Thanks for asking

In my study of the Great Depression, I argued that the Depression could be seen as resulting from governments doing too little, or too much.  In a laissez-faire world the Great Depression would not have happened, nor would it have happened if governments took as much responsibility for AD stabilization as they do today (and even that’s a really low bar!)

In blog posts on the Great Banking Crisis I argued it wouldn’t have happened if the government had done much more regulation, or much less regulation.  If they had abolished FDIC, TBTF, and the GSEs, banks would have taken far smaller risks.  But given they didn’t abolish those generators of moral hazard; they should have banned mortgages with less than 20% downpayments made with funds from FDIC-insured banks.

Tyler Cowen quotes this comment from Ryan Avent:

The euro-zone must recognise that it is the failure to build appropriate euro-zone-wide institutions””equal in scope to the considerations and resources of the central bank””that is contributing to soaring yields around the periphery and creating the illusion of the need for dramatic austerity in places that could do without it.

Maybe, but I’d argue exactly the reverse.  It was the success in building inappropriate euro-wide institutions, specifically a central bank, that created the crisis.  Ryan might agree, but then the question becomes how to get out of this mess.  Matt Yglesias says the solution is easy.  I only see one easy solution, monetary stimulus.  And even that won’t really solve the problem, just make it much smaller.  The other solutions, breaking up the euro or fiscal union (i.e. much more centralization or much less), are currently politically impossible.  Of course, one must be careful in dismissing ideas as politically infeasible, as the current path of Europe is likely unsustainable, which means  in the future they may well adopt a policy that is currently “politically infeasible.”

After commenting on Avent, Tyler discussed the ECB, and then made the following observation:

On top of all that, arguably the deflationary pressures in Greece, and possibly Spain, are already past the point of control from the ECB side, given the ongoing collapse in private lending.

The most recent inflation rate in Greece is 1.7%, whereas Spain has 1.9% inflation.  I don’t know about you, but I find those figures to be astounding.  That’s not deflation, and yet Tyler’s clearly right that they are being buffeted by powerful deflationary forces.  I’d make several observations:

1.  This shows the poverty of our language.  Economics lacks a term for falling NGDP, even though falling NGDP is arguably the single most important concept in all of macro, indeed the cause of the Great Depression.  So we call it “deflation” which is actually an entirely different concept.  I wouldn’t be the first to find connections between the poverty of our language and the poverty of our thinking.

2.  Through experience I’ve learned that whenever a data point seems way off, there are probably multiple reasons.  Thus Greece and Spain probably have less price level flexibility due to structural rigidities in their economies.  And the inflation might be partly due to special factors like increased VAT or higher oil prices.  Nonetheless, these sorts of depressions would have been associated with falling prices in the 1930s, so it’s not your grandfather’s business cycle.

Tyler has a new post:

Recently accepted wage cut for new project, ngdp will go up not down. I am helping to manufacture ngdp, people get with the program.

What did *you* do for nominal gdp today? Just asking.

In a recent post I argued that falling wages were a really bad sign.  Some commenters thought I opposed wage cuts.  Just the reverse, if we are stupid enough to let NGDP fall, wage cuts are an excellent idea.  I want wage flexibility at the micro level, and a monetary policy that produces stable wage growth at the macro level.  If the central bank targets inflation, wage cuts will even boost NGDP.

And what did I do for NGDP today?  I used blogging to press more FOMC members to support NGDP targeting.  Thanks for asking.


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22 Responses to “Thanks for asking”

  1. Gravatar of Major_Freedom Major_Freedom
    3. May 2012 at 13:37

    In my study of the Great Depression, I argued that the Depression could be seen as resulting from governments doing too little, or too much. In a laissez-faire world the Great Depression would not have happened, nor would it have happened if governments took as much responsibility for AD stabilization as they do today (and even that’s a really low bar!)

    Aw! So close.

    “In a laissez-faire world the Great Depression would not have happened”

    is right, and has quite honestly floored me. When you say a liassez-faire world, do you mean a world with a free market in money, which would have almost certainly been a precious metals standard? This is quite the admission, because you dumped on gold a while back in one of your posts.

    “nor would it have happened if governments took as much responsibility for AD stabilization as they do today”

    is not exactly right. Yes, they could have prevented unemployment and declines in output by printing more money, but that would have come at a cost of an even larger bust later on. A Greater Great Depression might have happened say 1939-1955.

    In blog posts on the Great Banking Crisis I argued it wouldn’t have happened if the government had done much more regulation, or much less regulation. If they had abolished FDIC, TBTF, and the GSEs, banks would have taken far smaller risks. But given they didn’t abolish those generators of moral hazard; they should have banned mortgages with less than 20% downpayments made with funds from FDIC-insured banks.

    Mises showed that central planning regulations have unintended and unforeseen consequences. Sure, they could have increased down payments, but that would have just redirected the money inducing bubble elsewhere, and caused a bubble there.

    Regulations cannot contain inflation. Even price controls cannot contain it, because the inflation will just manifest itself in shortages and the concomitant economic chaos associated with them.

    Regulations can only redirect the inflation, and because central planners are…ahem…not all knowing wizards who can know just what the “right” regulations are, which means your call that there should have been an increase in down payment, benefits of course from hindsight. But ex ante, you can’t know where the inflation inducing bubble will arise, because you can’t predict future choices of people. There’s no constancy relations there like there is in physics and chemistry. Any attempt to learn of such alleged constancy, has inevitable consequence of bringing about an alteration in the subject matter being studied, namely, people. When people believe they have learned a constancy relation in human action, those thoughts change the people who learn them, and when knowledge changes, so do people’s actions, and when people’s actions change, it eliminates any notion of an existing constancy believed to exist prior to the knowledge acquisition.

    Shouldn’t the fact that the above two statements you made, that the problem was either too little government, or too much government, contradict each other, in that they cannot either be right, that one must be wrong, make it obvious that you have to reject either too little government or too much government?

    It only looks like you can say both are possible because you’re ignoring the problems that would have arisen had those additional regulations been in effect. You have to stop thinking like a central planner and believing yourself capable of knowing how to stop business cycles by using guns. You lack the requisite knowledge to do such a thing. Hayek’s knowledge problem? Hello?

    This shows the poverty of our language. Economics lacks a term for falling NGDP, even though falling NGDP is arguably the single most important concept in all of macro, indeed the cause of the Great Depression.

    No, the cause of the Great Depression was a concerted effort to prevent wages from falling. Nobody looks at aggregate spending or aggregate prices except government statisticians. The aggregate money supply can go up or down and it won’t matter for investors and sellers who take into account price spreads and demand spreads.

  2. Gravatar of Steve Steve
    3. May 2012 at 13:53

    “The most recent inflation rate in Greece is 1.7%, whereas Spain has 1.9% inflation.”

    Imagine if the FOMC merged with the ECB.

    FOMC-ECB minutes, Brussels:

    Bullard: I know of no economic model where Greece and Spain could have near 2% inflation without operating at full capacity utilization.

    Lacker: If Greece and Spain have 50% youth unemployment while operating at full capacity, then the majority of young people in both countries must have zero marginal product. They are all useless zeroes, do you hear me! And we must begin to raise interest rates before Spanish youth employment drops below 50 percent!

  3. Gravatar of Benjamin Cole Benjamin Cole
    3. May 2012 at 14:18

    Bravo to Scott Sumner.

    At times, Sumner must feel like a man fighting a gigantic bag of jello. The doughty Sumner scores punch after punch after punch, against a flabby foe of lesser intellect.

    But intellectual flabby blabbermeisters are tough to beat. There is always more flab where that came from.

  4. Gravatar of CA CA
    3. May 2012 at 14:23

    By the way, how’s the book coming? Can we expect it sometime this year?

  5. Gravatar of Benjamin Cole Benjamin Cole
    3. May 2012 at 14:23

    Another comment on Rajan’s feeble contribution, in Foreign Affairs magazine: The world has changed. The game has shifted to the blogosphere.

    Rajan survives due to his institutional connections to Chicago and some armchair foundation types at the Council of Foreign Relations—not on the merits of his arguments.

  6. Gravatar of Major_Freedom Major_Freedom
    3. May 2012 at 15:37

    This shows the poverty of our language. Economics lacks a term for falling NGDP, even though falling NGDP is arguably the single most important concept in all of macro, indeed the cause of the Great Depression. So we call it “deflation” which is actually an entirely different concept. I wouldn’t be the first to find connections between the poverty of our language and the poverty of our thinking.

    You could use “devoluming” (pronounced DEE-VOL-YOU-MING) and “involuming.”

    It connotes a sphere. Radius is money supply, the constant Pi is velocity. (4/3) Radius times pi cubed is volume of sphere. Volume is money supply multiplied by velocity.

    It also works on the psyche, because devoluming conveys the impression of being trapped on all sides, and being less able to produce, whereas involuming conveys freedom and opportunity, and being more able to produce.

    You could say NGDP from 2008-2010 devolumed.

  7. Gravatar of Keith Keith
    3. May 2012 at 16:39

    Scott Sumner: “In a laissez-faire world the Great Depression would not have happened.”

    Yet I waited in vain for you to take exception to Brad Delong’s recent inclusion of this among the claims that “now seem pretty clearly false.”

  8. Gravatar of ssumner ssumner
    3. May 2012 at 17:08

    MF, Yes, lots of government policies contributed to the Great Depression, not just monetary policy. The high wage policy was a big factor.

    We did print lots of money after WWII, and there was no “Greater Depression.” Just decade after decade of boom. So that hypothetical’s been disproved.

    Steve, That’s not far off.

    Thanks Ben.

    CA, It’s been slowed by the blog. Especially answering comments. Especially answering comments asking about the book. 🙂

    MF, My hunch is that devoluming would not catch on.

    Keith, I don’t have time to correct all errors in the blogosphere–there are too many.

  9. Gravatar of curiouseconomist curiouseconomist
    3. May 2012 at 20:28

    Scott, this is a little off topic, but it’s something that’s been bugging me for a while: wouldn’t it be better to stabilize the expected path of nominal GNE rather than NGDP? To clarify:

    GNE = C + I +G
    GDP = C + I + G + NX, so GDP = GNE + NX

    My reasoning is that NX (ie. the trade balance) is just one part of the current account, which is itself just one part of the balance of payments. It seems arbitrary for monetary policy to respond to changes in NX but no other part of the BoP. If we are trying to proxy the “aggregate demand” of theory, then other parts of the BoP seem relevant. For example, a person would surely consider Net Factor Income From Abroad as part of their income.

    But why stop at NFIA? Why not include the whole BoP, which would mean targeting GNE + current account (= trade balance + NFIA + net unilateral transfers) + financial account + capital account. All of these components are also likely to have macroeconomically relevant effects on output. But the BoP sums to zero by identity, so we’re left with just GNE = C + I + G.

    This is getting to be a long comment, but I think targeting GNE makes intuitive sense as well, because if the BoP sums to zero, the behaviour of NX doesn’t really matter from a monetary policy perspective. Essentially, any change in NX must be offset by a change somewhere else in the BoP (by identity). Of course, large changes in BoP components would have effects on real output, but so would large changes in NGDP itself (e.g. sudden shift from C to I) – yet it doesn’t follow that targeting C is better than targeting NGDP. Essentially, monetary policy shouldn’t try to steer individual components of aggregate demand.

    So, isn’t it better to target NGNE rather than NGDP? I recognise the practical significance of this issue is likely to be small in the US (although in small open economies, I imagine it could become quite important) but even from a purely theoretical standpoint, I find it an interesting issue.

    Also, it’s interesting from a history of thought perspective, because until recent decades, economists often preferred to talk about GNP rather than GDP. As a result, lots of older papers on nominal income targeting talk about NGNP. Presumably there was a reason for the sudden shift in emphasis to GDP, and maybe it helps answer my question.

  10. Gravatar of Keith Keith
    4. May 2012 at 07:39

    SS: “I don’t have time to correct all errors in the blogosphere…”

    That’s actually fair in view of your record of taking on your economist adversaries, no matter how formidable they might be.

    But this isn’t just another blogospheric error. This is one of the big kahunas. And it’s very disatisfying that you and Delong won’t engage on it.

    I’d love to see two written debates, with a limited number of words per round and a limited number of rounds.

    In the first, Delong would affirm that Milton Friedman never supported (or maybe “never presented persuasive evidence of”) the claim that the government caused the Great Depression.

    In the second, you would affirm something like: The evidence that’s accumulated since MF made the claim makes it equally, or more, likely that the government could have produced a rapid recovery from the Great Depression.

  11. Gravatar of ssumner ssumner
    4. May 2012 at 14:47

    curiouseconomist, I prefer NGDP because I think it is more closely correlated with income and output, which is what I’m trying to stabilize.

    Keith, Their are many ways to read F&S’s study of the Depression, it’s certainly a plausible reading to claim they showed the Fed caused the Depression. Maybe I’ll do something this weekend.

  12. Gravatar of Saturos Saturos
    5. May 2012 at 00:53

    Scott, you said:

    “Some commenters thought I opposed wage cuts. Just the reverse, if we are stupid enough to let NGDP fall, wage cuts are an excellent idea.”

    Yet earlier you said:

    “If workers start making wage concessions then you’ve lost the war. They’ll never be big enough. Get ready to be voted out of office and replaced by another government. Nominal wage concessions are the last thing you want.”

    I’m too stupid to work this out for myself, so can you please explain to me how the two fit together?

  13. Gravatar of Saturos Saturos
    5. May 2012 at 00:55

    MF: Your last post is perhaps the best you’ve ever done. Can I say that I’m a fan of “devoluming”. (The word, that is, not the scenario.)

  14. Gravatar of Floccina Floccina
    5. May 2012 at 10:55

    Isn’t the USA monetary system prior to and during the GD a great example of:

    “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
    Friedrich von Hayek

  15. Gravatar of Major_Freedom Major_Freedom
    5. May 2012 at 13:12

    ssumner:

    MF, My hunch is that devoluming would not catch on.

    Yeah, you’re probably right.

    MF, Yes, lots of government policies contributed to the Great Depression, not just monetary policy. The high wage policy was a big factor.

    We did print lots of money after WWII, and there was no “Greater Depression.” Just decade after decade of boom. So that hypothetical’s been disproved.

    There were a series of recessions in the post war period.

    It hasn’t been disproved. It’s perfectly consistent with the data.

  16. Gravatar of Major_Freedom Major_Freedom
    5. May 2012 at 13:18

    You said:
    We did print lots of money after WWII, and there was no “Greater Depression.” Just decade after decade of boom. So that hypothetical’s been disproved.

    I said: There were a series of recessions in the post war period.

    It hasn’t been disproved. It’s perfectly consistent with the data.

    As a result, if the Fed didn’t do lots of money printing post WW2, then we would have otherwise had EVEN MORE of a boom period, because the growth would have been sustainable, and we wouldn’t have wasted capital which were exposed in the series of post ww2 recessions.

  17. Gravatar of Major_Freedom Major_Freedom
    5. May 2012 at 13:40

    ssumner:

    I said:

    As a result, if the Fed didn’t do lots of money printing post WW2, then we would have otherwise had EVEN MORE of a boom period, because the growth would have been sustainable, and we wouldn’t have wasted capital which were exposed in the series of post ww2 recessions.

    In other words, you are just reiterating the same counter-factual as you did before, which I hold is incorrect, namely, the counter-factual that if the Fed didn’t engage in that money printing post WW2, then there would have otherwise not been a decade after decade boom period, but something allegedly less.

    The historical data of post WW2 does not confirm the hypothesis you are advancing. For my hypothesis above that the boom would have otherwise been even better without the lots of money printing, is again just as consistent with the same past historical data as yours.

    But since our hypotheses contradict each other, it means neither of us can merely point to the data and wipe our hands of it and declare one of our hypotheses correct.

    You are interpreting the historical data with the a priori theory that inflation is needed to maximize real growth, and that less inflation means less real growth. That theory, while consistent with the data, nevertheless contradicts economic science that is based on first principles.

    If compare and contrast these two hypotheses to the standard of economic first principles, then your theory is refuted and mine is verified.

  18. Gravatar of ssumner ssumner
    6. May 2012 at 08:18

    Saturos, It’s simple:

    I oppose a monetary policy that leads to wage cuts. If wage cuts are common you know money is too tight.

    If we have such a monetary policy, despite my suggestion, then wage cuts help restore equilibrium.

    In AS/AD terms, I oppose a fall in AD which necessitates a right shift in SRAS due to falling wages. If a fall in AD does occur, then by all means shift SRAS to the right.

    Floccina. Yes.

    MF, The post war recessions were tiny compared to the GD. Your Austrian approach says they should have been huge.

  19. Gravatar of Major_Freedom Major_Freedom
    7. May 2012 at 19:29

    MF, The post war recessions were tiny compared to the GD. Your Austrian approach says they should have been huge.

    Not at all. The extent of recessions is a combination of two factors. One, the extent of prior monetary intervention during the boom. Two, the extent of monetary and regulatory/fiscal intervention during the correction.

    The Austrian approach makes no ex ante predictions of the size and scope of how much monetary intervention will be chosen, nor how much regulatory/fiscal intervention will be chosen.

    Since the monetary intervention was relatively large in boom leading up to 2008, and since the regulatory/fiscal intervention was relatively large during the correction, the recession has lasted, and we are not calling it a Great Recession.

    There was no concerted national effort to prop up wages in the post war period recessions, like there was during the Great Depression, so that had a lot to do with why the corrections were milder.

    The primary point however is that there were in fact recessions in the post war period, contrary to your claim that there was only boom decade after decade. The 1970s for example was when the previous 20 years of monetary intervention, finally caught up with the economy, thus putting a nail in the inflation employment trade off theory (yet so many still cling to the myth).

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

    Correction: and we are NOW calling it a Great Recession.

  21. Gravatar of PP PP
    11. May 2012 at 16:53

    Question from someone that clearly does not have enough monetary background. Could you explain this “If the central bank targets inflation, wage cuts will even boost NGDP.” a little further. I missed what the reasoning behind this argument.
    Thank you.

  22. Gravatar of ssumner ssumner
    13. May 2012 at 15:02

    PP, It’s basic AS/AD. Wage cuts shift SRAS to the right. If the Fed is targeting inflation, that forces them to shift AD to the right, to keep inflation on target. Output rises and inflation is unchanged, hence NGDP rises.

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