In praise of stagflation

In a recent interview Paul Krugman expressed concern that under NGDP targeting an increase in the trend rate of RGDP growth would force the central bank to lower the rate of inflation.  I replied something to the effect that this isn’t a bug, it’s a feature.  BTW, Nick Rowe did a better job of explaining why this is so.

The reverse is also true; a period of low RGDP growth would lead to above average inflation.  Why is “the worst of both worlds” deserving of praise?  Because the alternative would be even worse.  If higher inflation accompanies a growth slowdown, then the stagnation obviously is due to a real shock, not a fall in AD.  If AD had declined, you’d have lower inflation during the period of stagnation.  And when the economy is hit by a real shock, workers need to accept lower real incomes.  You could do that by tearing up and renegotiating all wage contracts; or you could simply accept a bit more inflation.

Why does stagflation have such a bad rap?  I think it’s because stagflation is often misdiagnosed.  Under a NGDP growth target of 5%, stagflation is likely to be about 1% RGDP growth and 4% inflation—something like late 2007 and early 2008.  Not good, but not the end of the world.

In one of yesterday’s posts I pointed out that we can’t trust any of the economic history that we learned in school–citing the 1929 stock market crash (which actually had no impact on the economy.)  Another example is that “decade of stagflation;” the 1970s.  The only problem with this commonly held view is that the 1970s were not a decade of stagflation; rather we saw an extraordinary surge in aggregate demand:

NGDP growth averaged:  10.4%

RGDP growth averaged:   3.2%

Growth was normal, and inflation was very high.  Rapid growth in AD explains roughly 100% of the inflation during the 1970s.  There was no stagflation, just inflation.

Now a purist can find a few individual years of stagflation, such as 1974.  This occurred for two reasons.  OPEC sharply cut oil output in late 1973, which was a severe real shock to the economy.  And price controls were being phased out, meaning that part of the measured inflation of 1974 actually occurred in 1972-73, but was covered up to facilitate Richard Nixon’s re-election.  (Actually that’s not quite fair—in those days many of the best and the brightest progressive economists supported wage-price controls.)

So the “stagflationary 1970s” is a big myth—almost as big a myth as the claim that the inflation of the 1960s was caused by LBJ’s refusal to pay for his guns and butter policies with higher taxes.  Or the claim that the evil Republicans sharply cut the top MTR on the rich during the 1980s.   Those are even bigger myths, something for future posts.


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71 Responses to “In praise of stagflation”

  1. Gravatar of Major_Freedom Major_Freedom
    16. June 2012 at 06:54

    If higher inflation accompanies a growth slowdown, then the stagnation obviously is due to a real shock, not a fall in AD.

    This is incorrect. A stagnation that contains both falling AD and falling output can both themselves be caused by a prior set of factors the effects of which we observe as falling spending and output.

    You cannot infer from a positive correlation between spending and output that this is evidence that the fall in spending caused the fall in output. For a positive correlation is also consistent with the theory that falling output caused the fall in spending. No, you cannot say a fall in output must make prices rise immediately, because it’s not the job of the central bank to keep AD at a rigid growth path. AD wouldn’t do that in a free market. AD would fluctuate just as much as potatoes and computers fluctuate.

  2. Gravatar of Major_Freedom Major_Freedom
    16. June 2012 at 07:09

    Another example is that “decade of stagflation;” the 1970s. The only problem with this commonly held view is that the 1970s were not a decade of stagflation; rather we saw an extraordinary surge in aggregate demand:

    NGDP growth averaged: 10.4%

    RGDP growth averaged: 3.2%

    Growth was normal, and inflation was very high. Rapid growth in AD explains roughly 100% of the inflation during the 1970s. There was no stagflation, just inflation.

    You said RGDP was ill-defined, now you’re saying RGDP has a value, in this case 3.200000246234527435272527%, and you’re inferring price levels too. Price level growth (inflation) is being claimed as averaging 10.4% – 3.2% = 7.2%.

    The reason why economists call the 1970s a period of “stagflation” was because of this.

    The “unemployment equilibrium”, the relationship between price inflation and employment, was empirically falsified. Increasing prices with increasing unemployment.

  3. Gravatar of Philip George Philip George
    16. June 2012 at 08:00

    Inflation from 1960 to 1980 was primarily a monetary phenomenon as can be seen from this graph of Corrected Money Supply v/s Inflation rate: See http://www.philipji.com/Mc-vs-inflationrate1960-1980.gif

    The graph from 2001 to the present period shows we are heading for a crash, compared with which 2008 was a picnic. See http://www.philipji.com/item/2012-05-19/jp-morgan-is-only-the-tip-of-the-iceberg

  4. Gravatar of ssumner ssumner
    16. June 2012 at 08:08

    Philip, Which monetary aggregate?

  5. Gravatar of Mike Sax Mike Sax
    16. June 2012 at 08:15

    “almost as big a myth as the claim that the inflation of the 1960s was caused by LBJ’s refusal to pay for his guns and butter policies with higher taxes. Or the claim that the evil Republicans sharply cut the top MTR on the rich during the 1980s. Those are even bigger myths, something for future posts.”

    See that’s just a tease, you make a provocative claim like this-certainly counterintuitive and not the conventional view-then you don’t offer any elaboration.

    Of course progs may take issue with your claim that the GOP didn’t cut top MTRs but so will the Reaganites who will also think you’re from planet Pluto in saying such a thing. For them the greatness of Reagan were his deep tax cuts that saw the top MTR go from 70% in 1980 to 28% by 1986

  6. Gravatar of Mike Sax Mike Sax
    16. June 2012 at 08:23

    “The “unemployment equilibrium”, the relationship between price inflation and employment, was empirically falsified. Increasing prices with increasing unemployment.”

    Major I’m sure your not making news with that.

  7. Gravatar of Lorenzo from Oz Lorenzo from Oz
    16. June 2012 at 08:25

    Australia experienced surging unemployment and inflation from 1974 onwards. This was a pattern across much of the Western world. Stagflation was real for us.

  8. Gravatar of Major_Freedom Major_Freedom
    16. June 2012 at 09:08

    Mike:

    Major I’m sure your not making news with that.

    It’s apparently news to the blog owner.

  9. Gravatar of Larry Larry
    16. June 2012 at 09:12

    This seems interesting: http://www.creditwritedowns.com/2012/06/will-globalization-go-bankrupt.html

  10. Gravatar of Jim Glass Jim Glass
    16. June 2012 at 09:35

    There’s a story I’ve heard several times about Milton Friedman effectively shooting down an NGDP targeting proposal by Robert Perry, president of the San Francisco Fed, at a meeting of economists there. As Michael Belongia’s version tells it…

    Milton Friedman at luncheon and said: “This is all nice, Bob, but tell me what you would do if you are at your nominal target of 6% but you have 7% on prices and -1% on real?” Awkward. Stagflation.

    I don’t know why Perry didn’t answer: “Being that we’d just come through such a shock that we needed money expansion sufficient to create 7% inflation to contain the fall in real GDP to only 1%, I’d give thanks that we had a policy rule that provided it instead of re-living 1930.”

    BTW, prices fell in May. The last time we saw a price fall start was August of 2008.

  11. Gravatar of bill woolsey bill woolsey
    16. June 2012 at 09:51

    With a money supply rule, and in the best case, where velocity is constant, then the result is the exact same as a nominal GDP level target.

    Of course, I don’t favor a 6% nominal GDP target or even 5%, but prefer 3%. Still, if a supply shock pushes real GDP 4% below trend, then it is likely that having inflation one percent higher than trend is the least bad response.

    Was Friedman, like me (or say, Selgin) griping about the 6% trend? Or was he claiming–what? The money growth should be managed to cause slower nominal GDP growth so inflation will be on target?

  12. Gravatar of Major_Freedom Major_Freedom
    16. June 2012 at 09:51

    You could do that by tearing up and renegotiating all wage contracts; or you could simply accept a bit more inflation.

    Inflation leads to a tearing up and renegotiating of contracts no less than deflation. Wage contract prices tend to increase with inflation, so why aren’t you complaining about the tearing up of contracts with inflation?

    So biased.

  13. Gravatar of Major_Freedom Major_Freedom
    16. June 2012 at 10:07

    The data in this chart is consistent with the theory that falling employment causes a fall in NGDP, and rising employment causes a rise in NGDP.

  14. Gravatar of Mike Sax Mike Sax
    16. June 2012 at 10:16

    “Inflation leads to a tearing up and renegotiating of contracts no less than deflation. Wage contract prices tend to increase with inflation, so why aren’t you complaining about the tearing up of contracts with inflation?”

    Yeah but they’re offset by rising prices.

  15. Gravatar of Major_Freedom Major_Freedom
    16. June 2012 at 10:23

    Mike Sax:

    Yeah but they’re offset by rising prices.

    And tearing up of existing contracts to make lower priced contracts, in deflation, is offset by falling prices.

  16. Gravatar of dwb dwb
    16. June 2012 at 10:28

    deflation: debt contract are more costly to renegotiate

  17. Gravatar of dwb dwb
    16. June 2012 at 10:28

    deflation: debt contract are more costly to renegotiate

  18. Gravatar of Major_Freedom Major_Freedom
    16. June 2012 at 10:32

    inflation: malinvestment is more costly to correct.

  19. Gravatar of JoeMac JoeMac
    16. June 2012 at 11:23

    Would NGDP level targeting work in developing countries, where real growth is both higher and more volatile?

  20. Gravatar of Major_Freedom Major_Freedom
    16. June 2012 at 11:33

    JoeMac:

    Would NGDP level targeting work in developing countries, where real growth is both higher and more volatile?

    Definitely. It would be even better if prices rose more than incomes for impoverished people who are last in line to the printing press. Instead of supporting 3 children, these people can pick which 2 they love the most. Any problems here would be the fault of liberals.

  21. Gravatar of Jim Glass Jim Glass
    16. June 2012 at 12:35

    And tearing up of existing contracts to make lower priced contracts, in deflation, is offset by falling prices.

    Well, *that* certainly explains all the happy days of 1929-33!

  22. Gravatar of B B
    16. June 2012 at 12:39

    I’m convinced everyone thinks the 70s were worse than they really were because everything was so damn ugly.

    Burnt orange shag carpets, avocado refrigerators, 20ft brown Cadillacs, plaid polyester suits, terrible haircuts.

    More attractive decades are remembered more fondly.

  23. Gravatar of TheNumeraire TheNumeraire
    16. June 2012 at 13:20

    I still see the 1970’s as a stagflationary because RGDP was well below potential. Working age population was growing very fast until the late 1970’s (as the boomers entered the workforce) which easily raises aggregate RGDP. Productivity was anemic, due in large part to supply-side shocks and the horrible tax system (heavy inflation + non-indexed progressive tax code).

    The 1980’s had far better RGDP per capita of working-age population. The 1980’s not only had slowing growth in working-age population but also relied heavily on low-skilled immigrants to achieve the growth that did occur.

  24. Gravatar of Doc at the Radar Station Doc at the Radar Station
    16. June 2012 at 16:13

    One of your best posts! I started my working life in the early 1970s and YES there were suddenly whopping high gas prices (0.19/gallon > 1.25/gallon) which took a lot out of your weekly paycheck,… BUT it wasn’t hard to find a job if you needed one. If you were laid off, you just had to wait for a phone call a few weeks later (at most) before you returned to work. No wholesale plant closings that I can remember–mainly just worrying or being angry that you didn’t get a high enough raise or Christmas bonus.

  25. Gravatar of Adam Adam
    16. June 2012 at 16:35

    MF: If monetary easing / inflation causes malinvestment, where exactly are the post-depression and post-1970 malinvestments resulting in an economic crash?

    Also, if fed easing causes booms, doesn’t Austrianism have to hold that fed tightening causes busts? If not, why the asymmetry?

  26. Gravatar of Becky Hargrove Becky Hargrove
    16. June 2012 at 16:46

    Doc,
    Exactly. Not only were jobs plentiful, but it was easy to pay the bills.

  27. Gravatar of Major_Freedom Major_Freedom
    16. June 2012 at 16:51

    Jim Glass:

    Well, *that* certainly explains all the happy days of 1929-33!

    Yeah, politically motivated propping up of wages doesn’t mix well with deflation.

    Adam:

    MF: If monetary easing / inflation causes malinvestment, where exactly are the post-depression and post-1970 malinvestments resulting in an economic crash?

    There was a post 1970s correction, in the early 1980s.

    Also, if fed easing causes booms, doesn’t Austrianism have to hold that fed tightening causes busts?

    Yes.

  28. Gravatar of johnleemk johnleemk
    16. June 2012 at 18:03

    MF:

    Perfect, you agree that monetary policy can artificially create economic crises by either being too loose or too tight. When the government/central bank has a monopoly on the supply of money, and is not producing enough to accommodate an increased demand in money, why should libertarians not criticise the monetary authority for printing too little money?

    You may quibble about how much the current crisis has been caused by supply-side issues versus simple demand-side issues (like falling demand caused by insufficient supply of money). But the ridiculously low inflation/nominal income growth of the post-2008 era amply demonstrates that the Federal Reserve and ECB have printing too little money compared to the demand for money. They are causing an artificial economic crisis by intervening in the market (i.e. printing less money than a free market would supply).

    Regardless of whether one thinks a free market in money would be the optimal way to determine the money supply, there is no question that the government can just as easily print too little money as it can print too much. And when the government is clearly implementing disastrous policies, whether they be producing too little or too much money, it is incumbent on economists, regardless of their feelings about how much government intervention in the macroeconomy is desirable, to demand the government correct its disastrous policy.

  29. Gravatar of ssumner ssumner
    16. June 2012 at 18:16

    Mike, OK, I’ll do a post tomorrow on Reagan.

    Lorenzo, Yes, I should have mentioned that stagflation was real for most countries–but not the US.

    Jim Glass, He should have asked Friedman “do you have any better ideas?”

    Bill, You said;

    “With a money supply rule, and in the best case, where velocity is constant, then the result is the exact same as a nominal GDP level target.”

    Yes, I forgot that argument, that’s better than my previous answer to Jim Glass. Ask Friedman “If we adopted your M-supply rule, and it just so turned out that velocity was very stable, would that fact disappoint you?” I used that in a previous post.

    MF, The Economist had a nice analogy of painting a house by moving the paint brush, or keeping the paint brush fixed and moving the house. You’d be in favor of keeping the paint brush fixed and moving the house back and forth.

    B, Good point.

    JoeMac, I think so, if the country was large. Not sure about small countries–I’d probably go with wage targeting there.

    TheNumeraire, I agree that people can see it however they wish. One could always change policy to make growth higher. Over the past 10 years US growth would have been much higher with open borders, for instance. But the fact is that RGDP growth was at long run trend and 100% of the inflation came from much faster than normal NGDP growth. If NGDP grows 5% we’d have had 1.8% inflation, even with the oil shocks.

    Doc, Good point.

  30. Gravatar of Benjamin Cole Benjamin Cole
    16. June 2012 at 21:38

    It is remarkable how insightful a person can become if they jettison partisan orthodoxy and shibboleths. Such as Scott Sumner.

    Yes, we had inflation in the 1970s, not stagflation.

    We are suffering now from tight money.

    Print more money.

    Of course, reform structural impediments in the economy, if you can. But print more money anyway.

  31. Gravatar of Greg Ransom Greg Ransom
    16. June 2012 at 22:00

    What about productivity?

    When few, lower cost inputs produce superior, increased output, prices should fall, and a dollar should buy more.

    Ie, how do you answer Selgin, Hayek & White, etc.

  32. Gravatar of Philip George Philip George
    16. June 2012 at 23:06

    ssumner,
    The monetary aggregate I call Corrected Money Supply is calculated by taking M1, adding sweeps, and subtracting savings (I use the personal savings figure from the St Louis site).

    The logic is explained in my book “The General Theory of Money” http://www.amazon.com/dp/B0080WPK2I

    Very briefly, money is a medium of exchange but savings are not spent (and so is not a medium of exchange) and hence is subtracted.

    This is not just another empirical measure but involves a total rethinking of what money is. Among other things it proves that a closed system cannot create money by lending and so the idea of money multiplication by fractional reserve banking is incorrect. This incidentally is an idea that Keynesians, monetarists and Austrians share in common.

    You could think of it as the Law of Conservation of Money.

  33. Gravatar of Saturos Saturos
    16. June 2012 at 23:08

    This is what Draghi has done to us,

    http://www.npr.org/blogs/money/2012/06/15/155106232/the-karl-marx-mastercard-is-here-it-needs-a-tagline

    I’m so getting one.

  34. Gravatar of TheNumeraire TheNumeraire
    16. June 2012 at 23:28

    Professor Sumner, arguing that “RGDP was at long run trend” during the 1970’s is superficial at best.

    The facts are that growth came almost exclusively from labor force inputs, not productivity. Income taxes and payroll taxes were non-indexed and there were umpteen tax brackets (meaning that even if one’s wage keep pace with inflation, bracket creep would cause a real loss in income). Capital income was onerously taxed, as from 1969-78 the CGT was the highest in postwar history and the 70 percent top bracket applied only to so-called unearned income (wages were subject to a top MTR of 50 percent). In arguing that there was no stagflation, you seem to be missing the fact that the inflation brought forth was interacting with the unindexed progressive tax code to erode real income growth.

    Similar to the last decade,the stock market was stagnant, as was median household income during the 1970’s. People routinely refer to present-day conditions as stagnation, how are the 1970’s any different? Sure, I suppose on the basis of more abstract measures like aggregate RGDP the 1970’s come out looking fine, but if worker productivity, aggregate wealth and after-tax incomes of individuals all stagnated, is it any wonder that the term stagflation took hold.

  35. Gravatar of Saturos Saturos
    16. June 2012 at 23:34

    Also, a response to this would be appreciated: http://marginalrevolution.com/marginalrevolution/2012/06/median-expected-change-in-family-income.html

  36. Gravatar of Robert Robert
    17. June 2012 at 02:38

    Philip George,

    The monetary aggregate I call Corrected Money Supply is calculated by taking M1, adding sweeps, and subtracting savings

    Savings aren’t part of M1. M1 is currency in circulation, traveler’s cheques, demand deposits, and other checkable deposits (NOW and ATS). A sweep account is actually two accounts: a demand deposit (included in M1) and a secondary investment account. If you’re not including savings deposits, why on earth would you include the secondary deposit of a sweep account?

    Do you have anything productive to contribute, or are you just shamelessly plugging your book?

  37. Gravatar of Philip George Philip George
    17. June 2012 at 04:37

    Robert,
    I’m sure you won’t understand. Are you trying to teach me what M1 and sweeps are?

  38. Gravatar of ssumner ssumner
    17. June 2012 at 05:46

    Thanks Ben.

    Greg, I’ve addressed that issue 100s of times. I worry about the downward inflexibility of wages, and hence prefer a slightly higher average wage increase. But that’s a fairly small difference, compared to what we agree on.

    Thanks for the info Philip. But isn’t saving a flow?

    Numeraire, What matters to me is what would have happened in the counterfactual of 5% NGDP growth, In that case inflation would have been about 1.8%. So in my view the high inflation was 100% due to excess AD.

    You are quite right that some aspects of AS (labor force growth) were above average, and some aspects of AS (productivity) were below average. I agree that our tax system was hurting growth. But none of that has any bearing on my argument that the high inflation was 100% due to the 10.4% NGDP growth. If NGDP had grown at 5%, inflation would have been low.

    Of course it’s always true that reforms that boost AS will lower inflation for any given NGDP increase. That was true then, and it’s equally true today.

    Saturos, Thanks for the links, I’ll take a look.

  39. Gravatar of Debunking a cherished myth: The 1970´s was not the “stagflationary decade”. | Historinhas Debunking a cherished myth: The 1970´s was not the “stagflationary decade”. | Historinhas
    17. June 2012 at 06:13

    […] a recent post provocatively entitled “In praise of stagflation” Scott Sumner writes: In one of […]

  40. Gravatar of Robert Robert
    17. June 2012 at 06:41

    Philip,

    Robert,
    I’m sure you won’t understand. Are you trying to teach me what M1 and sweeps are?

    I’m just trying to understand what on earth you’re talking about.

  41. Gravatar of Liquidationist Liquidationist
    17. June 2012 at 06:57

    What Scott seems to be saying here is that whether we face a problem of inadequate AD or a real problem caused by falling RGDP then increasing the money supply is always the best response. In the former case increasing the money supply will reduce the value of money and allegedly increase the level of economic activity. In the latter case, when changes in relative prices may be needed , he is claiming that increasing the money supply will induce inflation which will allow the new equilibrium levels to be arrived at quicker than without inflation.

    I would like to challenge this claim. All the evidence from the 1970″²s indicates that inflation leads to further distortions in relative prices as those best able to get access to the new money benefit at the expense of those who do not – moving the economy further away from equilibrium not closer. I think this is also shown over the past 4 years where despite large increases in NGDP relative prices have not shown a strong tendency to move to an equilibrium that would allow a more optimum use of resources (that is: real wages have not fallen by very much)

  42. Gravatar of Bill Woolsey Bill Woolsey
    17. June 2012 at 07:11

    Ransom:

    Market monetarists believe that when productivity rises above trend, then inflation should be below trend.

    So, if labor supply growth plus productivity growth generates a 3% growth rate of potential output, and nominal GDP is growing 5%, then the trend inflation rate will be 2%. If productivity should grow faster so that productive capacity grows 4% for a time then the result would be a 1% inflation rate. Prices will be rising more slowly, reflecting the extra growth in productivity.

    If productivity grew enough so that potential output grew 5%, prices would remain stable. And if it rose 6%, then prices would fall 1%. Market Monetarists see this as a good thing.

    I favor 3% trend growth, so if productivity grows above trend this would result in prices falling, reflecting the unusually high productivity growth.

    We are aware of, and agree with, Selgin’s arguments about the undesirability of trying to offset shifts in productivity by an expansionary monetary policly. Keeping nominal spending on a stable growth path, and letting inflation fall (or rise in the opposite scenario,) is the best solution.

    Where we mostly differ is about the trend. Market Monetarists are very skeptical of any argument that claims that anything over a 2% trend growth path for spending on output is disruptive and that a 1% trend deflation rate is somehow essential. I think most of us believe that the U.S. had adjusted to a 5% trend (with 2% trend inflation) and that a 3% trend (like I favor) would work out OK.

    As Scott mentioned in his response, however, he believes that the faster growth rates of nominal GDP have some benefits for clearing some labor markets.

  43. Gravatar of John John
    17. June 2012 at 07:14

    This post actually points right at the biggest problem in mainstream macroeconomic thinking; a position that Scott unfortunately embraces along with most other Keynesians and Chicago School economists. The problem is the idea or assumption that aggregate demand is casually linked with employment. As Scott points out, the problem with stagflation wasn’t a lack of real GDP growth, it was that boosting aggregate demand did not do what it was intended to do: fix the labor market.

    I think both Scott and Krugman, the two economists I read the most, should admit the fact that AD does not have anything more than a weak correlation with employment; a correlation prone to frequent breakdowns especially in cases of aggressive fiscal or monetary stimulus.

  44. Gravatar of TheMoneyIllusion » Reply to Karl Smith TheMoneyIllusion » Reply to Karl Smith
    17. June 2012 at 07:21

    […] In a recent post I pointed out that during the 1970s we had normal (3.2%) growth and that 100% of the high inflation was due to NGDP growth being much higher than 5%, indeed about 10.4% on average between 1970 and 1980.  So even during the 1970s, inflation would have been only around 1.8% under NGDP targeting. I think Karl Smith accepts that argument.  But he also claims: The 1970s were definitely an era of stagflation […]

  45. Gravatar of ssumner ssumner
    17. June 2012 at 07:49

    Liquidationist, You said;

    “What Scott seems to be saying here is that whether we face a problem of inadequate AD or a real problem caused by falling RGDP then increasing the money supply is always the best response. In the former case increasing the money supply will reduce the value of money and allegedly increase the level of economic activity. In the latter case, when changes in relative prices may be needed , he is claiming that increasing the money supply will induce inflation which will allow the new equilibrium levels to be arrived at quicker than without inflation.”

    No, I oppose money supply targeting.

    John, You misunderstood my argument. I do not believe we can fix the sort of structural unemployment problems we had in the 1970s with monetary stimulus. Indeed I believe money is neutral in the long run. The natural rate of unemployment rose by about 2% during the 1970s–that has nothing to do with monetary policy.

    Monetary policy has an effect on cyclical swings in unemployment–that’s all.

  46. Gravatar of Liquidationist Liquidationist
    17. June 2012 at 08:03

    “No, I oppose money supply targeting.”

    But except in the case of a sharp decrease in the demand for money a 5% NGDP target will always result in an increasing money supply. In the case of a fall in RGDP the 5% target will lead to a >5% inflation rate, which is probably enough to distort relative prices more than it helps them to adjust.

  47. Gravatar of TheNumeraire TheNumeraire
    17. June 2012 at 09:32

    Professor,

    I agreed all along with your assessment that high inflation was induced from excess AD caused by monetary policy. Even the AS oil shock was initially caused by OPEC raising its prices AFTER the general price level and other commodities had risen sharply in price.

    I was merely pointing out that the stagnation part of “stagflation” was hardly a myth, as you characterized it.

  48. Gravatar of Philip George Philip George
    17. June 2012 at 18:39

    ssumner,
    Isn’t saving a flow?

    Saving is the stock of unspent money in a year.

    Philip

  49. Gravatar of pyroseed13 pyroseed13
    17. June 2012 at 19:17

    Johnleemk’s post deserves some recognition. Too often my fellow libertarians forget that government creates not only surpluses but shortages as well, particularly regarding the money supply.

  50. Gravatar of Saturos Saturos
    17. June 2012 at 22:04

    Philip, and spending is the stock of spent money in a year. I get it…

  51. Gravatar of Philip George Philip George
    17. June 2012 at 22:28

    Saturos,
    There is nothing “flowish” in the Keynesian circular flow of incomes approach. It is just an arithmetic of stocks: money paid out as real income in a year, real savings, real investments etc.

    My model shows that what matters is not real incomes, real savings and real investments but money incomes, money savings and money investments. When I buy a pound of sugar for $1 and sell it for $2, my income is $1. When I buy a share of Wonderful Widgets for $1 and sell it for $2 my income is also $1. The first appears in GDP, the second does not. This is the basic problem with modern macroeconomics. It does not take financial assets into account. And this although it is clear the the Great Depression, Japan’s Lost Decade and the Great Recession all follow a common trajectory: a collapse in the prices of financial assets followed by a collapse of banks followed by a collapse of the real economy. My book rectifies this gap and shows exactly where macroeconomics is wrong. The transmission is not, as Keynes thought, from investment to real spending and real incomes but from money to money spending and money incomes.

  52. Gravatar of ssumner ssumner
    18. June 2012 at 08:41

    Liquidationist, You said;

    “But except in the case of a sharp decrease in the demand for money a 5% NGDP target will always result in an increasing money supply.”

    That’s equally true of an inflation target, or a Taylor Rule, or a fixed exchange rate regime, or a money supply rule, or virtually any policy that’s been proposed by a respected economist in the past 50 years.

    So what?

    Numeraire. RGDP grew at a brisk rate, so it was a myth in my view. If people want to claim some other variable was stagnating, that’s fine. But stagflation was supposed to mean slow RGDP growth, and it wasn’t slow. There’s no point in arguing about semantics, you are free to define words as you choose. I am using the standard definition.

    Philip, I’m afraid you don’t understand the distinction between stocks and flows.

  53. Gravatar of Major_Freedom Major_Freedom
    18. June 2012 at 08:58

    ssumner:

    “Numeraire. RGDP grew at a brisk rate, so it was a myth in my view.”

    How can an ill-defined concept (according to you) be claimed as rising or falling at any rate?

    RGDP is just NGDP of a past time period.

    This year’s NGDP is just last year’s NGDP plus monetary inflation and spending. It shouldn’t even be called “real” GDP.

    RGDP only has meaning if price levels have meaning, and you have said repeatedly price levels are meaningless. You even challenged your readers to define it for you.

  54. Gravatar of Major_Freedom Major_Freedom
    18. June 2012 at 09:06

    Liquidationist:

    But except in the case of a sharp decrease in the demand for money a 5% NGDP target will always result in an increasing money supply. In the case of a fall in RGDP the 5% target will lead to a >5% inflation rate, which is probably enough to distort relative prices more than it helps them to adjust.

    Excellent, another poster who understands economics. Notice the response you got:

    “That’s equally true of an inflation target, or a Taylor Rule, or a fixed exchange rate regime, or a money supply rule, or virtually any policy that’s been proposed by a respected economist in the past 50 years.”

    “So what?”

    See that? It’s like a pickpocket saying “The consequences of my actions are the same as what every other “respected” thief is calling for. Don’t single me out, since I am in a group. When I am in a group, you have to ask the group…meaning not me…meaning I don’t want to actually defend my position and I don’t want to answer your statement by being upfront and honest. I’d rather make you feel guilty about complaining about something that every “respectable” economist is also calling for.”

    What sophistry. That’s a textbook case of embarrassment manifesting itself in a “but others are doing it too!” justification.

    Hayek and Mises were respected economists, Selgin and White are respected economists, and they are against central banking. The new generation of up and coming economists are to a large degree informed about economic calculation, relative prices, and the destructiveness of central banking.

  55. Gravatar of Liquidationist Liquidationist
    18. June 2012 at 10:41

    “That’s equally true of an inflation target, or a Taylor Rule, or a fixed exchange rate regime, or a money supply rule, or virtually any policy that’s been proposed by a respected economist in the past 50 years.

    So what?”

    The ‘so what” is (i think) clear from my second sentence “In the case of a fall in RGDP the 5% target will lead to a >5% inflation rate, which is probably enough to distort relative prices more than it helps them to adjust.”

    That the point I’m trying to make.

  56. Gravatar of Saturos Saturos
    18. June 2012 at 13:16

    Philip, how much is your income right now? You don’t have to tell me – the answer is zero. You are receiving precisely zero dollars of income between t = 0 and t = h as h -> 0+.

    A more productive question would be to ask what your net wealth is right now. But don’t worry, I don’t really want to know…

  57. Gravatar of Saturos Saturos
    18. June 2012 at 13:17

    Scott, what did you think of the MarxCard?

  58. Gravatar of Major_Freedom Major_Freedom
    18. June 2012 at 13:18

    Saturos:

    Philip, how much is your income right now? You don’t have to tell me – the answer is zero. You are receiving precisely zero dollars of income between t = 0 and t = h as h -> 0+.

    A more productive question would be to ask what your net wealth is right now. But don’t worry, I don’t really want to know…

    Excellent point, Saturos. Very revealing and thought provoking. More people should think like that.

  59. Gravatar of Saturos Saturos
    18. June 2012 at 13:22

    Liquidationist, hasn’t Lars Christensen shown that NGDPLT always produces minimal distortion to relative prices?

  60. Gravatar of Saturos Saturos
    18. June 2012 at 13:25

    MF, you’ll be pleased to know that all mainstream economists think like that.

    In fact, MF, what do you think about the MarxCard?

    http://www.npr.org/blogs/money/2012/06/15/155106232/the-karl-marx-mastercard-is-here-it-needs-a-tagline

    (This should be good.)

  61. Gravatar of Liquidationist Liquidationist
    18. June 2012 at 17:27

    Saturos, Can you supply the link to the Christensen post ?

  62. Gravatar of Major_Freedom Major_Freedom
    18. June 2012 at 23:58

    Saturos:

    MF, you’ll be pleased to know that all mainstream economists think like that.

    Not exactly. Keynesians think about incomes, and monetarists think about inflation.

    Net wealth seems to be an after-thought.

    In fact, MF, what do you think about the MarxCard?

    http://www.npr.org/blogs/money/2012/06/15/155106232/the-karl-marx-mastercard-is-here-it-needs-a-tagline

    (This should be good.)

    I’m all in favor of 100% of a population of private property owners in a given territory voluntarily donating all their means of production to a central planner, and thereby impoverishing themselves. As long as they do not leech off of any individual property owner who does not want to participate, then I think people should be free to be self-destructive.

    As for this Marx-Card specifically, I think it’s just nostalgia, the same way teachers in the US nostalgically run favorably school plays starring the dictatorial genocidal maniac Abe Lincoln.

    It’s more the romantic ideology attributed to the man, rather than the man and the consequences of his ideas and actions.

    To East Germans, Marx represents a “I don’t have to work, the state will take care of me by robbing from those who do” longing from their childhood.

    Socialist romanticism is very difficult to abandon. It’s like a parent foisting an unready young teenager out into the world and refusing to let them stay at home. Such a drastic change takes time for the teen to learn to be independent. He might wear a Che Guevara t-shirt, carry a copy of Das Kapital, rail against economic alienation through bad poetry on his Macbook, while drinking fair trade coffee. He might never intellectually recover. 20 years later he might still long for communism.

    Capitalism only works if enough people are intellectually informed about it and willing to live by its rules. The problem is that it is very weak against monopoly ideology, which is why the state and their friends in the market can run roughshod over it with legal impunity.

  63. Gravatar of Saturos Saturos
    19. June 2012 at 10:52

    Liquidationist, Well to be honest I haven’t actually seen his proof, but he keeps going on about it as if there is one. See here for instance: http://marketmonetarist.com/2012/06/14/jeff-frankel-restates-his-support-for-ngdp-targeting/

    MF, thanks for the reply. Btw both MMs and NKs see net wealth as being very important in the “backward transmission mechanism” of monetary policy.

  64. Gravatar of ssumner ssumner
    20. June 2012 at 06:16

    Saturos, It’s cute.

    Liquidationist. Relative prices that matter most (wages) are distorted more uner inflaito ntargeting than NGDP targeting.

  65. Gravatar of Philip George Philip George
    20. June 2012 at 18:40

    ssumner,
    You’re phrasing your comment wrongly. The point is not that I have misunderstood stocks and flows.

    What you need to ask is: Why does M1 (a stock) contain exactly a year’s stock of saving? One reason is that this is all that income statistics tells us. It gives us the amount of money that is unspent in 12 months. What happens to this saved money after 12 months? The statistics are silent about that. Is it retained in M1 or moved out to a savings deposit and therefore out of M1? Does M1 contain less than 12 months of savings?

    I have attempted to answer the question empirically in http://www.philipji.com/money-supply/what-is-money-supply.html in the section “Estimating the amount of saving in demand deposits”.

  66. Gravatar of Major_Freedom Major_Freedom
    20. June 2012 at 23:56

    Saturos:

    MF, thanks for the reply. Btw both MMs and NKs see net wealth as being very important in the “backward transmission mechanism” of monetary policy.

    Too bad they have no clue as to the vital function of unhampered economic calculation has on the preservation and growth of net wealth. They ignorantly view the economy on the basis of aggregates.

  67. Gravatar of Jason Jason
    1. July 2012 at 13:18

    Your blog motivated me to buy a copy of “A Monetary History of the United States”.

    I would love to see a blog post from you based off of one graph of real GDP and nominal GDP starting before the great depression. I’d do it myself, but FRED data starts in 1949 and new ALFRED data only goes to 1929; internet searches turn up data but I can’t tell if it is real or nominal.

    Something like “A NGDP history of the US”. Your description of the 1970s above would be a good example.

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