the most to say.

    You are right: relative prices are the nerve signals of the economy. by keeping nominal income steady and IGNORING changes in the price level, the Fed promotes a very high signal to noise ratio in relative prices.

    You are falsely equivocating stable NGDP with stable prices, as if prices are even supposed to be stable in an unhampered price system.

    you are confusing relative prices with the overall price level (inflation, which means that ALL prices are going up or down the *same amount*). the *overall* price level is a function of nominal aggregates. By stabilizing nominal aggregates, keeping the *overall* price level steady, changes in relative prices are clearer to see.

  91. Gravatar of dwb dwb
    29. March 2012 at 04:43

    … IGNORING changes in the price level relative prices

  92. Gravatar of Major_Freedom Major_Freedom
    29. March 2012 at 05:08

    No: your error is that expenditures on capital goods and investment count in gdp. So if the relative price between consumer goods and capital goods changes (because people want to save more) then gdp could well the same, go up, or go down.

    How is that my “error”? I fully recognize that spending on capital goods counts towards GDP.

    My point is that consumer spending changes will bring about a specific change in relative spending and prices, regardless of GDP. It is this specific relative spending and price change that is important to the price system sending signals to investors. But when the central bank focuses on nominal aggregate spending, and inflates in order to boost an arbitrary aggregate like NGDP, that action itself alters the relative spending and price changes away from what it otherwise would have been had individual market actors been in total control of all things monetary.

    This is why NGDP targeting distorts the price system.

    in fact, expenditures on capital goods tend to be pro-cyclical so the Fed is probably more likely to tighten. Now, all those people and corporations who built the capital goods earned “income” so the Fed steers so that that total nominal income remains the same (but your are right the relative price will change).

    No, the Fed doesn’t tighten. They loosen when consumer expenditures fall. They pretty much ignore asset prices.

    And: the changes in relative prices are non “distortionary” or external. quite the opposite.

    No, the changes in prices resulting from inflation are in fact distortionary. It’s literally the opposite of what you claim.

    people want to “save more” or dissave for specific reasons (retirement, college, boat,…) or buy more of this (“ipad”) and less of that (“pink slime” eew). those things happen no matter what. when inflation is HIGH the changes in relative prices are masked by the change in overall price level.

    False. The changes in relative prices can be observed. They are not “masked” by taking crude averages of them.

    “Focusing on crude aggregates like “aggregate spending” and “average aggregate prices” completely ignores the relative spending changes and the relative price structure WITHIN those aggregates. That’s where the price system has the most to say.”

    You are right: relative prices are the nerve signals of the economy. by keeping nominal income steady and IGNORING changes in the price level, the Fed promotes a very high signal to noise ratio in relative prices.

    No, you keep ignoring, or refusing to accept, the fact that inflating to target NGDP ITSELF brings about a different relative spending and price structure than what would otherwise have existed had the consumers actions not been “responded” to.

    Just because the Fed is ignoring prices and keeping nominal income steady, it does not in any way mean they are not bringing about a relative spending and price structure change by inflating in their targeting of NGDP. Inflation itself affects the relative spending and price structure! This is the case regardless of the Fed’s intentions.

    Imagine me giving you $10 billion in newly created money, in order to bring about a specific aggregate demand, and I don’t care about prices. Spending that money does indeed bring about a relative spending and price change in the economy.

    “You are falsely equivocating stable NGDP with stable prices, as if prices are even supposed to be stable in an unhampered price system.”

    you are confusing relative prices with the overall price level (inflation, which means that ALL prices are going up or down the *same amount*).

    Not in the slightest. I am fully aware of the difference between relative prices and price levels. Nothing of what I said would in any way convey a misunderstanding of those two aspects.

    the *overall* price level is a function of nominal aggregates. By stabilizing nominal aggregates, keeping the *overall* price level steady, changes in relative prices are clearer to see.

    Inflation of the money supply does not change all individual spending and all individual prices equally over time. You are fallaciously presuming that inflation, because it increases the price level, somehow ONLY affects the price level, and not relative spending and relative prices.

    Keeping nominal aggregate spending “steady” does not in anyway make relative prices “easier to see.” Relative prices with and without inflation are equally easy to see. The problem is that inflation brings about its own relative price difference, apart from what the consumers did through their actions.

  93. Gravatar of Major_Freedom Major_Freedom
    29. March 2012 at 05:19

    dwb:

    … IGNORING changes in the price level relative prices

    It doesn’t matter. Even if I ignored relative price changes when I give you the $10 billion in new money, the results of spending that money STILL brings about relative spending and price changes apart from what otherwise would have existed. And not just between consumption and investment spending, but within consumption spending and within investment spending, and hence relative prices, as well.

  94. Gravatar of dwb dwb
    29. March 2012 at 06:01

    @MF
    ok so to distill your issues. Your main issue is that 1) you are concerned that with for example a 5% NGDP target, there is some equilibrium with permanent 5% inflation and 0% real growth. So in general you are worried ngdp targeting will result in “more inflation than growth.” Also 2)the means with which the Fed gets there (money supply growth).

    Because earlier you conceded that money printing increases employment, so “printing money” could increase output not inflation. But right, the permanent money printing machine might lead to 1) so how does the Fed “control” the breakdown between employment (real growth) and inflation.

    i know these issues have been a addressed many times and i have a tight schedule. more later.

  95. Gravatar of Negation of Ideology Negation of Ideology
    29. March 2012 at 07:12

    Major -

    “No, you keep ignoring, or refusing to accept, the fact that inflating to target NGDP ITSELF brings about a different relative spending and price structure than what would otherwise have existed had the consumers actions not been “responded” to.”

    I’m interested in that phrase “would have otherwise existed” in some alternative world. It all depends on what that baseline you assume. I agree that targeting NDGP will bring about a different relative spending and price structure than alternative targets, like CPI, gold, silver, or the size of the monetary base or M2. And each of these targets will differ from each other. And if the government doesn’t exist and therefore uses no money, we’d get some other relative spending and price structure.

    Your entire argument basically steals first base. You assume that your preferred system is the correct way, and any deviation is a distortion of that. One could just as easily assume that NGDP targeting(or something else) is the correct way, and your preferred system is the one that brings about a different scenario than otherwise would have existed.

    And you never answered my question of whether I should be able to pay my taxes in pork bellies.

  96. Gravatar of Major_Freedom Major_Freedom
    29. March 2012 at 08:10

    Propagation of Ideology:

    I’m interested in that phrase “would have otherwise existed” in some alternative world. It all depends on what that baseline you assume. I agree that targeting NDGP will bring about a different relative spending and price structure than alternative targets, like CPI, gold, silver, or the size of the monetary base or M2. And each of these targets will differ from each other. And if the government doesn’t exist and therefore uses no money, we’d get some other relative spending and price structure.

    The baseline is an unhampered price system founded upon individual property rights. This “alternative world” doesn’t have to actually exist before individuals will act as if such a world exists, due to not being able to observe it and thus being relegated to having to plan according to the data that does exist. Earning more revenues or being able to borrow at lower costs, the actual data that exists overwhelms any ability on the part of people to discern the correct information from the fluff. For example, if a bank offers you a mortgage rate of 2% for 7 years due to an influx of cheap money from the Fed, will you refuse to accept it on the basis that you believe the “real” rate would otherwise be 8% over those 7 years?

    It would be like acting all “surprised” when radio listeners act as if what they are hearing is “true”, even though the signal is being jammed into saying something that is not “true.”

    How many people really think like this? Hardly any, which is why monetary policy actually affects the economy and is not innocuous.

    Your entire argument basically steals first base. You assume that your preferred system is the correct way, and any deviation is a distortion of that.

    The same view is held by those who advocate for NGDP targeting silly. It’s not inherently wrong to be convinced that there is an optimal way that is different from what exists, and that deviations from that optimal way are the reasons why there are visible problems.

    One could just as easily assume that NGDP targeting(or something else) is the correct way, and your preferred system is the one that brings about a different scenario than otherwise would have existed.

    But it’s not “just as easy.” It’s not just throwing a random standard out there. The standard of an unhampered price system founded upon individual property rights is a priori valid, it is a valid standard that is justified prior to any future experience that “tests” it, the same way I can know murder and rape are unjustified, and that no rape and no murder is the standard, prior to any future experience that would “test” these theories.

    I don’t need to actually “test” the theory that raising the minimum wage to $1 million an hour tomorrow would, all else equal, generate unemployment. I can know it will prior to observing it. I don’t need to actually “test” the theory that worldwide socialism will not have any price system for the means of production, before I can know it is true.

    And you never answered my question of whether I should be able to pay my taxes in pork bellies.

    I did answer it. I said if taxes are going to exist, the state can tax people of whatever the free market money happens to be. If it’s pork bellies, then they can tax in pork bellies.

  97. Gravatar of D R D R
    29. March 2012 at 08:14

    Everyone knows that if you are hired to process pork bellies, you should be paid in pork bellies and be taxed in pork bellies.

  98. Gravatar of Major_Freedom Major_Freedom
    29. March 2012 at 08:18

    dwb:

    ok so to distill your issues. Your main issue is that 1) you are concerned that with for example a 5% NGDP target, there is some equilibrium with permanent 5% inflation and 0% real growth. So in general you are worried ngdp targeting will result in “more inflation than growth.” Also 2)the means with which the Fed gets there (money supply growth).

    I argued the second, not the first. But thinking about the first, it would depend on the time periods considered.

    Because earlier you conceded that money printing increases employment, so “printing money” could increase output not inflation.

    Only as a derivative effect, AFTER prices have already risen. Hiring more people takes place prior to any additional output on the basis of that labor. Higher wage costs means higher business costs, so prices will have to be higher once the output is ready for sale.

    But right, the permanent money printing machine might lead to 1) so how does the Fed “control” the breakdown between employment (real growth) and inflation.

    They can’t.

  99. Gravatar of Negation of Ideology Negation of Ideology
    29. March 2012 at 09:26

    Major:

    “The baseline is an unhampered price system founded upon individual property rights. ”

    That’s what we have now.

    “I said if taxes are going to exist, the state can tax people of whatever the free market money happens to be. If it’s pork bellies, then they can tax in pork bellies.”

    There wouldn’t necessarily be one free market money, there would likely be dozens. The state would ultimately have to make a choice as to what it will accept and on what terms. Taxes are a matter of law, when a government passes a law that you have to pay something to it, it obviously has to say in the law what that something is.

    So lets try again. I bill all my customers in pork bellies, you bill all your customers in gold. You refuse to accept pork bellies as payment, I refuse gold. When the government assesses a tax bill for each us to pay, what do we pay it in?

  100. Gravatar of Major_Freedom Major_Freedom
    29. March 2012 at 09:50

    Propagation of Ideology:

    “The baseline is an unhampered price system founded upon individual property rights. ”

    That’s what we have now.

    Now that’s funny.

    No, that is definitely not what we have now. Money production in this country and around the world is controlled by a coercive monopoly that disrespects private property rights. The state is an agency that systematically exploits private property owners. Unhampered means unhampered by the state. The state controlling money production is the very antithesis of unhampered.

    Indeed, so far removed is our monetary system from that of an unhampered price system that the only word that can properly describe money production in this country and pretty much every other country, is communism. Communism is government ownership and/or control of the means of production.

    Welcome to the real world.

    “I said if taxes are going to exist, the state can tax people of whatever the free market money happens to be. If it’s pork bellies, then they can tax in pork bellies.”

    There wouldn’t necessarily be one free market money, there would likely be dozens.

    I don’t think so. Typically what happens is one or two currencies become the dominant ones that are universally accepted. In a free market for modern economies like ours, this will almost certainly mean precious metals like gold and silver. Certainly not “dozens.” That’s just silly. And even if there were dozens, then the state will simply have to make do with trying to find a way to exploit those who are using a currency the state might not want.

    The state would ultimately have to make a choice as to what it will accept and on what terms. Taxes are a matter of law, when a government passes a law that you have to pay something to it, it obviously has to say in the law what that something is.

    Sure. But the gold/silver free market standard preceded the state taxing people in gold/silver. Before the US state was formed in 1776, people were using gold/silver as money on their own recognizance. Yes, amazing isn’t it?

    So lets try again. I bill all my customers in pork bellies, you bill all your customers in gold. You refuse to accept pork bellies as payment, I refuse gold. When the government assesses a tax bill for each us to pay, what do we pay it in?

    Well, one of two possibilities. One, the state could tax you in pork bellies and me in gold. Two, the state could do the same thing that they are doing now. The state can tax you in a particular commodity the state wants, that you might not even be accepting in your trades, but you are responsible for paying the state in that commodity anyway. For example, if I only accept gold, and I am able to run a business that way, I still have to pay taxes in US dollars, which means I have to accept US dollars and become another stooge in the “universal acceptance of US dollars” pool of suckers.

  101. Gravatar of D R D R
    29. March 2012 at 10:21

    “One, the state could tax you in pork bellies and me in gold.”

    Told you!

    “I have to accept US dollars and become another stooge in the “universal acceptance of US dollars” pool of suckers.”

    Not true. Even now you don’t have to accept US dollars unless you are owed an amount denominated in dollars. If you don’t want to accept dollars, then don’t accept IOUs in dollars, and don’t trade your stuff for dollars. You may find it difficult to find trading partners, but that’s your choice.

    At the time you pay your taxes, you *may* have to convert some gold into dollars because the government may so demand, but that doesn’t mean you ever have to hold dollars for any length of time.

  102. Gravatar of Major_Freedom Major_Freedom
    29. March 2012 at 10:32

    D R:

    Told you!

    This was never in dispute.

    “I have to accept US dollars and become another stooge in the “universal acceptance of US dollars” pool of suckers.”

    Not true. Even now you don’t have to accept US dollars unless you are owed an amount denominated in dollars.

    No, this is not how the tax code works. If you only accept gold, then you still have to pay taxes in US dollars on the gold you make. The IRS will consider you to be making a taxable income.

    If you don’t want to accept dollars, then don’t accept IOUs in dollars, and don’t trade your stuff for dollars. You may find it difficult to find trading partners, but that’s your choice.

    Not true. Remember the liberty dollar? Remember the man who paid his employees in gold coins, and the IRS still wanted to tax him?

    At the time you pay your taxes, you *may* have to convert some gold into dollars because the government may so demand, but that doesn’t mean you ever have to hold dollars for any length of time.

    And there’s the rub. If one has to accept US dollars because they owe taxes in US dollars by law, then I rest my case.

  103. Gravatar of D R D R
    29. March 2012 at 10:47

    “This was never in dispute.”

    Sorry, Major. I realize I was not specific, but that “you” was not you.

    “No, this is not how the tax code works. If you only accept gold, then you still have to pay taxes in US dollars on the gold you make. The IRS will consider you to be making a taxable income.”

    That’s not the same thing as accepting US dollars. I’m not saying you can avoid income taxes by refusing US dollars. You can arrange for an intermediary to transfer the appropriate number of dollars to the IRS in return for whatever you can arrange with that intermediary. At no point do you ever have to be in possession of any US currency.

  104. Gravatar of Major_Freedom Major_Freedom
    29. March 2012 at 11:43

    D R:

    That’s not the same thing as accepting US dollars.

    Why not? You have to accept them for a specific reason. If it’s not because you want to go on vacation, then it’s because you have to pay taxes.

    I’m not saying you can avoid income taxes by refusing US dollars.

    But paying taxes in US dollars is sufficient for my point that one MUST accept them in exchange, if one wants to avoid jail that is, which is the very coercion I am talking about.

    You can arrange for an intermediary to transfer the appropriate number of dollars to the IRS in return for whatever you can arrange with that intermediary.

    But then I have to “sell” something to that intermediary, and that creates another tax IOU in US dollars!

    You can’t avoid it.

  105. Gravatar of Negation Of Ideology Negation Of Ideology
    29. March 2012 at 12:20

    Major:

    Now we’re getting somewhere.

    “Well, one of two possibilities. One, the state could tax you in pork bellies and me in gold. Two, the state could do the same thing that they are doing now.”

    My question was what you are arguing for, not what the government can do. I’m gathering that you favor option one. So my question now is this – how would it ensure you and I are taxed equally? Would the government determine the gold/pork belly exchange rate? Wouldn’t everyone pay their taxes in whatever item they most wanted to get rid of? And what would it use to pay government workers?

    “But paying taxes in US dollars is sufficient for my point that one MUST accept them in exchange, if one wants to avoid jail that is, which is the very coercion I am talking about.”

    That’s true of taxes in general. In any monetary system, taxes are coercive. If I have to pay 10% of my income in gold coin I am no less coerced than if I have to pay 10% of my income in US Dollars.

    The difference is, if the government accepts gold or pork bellies as payment, it is influencing the market for gold and pork bellies and their relative price. If it only accepts a US Dollar that it issues, relative prices of gold and pork bellies(and everything else) are unaffected. The value of gold and pork bellies are determined by the free market, as they should be. In your system, they are ultimately determined by the government when it chooses what to tax in, and what exchange value it accepts it as.

    A system of everybody paying tax in the currency of their choosing is completely unworkable in the real world. What if I want to pay my tax in live alligators?

  106. Gravatar of D R D R
    29. March 2012 at 12:22

    “But then I have to “sell” something to that intermediary, and that creates another tax IOU in US dollars!”

    It’s obviously not true that YOU have to EVER accept a dollar in order to pay the tax in dollars. You don’t have to “sell” anything– you can give the intermediary gold and they submit payment to the government. Or you can have an account with the intermediary, denominated in lattes for all anyone should care. They’ll debit the appropriate number of lattes from your account.

    Circuitous, perhaps. But it’s your choice.

  107. Gravatar of D R D R
    29. March 2012 at 12:25

    “A system of everybody paying tax in the currency of their choosing is completely unworkable in the real world. What if I want to pay my tax in live alligators?”

    Stink bugs and stool samples. I am sure the price is such that to meet my tax obligation it would require voluminous quantity thereof…

  108. Gravatar of Major_Freedom Major_Freedom
    29. March 2012 at 13:08

    Propagation of Ideology:

    My question was what you are arguing for, not what the government can do.

    Oh, well then I am arguing for zero taxation.

    So my question now is this – how would it ensure you and I are taxed equally?

    I’m sorry, were we living in an equal tax country? No, it’s progressive. Gold can be taxed more than pork bellies, because they’re worth more.

    Would the government determine the gold/pork belly exchange rate?

    I’m sure there would be a market rate.

    Wouldn’t everyone pay their taxes in whatever item they most wanted to get rid of?

    Well that explains the dollar.

    And what would it use to pay government workers?

    If the state wants to pay their workers in something other than pork bellies, they’ll have to get something else that the workers want.

    The difference is, if the government accepts gold or pork bellies as payment, it is influencing the market for gold and pork bellies and their relative price. If it only accepts a US Dollar that it issues, relative prices of gold and pork bellies(and everything else) are unaffected.

    True, but then the relative dollar between cotton, linen, and computer bits would change if the government taxes in US dollars.

    A system of everybody paying tax in the currency of their choosing is completely unworkable in the real world. What if I want to pay my tax in live alligators?

    Hey cool, you just make an excellent case for abolishing taxation in a free market monetary system.

    Kind of shows why money is communist in a statist society.

  109. Gravatar of Major_Freedom Major_Freedom
    29. March 2012 at 13:11

    D R:

    It’s obviously not true that YOU have to EVER accept a dollar in order to pay the tax in dollars.

    Somebody paying on my behalf just moves the problem one step back. They’ll be compelled to accepting US dollars. SOMEBODY has to pay for me, me or someone else.

    You don’t have to “sell” anything– you can give the intermediary gold and they submit payment to the government.

    They’ll have to pay taxes on that gold in addition to the money they have to pay on my behalf.

  110. Gravatar of dtoh dtoh
    29. March 2012 at 13:18

    Scott,
    A suggestion for your blog. For thousands of years, democratic societies have been based on open discourse, but at the same time they have found it effective to adopt certain rules regarding that discourse, in order to a) keep individuals with an inclination for verbosity from monopolizing the deliberation, and b) force individuals as a courtesy to others to be concise and persuasive in the arguments. Typically those rules include a limitation on how long someone can speak and how many times they are allowed to speak.

    The rules can always be bent by the moderator, but you might want to consider limiting comments to 400 words each and to two comments per person per blog entry.

  111. Gravatar of Doc Merlin Doc Merlin
    29. March 2012 at 13:36

    @ dtoh

    Lame!!!

    What makes this blog cool is how open the discourse is, and how Scott actually responds and interacts with the commenters. I wouldn’t want more restrictions placed on it.

  112. Gravatar of dtoh dtoh
    29. March 2012 at 13:41

    Doc,
    Which is why you need rules to keep a few people from wrecking a good thing.

  113. Gravatar of dwb dwb
    29. March 2012 at 14:07

    you might want to consider limiting comments to 400 words each and to two comments per person per blog entry.

    if i have an excess can i sell them to someone else?

  114. Gravatar of D R D R
    29. March 2012 at 16:06

    “They’ll have to pay taxes on that gold in addition to the money they have to pay on my behalf.”

    Okay. So long as we are down to irrelevant details fleshing out how you could make a principled stand on something utterly meaningless, then I’m satisfied.

  115. Gravatar of Negation of Ideology Negation of Ideology
    29. March 2012 at 16:53

    dtoh – If your problem is with me for encouraging this, I apologize. I was just curious to understand the root issue, and now I think I do. I think a word limit is a good idea. I think limiting comments to two is a little low, maybe 4 or 5. Obviously Scott can set whatever limits he wants on his blog.

    Major – I now feel I have a complete understanding of your argument.

    “Oh, well then I am arguing for zero taxation” and “Kind of shows why money is communist in a statist society” sums it up. Your argument isn’t really with me, or market monetarism, it’s with any government at all. You are a anarchist. You equate any goverment with communism. I disagree, I think it’s obvious that you need a government to enforce the law if you’re going to have any private property rights, legal contracts, or a functioning market. But I think the argument of whether we need any state at all is beyond the scope of this blog, so I’ll drop it and we can agree to disagree.

    Go ahead and respond – I’ll let you have the last word.

  116. Gravatar of dtoh dtoh
    29. March 2012 at 20:44

    NegIde

    Not at all. Everyone should have a chance to pursue a point on once in awhile. A good moderator will not slavishly follow the rules…. just use them when things get out of hand.

    It would be nice to see more clarity and brevity in some of the comments. As Cicero said, “If I’d had more time, I would have written a shorter letter.”

    dwb – You can sell your excess ideas… but only for pork bellies.

  117. Gravatar of MDrew MDrew
    30. March 2012 at 02:47

    ssumner,

    I didn’t know you had any particular commitment to never deleing anything; I wasn’t anticipating that you would, just saying that I would understand if you didn’t put that type of comment up, and that the point was just that the thought go through your head. I’m not trying to demonstrate to the world that you’re the greater asshole (and in fact, ‘greater’ was more than I meant to say – I should have just deleted that and replaced it with equal rather than just adding that as a possibility). I can’t point to it; I just think it’s in your tone.. I just think you’re not doing much in particular to depersonalize these disputes despite sort of acting like the personal nature of them is distasteful. Again, take it with a grain of salt (what more would you take it with?); it’s just my perspective. I’m satisfied merely that it passed through your consciousness momentarily.

  118. Gravatar of MDrew MDrew
    30. March 2012 at 02:47

    ssumner,

    I didn’t know you had any particular commitment to never deleing anything; I wasn’t anticipating that you would, just saying that I would understand if you didn’t put that type of comment up, and that the point was just that the thought go through your head. I’m not trying to demonstrate to the world that you’re the greater asshole (and in fact, ‘greater’ was more than I meant to say – I should have just deleted that and replaced it with equal rather than just adding that as a possibility). I can’t point to it; I just think it’s in your tone.. I just think you’re not doing much in particular to depersonalize these disputes despite sort of acting like the personal nature of them is distasteful. Again, take it with a grain of salt (what more would you take it with?); it’s just my perspective. I’m satisfied merely that it passed through your consciousness momentarily.

  119. Gravatar of MDrew MDrew
    30. March 2012 at 02:47

    ssumner,

    I didn’t know you had any particular commitment to never deleing anything; I wasn’t anticipating that you would, just saying that I would understand if you didn’t put that type of comment up, and that the point was just that the thought go through your head. I’m not trying to demonstrate to the world that you’re the greater asshole (and in fact, ‘greater’ was more than I meant to say – I should have just deleted that and replaced it with equal rather than just adding that as a possibility). I can’t point to it; I just think it’s in your tone. I don’t believe you’re not doing much in particular to depersonalize these disputes vaguely acting like the personal nature of them is distasteful (which it is). Again, take it with a grain of salt (what more would you take it with?); it’s just my perspective. I’m satisfied merely that it passed through your consciousness momentarily.

  120. Gravatar of MDrew MDrew
    30. March 2012 at 02:50

    Whoa. By all means please delete those extra submissions. Apologies for that.

  121. Gravatar of CA CA
    30. March 2012 at 12:15

    Sumner was on a panel with DeLong today in Kansas City. Cant wait to read how that went.

    http://www.growthology.org/growthology/2012/03/economics-bloggers-forum-2012-1.html

  122. Gravatar of CA CA
    30. March 2012 at 13:29

    Previous link isn’t working anymore. Page has been moved here:

    http://www.growthology.org/growthology/2012/03/economics-bloggers-forum-2012.html

  123. Gravatar of Open letter to Brad DeLong | Historinhas Open letter to Brad DeLong | Historinhas
    31. March 2012 at 07:30

    [...] Scott Sumner did a post on your paper with Summers. Being an academic, he knows much better than me how to “roam around the room”, much as diplomats deal with one another. This is a good example of “diplomatic trashing”: PS. Just to reiterate, this post is not a comment on the core of D&S. I´m not qualified to judge their model, but it looks fine to me. I just don´t buy the assumption that motivates the entire exercise. [...]

  124. Gravatar of Major_Freedom Major_Freedom
    31. March 2012 at 19:04

    “Oh, well then I am arguing for zero taxation” and “Kind of shows why money is communist in a statist society” sums it up. Your argument isn’t really with me, or market monetarism, it’s with any government at all. You are a anarchist. You equate any goverment with communism. I disagree, I think it’s obvious that you need a government to enforce the law if you’re going to have any private property rights, legal contracts, or a functioning market. But I think the argument of whether we need any state at all is beyond the scope of this blog, so I’ll drop it and we can agree to disagree.

    I correctly identify any government ownership and/or control of any means of production to be communist to that extent.

    Monopolies are not needed in security and protection. If they were, then only world government would be proper, and with world government, there are no other governments to ensure it doesn’t gain too much power.

    It’s lazy to just dismiss someone’s arguments on the basis of labelling them as such and such a person. You completely ignored the substance of my argument.

  125. Gravatar of Alejandro Alejandro
    2. April 2012 at 04:22

    … That’s the policy we should be teaching our grad students. The optimal monetary policy. Not a policy mix that only has a prayer of making sense in countries where the central bank is even more stupid and corrupt than the Congress. As far as I can tell, those countries don’t exist.

    In Argentina we might me reaching that point. Soon the central bank will be doing both monetary and fiscal policy.

  126. Gravatar of ssumner ssumner
    2. April 2012 at 06:12

    DR, You said;

    “So… it should be judged on a cost benefit basis in which we do not consider all the benefits? Odd.
    Should NGDPLT be so judged as well?”

    OK, I’ll try to explain this one more time. It should be judged on all the benefits you expect to occur. If you don’t expect the “multiplier” to lead to growth, there’s nothing to judge.

    dtoh, Good idea, but I’m increasingly ignoring the long rambling incoherent comments.

    MDrew, I notice you ignored my previous comment. You didn’t provide evidence of my rudeness. Can I assume calling their paper “excellent” was what you had in mind? If not, please explain.

  127. Gravatar of D R D R
    3. April 2012 at 13:51

    “OK, I’ll try to explain this one more time. It should be judged on all the benefits you expect to occur. If you don’t expect the “multiplier” to lead to growth, there’s nothing to judge.”

    But I do expect the “multiplier” to lead to growth.

    And isn’t that the point of DeLong and Summers? You look at Figure 3.1 and say, the MP curve corresponding to “fiscal offset” is stupid. They agree. They look at Figure 3.1 and say the MP curve corresponding to “zero nominal bound” implies that fiscal policy is effective.

    I guess your view is that the “zero nominal bound” MP curve is also stupid because the Fed could always lower the curve so that it intersects IS at a lower real interest rate and higher output.

    But even if that is an option then we are asking the question of which policy is more effective, not if.

  128. Gravatar of ssumner ssumner
    4. April 2012 at 05:26

    DR, You said;

    But I do expect the “multiplier” to lead to growth.”

    But I don’t, which I why I oppose putting growth assumptions into C/B analysis.

    I agree with Nick Rowe that the IS curve slopes upward.

  129. Gravatar of D R D R
    4. April 2012 at 06:41

    How is that a responsive answer?

    The slope of the IS curve is irrelevant. Holding MP constant, a rightward shift in IS raises output.

    Maybe you think that you can’t shift IS to the right without shifting MP as well, but then wouldn’t Nick Rowe say you miss the “whole point of drawing two curves.”

  130. Gravatar of Dan Kervick: Beware of Rule by Central Banks « naked capitalism Dan Kervick: Beware of Rule by Central Banks « naked capitalism
    4. April 2012 at 11:11

    [...] recently launched a blistering attack on a new paper by J. Bradford DeLong and Lawrence Summers. DeLong and Summers argue in that paper [...]

  131. Gravatar of ssumner ssumner
    5. April 2012 at 14:55

    DR, I don’t have the graph in front of me, but my general view is that IS-LM curves don’t really tell us anything. The results you get out of it simply reflects the assumptions you put into it. If you assume the Fed targets inflation then fiscal stimulus is ineffective. If the IS-LM model says otherwise, then the model is wrong. Perhaps they assume that a shift in IS will not be offset by an opposite shift in LM.

  132. Gravatar of D R D R
    5. April 2012 at 17:43

    “If the IS-LM model says otherwise, then the model is wrong.”

    You know, I was warned early on in my economics work that economists worked backwards from their conclusions. Thank you for confirming that for me. I guess we are done here.

  133. Gravatar of Becky Hargrove Becky Hargrove
    5. April 2012 at 18:07

    The above Naked Capitalism link: in which Dan Kervick makes DeLong seem like an angel in comparison…
    Perhaps I should say Dan if you are reading this…I am not anti-government nor are most people here at this site, we just want government to work better than it does right now. When I began my studies nine years ago, as an advocate for the poor, I figured out in short order that one of my primary goals was to do whatever I could to help stabilize governments. And in order for economies to work better, for governments to work better, each individual in this world deserves to have economic access for the whole of their lives. Ultimately, there is far too little wealth for governments to build upon, if individuals are not allowed to create their own wealth on their own terms. When people cannot do that, we all end up pulling one another down, as is happening in the present.

  134. Gravatar of dwr dwr
    19. April 2012 at 08:11

    First and foremost, this is a good post. Just nitpicking, Prof Sumner, but Raj Chetty in the last decade published a phenomenal paper addressing the issue of “unemployment compensation discourages work” by distinguishing moral hazard effects from liquidity effects.

  135. Gravatar of Skepticlawyer » Debt, doom and despair Skepticlawyer » Debt, doom and despair
    15. July 2012 at 15:31

    [...] My take on this is that (1) if the US Congress could spend so much for so little stimulus effect, then fiscal stimulus is–as a matter of practical politics–an amazingly wasteful way of getting economic stimulus. And (2) since the fundamental problem was contractionary monetary policies, and the monetary authorities “move last”, then fiscal stimulus becomes even more problematic. (As Scott Sumner points out, the fiscal multiplier is a measure of central bank incompetence.) [...]

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