These money illusions

Readers who weren’t with me back in 2009 might not know why I chose the moniker “TheMoneyIllusion.”  From the beginning I realized that the term had multiple connotations, almost all of which dovetailed nicely with the content of my blog:

1.  In 1928 Irving Fisher wrote a whole book entitled “The Money Illusion,” full of delightful examples.  He was referring to the tendency of people to confuse real and nominal variables, or perhaps it would be more accurate to say people tend to see nominal variables as being in some sense “real.”  I still recall when we got no pay increase back in 2009, a year of minus 1% inflation.  My colleagues at Bentley greeted the anouncement very differently from when we got a 4% increase during a year of 3% inflation.  I see money illusion everywhere I look, so I didn’t need much convincing.

2.  Another form of money illusion is confusion about the nature of monetary policy.  The liquidity effect is actually just an epiphenomenon, and yet most people see it as not just a side effect, but rather as monetary policy itself.  And “most people” includes the Fed.  For this reason, policy is often perceived as being ineffective at the zero bound, unless perhaps longer term rates can be lowered via QE.  In fact, in the long run more money lowers the value of money (value in terms of the share of NGDP which can be bought with each dollar) for exactly the same reason that more apples lowers the value of apples.  (Admittedly the problem of expectations is more complicated in the money market.)

These two forms of money illusion have some interesting parallels.  In both cases the problem becomes much more severe at the zero rate bound.  For psychological reasons that are quite frankly irrational, both workers and central banks behave bizarrely at the zero bound.  Workers start being much more resistent to wage cuts necessary to restore labor market equilibrium.  And central banks become much more resistent to monetary policy steps needed to keep NGDP on track.  Their superstitious fears of the number zero (which after all is a foreign concept borrowed from the Islamic world) causes them to behave in ways that are both personally and socially destructive.

In terms of the previous post, the zero interest rate boundary contributes to the Fed’s failure to hit its NGDP target, causing NGDP instability.  Then the zero wage change boundary takes that NGDP instability and converts it into relative wage instability (unstable W/NGDP).

3.  There’s a third form of money illusion, to which economists are also subject.  Economists have just as much trouble as the Fed does in identifying the stance of monetary policy.  Because they think ultra-tight money is actually ultra-easy money, then are often not able to perceive the impact of very tight money.  This means that they find some other explanation for economic distress, such as financial instability.  Fisher said the business cycle is nothing more than the “dance of the dollar.”  Fisher defined monetary policy in terms of the price of money (1/P), not the rental cost of money (i.)  Because modern economists see tight money as high interest rates they confuse cause and effect, not understanding that financial distress is a symptom of a monetary policy-induced recession, not the cause.

I’ve followed Fisher’s approach, except that I believe the inverse of NGDP is a more useful indicator of the stance of monetary policy than the inverse of the price level.  One of my goals in the previous post is to get people to think about my message in a different way.  I’d rather people not think of me as calling for the Fed to stabilize NGDP (although obviously I am calling for that) but rather to see me as calling for the stabilization of its inverse—i.e. 1/NGDP.  Obviously those two goals are identical from a purely mathematical perspective.  So why do I prefer 1/NGDP?

I’ve often seen commenters, particularly those of the Austrian persuasion, complain that I favor some sort of central planning.  I’ve always found this claim to be rather bizarre, but haven’t been able to rebut it in a persuasive fashion.  If we talk about targeting 1/NGDP, then it will become clearer that all I want the Fed to do is stabilize the value of money.  Since they have a monopoly on the production of base money, is it really that unreasonable (even from a libertarian perspective) to ask them to at least try to stabilize the value of cash in terms of the share of NGDP that can be bought with each dollar?

This blog is about controlling the value of money, and letting the rest of the economy be determined by market forces.  I notice that critics of my blog often make the following claims:

1.  They claim the free market economy is so delicate and fragile that even the very small changes in the per capita money supply, or price level, or NGDP, during the 1920s somehow brought on major economic dislocation.

2.  Or, at the other extreme, they claim that even massive injections of money couldn’t possible be expected to create jobs.  Money just causes inflation, there are no real effects.

Oddly, many of my critics seem to hold both views at once.

And finally, you may wonder why I didn’t simply call the blog “Money Illusion,” which would sound more hip.  I seem to recall a scene in The Social Network where Justin Timberlake was discussing “The Facebook” with Zuckerberg.  Then he got up and left with a couple of starlets on his arms, and turned with one final piece of advice:  “By the way, drop the ‘the’, just Facebook.”

When I started out I tried to buy “MoneyIllusion,” but it cost $1800.  So then I checked “TheMoneyIllusion” and it was $12.  Keep in mind that I’m not as rich as either Timberlake or Zuckerberg.  If it had also been $1800, you’d be reading something like “TheseMoneyIllusions,” or God forbid “TheMoneyAllusion” (yes, I’m that cheap) so count your blessings.

PS.  This article discusses the actual origins of zero.  It was invented multiple times, and as usual not by the people who got credit (which were the Arabs.)  Interestingly, however, it appears to have been first invented in what is now an Arab country (Iraq.)  Didn’t the Iraqis also invent writing, law, money, literature, the calendar, and pretty much everything else?

PPS.  Ambrose Evans-Pritchard once called me the “eminence grise” of market monetarism.  I’m going to return the favor, calling him the poet laureate of market monetarism.

HT:  Lars Christensen


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66 Responses to “These money illusions”

  1. Gravatar of Cedric Cedric
    17. July 2012 at 11:11

    I love you identified the actor Timberlake and the character Zuckerberg in the same sentence. When you watch the movie, you don’t think about Jesse Eisenberg — you think about Zuckerberg. Not so with Timberlake.

    Bill Simmons made this point a year and half ago, writing: “That was my biggest issue with Justin Timberlake in “The Social Network” — I never felt as if he was anyone other than Justin Timberlake.”

    Scott proved Bill right, even if he didn’t mean to.
    http://sports.espn.go.com/espn/page2/story?page=simmonsnfl2010/week16picks

  2. Gravatar of Negation of Ideology Negation of Ideology
    17. July 2012 at 11:33

    I like “TheMoneyIllusion” better than “MoneyIllusion” because that was the title of Fisher’s book, so I think you made the right choice – not even counting the $1788 in savings.

    I also prefer to think of the goal as to “stabilize the value of cash in terms of the share of NGDP that can be bought with each dollar”. The dollar is just defined as one unit of GDP.

    It reminds me of the board game “Axis & Allies” – the money you used to buy tanks, bombers, etc., was Industrial Production Certificates, based on the GDP (or was it GNP) of each warring nation. Even as a kid playing that game, having taken no economics courses, it made perfect sense to me. Maybe you could use that board game to teach market monetarism.

  3. Gravatar of John hall John hall
    17. July 2012 at 12:00

    *The people who are now called Iraqis.

    @Negation of Ideology – I loved Axis and Allies and I recall a few years back that Greg Mankiw or somebody had linked to an economics simulator that allowed one to adjust monetary and fiscal policy in an effort to teach mainstream macro.

  4. Gravatar of Rademaker Rademaker
    17. July 2012 at 12:43

    The fact that debts are denominated in fixed nominal terms makes nominal changes in wages very much a real thing to wage earners with mortgages. I don’t think the people in your first example were irrational at all.

    The whole notion of “money illusion” becomes suspect when debt dynamics are taken in account.

  5. Gravatar of dwb dwb
    17. July 2012 at 12:48

    this post and the previous one were excellent. glad those squirrels in your imac have not slowed it down one bit. Actually i hear Apple is coming out with a new gadget that plugs directly into the cerebellum. talk about a twitter feed!

  6. Gravatar of DWAnderson DWAnderson
    17. July 2012 at 13:54

    This post brought to the fore, something I have been thinking about for a while: Do you think the money illusion always takes the same form, i.e. are people always likely to confuse real and nomial prices in the same way all the time?

    I suspect not, which is why I have suspicions about the ability to fine tune monetary policy. I’m not sure there are great alternatives, but that’s why I am skeptical of the power of monetary policy to reliably achieve desired effects (e.g. without overshooting or undershooting and creating worse problems). Upon reflection, that also leads me to be somewhat forgiving of current monetary policy.

  7. Gravatar of Aidan Aidan
    17. July 2012 at 14:04

    As someone who hasn’t followed the career of Ambrose Evans-Pritchard, I am genuinely curious as to when he turned from Vince Foster/Oklahoma City bombing conspiracy nut to reasonable voice on monetary policy. Any ideas?

  8. Gravatar of Aidan Aidan
    17. July 2012 at 14:04

    As someone who hasn’t followed the career of Ambrose Evans-Pritchard, I am genuinely curious as to when he turned from Vince Foster/Oklahoma City bombing conspiracy nut to reasonable voice on monetary policy. Any ideas?

  9. Gravatar of EconStudent EconStudent
    17. July 2012 at 15:01

    Dr Sumner, I enjoy your blog but have a question which has confused me for quite sometime. I’ve always assumed that when you say economists confuse tight money with easy money that what you (and Friedman) actually mean(t) is that today’s circumstances were caused by policy that wasn’t accommodating enough during the Greenspan-era, and not so much that today’s policy is tight (ie: low rates by the Fed are a product of “fixing” previous gaffs in policy). Am I wrong in this assumption?

  10. Gravatar of Morgan Warstler Morgan Warstler
    17. July 2012 at 15:04

    Euroblock looking better all the time:

    http://www.telegraph.co.uk/news/worldnews/europe/france/9404209/Frances-proposed-tax-hikes-spark-exodus-of-wealthy.html

    First England learns higher taxes lead to less revenue, and now France sees the rich and pick up and go.

    These are the hard lessons that the Europeans have to come to terms with.

  11. Gravatar of John Thacker John Thacker
    17. July 2012 at 15:11

    Since they have a monopoly on the production of base money, is it really that unreasonable (even from a libertarian perspective) to ask them to at least try to stabilize the value of cash in terms of the share of NGDP that can be bought with each dollar?

    One problem is that, as you know, you say NGDP, but people hear “inflation.” (It makes matters worse because other commentators, including those with the right policy prescriptions also throw around “inflation.”)

    I struggle sometimes with getting people (including myself!) to distinguish between NGDP, money supply, and inflation. (I especially confuse M and MV = NGDP when speaking quickly.) I think of inflation as NGDP/money chasing goods.

    People have this tendency to think that if, e.g., the price of food doesn’t go up for 50 years, then the money supply hasn’t increased. But if a whole bunch of other things were invented and are being bought in the meantime, so that food is a smaller part of GDP and GDP includes things that didn’t even exist (i.e., RGDP growth), then the money supply must have increased. If there are more goods, then there must be more money chasing those goods for prices to stay the same. If NGDP doesn’t grow, then that means that some prices– and, importantly, some wages– would have to drop.

    People can adjust to different levels of expected NGDP growth. It’s possible to even imagine a society where people actually expected to pay their banks (in nominal terms) for the privilege of safeguarding their money and making it available easily, instead of getting a positive rate of return. However, I wouldn’t hold my breath, and the costs of trying to overcome that psychology seem too difficult.

  12. Gravatar of John Thacker John Thacker
    17. July 2012 at 15:14

    Aidan–

    In the case of Evans-Pritchard, he took a path that went through Euroscepticism, of both the EU and euro.

    It’s all probably temperamentally related with a willingness to challenge what he sees as the status quo and being attracted to outside theories. Not all outside theories are wrong; simply most of them.

  13. Gravatar of Benny Lava Benny Lava
    17. July 2012 at 15:56

    Interesting read. Also, on the topic of the zero and numbers, I often wonder if the advancement of the European Renaissance and ensuing prosperity of Western Europe wasn’t spurred by the importation of the zero and Arabic numerals.

    On the subject of ABC economics, I sometimes find a curious lack of faith in the markets by them. For example they will look at a spike in a particular commodity and blame it on inflation, fiat currency, etc. but not demand and supply. Curious.

    Quite right about the Money Illusion. So many people complain that inflation punishes savers. But don’t savers keep their money in interest bearing accounts or invest in assets that appreciate ahead of inflation?

    My biggest critique is that of purchasing power, and how difficult that can be to tally. One, we consume asymmetrically (health care and college vs phones and food). Second, if the basket of goods changes over time how do we make an apples to apples comparison?

  14. Gravatar of Pietro Poggi-Corradini Pietro Poggi-Corradini
    17. July 2012 at 16:04

    I worry that the very action of trying to stabilize the value of money on the part of the Fed accidentally destabilizes the value of money. Maybe they don’t have a monopoly on the production of base money, or it’s not a very linear one.

  15. Gravatar of JimP JimP
    17. July 2012 at 16:49

    I personally find this slow motion nightmare so horrid.

    One presumes a generation from now people will read this blog and wonder how Bernanke could do it – at least with a straight face.

    He sits before congress – says that monetary policy is not working – says that he believes there is more the fed could do – and therefore he declines to do it. Good lord.

  16. Gravatar of Bill Ellis Bill Ellis
    17. July 2012 at 17:06

    Scott Sumner…this is an excellent post…one of my faves..

    But…”which after all is a foreign concept borrowed from the Islamic world”

    Seriously ? Zero confuses folks and makes them uncomfortable because it is Islamic ? Dude.
    Or even that western and Islamic culture are so different that westerners still have a problem with it after 2000 years ?
    Dude !
    Not to mention that zero is pre Islamic…DUDE !

  17. Gravatar of ssumner ssumner
    17. July 2012 at 17:51

    Cedric, It’s even weirder than you think. When I saw the movie I had no idea who either the actor or the character was. Then I read a review saying it was Timberlake, and I vaguely recalled that he was a famous pop star, but didn’t know what he looks alike. I had no idea who the tech guy was. I don’t follow tech or pop music, so I mentioned Timberlake because it was the only name I could recall, but when I saw the film I didn’t even now that.

    I thought he did a good job acting. I didn’t like the performance of the Zuckerberg character. It seemed like a caricature. Everyone smiles once and a while.

    Negation, I wish I’d played that game when I was young.

    John, I stand corrected.

    Rademaker, People mention that argument all the time, but it’s wrong. Debt is only a part of expenditure, and thus zero should not be the decisive number. In any case, debt is a sunk cost, so it really doesn’t even affect the optimal wage negotiating strategy.

    dwb, Thanks, But I’m mostly relying on my PC at work, and still haven’t figured out the iMac. Where is stuff like “snipping tool” and “notepad?”

    DW. No, money illusion doesn’t always take the same form, but it doesn’t make me at all forgiving of monetary policy.

    Aidan, I have no idea.

    EconStudent, No, I think policy was about right under Greenspan, and became way too contractionary in the second half off 2008.

    Morgan, The French will figure it out eventually.

    John Thacker. Some people just don’t think. Consider Woolsey’s 3% NGDP proposal. What would inflation average over the next 50 years if NGDP growth averaged 3%?

    Benny, They also forget that a weak economy leads to lower real interest rates on their saving accounts.

    Good point about ABC theory.

    Pietro, Why don’t they have a monopoly?

    JimP, I feel your pain.

    Bill, I have a strange sense of humor–that was supposed to be a joke. But thanks for the kind words about my post.

  18. Gravatar of Bill Kelly Bill Kelly
    17. July 2012 at 18:32

    Scott,
    Thank you very much for this post. In a previous posting, I wanted to know what money illusion was, and this is a very good answer. I have read the first chapter of Fisher’s book on the subject, and found it good reading. If you have time, I would appreciate a list of classic economics books that you think everyone should read. I think you will find many people are reading your (and other) economics blogs to try to understand what is going on in the US and Europe now.

  19. Gravatar of Lorenzo from Oz Lorenzo from Oz
    17. July 2012 at 18:42

    I still recall when we got no pay increase back in 2009, a year of minus 1% inflation. My colleagues at Bentley greeted the anouncement very differently from when we got a 4% increase during a year of 3% inflation. I see money illusion everywhere I look, so I didn’t need much convincing.
    But the two are different: the second makes it easier to pay previously incurred obligations, not all of which will rise due to inflation.

  20. Gravatar of Pietro Poggi-Corradini Pietro Poggi-Corradini
    17. July 2012 at 19:27

    I don’t know much monetary theory (sorry if i’m wasting everybody’s time), but take the period of exuberance when people were taking equity out of the rising value of their homes and over-leveraged banks were ready to help them do that, then follow that with the current situation where everyone is spooked. Money may not play that a big a role in either case.

  21. Gravatar of Don Geddis Don Geddis
    17. July 2012 at 19:52

    Sumner said: “all I want the Fed to do is stabilize … the value of cash in terms of the share of NGDP that can be bought with each dollar

    But you don’t really mean “stabilize” exactly. There needs to be an additional piece to your argument (probably something about sticky wages), about why you shoot for 2-3% inflation, instead of 0% inflation. This is why the Austrians are so upset: central bankers keep saying “stabilize the value of money”, but they really mean ~2% inflation. The Austrians want 0% inflation.

  22. Gravatar of Greg Ransom Greg Ransom
    17. July 2012 at 20:07

    Who makes this argument? If you can’t name anyone, then I assume no one actually makes this argument / claim. If you can name the person, tell us just where you find the argument made.

    Scott writes,

    “They claim the free market economy is so delicate and fragile that even the very small changes in the per capita money supply, or price level, or NGDP, during the 1920s somehow brought on major economic dislocation.”

  23. Gravatar of Jim Glass Jim Glass
    17. July 2012 at 21:23

    Money illusion ongoing in practice, driving the median voter to oppose the Fed doing any more than it has to help the economy (just things noticed in the last couple days)…

    [] At the New York Historical Society, a very respectable institution, a very reputable panel discusses the merits of the gold standard and reasons why we should bring it back — notably all the recent dangerous money printing, inevitable future inflation with fiat money, etc.

    This is before two audiences, both at the NYHS and on C-SPAN, that while maybe not large are of above-average education, status and influence.

    http://www.c-span.org/Events/History-of-the-Gold-Standard/10737431932/

    [] Ongoing at Reddit.com/r/economics you can find a good part of the youth of the world — average age 22, in college or just graduated — similarly going on and on about how deflation is good as it helps average people (starting with them) buy more with their money (e.g.: the way the cost of their electronic equipment always goes down), while higher inflation only bails out the bankers, etc., any inflation is too much, and so on. Our future leaders.

    I won’t bother to link anything. Take my word. :-)

    [] Following up on W/NGDP I looked via FRED at wages minus hourly wages. If sticky wages are a mechanism of recession then during normal times total wages will rise at a faster rate than than wages/hr and during recessions it will be the reverse — in fact, wages/hr may *rise* even as employment falls. Indeed it is exactly so.

    More precisely, total compensation percent increase year-over-year minus the same for hourly compensation always gives >0 except for <0 during (and very dang near only during) every recession.

    http://research.stlouisfed.org/fredgraph.png?g=8Q2

    Plus another view of the data. It’s very hard for me doubt the “sticky wages” mechanism after seeing these — with average hourly compensation *increasing* even from 2008-on as employment plunged historically.

    The connection: With 90% of workers employed even when unemployment is at 10%, the numbers indicate the median voter is secure and getting his annual wage *increase* even in a Great Recession.

    The MV theorem basically says government delivers what the median voter wants. The median voter doesn’t want a job or wage increases, he’s already got those. (His kids in college are equally well off.) The median voter wants protection against losing what he’s got.

    Thus the median voter is insensitive to the arguments for monetary stimulus (via QE, NGDP targeting, whatever) and very sensitive to arguments alleging risks of stimulus that could harm him. This creates both demand for such arguments — such as the presentation at the NYHS, Kudlow on Fox always proclaiming “A strong dollar first for a strong economy”, etc. — and a bias towards believing them.

    So money illusion has persuaded the median voter to oppose further monetary stimulus. And as per the theorem, government — Obama, Congress, the Fed — is providing what the median voter wants.

    In short, democracy is working. There’s nothing more to it, and nothing more that can be done about it. If money really is neutral in the long run, the economy will be back to where it should be in another five or eight years.

  24. Gravatar of Benjamin Cole Benjamin Cole
    17. July 2012 at 21:45

    Excellent posts of late by Scott Sumner.

    I hope Ben Bernanke is reading.

  25. Gravatar of Jim Glass Jim Glass
    17. July 2012 at 22:09

    This is why the Austrians are so upset: central bankers keep saying “stabilize the value of money”, but they really mean ~2% inflation. The Austrians want 0% inflation.

    How many more million people unemployed for how long (with corresponding loss of GDP and national wealth) is an acceptable number for driving inflation expectations down to 0%?

    What is the quantifiable benefit to the economy from 0% inflation expectations that will more than offset that cost?

  26. Gravatar of Rajat Rajat
    17. July 2012 at 22:12

    An interesting thing about reading this blog is the contrast to the New Classical macro I studied as an undergrad. In particular, I remember reading about the Lucas supply curve, in which only unanticipated monetary shocks could have real effects. So the central bank could only have real effects by quietly increasing or decreasing the money supply without telling anyone. By contrast, TheMoneyIllusion’s market monetarism seems to stand for the proposition that monetary policy will only have real effects where the central bank is out, loud and proud. I find this quite ironic.

  27. Gravatar of mbk mbk
    17. July 2012 at 23:01

    Scott, this was a very necessary and pointed post. It makes a lot more intuitive sense to think about 1/NGDP in terms of dollar value, than NGDP.

    There are definitely many forms of money illusion and believe it or not, they can work in the opposite sense too. As you know I live in a parallel universe from the US and I am often baffled. The world that I experience is very different from what I read about in blogs, yours included. Example, my per-class teaching honoraries have not increased one iota since 2007 and inflation runs a good 5% p.a. in Singapore. So here ye go, upward wage stickiness. Lucky there is money illusion to keep me happy! In 2007 these honoraries were actually cut 30% from what they had been before. So here ye go, no downward wage stickiness either. And my institution wasn’t the only one in recent memory. As to price of renting money vs 1/P, I see your point but I do think the price of renting out your money is very important for perceptions of value. Saving at 0.25% p.a. is very hard to explain to my 7 year old – I just can’t get the very concept of interest across to him. 25 cents for 100 dollars and you have to wait a year for it? Why on Earth would anybody want to save? The low rental value of money does degrade the perception of its value. And think about real estate. Rental costs move in lockstep with property valuations, at least in Singapore. And so on. So I am not quite so sure if the various illusions, and stickinesses, work the same way everywhere.

    But nonetheless – a very concise and timely post.

  28. Gravatar of Full Employment Hawk Full Employment Hawk
    17. July 2012 at 23:53

    “How many more million people unemployed for how long (with corresponding loss of GDP and national wealth) is an acceptable number for driving inflation expectations down to 0%?”

    Austrians are willing and eager to sacrifice working people on the alter of their false god.

  29. Gravatar of Full Employment Hawk Full Employment Hawk
    17. July 2012 at 23:57

    “He sits before congress – says that monetary policy is not working – says that he believes there is more the fed could do – and therefore he declines to do it. Good lord.”

    He is waiting for Romney to be elected before acting. He clearly does not want to do anything to help Obama.

  30. Gravatar of Full Employment Hawk Full Employment Hawk
    18. July 2012 at 00:02

    “the Lucas supply curve”

    This curve is based on the assumption that prices are not only perfectly flexible, but that all prices change simultaneously, an assumption that is totally counterfactual.

    Market monetarism is consistent with David Hume’s recognition that not only do prices only adjust slowly, but that the adjustment is sequential, with different prices changing at different time.

  31. Gravatar of Saturos Saturos
    18. July 2012 at 02:56

    Scott, you really need to turn this blog into a book. A “blook”, as they say. (I know which posts should be included. Then again, I’ve only read maybe 50% of the site.)

  32. Gravatar of Saturos Saturos
    18. July 2012 at 02:56

    If only he was aiming for 4% [NGDP per capita] growth:
    http://www.nytimes.com/2012/07/15/us/bush-presenting-book-of-economic-proposals.html

  33. Gravatar of John Phipps John Phipps
    18. July 2012 at 04:00

    Your first example contains what I feel is another illusion: if the CPI is 4%, your 5% raise is only 1%. Inflation rates are individual, but hard to calculate individually.

    So if I were not in the housing market or putting a kid through college or coughing up (pun intended) for medical care, MY inflation rate could be much lower. Ditto for driving less or buying low-inflation products.

    Of course, economists must work with macro numbers, but the illusion my wealth just took an exact CPI or CPE reduction in value is becoming more unhelpful as consumption patterns diverge.

    It would useful to create some sample citizens, populate their consumption lists, and provide an inflation table, rather than a blanket number we all imagine we are subject to, IMHO.

  34. Gravatar of John John
    18. July 2012 at 04:36

    Question for those Fed watchers out there: Isn’t Operation Twist essentially a tightening program? I’ve learned that lower short-term rates relative to long-term rates indicates an easing stance while an inverse yield curve represents tightening. Therefore, wouldn’t an attempt to flatten the yield curve be moving closer to a tightening scenario. It makes it less profitable for banks to borrow short and lend long.

  35. Gravatar of Y.Alekseyev Y.Alekseyev
    18. July 2012 at 06:04

    I am not at all familiar with Chris Sims’ work, but methinks this is worth a blog post in response. http://www.frbatlanta.org/news/conferences/12zero_degrees_sims_transcript.cfm

    “Over the course of about 10 years, things that I did and other people followed up on managed to sort out what the effects of monetary policy changes are and distinguish those from co-movements in money and prices and income that didn’t have anything to do with policy. There’s now pretty much a consensus on how monetary policy affects the economy, and on what the size of that effect is. The general conclusion is that it accounts for maybe somewhere between zero and 20 or 25 percent of the fluctuations we see, but if you try to trace out historically, [!!!] you can’t blame any recession on monetary policy [!!!].”

    Unfortunately, I do not precisely know how to interpret this. Does he mean that monetary policy has not had any real effects? Or does he mean that monetary policy is also ineffective for the nominal economy?

    More complicated still: is it just an observation of an historical fact – which could be because monetary policy has been conducted badly, for example – or should we take any prescriptive lessons from this? I do not know. But it seems to me that while theories are all nice, testing them out in the real (or nominal – heh) world is of value. If there is an econometric study out there that has won some people a Nobel, and that study says that the Fed is relatively powerless, I’d like to know what that means to a leading proponent of the opposite theory.

  36. Gravatar of johnleemk johnleemk
    18. July 2012 at 06:13

    Rajat,

    Interesting that that’s what you took away from the Lucas critique. In my macro classes the Lucas critique wasn’t presented as a hard-and-fast “anything policy tries to do about macro will always be circumvented” and more “this is something to keep in mind when analysing the effects of policy” — and most if not all the examples of the Lucas critique which we dealt with focused on fiscal, not monetary, policy. My takeaway always was that money illusion meant that monetary policy would still have real effects.

    mbk,

    As someone who grew up in Singapore/Malaysia you’ve made me think that that might have something to do with how I see the world. One of the things which struck me upon entering the workforce in the West was how people feel entitled to all sorts of things, including pay raises, which aren’t seen as entitlements where I come from. (Another example of Western entitlement is privacy: my father is still shocked that my American employer doesn’t monitor the timestamps for when I’ve badged into the office to make sure I’m coming in to work on time — and I’m salaried, not paid by the hour.) In Malaysia, my home country, nominal wages for, say, entry-level engineers have certainly not kept pace with inflation; my father’s impression is that nominal wages have actually been stagnant since he entered the work force a few decades ago.

    In economics we tend to dismiss cultural explanations as not useful to our analyses. I still think that money illusion exists — from a purely Bayesian perspective I haven’t seen enough comprehensive evidence to challenge this null — but I wouldn’t dispute that you might be right. I don’t know whether the cultural variables you put out there are meaningful enough to enter into quantitative economic analyses, but when speaking qualitatively, as all social scientists must do at some point, they are difficult to ignore.

  37. Gravatar of John Thacker John Thacker
    18. July 2012 at 06:27

    Your first example contains what I feel is another illusion: if the CPI is 4%, your 5% raise is only 1%. Inflation rates are individual, but hard to calculate individually.

    This is certainly true, but, mutatis mutandis, the same relationship holds for 0% raises in a time of 1% deflation.

  38. Gravatar of John Thacker John Thacker
    18. July 2012 at 06:28

    He is waiting for Romney to be elected before acting. He clearly does not want to do anything to help Obama.

    Except that by this same argument, he wanted to help Obama get elected in 2008. I think it’s much easier to simply note that the opinion of economists, much less the average public, is against him in surveys.

  39. Gravatar of John Thacker John Thacker
    18. July 2012 at 06:31

    But the two are different: the second makes it easier to pay previously incurred obligations, not all of which will rise due to inflation.

    An excellent point. This suggests that people who want a better Fed policy should, as a first step, stop having the Federal government subsidize the existence of the 30 year fixed mortgage. It doesn’t exist in other countries, and it wouldn’t exist here without federal intervention.

  40. Gravatar of W. Peden W. Peden
    18. July 2012 at 06:39

    John Hall,

    Here’s the link to Mankiw’s (often intentionally hilarious) game-

    http://bcs.worthpublishers.com/mankiw6/pages/bcs-main.asp?v=category&s=00070&n=99000&i=99070.01&o=|00510|00520|00530|00540|00560|00010|00020|00030|00040|00050|00060|00070|00080|00090|00110|01000|02000|03000|04000|05000|06000|07000|08000|09000|10000|11000|12000|13000|14000|15000|16000|17000|18000|19000|20000|99000|

    The optimal strategy is apparentely to fire up the budgetary surplus (having initially offset the deflationary effect with money supply growth) and then vary the money supply to keep the output gap close to zero; a cheeky firing up of output above the natural rate can also help. Fortunately, unlike the real world, there aren’t any major problems in getting the output gap right. Getting over 100 and beating Kennedy/Johnson then becomes fairly easy. It’s also fun to try other things e.g. freezing the monetary base and using only fiscal policy. Unlike, say, Economica, Mankiw’s game allows for unconventional policies at 0% nominal interest rates, so one doesn’t have to worry about low inflation or even running a Selginite productivity norm-type deflationary policy.

    With Microsoft Excel, creating these kinds of economics games is actually surprisingly easy: some textbook equations, a historical or randomised dataset, and some cells for exogenous variables does the trick. The only limitation is that there are no fun graphics with Excel, but there are plenty of more fiddling dedicated games-making programs.

  41. Gravatar of W. Peden W. Peden
    18. July 2012 at 06:59

    A better link- http://bcs.worthpublishers.com/mankiw6/

  42. Gravatar of Bob Bob
    18. July 2012 at 06:59

    “These two forms of money illusion have some interesting parallels. In both cases the problem becomes much more severe at the zero rate bound. For psychological reasons that are quite frankly irrational, both workers and central banks behave bizarrely at the zero bound. Workers start being much more resistent to wage cuts necessary to restore labor market equilibrium. And central banks become much more resistent to monetary policy steps needed to keep NGDP on track.”

    Bizarre? Irrational? Since when did being resistent to wage cuts become irrational? Joe-Shmoe doesn’t base his financial future on some frictionless, equilibrium model of the economy. Hence the downard rigidity to wage cuts and nominal price stickiness in a zero-lower bound environment.

    And how is the central bank behaving irrationally and bizarrely? The Bernanke Fed has shown itself to be aggressive in implementing unconventional, untested easing policies in order to support NGDP. We would be in a much worse situation now if not for their dramatic policies.

    That being said, you prove that you are the one who is disillusioned concerning the Fed and monetary policy.

    “Since they have a monopoly on the production of base money, is it really that unreasonable (even from a libertarian perspective) to ask them to at least try to stabilize the value of cash in terms of the share of NGDP that can be bought with each dollar?”

    Yes, the Fed has a monopoloy on production of base money. But at the zero-lower bound this is irrelevent. The massive increase in base money has done nothing. It just sits on the books as excess reserves and does not enter the banking system. The reason for this is the zero-lower bound constraint. The natural rate of interest required for the banking system to reach equilibrium and for those reserves to be pushed into the system is negative, yet obviously we can’t go there in nominal terms.

    We’re talking about the wrong things here. Bernanke himself has said that the Fed’s large-scale asset purchases are not textbook, academic rounds of quantitative easing, but rather “credit easing.” Quantitative easing is concerned with the liability side of the central bank’s balance sheet (forcing reserves into the banking system). The Fed’s “credit easing” is concerned with the asset side; hence, the purchases of MBS during “QE1″ which stabilized the mortgage market and eased credit there, and “QE2″ which removed $600Bn of save-haven assets from the market, lowered spreads on risk-assets, and reduced the government’s debt-service burden (interest earned on securities owned by the Fed is remitted to the treasury).

    Moreover, the financial system is now so complex that at the zero-lower bound, the lines between credit and money begin to blur. The Fed is responsible for something like only 15% of the total broad money-credit aggregate. The rest of money creation rests in the private shadow banking markets. While the Fed can indirectly ease shadown banking conditions via lowering long-term rates which translate to easier ABS, repo, and CP markets, it by no means has a “monopoly” by which it can be expected to have the power to stabilize NGDP by itself.

    As Bernanke has said all along, “Monetary policy is not a panacea.” It comes with costs and risks. While many support “QE3″ right now, it is unlikely it would have much of a benefit relative to the costs. The S&P is already trading near multi-year highs even in the face of terrible economic data. Risk premiums, treasury yields, and volatility are extremely low (the Vix had a 15 handle today!). “QE3″ might help support the market for now, but it’s unlikely it would squeeze out much of a further rally. On the cost side, the Fed has already purchased a ton of treasuries. Buying more might reduce the supply to the point that the market thins and becomes dislocated. If the world’s go-to, risk-free market were to experience problems, all bets are off on what might happen. Is it really worth that risk in order to squeeze out a few more points on the S&P? I think not. And I doubt Bernanke does either. “QE3″ will likely ultimately arrive. But only when market conditions deteriorate enough such that it would actually benefit asset prices and protect household wealth from deflation.

  43. Gravatar of Major_Freedom Major_Freedom
    18. July 2012 at 07:10

    4. There is a 4th Money Illusion. This is the illusion that Market Monetarists, Monetarists, Keynesians and Central Bankers have in their belief that a small group of arm-chair technocrats can have the intellectual wherewithal to know what the entire nation’s money, interest rates, and spending ought to be. Reality:: No individual can know such a thing.

    ———————-

    I’ve often seen commenters, particularly those of the Austrian persuasion, complain that I favor some sort of central planning. I’ve always found this claim to be rather bizarre, but haven’t been able to rebut it in a persuasive fashion. If we talk about targeting 1/NGDP, then it will become clearer that all I want the Fed to do is stabilize the value of money. Since they have a monopoly on the production of base money, is it really that unreasonable (even from a libertarian perspective) to ask them to at least try to stabilize the value of cash in terms of the share of NGDP that can be bought with each dollar?

    You never will, as long as you keep demanding the Fed inflate and deflate according to non-market, central planner rules.

    Without provocation or solicitation, you advise the monopolist on what they ought to do, and while doing so, you quite often attack the gold standard as inferior to centrally planned fiat money, you ridicule free market in money supporters as “ideologues”, and now, you say you find it “rather bizarre” that those who can smell central planning a mile away and who are the targets of your attacks, would dare point out the blatantly obvious truth that you do in fact favor “some type of” central planning when it comes to money, spending, and thus interest rates? Can we be a little more frank and a little more honest?

    Calling for a centrally planned gradual devaluation of the purchasing power of money spending, is still calling for a central plan. That makes you a central planning supporter. “All you want to do” is have central planners controlling the purchasing power of money spending according to your own rule. Ergo, “all you want to do” is have a small group of people overrule the market and impose central planning in money, spending, and thus interest rates.

    I don’t buy the defense of your followers when they say things like “We all favor a free market in money, but given the Fed isn’t going away anytime soon, this is what we say they ought to do.” The reason I don’t buy your follower’s defense, and you’re own similar defense, is that I see nobody talking about, defending, analyzing, and promoting a free market in money. Nobody. And every time the subject comes up, it’s patronize MF time. There is also no discussion on how a free market in money is superior to central bank NGDP targeting (this follows if everyone truly thinks a free market in money is superior to central bank NGDP targeting).

    For if you all really did favor a free market in money, then you would be upfront about it, show what I am the only one at least attempting to show, and discuss the weaknesses of NGDP targeting as it stands against a free market in money. I mean REAL weaknesses, not just discussions of weaknesses that are really thinly veiled defenses like “Well golly gee there might be some occasions here and there when there is slightly more volatility, but overall it is more or less long term stable. It is far, far, far superior to what we have now! You have to give us that!”

    ———————

    As for the desire to have the central bank gradually devalue the purchasing power of money according to the annual rule: NGDP(1) = 1/[NGDP(0)*1.05]…

    First, it is light years away from libertarianism. “Stability” is simply not a characteristic of freedom. Freedom is dynamic, “messy”, and volatile. Yet out of this dynamism, out of this messiness, out of this volatility, order is bred out of chaos. Most importantly, this order cannot be duplicated by central economic planners, for the order is brought about by price signals that are borne out of the market process itself. This cannot occur, or at least is severely hampered, if there is an introduction of non-market activity, and this especially includes non-market institutions like central banks.

    The main error that economists have been making since the birth of the science, is to observe the order in the market and then mistakenly believe it can be made more order-like if it was just managed from above, like parental guardians watching a chaotic playground from above. It’s the philosophic contradictions that have corrupted schools and has lead to you believing NGDP targeting to be the final solution.

    While I won’t get into too much detail here, the very idea of “stability” is an outgrowth of the destabilization created by central banks themselves. Wanting stability is therefore understandable, but the idea of stability itself, that is a problem. Stability is foreign to human life. In fact, it is contradictory. Seeking stability is seeking to change the prevailing state of affairs to make it more suitable for further action. But the further action is itself destabilizing, since action is a ceaseless drive to change the prevailing state to make it more suitable. Seeking to IMPOSE “stability” is an attempt at creating square circles.

    “But what about Australia!?” Yes, the central bank there has imposed stability in certain statistics. But what is going completely unnoticed, which is why I brought it up, but the contradictory attempt to create stability in the market by controlling spending has the mirror effect of destabilizing the money supply, specifically, the money supply growth accelerates. The responses from people on this blog to this phenomena has been truly remarkable to behold. Those partial to market monetarism have actually denied this is a problem. That we can just keep adding more and more zeroes at an ever increasing rate, and then, periodically, when there are too many zeroes, the central bank can just lop off a few zeroes and rename the currency. Maybe I am the only one who can see that this is no solution, because even if this is done, we would still be in an accelerating money supply growth, which means even the renaming events would accelerate as well.

    This process, contrary to market monetarists believing it to be just a snag in the central planning, is actually the market process “expunging” the fiat currency from “the system.” As humans never cease acting, never cease bringing about change, they are learning and adapting to the central planned money, and each dose of equal sized money, has a reduced effect to bring about the real changes necessary to maintain “spending” as before. So while the market puts more and more pressure to reduce NGDP, as NGDP is foreign to the market, the central bank has to reassert itself and increase the rate of M, so as to reverse the outcome and attain its desired spending.

    Central bank goals are not free market individual goals.

    ———————-

    This blog is about controlling the value of money, and letting the rest of the economy be determined by market forces. I notice that critics of my blog often make the following claims:

    1. They claim the free market economy is so delicate and fragile that even the very small changes in the per capita money supply, or price level, or NGDP, during the 1920s somehow brought on major economic dislocation.

    2. Or, at the other extreme, they claim that even massive injections of money couldn’t possible be expected to create jobs. Money just causes inflation, there are no real effects.

    Oddly, many of my critics seem to hold both views at once.

    I don’t hold the second view, so you’re not talking about me. The ABCT presupposes that inflation has real effects. Inflation affects the real capital structure of the economy over time, which is where the problems of inflation are manifested.

  44. Gravatar of Morgan Warstler Morgan Warstler
    18. July 2012 at 08:27

    Jim Glass says nicely what I say constantly…

    “The connection: With 90% of workers employed even when unemployment is at 10%, the numbers indicate the median voter is secure and getting his annual wage *increase* even in a Great Recession.

    The MV theorem basically says government delivers what the median voter wants. The median voter doesn’t want a job or wage increases, he’s already got those. (His kids in college are equally well off.) The median voter wants protection against losing what he’s got.

    Thus the median voter is insensitive to the arguments for monetary stimulus (via QE, NGDP targeting, whatever) and very sensitive to arguments alleging risks of stimulus that could harm him. This creates both demand for such arguments — such as the presentation at the NYHS, Kudlow on Fox always proclaiming “A strong dollar first for a strong economy”, etc. — and a bias towards believing them.

    So money illusion has persuaded the median voter to oppose further monetary stimulus. And as per the theorem, government — Obama, Congress, the Fed — is providing what the median voter wants.

    In short, democracy is working. There’s nothing more to it, and nothing more that can be done about it. If money really is neutral in the long run, the economy will be back to where it should be in another five or eight years.”

    This is the HEGEMONY.

    And and I keep saying, what they want is not just “no printing” what they really want is “less government” and what that means is “the same services for less money”

    And THAT IS DOABLE.

    AND NGDPLT will DELIVER that.

    but Scott refuses to appeal directly to the hegemony – instead he makes a goofy round about argument that the economy will grow faster and that is good for the hegemony.

    but that is a losing argument, and we all KNOW IT.

    Why do we know it?????

    Because it hasn’t been working for 4 years!

    What is WRONG with MM and Scott Sumner???

    Why not drop the shitty arguments you make, and put the meat in the window!

    Tell people that NGDPLT will force the government to become more productive and deliver the same services for less taxes.

    TELL THEM that you have a way to hack the government into behaving like a private corporation desperate to cut employee costs.

    *crickets*

    Your intransigence on changing your messaging to achieve what you claim to want speaks volumes about the very thing you are chiding the Fed for.

  45. Gravatar of Saturos Saturos
    18. July 2012 at 10:49

    “Most importantly, this order cannot be duplicated by central economic planners, for the order is brought about by price signals that are borne out of the market process itself. This cannot occur, or at least is severely hampered, if there is an introduction of non-market activity, and this especially includes non-market institutions like central banks.”

    So your counterargument to Scott is basically that any institution systematically “intervening” in the market (even just to set the standard of value, or the means of transaction) will lead to its ruin (so it is fragile). So how do you explain that we have had central planning of the legal strucure at all times, and yet you’ve never blamed that for recessions or misallocations? Hayek was not opposed to government activities so long as they were rule-bound. He certainly didn’t have an argument for how passive, non-discretionary, rule-bound ex-ante predictable government actions could lead to repeated recessions. You can fool all the people some of the time…

  46. Gravatar of Saturos Saturos
    18. July 2012 at 11:27

    Cedric, don’t worry, Eisenberg will end up just as overexposed as Timberlake – due to the very acting talent you indicated.

  47. Gravatar of ssumner ssumner
    18. July 2012 at 11:35

    Bill, I have a list over at FAQs.

    Lorenzo, I find it applies to net creditors as well, even though they should have the opposite bias from net debtors.

    Pietro, Start with the FAQs in the right column.

    Don, First of all I give no thought to what the Austrians and MMTers want when I discuss monetary policy. I focus on mainstream macroeconomists. Second, I’d greatly prefer Woolsey’s 3% NGDP target path to the current policy, as long as its level targeting.

    Greg, I did a post on the 1920s once, and dozens of Austrian commenters made that argument.

    Jim Glass, I certainly agree there’s a lot of money illusion out there. But the average voters has no idea what monetary policy is. I’d guess less than 10% know what it is. They also define inflation in a very different way from Bernanke. So there is no such thing as “public opinion” when it comes to monetary policy. I’m not even sure most economists know what it is. An expansionary policy would be popular, in my view.

    We can’t blame voters, PhD macroeconomists caused the Great Recession.

    Thanks Ben.

    Rajat. It’s actually more similar than you think. I think it’s mostly unanticipated money that has real effects. Policy that wasn’t anticipated when contracts were signed. However I do assume some irrationality near zero, unlike Lucas.

    mbk, Thanks.

    Saturos. I’d have time to turn this into a book if I didn’t spend so much time answering comments.

    John Phipps, I know that, but it doesn’t explain the mystique of zero.

    John. Only if successful! That’s a joke with a grain of truth.

    Alekseyev, I addressed that in another post. I’d love to hear his explanation–it seems a bizarre claim.

    John Thacker, I agree with all three comments.

    W. Peden, Thanks for the link.

    Bob. Workers should care about real wages, not nominal wages. If they cared about real wages, then the zero percent nominal wage gain point would be nothing special.

  48. Gravatar of Major_Freedom Major_Freedom
    18. July 2012 at 12:50

    Saturos:

    So your counterargument to Scott

    Well, actually Scott is countering the free market, but anyway…

    is basically that any institution systematically “intervening” in the market (even just to set the standard of value, or the means of transaction) will lead to its ruin (so it is fragile).

    “Just” to set the standard of value? It is precisely such actions that are so ruinous to the market. You just don’t appreciate the effects of monetary policy on the market. You believe a central planner “setting the standard of value” of money is so innocuous, so minor, such a small intervention.

    So how do you explain that we have had central planning of the legal strucure at all times, and yet you’ve never blamed that for recessions or misallocations?

    What are you talking about? It is precisely the central planning of the “legal structure” that is the reason why we have a central bank with legal monopoly privilege, which is the reason why we have the business cycle. Of COURSE the “legal structure” has to change. This is why I have suggested a free market in money production. That implicitly calls for a change to the “legal structure.”

    Hayek was not opposed to government activities so long as they were rule-bound.

    So you think Hayek would have been OK with fascism and communism as long as they are rule-bound? I think you are misreading Hayek.

    He certainly didn’t have an argument for how passive, non-discretionary, rule-bound ex-ante predictable government actions could lead to repeated recessions. You can fool all the people some of the time…

    NGDP targeting is not passive. It is active. The Fed has to do something. The state’s SWAT teams have to do something to ensure monopoly. The people have to do something, namely continue to pay taxes in said monopoly currency so that NGDP targeting of said monopoly currency can continue. Market monetarist political strategists have to do something. They have to convince the people central bank NGDP targeting is to their interests, and that if they don’t agree, then they’re stupid. Philosophers of science have to do something. They have to convince the people that their actions are no different than the behavior of atoms, in that they act according to constant operative causes, and so can be centrally planned. Ethicists have to do something. They have to convince the people that violence against innocent people is justified. Investigative reporters have to do something. They have to turn a blind eye to what the state does with printed money that they can’t do with borrowed and taxed money alone.

    NGDP targeting is not non-discretionary. It is discretionary. Choosing 5% rather than 10% is discretionary. Choosing to create $100 billion instead of some other sum, so that the Fed can achieve the discretionary 5% NGDP growth target, is also discretionary.

    —————–

    Hayek was unfortunately too influenced by social democratic principles in his later life. I don’t hold him in a particularly high regard.

  49. Gravatar of Mike Stimpson Mike Stimpson
    18. July 2012 at 13:06

    Here’s the problem with 1/NGDP stability. It means that each dollar becomes worth, not a fixed basket of goods, but a fixed fraction of the national economy.

    Why is that a problem? Well, imagine that real GDP grows, for whatever reason – increased productivity, immigration, whatever. That means that each dollar, being worth a fixed fraction of national output, is worth more stuff. That is, 1/NGDP stability is deflationary.

    And real GDP growth is considered the normal state of affairs for a healthy economy. And deflation is considered very damaging.

    Somewhere in all this, something is badly wrong with your theory.

  50. Gravatar of Jim Glass Jim Glass
    18. July 2012 at 13:06

    the average voters has no idea what monetary policy is. I’d guess less than 10% know what it is. They also define inflation in a very different way from Bernanke.

    True enough.

    So there is no such thing as “public opinion” when it comes to monetary policy.

    But this doesn’t follow. Ignorance of a subject certainly doesn’t mean “no opinion” about it.

    Rather the opposite, the more ignorant of a subject one is the easier it is to have opinions about it that are strong, strident and self-righteous.

    See, oh, about a million internet discussions.

    The voting public has strong opinions about all kinds of things about which it is 97% ignorant. Do I need to make a list?

    An expansionary policy would be popular, in my view.

    And yet plainly it is *not* popular. That’s the problem.

  51. Gravatar of Razer Razer
    18. July 2012 at 13:25

    Scott,

    When a voter says he’s voting for the ‘lessor of two evils’, is he not in fact till voting for evil?

    So when you scratch your head as to why Libertarians/Austrians aren’t persuaded by your supposed belief in the free market and call you a central planner enthusiast or statist, you will know why. If you support free markets, how about proving it? You prove quite the opposite by calling for central planning in the area of money production and your unwavering support of central banking at every turn. Your only problem with central planning i they’re not acting upon your central plan, not the idea itself. Maybe us Libertarians just aren’t as easy to fool as you’d like.

  52. Gravatar of mbk mbk
    18. July 2012 at 16:35

    Johnleemk,

    interesting points. I am not even sure if the cultural habits mentioned are a function of country or rather, of generation. That is, people carry over habits from another era, in addition to their country’s culture. Example, the hereditary German fear of hyperinflation, which does not exist in countries that routinely devalued but never catastrophically, like Italy or France. Other example, Europeans of my parents’ age are used to complete income stability and strong entitlements, but Europeans of my age (40s and down) are used to wildly variable incomes and stints of contract work with little social protection. They also shake their heads over their parents’ expectation of security, something they never had.

    But here is the thing – whatever you call it – no one person except macroeconomists wants the exchange value of money for goods to change, because it makes budgeting more difficult. It may have macro advantages but it just doesn’t “sell”. In the early 2000′s in Singapore prices changed very little at all and it was easy to budget your life. Nowadays, you don’t know how much your rental increase is going to be and you can only hope that there will be a corresponding increase in income somewhere in the misty future.

    I think Jim Glass’ argument is completely sound too, and fits all we know from Kahneman et al., prospect theory and the like – the median voter is less profit seeking than risk averse: when in doubt, (s)he does not want any change at all. Increases in income count asymetrically less than increases in expenses, prospective loss counts as more than prospective profit etc. That is a standard and well established result.

  53. Gravatar of Greg Ransom Greg Ransom
    18. July 2012 at 16:44

    No Austrian would make an argument in these terms — and even in poper Austria casual categories & terms none provide a single cause explanation. NONE.

    And none fail to take a multi-nation explanatory problem situation dating to 1925 and before, or fail to discuss the parhologies of the gold exchange standard or German & Austria finance, spending & intervention pathology, British pathologies, etc.

    And none fail to mention tariff pathologies & Hoover-FDR policy pathologies, U.S. banking pathologies.

    Sincerity requires that you honestly characterize your explanatory rivals, rather than invoke straw men to smear them with false conceptions they do not hold.

    “Greg, I did a post on the 1920s once, and dozens of Austrian commenters made that argument.”

  54. Gravatar of Major_Freedom Major_Freedom
    18. July 2012 at 17:09

    ssumner:

    Greg, I did a post on the 1920s once, and dozens of Austrian commenters made that argument.

    And what argument was that? This one:

    “They claim the free market economy is so delicate and fragile that even the very small changes in the per capita money supply, or price level, or NGDP, during the 1920s somehow brought on major economic dislocation.”

    Austrians didn’t say “so delicate and so fragile.” They also didn’t say “very small changes”. They have shown that the “small changes” were in fact BIG changes. RECORD changes.

    The Dow Jones Industrial Average began its monstrous bull market in late 1921 at a cyclical low of 66, mounting a drive that carried it to a high of 300 by mid-1929, more than tripling in value. In the S&P, industrials went up 321%, railroads went up 129%, and utilities went up 318%.

    When annual national output averages 5.2% during the 1920s, and the S&P increases an average 18.6% a year, something has to give. During 1927-29 for example, the economy grew 6.3%, while stocks gained 82.2%.

    ——————-

    What about money?

    From 1921 to 1928, “uncontrolled reserves” decreased by $1.430 billion while “controlled reserves” increased by $2.217 billion. Since member bank reserves totaled $1.604 billion in 1921, it means controlled reserves increased 138%, which is 18.4% per year, while uncontrolled reserves fell by 89%, which is 11.9% per year. The Fed was helping out the Bank of England’s foolish attempt to maintain pre-war parity between gold and the pound sterling.

    The Fed also lowered the key interest rate in 1924, and again in 1927, which according to Austrians breeds malivestment, even if there is no significant corresponding increase in other monetary indicators.

    ——————

    The most jaw dropping comment that Sumner made that still occasionally comes up in conversations I’ve witnessed about foolish monetarists denying 1920s inflation, is this one:

    “The broader monetary aggregates rose significantly, but the government didn’t even keep data on M1 and M2 until fairly recently. No one in the 1920s thought the Fed should be targeting aggregates that didn’t even exist.”

    In Sumner’s mind, it’s like inflation doesn’t exist and can’t affect the market unless…..wait for it…the Fed is looking at the money, as if their powers of looking have the ability of reversing bubbles.

    Sumner’s admission that “the broader monetary aggregates rose significantly” is the very inflation Austrians are referring to.

  55. Gravatar of ssumner ssumner
    18. July 2012 at 18:09

    Mike, you said;

    Somewhere in all this, something is badly wrong with your theory.”

    Actually it’s your understanding of it that’s wrong. I’d read my National Affairs article, if you’d like a better understanding of what I’m proposing.

    Jim Glass, You’ve given me zero evidence that it’s not popular. Zero. Internet discussions? That’s like one out of every 100,000 voters. You can’t seriously claim that’s “public opinion.”

    Razer, Why should I prove anything to you, or any other dogmatic libertarian commenter? I’m trying to convince people with open minds. We disagree, deal with it.

    Greg, Yes, and no true German would ever support the Nazi party, so WWII never happened.

  56. Gravatar of Jim Glass Jim Glass
    18. July 2012 at 20:37

    Jim Glass, You’ve given me zero evidence that it’s not popular. Zero.

    Are we talking about the same thing?

    The idea of expansionary monetary stimulus isn’t popular. The voting population is *not* asking for it. How may politicians representing their constituents asked for it of Bernanke? Pretty much none — the Dems said “thank you for bravely doing enough” and the Repubs said “you’ve done too much”. If there is one things politicians are expert at, it is knowing what their constituents want.

    Even **most economists** don’t want it. As you’ve said yourself, the Fed does what the consensus of economists wants. The consensus of economists doesn’t want more.

    The average voting person doesn’t even know what it is, as you said.

    How does all this possibly square with it being a popular idea?

  57. Gravatar of Major_Freedom Major_Freedom
    18. July 2012 at 21:00

    ssumner wrote:

    Razer, Why should I prove anything to you, or any other dogmatic libertarian commenter? I’m trying to convince people with open minds. We disagree, deal with it.

    I’m I the only one who noticed the irony in this statement?

    Those who only try to convince, are by implication not open to being convinced.

    You’re dogmatic and you don’t even know it.

  58. Gravatar of Major_Freedom Major_Freedom
    18. July 2012 at 21:02

    Razer:

    Excellent comment. I’m glad there are at least a few people here who aren’t falling for the sophistry.

  59. Gravatar of Major_Freedom Major_Freedom
    18. July 2012 at 21:06

    “Your only problem with central planning is they’re not acting upon your central plan, not the idea itself.”

    BINGO. This is what is common among all central planning intellectuals. They all complain about the content, but only in a way that presupposes the idea itself. It’s all about posturing and shoulder pushing to get one’s own central plan as dominating all other central plans, without ever seriously addressing the idea of central planning itself.

  60. Gravatar of Greg Ransom Greg Ransom
    19. July 2012 at 06:46

    Your insincerity is showing again, Scott.

    Let me be more blunt.

    I’m saying that no actual ‘Austrian’ made the argument you are making.

    And I’m saying you haven’t — and can’t — identify any Austrian who made the argument.

    So you are essentially lying to your readers — for a ‘scientific’ purpose, to smear your explanatory rivals, and to intentionally mislead your readers.

    Deal with it.

    You’ve been called out.

    And you have no defense for your behavior — which explain why you are offering no defense for your behavior.

    I know this sort of unethical behavior is standard procedure among economists.

    But it should not be and never should have been.

  61. Gravatar of Greg Ransom Greg Ransom
    19. July 2012 at 07:06

    You were better off, Scott when you sincerely and honestly explained up front to your readers what you haven’t read a word of Austrian macroeconomics, and your remarks on the topic are not to be mistaken for remarks of someone who has any idea what he is talking about on this subject.

    It might even be better to simply say that any rival to your explanatory framework is evil, and leave it at that.

    Just write this, Scott:

    “Austrian economists are evil. I base this on not having read a word of Austrian macroeconomics. So judge my credibility accordingly.”

    That tells us your professional competence to write on the subject, and your well grounded conclusion based on that professional competence.

    Or something.

  62. Gravatar of Greg Ransom Greg Ransom
    19. July 2012 at 07:48

    Creationists are famous for attack bogus conceptions of Darwinian science using “data” in uninformed ways which doesn’t engage Darwin’s science at all.

    Scott Sumner is famous for attack bogus conceptions of ‘Austrian’ macroeconomic science using “data” in uninformed ways which doesn’t engage ‘Austrian’ macroeconomics science at all.

    And Scott is as ready as a creationist to identify anyone who doesn’t agree with him as evil.

    You are on all fours with the creationists, Scott, when it comes to scientific engagement with rival explanatory world views.

  63. Gravatar of ssumner ssumner
    19. July 2012 at 07:49

    Jim, They want more NGDP, they just don’t know that more NGDP IS AN EXPANSIONARY MONETARY POLICY.

    Greg, I see you are still making up lies about me. I’ve never read one word of Austrian macro? So Hayek isn’t Austrian?

  64. Gravatar of Greg Ransom Greg Ransom
    19. July 2012 at 13:58

    Last word I saw you write on this was you writing that you haven’t ever read Hayek’s work in macroeconomics, ie _The Pure Theory of Capital_, _Monetary Nationalism & International Stability_, _Monetary Theory and the Trade Cycle_, etc.

    Which one of those have you read?

    And when did you post on this topic?

    I missed it.

    You’ve also said you haven’t read Horwitz’s book on Austrian macro, nor Garrison’s book on Austrian macro, nor O’Driscoll’s book Hayekian macro, etc.

    Maybe my memory is failing me or maybe I simply missed your post on the topic of Horwitz’s book or Garrison’s book or O’Driscoll’s book.

    This is all news to me.

    If you have read a book by an Austrian macroeconomist on Austrian macro I’d just like to know which one.

    Because you are not competently characterizing the nature of the explanatory causal mechanism found there.

  65. Gravatar of ssumner ssumner
    22. July 2012 at 08:33

    Greg, I thought you were the logician. Absence of evidence is not evidence of absence.

  66. Gravatar of ASHOK G KARANDIKAR ASHOK G KARANDIKAR
    20. May 2013 at 19:34

    After going through all the literature on money illusion and the various responses, I am constantly reminded of two sentences I came across in the past, which seem to throw enough light on economic policies of various countries, which pretend to attain economic welfare. The first sentence is from an essay by Leacock(My Lost Dollar)”All great nations are built on the rock basis of absolute honesty” and the second one is “Poverty anywhere is a threat to prosperity everywhere” Thus a sound economic policy truly rests on sincere hard work by all to produce more and to see that the same is distributed equally as far as possible. Western economic theories have fooled the western countries and the world around in believing that some solid solutions are being provided to solve the economic problem.The basic question, “Why we pay what we pay” has not yet been adequately answered

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