The China Boomlet: A fable

I’m not very good at writing fiction, so I just sketch this out and let a modern-day Bastiat produce the finished product:

Imagine the 1.4 billion Chinese suddenly develop an insatiable desire to buy American products.  It doesn’t matter why.  Perhaps the CIA develops a technique of mass-hypnosis over the internet.  Or maybe James Cameron produces an insanely popular film that portrays American culture in a flattering light.

The Chinese totally lose interest in German cars, and start snapping up Chevys and Fords.  They all want to take vacations in our national parks, Disney World and big cities like New York, Washington and  San Francisco.  The buy up condos in Florida and Vegas.  They replace their tile floors with carpets from Georgia, and their Haier white goods with washers and dryers from the Midwest.  They start wearing American Apparel made in LA.  RVs become trendy.  They drop Chinese cigarette brands and start smoking Marlboros.  No more Airbus planes—it’s all Boeing from now on.

Before continuing the fable let’s think about whether this surge in Chinese demand would help the US economy right now, in 2012.  I’m particularly interested in what the following groups would think.  Would it be seen as “good news” for the economy?

1.  What would average Americans think?

2.  What would Democratic politicians think?

3.  What would Republican politicians think?

4.  What would economists think?

5.  What would journalists think?

6.  What would labor unions think?

7.  What would corporations think?

Here’s my claim:  They’d all be thrilled by this China boomlet.  But it turns out that it is surprisingly difficult to explain why they be thrilled.  Or perhaps I should say it’s easy to explain why, but the explanation conflicts with their views in other areas.

Economists like to differentiate between supply shocks and demand shocks.  A demand shock does not actually increase the economy’s ability to produce output.  It doesn’t create more capital or land, or more workers.  It doesn’t make our workers more skilled or our technology better.  Our ability to produce is not directly affected.  Rather, it creates more nominal demand for our given productive capacity.  Whether that actually leads to more output depends on the slope of the SRAS and LRAS curves.

And here’s what’s so interesting about my imaginary Chinese boomlet—it’s a 100% demand side shock to the economy!  So let’s assume that most people think it would help the economy.  That means they should feel the same way about monetary stimulus, which would have the same first-order effect.  Monetary stimulus would also boost AD.  Monetary stimulus would also fail to boost SRAS.  (Both the China boomlet and monetary stimulus might have an indirect effect on LRAS, depending on your assumptions.)

Now let’s go a step further.  After six months of flat out boom, the US unemployment rate has plunged from 8.2% to 6.4%, and it’s still falling.  Congress has repealed the extended UI insurance scheme.  The budget deficit is falling fast, without tax increases.  State and local governments are rehiring laid of teachers and policemen.  Housing begins recovering.  But some researchers at the Fed suddenly realize that this boom is all AD-driven, and hence is undercutting Fed policy.  The Fed had preferred a recovery where NGDP grew at 4.3% a year, to prevent overheating and inflation.  But NGDP has been rising at 9.4% for the last 6 months.  The Fed decides to raise interest rates enough so that year over year NGDP growth between 2012 and 2013 is expected to be 4.3%.  It turns out that requires a fed funds target of 11.75%.  The Fed does it anyway, and the boomlet collapses.

How would the public feel about the Fed’s action?  How would you feel about the Fed’s action?

Long time readers know where I am going with this.  The hypothetical Fed action I describe, which kills the recovery, is actually current Fed policy.  The Fed is very, very, very, very lucky that almost nobody realizes this.  The market monetarists realize what the Fed is doing.  So do Krugman/DeLong/Duy/Avent/Yglesias and a few others.  Unfortunately, a pretty small percentage of the 310,000,000 people in this country realize that the Fed could almost exactly  replicate the effects of this China boomlet with the mere flip of the switch.  But like that character in the old Melville tale, Bartleby the Scrivener, for some obscure reason they “would prefer not to.”

PS.  I do admit that the Fed would probably decide against killing this boom, and that this conflicts with the “Sumner Critique.”  I’ve always agreed that massive fiscal stimulus (such as WWII) would boost NGDP.  My argument has been that fiscal tweaking in the range where the Fed does more or less unconventional stimulus is likely to be relatively ineffective.  If it gets to the point where the Fed would have to raise rates, and those 310,000,000 Americans clearly see what is going on, then yes, the Sumner critique might break down.

PPS.  OK, maybe GOP politicians wouldn’t be thrilled by the boomlet, but they would be if the held the Presidency.


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99 Responses to “The China Boomlet: A fable”

  1. Gravatar of David Pearson David Pearson
    22. June 2012 at 06:40

    “So let’s assume that the most people think it would help the economy. ”

    Imagine your boomlet was achieved by a 100% China reval. Rural relative wages would rise, and they would consumer more basic discretionary goods (made in China) and commodities (made in the U.S.). Slower migration to cities might result in little net increase in housing investment (too bad for carpeting).

    The U.S. would see higher prices for manufactured goods sold at Walmart, and higher prices for commodities. This would constitute a terms of trade shock for heavily indebted middle-income Americans. Some of this would be offset by increased employment in the tradeables sector (including so-called “onshoring”). Arguably, the employment effect would lag the terms of trade effect.

    To recap: a decline in middle-income real wages offset by increased employment. Whether this would “help the economy” depends very much on the animal spirits of middle income shoppers. Would they cut back on spending because they see the terms of trade shock as signalling lower real income growth? I don’t see how we could possibly know in advance.

  2. Gravatar of dwb dwb
    22. June 2012 at 06:46

    great example. and its not even fiction, since they could engineer currency depreciation.

    but wait: Rational actors won’t hold their wealth in a currency that is being aggressively devalued.

    yes!

  3. Gravatar of dwb dwb
    22. June 2012 at 06:52

    @David Pearson

    you are looking at this backwards. yes, if the currency depreciated, import prices go up (actually, mainly oil prices: 70% of the trade balance is oil). But, we export tons of stuff, so people switch to shale gas instead of oil. big deal.

    overall, nominal gdp improves because the trade balance improves and unemployment goes down.

  4. Gravatar of Nick Nick
    22. June 2012 at 06:58

    In the scenario you describe, wouldn’t the extra Chinese demand for goods actually cause US inflation (assuming continuing fixed exchange rate) in the absence of Fed action as you have now basically increased the monetary base by (total yuan * FX rate)?

    But the whole hypothetical is tough to really imagine in this pure sense. I think that the real reason people would look favorably on a sudden increase in demand from China (or anywhere else) is because they imply a positive supply shock, rather than a purely exogenous increase in demand. For example, if the Chinese started buying Chevys, I don’t think that it would be because of some sudden mood change unrelated to supply, and I don’t think that many people who read the scenario believe it either, (explicit description in text notwithstanding). Rather, I think the implied assumption is that Chevy would be producing a 300 hp sedan that gets 80 mpg that sells for $15K, hence millions of Chinese start buying them. How can Chevy do this? Positive supply shock.

  5. Gravatar of dwb dwb
    22. June 2012 at 07:01

    in other words, “heavily indebted middle-income” need jobs and higher incomes to pay the bills, not lower prices on less than 20% of the goods they buy.

  6. Gravatar of David Pearson David Pearson
    22. June 2012 at 07:01

    “we export tons of stuff.”

    Do we? The tradeables sector is a very small part of our economy, and even that has a large portion of intra-industry trade that would not be affected by a China reval (for instance, in chemicals where we might import feedstock and export finished goods). Those employed in services would see a terms of trade shock: the prices of tradeables they consume would rise relative to the price of the services they produce. Even if the tradeables employment effect is large (which it isn’t), it would lag the terms of trade effect, causing a temporary shock to incomes. This temporary shock might cause middle income workers to reduce expected real wage growth.

  7. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 07:02

    This blog post inadvertantly sums up exactly what is wrong with monetarist thinking.

    Let me tweak this scenario a bit.

    Instead of China producing real wealth, earning money in exchange, and then with their money earnings buy up American goods, imagine instead that the Chinese have developed a way to print trillions of untraceable, undetectable counterfeit US dollars.

    Instead of producing real wealth to acquire money, real wealth that will be available to others, they just print US dollars.

    So imagine a flood of US dollars coming to America, and trillions of dollars worth of real wealth being shipped to China.

    The end result is that Americans have trillions of fewer dollars worth of real wealth, and China has trillions of more dollars worth of real wealth. By the same token, Americans have trillions of dollars more US dollars, and China has trillions of dollars fewer US dollars.

    Americans are poorer in real terms, and China is wealthier in real terms. American standards of living have to do without that real wealth, and Chinese standards of living get to benefit from that real wealth.

    Now, who would argue Americans are better off here, compared to a scenario where the Chinese did not print US dollars, and domestic prices in the US fell, such that even though Americans took a “nominal” hit, they at least were able to consume and benefit from the real wealth?

    Stated in this way,

    1. What would average Americans think?

    2. What would Democratic politicians think?

    3. What would Republican politicians think?

    4. What would economists think?

    5. What would journalists think?

    6. What would labor unions think?

    7. What would corporations think?

    Here’s my claim. They’d all consider the Chinese to have ripped Americans off big time. They would probably consider this to have been the biggest case of grand larceny in the history of geopolitics.

    Now suppose during this grand larceny, we see unemployment in the US falling from 8.2% to 1%, as Americans busy themselves working to produce goods that will be shipped to China in exchange for devalued paper notes. Idle resources in the US are also sprung back into action, as they are used up in the production of real wealth that will be shipped to China, in exchange for devalued paper notes.

    Sure, everyone is waking up in the morning and going to work, and sure, every resource is being used in the production of something, but is this scenario what we should be striving towards? To work and produce real wealth, that will be shipped to others, in exchange for devalued paper notes? Would anyone in their right mind consider this to be good for Americans? Most would say this is crazy.

    And yet this is the solution being proposed by Keynesians, and Monetarists, with the sole difference being this:

    Instead of real wealth being produced by Americans for the benefit of foreigners who print US dollars, there is real wealth being produced by some Americans for the benefit of other Americans who print US dollars and receive the devalued paper notes first.

    So instead of grand larceny taking place with China against America, there is instead grand larceny taking place within the US itself.

    In other words, what most Americans would consider absolutely not tolerable between China and the US, is being championed by Keynesians and Monetarists as the solution WITHIN the US itself.

  8. Gravatar of dwb dwb
    22. June 2012 at 07:05

    and the share of *Chinese* imports in the goods and services the US buys (PCE) is even smaller, like 3%.

    please, lets depreciate the dollar.

    http://www.frbsf.org/publications/economics/letter/2011/el2011-25.html

  9. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 07:09

    In addition, I think anyone who purposefully acted to stop the influx of counterfeit US dollars from China, would be doing a service to Americans, even though there would almost certainly be a temporary rise in unemployment and idle resources in the US. The parasitism would be broken, and the host can take time to recover, and start working for its own benefit, rather than the benefit of money printers and those who initially receive the printed money.

    You talk about wealth inequality? THAT’S where it is coming from.

  10. Gravatar of David Pearson David Pearson
    22. June 2012 at 07:12

    dwb,
    I believe you are arguing that a China boomlet would be insignificant to the U.S. economy. Its either insignificant or significant and of debatable direction. It can’t be both.

    I argue for significance: China serves as a price umbrella for a host of tradeables. Also, it creates marginal demand for commodities and so has an out-sized effect on commodities prices. The terms of trade effect of higher tradeables and commodities prices on U.S. service sector workers is what is open to debate.

  11. Gravatar of dwb dwb
    22. June 2012 at 07:14

    @David Pearson

    “Do we?”

    yes:
    http://www.census.gov/foreign-trade/Press-Release/2011pr/final_revisions/11final.pdf

    and not only that, for the first time in a long time we’ve become a net exporter in refined products. We export capital goods, agriculture goods, there is a lot of stuff made in the USA for export. we even export 133 BN in autos and almost 1 Tn of manufactured goods. The single biggest import in 2011 was crude oil, 336,687 Bn.

  12. Gravatar of Becky Hargrove Becky Hargrove
    22. June 2012 at 07:15

    “The Fed is very, very, very, very lucky that almost nobody realizes this.”

    That is profound, especially in that providing the money people actually need to go about their daily activities is about as basic as it gets.

  13. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. June 2012 at 07:18

    “I do admit that the Fed would probably decide against killing this boom, and that this conflicts with the “Sumner Critique.” I’ve always agreed that massive fiscal stimulus (such as WWII) would boost NGDP. My argument has been that fiscal tweaking in the range where the Fed does more or less unconventional stimulus is likely to be relatively ineffective. If it gets to the point where the Fed would have to raise rates, and those 310,000,000 Americans clearly see what is going on, then yes, the Sumner critique might break down.”

    Under normal circumstances the Fed is nearly always exposed to pressure to do more, especially when it shouldn’t.

    In ZIRP the vast majority of Democrats have become so befuddled they constantly question whether the the Fed can do anything at all. Thus when Bernanke says for the umpteenth time the FOMC is fully prepared to take further action to promote a stronger recovery in the context of price stability if necessary, (which is more or less a direct quote since it has been repeated ad nauseum like a mantra for years now) they think he’s just pulling a head fake.

    Bernanke is loving ZIRP because it takes all the pressure off him to do more. The only people who royally roasted him in Congress earlier this month where Republicans, and it was all because they accused him of doing too much.

  14. Gravatar of dwb dwb
    22. June 2012 at 07:19

    @David Pearson

    “I believe you are arguing that a China boomlet would be insignificant to the U.S. economy.”

    no, the hypothetical is that it is significant. i am saying that the positive demand terms of trade balance effect (more jobs) would far outweigh any impact from import price effects. consumption of imports is small (~15%), plus higher import prices mean we consume less of them (think: energy efficient cars).

  15. Gravatar of ssumner ssumner
    22. June 2012 at 07:24

    David, I agree, but of course that has no bearing on my post, which was based on a very different set of assumptions. I have previously done posts arguing against Krugman’s claim that Chinese revaluation would help the US economy.

    dwb. Good point. BTW, US devaluation (easier global monetary policy) would have a very different effect from Chinese revalaution (global tighter monetary policy) as I argued in earlier posts.

    Nick, I strongly disagree. Even if Chevys had not improved one iota, I think most Americans would view it as a good thing if BMWs went out of style in China and they began to prefer Chevys for reasons of a change in taste, not techhnology.

    David, You said;

    “The tradeables sector is a very small part of our economy,”

    That’s false, our exports are well over 12% of GDP, and a 25% rise in exports would probably add at least 3% to RGDP. Over 6 months that’s adding 6% at an annual rate. So I think my stylized facts are reasonable for a surge in exports.

    http://www.npr.org/blogs/money/2012/03/14/148460268/what-america-sells-to-the-world

    And again, your discussion has no bearing on this post, as I was claiming a different set of assumptions. I agree the event is unlikely to occur in the real world, but insist that if it did it would be welcomed as good news.

  16. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 07:26

    I’m not very good at writing fiction, so I just sketch this out and let a modern-day Bastiat produce the finished product

    That’s quite the irony mentioning Bastiat, since Bastiat would have considered Sumner’s worldview deplorable.

    Here are passages from “Maudit Argent” (in English: “What is Money?”), an essay written by Bastiat in 1849.

    “When legislators, after having ruined men by war and taxes, persevere in their idea, they say to themselves, “If the people suffer, it is because there is not money enough. We must make some.” And as it is not easy to multiply the precious metals, especially when the pretended resources of prohibition have been exhausted, they add, “We will make fictitious money, nothing is more easy, and then every citizen will have his pocket-book full of it, and they will all be rich.” – pg 188

    —-

    “Money serves only to facilitate the transmission of these useful things from one to another, which may be done equally well with an ounce of rare metal like gold, with a pound of more abundant material as silver, or with a hundredweight of still more abundant metal, as copper. According to that, if a country like the United States had at its disposal as much again of all these useful things, its people would be twice as rich, although the quantity of money remained the same; but it would not be the same if there were double the money, for in that case the amount of useful things would not increase.” – pg 191

    —-

    “It is impossible for society to render more services than it receives, and yet a belief to the contrary is the chimera which is being pursued by means of the multiplication of coins, of paper money, etc.” – pg 200

    —-

    “I must inform you, that this depreciation, which, with paper, might go on till it came to nothing, is effected by continually making dupes; and of these, poor people, simple persons, workmen and countrymen are the chief.” – pg 206

    —-

    “Sharp men, brokers, and men of business, will not suffer by it; for it is their trade to watch the fluctuations of prices, to observe the cause, and even to speculate upon it. But little tradesmen, countrymen, and workmen will bear the whole weight of it.” – pg 212

    —-

    Bastiat’s companion replies that the state:

    “…puts a bandage over our eyes, takes us gently from the midst of the social circle which surrounds us, to plunge us, with our susceptible faculties, our impressionable hearts, into the midst of Roman society…How can you expect them to take the slightest interest in the mechanism of our social order?” – pg 218

    —-

    Bastiat ends with this:

    “The most urgent necessity is, not that the State should teach, but that it should allow education. All monopolies are detestable, but the worst of all is the monopoly of education.” – pg 220

    —-

    Bastiat’s solution is for the citizens to acquire a true understanding of the nature of money (e.g. Mike Sax), the abolition of fiat money, the abolition of central banks, and a return to a free market commodity money such as gold and silver.

  17. Gravatar of ssumner ssumner
    22. June 2012 at 07:26

    Mark, But Bernanke doesn’t look like he’s having fun.

  18. Gravatar of Mike Rulle Mike Rulle
    22. June 2012 at 07:37

    Question to Scott

    What should the Fed do under your hypothetical real demand shock? Raise its NGDP target? Currently, you assume Bernanke is , for some reason TBD, not permitting monetary policy to achieve 5% NGDP, thus being too tight. Implicitly, however, he has a NGDP target, just lower than 5%. Is your view the Fed should target a constant NGDP, or target what it deems appropriate? I had always assumed you favored the former.

  19. Gravatar of Mike Sproul Mike Sproul
    22. June 2012 at 07:43

    The Chinese boomlet means that more real Chinese goods are being offered for real American goods. Monetary stimulus only amounts to our government issuing more of one of its liabilities (currency) while retiring an equal amount of another of its liabilities (bonds). Monetary policy only stimulates to the extent that it corrects a shortage of currency.

  20. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 07:48

    From investor Martin Sibileau.

    As found here:

    Does Paul Krugman really care about the poor?

  21. Gravatar of J.V. Dubois J.V. Dubois
    22. June 2012 at 07:55

    Wow, this is hell of a great post. It is just another piece that together with excellent article “A Country is not a Company” by Paul Krugman exposes one of the most common falacies about economies made by people who just relate their daily experience.

    And Krugman’s piece (see here http://www.pkarchive.org/trade/company.html) also explains that the reason why people, politicians, businessmen are so thrilled by export is that they can’t stop thinking about economy as not competing with other countries. There is another excellent article by Paul Krugman that focuses on the whole “competitiveness” bogus debate: http://www.pkarchive.org/global/pop.html

  22. Gravatar of Andy Harless Andy Harless
    22. June 2012 at 07:56

    Scott, here’s what I think you’re missing: money demand shocks (e.g., fiscal stimulus, the hypothetical China boomlet) can affect aggregate demand (temporarily) even if they are known to be temporary. Money supply shocks (monetary policy) will only affect aggregate demand materially if they are expected to be permanent. The hesitancy to pursue a less tight monetary policy — even by those who are either strong advocates for fiscal stimulus or would be happy with an external shock that had the same AD effect as a fiscal stimulus — is largely a result of a concern about the permanence of the effects. To make a monetary easing effective, the Fed has to convince markets that it doesn’t intend to reverse the easing later on, when many may regard a permanent easing of monetary policy (and the higher inflation rate that goes with it) as worse than the alternative. The same is not true of fiscal stimulus and other money demand shocks. You can do a one-time fiscal stimulus and reverse it a year later and not worry about permanent AD effects.

  23. Gravatar of Mike Rulle Mike Rulle
    22. June 2012 at 08:03

    I assume Bastiat, under your fable, would just let it be. There is no presumption of artificial demand, centralized borrowing to create demand, no negative tariffs to push external demand, no artificial devaluation, your example did not imply counterfeit money, so I am not sure where one reader got that from.

    In the short run, the US would have a forced savings because we probably could not reinvest fast enough to create new and inventive productive capacity, but in the medium to long run we would have some new higher equilibrium consumption level.

    I am not sure why one reader pulled out all the Bastiat fiat money quotes as that did not seem to be what you were getting at. As my previous post implies, and you state, to keep NGDP level, the Fed would need to raise rates. This does seem absurd—–so I can only assume NGDP should be a target consistent with economic conditions and commmunicated through stated policy and feedback loops (futures contracts). Is that true? If so, it raises NGDP complexities—-but does that matter?

  24. Gravatar of Mike Rulle Mike Rulle
    22. June 2012 at 08:12

    Continuation of previous post.

    There would likely also be inflation in the short run as consumers would try to spend and compete with external demand, but reinvestment would still occur as real and nominal profit increases would cause it.

    I do not understand your point as it relates to NGDP. Would appreciate answer. Thanks.

  25. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 08:21

    Mike Rulle:

    I assume Bastiat, under your fable, would just let it be.

    He would not let central banking be.

    There is no presumption of artificial demand

    “That means they should feel the same way about monetary stimulus, which would have the same first-order effect.”

    no artificial devaluation

    “That means they should feel the same way about monetary stimulus, which would have the same first-order effect.”

    your example did not imply counterfeit money, so I am not sure where one reader got that from.

    “That means they should feel the same way about monetary stimulus, which would have the same first-order effect.”

    I am not sure why one reader pulled out all the Bastiat fiat money quotes as that did not seem to be what you were getting at.

    “That means they should feel the same way about monetary stimulus, which would have the same first-order effect.”

    I hope that makes it clear. It’s the same.

  26. Gravatar of Adam Adam
    22. June 2012 at 08:25

    “That means they should feel the same way about monetary stimulus, which would have the same first-order effect.”

    They should, but instead they think, “inflation, bad!” or, if I may assume what MF will say (I haven’t read his comments and probably won’t), “inflation caused by monetary policy, bad!”

  27. Gravatar of Alex Godofsky Alex Godofsky
    22. June 2012 at 08:35

    Scott, here’s what I think you’re missing: money demand shocks (e.g., fiscal stimulus, the hypothetical China boomlet) can affect aggregate demand (temporarily) even if they are known to be temporary. Money supply shocks (monetary policy) will only affect aggregate demand materially if they are expected to be permanent. The hesitancy to pursue a less tight monetary policy “” even by those who are either strong advocates for fiscal stimulus or would be happy with an external shock that had the same AD effect as a fiscal stimulus “” is largely a result of a concern about the permanence of the effects. To make a monetary easing effective, the Fed has to convince markets that it doesn’t intend to reverse the easing later on, when many may regard a permanent easing of monetary policy (and the higher inflation rate that goes with it) as worse than the alternative. The same is not true of fiscal stimulus and other money demand shocks. You can do a one-time fiscal stimulus and reverse it a year later and not worry about permanent AD effects.

    Andy, if the fiscal stimulus is temporary it has to be paid for by future taxes, so it has to fight against Ricardian equivalence (to whatever degree that holds); if it isn’t paid off by future taxes, then the permanently larger stock of public debt should have similar inflationary effects to a permanently larger stock of currency, since the Fed will have to monetize a portion of it to maintain the same path of interest rates. How is the inflation from a permanent increase in the money supply worse than the deadweight loss from the current spending and future taxes?

  28. Gravatar of Cedric Cedric
    22. June 2012 at 08:40

    Adam, you said:

    “They should, but instead they think, ‘inflation, bad!’ or, if I may assume what MF will say (I haven’t read his comments and probably won’t), ‘inflation caused by monetary policy, bad!'”

    I’ll say it again — there’s a big correlation/causation confusion even among smart folks. They know that a country with a good economy has a strong currency, but then mistakenly assume that a strong currency at any point will produce a strong economy.

    As an aside, one of my relatives went out and bought a bunch of gold two years ago because he was convinced that QE was going to lead to hyperinflation. I explained to him that it wouldn’t, but he didn’t listen. Yesterday, he went on an epic rant about how the Fed is destroying the economy with loose money; I showed him the inflation data, but he said it was all made up.

    Some folks just have non-falsifiable beliefs.

  29. Gravatar of Alex Godofsky Alex Godofsky
    22. June 2012 at 08:40

    In particular, it seems that RE is essentially similar to the mechanism by which temporary increases in the money supply do nothing – so temporary fiscal and temporarily monetary policy should both be ineffective to similar degrees.

  30. Gravatar of John hall John hall
    22. June 2012 at 08:43

    “I’ve always agreed that massive fiscal stimulus (such as WWII) would boost NGDP.”

    What’s your explanation for why the massive fiscal contraction at the end of WW2 didn’t cause a greater negative shock to NGDP?

  31. Gravatar of Cedric Cedric
    22. June 2012 at 08:57

    “PS. I do admit that the Fed would probably decide against killing this boom, and that this conflicts with the “Sumner Critique.” ”

    The Sumner Critique isn’t false — it just needs to be refined. You know how some people who didn’t read Coase closely enough thought that distribution of property rights never mattered; they forgot the whole zero transaction costs point? And then you have the Vulgar Keynesians who say that government spending always always always produces big multipliers?

    The Vulgar Sumner Critique says that the Fed always and perfectly accounts for all exogenous influences to nominal AD, such as fiscal policy and international trade; therefore, nominal AD always and forever continues on the Fed’s path.

    What does the refined Sumner Critique look like? Maybe something like (all caps are my additions). . . The Fed TENDS to counteract exogenous impacts on aggregate demand THAT IT DOESN’T LIKE. The refined Sumner Critique accounts for why the Fed probably don’t kill the China boomlet, right?

    And why taxmageddon is bad, but not devastating? (of course, the Vulgar Sumner Critique also accounts for taxmageddon . . . but still, the refined Sumner Critique better accounts for both scenarios) http://www.slate.com/blogs/moneybox/2012/05/18/don_t_believe_the_quot_taxmageddon_quot_hype.html

  32. Gravatar of Mike Sax Mike Sax
    22. June 2012 at 09:04

    You know the saying “take it for what it is?” It seems that’s the opposite of how most commentators are taking the China Boomlet.

    Rather than focus on the CB as an analogy they’re getting into the mechanics of how it works and what it might do.

    I’m not saying they’re wrong or right just observing. Not sure why you consider it more a supply shock Nick-the demand side is the spike in all those millions of new Chinese customers for new US goods. The demand could start because of some new great innovation of Chevy but it doesn’t have to be the cause. Seems to me this is by definition a demand side question IMHO.

    If suddenly the price of luxury cars came down dramatically this might be a supply side story.

    Cedric, your relative is in good company. Think of all the money Bill Gross and Jim Rogers lost betting on a bursting buble in Treasurys. At least Bill Gross learnt his lesson. Rogers still thinks it’s coming any day now.

    Major a true understanding of money is that it’s not just another commodity like oil-or broccoli to mention the Right wing Supreme Court’s favorite vegetable.

  33. Gravatar of ssumner ssumner
    22. June 2012 at 09:06

    Mike, I want a 5% NGDP target, level targeting, regardless of what China does.

    It’s debateable where to start the trend line, right now I’d favor going about 1/3 of the way back to the pre-2008 trend line.

    Mike Sproul, I’m afraid you missed the point. The “more American goods” have to come from somewhere. Presumably in your worldview that comes from less output of goods for the American people–so we aren’t better of in GDP terms or consumption terms. But I’m claiming most Americans don’t look at things that way, most Americans are not RBC theorists. They believe (implicitly) in the sticky wage business cyle, even if they don’t have a clue as to what that means. They think more AD would be good. They just don’t know that the Fed can deliver more AD, more nominal spending. Even you’d agree they could do it with unconventional policies like pegging the price of NGDP futures contracts.

    Thanks JV.

    Andy, I’m afraid you slightly missed the point. This wans’t a critique of fiscal stimulus. I included Krugman, et al, in as the “good guys” in the post. They think monetary stimulus would help.

    And I wasn’t calling for more money supply, I favor a Fed policy aimed at less money demand. The Fed can do that by pegging the price of GDP futures, or devaluing the dollar, or some other foolproof method. My real focus was elsewhere–I was attacking the 99.9% who don’t believe that more monetary stimulus would do the same thing (even if effective) as more Chinese demand for our goods. You understand this fable, most Americans (and some economists even) wouldn’t even have a clue as to what I’m talking about in this fable.

    BTW, Fiscal stimulus has the same credibility problem as monetary stimulus—Ricardian equivilence (admittedly for taxes and transfers only, but that’s where the action is.) Then there’s the Sumner Critique–monetary policy offset. It’s by no means clear that fiscal stimulus would work–I happen to think monetary stimulus (say a higher explicit NGDP target, level targeting) is 10 times more powerful than fiscal stimulus.

    Mike Rulle, We’ve all learned to ignore Major Freeman.

    Adam, That’s right.

    Cedric, That’s right.

    John Hall, Monetary stimulus. That’s a great example of how fiscal policy is overrated, BTW

  34. Gravatar of ssumner ssumner
    22. June 2012 at 09:08

    Cedric, That’s right.

    Mike Sax, Yes, I’ve been surprised by commenter reaction. It’s just a fable.

  35. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. June 2012 at 09:25

    @John Hall,
    You wrote:
    “What’s your explanation for why the massive fiscal contraction at the end of WW2 didn’t cause a greater negative shock to NGDP?”

    You already have the short Sumnerian explanation, but my own slightly longer take is the following.

    Demobilization from the war behaved like a negative aggregate supply shock to the economy. From 1945-47 the implicit price deflator soared by over 24% and RGDP fell by nearly 12%. So, although the Treasury took its foot off the fiscal gas pedal, the Fed didn’t need to do much to compensate.

    For example, in interest rate terms, since nominal short term interest rates were essentially pegged to zero through early 1947, real rates fell nearly as low as -20% during that time. Monetary policy seemingly did nothing when in reality it was accomodative.

    @fellow Money Illusion commenters,
    I wish people would stop referring to Major Freedom as MF. It makes me think of another anacronym.

  36. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 09:29

    Mike Sax:

    You know the saying “take it for what it is?” It seems that’s the opposite of how most commentators are taking the China Boomlet.

    I took it for what it is. An implicit apology for doing what I described in my hypothetical story, but focused within the US.

    Major a true understanding of money is that it’s not just another commodity like oil-or broccoli to mention the Right wing Supreme Court’s favorite vegetable.

    False. A true understanding of money is that it is a commodity. A false understanding of money is that it is something other than a commodity, that it is beyond economic science, that is it something only the state should handle, because it cannot be connected, grounded, to individual action.

    Money is a commodity.

  37. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 09:32

    In other words Mike, I am not saying money is a commodity “just like” oil and broccoli. For I also hold that oil is not a commodity “just like” broccoli. Money, oil, and broccoli are all commodities, it’s just that money is the commodity most widely accepted in exchanges. Oil and broccoli are less widely accepted, with broccoli (I think) less widely accepted than oil.

  38. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 09:38

    Mike Rulle, We’ve all learned to ignore Major Freeman.

    Except those who try to resist the Major, often can’t resist debating the Major.

    Everyone who has said “ignore” and “Major_Freedom” in the same post, has ended up not being able to resist.

    It’s just too rewarding.

    At the very least, I know my posts are being read, and that is enough. Years from now when fringe historians want to see the evolution of market monetarism, they’ll see what I wrote, and know that not everyone was uninformed about how the market works.

  39. Gravatar of Mike Sax Mike Sax
    22. June 2012 at 09:38

    But money in it’s exchange function is not acting as a commodity but as a faciliator of transactions.

    When we had the gold dollar this was always a source of confusion-gold in it’s function as currency and gold as just another partiuclar commodity.

    In truth fiat money shows that the reason money is accepted has nothing to do with it’s partiuclar phsical qualities or any of the qualities that make someone want any partiuclar commodity. The paper has no value in itself as a commodity which better underscores that it’s not a commodity.

  40. Gravatar of Alex Godofsky Alex Godofsky
    22. June 2012 at 09:53

    Major Freedom: if I had a machine that could produce infinite quantities of oil at no cost, surely it would be fantastic for the economy if I opened the spigot? Why would it be bad if I did the same for money?

  41. Gravatar of Doug M Doug M
    22. June 2012 at 09:55

    If we saw a spike in demand from China:
    US current account improves
    US Currency rises
    Import prices fall — postive for supply side
    Wages and prices both rise, wages faster than prices.

    Spike in demand from printed money:
    US curency weakens
    Import prices rise — negative for supply side
    wages and prices rise but prices faster than wages.

    Now, taking the classical point of veiw, there always exists a price that clears the market. If there is unemployment, then real wages must be too high.

  42. Gravatar of Mike Sax Mike Sax
    22. June 2012 at 09:58

    It would be a good thing Alex though it would be cataclysmic for the oil companies.

    Still from my standpoint you’re conceding too much to the Major by accepting money as just another commodity. Money is different from oil as the medium of exchange.

  43. Gravatar of John John
    22. June 2012 at 10:00

    Scott,

    I can’t tell if you’ve actually read Bastiat. If you had, you would see the flaw in your reasoning. The increase in Chinese spending in America would have been counterbalanced by a decrease in domestic Chinese spending. The price of exchangeable commodities would remain unchanged in this scenario. In the case of expansionary monetary policy, commodity prices would rise relative to where they would’ve been otherwise. The higher prices are the “unseen cost” of monetary policy in your scenario.

    In the monetary policy scenario, there is no countervailing drop off in demand anywhere else in the economic system, only an increase. This is what inflation is all about.

  44. Gravatar of Morgan Warstler Morgan Warstler
    22. June 2012 at 10:06

    Scott makes only one mistake.

    Let’s flip it over and say it right…

    IF under that exact scenario, the Fed won’t piss on the at boom, and stick the hard NGDPLT cap, then they SHOULD be doing what they are doing now.

    The ENTIRE logic of the ying (printing when we run under) requires the yang (pissing on booms when they run over).

    —–

    This is why we get so much downward pressure on public employees BECAUSE Scott tells the fable wrong…

    Becuase THIS DOES NOT HAPPEN:

    “State and local governments are rehiring laid of teachers and policemen.”

    Keynes himself said this should not happen.

    And Scott ADMITS under the hard target CAP of NGDPLT, that we celebrate China BUT we don’t hire back the public employees – that would raise our NGDP artificially, and we dont want that!

    IN FACT, the entire time China is booming on our jock, the hard NGDP cap is making us race to gut public employees.

    Make hay while the hay making is good.

    Public employees eat it under ANY MM situation.

    Glad to help! Why do I have to remind everyone of this cold brutal fact??

  45. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 10:07

    Mike Sax:

    But money in it’s exchange function is not acting as a commodity but as a faciliator of transactions.

    The “facilitator of transactions” function follows from it being a commodity. It is precisely behaving as a commodity when it is used as a medium of exchange. Both “medium” and “exchange” imply it being a commodity.

    Do you know what a commodity is? It is not something you only eat or use up to produce that which you eat. A commodity is a scarce object of economic action. It can be a tank of compressed air, it can be a pair of shoes, it can be a pile of wood, and yes, it can be a piece of material made from cotton and linen and imprinted with a picture of a former US President.

    Money in its exchange function IS the commodity nature of money manifesting itself, the exact same way the exchange function of the real good going the other way to the buyer IS the commodity nature of the real good manifesting itself.

    When we had the gold dollar this was always a source of confusion-gold in it’s function as currency and gold as just another partiuclar commodity.

    The confusion is yours. Commodities used as currency do not cease being commodities. When you consider a trade of money commodity for non-money commodity, between two parties, then this is an exchange of two commodities that are ranked oppositely by each party. The seller (money commodity buyer) values the money commodity MORE than he values the non-money commodity, and the buyer (money commodity seller) values the non-money commodity MORE than he values the money commodity.

    If I buy a hamburger from you, it’s because I value the hamburger commodity more than I value the money commodity, and you value the money commodity more than you value the hamburger commodity.

    In truth fiat money shows that the reason money is accepted has nothing to do with it’s partiuclar phsical qualities or any of the qualities that make someone want any partiuclar commodity.

    The same thing is the case for all other commodities. Commodities are not valued because they are physical. They are valued because of the service they render. A commodity can be a hamburger or it can be a computer bit and linen/cotton that is demanded by force from a violent institution.

    Fiat money has shown not that money has nothing to do with it’s physical qualities, but rather than fiat money has everything to do with the violence that backs the demand for them.

    It will be impossible for the state to tax people in non-physical commodities. Fiat money is physical by the way. Both computer bits and linen/cotton are physical.

    The paper has no value in itself as a commodity which better underscores that it’s not a commodity.

    Correct, nothing has INHERENT value. People ACT to value things. And in the case of fiat money, in the absence of state violence, the value of the computer bits and the value of the linen/cotton, would come to be close to the exchange value of computer bits and cotton/linen themselves, the price of which will tend to be the costs of producing them plus profit to those who produce them.

    The fact that you say the paper has no value in itself as a commodity is a muddled way of getting to the idea that it is force and coercion which makes the paper SEEM like it is valued beyond what its paper quality would have otherwise justified in the market.

    If a state used force to demand taxes in fake dog poop that is produced by a fake dog poop maker with monopoly privilege, then you’ll sit there saying plastic isn’t a commodity, because it is being used as money and valued beyond what its plastic services would otherwise have rendered.

    Mike, you’re so wrong about money it hurts. You are unable to grasp how state violence messes up your ability to use theory to understand reality, because your theory is, at this point, insufficient and incomplete. Slowly but surely, you’ll get there. I’ve converted every single long term “internet debate partner” I’ve interacted with. I have a 100% success rate. This one person took 2 and a half years, but he eventually saw what was wrong with his beliefs. I don’t see you taking quite that long, but it seems like you have enough dirt and baggage carried over from those who have inadvertently brainwashed you, to make a go of it.

  46. Gravatar of Mike Sproul Mike Sproul
    22. June 2012 at 10:08

    Scott, you said:
    “so we aren’t better of in GDP terms or consumption terms.”

    We are better off. American producer surplus rises by more than American consumer surplus falls.

    “Even you’d agree they could do it with unconventional policies like pegging the price of NGDP futures contracts.”

    Not sure what you mean, but my knee jerk reaction is that pegging anything just creates a big risk of the Fed putting itself on the wrong side of an arbitrage process.

  47. Gravatar of John John
    22. June 2012 at 10:15

    Most thoughtful people don’t take astrology seriously because it lacks any causal mechanism. I still haven’t heard Scott elaborate on a causal mechanism for how more expansive monetary will fix the economy. There are 3 main explanations I’ve heard for how this is supposed to work. Two of which don’t really provide any stimulus in the long-run and one that works only if people are stupid.

    1. Unexpected or accelerating inflation makes business look artificially profitable by boosting revenue without a corresponding increase immediate increase in depreciation costs. This is a very short-lived stimulus that leads to recession later as many business have to be liquidated later.

    2. Inflation causes people to spend more in anticipation of falling value of their money. This is disastrous in the long run since by destroying savings, you destroy the ability to really grow.

    3. Inflation lowers real wages as wage increases lag price increases.

    I think Scott believes number 3 since he concurred with me earlier that a depression is the result of mis-adjusted prices and wages that make production difficult. I’d agree that number 3 can work as long as people don’t realize what’s going on. It would also be possible to end unemployment quickly through a combination of inflation and controls on wages like in World War II. Just because something would bring down unemployment wouldn’t make it a good policy.

  48. Gravatar of Saturos Saturos
    22. June 2012 at 10:34

    Scott, it isn’t a 100% demand shock. When foreigners demand more of our goods our currency appreciates, and we consume more imports. The more foreigners want to trade with us, the more gains from trade we receive. If we were an autarky opening up to trade and then China wanted our goods, we’d exchange them for Chinese products and increase our living standards due to comparative advantage.

  49. Gravatar of Cedric Cedric
    22. June 2012 at 10:35

    John,

    I think number 3 is the most important on your list. We have good evidence that wages are short-run nominal downwardly sticky, and that this phenomenon promotes layoffs as managers prefer to fire productive employees than force nominal wage cuts. I don’t think people need to be fooled by this policy for it to work.

    With regards to number 2, I think you’re underestimating how a good chunk of that increased spending could be on capital goods rather than consumption.

    And might I add two more things to your list:

    4. Inflation boosts exports, and therefore employment for folks making the exports. If inflation weakens a currency vis-a-vis another currency, it’s cheaper for that country to import from us. You might hear folks talk about an “export-oriented recovery,” which always sounded weird to me, given that any good you export is a good that you can’t consume domestically. But really, if we can boost employment by making goods for other people to consume, then we can earn a stronger currency and the corresponding ability to import and consume more goods domestically.

    5. Inflation can act like a bailout to debtors who owe their debt in nominal, not-adjusted-for-inflation dollars. MF will say that this is unfair, and he’s kinda right; but on the other hand, smoothing the deleveraging process is probably long-run good for everyone, even if in the short run it screws over some creditors. Milton Friedman has a good explanation here: http://www.youtube.com/watch?v=EY-HYUFlCPs&feature=related

  50. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 10:36

    Alex Gadovsky:

    Major Freedom: if I had a machine that could produce infinite quantities of oil at no cost, surely it would be fantastic for the economy if I opened the spigot? Why would it be bad if I did the same for money?

    Because money is a medium of exchange and is needed for economic calculation. More medium of exchange doesn’t make people wealthier, and opening up the spigots affects people’s ability to produce NON-MONEY commodities that are traded against money, in a division of labor society.

    In a division of labor society, where each individual is responsible for their own productivity of non-money commodities, there is a need for coordination. If one industry expands too much relative to other industries, then the overall production in the division of labor becomes physically unsustainable. It would be like the hammer and nail industry expanding by more than what will physically enable them to sustain such expansion because there are not enough factors of production available to do it.

    Only if factors of production, that the hammer and nail industry needs, are produced in sufficient quantities, or freed up from other sectors, can it be sustainable.

    Now, the question is, how can each industry expand in their own particular lengths, and know whether or not their expansions are creating net value, or incurring net losses? Remember, not all expansions are good. Some are wasteful and bad. So how can they do this? Well, this is where the money commodity comes in. Each firm’s owners can acquire resources against money, and then sell output against money, to see if their physical behavior is creating net value or loss in the overall productivity in the economy.

    The key thing here is that money production itself is divorced from the division of labor, from private property, from profit and loss, then its function as a tool of economic calculation is partially or fully destroyed. Why is that? Why can’t the central bank just promise 5% NGDP and everything else is up to the investor? It’s because nobody can know a priori what the future value of money will be relative to non-money goods. Not themselves, and certainly not a society of millions if not billions of other people.

    In order for people to be able to economically calculate against money, when producing non-money commodities, money production itself has to be judged according to profit and loss, just like the non-money commodities, rather than the whims of central bankers who are necessarily blind to this. They can be well-intentioned, but it doesn’t matter.

    What fiat money does is it allow investors in the division of labor to invest too much in particular areas of the economy, with corresponding underinvestment in other areas of the economy. Please note that this does not mean that we should see an absolute decline in particular sectors. It can mean that the expansion in some sectors was too small, while the expansion in other sectors was too great.

    It all goes back to the individual. Individuals do not want more of everything in equal quantities. They want more of some things in different quantities, and they want nothing more of other quantities (imagine people having enough table salt), and they also want more of what does not even exist yet because of a lack of resources. There is thus a complex of wants, and each want is extended relative to the others according to marginal utility.

    This is why the economy as a whole has to expand in such a way that each industry does not outstrip other industries too far. Too far and we’ll end up with people seeing double the salt on the grocery store shelves than they are willing to buy.

    It’s perhaps a bit too complicated to fully explain here, but the gist of it is that inflation makes relative over-investment and relative under-investment a more pronounced problem, because it keeps wasteful expansions nominally profitable, the very nominal profit and loss system that division of labor investors require to know if what they are doing is creating real gains or real losses.

    What happens when money enters the loan market first, is that it makes investors behave as if more real capital is available than there really is, and so we end up with some sectors expanding too much relative to other sectors, such that during corrections, we see this:

    http://research.stlouisfed.org/fredgraph.png?g=8bN

    This graph is perhaps the definite one that shows why the problem wasn’t one of aggregate demand. It was a problem of misallocated resources and labor, brought about by inflation making some industries (construction, durable goods) expand too much relative to other industries (retail, service).

    Expanding money is not a bad thing at all. But expanding money by too much, that is a bad thing. Central planners cannot, and will never, know how much money they should create, if they continue to act outside the scope of the market process itself, of profit and loss.

  51. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 10:38

    Mike Sax:

    It would be a good thing Alex though it would be cataclysmic for the oil companies.

    Still from my standpoint you’re conceding too much to the Major by accepting money as just another commodity. Money is different from oil as the medium of exchange.

    Oil is different from broccoli, but they’re still both commodities.

    Money is different from oil and broccoli, but money is still a commodity.

    The commodity status follows from it being an object of economic action. Its scarcity.

  52. Gravatar of J.V. Dubois J.V. Dubois
    22. June 2012 at 10:41

    A little bit off-topic, but still I found it interesting. I went again through old Krugman’s “A Country is not a Company” article: http://www.pkarchive.org/trade/company.html and it surprised me how positively monetarist he sounds:

    “In 1930, as the world slid into depression, John Maynard Keynes called for a massive monetary expansion to alleviate the crisis ….. Had his advice been followed, the worst ravages of the Depression might have been avoided”

    Hmm, Keyness pleading for monetary expansion and not for fiscal stimulus? Does it also mean that it was Rosevelt devaluation of gold and not masive fiscal stimulus (AKA World War II) that ended the great depresion? Interesting

    “The Federal Reserve can print as much money as it likes, and it has repeatedly demonstrated its ability to create an economic boom when it wants to”

    So printing money, not lowering interest rates is what makes FED able to generate boom whenever it wants? Interesting

    “Fed has both a jobs target and the means to achieve it …”

    Exactly the MM point: FED gets whatever unemployment it wants [above NAIRU]. So if unemployment is above what FED seems to consider the natural rate, it does not want it enough.

    Maybe it would be worth making a “Then and now” post for Paul Krugman as he did for Ben Bernanke.

  53. Gravatar of Cedric Cedric
    22. June 2012 at 10:58

    JV,

    “Maybe it would be worth making a “Then and now” post for Paul Krugman as he did for Ben Bernanke.”

    A post? How about a book?

  54. Gravatar of Adam Adam
    22. June 2012 at 11:46

    Morgan –

    I mostly ignore you too, but I’m not sure that’s such a cold and brutal fact. If government workers are being laid off during periods of strong NGDP growth (a strange assertion given that monetary and not fiscal policy would presumably be the means for targeting NGDP), at least they’re being sent out into a better job environment than they get now.

    But I don’t really see the overall tragedy in slowing down booms if it comes with the positive trade off of shortening and lessening slumps. Heck, it’s positively OG Keynesian.

  55. Gravatar of Yichuan Wang Yichuan Wang
    22. June 2012 at 11:52

    John, on the topic of why inflation helps, I would recommend that we, again, refocus on NGDP. Disinflations are often problematic, but not when real growth is robust. A lot of this has to deal with the fact that nominal adjustment is difficult. For a longer explication of these arguments, I would highly suggest looking at Evan Soltas’ post on NGDP targeting here: http://esoltas.blogspot.com/2012/05/ngdp-targeting-laymans-guide.html

    Sticky wages, do doubt, do play a role, but there’s a lot of other safe-asset and signal confusion arguments as well.

  56. Gravatar of Adam Adam
    22. June 2012 at 11:53

    John – Astrology lacks a casual mechanism AND has no observable efficacy.

    If it had the latter but not the former, people would take it seriously. “We don’t fully understand it” is, frankly, the only reasonable position when discussing something as complex as the economy.

  57. Gravatar of Mike Sax Mike Sax
    22. June 2012 at 11:58

    “Just because something would bring down unemployment wouldn’t make it a good policy”

    John maybe that’s true and maybe it isn’t, but no unemployed person believes it. So I’m happy youve got a good job.

  58. Gravatar of Andy Harless Andy Harless
    22. June 2012 at 12:13

    I was attacking the 99.9% who don’t believe that more monetary stimulus would do the same thing (even if effective) as more Chinese demand for our goods

    OK, but now you missed my point (which I didn’t express well). More monetary stimulus would not do the same thing as more Chinese demand for our goods. It’s impossible to design a monetary stimulus policy that would have the same effect (unless perhaps the stimulus is applied via forex intervention). The impact of monetary stimulus depends on expected monetary policy into the infinite future. Holding the expected path of the monetary base constant, the impact of the China boomlet depends only on what happens while the boomlet is taking place. Level targeting (NGDP or price) works (if it does work) because it makes a promise about the Fed’s future reaction function. We have to assume that the Fed will follow through on that promise even if the results are unpleasant from a certain point of view. Those who hold such a point of view may oppose monetary stimulus but may still be happy about the China boomlet, because the China boomlet doesn’t make any promises about what happens after we move up the AS curve, so there need be no risk that the inflation rate will rise above a comfortable level (assuming the Fed will be vigilant to prevent it from doing so).

  59. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 12:22

    John:

    Most thoughtful people don’t take astrology seriously because it lacks any causal mechanism. I still haven’t heard Scott elaborate on a causal mechanism for how more expansive monetary will fix the economy. There are 3 main explanations I’ve heard for how this is supposed to work. Two of which don’t really provide any stimulus in the long-run and one that works only if people are stupid.

    1. Unexpected or accelerating inflation makes business look artificially profitable by boosting revenue without a corresponding increase immediate increase in depreciation costs. This is a very short-lived stimulus that leads to recession later as many business have to be liquidated later.

    2. Inflation causes people to spend more in anticipation of falling value of their money. This is disastrous in the long run since by destroying savings, you destroy the ability to really grow.

    3. Inflation lowers real wages as wage increases lag price increases.

    I think Scott believes number 3 since he concurred with me earlier that a depression is the result of mis-adjusted prices and wages that make production difficult. I’d agree that number 3 can work as long as people don’t realize what’s going on. It would also be possible to end unemployment quickly through a combination of inflation and controls on wages like in World War II. Just because something would bring down unemployment wouldn’t make it a good policy.

    These are very good points. I bet you’ll just be given the laundry list of NGDP talking points as a response.

    Yichuan:

    Soltas seems to believe in a number of economic myths and logical fallacies:

    Ignorance concerning the cause of recessions: “Recessions occur because of declines in aggregate demand, the sum of individual decisions to spend money, or rather in declines in expectations of future demand.” {Major_Freedom: Recessions are caused by the same thing that causes the decline in “spending”, namely previous inflation and credit expansion distorting the capital structure of the economy].

    Failure to grasp the nature of costs being subjective at the individual level: “By changing the “default” option, the Fed’s incentive becomes to protect the economy from unnecessary costs” [Major_Freedom: The “economy” doesn’t incur costs. Individuals do].

    Circular logic: “NGDP targeting offers the best policy response to a real shock because a real shock reduces aggregate supply, causing prices to rise and real output to fall — and since NGDP targeting considers, in essence, prices multiplied by real output, real shocks do not change NGDP is demand stays stable.” [Major_Freedom: NGDP targeting is good for supply side shocks because real shocks won’t lead to a change in NGDP].

    Ignorance of the meaning of interest rates: “The NGDP target resolves the zero lower bound problem because if a real recession happened, the central bank would increase the rate of inflation, which means that it would have effectively cut the “real” interest rate.” [Major_Freedom: Interest rates are not governmental tools. They are not fetters to prosperity, the decreasing of which can boost prosperity. They are a result of individual time preference. They are a vital institution of coordinating production over time, to prevent undue expansions, and to encourage desired expansions. Central banks that influence interest rates, down to zero, and then printing even more money besides, has deleterious, harmful effects on economic growth and sustainability, and results in future recessions].

    Myth that individual sellers and investors economize NGDP, and conflating NGDP stability with economic growth and stability: “In other words, if the economy is constantly swinging from boom to bust in NGDP, then if I run a business, I won’t invest as much as I would have if the economy grew with more stability.” [Major_Freedom: No investor invests into, and no seller sells into, total spending. An individual investor and seller takes into account relative demands, relative prices, not aggregate demand or aggregate prices. Total spending can rise, fall, or stay the same, and this is independent from the profitability and demand concerning individual projects. It’s not the fall in aggregate demand that represents a problem for individual investors. It’s the fall in demand of their respective projects, vis a vis competing projects. Individuals are responsible for how much they spend out of their cash balances. If the Fed isn’t destroying people’s money, then should an individual spend less, which would result in NGDP falling, then the solution is not to print money and give it to someone who will spend it, it’s for the existing sellers and producers to adapt to the new monetary demand conditions prevalent in the economy, since there is a good reason why individuals are holding on to their cash balances for longer periods of time. They aren’t calling for inflation here, they’re wanting higher purchasing power].

    All in all, a seriously problematic defense of NGDP targeting.

    Adam:

    John – Astrology lacks a casual mechanism AND has no observable efficacy.

    So does economics. We can’t run controlled experiments on the economy. We only have one single data set that is history. We cannot observe any counter-factual world. We cannot infer from temporal movements in economic data any constant causality.

    Mathematics and logic have no observable efficacy. They are USED to understand observations. The same thing is true of economics. It’s not an empirical science based on constancy like physics or chemistry.

  60. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 12:30

    Mike Sax:

    John maybe that’s true and maybe it isn’t, but no unemployed person believes it.

    Wrong.

    Back when I became unemployed after my company went belly up years ago, I believed that not everything that would have eliminated my unemployment would have been a good thing. So I as a single individual falsify your “no unemployed person” exaggeration.

    I could have become a parasitical thief, and that would have eliminated my unemployment status, but I refrained from doing so, and kept searching for new business until I found it.

    I also could have become employed if employers had guns pointed at them, forcing them to hire me. But I refrained from supporting that.

    I also could have become employed if the state printed zillions of dollars, in combination with price controls, and I would have refrained from supporting that.

    There are MANY ideas I believe are bad ideas, even though they could have reduced the time I was unemployed.

    Maybe your judgment of other humans is a little….off.

  61. Gravatar of Bonnie Bonnie
    22. June 2012 at 12:39

    Major:

    “Fiat money has shown not that money has nothing to do with it’s physical qualities, but rather than fiat money has everything to do with the violence that backs the demand for them.”

    What about bank notes or other substitutes from a free banking/free market money system? Our 19th century economic history is replete with bank notes and other substitutes for specie in economic transactions, which for periods I have been able to find records, could have been backed, in aggregate, only 25-30% by specie at any given time. It is a wild splitting of hairs to assume counterfeiting is done by the US government out of an exercise of constitutional authority over currency as compared to how free market money was used prior to its prohibition. It requires violence to insist upon and enforce a gold standard, and you seem to be completely blind to your own hypocrisy.

  62. Gravatar of Mike Sax Mike Sax
    22. June 2012 at 12:41

    I wouldn’t say my judgement of human’s is off based on your expericne. You’re something of an outlier as humans go…

  63. Gravatar of Cedric Cedric
    22. June 2012 at 12:42

    “Just because something would bring down unemployment wouldn’t make it a good policy”

    Of course, this sentiment is stated much more eloquently while wearing a fake mustache.

    “Creating employment’s a straightforward craft
    When the nation’s at war, and there’s a draft
    If every worker was staffed in the army and fleet
    We’d have full employment and nothing to eat”

  64. Gravatar of Mike Sax Mike Sax
    22. June 2012 at 12:43

    Besides it makes all the difference whether you had lots of money socked away in the bank. If you don’t have an immediate need of funds it’s easyier to be sanguine.

    After all Mitt Romney likes to joke that he’s “unemployed” leaving out that if he lived to be 300 he need never work again.

  65. Gravatar of Alex Godofsky Alex Godofsky
    22. June 2012 at 12:51

    Andy:

    The impact of monetary stimulus depends on expected monetary policy into the infinite future. Holding the expected path of the monetary base constant, the impact of the China boomlet depends only on what happens while the boomlet is taking place.

    The Chinese hold a stock of USD and US debt and there is an expected future path of the size of that stock. For the boomlet to be “nonpermanent” they would return to the same path after it ended, and they could only do that by running even larger trade surpluses. The Chinese stock of USD and US debt is like Hume’s coin that “be locked up in chests”.

    For fiscal stimulus, if it’s “nonpermanent” then the government must use future taxes to pay off all of the debt incurred.

    For monetary stimulus, if it’s nonpermanent then the central bank has to return to the same path of the size of the monetary base.

    Why should we believe that any of these three cases is particularly more stimulative than the other? There should be a Ricardian equivalence-like effect for each of them that at least partially neutralizes the stimulus unless it is permanent.

  66. Gravatar of Morgan Warstler Morgan Warstler
    22. June 2012 at 13:15

    Adam, its ok, I don’t know who you are. 🙂

    Scott made a mistake, so it throws things off.

    China starts buying US goods and real estate etc.

    Economy starts booming.

    1. OH SHIT, the Fed is going to piss on the boom!

    2. Let’s make some room in NGDP – and automate govt!

    3. Let’s say we shut down the post office, and fire 400K postal employees. A smart move, that smart people consider obvious.

    4. Now there is more growth room for NGDP without raising rates.

    You are correct, this is BOTH:

    1. In line with Keynes – who is clear as a bell, not to increase public spending when the economy is growing, so that when it slows down, you don’t have to cut it.

    This is actually the real rubber meets the road right now. Go back to 1980, before the big build up of the public sector, grant them MAYBE .5% growth YOY for their productivty gains till 2012.

    That’s THE level (of the avg. individual public employee compensation) where you’ll start to see the right thinks “OK, the help is back in its box.”

    My argument has always been that both liberals and conservatives should ACCEPT this, and get back to that place ASAP. I think it is smart strategy for BOTH teams.

    2. YES, it is definitely a nicer thing to push public employees out of the nest during times of growth.

    ——

    Look, my point, the strategic realist point, the point that the ECB / IMF can say out loud, but liberals here force the Fed to keep quiet…

    Is that the CURRENT SIZE of the PUBLIC SECTOR, not the SIZE OF GOVT.

    Again, I’m not talking about size of “government” – wealth transfer, aid, security, education – I’m talking about STAFF SIZE.

    That’s the issue. The STAFF SIZE of GOVT. is going to get decreased from 22M to maybe 8M.

    Think of this as Government will go through the same forces that Agriculture and Manufacturing – both are bigger in dollar terms, but in jobs / manpower / votes – they are far, far smaller.

    This shouldn’t bother people. What should scare people is that idea that in 2010+ we aren’t all taking for granted that this is what happens to the govt. workforce.

    And all historical econ evidence and the deeper honest discussion that we see in Greece, Spain, US, etc.

    To survive govt. must modernize, economize, and growth with productivity gains.

  67. Gravatar of Il Gattopardo Il Gattopardo
    22. June 2012 at 13:18

    Major Freedom,

    Thanks for your many comments. As a former professor of macro and monetary theory, I really enjoy them. SS is willing to say anything to sell his ideas, even insulting Bastiat. The funny thing is that he believes his problem is to write fiction!

  68. Gravatar of Mike Sax Mike Sax
    22. June 2012 at 13:19

    Gattopardo are you an Austrian?

  69. Gravatar of Max Max
    22. June 2012 at 13:46

    Andy,
    “Money supply shocks (monetary policy) will only affect aggregate demand materially if they are expected to be permanent.”

    You mean, when at the zero bound? Or always?

  70. Gravatar of ssumner ssumner
    22. June 2012 at 16:46

    Doug, You said;

    “Import prices rise “” negative for supply side”

    Never reason from a price change.

    John, Yes, I realize there are possible terms of trade effects. But those are likely trivial compared to the impact on GDP. people are much happier at full employment with a slight fall in terms of trade than in a deep recession.

    Mike Sproul, Yes, you are right that the terms of trade effects could impact consumption, but I don’t follow your second comment about arbitrage. Does that mean gold pegs don’t work? If so, how did the US do it from 1879-1933?

    John, You said;

    “Most thoughtful people don’t take astrology seriously because it lacks any causal mechanism. I still haven’t heard Scott elaborate on a causal mechanism for how more expansive monetary will fix the economy.”

    You must be new here—I suggest reading my older posts. BTW, I favor a stable monetary policy, only “expansive” relative to our currently absurdly tight monetary policy. Why do you think a stable monetary policy is not a good idea?

    Saturos, I agree there are terms of trade effects. But whether it’s a supply shock depends how you define AS. I think it’s reasonable to view it as a demand shock. We aren’t suddenly able to produce more goods, we can simply consume a bit more for the same work effort. I’m using standard AS/AD model definitions; I agree AS can be defined in different ways.

    JV, Good find, I like the old Krugman better.

    Andy, It seems like you are agreeing with Krugman’s claim that monetary stimulus only works at the zero bound if we promise to be irresponsible. I don’t buy that argument—I think a 5% NGDP target, level targeting, would work fine, and would be quite responsible.

    I don’t accept the argument that monetary stimulus is more inflationary than other types of non-monetary stimulus, except to the extent that there might be terms of trade effects with the Chinese preference for US goods. But in terms of the rising output, I think the inflationary effects would be the same.

    Il Gattopardo, If you like MF, then I find it hard to believe that you are a former professor of macro and money. Major Freeman is wrong about almost everything. Go back over the last few weeks and read all the comments he’s left, if you don’t believe me.

  71. Gravatar of Mike Sproul Mike Sproul
    22. June 2012 at 18:00

    Scott, you said: “Does that mean gold pegs don’t work? If so, how did the US do it from 1879-1933?”

    Gold pegs work until the money issuer becomes insolvent and therefore unable to buy back all its money at the pegged rate. That’s when a bank run starts. Any peg, including a peg based on GDP futures, would have the same potential problem.

  72. Gravatar of Alex Godofsky Alex Godofsky
    22. June 2012 at 19:02

    Mike: sure, that’s theoretically possible, but absent truly out-of-control deficit spending for extended periods of time really unlikely. Banks usually have runs when the value of their backing assets is called into question, and the central bank owns a huge stock of short-term government debt.

  73. Gravatar of Benjamin Cole Benjamin Cole
    22. June 2012 at 22:59

    Another great Sumner post.

    BTW, I live in Thailand now, and I must be the last person to read a post, and by that time all commentary has been exhausted. So I just say, “great post.”

  74. Gravatar of Saturos Saturos
    23. June 2012 at 00:21

    OK, so Miles has replied to Scott: http://blog.supplysideliberal.com/post/25592568339/wallace-neutrality-and-ricardian-neutrality

    He still isn’t getting it. He still sees policy in a mechanical way, and wants to choose between interest rates or quantities of asset purchases, preferring the former. He sees the Svensson method as an asset market intervention rather than a strategy for communicating to the public that the medium of account has been redefined. He says, “…NGDP targeting to work also needs either (a) implicit promises to overstimulate the economy in the future to get stimulus now OR (b) departures from Wallace neutrality.” Of course we would rather say that it works by making not a promise but a threat to overstimulate the economy – the point is to shock the economy into reverting to a normal pattern of expectations, so that monetary policy has its normal effects and a normal quantity of money/level of interest rates coexists with adequate nominal growth. He should read Nick’s Chuck Norris posts, and his concrete steppes post. And he should also read the post at the top of this page. Instead he is still going on about “trillions and trillions” – still looking through the wrong end of the telescope. It reminds me of what Nick said ages ago regarding Kocherlakota about mathematical models leading you astray unless you understood on an intuitive level the behavior being described. You only know you’ve got the right answer when evidence, math and intuition all point in the same direction – but the intuition fosters the math and not the other way around. Hopefully once Miles lays all his views out in his upcoming post we’ll be able to get some things straighter.

  75. Gravatar of Saturos Saturos
    23. June 2012 at 00:25

    In fact it would really help if Nick or perhaps Bill could do a response to Miles – they’d probably have a better shot at persuading him.

  76. Gravatar of Saturos Saturos
    23. June 2012 at 01:33

    Hell, or he could just read this: http://www.nationalreview.com/nrd/articles/300951/monetary-regime-change

  77. Gravatar of Andy Harless Andy Harless
    23. June 2012 at 04:41

    Scott, I agree (personally) that 5% NGDP level targeting would would work and would be responsible, but one can reasonably disagree with either part of that proposition. You and I agree that 5% NGDP level targeting would be responsible, but not everyone agrees. So it does mean that the Fed has to promise to (at least potentially) do something that some people think is irresponsible. Those people who do think 5% NGDP level targeting is potentially irresponsible can still be happy about the Chinese boomlet.

    Consider someone whose is lexicographicallly averse to letting the core inflation rate go above 3%, even temporarily. NGDP level targeting can’t promise to avoid that person’s zone of unacceptability. The Chinese boomlet can (at least to within the Fed’s forecasting ability), because the Fed can tighten in time to avoid the higher inflation rate.

    Now, for someone who is confident in rational expectations, it’s hard to see why they would be so averse to temporarily high inflation rates, if the Fed made a credible promise to reduce it eventually (as would be implicit in the NGDP target). But not everyone is so confident in rational expectations or in the Fed’s ability to make credible promises. Some people would argue that expectations are at least partly adaptive and that, if you allow the inflation rate to go up, you’re going to have a devil of a time getting it back down, even if you have formally made a commitment to the NGDP level path. These people have a reasonable argument for preferring a Chinese boomlet to easier money.

  78. Gravatar of Mike Sax Mike Sax
    23. June 2012 at 06:04

    “In line with Keynes – who is clear as a bell, not to increase public spending when the economy is growing, so that when it slows down, you don’t have to cut it.”

    Morgan have you been watching the last four years? This is not a boom perioud so Keynes would not be for austerity.

  79. Gravatar of Mike Sax Mike Sax
    23. June 2012 at 06:06

    Yeah Gattopordo I’m fascinated: just what school were you a professor of Macro at?

  80. Gravatar of ssumner ssumner
    23. June 2012 at 06:11

    Mike, Sure, if the government is broke the peg breaks, but that’s not a realistic concern for a country like the US.

    Saturos, Everyone (including me) can benefit from reading Nick’s posts.

    Andy, On the theoretical issues I think you and I see eye to eye now (mostly because I had forgotten the terms of trade effect when I first wrote the post.) So no problems there.

    In terms of empirical judgements, I’m less sure. The China boomlet would dramatically boost AD, so I’m not sure we can say it wouldn’t push core inflation above 3%. I would agree it is unlikely. Conversely monetary stimulus raises oil prices sharply, but doesn’t have a dramatic impact on core inflation (which is mostly wage gains, if measured properly.) I’m not saying your point is wrong, I think you are right in a qualitative sense that the China boom is less inflationary for terms of trade reasons, but I don’t think that what I see as a minor difference in likely core inflation outcomes can even come close to explaining why the man on the street sees these two cases as being radically different, in completely separate boxes.

  81. Gravatar of Morgan Warstler Morgan Warstler
    23. June 2012 at 06:45

    Mike, the has to be a blood letting, because we’re not starting fresh and clean AFTER the public employees got fat.

    Keynes has two equal parts, and since we didn’t follow him in the growth years, we’re not going to follow him now.

    SO, be sure during the next growth cycle, to make sure public employees don’t get fat again, so they dont have to be put through this during the down swing.

    Kicker: if it isn’t yet painful enough that you have learned this lesson, then we need more pain.

  82. Gravatar of Mike Sax Mike Sax
    23. June 2012 at 07:03

    Yes, the lesson from pain. Very old testament of you. You’re assuming there ever will be another growth cyvle at this rate.

    Anyway buddy, here is a post you should enjoy

    Understand they want to destroy the President at all costs http://diaryofarepublicanhater.blogspot.com/2012/06/they-will-do-anything-to-destroy.html

  83. Gravatar of Mike Sax Mike Sax
    23. June 2012 at 07:07

    “Keynes has two equal parts, and since we didn’t follow him in the growth years, we’re not going to follow him now.”

    What growth years do you mean? Clinton balanced the budget didn’t he? So how did we not follow him. The Bush years was you guys. You deliberatly destroyed Cliton’s surplus turning it into a huge deficit and now think the next Democratic Administration has to clean it up.

    It’s a great script but don’t be suprised if Democrats aren’t buying in

  84. Gravatar of Andy Harless Andy Harless
    23. June 2012 at 11:13

    Scott, it’s not the terms of trade effect but the “excluded middle” that I was thinking about. The equilibrium has to involve a real interest rate that clears the market for current vs. future expenditure. There is no guarantee that that market-clearing real interest rate exceeds negative 3 percent. Assuming rational expectations, NGDP level targeting (or any other kind of level targeting) will definitely solve the problem eventually, because every time it fails, it sets a higher target nominal growth rate, and eventually that target nominal growth rate will be high enough to require enough inflation to allow a sufficiently low real interest rate. But when it does succeed, it may require an inflation rate that exceeds someone’s threshold of unacceptability.

    By contrast, with the China boomlet, there is no excluded middle, because it clears the current-vs-future-expenditure market merely by increasing the demand for current expenditure (in this case, demand coming from China), thus raising the equilibrium real interest rate up to the actual real interest rate instead of reducing the actual interest rate.

    I do realize there are secondary effects of both policies: monetary stimulus will also raise the natural real interest rate, and the China boomlet will also reduce the actual real interest rate (because movement up the AS curve will result in higher expected inflation). It’s possible that these secondary effects are so strong that there isn’t much practical difference between the two policies, but I don’t think we can count on that. The strength of those secondary effects is an issue about which reasonable people can disagree, and for someone who believes they are weak, there is a big potential difference between the two policies.

  85. Gravatar of Major_Freedom Major_Freedom
    23. June 2012 at 11:28

    Il Gattopardo:

    Thanks for your many comments. As a former professor of macro and monetary theory, I really enjoy them. SS is willing to say anything to sell his ideas, even insulting Bastiat. The funny thing is that he believes his problem is to write fiction!

    You’re quite welcome. It’s good to have a professor here who grasps monetary theory. Some people are in desperate need of an eye opening.

    ssumner:

    Il Gattopardo, If you like MF, then I find it hard to believe that you are a former professor of macro and money. Major Freeman is wrong about almost everything. Go back over the last few weeks and read all the comments he’s left, if you don’t believe me.

    You keep saying this and every time you fail to back it up with actual evidence. It’s an empty claim. You only want to convince yourself and everyone else that I am wrong on everything so that the demolitions I have made on your claims can be met with faith based skepticism on the part of your readers.

    I am not wrong on almost everything. YOU are wrong on almost everything. Yes, Il Gattopardo can go back and read all my comments. He’ll find a cornucopia of corrections, refutations, and criticisms of your numerous FALLACIOUS assertions.

  86. Gravatar of Mike Sax Mike Sax
    23. June 2012 at 11:43

    Major he’ll find the time you declared that Australia lost 100,000 net jobs while gaining 25% NGDP-thoungh only 7% if you go by Australian dollars

  87. Gravatar of Major_Freedom Major_Freedom
    23. June 2012 at 12:55

    Mike Sax:

    Major he’ll find the time you declared that Australia lost 100,000 net jobs while gaining 25% NGDP-thoungh only 7% if you go by Australian dollars

    You say “only 7%” like it’s some sort of crippling deflation.

    I’m still waiting for an explanation from market monetarists on why this occurred. After all, they spend lots of time pleading to the central bank how unemployment in the US rose because of falling NGDP. You would think they would devote just 1 minute to 2011 Australia losing 100,000 jobs and explaining why NGDP rising by 7% had nothing to do with it.

  88. Gravatar of Major_Freedom Major_Freedom
    23. June 2012 at 13:05

    Adam:

    “That means they should feel the same way about monetary stimulus, which would have the same first-order effect.”

    They should, but instead they think, “inflation, bad!” or, if I may assume what MF will say (I haven’t read his comments and probably won’t), “inflation caused by monetary policy, bad!”

    Yeah, all those morons who say it would be bad if China printed US dollars and bought up American real wealth, should be happy that they are not getting real wealth, but devalued toilet paper, I mean US dollars, instead!

    How crude, primitive, and neanderthal-like they must be to want to work and produce in order to increase their own consumption, rather than just acquire paper notes like good little inflation tax paying sheep.

  89. Gravatar of Major_Freedom Major_Freedom
    23. June 2012 at 13:17

    Bonnie:

    What about bank notes or other substitutes from a free banking/free market money system?

    As long as they are not backed by violence, meaning as long as the state does not demand taxes in such notes such that I have to accept them in trade, then banks should be free to print whatever virtually worthless paper they want if anyone is dumb enough to accept them.

    Money printing is fine, as long as it is done peacefully, and according to private property rights.

    If anyone could accept any payment, do you think they would choose cotton and linen over gold and silver? I doubt it, but it’s certainly possible. Let the better money win according to market, not political, competition.

    Our 19th century economic history is replete with bank notes and other substitutes for specie in economic transactions, which for periods I have been able to find records, could have been backed, in aggregate, only 25-30% by specie at any given time.

    Yes, and the 19th century is also replete with government intervention, force backed privileges, and two experiments of central banks. See the work of Selgin.

    It is a wild splitting of hairs to assume counterfeiting is done by the US government out of an exercise of constitutional authority over currency as compared to how free market money was used prior to its prohibition.

    It is more like flying a spaceship between two galaxies. And the government does not have constitutional authority to print money. The constitution specifically says only gold and silver shall be legal tender. Please note I am not defending the constitution, because I consider it to be an unjustified document that nobody today has any right to enforce. Contracts signed over 200 years ago cannot possibly be claimed as justified in being imposed on the future unborn. The document should have died with the signers.

    It requires violence to insist upon and enforce a gold standard, and you seem to be completely blind to your own hypocrisy.

    I don’t want to impose a gold standard by force. I favor a free market in banking. I just know that it is almost a sure thing that the free market process will result in precious metals ousting paper as the universal medium of exchange, so I use them interchangeably.

    No hypocrisy from me.

    If anyone is hypocritical, it’s people like you who say it’s morally wrong to initiate force against your neighbor, but then you say it’s OK if you’re wearing a government badge and you believe your neighbor owes you money for having the gall to work and produce and earn money using his own property.

  90. Gravatar of Major_Freedom Major_Freedom
    23. June 2012 at 13:29

    Mike Sax:

    Gattopardo are you an Austrian?

    Yeah Gattopordo I’m fascinated: just what school were you a professor of Macro at?

    Isn’t this amazing?

    People agree with each other and think nothing of it when their name is not Major_Freedom.

    But when someone agrees with the Major, it’s like a cat was thrown into the dog pound.

    If the world is not full of weak minded central planning ideologues, violence advocates, and statist strategists masquerading as economists, then it is almost a guarantee that someone somewhere is going to agree with me eventually.

    The relatively few actual economists of the world, especially in the age of the internet, makes this more likely than it was in the past, when ivory tower yahoos like Sumner would have barred any devious ideas from ever reaching the “official” channels like pearly gate journals, and state funded universities and colleges.

    The internet is to economics, as the word printing press was to the Protestant reformation. Just like the common people were able to learn, through the printing press, that the priests and the church were lying to them the whole time about the bible, for the sake of securing their position, so too is the internet breaking through the vicious control that priests such as Monetarists and Keynesians have been benefiting from and hiding behind for decades.

  91. Gravatar of ssumner ssumner
    24. June 2012 at 16:23

    Andy, Correct me if I’m wrong, but doesn’t the excluded middle assume monetary policy only works (in a transmission mechanism sense) via changes in the real interest rate? In my view there is also the hot potato effect, at least if the base injections are large enough. (Also effects on stock prices, exchange rates, commodity prices, etc.) Thus with NGDP futures targeting, say 12 months forward, there should be no (expected) excluded middle. The base will rise until expected future NGDP is right on target.

  92. Gravatar of John John
    25. June 2012 at 05:15

    Scott,

    I don’t favor a “stable” monetary policy for the same reason I don’t favor a stable government car policy. It’s price fixing pure and simple. It’s an interference with the most important part of the market economy, money and credit, that inevitably brings unintended consequences. I have serious doubts that it will do more to help business cycles than anything else.

  93. Gravatar of John John
    25. June 2012 at 05:21

    Also, I’m not sure that NGDP targeting would do anything to help increase liberty while I’m sure that getting rid of our ridiculous government backed banking cartel aka the Federal Reserve would.

  94. Gravatar of John Becker John Becker
    25. June 2012 at 05:44

    Scott,

    Where do you get that figure that inflation has averaged 1.1% over the last 46 or so months? I take it that comes from the BLS, the that headline, core, price-chained, etc.?

  95. Gravatar of Major_Freedom Major_Freedom
    25. June 2012 at 06:09

    John:

    Where do you get that figure that inflation has averaged 1.1% over the last 46 or so months?

    I can answer that, since I asked the same question, and another poster answered it.

    It’s from taking the CPI on 2008-07-01 (when the CPI was at a local peak, and when price inflation was at a local peak. Convenient, yes) and the latest CPI:

    ( [ CPI(today) / CPI(46 months ago) ] ^ (1/46) ) ^ 12 = 1.01106 = 1.1%

  96. Gravatar of Andy Harless Andy Harless
    25. June 2012 at 07:43

    Scott, I don’t think the excluded middle depends on the interest rate as a transmission mechanism. The transmission mechanism only determines how you get from the old equilibrium to the new one. Once you get to that new equilibrium, no matter how you got there, the equilibrium conditions have to hold. In particular, agents have to be satisfied with the tradeoff between current and future expenditure. If there is a fairly safe asset (money) that is expected to return negative 2%, there is no guarantee that agents will be satisfied at a level of current expenditure that is consistent with full employment.

    In terms of the hot potato theory, what expectations will make money into a hot potato? What will induce people to reduce their demand for money sufficiently to produce full employment? The prospect of a real recovery? Maybe; maybe not. The prospect of a real recovery plus 2% expected inflation? Maybe; maybe not. The prospect of a real recovery plus X% expected inflation? Certainly, if you set X high enough, but we don’t know what the critical value of X is. It could be zero; it could be 3%.

  97. Gravatar of Andy Harless Andy Harless
    25. June 2012 at 08:01

    Continuing my comment above: the point is that, in terms of the hot potato theory, there may be a discontinuity in people’s money demand function. If you use NGDP futures targeting at a 1-year horizon, there is no guarantee that there is an equilibrium that corresponds to the target, so the demand for NGDP futures may be very unstable. For a while people are confident that the target will be missed from below, and they sell huge amounts of NGDP futures, and more base money gets created. Then they suddenly shift and start to think the target will be missed from above, so they buy huge amounts of futures. Under this scenario, if people believe the target will actually be hit, they will always prefer to defer expenditures on the margin, so they will always want to hold more money, which preference will be inconsistent with the target’s actually being hit. If you create enough money, you may convince them that the target will be missed from above by a sufficiently large margin, in which case they will no longer want to hold money, until you convince them once again that you are not going to miss the target from above, and the cycle starts over.

  98. Gravatar of Adam Adam
    25. June 2012 at 08:59

    Morgan – I still don’t understand why you think that scenario would lead to a fiscal response to excessive NGDP growth instead of a monetary one (i.e., why you think cutting government workers would be the first instead of last choice). But perhaps the answer lies in your desire for that to be the case, which I had not previously appreciated.

    Andy – I thought the point (a point?) of Scott’s fable was that the Fed would be less likely to act to stifle the inflation that would result from his hypothetical boomlet.

  99. Gravatar of ssumner ssumner
    25. June 2012 at 18:36

    John, You can’t beat something with nothing. Tell me what monetary policy you favor, and we can see if it’s better than what I propose. And don’t say abolish the Fed. The Fed exists, we are all trying to minimize the damage it does. The Fed could print a zillion dollars and create hyperinflation. Is that a policy you favor more than a 5% NGDP target? If not, what policy do you prefer? If you won’t answer the question, then you are leaving a dangerous beast to run roughshod over the economy, because you at too much of a purist to try to tame the beast.

    I have published papers explaing how it would increase liberty–if you have any objections to my arguments, I’d be glad to hear them.

    John Becker, It’s headline inflation from the BLS. But all the indices tell roughly the same story, even private sector estimates.

    Andy, You lost me there. First of all, I don’t understand why you are talking about “full employment” as that mixes NGDP and RGDP determination. I need to know whether you think they can hit their NGDP target. Whether that leads to full employment is an entirely different question.

    So if we focus on NGDP, are you saying that no amount of base money can hit that target, or that if it does the market expectations of future NGDP will differ greatly from the price of NGDP futures contracts? I don’t agree with either of those critiques, but I can’t quite tell which one you are making.

    In my view base demand would be quite low under a 5% NGDP target, level targeting, and hence there’s be no problem hitting the target.

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