Rajan sees a massive demand shortfall, but says it’s not worth fixing

At least I think that’s what Raghuram Rajan is saying:

In fact, today’s economic troubles are not simply the result of inadequate demand but the result, equally, of a distorted supply side. For decades before the financial crisis in 2008, advanced economies were losing their ability to grow by making useful things. But they needed to somehow replace the jobs that had been lost to technology and foreign competition and to pay for the pensions and health care of their aging populations. So in an effort to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same. The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.

Rather than attempting to return to their artificially inflated gdp numbers from before the crisis, governments need to address the underlying flaws in their economies.

So it’s 50% demand shortfall. Given that NGDP growth since mid-2008 has been the lowest since Herbert Hoover was president, I’d say it’s more like 70% demand-side, at least in the US.  But let’s put that issue aside.  I agree with Rajan that we have a huge demand-side problem.  The question is what to do about it.  Rajan seems to be saying “nothing.”

1.  No one I know is claiming that we should target the pre-2008 RGDP trend line.

2.  If borrowing is the problem, leisure (i.e. unemployment) isn’t the solution. Rather we need to work harder in sectors determined by market forces, not governments.

3.  Elsewhere Rajan focuses on how attempts to reflate spending might lead to wasteful projects.  That argument may apply to fiscal stimulus, but I can’t see how it would apply to monetary stimulus aimed at boosting NGDP, which did not involve buying unconventional assets.

I’m not as negative on this piece as some on the left.  I agree that recessions are great times to do long term structural reforms.  But millions are needlessly unemployed right now due to the demand shortfall that both Rajan and I think is massive.  Why leave them hanging while we are going about our structural reforms?  I read the entire essay and could find no persuasive answer to that question.

PS.  I also find it interesting that Tyler Cowen says we need some additional monetary stimulus, but keeps raving about essays that take the opposite position.  In one sense that reflects well on him, he is well known for having the unusual ability to look past things that annoy him and find gems of wisdom in papers that may also be highly flawed.  But I’m not going to let him off the hook on this one:

Every paragraph of his piece is excellent,”

Does that include the paragraphs where he argues against monetary stimulus, despite the demand shortfall?

PPS.  There are times where Rajan seems to equate easy money and easy credit.  And he teaches at the school that Milton Friedman made famous!


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32 Responses to “Rajan sees a massive demand shortfall, but says it’s not worth fixing”

  1. Gravatar of Gabe Gabe
    3. May 2012 at 05:47

    I was surprised to see this in the financial times:

    http://www.ft.com/intl/cms/s/0/ab2ac432-92ea-11e1-b6e2-00144feab49a.html#axzz1tq5amMxp

    I wasn’t impressed by Ron Paul in the Krugman debate…but in this op-ed he destroys any Krugman article I have ever seen.

    Don’t worry guys. I’m still in agreement with Sumner on what the Fed should do…I want printing. However, it is only because I have placed my bets accordingly and think I can personally benefit from more expansionary monetary policy.

  2. Gravatar of DW DW
    3. May 2012 at 08:02

    Rajan would probably say you’re missing the point of that quoted paragraph if you’re focusing on the monetary policy implications.

    He is probably not a monetary policy monomaniac.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. May 2012 at 08:06

    He’s also wrong that we’ve lost our ability to grow by making useful things, as this very well done PBS program demonstrates;

    http://video.pbs.org/video/2227791872

    Joseph Schumpeter didn’t say it as well…at least not as efficiently.

    Rajan did say something in Fault Lines that caught my attention. Which was that Fed governors, off the record, say that they are constantly being intimidated (or at least trying to) by congressmen who privately threaten the Fed’s independence when they’re displeased. He seems to think that’s an important explanation for Fed policy.

  4. Gravatar of Becky Hargrove Becky Hargrove
    3. May 2012 at 08:06

    Tyler got a lot of pushback in the comments, Karl’s post, not so much. I enjoyed the essay but as you said it did not even glance into the world of the unemployed where none of the usual ‘rules’ of life even apply (why buy or wear makeup? why iron one’s clothes?) When do we start holding summits to ask the unemployed and underemployed what they think a good economy might be, moving ahead. I can’t blame some on the left about being in denial of the better points Rajan made, but I felt like going on a rant earlier this morning as to how people on the left and the right wanted to trash Rajan without offering up better ideas of their own.

  5. Gravatar of 123 123
    3. May 2012 at 08:52

    Scott, since Friedman is no longer with us, you are our best chance of getting reply to this:
    http://www.project-syndicate.org/commentary/re-capturing-the-friedmans

  6. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. May 2012 at 09:03

    Nothing to do with Rajan, but this is interesting (with lots of spiffy graphs);

    http://www.voxeu.org/index.php?q=node/7923

    ‘The ECB has, with the recent LTROs, managed a massive expansion of its balance sheet. This has been called the Eurozone equivalent of quantitative easing, as done by the Fed and the Bank of England. Large portions of this liquidity, however, are parked in overnight deposits at the ECB, reducing its effectiveness for the overall monetary policy stance.

    ‘The main obstacle for the ECB is not the fact that the Treaty on which it is based places tight limits on the purchase of government bonds, compared to those existing in the UK and the US. Rather, the absence of a banking and fiscal union and the strong heterogeneity within the Eurozone reduces the effectiveness of the instruments the ECB has.’

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. May 2012 at 09:07

    Also from the above cited Vox piece;

    ‘It is apparent that in both the US and the UK, the surge of repo lending to financial institutions was short-lived. It took place in response to the disruption of the interbank market following the Lehman shock and was unwound during 2009. By the beginning of 2010 it had either disappeared entirely (Fed) or been reduced to traditional proportions (Bank of England), and did not resume afterward.’

  8. Gravatar of Saturos Saturos
    3. May 2012 at 09:22

    “He is probably not a monetary policy monomaniac.”

    He should be :P

  9. Gravatar of Benjamin Cole Benjamin Cole
    3. May 2012 at 09:29

    Excellent blogging.

    But Rajan might wish to note our manufacturing sector is in fact booming, and industrial output has doubled since 1985.

    Really, we are not making things anymore? But this chart indicates a doubling of output from 1985 to 2008:

    http://www.federalreserve.gov/releases/g17/current/g17.pdf

    (BTW Japan industrial output shrank in the same time period).

    Rajan might be a desk-jockey, but our industrial economy has been doing fine—and growing again of late. And with a cheaper dollar….

    And again, are we to believe our economy thrived through 2008, but then suddenly–whamo!–we are unable to generate real growth due to huge structural impediments? This is economics as science, or science fiction?

    What of the ballyhooed flexibility of the private-sector, which is still the bulk of our economy (as it should be)?

    Jeez, please louise can we make Scott Sumner the All-Powerful Macroeconomic Emperor? I would give up any and all rights to not have to read gibberish from other “economists” again.

    For the record, I do disagree with Scott Sumner on one item: I think we could accelerate USA growth dramatically, and get back to former trend lines (not one-third of the way), and have no problem with inflation for years and years.

    The amount of unused capacity is amazing. People want to work. Give people boom times, and they will happily work 60 hours a week. What small fraction of the US workforces turns down overtime? I rarely meet anyone who doesn’t rub their hands at the thought of more business or work.

    The Fed just needs to pour it on, turn the presses on high, and print money until the plates melt.

    Bernanke needs to find his inner Chuck Norris, and say to his perverted tight-money friends, as he calmly puts is hand on the money-priting lever: “You think I can’t generate growth and inflation? Go ahead, make my day.”

  10. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. May 2012 at 10:10

    I take a shot at DeLong’s silly claim on my new blog;

    http://hisstoryisbunk.blogspot.com/2012/05/and-you-live-on-what-planet-professor.html

    ————-quote————-
    As to Professor DeLong’s what have you done for me lately plaint, it hardly was consistent with the Friedman’s philosophy that the federal government should launch a concerted attack on the standards of the home lending industry beginning with the GSE Act of 1992, the HUD Best Practices Initiative of 1994, and the amended Community Reinvestment Act of 1995.

    Without which interference the toxic mortgages which, when securitized and sold to investors around the world, eventually brought down those financial systems. Nor did the monetary policies of the Bernanke Fed, seemingly operating with a focus on interest rates, conform to any prescriptions of Milton Friedman who always warned against such a focus.

    No, it’s not that we too well embraced the policies favored by the Friedmans, it’s that we didn’t listen to them carefully enough.
    ————–endquote————–

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. May 2012 at 10:45

    Scott wrote:
    “I’m not as negative on this piece as some on the left. I agree that recessions are great times to do long term structural reforms. But millions are needlessly unemployed right now due to the demand shortfall that both Rajan and I think is massive. Why leave them hanging while we are going about our structural reforms? I read the entire essay and could find no persuasive answer to that question.”

    This reminded me of Noah Smith’s criticsm of Gideon Rachman:

    “Third, Rachman says that Europe’s real task is structural reform. This opinion echoes that of economists like John Cochrane. But does the case for structural reform affect the case for countercyclical fiscal policy? No. Because unless you believe that bad business environments cause recessions, improving structural factors won’t stop the business cycle.”

    http://noahpinionblog.blogspot.com/2012/05/macro-intuition-vs-theory.html

    As innane as I found Rachman’s criticism of stimulus in general, I’m not sure Rachman actually made that particular argument. However, it is true that there seems to be this unexamined assumption among critics of stimulus (monetary and fiscal) that one can only pursue structural reforms in the context of austerity. But my perception is that truly effective structural reforms are much easier to pursue in the context of stimulus. (In fact, as you yourself have noted, depressions often lead to worse macroeconomic policies.) Thus, this not only not an either/or proposition, it is in fact very much a both/and proposition.

  12. Gravatar of Major_Freedom Major_Freedom
    3. May 2012 at 12:08

    ssumner:

    So it’s 50% demand shortfall. Given that NGDP growth since mid-2008 has been the lowest since Herbert Hoover was president, I’d say it’s more like 70% demand-side, at least in the US. But let’s put that issue aside. I agree with Rajan that we have a huge demand-side problem. The question is what to do about it. Rajan seems to be saying “nothing.”

    We don’t have a demand side problem. The perceived “lack” of demand is only an effect. Changing the data of the effect won’t eliminate the problematic cause. It would like noticing that the effect of a flu is a higher temperature, and then believe that if the temperature is brought down, the problematic cause of the high temperature can be eliminated.

    There is more money now than at any time in history. It is simply absurd to believe that 2012 quantities of cash are not sufficient. There is more than enough money to clear the entire market.

    No, the reason why “spending” is not as high as it was pre 2008 is because of the problematic cause that resulted in a sudden decline in spending from so many people. Why would so many people suddenly reduce their spending like that? No NGDP advocate is answering this simple question. No, we’re all supposed to treat the fall in “spending” as if it were an inexplicable deus ex machina, a boogeyman of the capitalist economy.

    It would be like treating the higher temperature of someone as unexplained, ignore the cause that is the flu bug, then actively seek to lower their temperature as if that is a solution, which by the way just exposes them to even more illness.

    So many people are not spending as much as they used to because of supply side problems. It’s not because there is not enough money. If the supply side problems are resolved, then whatever spending exists, will be more than enough to clear the now fixed and sustainable market.

    Just because you want the Fed to print money, it doesn’t mean printing money is the solution. Printing money will just exacerbate the supply side problems, and bring about another round of these structural problems brought about by artificially low interest rates and credit expansion.

    The declines in each sector would not have occurred in these repeating ways all the time if the problem really was a “lack” of demand.

    To claim that there is a lack of demand is to display gross ignorance of sound economics. There is no such thing as a lack of demand for goods. People want practically more of everything in practically infinite quantities. The problem is that not everything wanted can be produced, and so we have to make choices. We have to make “sacrifices.” We have to engage in a specific course of action if we want to maximize production. Each puzzle piece in the division of labor has to be in the right proportions. If people want 1 million more houses, then there better be enough real savings of real resources to be used to complete 1 million newly started home projects. If there isn’t, then the inevitable result is going to be malinvestment and unemployment once the errors are realized, and NO AMOUNT of money printing can create new real resources from nothing.

    So all projects must be coordinated. The nail industry has to be coordinated with the hammer industry, and both of these industries have to be coordinated with the brick industry, and these industries all have to be coordinated with the trucking industry, and so on. If there is too much of one resource produced, and a corresponding lack of production of another required resources (e.g. too many resources went into bricks and not enough into the required trucks that transport bricks), then this economy is distorted, and the bad investments have to be corrected. This correction encompasses a change in relative demands. These relative demand changes can only be brought about by relative price changes, of profit and loss. Profit and loss tends to coordinate all the various industries.

    What inflation does, is that it changes relative prices and relative spending which then distorts the real resources allocations. It exacerbates the too many bricks problem and it exacerbates the not enough trucks problem.

    Why aren’t there enough resources when there is inflation? Because consumers are tying them up by spending their money on consumption and NOT saving, and thus NOT releasing the requisite real resources that would justify the expansion of brick making projects.

    The scarcity is felt in the form of too high cost for trucks (since there is a relative scarcity of them), and thus a perceived “lack of demand” for projects that utilize trucks (since there is an overproduction of bricks relative to trucks).

    Don’t bother trying to find holes in this, because you won’t find any. This is actually what happens when there is inflation into the loan market, and a resulting unsustainable change in the structure of production that no amount of more money printing can solve, but can only exacerbate these problems by creating yet more over/under investment relative distortions.

    Too many houses, not enough complimentary resources freed up by the consumers to enable a completion of the production of houses at a low enough cost, ergo the housing bubble and bust.

    Too many technology companies, not enough complimentary resources freed up by the consumers to enable a completion of the production of dot com companies at a low enough cost, ergo the dot com bubble and bust.

    If the Fed accelerated inflation in 2000 and didn’t let the dot com bubble bust, if they accelerated inflation again in 2006 and didn’t let the housing bubble bust, then we would have, right now, been living in an even MORE distorted economy, since there still would have been too many resources in housing, and not enough in “trucks” (and other complimentary resources) to make the relationship sustainable.

    I defy you to look at the above chart, and tell me why I should believe your story that it’s an aggregate demand problem, and not a structural, supply side, recalculation problem.

    Why did the construction industry slump so much more than retail? The Austrians know. They know that it’s because artificially low interest rates and credit expansion results in too many resources to be invested in the higher order, more capital intensive stages like construction, which are more sensitive to interest rates, and not enough resources have been released from consumer saving, which is the same thing as “too many” resources were allocated to retail relative to construction, to enable construction and retail to “match up” the way bricks and trucks have to match up. If resources are tied up in Big Macs, iPods, and T-shirts at retail, then they can’t be used for the complimentary resources that the expanded construction industry requires.

    Only if consumers SAVED, and brought about a release of resources from retail, would the expanded construction industry be in line with the rest of the economy.

    But because the Fed, under your call, under the Keynesians’ call, and under the Monetarist’s call, all relentlessly called for more inflation, on the basis of looking at silly statistics such as “spending”, you completely ignore how your call is bringing about a series of unsustainable expansions in various sectors, that do not sustainably match up. Construction was expanded when it should not have expanded, because consumers were not saving enough. The result was a post 2008 collapse in construction that was much larger than the fall in retail, and the other industries less sensitive to interest rates.

    Different sectors of the economy are sensitive to artificially low interest rates in different ways. Construction and other highly capital intensive industries are very sensitive to interest rates, because the time between investment here and final consumption later on, is quite long. Retail, is not so much sensitive to interest rates, because the time between investment to consumption is much shorter. Go on, try the math. Discount a future cash flow of $100 by the same interest rate of say 5%, but put in different time periods. The present discounted value for a $100 cash flow 10 years from now is $61. The present discounted value for a $100 cash flow 1 year from now is $95. Now change the interest rate to 3%. The $100 cash flow 10 years from now has a present value of $74. The $100 cash flow 1 year from now is $97.

    So the value of the 10 year cash flow went from $61 to $95, or an increase of $34. The value of the 1 year cash flow went from $74 to $97, or an increase of $23.

    Longer term cash flows, such as the construction industry, are more sensitive to interest changes than short term cash flows, such as retail.

    This is why the construction industry slumped so much more post 2008. It’s because the construction industry is so much more sensitive to artificially low interest rates from the Fed, and was relatively over-expanded, while the other industries were relatively under-expanded.

    Resources are scarce, Dr. Sumner. They can only be used for specific employments. If a division of labor, private property economy where individuals produce for a profit, and have no clue how to coordinate the entire economy on their own, but can only play their part in the puzzle, the price system MUST be left ALONE to do its job. It cannot be relentlessly attacked all the time. Yes, this means you have to suck it up and accept any and all changes to all aggregate money statistics that occur apart from the Fed’s actions, such as higher cash balances, or this much investment here and there, and this much consumption here and there, but no more.

    You have to let the price system do its job and you have to stop taking a steaming dump on it all the time, what with your incessant non-real world absurd standard of instantaneous price changes. Give people a break already, and stop HURTING them. You are HURTING people who participate in the division of labor, by supporting and advocating for central economic planning in money that does not work, not even NGDP works because it cannot avoid the problem of malinvestment and relative capital structure distortions.

    For the love of freedom and prosperity, learn how the free market economy works by reading and accepting the only economists who know how the free market economy works, namely, the free market economists. Contribute to economic science by understanding and advancing free market economics. Stop being an opportunistic destroyer of humanity.

  13. Gravatar of John John
    3. May 2012 at 12:31

    Scott,

    I think I can help with number 3 since it’s basically an Austrian-oriented argument. Attempts to increase demand through monetary policy can lead to wasteful investment projects because the new money enters the economy through the banking system pushing down the rate of interest. This causes the rates of interest to deviate farther and farther from actual consumer demand as expressed in the hypothetical Wicksellian equilibrium rate. Long term projects receive a huge stimulus from lower interest borrowing, as a result many long term, capital intensive projects start which cannot be justified by actual consumer demand or the available supply of capital goods.

  14. Gravatar of Morgan Warstler Morgan Warstler
    3. May 2012 at 16:45

    Karl Smith if full of shit:

    http://modeledbehavior.com/2012/05/03/rajan-on-lessons-from-recession/#comment-27069

    Mark, to your point:

    “However, it is true that there seems to be this unexamined assumption among critics of stimulus (monetary and fiscal) that one can only pursue structural reforms in the context of austerity.”

    This just doesn’t happen though, I’m preaching a structural reform that is a REAL GIVE to the small business conservatives.

    And you aren’t seeing Noah or Karl embracing it.

    If you want to argue for stimulus, you do it as a beggar asks for change, you do it in the way that most pleases the guys paying for the stimulus.

    At the end of the day, it is ALWAYS about this: who gets to control the “excess capacity” and do it under terms that they set.

    So if econ bloggers want to get some stimulus, then let them seek and find methods of unsticking wages, tearing down policies that make wages sticky.

    Until then, their arguments are really just for the least amount of structural reform possible.

  15. Gravatar of ssumner ssumner
    3. May 2012 at 17:32

    Gabe, Somehow I doubt that.

    DW, Elsewhere in the article he makes it clear he opposes monetary stimulus.

    Patrick, But what can these Congressmen do to the Fed? It seems unlikely that the President would sign any wacky legislation by the Ron Paul-types.

    Becky, At least I am offering ideas.

    123, I don’t entirely agree with that, but there’s too much on my plate right now. I certainly think the Singapore model works better than our model, and it’s a smaller government model. I also think the crisis was mostly caused by government failure, not market failure. I’m probably a bit more interventionist than Friedman on externalities, but it’s absurd to hold our medical malpractice system up as an example of “free market” solutions.

    Patrick, Thanks for that link.

    Saturos, That’s right.

    Ben, You are right that our manufacturing sector has grown faster than most developed countries.

    Patrick, I agree the crisis was mostly government failure.

    Mark, I completely agree.

    John, You said;

    “I think I can help with number 3 since it’s basically an Austrian-oriented argument. Attempts to increase demand through monetary policy can lead to wasteful investment projects because the new money enters the economy through the banking system pushing down the rate of interest. This causes the rates of interest to deviate farther and farther from actual consumer demand as expressed in the hypothetical Wicksellian equilibrium rate.”

    These arguments are wrong on almost ever level you could imagine, as I’ve pointed out 100s of times. New money doesn’t always reduce interest rates, it usually raises them. Most new money doesn’t go out through banks. The Wicksellian equilibrium rate is the rate that leads to macro equilibrium (which we are obviously far below.)

  16. Gravatar of Becky Hargrove Becky Hargrove
    3. May 2012 at 17:45

    Scott,
    I agree with your ideas and will continue to defend them every chance I get, as both short and long term solutions! You are proactive, and more people need to be proactive – that’s what I was getting at with my clumsy wording.

  17. Gravatar of Rien Huizer Rien Huizer
    3. May 2012 at 21:08

    Scott,

    If we just forget about the demand side for the moment (there seems to be a growing consensus that fiscal policy is really controversial and that monetary policy might be a better option; besides, there is little room for fiscal stimulus, even if it were certain to be efficient. There is of course the matter what kind of monetary policy, etc), the supply side argument is in good hands with Rajan a development economist.

    Trend per capita growth comes partially by devoting more GDP to private sector investment and less to consumption and/or gvt aggregate spending. We have been relying on the mysterious TFP for growth and facilitating a savings deficit via exploiting the expernal position of the USD. The key question for the US -especially if and when it moves out of this cyclical downturn which may happen anyway, regardless of policy- is how to return to real trend growth. Especially growth that will afford growing real household incomes in the bottom three quartiles of the income distribution.

    Not that Rajan offers solutions of course. But I wonder what kind of policy set would be (a) effective in fostering a shift from consumption to business investment and (b) without the governing party committing suicide while doing it.

  18. Gravatar of Prakash Prakash
    3. May 2012 at 22:09

    Hi Scott,

    About this line, “Most new money does not go out through banks”

    Could you Please link to your previous blog posts or papers where this is discussed. I have genuinely missed the logic and empirical evidence that underlie that statement. I have assumed more money will be transmitted through banks to consumers by fuelling a bubble in the-next-big-thing. I don’t deny the ability of the bankers to create inflation, nominal growth and bubbles.

  19. Gravatar of Morgan Warstler Morgan Warstler
    3. May 2012 at 22:30

    “But I wonder what kind of policy set would be (a) effective in fostering a shift from consumption to business investment and (b) without the governing party committing suicide while doing it.”

    My Guaranteed Income plan.

    REAL consumption goes up
    The price of good and services goes down
    Imports fall, we likely become a net exporter.
    Human capital is maximized

    The US would effectively use 30M subsidized laborers to allow entrepreneurs to compete globally.

    Entrepreneurs are OWED these 30M labors, after all, they are PAYING for them to receive more than they are able to earn in the free market – which is not enough to live on.

    Since we are going to provide this safety net, the LEAST the government can do is auction that labor back to the people who actually pay taxes.

    This is non-controversial and political manna rained down from above by yours truly.

    The econ-blogosphere needs to focus their energies on rubber stamping their approval on it, so that politicians see how easy it is to silence the labor and laxy contingents in the American polity.

  20. Gravatar of Morgan Warstler Morgan Warstler
    3. May 2012 at 23:01

    MF,

    I wish you’d grow up.

    There’s largely nothing you say I disagree with… but I will never waste my time barking in rat holes. I’m going in and dragging the rat out.

    Which is really what Sumner is doing. He’s not an Austrian because he doesn’t think it can win.

    And it can’t, not yet.

    The ONLY question is: does NGDPLT at 4% delivered rain or shine since 1913, 1929, 1945 whatever… lead to more or less inflation, and bigger or smaller govt. than we have status quo 2012?

    Because that is the A / B choice you have.

    You want to explain that MM is eventually just as bad, I agree completely…

    but I know how brainwashing / credible authority / color marketing works, and you need to never be more than a few shades off from last years color, or it clashes in the minds of the consumer.

    When at all possible, humans must be wandered down the garden path. Scott is but a steeping stone, but he’s a nice solid one to rest armies and gain strength.

  21. Gravatar of Rien Huizer Rien Huizer
    4. May 2012 at 01:48

    Morgan,

    Guaranteed income plans offer a variety of poltical suicide opportunities. But yes apart from that, I would take a look at it if I had the power..

  22. Gravatar of Becky Hargrove Becky Hargrove
    4. May 2012 at 04:43

    Rien, Morgan,
    That’s one reason I have concentrated on lots of non-monetary strategies. It make the elements of ‘suicide’ opportunities less menacing.

  23. Gravatar of Major_Freedom Major_Freedom
    4. May 2012 at 04:46

    Morgan, you’re not asking me to “grow up.” You’re asking me to sacrifice my more valued principles for less valued principles.

    You’re asking me to advocate for a monetary system that hurts people, and to pretend that the best can’t win. Why can’t it win? Because it just can’t says you.

    You say Sumner will never be an Austrian because he believes it can’t win. Do you actually believe that if NGDP “wins” that Sumner won’t lose from the destruction NGDP makes?

    You’re like one of those misguided voters who won’t vote for the candidate they don’t believe can win, as if they personally will “win” if the candidate they know isn’t the best, but is believed to be the most popular, wins. How in the world is that a win? It’s a friggin loss! Everyone loses.

    Just because one “chose” or “called” for the suboptimal alternative, just because one is consciously aware of it, just because one perceives oneself to be on that “team”, it doesn’t mean one can transcend the damage that will be inflicted on oneself and others because of it.

    Let me ask you this: Do you honestly believe that the people who worked their whole professional lives being “pragmatic” with the rats, who tried and then succeeded in INTRODUCING the Federal Reserve System, on the basis that they believed this evil was less evil than the (alleged) evil of the gold standard, that some of them knew it wasn’t good, but they just advocated for it anyway because they thought a 100% reserve free market in money “would never happen”? That they wanted to drag the fractional reserve banking rats out rather than bark at them with 100% reserve gold?

    And after the Fed was introduced, and there has been 18 recessions, 2 great depressions/recessions, and what I argue is inevitable hyperinflationary depression or deflationary depression, did the intellectual founders of the Fed “win” Did everyone else win? Or did everyone else lose, which is why you are sitting here right now, at this moment, telling me to do the same thing that the supporters of the new Fed said was the right thing to do, and “just go with what is going to win”?

    Morgan, it is misguided people like you that march the world step by step towards oppression and destruction, for some silly, petty, and very much FAKE, sense of “mature” feeling of “being on the winning team”, when the world goes the way you believe it is going to go because you’re allegedly too powerless to stop it anyway, so why not join the dark side.

    You want me to grow up? How is sacrificing what I think is right a growing up? That’s not growing up. That’s becoming corrupt, old or young. If you consider becoming corrupt some weird rite of passage in human life, then sorry, all your wishing is of no use to me.

    The question you are presenting to me is a false choice, exactly like the question between a fractional reserve banking system, and a Federal Reserve led fractional reserve banking system, was a false choice. In 1913 they could have abolished fractional reserve banking and not have any perceived need for a lender of last resort to solve the problems associated with fractional reserve. Did you know that the ostensible original purpose of the Fed was to be lender of last resort? Now they are a permanent central economic planning fixture of the world, where they centrally plan interest rates, the money supply, even governments through debt purchases, and now you want them to centrally plan quantities of “spending” because what’s been tried hasn’t worked?

    You fools are the ones who would rather drive us one inch closer to the cliff because turning the car around is too “hard” for you. You’re the child, not me. You’re the mentally weak one who perceives himself as so powerless that he can only join the teams he believes will win, regardless of what their ideas are.

    The following is ACTUALLY the ONLY question is: Given the fact that truth eventually wins out, that no individual is powerful enough to vanquish it, will you orient your mind AND body to truth, or not? You’re asking me to orient my mind and body to lies, as if that’s going to benefit me. That won’t benefit me because I am benefited when others have sustainable jobs, producing goods and services in a sustainable division of labor without a central bank messing this up. I benefit when others are not protesting and rioting and unemployed due to misguided people like you believing that is the best we can do and that we should shut up about the best and keep it internally.

    What would you have me do? Lie to others about what I think is best? Should I go out and try to convince people that NGDP targeting is the best, and trick them by holding what I really think is best to myself? I should lie to them? Is that what you’re asking me to do? That because the rabble are too stupid to understand the best, give the rabble second or third or fourth best instead, and truck them into moving forward “for their own good”?

    Or do you want me to tell others “OK, THIS is the best, but let me tell you about THAT as well. Like me, I want you to go around and tell people about the best AND the less than best, and so on down the line, from person to person, until everyone is aware of the best and the less than best, so that we can finally get people to move forward to…the less than best.

    Silly Morgan, that would be silly. If you really think I can be successful getting the best and the less than best out, then you’re telling me that the best is possible, not impossible, to implement.

    But you and I both know you really mean the former one. You want me to lie to the rabble, so that I can trick them into moving forward?

    Here’s the problem with that. I don’t consider it moving forward AT ALL. I consider it continually moving backwards, but at a lower speed. It’s like a car that’s driving toward a cliff at 100 mph. You’re telling me it’s wrong to expect to convince the driver to REVERSE course, and that in order to “win”, I have to get the driver to slow down to 98 mph so that he can drive over the cliff at a slower speed.

    I’ll grant you that NGDP would postpone the disaster, but how stupid do you have to be to not understand that this is not a solution that can REVERSE the car and avoid disaster?

    Even if I was 99.99% sure of my conviction that I could get the driver to reverse course, I will still say everything I can about the benefit of reversing course, and turning the car to a path where there is a healthy future instead. I will NOT consider myself a winner if I get the car to slow down to 98 mph but directed towards the same cliff.

    You’re not going to convince me to purposefully lie to others and have them continue to drive towards the cliff. When the monetary system goes down, it drags me down with it. It’s to my own interests to do the opposite of what you are telling me I should do.

  24. Gravatar of Major_Freedom Major_Freedom
    4. May 2012 at 04:51

    Correction: 99.99% sure of my conviction that I could NOT get the driver to reverse course, I will stay everything I can about the benefit of reversing course,

  25. Gravatar of Major_Freedom Major_Freedom
    4. May 2012 at 05:02

    In other words, NGDP targeting is not moving a step closer to the best. It is a continued moving closer to the worst, but at best only at a slower speed, which has given you the illusion of moving towards the best.

    To answer your (false dichotomy) question:

    “does NGDPLT at 4% delivered rain or shine since 1913, 1929, 1945 whatever… lead to more or less inflation, and bigger or smaller govt. than we have status quo 2012?”

    I will say more inflation and more government, because if we applied NGDP targeting analysis to past history, it has only ever called for more money printing than actually occurred.

    I’ve only seen Sumner et al say “NGDP wasn’t high enough in years [A, B, C].” I’ve NEVER seen Sumner et al say “NGDP was too high in years [X, Y, Z].” That means NGDP targeting would have, all else equal, INCREASED price inflation.

    In addition, I’ve only ever seen the mechanism by which NGDP is supposed to rise to be “The Fed could have bought more government debt.” That means NGDP targeting also would have, all else equal, INCREASED government.

  26. Gravatar of Becky Hargrove Becky Hargrove
    4. May 2012 at 05:17

    My strategy would have a for profit element in terms of a base (places where people without traditional jobs or homes can actually go in the world, providing they are willing to commit to voluntary time participation with at least 50 others, and constant effort in increasing educational skills) and would eventually have lots of money for land, by providing the kinds of products these people actually need. They need to have access to mobile (as in take apart) modular units to create homes and businesses, and traditional communities would fight to change their zoning so they could also use such high tech building elements. (This type of manufacturing could be provided by the knowledge-based communities) The non-monetary part is in non-profit sharing of ‘seed knowledge’ for these new knowledge based communities. With mobile building units, people buy what they need when they need it, sell it when they don’t, no hassles with leaving anything after death and because they buy units a few at a time, no big sticky loans to deal with. Everyone with sufficient money can continue with low tech construction and giant loans as usual.

  27. Gravatar of Major_Freedom Major_Freedom
    4. May 2012 at 06:22

    Becky and Morgan, planning entire societies to such precise detail carries with it a quintessentially crazy air about it, as if real life is a game of Sid Meier’s Civilization.

    Many early communists and socialists set forth their fixed utopias in great and absurd detail as well.

  28. Gravatar of Becky Hargrove Becky Hargrove
    4. May 2012 at 07:06

    MF,
    Don’t forget the communists took the easy way out and told everyone what to do instead of encouraging them to be entrepreneurs of their own skills. Societies are best rebuilt using the capacity of every human being and we are in need of better structured freedoms in the present.

  29. Gravatar of ssumner ssumner
    4. May 2012 at 15:58

    Thanks Becky.

    Rien, Tax reform could be both a vote getter and a good pro-investment reform.

    Prakash, Banks create credit, not money. I define money as the monetary base, which is created by the Fed

  30. Gravatar of Floccina Floccina
    5. May 2012 at 09:52

    I agree. I often say how does higher NGDP not solve that problem.

  31. Gravatar of Major_Freedom Major_Freedom
    7. May 2012 at 19:28

    Becky Hargrove:

    Don’t forget the communists took the easy way out and told everyone what to do instead of encouraging them to be entrepreneurs of their own skills. Societies are best rebuilt using the capacity of every human being and we are in need of better structured freedoms in the present.

    Now apply those principles to money production.

  32. Gravatar of My take on Rajan’s “True Lessons of the Financial Crisis” « azmytheconomics My take on Rajan’s “True Lessons of the Financial Crisis” « azmytheconomics
    18. May 2012 at 10:41

    [...] lot of economists have made a big deal of Raghuram Rajan’s piece “The True Lessons of the [...]

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