More reasons to stop talking about inflation

Dan Kervick at Naked Capitalism discusses Paul Krugman’s advocacy of a monetary policy aimed at higher inflation rates.  Krugman didn’t explicitly say this would be achieved through higher levels of aggregate demand, but I can’t imagine anyone thinking that Krugman meant the Fed should aim for higher inflation by reducing aggregate supply output.  Kervick seems to make that assumption:

Krugman’s two main arguments for the beneficial results of inflation are questionable. First, he argues that inflation will help reduce private sector debt overhang. But inflation only reduces debt overhang in a significant way for households who are fortunate enough to see their nominal wages rise along with the general rise in prices. In today’s economy, workers are frequently not so fortunate.

Suppose you work 40 hours a week for $1000 of take home pay, and you have a weekly debt bill of $500 and a weekly consumption bill of $500. So you work 20 hours for debt repayment and 20 hours for consumption. Now let’s suppose prices rise by 5%. Then the same basket of consumption goods you purchased before for $500 now costs you $525. Your debt bill, which is fixed in nominal terms, remains $500 per week.

Suppose also that your employer does not give you a raise, but chooses to take advantage of the inflation by keeping your nominal wages right where they were at $1000 per 40 hours. Then the result will be that you will have to decrease your real consumption by 4.7%. You will continue to work 20 hours for debt repayment and 20 hours for consumption, but now your consumption will be lower in real terms.

Here’s a homework assignment for economics students out there.  Explain Kervick’s argument using an AS/AD model.  You will quickly see that it only makes sense if you assume the inflation was created by reduced AS.  If it was caused by increased AD, then real GDP would have increased along with prices (assuming the AS curve is not vertical, and I can’t imagine an MMTer making that assumption.)

This is the classic problem of confusing shifts in AD with a movement along an AD curve.  It’s true that higher prices would cause people to buy less if you assumed the AD curve didn’t shift, i.e. that their incomes were constant and the inflation was caused by less AS.  But Krugman is obviously calling for the Fed to create higher prices via more AD, not less AS.

Never reason from a price change.  If we stop talking about inflation and start talking about NGDP, it will at least be clear that we are talking about boosting AD, not reducing AS.  At least I thought so, until I came upon this whopper from Kervick:

Yes, there are some people who still believe America’s workers are overpaid! In a recent post, Scott Sumner approvingly quotes Tyler Cowan, who has argued both against public sector hiring and for lower real wages. Cowan said, “the greater the number of protected service sector jobs in an economy, the more likely those citizens will oppose inflation. Inflation brings the potential to lower real wages, possibly for good.” Sumner then argued that Cowan’s considerations are a strong argument for favoring monetary policy over fiscal stimulus.

My post said nothing about wages, and I certainly didn’t endorse lower wages.   (Although you wouldn’t know that by clicking on the link, because it doesn’t link to my post.  I wonder why?)   I was arguing that we shouldn’t aim for a higher inflation rate, but rather for higher NGDP.  I thought MMTers also favored higher NGDP,  I guess at least one does not.

I finally got around to reading a Steve Keen post mentioned by Krugman and Nick Rowe:

Sigh. The level of currency restrains lending? So banks stop lending as they approach the limits to currency set by the Fed’s printing of notes?

I can’t improve on the comments of Neil Wilson on Krugman’s argument here:

“Krugman needs to start attending the real world. The latest argument is utter tosh. For there to be a constraint in the real world, you have to have the actual power to stop another entity from doing something.

What Krugman is suggesting is that the Fed has the power to limit the amount of currency in issue. In other words he’s suggest that to control the economy the ATMs will be left to run dry and you will be told ‘no’ when you go and try and draw cash at the bank counter.”

[The first part is Keen, the second part is Wilson.  Someday I need to learn how to double indent.]

Three hundred years of monetary economics is based on the notion that as money gets scarcer its value will rise.  So if the Fed reduces the monetary base, you do not see ATMs run out of currency, rather the price of money rises.  In the long run this means deflation, as the value of money is the inverse of the price level.  But prices are sticky in the short run so less money may initially raise the opportunity cost of holding money, especially short term interest rates.  (Whether rates actually go up depends on other factors as well, such as NGDP growth expectations.)  Perhaps I misunderstood Keen (I seem to have misunderstood every other MMT quotation I tried to analyze) but it almost seems like he’s conflating the very different concepts of ‘scarcity’  and ‘shortage.’

HT:  John Bennett


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195 Responses to “More reasons to stop talking about inflation”

  1. Gravatar of DonG DonG
    7. April 2012 at 13:56

    I am skeptical of Tyler’s remark. I think govt. employees have shown a strong ability to raise their compensation with any inflation. Is there somewhere on earth that govt. employees fight for market wages?

    Another topic. Is anyone doing any work on a wealth-based tax system. Google tells me that India has such a thing, but I don’t see anything else cooking for the West. Replace inheritance tax, income tax, capital gains, FICA, …. with a 1% wealth tax and a 10% sales tax. That would seem simple, encourage savings and yet discourage excessive accumulation. The wealth tax kicks in at $100K net/per adult. That should yield between $2T and $2.5T.

  2. Gravatar of Max Max
    7. April 2012 at 14:07

    A rise in the price of currency (i.e. a $1 bill selling for more than $1) equates to a fall in interest rates, not an increase. If the supply of currency were exogenous, the zero bound wouldn’t exist.

    So, limiting the supply of currency (when near the zero bound) is obviously inflationary.

  3. Gravatar of marcus nunes marcus nunes
    7. April 2012 at 14:16

    And Luigi Zingales is another one claiming, like John Taylor, for a single mandate – the very precisely defined concept of price stability!
    http://thefaintofheart.wordpress.com/2012/04/07/by-all-means-eliminate-the-fed%C2%B4s-double-mandate/

  4. Gravatar of David Pearson David Pearson
    7. April 2012 at 15:13

    “…as money gets scarcer its value will rise…”

    And as it becomes more abundant its value will fall.

    High powered money is, effectively, the portion of the base that does not earn the IOR.

    That portion has accelerated over the past year (to 9% growth for currency, 20%+ growth for RR).

    Should we therefore expect inflation to accelerate, all else equal?

  5. Gravatar of Jim Glass Jim Glass
    7. April 2012 at 15:31

    Is anyone doing any work on a wealth-based tax system…. Replace inheritance tax, income tax, capital gains, FICA, … with a 1% wealth tax and a 10% sales tax. That would seem simple…

    Simple?? We already have a wealth tax, it is the estate tax. The reason it is imposed only once per lifetime, and on only very few people (the richest, who will pay a lot) is because it is administratively hugely costly, complex, easy to game, and highly prone to corruption.

    A real wealth tax would require full self-reporting of trillions of dollars worth of non-marketable assets (interests in private businesses, private possessions, non-marketable financial assets, on and on) and accurately valuing all of them each year. Remember, every appraisal of such an asset is *subjective*, and can be legally protested and appealed, usually with good cause.

    That’s endless litigation, plus the wealth police searching safe deposit boxes and kicking in doors to find all the wealth that has been converted to concealable property, plus property assessors having strong incentives to facilitate cash payments from property owners in exchange for reduced assessments, etc., in a cycle that re-starts itself fresh each year.

    See: How Pittsburgh imposed a Georgist Land Value Tax in 2000 that immediately collapsed under these pressures and was promptly abandoned, while requiring years of litigation to clean up the mess it left behind (that was just valuing land, something everyone can see) … how e.g. in Massachusetts — which has corporate taxes, sales tax, income tax, employment tax, inheritance tax, etc, etc. etc. — more than 90% of all litigation is over property valuations … how NYC a few years back had a billion-dollar property tax scandal, with assessors under-valuing properties by *billions* as far back as records went. Have you ever heard of a billion-dollar payroll tax scandal?

    The thing about tax systems is that they have to work in the real world. When nifty theoretical concepts hit the real world, the result can be gruesome. That’s what policy has to survive. It’s the same with all economic policy, but with tax policy unexpected consequences land hard and fast.

  6. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. April 2012 at 15:36

    David P: If that extra money gets used in actual transactions, and output does not rise to match, presumably. (This is economics, everything–especially relative value–is relative.)

  7. Gravatar of Benjamin Cole Benjamin Cole
    7. April 2012 at 15:46

    Dan Kervick needs to go to something more in his line of reasoning, such as gardening, or oil painting.

    Precisely because real wages are decreased is one reason you want AD-caused inflation. Sticky wages slows down employment growth otherwise.

    And why is it the same people who never care about workers suddenly become acutely concerned with minor real wage cuts in a moderately inflationary environment?

    besides, real wages will probably increase if we can ever get back to a robust grwothin our economy, Which we know, from the Japan experience, will not happen unless the Fed put the pedal to the metal?

    Putting on the Kervick dunce caps, we find that wages must have increase 15 percent in Japan in the last 20 years, due to deflation.

    Actually, we find out real wages have been falling in Japan—you cannot protect real wages by zero inflation or deflation. You end up with a deflationary recession that robs everyone, almost.

    http://thinkprogress.org/yglesias/2011/08/25/304564/falling-real-wages-in-japan/

    Kervick’s clueless commentary dovetails with recent commentary by Market Monetarists that there are interest grouse who foil proper monetary policy. People in steady salaried jobs—including central bankers and their staffs–would “suffer” from higher growth and inflation, while factory workers and others who work hourly would probably benefit.

    Additionally, bondholders would be impacted by higher interest rates.

    Of course, remember Japan. No better how much Japan catered to salarymen and bondholders, everyone was worse off (well except maybe for central bank salarymen if they kept their salaries fixed in nominal terms).

    Central bankers should be forced to buy REIT stocks.

  8. Gravatar of Maximillian Maximillian
    7. April 2012 at 17:01

    Some people must simply think there is a dial inside the fed somewhere labelled inflation.

  9. Gravatar of Jim Glass Jim Glass
    7. April 2012 at 17:01

    A rise in the price of currency (i.e. a $1 bill selling for more than $1)

    The price of $1 in currency is always $1. It never sells for more than that.

    (If you want to ask for 75 cents of currency for every $1 of currency you pay, I’ll be glad to step into the other side of that deal. But don’t ever expect to buy $1.25 of currency for every $1 you pay.)

    equates to a fall in interest rates, not an increase.

    The interest rate is the price of *renting* money, not selling it. At the end of the rental term it is returned. The price of renting can move in the opposite direction from the price of buying and selling.

    The price of buying currency is the amount of goods and services it is exchanged for in the market. When the price of currency goes up, you must pay more in goods and services to purchase it, and it buys correspondingly more in goods and services going the other way.

    Ninety cents buys goods that previously cost $1. This is deflation.

    So, limiting the supply of currency (when near the zero bound) is obviously inflationary.

    Deflationary. Just as with anything else, when the supply of money rises more slowly than the demand for it, its price rises. This rising price of money is deflation.

  10. Gravatar of Joe L. Joe L.
    7. April 2012 at 17:20

    “So if the Fed reduces the monetary base, you do not see ATMs run out of currency, rather the price of money rises. In the long run this means deflation, as the value of money is the inverse of the price level.”

    In a system with no Central Bank to service the currency drain the persistence of withdrawals depletes bank reserves (e.g. gold) and deposits, then banks must shrink or fail to grow the collective bank balance sheet, this lack of expanding bank credit is deflationary for asset prices and investments. When Fed services the currency drain it reverses the impact of the currency withdrawals and this permits banks to continue to expand balance sheets which is slightly inflationary under ideal conditions in a growth economy.

  11. Gravatar of David Pearson David Pearson
    7. April 2012 at 17:35

    Lorenzo,
    Currency growth is double that of NGDP growth. One could argue people are making bigger ATM withdrawals with rates at zero — more “wallet money”. Or currency transaction demand is rising and we’ll see inflation accelerate. Which one is true? We’ll find out in a few years, except by then other factors will intrude. I see little practical difference between Keen’s central point — the base is irrelevant — and the empirical observation that velocity is indeterminate over even long time periods.

  12. Gravatar of Max Max
    7. April 2012 at 17:47

    “The price of $1 in currency is always $1. It never sells for more than that.”

    It could if the Fed stopped offering to sell unlimited quantities at face.

    “The interest rate is the price of *renting* money, not selling it.”

    The interest on currency is always 0%. So to make a person indifferent between a negative interest t-bill and currency, the currency must sell above face value.

  13. Gravatar of Dan Kervick Dan Kervick
    7. April 2012 at 18:02

    If it was caused by increased AD, then real GDP would have increased along with prices (assuming the AS curve is not vertical, and I can’t imagine an MMTer making that assumption.)

    How does this address my point about real wages Scott. My point was simple. If consumer prices go up while the nominal wages for a given class of people stay where they are, then there real wages go down. That point is independent of the cause of consumer price increase, and holds even if prices rise due to a boost in AD and GDP. Are you saying that people’s nominal wages will rise automatically along with prices and GDP?

    Thanks you for noting the broken link. I’ll fix it now.

  14. Gravatar of Dan Kervick Dan Kervick
    7. April 2012 at 18:27

    Scott, the link seems OK to me now. It goes to your “Four Short Posts” post from April 4. You cited Cowan’s argument:

    Inflation brings the potential to lower real wages, possibly for good. How many insiders, if they had to renegotiate their current deals, would do just as well?

    Get the picture?

    This is a neglected cost of protected service sector jobs, namely that the economy’s central bank will face strong political pressures not to inflate even when a looser monetary policy would be welfare-improving.

    To which you said:

    I’ve already pointed out that this is an argument for switching from inflation to NGDP targeting. But it is also a strong argument for relying more on monetary stimulus than fiscal stimulus.

    So it seems to me that Cowan was arguing lower inflation can potentially lower real wages, “possibly for good”, and that avoiding the political pressure that would result from that outcome was a good reason to stay away from a public jobs program.

    I see you agreed with him on the latter political point, but did not really take a position on whether lowering real wages through inflation would be a good thing or not, but rather called for shifting from inflation targeting to NGDP level targeting. Is that correct? I’ll add an update to my post with the correction if I’m interpreting you correctly.

  15. Gravatar of Dan Kervick Dan Kervick
    7. April 2012 at 18:34

    Precisely because real wages are decreased is one reason you want AD-caused inflation. Sticky wages slows down employment growth otherwise.

    It might be a reason you want it Benjamin. But I know too many people whose real wages have been falling for too long, while others in the “plutonomy” make out like bandits, to follow you there.

    If we get a federal jobs guarantee program, not only will the unemployed get work and a decent income, but the disappearance of the permanent buyers’ market for labor will force employers to compete harder for employees by offering higher real wages – hopefully cutting both executing salaries and profits. Profit levels are absurdly high right now given that firms are not creating jobs with any alacrity.

  16. Gravatar of Tommy Dorsett Tommy Dorsett
    7. April 2012 at 18:42

    How about Krugman calling for 70%+ MTRs on ‘the rich’ based on D&S’s highly questionable elasticity estimates.

    http://krugman.blogs.nytimes.com/2012/04/03/the-simple-analytics-of-soaking-the-rich-wonkish/

    Funny, the UK just ditched their 50% top rate because it failed to bring in more revenue. Never let the facts get in the way of a good theory.

  17. Gravatar of Benjamin Cole Benjamin Cole
    7. April 2012 at 19:11

    Dan Kervick-

    I am no fan of extreme distributions of wealth and income, that can also choke an economy, btw. One reason that Douglas MacArthur (!) instituted land reform in Japan and the Philippines is that the super-rich controlled so much in assets they really had no incentive to develop land. Why break a sweat when you are living in the lap of luxury anyway?

    But, if you feel we have a plutonomy or plutocracy, I won’t disagree too much.

    Scot Sumner has pointed out that consumption taxes tax those who consume–and if the rich consume a lot, they will pay a lot in taxes. Perhaps exempt food, rent and medical care, and you probably have a progressive tax system.

    The worst policy choice is to asphyxiate the economy though tight money. Japan has tried deficit spending and tight money for 20 years, and it is an epic failure.

    From being world economic leaders, they became the laggards of the Western world, and real wages fell 15 percent, while industrial production fell 20 percent. Property markets fell by 80 percent (and are still falling), and stocks by 75 percent, and no signs of it getting better. The yen soared. But they did whip inflation.

    I am fine with a floor under anyone who works 40 hours a week, or who retires (I would bump that up to age 70). I can’t imagine we say to someone who works forty hours a week, “Gee, sorry, you can’t afford health care so too bad.” I am all for great public schools at least through k12. Cut defense spending by two-thirds.

    But pump up the money supply. Please.

    I retract my commentary about your taking up gardening. But read Scott Sumner and take cues on monetary policy. Japan is not an example of how to enrich the populace.

  18. Gravatar of Tommy Dorsett Tommy Dorsett
    7. April 2012 at 19:22

    Dan Kervick – Real wages and real incomes are not the same thing. Real wages can and do fall as real incomes rise because aggregate hours worked increase with a positive demand shock.

    The 08 bust was characterized by the largest rise in the ratio of wages to NGDP since the 1930s. Real wages soared but real incomes collapse along with hours worked and employment.

  19. Gravatar of Dan Kervick Dan Kervick
    7. April 2012 at 19:29

    Tommy Dorsett,

    Point taken. What I was talking about is a fall in real income due primarily to a fall in real wages unaccompanied by any increase in hours worked.

  20. Gravatar of Dan Kervick Dan Kervick
    7. April 2012 at 19:39

    Benjamin, as long as I have been reading this blog I have not been able to figure out what mechanism Scott has in mind for “loosening” money, and how it is exactly that the Fed is supposed to be able to accomplish this loosening.

    I understand the MMT version of monetary loosening: the Treasury could spend more than takes in. But I don’t understand the MM account of the specific operations that are involved.

  21. Gravatar of Morgan Warstler Morgan Warstler
    7. April 2012 at 19:44

    Dan, let me try and clear it up for you.

    Scott’s not saying that some folks with jobs won’t experience less in short term.

    He’s saying who cares? the other unemployed get jobs, and the quality of life improves across the board (altho Scott doesn’t make that argument)

    His concern was you assuming that there wouldn’t be growth from the folks you want to protect eating it a bit.

    More importantly, you’ve been told the way to do a Guaranteed Income (Paypal) Auction the Unemployed (Ebay), so that it can ACTUALLY happen… like REALLY HAPPEN.

    If you want to insist that every single person have an income that they can live on, I say FINE, under two conditions:

    1. the $ comes from taxes as a social benefit
    2. their weekly labor gets auctioned at the private market, so these people have bossy bosses making them work hard.

    You really ought to explore WHY in your brain, you can be offered the above and don’t think it is a fair deal.

    —-

    The reality is we ARE talking about the guy washing cars making slightly less money as the economy improves and the cost of car washes goes down and more people get the service for less money.

    We have 30M unemployed, mostly the least productive workers, we can GUARANTEE them the $ to live, but we can’t pretend we have magic powers and can wave a magic wand and suddenly the amount they need to live, is what their boss can make a profit off of.

    Employing those 30M means that everyone else they compete with will be making less.

    The Govt. is not going to get bigger Dan, income inequality is going to increase… but you shouldn’t worry about that, you should instead want everyone to have a living wage and everyone to have to a real return made by someone for employing them.

    That is SUSTAINABLE.

  22. Gravatar of Morgan Warstler Morgan Warstler
    7. April 2012 at 19:47

    “Funny, the UK just ditched their 50% top rate because it failed to bring in more revenue. Never let the facts get in the way of a good theory.”

    Gotta love a good immediate feedback loop.

  23. Gravatar of SG SG
    7. April 2012 at 20:09

    Dan,

    How long have you been reading Scott’s blog? All he talks about is *how* the Fed should provide more monetary stimulus.

    My understanding is that he wants the Fed to ease the same way it has always done so – through open market operations buying government bonds. But the real easing is done through communication – for example by committing to a higher inflation target, or an NGDP target. Rational investors will expect the Fed to follow up, so that will have the immediate effect of increasing inflation expectations, leading to people hoarding money less, leading to more AD.

    I am in no way a trained economist (one econ class in undergrad, back in 2006), but Scott’s never been shy about saying what he believes the Fed should do. If nothing else, he’s in favor of more QE.

  24. Gravatar of Jim Glass Jim Glass
    7. April 2012 at 21:00

    “The price of $1 in currency is always $1. It never sells for more than that.”

    It could if the Fed stopped offering to sell unlimited quantities at face.

    Please explain how a $1 bill would not equal a $1 bill. (Because of the “inflation” resulting from the shortage of money supply?) We really would like to know.

    Perhaps an actual historical example of a unit of currency not equaling itself in value, and selling for more than itself, would help illustrate, if you can supply one.

    (When gold was base money and no central bank could provide but very finitely limited quantities of it, did an ounce of gold sell for more than an ounce of gold?)

    “The interest rate is the price of *renting* money, not selling it.”

    The interest on currency is always 0%.

    If you *rent* currency the interest cost is certainly typically *not* 0%. Who is going to rent you a big, huge pile of currency for 0%? Let me know! I want in too.

    If you *own* currency in your possession then nobody receives or pays interest on it. But why would you think anyone would? After all, if it’s not rented there’s no rent.

    So to make a person indifferent between a negative interest t-bill and currency, the currency must sell above face value.

    Help me find the coherent thought in this — perhaps by giving an example of “a currency selling for more than its face value”. Eight dollar bills selling for ten dollar bills?

    Also, there’s never been much about in negative-interest T bills, but we have lots and lots of experience with positive interest T-bills. By your same logic are you also saying: “to make a person indifferent between a positive interest t-bill and currency, the currency must sell below face value”?

    If not, why not?

    Is all this another new flavor of MMTism? Curiouser and curiouser. [g]

  25. Gravatar of Dan Kervick Dan Kervick
    7. April 2012 at 21:15

    SG,

    In his recent post on near-monies, Scott said,

    Mr. Garcia is correct that the shadow banking system would be important if money multipliers, fed funds rates, and reserves were important. But they aren’t. All that matters (for AD) is the monetary base and base velocity.

    So I take it that he thinks commercial bank reserves and the Fed funds rate – and hence open market operations, which are operations that adjust the Fed funds rate and reserve quantities – aren’t important and are somehow independent of the monetary base. I suppose as an MMTer I should be gratified that he doesn’t think the bank reserve channel and the money multiplier are important. But I have to say that the rest loses me. I don’t see what mechanisms he thinks are still in play through which the Fed controls or influences the monetary base. How exactly does the part of the base which does not consist of commercial bank reserves get adjusted by the Fed?

    As far as expectations, that’s very hard to predict, since they are subjective and vary from one person to another. It sounds to me like you believe that if the Fed announced its “commitment” to a higher NGDP target, that would influence your personal behavior, because you would then expect the Fed to “follow up” in some mysterious and undefined way to make good on this commitment. And it can’t be denied that if enough people still think like you, then various Fed pronouncements could still have broad effects.

    But I believe these expectations effects are unsustainable and are rapidly disappearing as clearer awareness of the actual mechanics of Fed operations penetrates the public mind. Fed expectations influence is largely based on confused and vestigial beliefs about mysterious monetary voodoo, including bad Econ 101 textbook models of loanable funds and the money market. My sense is that this kind influence is eroding every day. I noticed in the recent Krugman debate with Keen and Scott Fullwiler, the comments increasingly indicate that people now see that Krugman doesn’t know quite what he’s talking about when it comes to the operative causal mechanisms governing bank operations, and the Fed’s connection with them. If people’s expectations are based on their beliefs in the accuracy of certain models, and those beliefs are undermined, then the expectations channel will be undermined along with them. I look forward to the time when most of these voodoo expectations effects are completely gone. Then the Fed’s influence will be limited to only those operations are based on underlying expectations-independent mechanics. Perhaps then people will turn back toward things that really work, independently of psychological games and the intentional propagation of myths.

  26. Gravatar of Morgan Warstler Morgan Warstler
    7. April 2012 at 23:03

    what’s so funny is that your entire post is about the fairness outcome, and when you argue here now, you want to keep it technical.

    The base human assumption you start with is denied.

    In your specific example that you put your stake in the ground on, the guy makes less because of xyz.

    But the response is that he should go ahead and get less -and you drop it.

    wtf?

  27. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. April 2012 at 23:58

    David P: Do we have any idea how much of that currency growth is being held outside the US? That could rather make a difference.

  28. Gravatar of Max Max
    8. April 2012 at 00:39

    “Please explain how a $1 bill would not equal a $1 bill.”

    A matured $1 bond entitles you to $1, so it can never be worth less than $1, but it could be worth more. Of course, the treasury doesn’t offer $1 bearer bonds, so this is an alien idea. But not a complicated one. If the green paper were auctioned instead of sold for $1, then that’s what they would be, bearer bonds. Quite usable as a medium of exchange.

    Anyway, back to the original point. If the Fed limited the quantity of green paper (not money, GREEN PAPER!), then the 0% interest rate floor would go away. You could have a -4% rate or whatever is called for.

  29. Gravatar of Lorenzo from Oz Lorenzo from Oz
    8. April 2012 at 02:29

    David P: Besides, isn’t the Fed just going to take currency out of circulation if inflation does start rising significantly? After all, currency has been going up much faster than M1 or M2 without any notable effect on prices for some time now. But then you start taking into account expectations and a simple quantity story does not work anymore.

  30. Gravatar of Jason Rave Jason Rave
    8. April 2012 at 03:05

    Is it any wonder we have problems at the zero lower bound in real world economics when people don’t understand the fundamental idea of short-run expectations augmented Phillips Curve and SR Non-neutrality (or super non-neutrality) of money?!

    I hope you and the rest Scott continue educating (or at least continue trying) the masses on the role of inflation at the ZLB (but also why NGDP level targeting would be better than inflation targeting as a result).

  31. Gravatar of RebelEconomist RebelEconomist
    8. April 2012 at 03:15

    Explain Kervick’s argument using an AS/AD model. OK; I’ll have a go (although I am not saying that I necessarily believe my own explanation).

    Fed buys bonds, crediting accounts of bondholders. Ex-bondholders buy commodities to store, fearing inflation and seeing few attractive domestic investment opportunities. There will be some positive impact on US inflation from the commodity price rises, but depending on the commodities affected, there might be minimal impact on US GDP, and hence on US wages, so the typical worker might see their nominal disposable income fall. Their real debt burden may have fallen a bit, but it is still harder for them to service.

    How’s that for an explanation? I know it’s more in the spirit of AD/AS than the letter, because it needed a few more moving parts, but those extra moving parts are perhaps indispensible to understanding what is going on.

    My real point here is that economists should make a bit more effort to tease out the argument that people are trying to make, rather than seizing on the argument’s weakpoints to rubbish it because their instinct is to disagree. I get tired of ploughing through these vital but adversarial debates which generate more heat than light.

    And by the way, the idea that the UK ditched its 50% top rate of income tax because it failed to bring in more revenue is disinformation. The revenue it raised in its year or so of existence was severely reduced by income-shifting strategies ahead of its introduction, and even then, it did bring in a little more than the previous 40% rate. I am sure that the motivation for abolishing the 50% rate was largely ideological, though I am somewhat sympathetic to that ideology.

  32. Gravatar of W. Peden W. Peden
    8. April 2012 at 04:44

    RebelEconomist,

    I agree on the 50% tax rate. Do I think that the UK government spends too much and taxes too much? Yes. However, any argument for cutting taxes during a period of deficit reduction and without compensating cuts in expenditure must be based on good evidence that such a tax cut will raise more revenue. No such evidence has been presented, as you say.

  33. Gravatar of W. Peden W. Peden
    8. April 2012 at 04:53

    Benjamin Cole,

    I disagree with Dan Kervick just as much as you do, but there’s no need to be insulting. You’re much too positive a person for that kind of thing.

    I DO think that critics of MM are right that there is a “black box” approach to the transmission mechanism between monetary policy and the money supply in a lot of MM reasoning. This is not a new problem in monetarism: Fisher and Friedman are very good once we’re in hot potato territory, but how do we get there?

    Since MMs come from very different theoretical backgrounds, this black box approach is understandable. However, ultimately it’s unjustifiable and we need to provide accounts of the empirically apparent connection between monetary policy and the money supply.

    Expectations are important and MMs often mention them, but expectational reactions to a policy assume policy effectiveness. So we need to provide something in the cultural manner of the People of the Concrete Steppes, as Nick Rowe calls them, even though we know that expectations do the heavy lifting in practice.

    That’s why I go on so much about Tim Congdon and his working linking monetary policy, asset prices, credit and the money supply. I haven’t yet found any reason to doubt his account of the transmission mechanism. Monetarists can provide as much mechanistic explanations as non-monetarists require, provided we remember that in practice expectations lead concrete actions.

  34. Gravatar of Bill Woolsey Bill Woolsey
    8. April 2012 at 04:56

    If we start with, more spending on goods and services–capital goods and consumer goods and services–then firms sell more, and respond both by expanding production faster and raising prices faster. That “raising prices faster” part is an increase in the inflation rate. It is important to understand (and Scott fails to mention this enough, in my opinion,) that the increase prices faster part is an alternative to the response of “expanding the production of good and services faster.” The more of the increase in spending results in more rapid increases in prices, that is, higher inflation, the less it results in more rapid increases in production. In the very unlikely scenario where very rapid expansions in productive capacity combined with more rapid growth in spending on output result in firms lowering prices, but expanding production even more, that would be a good thing. The inflation is never “needed” or “good.”

    However, that more rapid inflation would be associated with more rapid increaes in spending (as expained,) would be a necessary evil. And refusting to allow spending to rise in order to avoid the inflation woudl be a mistake. It isnt’ that we “need” more inflation. It is that we need to put up with more inflation as a necesary evil to generate more production of goods and services.

    While more rapid growth in the production of goods and services is a good thing, other things being equal, this must be understood in the context of an economy that is producing below capacity. More rapid growth in the production of goods and services is possible and desirable because it will allow the unuitlized labor, capital, and other resources to be used to produce goods and services. (If, on the other hand, the economy is already producing at capacity, to the degree any temporary expansion of output would be generated by more rapid growth in spending on output would be of little benefit.) Anyway, this includes additional employment of labor.

    It would be possible for the real wage per worker or hour of labor to stay constant, or grow at it’s current slow rate, and employment to expand. It is also possible that real wages would fall.

    If one imagines that final goods prices are perfectly flexible and nominal wages are sticky, then the only reason why prices and wages have not fallen enough to maintian full employment and real output at capacity “must” be that nominal wages didn’t fall. And so, “real wages” are too high. The loss of output and employment was due to prices rising more slowly than wages, and full recovery will require prices to rise more quickly than real wages.

    In my view, this “wages sticky/final output prices perfectly flexible” approach is a bit overdone. Some wages are flexible and some final goods prices are very sticky.

    Anyway, Scott is correct that the goal is to increase spending on output (nominal GDP,) and not increase inflation. The goal isn’t to reduce real wages, but to increase in the imputed demand for labor and other resources.

  35. Gravatar of RebelEconomist RebelEconomist
    8. April 2012 at 05:20

    Actually, W.Peden, I am not sure that the UK government does spend too much. Most times that the rather pusillanimous cuts that we have had so far bite, there seems to be a pretty good story about the damage being caused (in the short-term at least). And I would like to see some spending increase, such as on pre-university education in an attempt to tackle Britain’s chronic underclass, for example. It is the rate of tax on income that worries me. I would prefer to see the gap between spending and income closed by introducing/increasing taxes that cause less undesirable distortions, such as land tax, inheritance tax, carbon tax and VAT.

  36. Gravatar of Morgan Warstler Morgan Warstler
    8. April 2012 at 05:29

    RebelEconomist,

    when the ex-bondholders buy commodities, what do the ex-commodity holders buy?

    please continue the process to tease out the reasoning…

    as I understand it, this is the hot potato.

  37. Gravatar of Morgan Warstler Morgan Warstler
    8. April 2012 at 05:31

    I think generally, UK has far too rich a safety net, and far too many people in wagon.

  38. Gravatar of RebelEconomist RebelEconomist
    8. April 2012 at 05:39

    By the way, I have written elsewhere ( http://reservedplace.blogspot.co.uk/2011/10/naked-hypocrisy.html ) about the dangers that bloggers face when accepting advertising to make a few pennies, but non-UK readers of TheMoneyIllusion might be amused to know that, right now, for the UK reader, this post is accompanied by an advert for this: http://www.ifii.com/subscribe/pages/201109_hyperinflation_report/0/0/0/6IZM?kw={keywords}&cr=8135281227

    Clearly, adsense has little faith in Scott’s ability to persuade his readers!

  39. Gravatar of RebelEconomist RebelEconomist
    8. April 2012 at 05:51

    Morgan, I suppose the most realistic possibilities are:
    (1) nothing – ie the ex-commodity-holders leave the money in their bank, which takes charge of the reserves
    (2) US treasuries (and then, see 1)
    (3) foreign currency (and then, see 1)

    In short, the additional reserves are not destroyed; the key question is, what prices does their existence bid up?

  40. Gravatar of ssumner ssumner
    8. April 2012 at 05:54

    DonG, Wealth is hard to tax because most is in the form of human capital. A consumption tax (VAT) is equivalent to a wealth tax.

    Max, The nominal price of currency doesn’t change–that’s what makes it currency.

    Marcus. That’s too bad.

    David Pearson, Not if the demand for currency is rising just as fast.

    Ben, You said;

    “Actually, we find out real wages have been falling in Japan—you cannot protect real wages by zero inflation or deflation. You end up with a deflationary recession that robs everyone, almost.”

    Exactly.

    Maximillian, That’s right, it’s actually labeled “NGDP growth.”

    Joe L. That’s right.

    Dan, The effect of inflation on real incomes completely depends on whether it’s demand or supply side inflation. “Never reason from a price change.” If it’s higher aggregate demand, then any rise in prices occurs precisely because AD shifted right, which means real incomes also rise (Unless SRAS is vertical.) Are you assuming SRAS is vertical?

    Yes, I never said I agreed with any of Tyler Cowen’s assertions about wages. All I agreed with was his claim that inflation targeting is not politically feasible. I agree, which is why I favor NGDP targeting. Inflation targeting is not politically feasible because no one seems to understand the distinction between demand-side and supply-side inflation. That’s why we should be trying to boost AD, not inflation.

    I would add that any boost to AD will boost inflation to at least a tiny extent. That means the real hourly wages of anyone whose nominal wage is fixed will fall until they can renegotiate higher wages. That’s a given, but has nothing to do with monetary policy. In any case, the welfare of Americans depends much more on total real income than real hourly wages. Aggregate total real wages fell sharply in 2009, while real hourly wages rose sharply (due to deflation). Guess which one accurately portrays the condition of working Americans.

    Tommy, I agree, and did a post on that a few months back.

    Dan, You said;

    “So I take it that he thinks commercial bank reserves and the Fed funds rate – and hence open market operations, which are operations that adjust the Fed funds rate and reserve quantities – aren’t important and are somehow independent of the monetary base.”

    I’m not sure where you got this idea, as an open market purchase of $X dollars increases the monetary base by exactly $X. The impact depends on whether it’s expected to be temporary or permanent.

    You said;

    “But I believe these expectations effects are unsustainable and are rapidly disappearing as clearer awareness of the actual mechanics of Fed operations penetrates the public mind. Fed expectations influence is largely based on confused and vestigial beliefs about mysterious monetary voodoo, including bad Econ 101 textbook models of loanable funds and the money market. My sense is that this kind influence is eroding every day. I noticed in the recent Krugman debate with Keen and Scott Fullwiler, the comments increasingly indicate that people now see that Krugman doesn’t know quite what he’s talking about when it comes to the operative causal mechanisms governing bank operations, and the Fed’s connection with them.”

    You are in way over your head, as is Keen (whose post was full of undergraduate errors.) MMTers like to claim that textbooks assume the multiplier is constant. That’s not true. I teach out of the number one money textbook and it spends a lot of time discussing why the multiplier changed sharply during the Depression. Krugman certainly doesn’t assume a constant multiplier, just the opposite. It wasn’t assumed constant when I was an undergrad in the 1970s. You guys are attacking a straw man. People like Nick Rowe and Krugman have an understanding of monetary economics that’s far ahead of any MMTer. Start with expectations. Money is a relatively durable asset, how can it’s value not be driven by expectations? We know that the value of other durable assets like homes and equities and bonds are heavily driven by expectations. Stock prices respond very strongly to even modest monetary policy changes, like a 1/4 point change in the fed funds target. How is that not expectations?

    Jason, That’s right.

    RebelEconomist, You told us that you were going to developing an explanation in terms of the AS/AD curves, and you failed to do so. What’s your argument? Does monetary policy affect AS or AD? More importantly, what was Krugman assuming in the post that Kervick criticized?

    You said;

    “My real point here is that economists should make a bit more effort to tease out the argument that people are trying to make, rather than seizing on the argument’s weakpoints to rubbish it because their instinct is to disagree.”

    I agree, Kervick should have teased out that Krugman was referring to an AD shock (which is obvious) before rubbishing him.

    It’s hard to say how much revenue the 50% tax rate yielded, as you don’t know how much it reduced revenue in other brackets, or corporate taxes, or VAT taxes, etc.

    Bill, I agree that both wages and prices are both sticky and flexible to some extent. I believe wages are a bit more sticky.

  41. Gravatar of ssumner ssumner
    8. April 2012 at 06:03

    Rebeleconomist. Britain spends nearly 50% of GDP on government programs, that’s more than Germany. If there are “unmet needs” that’s probably because money is wasted, not because too little is spent.

    I pay no attention to ads–couldn’t even tell you who advertises here.

  42. Gravatar of Dan Kervick Dan Kervick
    8. April 2012 at 06:30

    It is important to understand (and Scott fails to mention this enough, in my opinion,) that the increase prices faster part is an alternative to the response of “expanding the production of good and services faster.” The more of the increase in spending results in more rapid increases in prices, that is, higher inflation, the less it results in more rapid increases in production.</i?

    Bill, I never forget this part. But Scott, as I recall, would like us all to obey an unofficial ban on the use of the word "inflation". That is, he doesn't like to talk about a concept that is needed to inject clarity at this very spot. The title of this particular post is "More Reasons to Stop Talking about Inflation."

    As you know, MMTers also support government injections of money (net financial assets) into the private sector economy. They would like to do this in a way which is maximally likely to boost the real aggregate demand for goods and services, and also employment – rather than simply raise the price level so that nominal spending rises without any significant real economy impact.

    My argument in my recent posts, which I believe is in line with what most other MMTers have been saying, is that the central bank really has no effective tools for engineering the kinds of beneficial changes you are describing, and for targeting the injections of money in such a way that the injections are maximally likely to result in expanded aggregate demand, output and employment. We think that institutions and the grubby mechanical details matter, and that it won't do simply to look at the central bank in the textbook manner as the entity that exogenously controls the aggregate money supply, or even monetary base. The Fed is constrained by its responsibility to supervise the payments system and guarantee its smooth functioning in response to the endogenous changes in the demand for and provision of commercial bank credit. The Fed is also constrained by a combination of laws and established customary understandings that severely limit the kinds of spending in which it can engage.

    Now of course, it is always possible that the Fed could begin to engage in all sorts of spending that would be "unconventional" to say the least. For that matter, the Congress could completely delegate all of its constitutional power of the purse to a newly created "spending czar" with an unlimited power to place orders with the US mint for physical currency in any desired denominations, and to use it to purchase and transfer goods and services of any desired kinds. Or maybe Ben Bernanke could do the same thing by usurping those kinds of powers unilaterally by starting to order and buy real goods and services, and by simply crediting the bank accounts of those from whom he buys the goods and services. Maybe he could just start purchasing bridges and energy infrastructure systems, or hire an army of street sweepers, or send checks to random Americans desperate to buy more stuff.

    Two things to note about these scenarios: first, they will never happen since Congress guards its power of the purse very jealously. Congress would and should move rapidly to shut down any such moves by the central bank, since they clearly exceed to the legislative intent behind the act of Congress that created the Fed in the first place, and delegated to it some of Congress's constitutionally provisioned spending authority. And second, whatever short term benefits might result from these czar-like spending operations, the benefits would be swamped in the long term by the immense damage to our republic caused by moving in this authoritarian and undemocratic direction.

    The only other way for the Fed to have the kinds of impact on real spending, employment and production that are desired is via the expectations channel. One might hope that there are still enough people out there who don’t understand the actual powers of the Fed, and so conform their expectations and behavior to Fed pronouncements out of a misguided belief that vast operational powers stand behind these august pronouncements. As I have argued, I think these myth-based expectations effects are rapidly evaporating in our time as more and more people come to appreciate the limits of the actual institutional and operational structures contained in the Fed system, and stop thinking of the central bank as the kind of all-purpose monetary black box they might have picked up from the into economics textbooks.

  43. Gravatar of Dan Kervick Dan Kervick
    8. April 2012 at 06:32

    [Excuse me for re-posting this, but I goofed with the tags on the original post and want it to be more legible.]

    It is important to understand (and Scott fails to mention this enough, in my opinion,) that the increase prices faster part is an alternative to the response of “expanding the production of good and services faster.” The more of the increase in spending results in more rapid increases in prices, that is, higher inflation, the less it results in more rapid increases in production.

    Bill, I never forget this part. But Scott, as I recall, would like us all to obey an unofficial ban on the use of the word “inflation”. That is, he doesn’t like to talk about a concept that is needed to inject clarity at this very spot. The title of this particular post is “More Reasons to Stop Talking about Inflation.”

    As you know, MMTers also support government injections of money (net financial assets) into the private sector economy. They would like to do this in a way which is maximally likely to boost the real aggregate demand for goods and services, and also employment – rather than simply raise the price level so that nominal spending rises without any significant real economy impact.

    My argument in my recent posts, which I believe is in line with what most other MMTers have been saying, is that the central bank really has no effective tools for engineering the kinds of beneficial changes you are describing, and for targeting the injections of money in such a way that the injections are maximally likely to result in expanded aggregate demand, output and employment. We think that institutions and the grubby mechanical details matter, and that it won’t do simply to look at the central bank in the textbook manner as the entity that exogenously controls the aggregate money supply, or even monetary base. The Fed is constrained by its responsibility to supervise the payments system and guarantee its smooth functioning in response to the endogenous changes in the demand for and provision of commercial bank credit. The Fed is also constrained by a combination of laws and established customary understandings that severely limit the kinds of spending in which it can engage.

    Now of course, it is always possible that the Fed could begin to engage in all sorts of spending that would be “unconventional” to say the least. For that matter, the Congress could completely delegate all of its constitutional power of the purse to a newly created “spending czar” with an unlimited power to place orders with the US mint for physical currency in any desired denominations, and to use it to purchase and transfer goods and services of any desired kinds. Or maybe Ben Bernanke could do the same thing by usurping those kinds of powers unilaterally by starting to order and buy real goods and services, and by simply crediting the bank accounts of those from whom he buys the goods and services. Maybe he could just start purchasing bridges and energy infrastructure systems, or hire an army of street sweepers, or send checks to random Americans desperate to buy more stuff.

    Two things to note about these scenarios: first, they will never happen since Congress guards its power of the purse very jealously. Congress would and should move rapidly to shut down any such moves by the central bank, since they clearly exceed to the legislative intent behind the act of Congress that created the Fed in the first place, and delegated to it some of Congress’s constitutionally provisioned spending authority. And second, whatever short term benefits might result from these czar-like spending operations, the benefits would be swamped in the long term by the immense damage to our republic caused by moving in this authoritarian and undemocratic direction.

    The only other way for the Fed to have the kinds of impact on real spending, employment and production that are desired is via the expectations channel. One might hope that there are still enough people out there who don’t understand the actual powers of the Fed, and so conform their expectations and behavior to Fed pronouncements out of a misguided belief that vast operational powers stand behind these august pronouncements. As I have argued, I think these myth-based expectations effects are rapidly evaporating in our time as more and more people come to appreciate the limits of the actual institutional and operational structures contained in the Fed system, and stop thinking of the central bank as the kind of all-purpose monetary black box they might have picked up from the into economics textbooks.

  44. Gravatar of Major_Freedom Major_Freedom
    8. April 2012 at 06:33

    ssumner:

    Here’s a homework assignment for economics students out there. Explain Kervick’s argument using an AS/AD model. You will quickly see that it only makes sense if you assume the inflation was created by reduced AS. If it was caused by increased AD, then real GDP would have increased along with prices

    WRONG WRONG WRONG!!!!!!

    Real supply is NOT increased on account of the Fed printing more pieces of toilet paper! Why do you persist in believing that myth?

    One cannot assume that printing money creates more real wealth. Printing money doesn’t create a single new capital good or a single new consumer good. It just redirects capital and consumer goods.

    See Zimbabwe and Weimar.

    Dan Kervick’s point is that inflation can only benefit a borrower if their income rises beyond the rate at which prices of the goods they buy rise. If it doesn’t, then they pay higher prices but own the same debt obligations and thus have a lower take home pay. This point is incontrovertible.

    Inflation of the currency RAISES prices from what they otherwise would have been. It doesn’t produce real wealth. One cannot turn stone into bread.

  45. Gravatar of Morgan Warstler Morgan Warstler
    8. April 2012 at 07:31

    When they buy a treasury or foreign currency, what do the ex treasury holders buy?

    Please keep doing this until someone buys something. Tease it out. Does anyone EVER just go on vacation?

    Ending IOR is a great idea. Please don’t base your entire point on reserves.

    Personally, I like to think about it not in terms of what ex-owner buys, I like to think about it is terms of what the “other buyer” the one denied by Fed purchase chooses to buy.

  46. Gravatar of W. Peden W. Peden
    8. April 2012 at 07:31

    RebelEconomist,

    “Most times that the rather pusillanimous cuts that we have had so far bite, there seems to be a pretty good story about the damage being caused (in the short-term at least).”

    It’s the law of cuts: there are always good arguments for any particular item of expenditure, even if there are no good arguments for the level of expenditure in the aggregate.

    “And I would like to see some spending increase, such as on pre-university education in an attempt to tackle Britain’s chronic underclass, for example.”

    I agree that pre-university education could do with a little more spending, though I’m not convinced that the state education system provides as much output-for-inputs as (say) the NHS. Additionally, there are plenty of revenue-neutral reforms that could reduce the problems of the underclass e.g. education that is better suited for individual pupils rather than a one-size-fits-all national curriculum.

    “It is the rate of tax on income that worries me. I would prefer to see the gap between spending and income closed by introducing/increasing taxes that cause less undesirable distortions, such as land tax, inheritance tax, carbon tax and VAT.”

    I partly agree: I would like to see a lower income tax (both personal and corporate) and a carbon tax, but my preferred primary replacement would be a progressive consumption tax. A PCT would be impossible in the short run, but movements towards it could be attained by raising ISAs and lowering capital gains tax, which would require a technical rise in income tax (the actual proportion of taxed income wouldn’t change).

    A progressive payroll tax would be a politically difficult but administratively simple means of attaining a PCT. It would have the added benefit of allowing for the merger of national insurance contributions and income tax.

    Another interesting tax reform I’ve seen suggested is some merger of taxes on businesses (NI, business rates, VAT etc.) into one single tax.

    The West and countries like Britain in particular have problems of chronic imbalance between consumption and investment: we save too little and consume too much. While higher VAT and lower income tax would solve this, VAT is still more regressive than (say) a PCT.

  47. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    8. April 2012 at 07:34

    ‘Anyway, back to the original point. If the Fed limited the quantity of green paper (not money, GREEN PAPER!), then the 0% interest rate floor would go away. You could have a -4% rate or whatever is called for.’

    From what mental institution are you posting, Max?

  48. Gravatar of RebelEconomist RebelEconomist
    8. April 2012 at 08:05

    Scott, my emphasis was more on a story in which demand and supply, rather than aggregate demand and supply, interacted with prices as expected. I guess it’s a kind of limited participation argument, involving more than one sector, which an aggregate demand and supply model does not allow. But look, you raised aggregate demand and supply; the important question is whether Dan Kervick’s explanation (as to why inflationary monetary policy may not reduce the private sector debt overhang) was reasonable, and I think that it is.

    I agree that a 50% state share of GDP is excessive in normal times, but right now, I fear that the challenge faced by the UK is almost as serious as a war, and we might need a temporary period of abnormally active government to meet that challenge. I refer of course to the challenge posed by the effective entry of China etc into the world economy, and the disastrous failure of our initial attempts to mitigate that challenge by borrowing to maintain consumption, not to mention the ageing of our population. The UK’s largest item of government expenditure is welfare, and we need to invest more in the short term to get welfare expenditure down. Sadly, if we are going to force structural reform, we might need to spend some more on the police for a while too!

  49. Gravatar of Morgan Warstler Morgan Warstler
    8. April 2012 at 09:16

    “I refer of course to the challenge posed by the effective entry of China etc into the world economy, and the disastrous failure of our initial attempts to mitigate that challenge by borrowing to maintain consumption, not to mention the ageing of our population.”

    Dude, you guys just need to get some Wal-Marts.

  50. Gravatar of Morgan Warstler Morgan Warstler
    8. April 2012 at 09:25

    “I know there are some people who abuse the system,” Ms. Shelby said. “But I was willing to do anything they asked me to. If I could, I’d still be working for those two dollars an hour.”

    http://www.nytimes.com/2012/04/08/us/welfare-limits-left-poor-adrift-as-recession-hit.html?_r=1&pagewanted=all

    Dan, have you no empathy at all?

    You won’t get your way, but my way is attainable.

    Do not leave these people in a capitalist system, shiftless because you want to grow the govt.

    30M. Paypal. Ebay. Take half a loaf, let these people go to work.

    Have you no shame?

  51. Gravatar of Dan Kervick Dan Kervick
    8. April 2012 at 09:32

    Pressed for time right now because of Easter. I understand the short-term non-neutrality of money. David Hume explained the phenomenon in his essay “Of Money,” and most of the developments since then are just modifications of this picture.

    So I don’t oppose targeted injections of money that have an inflationary effect as a by-product, and that protect workers and the most vulnerable. What I oppose are attempts to engineer inflation as the initial effect in a way that allows employers to reduce costs by further reducing workers’ real wages without extracting any pain from employers and stock-holders. We are past the time when we should be aiming to solve the problem of the unemployment of some workers on the backs of other workers. There are other ways.

  52. Gravatar of dwb dwb
    8. April 2012 at 09:56

    we have no idea what the elasticity of supply is (although with 15 mm underemployed people one would think is pretty elastic) so we just have no idea how much real growth further stimulus would produce. sad that so many trained economists get this wrong.

  53. Gravatar of Max Max
    8. April 2012 at 10:25

    “From what mental institution are you posting, Max?”

    Heh. It’s funny how simple but unfamiliar concepts can be challenging.

    That’s why it gave me pleasure to think of it, although a little googling showed it was (naturally) already known. See for example:

    http://blogs.ft.com/maverecon/2009/05/negative-interest-rates-when-are-they-coming-to-a-central-bank-near-you/#_ftn3

    start at “(3) Unbundle currency from the unit of account.”

  54. Gravatar of Benjamin Cole Benjamin Cole
    8. April 2012 at 10:27

    W Peden-

    If you are still reading, you are right, and I retracted my commentary about Kervick The Gardener.

    Still, Kervick concedes he does not understand what Scott Sumner is taking about–he does not understand Market Monetarism, or even Milton Friedman’s paper on Japan.

    In a deep recession, following a real estate bust, print more money, print more money, print more money until the plates melt or you run out of ink. Are we to believe a central bank, facing a deeply depressed economy, cannot cause growth followed by inflation? Really? Except of course, when the central bank causes hyperinflation.

    I wil try to be more friendly and optimistic, after all, I am the one who says we should seek allies, not make enemies.

    Top of the holidays to all!!

  55. Gravatar of Steve Steve
    8. April 2012 at 11:26

    @ RebelEconomist, ssumner:

    “Clearly, adsense has little faith in Scott’s ability to persuade his readers!”

    Adsense targets ads at the *reader*, not the website. If you are getting ads for the “hyperinflation survival guide” it’s because Google thinks you, not MoneyIllusion readers in general, are prone to purchase such a guide. If you tell us what ads you are seeing, you are giving away private little bits about your own internet predilections. Yes, Google is evil.

  56. Gravatar of W. Peden W. Peden
    8. April 2012 at 12:04

    Benjamin Cole,

    Great to hear: your merry “can-do” attitude is a key feature of this blog and helps keep us all from becoming despairing back-seat central bankers!

  57. Gravatar of Becky Hargrove Becky Hargrove
    8. April 2012 at 12:05

    Steve,
    Some days I have written about things that the ads immediately chased me with some truly strange offerings. No, please don’t even ask! Although I don’t mind singing the praises of good coffee and seeing those kinds of ads…

  58. Gravatar of bmcburney bmcburney
    8. April 2012 at 12:06

    Doesn’t Krugman support reductions in AS? I believe he advocates restrictions on most forms of energy development, increased regulation of financial products and services, increased regulations on drug and medical device development, increases in the minimum wage, stricter regulation of occupational health and safety, increased wage and hour regulation. Do these things affect AS or AD? Please explain.

  59. Gravatar of W. Peden W. Peden
    8. April 2012 at 12:14

    Dan Kervick,

    I think I follow your reasoning now, so I can at least see where I disagree with you: on public choice grounds, I would prefer a financial-asset based increase in the quantity of money through central bank purchases, rather than a non-debt funded fiscal stimulus where public choice problems come into play more seriously. In general, I expect a democratically accountable government to spend in such a way that will increase its power.

    Once the liquidity trap and Austerianism are out of the way, the only place in which fiscal vs. monetary stimulus advocates will disagree is on the advantages of targeted cash injections versus untargeted cash injections.

  60. Gravatar of Becky Hargrove Becky Hargrove
    8. April 2012 at 12:59

    From the article that Morgan linked to:
    “Diverting Federal Funds: Arizona gets the same base funding from the federal government, $200 million, that it received in the mid-1990s when caseloads were five times as high…Arizona spends most of the federal money on other human services programs, especially foster care and adoption services, while using just one-third for cash benefits and work programs – the core purposes of Temporary Assistance for Needy Families.”

    In other words, Arizona uses that money to place children after their parents are put into prisons for countless crimes. This is why we need better solutions than government has put forth for the poor, because by the time states use federal money to patch their own budgets and the needs of middle class obligations, nothing is left for the marginalized of this world.

  61. Gravatar of Jim Glass Jim Glass
    8. April 2012 at 13:15

    “Please explain how a $1 bill would not equal a $1 bill.”

    A matured $1 bond entitles you to $1, so it can never be worth less than $1, but it could be worth more.

    Another request for an example from anywhere in real life: A matured bond with a value of X in currency that was worth more than X in currency.

    Anyhow, a bond is not currency. A $1 bond is not a $1 bill. A bond is what you get when you rent out currency to others. Thus, how a $1 bill would not equal a $1 bill remains a mystery.

    Your unending insistence on confusing the price of renting money with the price of buying it (so money shortages cause inflation) and on ignoring my requests for examples, and for answers to questions, tells me we can end this brief exchange without missing anything.

    So, oh, you can ignore that above request for an example too.

    I said before that I do enjoy watching MMTers so enjoy posing as being original and insightful … but only up to a point.

  62. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. April 2012 at 13:39

    Dan Kervick wrote:
    “It is important to understand (and Scott fails to mention this enough, in my opinion,) that the increase prices faster part is an alternative to the response of “expanding the production of good and services faster.” The more of the increase in spending results in more rapid increases in prices, that is, higher inflation, the less it results in more rapid increases in production.”

    After reading Scott’s initial post my first reaction was to say to Scott that he was wasting his time. Post-Keynesians and MMTers not only don’t believe in ISLM, most of them don’t seem to believe in AS/AD either. In fact they seem to pride themselves on their rejection of most orthodox macroeconomic models.

    After reading Dan’s initial responses in this thread I was surprised he seemed not to reject AS/AD. But after reading the above I’m not so sure.

    What is it about fiscal stimulus that results in mostly a real response and a monetary stimulus that results in mostly a price response? What Dan is saying implies that he believes that the slope of the SRAS curve is highly dependent on the type of AD stimulus pursued. Given that this seems to totally fly in the face of conventional explanations for why SRAS is upwardly sloped I think I’d like to hear how this could possibly be true.

  63. Gravatar of Bill Woolsey Bill Woolsey
    8. April 2012 at 13:56

    Max:

    I favor negative nominal interest rates when necessary to clear the markets for short and safe finanical assets. The simple way to do it is to privatize the issue of hand-to-hand currency. Thanks for the citations to Buiter.

  64. Gravatar of Morgan Warstler Morgan Warstler
    8. April 2012 at 14:28

    There is nothing to understand in Dan’s point. It is no different than dirty hippie MMTers.

    It all comes back around to this:

    “What I oppose are attempts to engineer inflation as the initial effect in a way that allows employers to reduce costs by further reducing workers’ real wages without extracting any pain from employers and stock-holders. We are past the time when we should be aiming to solve the problem of the unemployment of some workers on the backs of other workers. There are other ways.”

    You can dance around the “engineer inflation” by talking NGDP etc. but IN THE END, Dan is still going to vote no because:

    1. Real wages for some of the employed – the ones who compete most with the unemployed WILL go down short term.

    2. Dan really WANTS to have the govt. get bigger and guys like Dan to have more say in things.

    He’s not actually motivated by 30M becoming employed, he wants to DIRECT THEIR LABOR to things he deems socially important.

    Econ chatter is nice, but not if Dan can’t be moved off those points.

    Money and monetary theory are not social goods, they do not exist for democratic reasons.

  65. Gravatar of Peter N Peter N
    8. April 2012 at 15:09

    The gospel according to Krugman:

    “The change in bank reserves caused by an open market operation doesn’t directly affect the money supply. Instead it starts the money multiplier in motion. After the $100 million increase in reserves shown in panel (a), commercial banks would lend out their additional reserves, immediately increasing the money supply by $100 million. Some of those loans would be depositied into the banking system, increasing reserves again and permitting a further round of loans, and so on, leading to a rise in the money supply. An open market operation sale has the reverse effect; bank reserves fall, requiring banks to reduce their loans, leading to a fall in the money supply.

    Ecomomists say the Fed controls the money supply – checkable deposits plus currency in circulation. In fact it controls only the monetary base – bank reserves and currency in circulation. But by increasing or reducing the monetary base, the Fed can exert a powerful influence on both the money supply and interest rates.”

    Macroeconomics Krugman and Wells P 399. Yours for only $130.

    Yet any number of economists writing for the Fed believe reserves don’t work this way at all. And, of course, the Fed’s addition of $1.5 trillion of reserves has had little or no effect.

    Currency OTOH does correlate with the aggregates reasonably well, but that’s not what he’s saying.

    Even if you just consider currency, the Fed doesn’t directly restrict currency. That’s Keen’s empty ATMs. So a currency multiplier is a result, not a cause, and any multiplier based on reserves or currency would likewise be a result and not a cause.

    How then does the base exert its magic?

    Say the observed sales of oranges to grapefruits is 3 to 1. Does this mean that grapefruits control oranges, or does it mean they have similar sensitivity to cold and are grown in the same places? Should we invoke a citrus multiplier?

    Either the following is true or it isn’t, and if it’s true then you should be able to explain the mechanism, and explain it in a way that is in accord with the data:

    “But by increasing or reducing the monetary base, the Fed can exert a powerful influence on both the money supply and interest rates.”

    Until then, I question it.

  66. Gravatar of ssumner ssumner
    8. April 2012 at 15:10

    Dan, You said;

    “As you know, MMTers also support government injections of money (net financial assets) into the private sector economy. They would like to do this in a way which is maximally likely to boost the real aggregate demand for goods and services, and also employment – rather than simply raise the price level so that nominal spending rises without any significant real economy impact.”

    Wow! So not only do MMTers have a completely new theory of how AD is determined, which shows all the Nobel Prize winners throughout history from Milton Friedman to Paul Krugman are completely wrong, but they also have a completely new theory of how changes in AD get partitioned into real output and price changes. So now we are to believe that if the Fed boosts NGDP we’ll get inflation, and if we do things he MMT way we’ll magically get higher RGDP instead of inflation? I’d love to see that model.

    RebelEconomist, Let’s start with the fact that China joining the world economy has NOTHING to do with Britain’s problems. China didn’t cause British NGDP to collapse in late 2008.

    You said;

    “I guess it’s a kind of limited participation argument, involving more than one sector, which an aggregate demand and supply model does not allow.”

    All macro arguments (about prices and aggregate real income) can be explained with AS/AD. If you don’t think so, then you are misinterpreting AS/AD. Draw the initial equilibrium. Then tell me the new equilibrium after monetary stimulus. Then tell me which curves needed to shift to make it happen. The problem here is that people think a “supply shock” must be something that looks like higher energy prices or regulations. Not true. Kervick claimed easy money would raise prices and reduce real incomes. He’s claiming monetary stimulus would reduce AS. You can make that claim (although I don’t buy it) but if you are going to make that claim you have no business trashing Krugman as he did. Krugman was obviously assuming monetary stimulus would boost AD, as does almost everyone else. If MMTers want to contest that, they’ll need far more plausible explanations than Kervick provided, which (no offense intended) looked a lot like an undergraduate who didn’t understand the difference between a shift in AD and a move along the AD curve. Now maybe he had some much more sophisticated explanation in mind, but he didn’t provide it.

    Dan, You said;

    “Pressed for time right now because of Easter. I understand the short-term non-neutrality of money. David Hume explained the phenomenon in his essay “Of Money,” and most of the developments since then are just modifications of this picture.
    So I don’t oppose targeted injections of money that have an inflationary effect as a by-product, and that protect workers and the most vulnerable. What I oppose are attempts to engineer inflation as the initial effect in a way that allows employers to reduce costs by further reducing workers’ real wages without extracting any pain from employers and stock-holders. We are past the time when we should be aiming to solve the problem of the unemployment of some workers on the backs of other workers. There are other ways.”

    Now we are getting really close. I think you have simply misunderstood Krugman’s argument. He favors exactly what you favor. I’ve consistently argued that Krugman should use the language of NGDP rather than the language of inflation, partly because inflation sounds like you are trying to screw workers (with inflation caused by lower SRAS), which is clearly not the intent. Krugman did sort of admit the PR advantage of NGDP in one post, but seems to have reverted back to inflation language.

    Steve, That’s right—and I should have said those hyperinflation ads are aimed at Major Freedom, my most reliable commenter.

    bmcburney, Yes, I disagree with Krugman on AS.

    Mark, Yes, that was what puzzled me too, see my reply above.

  67. Gravatar of Becky Hargrove Becky Hargrove
    8. April 2012 at 15:15

    Morgan,
    Let’s complete that last thought in this thread…Human skills and knowledge do exist for democratic reasons, even if money does not. The reason they don’t seem to in the present is that they are relegated to a random corner of monetary production, which is barely even able to use representative democracy for scarce goods. The finite quantity of human time is attached to the infinite quantity of knowledge advancement potential. That is where true democratic possibility comes from.

  68. Gravatar of ssumner ssumner
    8. April 2012 at 15:28

    Peter, You said;

    “That’s Keen’s empty ATMs.”

    I suppose if a frost killed 20% of the coffee crop we’d go into grocery stores and be unable to buy coffee, after all, it’s not like the price of coffee would rise. I am surprised anyone is even trying to defend Keen–sometimes it’s better to just cut your losses.

    Krugman of course doesn’t believe the multiplier effect applies at zero interest rates, as I’m sure you must know. So the comment about an extra $1.5 trillion in reserves creating no increase in the money supply is pretty much beside the point, isn’t it?

    You said;

    “Either the following is true or it isn’t, and if it’s true then you should be able to explain the mechanism, and explain it in a way that is in accord with the data:

    “But by increasing or reducing the monetary base, the Fed can exert a powerful influence on both the money supply and interest rates.”

    Until then, I question it.”

    What shocks me is when commenters don’t say the traditional explanation is wrong, but seem unaware that it even exists.

  69. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. April 2012 at 15:51

    Scott wrote:
    “Steve, That’s right—and I should have said those hyperinflation ads are aimed at Major Freedom, my most reliable commenter.”

    I think Steve’s point is it’s even more personalized than that. In August I was getting ads for men’s swim trunks, sandals and Hawaiian shirts. Right now I’m getting appeals from Michelle Obama to tell Barack that “I’m in.” I kind of doubt Major Freedom is seeing the same ads.

  70. Gravatar of Major_Freedom Major_Freedom
    8. April 2012 at 16:09

    I think Steve’s point is it’s even more personalized than that. In August I was getting ads for men’s swim trunks, sandals and Hawaiian shirts. Right now I’m getting appeals from Michelle Obama to tell Barack that “I’m in.” I kind of doubt Major Freedom is seeing the same ads.

    I use Adblock and Adblock Plus extensions. I never see any ads.

  71. Gravatar of Major_Freedom Major_Freedom
    8. April 2012 at 16:16

    ssumner:

    Steve, That’s right—and I should have said those hyperinflation ads are aimed at Major Freedom, my most reliable commenter.

    I guess you’re going to have to learn the hard way that the end game of fiat money systems is either hyperinflation, or universal price controls and socialism.

    Your name and the names of other monetarists are eventually going to be historically associated with hyperinflation (or socialism).

    My anonymous name will probably be forgotten, unless all the internet records still exist.

  72. Gravatar of SG SG
    8. April 2012 at 16:57

    Dan Kervick,

    Do you believe in rational expectations? Why is it so hard for you to believe that investors will react now to promised Fed policy in the future? Equity markets tremble and lurch with every comma that comes out of an FOMC meeting report.

    You asked if I would react to a Fed policy announcement. Of course not. Efficient markets will have already adjusted the values of the trades I might make to take advantage of such an announcement.

    I just wonder, in a world where market prices react instantaneously to all kinds of random events, from a hypothetical war with Iran to a rumor about the next iphone, why would markets not react to the explicit goals of the most powerful central bank in the world? Inconceivable.

  73. Gravatar of SG SG
    8. April 2012 at 17:02

    Steve,

    Dan said

    In his recent post on near-monies, Scott said,

    Mr. Garcia is correct that the shadow banking system would be important if money multipliers, fed funds rates, and reserves were important. But they aren’t. All that matters (for AD) is the monetary base and base velocity.

    So I take it that he thinks commercial bank reserves and the Fed funds rate – and hence open market operations, which are operations that adjust the Fed funds rate and reserve quantities – aren’t important and are somehow independent of the monetary base.

    Do you think he is correct?

  74. Gravatar of Benjamin Cole Benjamin Cole
    8. April 2012 at 17:03

    To paraphrase Ben Franklin: He who seeks economic security through price stability will soon have neither.

  75. Gravatar of dwb dwb
    8. April 2012 at 17:04

    i guess you’re going to have to learn the hard way that the end game of fiat money systems is either hyperinflation, or universal price controls and socialism

    just keep the record in your doomsday bunker.

  76. Gravatar of Major_Freedom Major_Freedom
    8. April 2012 at 17:31

    just keep the record in your doomsday bunker.

    Yeah, “doomsday” like telling someone that heading straight for a cliff will result in them getting hurt justifies a “you’re a doomsayer!” comment.

  77. Gravatar of A view of the Phillips Curve leads to the adoption of a “nominal spending target” | Historinhas A view of the Phillips Curve leads to the adoption of a “nominal spending target” | Historinhas
    8. April 2012 at 18:02

    [...] of oil and commodities can, in addition, be just of a temporary and reversible nature. That´s why Scott Sumner is always suggesting “let´s stop talking about [...]

  78. Gravatar of Dan Kervick Dan Kervick
    8. April 2012 at 18:26

    What is it about fiscal stimulus that results in mostly a real response and a monetary stimulus that results in mostly a price response? What Dan is saying implies that he believes that the slope of the SRAS curve is highly dependent on the type of AD stimulus pursued.

    I just don’t believe that the Fed has significant influence over aggregate demand. It’s not a matter of thinking aggregate demand is equally stimulated either way, but that one direction has a real response and the other direction a real response.

  79. Gravatar of Dan Kervick Dan Kervick
    8. April 2012 at 18:37

    Do you believe in rational expectations? Why is it so hard for you to believe that investors will react now to promised Fed policy in the future? Equity markets tremble and lurch with every comma that comes out of an FOMC meeting report.

    SG, I know that asset markets frequently respond like agitated lemmings to all kinds of tips and signals, moving their investments here and there based on the fad of the hour.

    In the case of responses to Fed pronouncements, I don’t consider all of these responses instances of the impact of rational expectations, but rather of ignorant expectations. If you read the comments of the investor community following the announcements of the QE programs, you will see that many people, although disposed to “respond” in some way to the action, have no understanding at all of Fed operations and transmission mechanisms, and so jump to all kinds of crazy conclusions about what Fed actions and statements mean for the future direction of the economy.

  80. Gravatar of Brito Brito
    8. April 2012 at 18:46

    Dan, ignore Zero Hedge nutjobs; the responses aren’t about that. They’re about beliefs about interest rates, and for investors at financial institutions, beliefs about the future risk free rate can drastically affect valuations of portfolios, even small movements by a few basis points may cause major portfolio adjustments.

  81. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. April 2012 at 18:54

    Dan Kervick wrote:
    “I just don’t believe that the Fed has significant influence over aggregate demand. It’s not a matter of thinking aggregate demand is equally stimulated either way, but that one direction has a real response and the other direction a real response.”

    (I’ll focus on the first part of that statement since I suspect you mispoke in the second part.)

    If monetary stimulus has no significant effect on AD then how can it have an effect on inflation (given the AS/AD model)?

  82. Gravatar of Lorenzo from Oz Lorenzo from Oz
    8. April 2012 at 19:03

    Major_Freedom: I guess you’re going to have to learn the hard way that the end game of fiat money systems is either hyperinflation, or universal price controls and socialism. It already having been established that your knowledge of economic history is abysmal, this seems to be yet another similarity between internet Austrianism and Marxism: you know the future!

    Hyperinflation is actually rare. An amazing thing when it happens; a form of economic exotica that, as economic exotica, has a morbid fascination, but quite uncommon. Many countries have never experienced hyperinflation. Those that have usually do so when their political system is under severe stress or shows some other chronic weakness. That is, while hyperinflation is a monetary phenomenon, it usually has political causes.

    Universal prices controls and socialism: not very common either. Indeed, have become dramatically less common over the last 30 years. As have price controls in general.

    But you have irrefutable economic logic. If facts don’t count, then of course, provided there are no internal contradictions, one’s logic is irrefutable. Because all you are playing is a self-contained game into no outside rebuttal is permitted to enter.

  83. Gravatar of Becky Hargrove Becky Hargrove
    8. April 2012 at 19:12

    Lorenzo,
    Zing! You win the best ‘attempt’ of the week. I needed a good laugh before calling it a night.

  84. Gravatar of Steve Steve
    8. April 2012 at 19:41

    Dan Kervick wrote: “In the case of responses to Fed pronouncements, I don’t consider all of these responses instances of the impact of rational expectations, but rather of ignorant expectations.”

    One of my pet peeves is people who claim market reactions are “ignorant expectations.” If you believe that you should quick blogging and make a fortune trading the markets. If you can’t make money trading, you have no right to call market expectations ignorant.

  85. Gravatar of Major_Freedom Major_Freedom
    8. April 2012 at 20:04

    Lorenzo from Oz:

    It already having been established that your knowledge of economic history is abysmal, this seems to be yet another similarity between internet Austrianism and Marxism: you know the future!

    That’s funny, coming from someone who I have corrected on many occasions regarding the nature and significance of economic history.

    Your ignorant believe that because something never happened, that it follows from this that it never will happen, shows that you have no business talking down to anyone regarding economic history.

    Hyperinflation is actually rare. An amazing thing when it happens; a form of economic exotica that, as economic exotica, has a morbid fascination, but quite uncommon. Many countries have never experienced hyperinflation. Those that have usually do so when their political system is under severe stress or shows some other chronic weakness. That is, while hyperinflation is a monetary phenomenon, it usually has political causes.

    You know what’s even rarer still? The whole world being on a fiat standard. That is so rare in fact, that it has never before happened until 1971.

    The fact that certain economic events are “rare” bares ZERO relation to its probability or chance of happening in the future. Historical economic events are determined by human choice, not some mystical supernatural force that only reveals itself by occurring repeatedly enough for dimwitted yokels to be riled from their slumber.

    Universal prices controls and socialism: not very common either.

    I am not making any argument as to the number of times they occur. I am not saying that they happen often. I am not saying they happen easily. I am only saying what follows from economic principles. These principles follow as laws, based on particular actions taken.

    Your silly belief that something occurring with rarity means it should be ignored or ridiculed, is exactly the kind of ignorance that led to people believing that national level home prices can never fall, because they never fell prior. Look how that naive prediction turned out. National home prices did fall.

    Stop spewing on this blog ignorant claims that are based on a fallacious interpretation of the nature and significance of economic history. You’re up the creek without a paddle.

    Indeed, have become dramatically less common over the last 30 years. As have price controls in general.

    Irrelevant. Fascism occurred in ancient Greece, and then two thousand years later it returned in northern Europe.

    But you have irrefutable economic logic. If facts don’t count, then of course, provided there are no internal contradictions, one’s logic is irrefutable.

    Facts do count, as long as you understand what the significance of an economic historical fact really is. By your crap logic, if I were to eat a ham sandwich every day at lunch for the last year, and I argued that these economic historical events contain zero causality in whether I will eat a ham sandwich tomorrow, then you will spew out that I am allegedly not paying proper attention to “the facts”, which is my eating a ham sandwich every day over the last year.

    You, like so many other economically illiterate yahoos, constantly conflate economic history with economic theory. They are in fact separate. Economic history is totally and completely unique. It is unique to what people knew and what people did at that time. There is absolutely no constant causal connections between past choices and present choices.

    Economics is not a positive science. Positivism in economics is like astrology in physics.

    Economics is logico-deductive. Here’s an easy way to see why:

    Suppose we both agreed 100% to economic history. We both agree 100% that economic regulations and living standards in the 19th century were lower than they were in the 20th century.

    Theory one is that living standards improved despite the increase in regulations. Theory two is living standards improved because of the regulations. These two theories are exhaustive of all possible theories. Either A caused B, or it didn’t and B occurred despite A.

    Both theories are consistent with the historical data, and yet the theories contradict, so at least one must be wrong. It is economic theory that can enable us to falsify one of the theories. Economic history cannot be the basis, because economic history is consistent with both theories. History cannot be used to falsify either theory.

    This is where economic theory can enable us to find out which explanation is wrong, and where you conflaters of history and theory are left scratching your heads.

    Because all you are playing is a self-contained game into no outside rebuttal is permitted to enter.

    It is no more closed than any other epistemology. All you need to do is provide better arguments that have superior logic, which will be done through critiquing it.

    Maybe you are making another conflation, this time conflating your inability to provide a superior logical critique, with some sort of flaw on the part of those you can’t refute.

    You know what I just noticed? Your reply contained not a single substantive argument about economics. It was nothing but a mindlessly antagonistic post. You might as well have said “Nuh uh!” and you would not have said anything more sophisticated.

  86. Gravatar of Brito Brito
    8. April 2012 at 20:09

    Major_Freedom, where is this hyperinflation going to come from?

  87. Gravatar of Dan Kervick Dan Kervick
    8. April 2012 at 20:11

    even small movements by a few basis points may cause major portfolio adjustments.

    Do these portfolio adjustments have a significant impact on the overall level of economic production, consumption and employment? Or do they just involve movements of investor funds among assets with little net macroeconomic effect.

  88. Gravatar of Brito Brito
    8. April 2012 at 20:20

    Dan Kervick, now we’re getting somewhere. It really depends; what I tend to observe is this: monetary easing such as QE almost always causes a rally in major domestic stock indexes, which means more investment into firms; now the balance sheets of businesses aren’t looking so bad because their assets are worth more, with improved balance sheets firms may be less averse to make plans for future production etc etc…

    I agree that central bank intervention is probably not as powerful as Scott seems to imply, at least in the short run, however MMTists seem to go too far the other way, focusing too much on bank lending, and not looking at financial markets, which are kind of a big deal; in fact a huge deal when you’re looking at stock markets bottoming out.

  89. Gravatar of Major_Freedom Major_Freedom
    8. April 2012 at 20:39

    Brito:

    Major_Freedom, where is this hyperinflation going to come from?

    The legalized counterfeiters, should they continue to target constant prices, nominal spending, or any other partial attribute of the full nature of money, by monetary inflation, which invariably leads to a more and more distorted real economy, which requires an exponentially rising money supply in order to coax people into spending enough money to sustain the distorted structure and thus sustain a status quo NGDP.

    Look at the money aggregates around the world. They are all exponentially rising. Exponential increases in money, provided central banks continue to do what they are doing, which is use inflation to stave off corrections to problems that inflation itself creates, are mathematically guaranteed to eventually reach the vertical.

    This is because monetary inflation itself destroys the ability of money to perform the function as a tool of economic calculation. A given sum of monetary inflation requires a greater amount of inflation afterwards to prevent the problems created by the initial inflation, and thus to sustain the status quo spending of money on those problems.

    With a distorted real economy, the only solution to correcting it, the ONLY solution, is to absorb money production into the market process. Central bank monkeys trying to mimic the market cannot do this.

    As the vertical is reached, monetary inflation will no longer be able to sustain the economy’s structure of production and status quo NGDP. At that point, the central bankers will be faced with the same choice as before: inflate and put the final nail in the coffin of the currency, or do not inflate, and bring about a correction which we see as depression/recession. And guess what? The longer the central banks go with inflating, the more painful the correction will be. We have had 40 years of inflation, and it has transformed the world according to the central banker’s vision, intentional or unintentional, rather than the visions of individual property owners.

    My view is that inflation in the world US dollar standard, has created such world imbalances, that the worldwide correction that will occur should the bankers choose to abstain from inflating more, rather than hyperinflation, the political and economic upheaval is going to be unprecedented in world history.

    China in particular is going to experience a major crash, because not only did they blow up an inflationary boom, which is painful enough, but they combined it with large numbers of communist-style projects that have no real value. Already China is slowing down, and if you want to make some good money, I suggest shorting China.

    I don’t make predictions, because I cannot predict human choices, heck I can’t even predict what I myself will know and hence do next year, but I will say that once the fiat money system ends, people are almost certainly going to look back and think how idiotic people were to trust a small group of people to be in charge of a communist monetary system, creating money from nothing, and expected it to work.

  90. Gravatar of Brito Brito
    8. April 2012 at 20:54

    Oh lord I wasn’t expecting such a long response, I’ll respond to that tomorrow, maybe.

  91. Gravatar of Max Max
    9. April 2012 at 00:28

    Jim, the idea is not “MMT” and it is not brilliant or original. It’s very simple, merely outside the box.

    Just think: does currency (i.e. the green paper) NEED to be the unit of account? Answer: no. It’s slightly more convenient that way. It’s traditional. But it’s not necessary.

    Shops already have different prices depending on the mode of payment. The credit card price is not the cash price. So we are half way there already.

    I don’t want to have a stupid argument over terminology. If you don’t want to call green paper in your wallet that you use to buy stuff currency, fine. Call it whatever you want.

  92. Gravatar of RebelEconomist RebelEconomist
    9. April 2012 at 02:30

    Scott, you imply that the present recession was caused by the alleged failure of central banks to ease monetary policy sufficiently in 2008. I am interested to know how you think that the stresses that had built up in the US and other economies by 2007 (eg sub-prime exposure, moral hazard, uncompetitiveness etc) would have turned out had central banks followed what in your view was a sufficiently easy policy in 2008. Personally, I thought that a US slump was inevitable from about the early 2000s, and has far deeper causes that what was done or not done at one brief point in an evolving downturn.

    If you insist on forcing my interpretation of Kervick’s argument into AS/AD, it seems to me that what is suggested is that expansionary money supply causes an inward shift of the AD schedule, resulting in lower DOMESTIC output and prices. Higher import prices account for the difference between the fall in the price of domestic output and the rise in the consumption price level. In short, I think that confusion arises because analysts are ambiguous about whether the variables they are discussing are domestic or global.

  93. Gravatar of dwb dwb
    9. April 2012 at 05:32

    @MF

    people have been making these predictions about fiat money since it was invented a thousand years ago. funny thing, you forgot how the story ends: even in Weimar they did not end the hyperinflation by going back to the gold standard. Germany is still on fiat money despite the experience. America largely rejected the gold standard when the constitution was written, despite experiences with inflation in some colonies and the fact that Britan and much of Europe was on the gold standard.

    It kinda saddens me to think you are actually worried about this, because the likelihood of the US going off fiat money is more remote than me hitting the Powerball. It’s just not going to happen.

    My view is that inflation in the world US dollar standard, has created such world imbalances, that the worldwide correction that will occur should the bankers choose to abstain from inflating more, rather than hyperinflation, the political and economic upheaval is going to be unprecedented in world history.

    China in particular is going to experience a major crash, because not only did they blow up an inflationary boom, which is painful enough, but they combined it with large numbers of communist-style projects that have no real value. Already China is slowing down, and if you want to make some good money, I suggest shorting China.

    I don’t make predictions, because I cannot predict human choices, heck I can’t even predict what I myself will know and hence do next year, but I will say that once the fiat money system ends

  94. Gravatar of Mike Sax Mike Sax
    9. April 2012 at 07:27

    As a proponent of more MM-MMT smackdowns, glad to see Scott picked this up. I haven’t made up my mind who won this one.

    http://diaryofarepublicanhater.blogspot.com/2012/04/mmt-mm-smackdown-scott-sumner-vs-dan.html

  95. Gravatar of Becky Hargrove Becky Hargrove
    9. April 2012 at 07:34

    Mike,
    I’m glad you like MM-MMT matchups. I’ve learned to giggle at the others but this particular fight makes me nervous.

  96. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 08:01

    I’m still waiting for Dan to explain how, if monetary stimulus has no significant effect on AD, it can have an effect on inflation (given the AS/AD model)?

    Given the chirping of crickets I gather he has no explanation. Which brings me back to my original contention: he doesn’t really believe in the AS/AD model and in which case he ought to provide a criticism.

  97. Gravatar of RebelEconomist RebelEconomist
    9. April 2012 at 08:13

    @Mark A. Sadowski – see my comment to Scott just above.

  98. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 08:25

    @RebelEconomist,
    The biggest problem with your argument is that the economic implosion post June 2008 coincided with a run up in the dollar and a collapse in commodity prices. Besides which it’s hard for me to conceive of a situation where a weaker currency leads to decreased AD, especially in a country as relatively closed as the US. (Commodity prices are primarily determined by global demand, not by US monetary policy.)

  99. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 08:49

    @RebelEconomist,
    And let me clarify. What you are really describing is supply side shock, a leftward shift in the AS curve, not a decrease in AD, due to an increase in commodity prices. The only way monetary stimulus could cause a decrease in AD is if it led to a decrease in total demand at a any given price level, which I think is preposterous.

  100. Gravatar of Peter N Peter N
    9. April 2012 at 09:27

    @Mark A. Sadowski

    Why do you think aggregate supply makes any sense, when nobody has ever managed to come up with a mathematically defensible method of aggregation.

    I see no reason to doubt Franklin Fisher.

    http://economics.mit.edu/files/2631

    Aggregate supply and aggregate demand are useful concepts provided you don’t make assumptions about how the aggregates can be deaggregated.

    This is, in effect I believe, what you are doing. That doesn’t mean your conclusions are wrong, but it does mean that your argument doesn’t prove them.

  101. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 10:21

    dwb

    people have been making these predictions about fiat money since it was invented a thousand years ago. funny thing, you forgot how the story ends: even in Weimar they did not end the hyperinflation by going back to the gold standard.

    I didn’t say hyperinflation necessarily leads to a gold standard. I know how it ended.

    People have been saying these things about fiat money because both theory and history make it absolutely clear that fiat currency systems do not last.

    Do you know what the average life cycle of a fiat currency is? It’s about 40 years. Of course fiat currencies can last for much shorter, and much longer, but that’s the historical average.

    Fiat systems contain an inherent moral hazard that prevents it from lasting in the long term. The very attribute of people being able to create money at virtually no cost, creates a moral hazard. This is why fiat currencies are such short lived. The dollar has lasted since 1971 in large part because of a long period of economic growth under gold constraint, that has enabled the US state to use military might to postpone the day of reckoning. But in the long run, the moral hazard overwhelms.

    Germany is still on fiat money despite the experience. America largely rejected the gold standard when the constitution was written, despite experiences with inflation in some colonies and the fact that Britan and much of Europe was on the gold standard.

    America did not reject the gold standard, especially when the constitution was written. The constitution states that only gold and silver shall be legal tender. Of course the fact that the clause was poorly written has made inflationists believe the state ratifiers were OK with federal fiat money.

    It kinda saddens me to think you are actually worried about this, because the likelihood of the US going off fiat money is more remote than me hitting the Powerball. It’s just not going to happen.

    Spare me of your capitulating, naive sheep mentality.

    And if you were reading closely, I said fiat money has the long run result of EITHER hyperinflation OR universal price controls and socialism.

    I am not predicting hyperinflation.

    It saddens you? Why do let this make you sad? You must be sad already to allow some random internet blogger to make you sad.

  102. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 10:22

    @Peter N,
    Without aggregates there is no macroeconomics, so we might as hang it all up and call it a day.

    I see plenty of reason to doubt Franklin Fisher. I don’t accept your over the top blanket statement at all. There’s plenty of good work that comes out of the analysis of aggregate production functions. In fact my own neophyte work uses a Solow growth model so I guess that puts me squarely on the “Neoclassical” (a term I deplore) side of the Cambridge capital controversy.

    Since I’m not trying to draw microeconomic policy conclusions from a simple macroeconomic model I don’t see a problem. And in the final analysis I’m not the one trying to prove anything. Dan Kervick is, and I don’t think he’s succeeding very well.

  103. Gravatar of ssumner ssumner
    9. April 2012 at 11:09

    Mark, Yes, that’s right.

    MF, You said;

    “I use Adblock and Adblock Plus extensions. I never see any ads.”

    Ssssssh! Don’t let my advertisers know this or I may lose money.

    Ben, You said;

    “To paraphrase Ben Franklin: He who seeks economic security through price stability will soon have neither.”

    That’s actually very good.

    Dan, You said;

    “I just don’t believe that the Fed has significant influence over aggregate demand.”

    Then they can’t create inflation.

    Rebeleconomist, You said;

    “Scott, you imply that the present recession was caused by the alleged failure of central banks to ease monetary policy sufficiently in 2008. I am interested to know how you think that the stresses that had built up in the US and other economies by 2007 (eg sub-prime exposure, moral hazard, uncompetitiveness etc) would have turned out had central banks followed what in your view was a sufficiently easy policy in 2008. Personally, I thought that a US slump was inevitable from about the early 2000s, and has far deeper causes that what was done or not done at one brief point in an evolving downturn.”

    I claim it was caused by tight money, not a failure to ease. The Fed tightened monetary policy. If you don’t agree, please tell me your defintion of easy and tight money.

    If the Fed had done it’s job we would probably have had several years of stagflation, say 1% RGDP growth and 4% inflation. Unemployment would have risen to 6%. The national debt would have been far smaller. Far fewer Americans would have defaulted on their mortgages, partly because far fewer would have become unemployed, and partly because housing prices would have fallen 15% to 20% instead of 32%. These are all rough guesses.

    Oh, and population growth would not have slowed to the lowest rate in many decades. And fewer young people would live at home, more would have their own place. Immigration would have been higher, and fewer Mexican workers would have returned to Mexico.

    I can’t imagine how more money could reduce AD, but I guess that’s an answer.

    Mike Sax, You haven’t decided who won? How about when Nick Rowe demolished the MMT argument, are you still undecided about that one too? And let me know when you figure out how Gaddafi’s troops are doing in the Libyan war.

    Mark, You said;

    “I’m still waiting for Dan to explain how, if monetary stimulus has no significant effect on AD, it can have an effect on inflation (given the AS/AD model)?”

    I’m wondering that too.

  104. Gravatar of RebelEconomist RebelEconomist
    9. April 2012 at 11:44

    @Mark A. Sadowski,

    Maybe you are right that the story (ie that monetary easing has more impact on imports than domestically produced goods) is better represented as a shift in the AS curve. I was trying to fit Dan Kervick’s point about the effect of existing debt on domestic demand into an AS/AD framework. I guess the point is that an AS/AD framework does not really help understanding, because it is too simple, and you end up representing vital economic mechanisms as mere shift variables.

    I don’t see what 2008 has to do with it. Dan Kervick is discussing what Krugman is proposing now. No doubt there were lots of shift variables in action in 2008.

    But look, I actually disagree with Dan Kervick; I do think that looser monetary policy would decrease unemployment. My point is that we should try to understand what he is trying to say, and why he is probably wrong. For example, Dan Kervick seems to be forgeting that the consumption-depressing effect on debtors of an increased real debt burden is offset by the opposite effect on creditors. I also appreciate that the idea that recent rises in commodity prices are driven by inflation hedging is controversial.

  105. Gravatar of RebelEconomist RebelEconomist
    9. April 2012 at 11:58

    Thanks Scott. Your problem is that you have to admit that these are rough guesses. The outturn might have been a moderate recession and, say, 6% inflation, and many might consider that level of inflation to be unacceptable. I would. That is also why I am against Krugman’s advice for dealing with the present economic weakness.

  106. Gravatar of dwb dwb
    9. April 2012 at 11:58


    Do you know what the average life cycle of a fiat currency is? It’s about 40 years.

    if you are going to go into fiction writing, please, at least make it ORIGINAL and ENTERTAINING.

  107. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 11:59

    ssumner:

    <i.“I use Adblock and Adblock Plus extensions. I never see any ads.”

    Ssssssh! Don’t let my advertisers know this or I may lose money.

    I’ll make it up to you:

    Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation Hyperinflation

    There, that ought to make adsense go red alert, resulting in more cash for you!

  108. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 12:00

    dwb

    if you are going to go into fiction writing, please, at least make it ORIGINAL and ENTERTAINING.

    Oh, you mean the exact opposite to how you write? No thanks, I’d rather be original and entertaining.

  109. Gravatar of Peter N Peter N
    9. April 2012 at 12:55

    @Mark A Sadowski

    There’s nothing wrong with using aggregates in Macro provided you don’t believe you’re actually aggregating demand as opposed to adding up dollars.

    The trouble starts when you take an aggregate figure and try to deaggregate it. Combine this with a single consumer model, and you get absurdities like:

    “We can ignore debt because we owe the money to ourselves.”

    “The demand lost from debtors will be exactly offset by the increased demand from the creditors.”

  110. Gravatar of Peter N Peter N
    9. April 2012 at 13:08

    @Lorenzo

    One reason hyperinflation has rare is that revulsion and Gresham’s law happen first. People then switch to some other form of money, either another currency or possibly unit of account credit. You usually need a fairly advanced economy to get hyperinflation – an economy where it’s hard to avoid using the currency (I say probably to allow for the inevitable exception, though I don’t know of one).

    I had a look at your web site. It made me think that we’ve been ignoring ambit compared to other properties of money. Surely there’s a story there.

  111. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 13:28

    @RebelEconomist:
    You wrote:
    “My point is that we should try to understand what he is trying to say, and why he is probably wrong.”

    I think I *am* trying to understand what he he saying. That is why I asked him a simple one sentence question that I believe got to the heart of the matter. The trouble is I never got an answer. (And I think that alone may tell me something.)

    And wrote:
    “For example, Dan Kervick seems to be forgeting that the consumption-depressing effect on debtors of an increased real debt burden is offset by the opposite effect on creditors.”

    Not only that but Krugman actually went to the trouble of writing a paper with Gauti Eggertsson that showed under what conditions that the real debt burden might be consumption depressing. It’s not as if New Keynesian economists haven’t thought about these things. The MMTs keep acting as though they’re the only ones that have ever considered these possibilities.

  112. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. April 2012 at 14:10

    Becky H: I aim to please :)

    Peter N: Yes, there are barriers to hyperinflation, which is why political stress is such a common feature. The only non-paper money example I am aware of is Rome during the “crisis of the third century”, but I guess it counts as an advanced economy. There was a significant shift to barter and self-contained estates. (There is an argument that the manorial economy really began in the late Roman Empire.)

    Nick Rowe has also commented that the ambit question is an overlooked one. Trying to work things through from the simplest level, and reading some of Charles Goodhart’s papers (he of Goodhart’s Law), made me consider it. Also, remembering buying a Siberian rabbit fur hat in Red Square with $US in 1995.

  113. Gravatar of Peter N Peter N
    9. April 2012 at 14:49

    @SSumner

    “Krugman of course doesn’t believe the multiplier effect applies at zero interest rates, as I’m sure you must know.”

    No, I don’t know this. He isn’t one for qualifying his remarks. I will, however, take your word for it, rather than think he believes an absurdity.

    “I suppose if a frost killed 20% of the coffee crop we’d go into grocery stores and be unable to buy coffee, after all, it’s not like the price of coffee would rise. I am surprised anyone is even trying to defend Keen–sometimes it’s better to just cut your losses.”

    There is no doubt that the Fed can and does control the price of reserves, just as there is no doubt that it doesn’t directly control the quantity (which it could by either refusing to supply reserves at any price or changing the reserve requirement (which the Chinese central bank does)).
    Krugman gratuitously adds the phrase “at a fixed price”. This is a strawman that AFAIK his critics don’t believe. The Fed supplies reserves at the price at which it wants to supply them. Its main tool is the discount rate.

    Since most bank liabilities are not reservable, however the quantity of reserves is less important than the price. Supply and demand obviously applies, but demand is a function of the Federal funds rate, the banks’ profitable lending opportunities, and how close the bank is to it’s capital based lending limits. Most banks lend right up to their limits, so their lending isn’t primarily reserve constrained.

  114. Gravatar of Peter N Peter N
    9. April 2012 at 14:56

    @Lorenzo,

    Some ideas:

    Consider what happens when an ambit suddenly ceases to exist.

    Consider the bridge between 2 ambits. Is this a place to exact rents?

    Consider 2 ambits with different velocities. Is there an arbitrage possibility?

  115. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. April 2012 at 15:38

    Major_Freedom: That’s funny, coming from someone who I have corrected on many occasions regarding the nature and significance of economic history. Actually, you have never managed to do that, since you never seem to get what I am saying or implying correct.

    Your ignorant believe that because something never happened, that it follows from this that it never will happen, shows that you have no business talking down to anyone regarding economic history.
    Never said or implied that.

    You know what’s even rarer still? The whole world being on a fiat standard. That is so rare in fact, that it has never before happened until 1971. Which adds up to lots of experience of fiat currencies, and not a lot of episodes of hyperinflation.

    The fact that certain economic events are “rare” bares ZERO relation to its probability or chance of happening in the future. Not much to its possibility, but it does go to probability, with normal ceteris paribus caveats.

    I am only saying what follows from economic principles. These principles follow as laws, based on particular actions taken. Which is why arguing with you is like arguing with a Marxist, everything gets reconstrued back to suit the analytical model regardless of what violence is done to the facts of the case or what the other person is arguing.

    Robust predictions of general tendency is the most one can hope for, since even economies are too complex for anything more let along the social systems they are embedded in.

    Your silly belief that something occurring with rarity means it should be ignored or ridiculed, is exactly the kind of ignorance that led to people believing that national level home prices can never fall, because they never fell prior. Look how that naive prediction turned out. National home prices did fall.
    Never said or implied that. What I was critiquing is your overblown sense of certainty.

    Stop spewing on this blog ignorant claims that are based on a fallacious interpretation of the nature and significance of economic history. You’re up the creek without a paddle. An old biblical saying about motes and beams seems appropriate: or, to be simpler, take your own advice.

    Irrelevant. Fascism occurred in ancient Greece, and then two thousand years later it returned in northern Europe. Once again, no sense of history. Fascism is, amongst other things, a modernising revolt against modernity: you simply cannot have it prior to the French Revolution. Certainly, authoritarian systems abound in history but that does not make them fascism.

    Facts do count, as long as you understand what the significance of an economic historical fact really is. By your crap logic, if I were to eat a ham sandwich every day at lunch for the last year, and I argued that these economic historical events contain zero causality in whether I will eat a ham sandwich tomorrow, then you will spew out that I am allegedly not paying proper attention to “the facts”, which is my eating a ham sandwich every day over the last year. …
    Yes, every self-contained system needs a means to discount awkward facts. My point is not about the significance of the facts, it is that you have such a poor grasp of what the facts are to start with.

    It is no more closed than any other epistemology. All you need to do is provide better arguments that have superior logic, which will be done through critiquing it. … Since you cannot appear to even grasp what I am, and am not, saying or implying there is no route “into” your self-contained bubble. As I said in my comment above and you have just labouriously demonstrated.

  116. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. April 2012 at 15:41

    Peter N: I think of ambits as sets of transactions, often with overlapping possibilities at the edge. Each set being the transactions in which a particular money is used. The “bridge” between sets being the exchange rate.

  117. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 16:14

    Peter N wrote:
    “No, I don’t know this. He isn’t one for qualifying his remarks.”

    I’m trying limit the number of responses to other responses these days (life is short) but I personally find this remark too demonstrative of your general obtuseness.

    In the last five years Paul Krugman has written 217 blogposts that mention the phrase “liquidity trap.”

    No doubt you are aware a liquidity trap is a situation in which injections of cash into the private banking system by a central bank cannot lower interest rates and hence cannot stimulate economic growth. One of the prime implications of this is that no matter how large the central bank chooses to make the monetary base it fails to increase the size of the money supply because short term interest rate vehicles become near substitutes for money.

    Just to make that more concrete, that means the monetary multiplier tends increase at low interest rates.

    I personally don’t believe monetary policy is ever impotent. Moreover I find it somewhat tiresome to come riding to Krugman’s defense everytime a PK or an MMT thoughtlessly attacks him for things he hasn’t done, or more importantly, for things he actually has done.

  118. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 16:23

    Lorenzo from Oz:

    Which is why arguing with you is like arguing with a Marxist, everything gets reconstrued back to suit the analytical model regardless of what violence is done to the facts of the case or what the other person is arguing.

    Except you haven’t shown how I am in fact “doing violence to the facts.”

    You claim that I am taking everything back to suit an analytical model? So are you. You are desperately trying to take everything back to suit the analytical model of positivist methodology in economics, of assuming constancy in relations, regardless of the fact that human action is not constant.

    You say arguing with me is like arguing with a Marxist? That’s absolutely hilarious, considering how utterly closer you are to Marxism than I am in terms of epistemology. Marx, like you and unlike me, used a historicist epistemology. Marx, like you and unlike me, insisted that there existed constant relations in human action. Marx, like you and unlike me, never let facts get in the way of his economic views.

    I will say this again until it sinks into your head: What you call economic facts are really nothing but economic history. They are not economic principles or theories. What you call economic facts are not able to elucidate any economic theories on their own. ALL economic historical data is meaningless without an a priori theory to make sense of the data.

    Your problem is that your a priori theory that you are using to interpret the historical data, is internally flawed. You want to insist that your theories are immune from logical criticism, because you don’t believe economics has to be logical.

    Robust predictions of general tendency is the most one can hope for, since even economies are too complex for anything more let along the social systems they are embedded in.

    That’s exactly why your worldview is fallacious. What you call “robust predictions” are nothing but false claims about alleged constancy in “general tendencies.”

    There are no constancies in the sphere of human action. Repeat that fact in your head.

    “Your silly belief that something occurring with rarity means it should be ignored or ridiculed, is exactly the kind of ignorance that led to people believing that national level home prices can never fall, because they never fell prior. Look how that naive prediction turned out. National home prices did fall.”

    Never said or implied that.

    What bologna. You did imply that by repeating ad nauseum that universal price controls and socialism and hyperinflation are “rare”, as if this constitutes a refutation of what I am saying.

    What I was critiquing is your overblown sense of certainty.

    You’re so certain that I am wrong, so look in the mirror first before you go around accusing others of being so certain.

    You’re so certain of the economic facts. You’re so certain of everything you have said to me, and yet here you are, pretending to have something on me by telling me I am being too certain. Give me a break. You’re such a hypocrite.

    “Stop spewing on this blog ignorant claims that are based on a fallacious interpretation of the nature and significance of economic history. You’re up the creek without a paddle.”

    An old biblical saying about motes and beams seems appropriate: or, to be simpler, take your own advice.

    Sorry, I am an atheist. I guess I am not surprised that you would be quoting sayings from ancient religious texts.

    “Irrelevant. Fascism occurred in ancient Greece, and then two thousand years later it returned in northern Europe.”

    Once again, no sense of history.

    You haven’t shown how I don’t have a sense of history a first time, so how in the world can you preface this with “once again”?

    Fascism is, amongst other things, a modernising revolt against modernity: you simply cannot have it prior to the French Revolution.

    You’re clueless. Fascism is not a modernising revolt against modernity. Fascism in the economic sense is government control, but not ownership, of the means of production. Fascism did in fact exist prior the French revolution.

    Plato’s Republic is a fascism blueprint. No less than 9 of Plato’s students set up fascist city states across Greece. Of course they all eventually failed, but it’s incorrect to claim that fascism cannot exist prior to the French revolution.

    Your knowledge of history is garbage, your knowledge of political philosophy is garbage, and the quality of your posts is rapidly declining.

    Certainly, authoritarian systems abound in history but that does not make them fascism.

    Very good observation.

    “Facts do count, as long as you understand what the significance of an economic historical fact really is. By your crap logic, if I were to eat a ham sandwich every day at lunch for the last year, and I argued that these economic historical events contain zero causality in whether I will eat a ham sandwich tomorrow, then you will spew out that I am allegedly not paying proper attention to “the facts”, which is my eating a ham sandwich every day over the last year.”

    Yes, every self-contained system needs a means to discount awkward facts.

    I didn’t discount any facts! I merely correctly identified them for what they are and their proper significance.

    You are improperly overstating the significance of historical events. It is in no way “awkward” that I recognize that every day during the last year, I ate a ham sandwich. It is only awkward to you because you have to deal with the fact that this history alone cannot expose any constancy relation that can expose a causal connection between those events in the past, and my choosing to eat a ham sandwich tomorrow, or the next day. You have to deal with the awkward fact that each day, I am making a fresh choice to eat a ham sandwich.

    “My point is not about the significance of the facts, it is that you have such a poor grasp of what the facts are to start with.”

    You haven’t in any way shown how I have “a poor grasp of the facts.”

    You didn’t even address my scenario of the ham sandwich. You didn’t show any hint of having any knowledge in how to deal with economic events, how to interpret them, what the significance of events are, and how economic science is to deal with them.

    All you’re doing is spewing out mindless antagonism after mindless antagonism.

    There is zero economics in your posts. There is zero economic analysis in your posts. There is zero display of understanding political philosophy. There is zero evidence that you comprehend fascism.

    I could go on and on, but at least I am contributing economic analysis in my posts.

    “It is no more closed than any other epistemology. All you need to do is provide better arguments that have superior logic, which will be done through critiquing it.”

    Since you cannot appear to even grasp what I am, and am not, saying or implying there is no route “into” your self-contained bubble.

    I cannot grasp what you are? I don’t care what you are. What I do know is that you are, so far, utterly unable to engage in real economic analysis through logic. All you have done so far is say “You don’t know the facts, you don’t know history” blah blah blah.

    As I said in my comment above and you have just labouriously demonstrated.

    You haven’t shown how I have demonstrated it.

    You know what I just noticed again? This is the second time in a row that you have made posts that contain zero economic analysis.

    Maybe you should just admit that you don’t know what economic science really is, and that you have an empty tank. It’s getting rather tedious toiling through your ignorant posts.

  119. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 16:31

    @Peter N.,
    Haste makes waste.

    “tends increase at low interest rates” should of course read “tends to decrease at low interst rates.” But I take it you’re not one of those “Gotchya” MMTers are you? That’s tiresome too.

  120. Gravatar of CA CA
    9. April 2012 at 16:56

    Seriously Professor Sumner; why do you allow this ass clown (mf) to hang around and badger your most thoughtful and loyal readers/commenters? You’re not an anarchist are you? Shouldn’t there be rules to commenting here? I think you should do a commenting etiquette post.

  121. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 17:05

    CA:

    Seriously Professor Sumner; why do you allow this ass clown (mf) to hang around and badger your most thoughtful and loyal readers/commenters? You’re not an anarchist are you? Shouldn’t there be rules to commenting here? I think you should do a commenting etiquette post.

    Speaking of etiquette, hahaha.

    Why am I not surprised that resident fawn CA would spew a hypocritical remark? You’ll never see me swearing at other posters.

    And badger? Please. It goes both ways. I can take it. Seems like you can’t. Lorenzo was very antagonistic in his last post, and you’re telling me that I am badgering others? You’re just eliciting a tribal mentality where “our side” can do it, but “their side” cannot.

    I realize you want to have Sumner’s babies. It’s OK. I understand where you’re coming from. But if you want to swear at other posters here, maybe you should instead choose another blog to poison?

  122. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 17:08

    CA,
    One of the things I admire most about Scott’s administration of The Money Illusion is the amost complete lack of censorship. (Most of us here consider ourselves libertarians of one stripe or another.)

    Believe it or not Scott has censored at least one of my comments. But it was hardly an important one. It was an off color joke in response to another off color joke. And Scott thought his advertisers might be offended. So he emailed me about the situation and I thought it was perfectly understandable. I know of very few blog hosts who would have taken the time.

    Lorenzo apparently can take care of himself. And this “debate” with MF might be illucidating to some of The Money Illusion’s readers.

  123. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 17:08

    Oh, and CA, a blogger allowing all kinds of comments on his blog is not evidence of that blogger being an anarchist.

  124. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 17:15

    Mark Sadowski:

    Lorenzo apparently can take care of himself. And this “debate” with MF might be illucidating to some of The Money Illusion’s readers.

    Didn’t you know, Mark? All socialist minded people like CA want to censor their opponents. I’m just surprised that CA took that long to reveal his/her true beliefs.

    While my methods may be a little caustic, a little abrasive, and not respectful of authority, I have found that I tend to bring out people’s core beliefs where otherwise they would have remained superficial and fake. That helps everyone I think.

  125. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 17:20

    Major Freedom,
    You can be sure few people here disagree with you more than me. But you can always count on me to defend your right to express your opinion.

  126. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 17:31

    Mark:

    You can be sure few people here disagree with you more than me. But you can always count on me to defend your right to express your opinion.

    Thanks Mark, but that right actually resides with Sumner. He has the power to permit or censor comments as blog administrator.

    My having free speech doesn’t mean I can yell profanities in your house.

  127. Gravatar of Peter N Peter N
    9. April 2012 at 17:45

    I don’t really believe Krugman doesn’t understand the current situation.

    “Now, under current conditions — that is, in a liquidity trap — the monetary base is indeed irrelevant at the margin, because people are indifferent between zero interest public liabilities of all kinds. ”

    I was just expressing my irritation with his, dare I say, obtuseness, about his opponents’ arguments, many of which were quite mainstream, at least if you believe the Fed’s own economists.

    Bank lending these days is constrained by capital. Most bank liabilities are not reservable. The price of reserves matters, since it affects the cost of funds, and the Discount rate is the key guide interest rate.

    However, it is unclear to what extent the monetary base controls the broadest monetary aggregates (like M4, now that we finally have it).

    As for monetary policy at the lower bound, yes indeed. The world needs it desperately.

  128. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 17:45

    Major Freedom wrote:
    “Thanks Mark, but that right actually resides with Sumner. He has the power to permit or censor comments as blog administrator.

    My having free speech doesn’t mean I can yell profanities in your house.”

    Exactly so. And given Scott’s history I trust his judgement.

    P.S. I personally think “@$$” is unacceptable. But I also believe a warning is sufficient. Let the comment stand and CA be shamefully exposed as the original profanity issuer.

  129. Gravatar of Dan Kervick Dan Kervick
    9. April 2012 at 17:54

    For example, Dan Kervick seems to be forgeting that the consumption-depressing effect on debtors of an increased real debt burden is offset by the opposite effect on creditors.

    I’m not sure exactly where this plays a role in what I said. But my intuitions are that debtors in the aggregate are a less wealthy class than creditors in the aggregate, and that that means debtors on average have a higher propensity to consume than creditors on average. If that is true, then I would infer that the consumption-depressing effect on debtors is greater than the consumption-enhancing effect of creditors.

  130. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 17:54

    Peter N. wrote:
    “However, it is unclear to what extent the monetary base controls the broadest monetary aggregates (like M4, now that we finally have it).

    As for monetary policy at the lower bound, yes indeed. The world needs it desperately.”

    That’s why we desperately need to reshift the focus from aggregates to results. From money supply to an NGDP level target.

  131. Gravatar of dwb dwb
    9. April 2012 at 17:56

    You are desperately trying to take everything back to suit the analytical model of positivist methodology in economics, of assuming constancy in relations, regardless of the fact that human action is not constant.

    no: one of the empirical regularities in macro, true for 000s of years (yes thousands!), is the quantity theory of money MV=PY, the basis of long run money neutrality. This is a fact like evolution is a fact, not a theory. We can debate whether the gold standard or fiat money is better (or some other method of money supply determination) but ultimately, the hidden regularity is the same. We are merely debating things like “how fast” or “how sticky” prices and wages are. nothing more.

  132. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 18:00

    Dan Kervick,
    You’re still autistically avoiding direct conversation with me. Lift your eyes, look me in the eyes. I promise debate with me shall not hurt, and shall only yield the truth.

  133. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 18:06

    dwb:

    no: one of the empirical regularities in macro, true for 000s of years (yes thousands!), is the quantity theory of money MV=PY, the basis of long run money neutrality. This is a fact like evolution is a fact, not a theory. We can debate whether the gold standard or fiat money is better (or some other method of money supply determination) but ultimately, the hidden regularity is the same. We are merely debating things like “how fast” or “how sticky” prices and wages are. nothing more.

    MV=PY is a logical relation, dwb. An accounting tautology. It is not an empirical hypothesis. All it says is that money spent is money received. This can be verified without testing it, and just thinking about the terms and what they mean.

    The V is a fudge factor that simply balances the equation. V has no independent definition apart from being defined as a function of the other three variables.

    The quantity theory of money is not a hypothetical proposition subject to testing. It is a logically grounded irrefutable economic proposition.

  134. Gravatar of dwb dwb
    9. April 2012 at 18:24

    @MF,
    its simultanously bizarre, amusing, and a whole lot of other things that you would argue the quantity theory of money since its the basic framework behind understanding how fiat money could end in hyperinflation, the basic statement of money neutrality. as sure as the sun will rise tomorrow if the govt prints 100,000x as much money overnight as existed yesterday, then the price level will go up… darn near 100,000x (depending on how flexible prices are). Sure, technology interest rates and a whole lot of other things can affect it, but the basic premise is indisputable. Implicitly you rely on it every time you make a “hyperinflation” post.

    If you learn ONE THING on this blog, please absorb that.

  135. Gravatar of dwb dwb
    9. April 2012 at 18:27

    @MF:

    re-examine the table.

    http://www.themoneyillusion.com/?p=13774

  136. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 18:29

    Mark Sadowski:

    That’s why we desperately need to reshift the focus from aggregates to results. From money supply to an NGDP level target.

    Even if an NGDP target leads to an exponentially rising money supply? Keep targeting NGDP no matter what?

    Everyone here needs to learn that a linear rising NGDP statistic does not imply a linear growing money supply statistic.

    Since NGDP targeting requires inflation, and since inflation alters the real economy in such a way that it requires an acceleration in inflation to be sustained, which then alters the real economy even more and so requires yet another acceleration in inflation to be sustained, the inevitable outcome is exponential money supply and eventual hyperinflation.

    NGDP targeting is not a long term sustainable policy.

    The Fed should not be targeting any tiny portion of the full services that money provides, such as “spending” or “prices” or “interest rates on loans.”

    The Fed, if it is going to exist, should target aggregate money supply that matches precious metals as closely as possible. If that means 20% price inflation or -20% price inflation, so be it. If that means 10% interest or 1% interest, so be it. If that means 10% NGDP growth or -10% NGDP growth, so be it.

    The Fed should not be in the business of micro-managing the economy by altering the quantity of nominal spending. They should let the market decide how much spending takes place by how much the market mines precious metals. They should commit to targeting the rate of precious metals discovery, which will act as a calm sea over which economic calculation is minimally hampered, and hence real productivity is maximized.

    Constantly overruling the market’s NGDP by inflation will do nothing except create increasing instability in the monetary system, which will appear as “great moderations”, until the monetary system breaks down.

  137. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 18:30

    Dan Kervick,
    I’ve never seen a man (I’m assuming you’re a man, not that gender matters that much) more weak-kneed in the face of honest debate than you. I really wanted to prove you wrong and you will not give me even that simple satisfaction.

    You really disappoint me.

    I’ll see you at the hanging.

  138. Gravatar of Major_Freedom Major_Freedom
    9. April 2012 at 18:33

    dwb:

    re-examine the table.

    http://www.themoneyillusion.com/?p=13774

    And?

    its simultanously bizarre, amusing, and a whole lot of other things that you would argue the quantity theory of money since its the basic framework behind understanding how fiat money could end in hyperinflation, the basic statement of money neutrality. as sure as the sun will rise tomorrow if the govt prints 100,000x as much money overnight as existed yesterday, then the price level will go up… darn near 100,000x (depending on how flexible prices are). Sure, technology interest rates and a whole lot of other things can affect it, but the basic premise is indisputable. Implicitly you rely on it every time you make a “hyperinflation” post.

    Like I said, I hold the quantity theory of money to be a non-hypothetical, logically grounded proposition. I do not consider it as a testable empirical proposition. It is like empirically testing the law of supply and demand.

    If you learn ONE THING on this blog, please absorb that.

    This is not something I learn on this blog, this is something I already knew.

  139. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 18:36

    Major Freedom,
    I had all but given up on a reasonable debate when you storm in.

    Ok. Let’s start from a reasonable premise. What makes you think that an increase in aggregate expenditures will break for prices more than even? Why wouldn’t it yield an increase in real income?

  140. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. April 2012 at 18:50

    Major_Freedom: Fascism in the economic sense is government control, but not ownership, of the means of production. That is not Fascism, that is regulation. For Fascism, economics is a means to national unity (Fascist Italy), racial supremacy (Nazi Germany), etc. Fascism is a fascinating, and complex, phenomena that cannot be reduced to a simple economic definition. It makes sense to call the jihadis “Islamofascists” since there are so many overlaps and similarities (such as, for example, their glorification of violence and their atavism). But economic policy is not something they are greatly concerned about. It certainly does not define them or their politics. Just as it does not with Fascism.

    This would be a case of you doing violence to the facts.

    I cannot grasp what you are? I don’t care what you are. Nor, apparently, can you grasp simple English.

    ALL economic historical data is meaningless without an a priori theory to make sense of the data.
    Actually, no. A time series of levels of unemployment, or of inflation, etc has meaning. It even has significance. Trying to make sense of why it is like that, that takes more analysis. And the process should be iterative, working back and forth between facts (history if you like) and analysis.

    As for ‘a priori theory’, one cannot even work out what one needs to theorise about with some experience. Hence the need for an iterative process.

    Wading through the rest of your self-contradictions falls into the ‘life is too short’ category. You have put them on display for all to read, that is sufficient.

  141. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. April 2012 at 18:51

    Major_Freedom: Fascism in the economic sense is government control, but not ownership, of the means of production. That is not Fascism, that is regulation. For Fascism, economics is a means to national unity (Fascist Italy), racial supremacy (Nazi Germany), etc. Fascism is a fascinating, and complex, phenomena that cannot be reduced to a simple economic definition. It makes sense to call the jihadis “Islamofascists” since there are so many overlaps and similarities (such as, for example, their glorification of violence and their atavism). But economic policy is not something they are greatly concerned about. It certainly does not define them or their politics. Just as it does not with Fascism.

    This would be a case of you doing violence to the facts.

    I cannot grasp what you are? I don’t care what you are. Nor, apparently, can you grasp simple English.

    ALL economic historical data is meaningless without an a priori theory to make sense of the data.
    Actually, no. A time series of levels of unemployment, or of inflation, etc has meaning. It even has significance. Trying to make sense of why it is like that, that takes more analysis. And the process should be iterative, working back and forth between facts (history if you like) and analysis.

    As for ‘a priori theory’, one cannot even work out what one needs to theorise about without some experience. Hence the need for an iterative process.

    Wading through the rest of your self-contradictions falls into the ‘life is too short’ category. You have put them on display for all to read, that is sufficient.

  142. Gravatar of Dan Kervick Dan Kervick
    9. April 2012 at 20:16

    Mark what are you talking about?

  143. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 20:22

    Dan,
    What do you think I’m talking about? Answer the question I simply asked in a single sentence almost two days ago.

  144. Gravatar of CA CA
    9. April 2012 at 20:55

    Mark Sadowski: I commend your dedication to freedom of speech, but this is not a freedom of speech issue. I wasn’t asking for the government to step in and silence or threaten Major in response to his opinions. Major is free to spew whatever nonsense he desires. But this is not his blog-and it’s not mine either! For once I agree with Major when he writes, “but that right actually resides with Sumner. He has the power to permit or censor comments as blog administrator.” Thus, I was appealing to Scott, as the administrator of the blog, to reassess his hands-off approach to moderation. I don’t know how that makes me a socialist.

    As to the “@ss clown” remark, I thought it was pretty benign. But since you’ve expressed some degree of regret over it, I apologize.

  145. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 21:02

    Dan,
    This is getting a little strange. If you want it to be a little less strange you can do something to relieve this. Hello?!?

    P.S. I could exercise my credentials but I hope I don’t have to pull out my diplomas. Just place your hands on the car and display a little reason.

  146. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 21:10

    CA,
    As you said, It’s all up to Scott. I think @$$ was over the top but personally I wouldn’t dream of censoring that. I would warn you.

    I’m not an official Money Illusion cop. But if I were I’d give you a warning and tell you to behave yourself now and in the future, and then send you on your way.

  147. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 21:43

    Central Police Station Scott,

    There’s a Dan Kervick on the loose (my fault as I let him get away).

    Look for a wild Modern Monetary Monetarist with dreams of fiscal stimulus driven macroeconmic equilibrium in his eyes.

    He’s highly dangerous and armed with infrastructure and welfare enhancing spending. Be on the lookout.

  148. Gravatar of Dan Kervick Dan Kervick
    9. April 2012 at 21:52

    I’m afraid we are wildly talking past each other, Mark. My point was about what happens to specific kinds of people in the context of a general rise in the price level. It was not a point about aggregates, and it doesn’t matter whether the inflation in question is demand pull or supply push.

    Paul Krugman had argued that if there is inflation, that helps people with debt repayment. I claimed that that is only true of those people whose nominal wages happen to rise along with prices. I used a really simple illustration to make clear the impact on some people of what I thought should be a totally obvious fact: that in the context of a general rise in prices, not everyone gets a nominal raise! Some employers, eager to reduce their labor costs and employees’ real wages, but unable or unwilling to give them a nominal pay cut, simply hold back on the pay increases as so that they can pay their employees lower real wages.

    This is something that happens all the time, every day. I can tell you that I know many people who have not received significant raises in three years, and whose wages have not kept up with price increases. They are now poorer than they used to be. They have not received any substantial debt relief at all, because the debt relief only comes when you get a nominal pay increase so that the ratio of your nominal wages to your debts (which are mostly fixed in nominal terms) increases. So the general price increase just makes them poorer, and future price increases engineered by economic policy makers – via whatever policy tool they might employ to do the engineering – will only make them poorer still.

    It’s also my view that the people upon who this sad fate is most likely to fall are those with the least bargaining power in our economy and who have already endured the heaviest costs of the economic catastrophe enabled by malpracticing economists who are too busy dicking around with their moronic curves and textbook models to understand how anything in the real world actually works.

    Are you guys really denying this phenomenon of nominal wages for the least powerful lagging behind price level increases? Do you really think there is some magical macroeconomic glue that keeps prices and wages all yoked together like beads along a single curve?

    Apparently, Scott needs to have this translated into textbook curve talk before he will deign to cease pretending that he can’t understand it. Or maybe he thinks my example is about the “representative wage-earner”, so that it was meant to illustrate what happens to real and nominal wages in general But I think it is a completely intuitive point that is absolutely obvious to anybody who actually pays attention to the real business world and knows how it works. Scott replied to my reply to his question by saying this:

    Dan, The effect of inflation on real incomes completely depends on whether it’s demand or supply side inflation. “Never reason from a price change.” If it’s higher aggregate demand, then any rise in prices occurs precisely because AD shifted right, which means real incomes also rise (Unless SRAS is vertical.) Are you assuming SRAS is vertical?

    So again, apparently there is a built-in difficultly in the MM mind in understanding the difference between gross aggregate phenomena at the smooth, birds-eye, curve-level view of the economy and the very uneven, bumpy, unfair and ugly carnage that lies beneath when you zero in on classes of real people making up the components of the aggregates.

    If prices rise by 3%, the gods of macroeconomics do not come along to make sure everyone’s nominal wages rise by 3% too. There are big winners and big losers in all these policy choices. And the inflationists – oh excuse me, the “NGDP level targeters” – are getting ready to stick it to the most vulnerable workers yet again. I can understand why this is a popular approach among the conservatives and Social Darwinists and in the MM camp, but I’m a little miffed that nice liberal boys like Paul Krugman are lending their weight to the unending war of wealth and ownership against labor and the vulnerable.

    Oddly, some people on this thread who disagree with my policy preferences nevertheless have no trouble at all understanding what I’m talking about, and have argued that the ability of employers to take advantage of inflation to reduce real wages is a feature not a bug. I respect their honesty.

    You want to translate this into a question about curves floating around in macroeconomic space? Do it yourself. Because I can’t believe that you honestly don’t understand what I’m talking about.

  149. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 22:48

    Dan Kervick,
    You wrote:
    “You want to translate this into a question about curves floating around in macroeconomic space? Do it yourself. Because I can’t believe that you honestly don’t understand what I’m talking about.”

    I cant’t believe you spend two days writing nine paragraphs responding to a question that was only a one sentence long.

    I tell you what. I’ll take two months and write a research paper in response. Becuase that’s what you deserve.

  150. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 23:19

    Dan,
    Forgive me,
    It was only really six paragraphs long.

    Actually you’re original point was highly hypothetical. I didn’t take that as typical of anyone.

    There are nearly 30 million people in this country without jobs or with who are underemployed. And were one to consider the effect of employing these people at a living wage at full time hours the multiplier effect on the currently employed would be enourmous.

    Third paragraph you write:

    “I can tell you that I know many people who have not received significant raises in three years, and whose wages have not kept up with price increases.”

    As a group and individual tutor an S-contract instructor I can tell you I have not received a significant increase in seven years. But I am en economist. Moreover I am a macroeconomist.

    Fourth papragraph you write:
    “…malpracticing economists who are too busy dicking around with their moronic curves and textbook models to understand how anything in the real world actually works.”

    Charming. It might benefit you to know I am currently unemployed. Not that I deserve to be. I actually was an advocate of the unemployed who lost his job in large part because of that role. (I tried to teach Development Economics from a progressive point of view.) That truly makes me moronic.

    Fifth paragraph
    “Are you guys really denying this phenomenon of nominal wages for the least powerful lagging behind price level increases? Do you really think there is some magical macroeconomic glue that keeps prices and wages all yoked together like beads along a single curve?”

    Um no. Did I say anything that implied that?

    The sixth and subsequent paragraphs deserve no response.

    Who made you the moral arbitrar? You who knows nothing about macroeconomics? You who have spent zero years suffering for the field or for its implications? Who gave you the right in your enourmous ignorance to pass judgement on the whole macroeconomics profession and @!$$ all over it?

  151. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. April 2012 at 23:47

    Dan,
    On the fifth paragraph,
    When employment is above Nairu generally ULC rises faster than prices and vice versa.
    (I don’t know why I’m telling you I believe this because I think you’re a dick.)

  152. Gravatar of Dan Kervick Dan Kervick
    10. April 2012 at 03:06

    Mark, get a grip. You first seemed to assume that I had read every one of 140 comments carefully and so must have been making a deliberate and rude decision not to respond to your particular question. Then you assume that I spent two days writing a response which I actually wrote last night after I reviewed the thread to find out what you were so irritated about, what your question was and why you were jumping up and down demanding an answer. Now your ego is bruised because I responded to your string of personal insults with something less than decorum.

  153. Gravatar of Becky Hargrove Becky Hargrove
    10. April 2012 at 04:53

    Dan Kervick,
    Please tell me if you are honestly in favor of unemployed people gaining work, and middle class all keeping their wages, with zero rise in prices. That is what I do not understand…how exactly do you expect that to work? I am also in favor of the unemployed gaining access to economic life in ways that do not disturb overall monetary equilibriums, but I have thought for nearly a decade as to how to make that work, so that wealth can be measured in new ways. Your fight against so-called ‘inflation’ with everyone being employed as usual has yet to be explained. And no I don’t expect you to use economic language to tell me, because I did not use economic language to put my work together. For someone who makes fun of economic texts when you fight the market monetarists, you still prefer to fight them by technical means. But when you are in what you consider more public places, you do so with emotion, not to mention political ammunition. Why are you so afraid to make emotional arguments here? I think all you are doing is standing for the status quo which is in desparate need of repair. I do not expect you to reply to me, for I am no one but a concerned bystander in all this, but at least it goes on the record that I asked you what was really important, for me to ask. One more thing, the measure of nominal income is but the first step to a better understanding of wealth in the future. When we refuse to allow people the most accurate measure of all, how can they ever come to understand their own place in the economy?

  154. Gravatar of dwb dwb
    10. April 2012 at 05:20

    @MF,
    This is not something I learn on this blog, this is something I already knew.

    great, we have a common framework in the QTM. the only part where i disagree is that it has been empirically tested many times and found to hold over the long run.

    So it should be readily apparent now why your claim is false:

    Everyone here needs to learn that a linear rising NGDP statistic does not imply a linear growing money supply statistic.

    in the QTM PY=MV, PY is the *definition* of NGDP, or total nominal spending. long run money neutrality implies that over the long run, NGDP will grow at the same rate as the money supply (with fixed technology).

  155. Gravatar of Dan Kervick Dan Kervick
    10. April 2012 at 05:44

    Becky, if we pursue policies that produce full employment and rising standards of living, then if those policies also produce modest inflation as a by-product that is nothing to be worried about. But what I argued against was Krugman’s call to deliberately engineer inflation as a tool for achieving other beneficial results. He presented two familiar arguments for the alleged benefits of this inflationary program, and I argued in my original post at NEP that both arguments were problematic.

    I have also been very skeptical of further reliance on the Fed and central bank innovations such as NGDP level targeting to lift this country out of the deep stagnation we are experiencing. I just don’t think these monetarist approaches will be very effective, and therefore think the time that has been spent debating and advocating them is something of a distraction. My view is that we need massive fiscal activism.

  156. Gravatar of Morgan Warstler Morgan Warstler
    10. April 2012 at 06:04

    Dan, Sumner supports my Guaranteed Income plan, the one you are afraid to discuss.

    You are so desperate for a Jobs Guarantee, but you HIDE from discussing the free market version.

    speaks volumes.

  157. Gravatar of Negation of Ideology Negation of Ideology
    10. April 2012 at 06:35

    Major –

    “Everyone here needs to learn that a linear rising NGDP statistic does not imply a linear growing money supply statistic.”

    I’m not trying to bash you, because this is a common error, but a 5% annual growth in NGDP is exponential, not linear. The wikipedia entry even uses 5% growth as its example!

    http://en.wikipedia.org/wiki/Exponential_growth

    And I was surprised to find this nugget:

    “Economic growth is expressed in percentage terms, implying exponential growth. For example, U.S. GDP per capita has grown at an exponential rate of approximately two percent per year for two centuries.”

    Exponential growth is one of those terms people throw around to sound scary, but it’s not. Population grows exponentially, productivity grows exponentially, RGDP grows exponentially, NGDP grows exponentially, and the money supply grows exponentially.

  158. Gravatar of J.V. Dubois J.V. Dubois
    10. April 2012 at 07:41

    Dan, I just read the whole discussion and I have to say, that there is a time when you have to admit you were wrong. Krugman was wrong with famous “we owe it to ourselves” and him not admitting it diminished him somewhat in my eyes. So admit it, you are talking nonsense here.

    To restate the question asked by Scott and Mark – what is it with fiscal policy that makes it so beneficial for real growth?

    As I understand, large part of stimulus depends on the multiplier. I always thought that MMTers were hard keynesians who think that fiscal stimulus is great even if used to build pyramids, or dig and fill holes in the ground. So let me ask – how does digging up the hole and then filling it back add to “real growth”. The real magic behind this trick is that it increases income which is used to buy things that are made by other people. So now what happens if this fiscal stimulus income is sucked by greedy corporations which refuse to pay their workers what’s due? Then fiscal policy failed to induce growth.

    All you MMTers get this into your head – monetary policy is about nominal aggregate demand. It is there to remove that “dig and fill back” part of the keynesian stimulus. That part is not only unnecessary, but harmful as it soaks real resources such as labor. Useless work is the same as no work. It does not ad up to any real resources.

    Now there may be lot of useful and pro-growth things that government can do. Government may build infrastructure, retrain workforce, offer jobs for unemployed people so they keep their work morale. This is fiscal policy. Politicians make decisions weighting costs and benefits of policies – economical (such as infrastructure), environmental, social. Monetary policy just makes sure that they have one less problem to think about.

    If you are still too dense to think this through, imagine a world where every country agrees to embark upon emmision permits market. Suppose that scientists invented long-term path for emissions that our planet can cope with and that this is the government goal. Then they let markets to calculate the price of the permit. As long as the emmisions are on long-term path all is well. Suddenly “fiscal policy” has one less problem to care about. There is no need to raise carbon taxes to compensate people most harmed by environmental change.

  159. Gravatar of Major_Freedom Major_Freedom
    10. April 2012 at 08:17

    Propagation of Ideology:

    “Everyone here needs to learn that a linear rising NGDP statistic does not imply a linear growing money supply statistic.”

    I’m not trying to bash you, because this is a common error, but a 5% annual growth in NGDP is exponential, not linear.

    Sorry, terrible wording. I meant a constant growth NGDP statistic does not imply a constant growth in money supply statistic. Yikes.

  160. Gravatar of Major_Freedom Major_Freedom
    10. April 2012 at 08:36

    Propagation of Ideology:

    Exponential growth is one of those terms people throw around to sound scary, but it’s not. Population grows exponentially, productivity grows exponentially, RGDP grows exponentially, NGDP grows exponentially, and the money supply grows exponentially.

    Sure, there’s no problem with exponential growth, my point though is that I reject that notion that a constant exponential growth in “spending” via inflation carries with it a constant exponential growth in money supply. My view is that in order to get a 5% constant growth NGDP via inflation, there has to be an accelerating rate of increase in money supply, not just the same constant rate of growth of money supply.

    I’m no doubt butchering the English language here, but I hope I got the point across.

  161. Gravatar of Mike Sax Mike Sax
    10. April 2012 at 08:45

    Great job boys and girls! This is what I had in mind when I said we need some MMT-MM smackdowns.

    It was worth a post http://diaryofarepublicanhater.blogspot.com/2012/04/kervick-sumner-war-becomes-cage-match.html

    Mark Sadowski, I don’t mean to tell you that you figured in this one prominently. You win the Stephen Williamson award.

  162. Gravatar of dwb dwb
    10. April 2012 at 08:51

    @MF:
    I’m no doubt butchering the English language here, but I hope I got the point across.

    no you are clearly not. go back you what you agreed was a framework: the QTM. MV=PY. PY is nominal spending. The growth rate of money over the long run is the same as nominal spending. whether the money supply grows appears in prices (P) or output (Y) depends mostly on price stickiness.

  163. Gravatar of Dan Kervick Dan Kervick
    10. April 2012 at 08:51

    J.V. Dubois,

    I’m not defending any hole-digging. My views are that there is no reason a government enterprise needs to be any less productive than than private sector enterprise; that capitalist enterprise is a broadly effective but highly imperfect system for matching willing workers with productive and socially beneficial tasks; and that there are certain kinds of productive activity that governments can do way better than the private sector anyway. As a result, it seems to me that when our society is producing so far below its capacity and failing to carry out important public investment projects, and there are so many willing and able workers available for work and eager for a job and a steady income, then the public should hire them and pay them out of the public treasury.

    A good part of the financial resources needed for these tasks can certainly be created from scratch using the public’s inherent monetary sovereignty and authority to run a larger pure deficit without any additional public borrowing or taxes. But if we do that, it is much better to inject the new money directly into the economy to pay productive labor and purchase public goods and social capital than to either purchase more treasury securities or offer the money as a yield on on some new-fangled financial instrument like a NGDP futures contract. I think MM is very weak on transmission mechanisms and concrete proposals for optimizing the productivity of the financial capital they want to create somehow as part of the “loosening” they are always calling for. And I believe they overestimate the role of the Fed chairman’s expectations-mananging powers.

  164. Gravatar of Negation of Ideology Negation of Ideology
    10. April 2012 at 09:06

    Major -

    I understand your point now, and I agree the increase in money supply wouldn’t be constant. I still wonder why you think it would have to be accelerating. Wouldn’t it fluctuate? It seems to me there might be some years where money supply has to increase rapidly to hit the 5% NGDP target, and other years where it has to grow slowly or even decline – but over the long term it would probably average about 5%.

    Are you assuming velocity is going to continually decline in the future? And why would that be?

  165. Gravatar of Major_Freedom Major_Freedom
    10. April 2012 at 09:26

    dwb:

    no you are clearly not.

    OK, how’s this:

    I submit that a constant 5% NGDP target requires a 5%, then 6%, then 7%, then 8%, etc, money supply growth.

    go back you what you agreed was a framework: the QTM. MV=PY. PY is nominal spending. The growth rate of money over the long run is the same as nominal spending. whether the money supply grows appears in prices (P) or output (Y) depends mostly on price stickiness.

    Yes, I agree that nominal spending is determined by the money supply, but I reject the notion that a central bank using inflation to target a constant nominal spending growth can be accomplished with a constant growth in money supply. I hold that a constant growth in nominal spending, via inflation from a central bank, can only be accomplished by an accelerating growth of the money supply. This is because money is not neutral. It affects the real economy, in ways that do not match real consumer preference. As such, there is a permanent countervailing market force derived from real individual preferences that seeks to reduce spending out of cash balances, given the increasingly distorted real economy that is caused by the inflation itself.

    In 2008-09, a $1 trillion inflation was enough to postpone the day of reckoning and generated a global stock market rally. The current rally since December 2011 required over $3 trillion in global inflation. This generated just a 100-day rally that is already breaking down.

    The next inflation will have to be $5 trillion, which may last 50 days. Then the next inflation will have to be $7 trillion, which may last 25 days.

    My point is that constant growth in nominal spending in an increasingly distorted real economy, requires accelerating inflation, not just constant growth in inflation, to prevent the desperately needed corrections from taking place.

  166. Gravatar of Mike Sax Mike Sax
    10. April 2012 at 09:46

    You know I have a real bone to pick with adsense. I’m not the only one to have seen the epcm go way down lately. Is it a bad patch or are they just not paying anyone anymore?

  167. Gravatar of Mike Sax Mike Sax
    10. April 2012 at 09:49

    And I direct the above question to rebeleconomist or anyone with a clue about how adsense operates-namely how it treats its publishers.

  168. Gravatar of Major_Freedom Major_Freedom
    10. April 2012 at 09:59

    Propagation of Ideology:

    I understand your point now, and I agree the increase in money supply wouldn’t be constant. I still wonder why you think it would have to be accelerating. Wouldn’t it fluctuate? It seems to me there might be some years where money supply has to increase rapidly to hit the 5% NGDP target, and other years where it has to grow slowly or even decline – but over the long term it would probably average about 5%.

    This “probably” derives from assuming money is neutral over the long run. I don’t hold money as neutral in either the short or the long run.

    In my view, the money supply will have to be accelerating, because any given round of inflation, because money is non-neutral, alters the real economy apart from that which is generated by changes in real consumer preferences. Even if investors are perfectly aware of the extent of inflation, even if investors are perfectly aware that prevailing interest rates are not the rates what would exist in the absence of inflation, it is still the case that no individual investor can know what the true temporal preferences of consumers really is, because the interest rates that exist make market driven interest rates unobservable.

    So investors invest in different projects apart from ones the real consumer considers valuable. As this occurs, consumers will constantly be exercising their real preferences trying to bankrupt and change the existing projects, and in order for the Fed to sustain “spending” on all the projects, there will have to be an additional inflation greater than what originally brought the altered projects about in the first place. As this new inflation enters the economy, to stave off corrections, and thus sustain “spending”, that very solution again alters the real economy, again apart from real consumer preferences, and so a policy of sustaining constant growth in “spending” would require continuous increases in inflation.

    Are you assuming velocity is going to continually decline in the future? And why would that be?

    Velocity is really a fudge factor whose only meaning and relevance is a ratio of the other variables in the MV=PY equation. V doesn’t have its own definition. It is defined according to the other variables. V is PY/M, and that’s it.

    But to respond to your question, yes, the ratio PY/M will have to fall, as I hold that M has to grow faster than PY in order to coax a constantly growing PY in an inflation induced altering economy. And when I say “fall”, please understand that I don’t mean “fall over time.” I mean fall from where it otherwise would have been at that time.

  169. Gravatar of ssumner ssumner
    10. April 2012 at 11:18

    Rebeleconomist, OK, but there is one point you should absolutely agree with me on–fiscal stimulus was madness. If you think a deep recession was better than a mild recession plus 6% inflation, that’s your right. But most people clearly didn’t agree, as Congress passed a big stimulus which greatly boosted the national debt. The vast majority of economists supported that policy. The goal was to boost AD, i.e. have more inflation and less recession. So if that’s the way we went, we certainly should have used monetary policy, not fiscal. I’m just trying to get people to think clearly about these issues, I don’t insist everyone has the same policy preferences that I do.

    MF, Thanks for the ad revenue!

    Peter N. In a liquidity trap an increase in the base fails to boost M2. He talks about that problem all the time. No one can accuse him of not making his views crystal clear on that point.

    You said;

    “Its main tool is the discount rate.”

    This is flat out wrong. Prior to 2008 roughly 99% of new money was injected via OMPs, and less than 1% via the discount window. Banks were discouraged from borrowing through the DW, there was a stigma.

    CA, MF makes market monetarism look better by comparison. Just ignore him, I mostly ignore him now. It’s like the 1st amendment. It’s better to make a blanket rule than to figure out who to censor. Down that road lies Brad DeLong. It’s a slippery slope. I’d rather let it take up space, and just skip over it.

    I do generally censor obscenities, but since @$$ is fairly mild, and you appologized and I don’t want to search though 100s of comments in my control panel I’ll let it pass.

    Everyone, take a deep breath and pretend you are Tyler Cowen before commenting. That will keep things more sane.

  170. Gravatar of Major_Freedom Major_Freedom
    10. April 2012 at 12:18

    ssumner:

    CA, MF makes market monetarism look better by comparison.

    Funny, I always thought market monetarism makes my own views and the free market look better by comparison.

    Just ignore him, I mostly ignore him now.

    Mostly ignore? Or unable to refute, hence giving up?

  171. Gravatar of dwb dwb
    10. April 2012 at 12:41

    @MF
    This “probably” derives from assuming money is neutral over the long run. I don’t hold money as neutral in either the short or the long run.

    But to respond to your question, yes, the ratio PY/M will have to fall, as I hold that M has to grow faster than PY in order to coax a constantly growing PY in an inflation induced altering economy

    couple of points, glad you are finally coming around:
    1. if you believe in hyperinflation you also accept long run money neutrality, as hyperinflation is prima facie evidence for it.

    2. You do not need to invoke ever-changing V (or accelerating M) to get hyperinflation. In Weimar Germany, for example, the hyperinflation was due to printing money. period. When they withdrew the currency and stabilized the money supply, inflation stopped. The gold standard essentially fixes M. Go back and look at this table (compare NGDP growth minus money supply growth = velocity growth,and compare the inflation/real growth split): http://www.themoneyillusion.com/?p=13774. you can almost ignore V. M is the most important driver.

    3. Since you dont NEED changing V, why invoke it? You have not really explained how this happens {the intuition for V is the number of times the same piece of script circulates}.

    4. You should HOPE that v has an upper limit, in ANY money system, even if you have 1000s of private coin minters. Otherwise inflation is unbounded even with a fixed money supply like gold.

    5. empirically, the change in V is the OPPOSITE of your assumption anyway (higher V, higher nominal gdp http://research.stlouisfed.org/fred2/graph/?g=6m8 ). Which means when the economy gets hot, velocity actually *increases* (more growth from the same base). This would exacerbate hyperinflation.

    6. You still have not explained how if PY stays constant (because the fed targets ngdp) you get higher P. You keep saying the non neutrality of money but thats not an explanation, since you cleearly accept hyperinflation and hence money neutrality (are you using the wrong phrase here)?

  172. Gravatar of Major_Freedom Major_Freedom
    10. April 2012 at 13:41

    dwb:

    if you believe in hyperinflation you also accept long run money neutrality, as hyperinflation is prima facie evidence for it.

    I can see why you would believe this, but it’s not correct. It only seems correct when you think of crude aggregates like “price levels.” Not all equal price levels are equal. Hyperinflation is always accompanied by a drastically altered real economy, since the economy is affected by inflation and hyperinflation. Yes, “prices” rise, but that doesn’t mean money is neutral in the long run, because the real economy is different on account of the inflation and hyperinflation.

    This is what is meant by the non-neutrality of money. If all you do is focus on indeterminate “price levels”, while ignoring just what it is that has a price level, then you will not discern the non-neutrality of money, and you will make the incorrect inference that since “the price level” rose, then money is neutral after all.

    Inflation, and especially hyperinflation, have affects on the real economy. You can’t compare price levels in the past with price levels in the present, not when the real economy is different on account of the inflation in the meantime. It would be like trying to compare the prices of hamburgers and hotdogs sold yesterday, with foot massages and t-shirts sold today. Sure, there is a “price level” associated with each cross section, but you can’t compare them and then say “the price level rose”.

    You do not need to invoke ever-changing V (or accelerating M) to get hyperinflation. In Weimar Germany, for example, the hyperinflation was due to printing money. period. When they withdrew the currency and stabilized the money supply, inflation stopped. The gold standard essentially fixes M.

    Sure, hyperinflation in Weimar was caused by printing money. Period. Yet I don’t see how this stands against my contention concerning the relationship between constant growth of NGDP targeting via inflation, and accelerating money supply, which entails falling V.

    Since you dont NEED changing V, why invoke it? You have not really explained how this happens {the intuition for V is the number of times the same piece of script circulates}.

    Of course we need a changing V in my argument. If PY is growing at 5% per year, and I contend that this requires accelerating M, then V mathematically must fall.

    You should HOPE that v has an upper limit, in ANY money system, even if you have 1000s of private coin minters. Otherwise inflation is unbounded even with a fixed money supply like gold.

    V is limited to the number of transactions made in a period of time, i.e. supply.

    empirically, the change in V is the OPPOSITE of your assumption anyway (higher V, higher nominal gdp http://research.stlouisfed.org/fred2/graph/?g=6m8 ).

    I didn’t assume anything regarding V and its relation to GDP.

    Which means when the economy gets hot, velocity actually *increases* (more growth from the same base). This would exacerbate hyperinflation.

    Velocity has no meaning apart from PY/M. If velocity increases, then PY, or aggregate demand, is increasing faster than M. Since prices are constrained to demand and supply, and since Y is supply, it means velocity is constrained to supply.

    People can’t increase the number of exchanges they make unless there is a corresponding supply present to enable the money exchanges. If there is only so much supply in the pipeline, then it won’t matter how fast people try to spend their money, they must wait for production.

    You still have not explained how if PY stays constant (because the fed targets ngdp) you get higher P.

    Under NGDP targeting, the Fed wouldn’t target a constant PY. They would target an increasing PY of 5% per year. Unless Y increases 5% per year, an increase in PY means that P MUST go up each year.

    You keep saying the non neutrality of money but thats not an explanation, since you cleearly accept hyperinflation and hence money neutrality (are you using the wrong phrase here)?

    Hyperinflation does not imply money neutrality. Hyperinflation has effects on the real economy, no less than inflation. Hyperinflation is a manifestation of money non-neutrality, not neutrality.

  173. Gravatar of Major_Freedom Major_Freedom
    10. April 2012 at 13:44

    Let me rephrase:

    empirically, the change in V is the OPPOSITE of your assumption anyway (higher V, higher nominal gdp http://research.stlouisfed.org/fred2/graph/?g=6m8 ).

    I didn’t assume anything regarding V and its relation to GDP.

    I didn’t assume anything regarding V and its relation to NGDP over time.

    I said above:

    But to respond to your question, yes, the ratio PY/M will have to fall, as I hold that M has to grow faster than PY in order to coax a constantly growing PY in an inflation induced altering economy. And when I say “fall”, please understand that I don’t mean “fall over time.” I mean fall from where it otherwise would have been at that time.

  174. Gravatar of Major_Freedom Major_Freedom
    10. April 2012 at 13:46

    dwb:

    Please note that your chart includes GDP, not NGDP.

  175. Gravatar of dwb dwb
    10. April 2012 at 14:17

    @MF,
    in FRED, GDP is nominal gdp. GDPC1 is real GDP to 1 decimal place
    http://research.stlouisfed.org/fred2/categories/106?pageID=1&ob=&od=desc&filter%5B0%5D=frequency&filter%5B1%5D=Quarterly&filtergo=Filter

  176. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. April 2012 at 16:56

    Dan Kervick,
    Of course my ego is bruised. Moreover my ideal of self control is bruised. I placed myself under arrest for my lack of self-control.

    But at least my intellect isn’t bruised. I noticed you still haven’t directly addressed the question I posed now over three days ago. I assume that’s because you can’t.

    You keep eliding.

  177. Gravatar of dwb dwb
    10. April 2012 at 17:09

    @MF,
    not much time:
    This is what is meant by the non-neutrality of money

    you are using “neutrality of money” in two different ways:
    1. increases in money increase inflation (as in hyperinflation).
    2. (hyper)inflation distorts relative prices and hence negative contributes to real output.

    neither proposition is controversial, most people (including me) would agree with both (depending on degree and whether we are talking about short or long run).

    But only #1 is money neutrality, in the technical sense.
    http://www.investopedia.com/terms/n/neutrality_of_money.asp#axzz1rgiseb9j

    #2 is considered a “cost” of inflation and most economists would agree high inflation distorts prices.

    however, its confusing to conflate the two.

    #2 is a question of degree. miniscule inflation (1%) distorts relative prices little while hyperinflation distorts it a lot. The argument is symmetric: deflation also distorts relative prices.

    Under NGDP targeting, the Fed wouldn’t target a constant PY. They would target an increasing PY of 5% per year. Unless Y increases 5% per year, an increase in PY means that P MUST go up each year.

    yes, now the meat.

    well, maybe they would target a constant PY, who said that? what if the fed targeted ngdp at 0% (some might advocate this)? population and productivity growth combined is ~2.5%, so how about 2.5% or a little less, which would imply 0% inflation on average?

  178. Gravatar of Dan Kervick Dan Kervick
    10. April 2012 at 19:57

    Mark, I made no assertions about whether monetary policy can cause inflation.

    My post was on the question of whether inflation would have the beneficial effects Krugman claimed it would have. He offered two familiar classic arguments in favor of a positive answer to that question: (1) inflation helps debtors pay pay their debts faster and (2) inflation causes people to spend their money more rapidly.

    In response to (1) I argued that inflation only helps some people pay their debts more rapidly: namely those whose nominal wages rise significantly along with the increase in the price level. I have claimed that there is a significant class of people for whom that does not happen. For them, the impact of inflation is lower real wages and negligible impact on their debt burden.

    Scott then argued that my argument failed because if the inflation was caused by an increase in aggregate demand (by which I understand him to mean the AD curve moving to the right), then GDP would have increased as well.

    I replied that that had nothing to do with my point, since I was not talking about an aggregate phenomenon, but a phenomenon affecting a particular subclass of people within the aggregate population, and that my point held even if the inflation was caused by an increase in aggregate demand. Another way of putting it is that it is entirely possible that prices and nominal national income could go up, even while a significant portion of the nation does not see an increase in their nominal income. There would be no debt burden benefit for the latter group. I have also argued that this latter group consists of the most vulnerable and most poorly paid workers in our economy, with the least bargaining power.

    In response to Krugman’s point (2), I cited a 2011 paper arguing that that the alleged positive correlation between the rate of inflation and the propensity to spend (something I learned even back when I was in college taking into econ), might not actually exist.

    So can you see that the question of whether the Fed can engineer increases in the rate of inflation, and if so by what means, is not relevant to my argument? I wasn’t talking about whether the Fed could create higher inflation; I was talking about whether higher inflation, however it is caused, would be a good thing.

  179. Gravatar of Markt0 A. Sadowski Markt0 A. Sadowski
    10. April 2012 at 20:31

    Dan,
    Even if I wanted to respond I can’t. I don’t know why because I have received no explanation.

  180. Gravatar of dwb dwb
    10. April 2012 at 20:38

    @ Dan Kervick,
    krugmans choice of the word “inflation” was unfortunate. there is no reason to think higher AD would be inflationary. in fact, with so much slack, its more likely to raise employment more than prices (see his later post on the Phillips curve for example).

    even if there is slight inflation, we can actually estimate the distribution of those who might see some gains and its most (see link, the portion of the distribution above 2% is more than 60%. 2% is about current inflation), to Scotts point.

    so i dont see the evidence for much redistributive inflation, or eben much inflation. but lets say im wrong. we can’t let the perfect be the enemy of the good. the solution to income inequality cannot be to allow 8% UE, surely thats perverse. monetary policy does not create redistributive forces that are not already present.

    http://economistsview.typepad.com/economistsview/2012/04/evidence-of-nominal-wage-rigidities.html

  181. Gravatar of Major_Freedom Major_Freedom
    10. April 2012 at 20:43

    dwb:

    in FRED, GDP is nominal gdp. GDPC1 is real GDP to 1 decimal place

    Ah, well in any case, my point still stands. I didn’t assume anything regarding V and its relation to NGDP over time. If I did, then I would point to velocity being on a downward trend since 2001. But since my argument is not about temporal changes, even that wouldn’t justify my point.

    “This is what is meant by the non-neutrality of money.”

    you are using “neutrality of money” in two different ways:

    1. increases in money increase inflation (as in hyperinflation).

    2. (hyper)inflation distorts relative prices and hence negative contributes to real output.

    Actually I was always referring to 2., although I would not personally choose “negative” as an adjective. I just say “alter.”

    neither proposition is controversial, most people (including me) would agree with both (depending on degree and whether we are talking about short or long run).

    If you hold that money is neutral, then you can’t agree with 2. Some economists, such as Sumner, often unintentionally even go as far as assuming SUPER-neutrality of money in the long run, which is the belief that inflation has zero affect on the real economy in the long run. It’s rather astonishing.

    But only #1 is money neutrality, in the technical sense.

    http://www.investopedia.com/terms/n/neutrality_of_money.asp#axzz1rgiseb9j

    Your citation in fact clearly refers to 2, not 1. It says:

    “An economic theory that states that changes in the aggregate money supply only affect nominal variables, rather than real variables; therefore, an increase in the money supply would increase all prices and wages proportionately, but have no effect on real economic output (GDP), unemployment levels, or real prices (prices measured against a base index).”

    That citation defines neutrality to mean inflation does not affect real side of the economy.

    #2 is considered a “cost” of inflation and most economists would agree high inflation distorts prices.

    Again, neutrality of money means that inflation does not affect the real side of the economy. I have no idea what you’re thinking about, because even the citation you gave agrees with me and does not agree with you.

    however, its confusing to conflate the two.

    Indeed.

    #2 is a question of degree. miniscule inflation (1%) distorts relative prices little while hyperinflation distorts it a lot. The argument is symmetric: deflation also distorts relative prices.

    It’s not just about prices, dwb. It’s about altering the real side of the economy. Neutrality of money is the belief that inflation does not affect the real side of the economy, and only affects the nominal quantities, i.e. prices and demands, and nothing else.

    “Under NGDP targeting, the Fed wouldn’t target a constant PY. They would target an increasing PY of 5% per year. Unless Y increases 5% per year, an increase in PY means that P MUST go up each year.”

    yes, now the meat.

    well, maybe they would target a constant PY, who said that?

    I was only referring to the 5% NGDP targeting plan and its implications, nothing more.

    what if the fed targeted ngdp at 0% (some might advocate this)?

    Then prices would fall if productivity goes up, and prices would not fall if productivity remained unchanged.

    population and productivity growth combined is ~2.5%, so how about 2.5% or a little less, which would imply 0% inflation on average?

    You’re asking me? I am against NGDP targeting. If you’re just asking about mechanics, then sure, 2.5% NGDP would result in 0% price inflation, as long as real productivity was 2.5%, which I can’t predict.

  182. Gravatar of dwb dwb
    10. April 2012 at 20:45

    … original frbsf post.

    see figures 4, 5: the force behind inequality is education, not macro policy.

    http://www.frbsf.org/publications/economics/letter/2012/el2012-10.html

  183. Gravatar of Major_Freedom Major_Freedom
    10. April 2012 at 20:52

    dwb:

    According to FRED, velocity of MZM has been on a downward trend since 1980, and velocity of M2 has been on a downward trend since 2001 (I was referring to M2 velocity above).

    http://research.stlouisfed.org/fred2/graph/?id=M2V,MZMV,

    Again, IF I were making a temporal argument about velocity, then my argument that constant price or spending targeting growth will lead to accelerating monetary inflation and hence declining velocity, would be consistent with the data, but since I am making an argument of counter-factuals, then even the downward trends of velocity for MZM and M2, would not validate, or verify, or confirm my argument.

  184. Gravatar of Dan Kervick Dan Kervick
    11. April 2012 at 03:29

    krugmans choice of the word “inflation” was unfortunate. there is no reason to think higher AD would be inflationary.

    Maybe dwb, but it wasn’t accidental. He wasn’t speaking “Austrian” in that post – a language in which “inflation” sometimes means just an increase in the money supply rather than a general increase in the price level. He was clearly arguing on behalf of the general increase in the price level, because the two arguments he gave are about benefits that are supposed to flow from an increase in prices specifically.

  185. Gravatar of dwb dwb
    11. April 2012 at 04:53

    @MF,
    sure. inflation and nominal gdp growth have also been on a downward trend as the Fed has disinflated the economy.

    yes, you can ingore velocity (thats my point): its growth in the money supply that is crucial and money supply growth is a choice variable. inflation stops when the central bank finds the off switch to the printing presses.

  186. Gravatar of dwb dwb
    11. April 2012 at 05:03

    @Dan Kervick
    Maybe dwb, but it wasn’t accidental.

    yes, i know and its annoying, because not even a day later he posts about the Phillips curve, contradicting himself. Does he really think inflation sells?

    VENTI SIZE INFLATION PLEASE, AND ONE OF THOSE MUFFINS TOO.

    The title of this post is “more reasons to stop talking about inflation.”

    The fact is though that monetary policy does not create redistributive forces that are not already present.

  187. Gravatar of Major_Freedom Major_Freedom
    11. April 2012 at 06:03

    dwb:

    sure. inflation and nominal gdp growth have also been on a downward trend as the Fed has disinflated the economy.

    That’s false. Inflation and nominal GDP have been on upward trends since both 2001 and 1980, the time periods that velocity has been on downward trends.

  188. Gravatar of dwb dwb
    11. April 2012 at 06:32

    @MF,
    That’s false. Inflation and nominal GDP have been on upward trends since both 2001 and 1980

    since 2001, virtually no trend (if any, downward):
    http://research.stlouisfed.org/fred2/graph/?g=6nN

  189. Gravatar of dwb dwb
    11. April 2012 at 06:34

    @MF,
    and since 1980,

    http://research.stlouisfed.org/fred2/graph/?g=6nO

    not sure what you are looking at, but inflation and nominal GDP growth was higher in the 80s than the 90s and 00s

  190. Gravatar of Major_Freedom Major_Freedom
    11. April 2012 at 06:46

    dwb:

    When I say upward trends, I mean nominal GDP and inflation have been increasing over time, not that their rate of annual growth has been increasing.

    After all, I am talking about absolute velocity decreasing, not the rate of change in velocity decreasing.

    I want to compare apples with apples.

  191. Gravatar of Dan Kervick Dan Kervick
    11. April 2012 at 08:56

    The fact is though that monetary policy does not create redistributive forces that are not already present.

    That would be true if it were neutral. But monetary injections can cause much more than changes in aggregates, depending on how they are administered.

    Here’s the simplest way: Print up 10 trillion dollars, divide it up into 20 million parts, and sent one part to each of the 20 million poorest American households. You will definitely cause inflation, and the money will clearly diffuse beyond those 20 million households. But in the end the % wealth increase will be much greater for the 20 million households on average than it will be for the rest of the population.

  192. Gravatar of dwb dwb
    11. April 2012 at 09:06

    @MF,
    I always try to be careful when discussing *levels* vs growth rates (inflation is the *growth rate* of the price level), and not mix levels vs growth rates.

    yes, gdp goes up over time, but growth rates are usually more relevant. This is for the simple reason that the population grows about 1.5% per year (population doubles about every 45 years), so if all we did was bake bread, gdp as measured by bread output would increase 1.5% per year just to keep up. If we keep the price of bread constant at $1 then nominal gdp grows at a rate of 1.5% per year. {and i will also need to invest in more ovens too, so the oven-making industry i guess will increase at about 1.5% per year}. And applying the QTM, the money stock has to grow about 1.5% per year to keep the price level constant. Productivity tends to build on itself similarly, so the equilibrium *growth rate* of the economy is probably around 3%, ish, IMO, but thats not really known with much precision.

  193. Gravatar of Major_Freedom Major_Freedom
    11. April 2012 at 09:18

    dwb:

    I always try to be careful when discussing *levels* vs growth rates (inflation is the *growth rate* of the price level), and not mix levels vs growth rates.

    Good point.

    yes, gdp goes up over time, but growth rates are usually more relevant. This is for the simple reason that the population grows about 1.5% per year (population doubles about every 45 years), so if all we did was bake bread, gdp as measured by bread output would increase 1.5% per year just to keep up. If we keep the price of bread constant at $1 then nominal gdp grows at a rate of 1.5% per year. {and i will also need to invest in more ovens too, so the oven-making industry i guess will increase at about 1.5% per year}. And applying the QTM, the money stock has to grow about 1.5% per year to keep the price level constant. Productivity tends to build on itself similarly, so the equilibrium *growth rate* of the economy is probably around 3%, ish, IMO, but thats not really known with much precision.

    OK, sure, if you want to talk about growth rates, then I will agree that higher growth in inflation tends to be associated with higher growth rates in velocity, and lower growth in inflation tends to be associated with lower growth rates in velocity.

    That makes sense, because when inflation speeds up, the hot potato effect dominates and you see increased velocity.

    But I should warn you that “inflation” in FRED is the CPI index, which is highly incomplete of the full picture, so a decline in the growth rate of CPI can be accompanied by an increase in the growth rate of the monetary inflation, so even though we would observe the rate of growth in inflation decreasing while velocity decreases, a decrease in the rate of growth of velocity can be accompanied by an increase in the rate of monetary inflation.

  194. Gravatar of dwb dwb
    11. April 2012 at 10:06

    But I should warn you that “inflation” in FRED is the CPI index, which is highly incomplete of the full picture

    yep, economists track many different measures of “inflation”. FRD does not even categorize them all in the same place. The Fed’s “target” is actually 2% based off PCE (PCECTPI), not CPI, and all of them have their own peculiar measurement issues. I assume by “money inflation” you mean the growth rate of the money supply. measurement of inflation is something one could write several books on and not exhaust the subject.

  195. Gravatar of More reasons to stop talking about inflation | George Street Review More reasons to stop talking about inflation | George Street Review
    11. July 2012 at 16:17

    [...] Republished with permission. Originally published at The Money Illusion. [...]

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