When do nominal changes have real effects?

I regret my haste yesterday in posting a reply to Tyler Cowen on eurozone sticky wages.  I hadn’t fully digested the report, merely skimming it until I found data that confirmed my priors.  The reality is more complex.  My other regret is that I might have seemed to imply that the peripheral countries wouldn’t be in trouble if they had flexible wages.  Not so, flexible wages in Spain would not have prevented a sharp fall in eurozone NGDP and RGDP growth after 2008.  At a minimum, the ECB policy made a real estate depression in Spain almost inevitable.  Re-allocation was needed, and flexible wages don’t prevent the real costs of re-allocation.  Let’s rank the possible outcomes:

1.  With overbuilding some decline in Spanish housing was inevitable, even with perfect monetary policy

2.  With bad ECB policy, the decline in Spanish housing would be even worse, due to declining sales to non-Spanish residents.  This is true even if Spain wasn’t in the euro.

3.  With Spain in the euro, bad ECB policy would cause an even bigger decline in the Spanish housing industry.

Even in the best case (case 1) completely flexible wages in Spain might not have prevented an economic slowdown.  As we move to steps two and three the problem grow larger, even with completely flexible wages.  The analogy for the US is that overbuilding in the sub-prime states meant a pullback was inevitable (case 1) but tight money by the Fed (case 3) made it much worse than necessary.

Yesterday a reporter asked me how much QE3 would impact RGDP growth.  My guesstimate was in the 0.2% to 0.4% range over the next few years.  I didn’t completely pull that number out of thin air, but pretty close.  What I did was notice that TIPS spreads seemed to increase by 0.1% to 0.2% on the news.  Then I assumed that given the slack in the economy, a boost to NGDP would probably be roughly 2/3 RGDP growth and 1/3 inflation.  Obviously that’s a rough guess, but at least I think it gives us a sort of “order of magnitude ” estimate of the power of the Fed’s announcement.  Of course some sort of policy change was expected, so this just reflects the effect of the part of the Fed announcement that was more than markets expected—perhaps the open-ended QE and the promise to keep money accommodative well into the recovery.

Clive Crook has some very thoughtful comments on the Fed announcement, and what it means in terms of Woodford’s model.  I’d caution readers to read him very closely, as at one point he says that he agrees with Joe Gagnon that QE has some impact on spending.  Woodford disagrees.  Then Crook goes on to analyze what we should expect if Woodford’s model is true, and also if we take the Fed statement literally.  Recall that the Fed didn’t promise any catch-up inflation (i.e. above 2%), there were merely subtle hints of the Fed moving in that direction.  So the pessimistic take wasn’t actually Crook’s view, it was the outcome if Woodford’s model is right, and if the Fed can be taken literally.  Obviously I have doubts about both assumptions, and even Crook has doubts about one of them (Woodford’s QE views.)

Crook also points out that level targeting of NGDP might lack credibility in the current environment.  I think he’s partly right, but I don’t see it as a problem, because he’s actually considering a hypothetical that is both unlikely to occur, and too expansionary from even my perspective.  Recall that in 2009 I favored going back to the old pre-2008 NGDP trend line, but more recently have advocated going just a third of the way back.  The problem here is that while NGDPLT is completely automatic when fully implemented, discretion is required when deciding where to set the initial trend line.  Last year Christy Romer did a NYT column calling for a return to the old trend line.  Because we are roughly 10% below that line, this would entail quite rapid NGDP growth (and inflation) over the next few years.  Because a lot of time has gone by, and because many wage contracts now reflect the lower NGDP trend line, I no longer favor going all the way back, but rather looking for a pragmatic compromise.  I think Crook’s right that 100% level targeting right now (Romer’s plan) would currently lack credibility, there simply aren’t enough economists inside or outside the Fed that favor that degree of stimulus.

But I would warn readers not to become overly pessimistic about credibility on the basis of this thought experiment.  The Fed doesn’t stray far from what the consensus of economists favor, and hence any Fed policy that adheres to that consensus and is publicly announced is likely to have a high level of credibility.  Here is an example:  In the 1920s people like Warren and Fisher favored an inflation target (actually the price level) but the consensus of economists favored the gold standard, which does not allow for inflation targeting.  Except for a brief period of price level targeting in 1933 (which was intensely unpopular with mainstream economists) we stuck with gold.  Later inflation targeting became the consensus policy, and central banks all over the world were able to fairly quickly bring inflation down, and get long term bond markets to expect roughly 2% to 3% inflation.  That’s a big success.  If we can get the consensus of economists to shift to NGDPLT  (and so far we market monetarists have had much more success than I expected) then a future Fed may adopt NGDPLT, and it will be highly credible.  If economists as a class think level targeting is the right way to go, then a period of “catch-up” will not seem “irresponsible.”  Even better, level targeting keeps NGDP from wandering so far from trend in the first place.

PS.  The reporter who interviewed me also asked if QE3 might push up oil prices and hence derail the recovery.  I had three comments:

1.  Rising oil prices don’t derail the recovery if they are caused by QE3.  That’s because, at least at the global level, real oil prices only rise due to QE3 if it is expected to boost RGDP growth.  And QE3 only slightly depreciated the dollar.

2.  Oil prices increased only slightly on QE3 news.  That’s both good and bad.  It’s good because the effects of QE3 get immediately priced into asset markets (EMH) but it’s bad for the same reason–the markets are telling us to expect only a modest boost to growth.

3.  Oil prices rising due to non-QE3 reasons (say a war in Iran) could derail a recovery.

And finally, we already pretty much know the expected effects of QE3 on nominal aggregates.  If there is any “test” to be passed, it would relate to the impact (if any) of higher NGDP growth on RGDP.  That’s what people should keep their eye on.  Let’s hope we do better than Britain.

HT:  Saturos

Totally off-topic:  Alex Tabarrok has a new “back of napkin model” that should immediately go into all econ textbooks.  Also note that many people wrongly assume that it’s best to be at the top of Laffer Curve-type diagrams.  Not so, you want to be to the left of the peak.

PS.  I did a piece for Yahoo finance.  I was told to write it for an average reader, so it’s a bit lower level than my blog posts.


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36 Responses to “When do nominal changes have real effects?”

  1. Gravatar of foosion foosion
    19. September 2012 at 06:19

    I’d appreciate more detail on the transmission from NGDP to RGDP.

    You’re much clearer on employment effects, in that inflation ameliorates the effects of wage stickiness. Is this one of the transmission mechanisms from NGDP to RGDP?

  2. Gravatar of Dennis Dennis
    19. September 2012 at 06:43

    Re: off topic: I see why you would want to be left of the peak in the Laffer curve (maximum government revenue is not anybody’s real goal) but I don’t see why you wouldn’t want maximum innovation.

  3. Gravatar of Nick Rowe Nick Rowe
    19. September 2012 at 06:49

    On returning or not to the old NGDP trend line. Wages (and prices) matter. But long-term debt matters too. Even if just for fairness. That argues for a higher NGDP target than looking at wages alone.

  4. Gravatar of Britmouse Britmouse
    19. September 2012 at 07:27

    “Let’s hope we do better than Britain”

    Geez, don’t bash a country while its down :)

    The UK GDP deflator has been well below 2% for most of the last three years if you ignore the VAT distortion. (Though it has got much much worse in recent quarters, we are struggling with import price deflation thanks to the idiots at the BoE allowing Sterling to appreciate)

    http://uneconomical.wordpress.com/2012/06/27/uk-inflation-measures/

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    19. September 2012 at 08:34

    This should be under, ‘The Anxiety of Influence’, but, it’s also under, ‘So we changed our minds…Romney was right’;

    http://taxvox.taxpolicycenter.org/2012/09/13/who-pays-the-corporate-income-tax-2/

    ‘…until now, TPC assumed investors ultimately paid the entire corporate tax in the form of lower returns to capital. Now, TPC concludes that labor also pays through lower wages. As a result, workers, as well as shareholders and other owners of capital, would benefit from any cut in the corporate tax. Similarly, both would take a hit if corporate taxes are hiked.’

    And, Feldstein and Rosen were too;

    http://taxvox.taxpolicycenter.org/2011/07/27/why-do-people-pay-no-federal-income-tax-2/

    ‘…we should keep in mind that high-income households pay a lot less tax than they would without tax expenditures.’

  6. Gravatar of Major_Freedom Major_Freedom
    19. September 2012 at 08:50

    My other regret is that I might have seemed to imply that the peripheral countries wouldn’t be in trouble if they had flexible wages.  Not so, flexible wages in Spain would not have prevented a sharp fall in eurozone NGDP and RGDP growth after 2008.  At a minimum, the ECB policy made a real estate depression in Spain almost inevitable.  Re-allocation was needed, and flexible wages don’t prevent the real costs of re-allocation.

    Isn’t it interesting that even if wages are flexible, and a fall in the demand for labor can purchase all available labor at a lower price, then market monetarists who advocate for a growing NGDP will STILL say that there will be “trouble.” What is this trouble that comes with a falling NGDP you might ask? The trouble is that…there is a fall in NGDP!

    So even if Spain’s rate of unemployment did not rise, because wage rates fell sufficiently, then we’re still supposed to believe there is trouble in Spain.

    The excuse of “reallocation” is weak. It is weak because the same type of “reallocation” takes place in an economy with growing NGDP, which Sumner advocates. If growing NGDP requires reallacation, and this reallocation represents “trouble”, then one simply cannot say that NGDP growth is justified in a country that is reallocating towards lower wage rates.

    It should be noted that lower wage rates do not necessarily imply lower standards of living for wage earners, because wages are also a business cost, and with lower business costs, selling prices can fall. It should also be noted that lower wage rates, especially during a depression, during a period of high unemployment, will almost certainly be accompanied by a gross increase in the nominal demand for labor, as investments that were postponed up until that time, awaiting for falling costs, can finally be made. There is also the boost to profitability that comes with this, as along with a higher demand for labor, it is highly likely that there will be a higher demand for capital goods as well, since labor requires capital goods. This increased demand for capital goods will generate net investment and add to profits almost dollar for dollar with the net investment.

    I find it not all that surprising that someone who has made an intellectual investment in NGDP targeting would seek to minimize and downplay an optimal solution for high unemployment and depressions that does not contain any requirement of non-market inflation. These solutions are approached with skepticism and dismissals because they represent a threat to market monetarists who believe that it is just not possible for wages to fall. They say things like “EVEN IF wages fell…” so as to erect a secondary defense behind the primary one of sticky wages.

  7. Gravatar of Major_Freedom Major_Freedom
    19. September 2012 at 08:59

    Market monetarists also never address the fact that inflation exacerbates wage stickiness, because wage earns become psychologically predisposed to expecting higher prices in the future, which limits their willingness to accept lower wage rates in the present. Constrast this with an economy with a free market money, where prices would fall, and it is quite straightforward that this inflation psychology would be eliminated, since the source of the psychological is eliminated.

    In a free market in money economy, wage rates would be far more flexible in the downward direction, should deflationary pressures require wage rates to fall, because wage earners will be expecting prices to be lower in the future anyway.

    This inflation psychology that makes wage rates more rigid downward is ignored by market monetarists, because they NEED wage rigidity, among other things, in order to justify their NGDP central plan. With wage flexibility, it makes it very difficult to justify NGDP as a means to eliminate unemployment.

  8. Gravatar of Don Geddis Don Geddis
    19. September 2012 at 09:20

    MF: “we’re still supposed to believe there is trouble in Spain

    After all this time on this blog, and you still don’t understand? Even Market Monetarists know that there is much more to macroeconomics than just NGDP. All they are asking for, is that monetary policy not cause additional economic pain, on top of whatever real problems the economy already has.

    Nobody (except you?) thinks that NGDPLT will somehow solve all macro issues.

    “this inflation psychology would be eliminated”

    Interesting theory you have on human psychology. One that is not supported, by any data, from any time throughout all of human history.

    It shouldn’t surprise you to learn that essentially everybody disagrees with you about human psychology … which leads quite naturally to vastly different preferred monetary policies.

  9. Gravatar of Major_Freedom Major_Freedom
    19. September 2012 at 09:43

    1.  With overbuilding some decline in Spanish housing was inevitable, even with perfect monetary policy

    As expected, there is no mention of the connection between past inflationary monetary policy and it’s disproportionate effect on building. To argue that with overbuilding there will be some decline in housing even with perfect monetary policy, conveys the impression that monetary policy had nothing to do with the overbuilding in the first place. That monetary policy is somehow independent from housing overbuilding.

    Are market monetarists saying that for the housing overbuilding in all the countries where there was overbuilding, that in every case, it was solely due to the same reasons being used to explain the US housing bubble, namely “regulations” and “moral hazard”? That the fact that in all the countries where there was a housing boom, real interest rates were low or negative, had nothing to do with it? That the almost worldwide acceleration in credit expansion from the 1990s on, did not have any effect on housing in the boom phase?

    How can “regulations” alone, which are country specific, and set independently inn each country, all of a sudden generate a global real estate boom at the same time? Did the world leaders get together one day and agree to George Bush’s “ownership society” ideology? Or did the world’s central bankers, who do coordinate their actions, bring about so much inflation that not only did prices not fall as they probably would have considering the global increase in productivity during the last generation, such that prices rose only somewhat, but there was the unintended consequence of blowing up a real estate bubble in many countries around the world?

    If housing boomed in so many countries around the world, then it is obligatory that we look to what was similar to all these countries. Why is it that in market monetarism there is this moratorium on identifying central banks as the common thread? Is it solely the fact that NGDP did not rise in double digits everywhere? Why does NGDP have to rise to a great extent before monetary policies around the world can be identified as responsible for the housing bubbles? It should be noted that this evasion rests on the unwarranted assumption that inflation of the money supply has to affect all goods more or less equally in terms of nominal demand and price rate increases. This is not so. Inflation does not affect all goods more or less equally, because central banks do not send checks to every individual at the same rate, and even if they did, there would still be a revolution in production and hence there would still be a differentiated affect on demands and prices.

    Just consider what would happen if Bernanke sent every individual a check for $1 million in exchange for their house trash accumulated during the week. Does anyone really believe that people will take their checks and purchase everything they usually purchase but in greater quantities, keeping them in their relative proportions? Would everyone buy triple or quadruple of everything they are buying now, including table salt, dog food, pairs of glasses, copies of books, washing machines, diswashers, BBQs, and movie tickets? Of course not. If everyone got a check for $1 million, then they would almost certainly change their relative purchasing habits. Maybe they’ll take an additional few vacations, another car maybe, give money to their parents, and invest the rest. The point is that inflation changes the relative investment trajectories of the economic system.

    This is why it behooves market monetarists to immediately cease and desist focusing solely on aggregates like price levels and spending, and start recognizing that inflation fundamentally revolutionizes the real side of the economy, even if NGDP and price levels rise only modestly from one period to the next.

    One cannot ignore all of those productions that are abandoned because of the inflation. If I take my $1 million check and purchase vacations, an additional house, charity, and invest the rest, this will redirect resources away from other lines, to the lines I involve myself with. With more vacations, it is likely that more resources will go to into resorts and cruise ships, rather than other lines that would have been expanded if the $1 million checks were not sent out. This is how to understand the housing bubble. With cheaper money, real estate became an attractive alternative investment once the Nasdaq bubble burst. This then redirected EXISTING demand from elsewhere, and more and more resources went into housing instead of other lines. You just can’t see this process by only looking at the aggregates like price levels and spending. These aggregates mask what is going on underneath.

    2.  With bad ECB policy, the decline in Spanish housing would be even worse, due to declining sales to non-Spanish residents.  This is true even if Spain wasn’t in the euro.

    3.  With Spain in the euro, bad ECB policy would cause an even bigger decline in the Spanish housing industry.

  10. Gravatar of Kevin Dick Kevin Dick
    19. September 2012 at 09:46

    Off topic, but Timothy Taylor just pointed to this Economic Letter written for the SF Fed by Leduc and Liu.

    They estimate that “uncertainty” is currently adding 1-2 % points to unemployment. I assume you’d take this as positive evidence that the Fed should explicitly target the forecast?

    http://www.frbsf.org/publications/economics/letter/2012/el2012-28.html

  11. Gravatar of Edward Edward
    19. September 2012 at 10:00

    MF,

    Prices would not necessarily fall in a free market in money economy. You’re thinking sloppily and one dimensionally again. Prices denominated in the rarer monies could fall, like platinum and gold but silver or copper prices might rise. Also the mere expectation of falling prices in the future creates a delay to buying and investment,
    As buyers hold off purchases in anticipation of better deals. Only when prices hit a bottom, and are expected to RISE on the future thus generating expected inflation, does buying and investment commence

  12. Gravatar of Edward Edward
    19. September 2012 at 10:07

    A repost to MF’s earlier nonsense on the “what’s on Chairman Bernanke’s mind thread:

    I noticed that a typical modus operandi of yours is to spout some nonsense, and when somebody comes up and refutes it, you respond to the refutation by saying “you have not refuted x or y!” And completely ignoring what that person says. Thats fine, but dont claim “you have not refuted x or y” We have. Dozens of times. You just refuse to listen. Its like the Republicans who keep repeating the zombie lie that 47 million Americans pay no income tax, as if income taxes were the only taxes there are.

    SO… lets try this again.

    On “real” saving versus money inflation.

    I noticed that Austrians have this amusing tendency to assume that savings have to proceed investment and production, as if savings were some fixed lump. Its similar to the lump of labor fallacy. Savings can rise, (Both percentage wise and in total with rises in production income, and monetary inflation. ) The 1950′s were a time when America’s private sector was incredibly UNDER-leveraged and Saving was high, in the 10% range. Were those signals false? (Of course they were. The market is ALWAYS wrong, and weak if there is even the slightest hint of government involvement.. {thats sarcasm for you, in case u dont understand and say Ive acknowledged your point or soemthing})

    On cash holders…

    People have the right to save cash. I DO NOT AGREE with Keynes who said a literal tax on cash holding would solve AD problems. What cash holders do not have is a right to gain at the expense of the rest of the economy. Purchasing power is not an absolute entity! Its a jointly shared phenomenon! If I have three hundred dollars in my wallet, those pieces of paper are my property. But purchasing power involves an outside relationship between that $300 and say, groceries, or ipads,iphones computers or mall items. I haven’t bought those things yet, So how in God’s good name do I have a right to profit by demanding that the Fed not print the agreed upon consensus by all rational market particpants , thus forcing those sellers to lower their prices in an unstable way at a loss. there is no initiation of force, none whatsoever in the Fed printing more dollars, anymore than there is an initiation of force of a silver mine producing more silver. Yes there are legal tender laws (but remember, legal tender laws do not forbid other currencies, what they do is to mandate the settling of DEBTS in one currency) but the mechanics are the same.

    “How do you know they werent just delaying and delaying and delaying hoping for a lower price?

    They don’t have to delay if they are hoping for a lower price. If all they want is a lowest price, then they can sell it for whatever price the market will bear, including zero price.

    I assume that what you meant to rhetorically ask in your miasma of stupidity, is how do I know that they weren’t delaying and hoping for a HIGHER price.”

    I was talking about BUYERS my doltish friend! Buyers! You originally mentioned “consumer preferences” which I assumed meant buying, because a consumer qua consumer is a buyer. You do understand that deflation is a friend of buyers, dont you? Buyers postpone purchases until a floor has been reached, Surpluses develop because the price is not low enough, and they’re not so easy to get rid of!. after all, target, and dominicks and office max and home depot don’t conduct buyers auctions to get bids on their merchandise, so price discovery isn’t that easy. (And you wonder why I get angry, its like you’re deliberately ignorant)

    “The fed is not supposed to respond to a signal a that prices fall durinng a productivity deflationary blast.

    Not “supposed to” according to what?!?”

    According to NGDP level targeting

    They’re only supposed to respond in declines of nominal spending.

    According to what? Your own false conception of what central bankers “should” do? Why should your “should” coercively overrule other people’s peaceful shoulds? Where in the hell did you acquire this privilege? Your ass or a hole in the ground?”

    How about truth and reality MF. how about what closely approximates a free market in money production, which I support by the way.

    And even if price levels were targeted, what is the essential differance between an increase of nominal wages by 11% with the price level at zero, and a zero increase in wages and a fall of the price level by 10%?

    If the former is the result of inflation, then the essential difference is the distortion to the price system, and hence the hampering of economic calculation, and hence the sustainability of a given set of investment trajectories..

    You were supposed to say zero. (Sigh) there is zero difference between an 11% increase in nominal wages and a 10% decrease in prices holding wages constant.”

  13. Gravatar of Major_Freedom Major_Freedom
    19. September 2012 at 10:07

    Don Geddis:

    After all this time on this blog, and you still don’t understand? Even Market Monetarists know that there is much more to macroeconomics than just NGDP.

    WHERE is the detailed explanations of this alleged knowledge? I visit here often and I only ever see passing nods that are probably designed just to serve as exactly what you are doing here: claiming that there is a recognition of more, but never actually making them more important than NGDP when they are more important.

    Moreoever, I was actually referring to the MICRO concepts that are ignored. Sumner himself has stated on at least one occasion that he purposefully ignores micro because it’s allegedly boring and is not as interesting as the nice clean macro (I am paraphrasing).

    All they are asking for, is that monetary policy not cause additional economic pain, on top of whatever real problems the economy already has.

    There is a difference between INTENTIONS and RESULTS. I am not here questioning Sumner’s sincerity of wanting to minimize economic problems such as unemployment. I am here talking about the results of the means by which he chooses to accomplish his intentions. This is a scientific issue as well, not just a moral, let’s do good issue.

    Nobody (except you?) thinks that NGDPLT will somehow solve all macro issues.

    He, and so many other monetarists, are almost completely ignoring the effects of monetary policy DURING THE BOOM. The typical explanation of the connection between monetary policy and the boom is one of skepticism, dismissals, hand waving, minimizing, “I am not completely convinced” type of explanation. There is the occasional conditional statements that contain “might”, “may”, “possibly” and so on, but they are uncommitted so it is impossible to know what is sincere and what is designed solely to give the appearance that market monetarism is not pathological.

    I have raised these issues many times, but Sumner is practicing a rather amusing blackout policy on my posts. He won’t touch them, although I have seen that he occasionally addresses these points in an indirect way, by finding someone else who said similar things, and then he’ll show a resoonse to them and cite their similar arguments. It is truly fascinating to observe.

    “this inflation psychology would be eliminated”

    Interesting theory you have on human psychology. One that is not supported, by any data, from any time throughout all of human history.

    It is supported, by copious amounts of data, for many periods and locations throughout many history.

    Interesting denial you have. It’s these knee jerk types of denial reactions you guys have that shows me I am on the right track.

    It shouldn’t surprise you to learn that essentially everybody disagrees with you about human psychology … which leads quite naturally to vastly different preferred monetary policies.

    Why shouldn’t it surprise me? What is “essentially everyone” disagreeing with me about human psychology? What is essentially everyone holding about human psychology that differs from mine? Be specific. I want to hear you say you are convinced people are so stupid that they cannot set their own prices, spending, and interest rates without destroying themselves, and that we need…people…to set the right prices, demands, and interest rates. I’ll give you a cookie if you cann show what my convictions concerning human psychology even is.

  14. Gravatar of Major_Freedom Major_Freedom
    19. September 2012 at 10:33

    Edward:

    Prices would not necessarily fall in a free market in money economy. You’re thinking sloppily and one dimensionally again.

    First, you haven’t yet shown before that my thinking is “sloppy” and “one dimensional”. I asked for where you did, but you did not respond, which can only tell me it’s used for rhetorical purposes rather than argumentative substantiation.

    Second, my statement at prices fall in a free market of money (I use precious metals as a proxy) is confirmed by literally thousands of years of empirical history. I didn’t say it is “necessary” that they fall, just that they have tended to fallen, and I see no reason why that would change if we adopted a free market in money today.

    Prices denominated in the rarer monies could fall, like platinum and gold but silver or copper prices might rise. Also the mere expectation of falling prices in the future creates a delay to buying and investment, as buyers hold off purchases in anticipation of better deals. Only when prices hit a bottom, and are expected to RISE on the future thus generating expected inflation, does buying and investment commence

    This is unequivocally false. Falling prices may lead to an increase in this “delay” of purchase, but it will not lead to a perpetual delay forever. At some point, the present desire for wealth, for consumption, overwhelms the utility that can be made in the future by delaying current consumption and paying a lower price in the future. Now, I don’t expect you to know as much as me when it comes to economics, but I at least expect you to get out of your house occasionally and notice that people really do purchase goods in note present even if they know the price will be lower in the future. Case in point, electronics. iPhones and televisions tend to fall in notice over time, because the rate of productivity is so high there that not even Ben CTRL+P Berbanke can inflate fast enough to make those prices rise, and yet consumers are literally waiting in lines for more than a week to get their hands on a new iPhone 5 that will almost certainly have a lower price in future. Why aren’t people doing as you say when it comes to perhaps the only types of goods that are falling in price?

    What is going on here is that you are taking a kernel of a truth, which is that people may delay their purchases somewhat from the current delay to a new longer term equilibrium delay if prices fell instead of rose over time, but then you are going off the deep end and falsely claiming that consumers will only purchase a good if they believe the price has hit a bottom and has nowhere to go but up from there. That claim is just patently absurd, especially when the iPhone has been in the news everywhere. Are electronics consumers waiting for a price bottom before they purchase electronics? No, they are not. What is true for electronics can be true for ALL OTHER GOODS as well, as people do bite the bullet and choose to gain utility in the present, rather than in the future.

    You have to learn the important concept of TIME PREFERENCE. This is a concept that tells us that all else equal, people prefer goods in the present as compared to the future. To connect this to goods, you have to understand that people do not and cannot indefinitely postpone their consumption, even if prices will keep falling.

    The fundamental error in your claim to me is the core conviction that any voluntary reduction in spending is an evil that must be counter-acted with coercive means that force consumer spending sooner than people would otherwise have done had they lived in peace. You have a quasi-Keynesian belief that consumer spending must be at a higher equilibrium level as what exists with price inflation, as opposed to a lower equalibrium level as what would exist with price deflation.

    There is no justification for violence against innocent people to ensure that they consume as soon as possible, rather than later on.

  15. Gravatar of marcus nunes marcus nunes
    19. September 2012 at 11:20

    I give a Market Monetarist interpretation of growth and inflation over the last 50 plus years:
    http://thefaintofheart.wordpress.com/2012/09/18/50-years-of-us-growth-and-inflation-history-from-a-market-monetarist-perspective/

  16. Gravatar of Arthur Arthur
    19. September 2012 at 11:56

    Eli Dourado thinks the short run is over, so money is neutral again:

    http://elidourado.com/blog/the-short-run-is-short/

  17. Gravatar of Major_Freedom Major_Freedom
    19. September 2012 at 12:25

    Edward:

    A repost to MF’s earlier nonsense on the “what’s on Chairman Bernanke’s mind thread:

    You know, if keep saying my arguments are “nonsense”, at some point you may even convince yourself. You haven’t convinced me, because you haven’t SHOWN it yet.

    I noticed that a typical modus operandi of yours is to spout some nonsense, and when somebody comes up and refutes it, you respond to the refutation by saying “you have not refuted x or y!”

    Now that is funny. I just got through saying that your modes operandi is to claim that my arguments are nonsense, fail to show how they are wrong, then claim to have refuted them and then feign surprise that I refuse to accept your “refutations”, which by the way are not original and have been refuted countless times by myself and others stretching back literally centuries, as actual refutations. They are not refutations. I have refuted you. You have not refuted me.

    And completely ignoring what that person says.

    This statement is either the product of blindness, extreme reading comprehension difficulties, or just outright lying. I do not ignore what you are saying. I have addressed your last series of posts with line by line analysis. How is that ignoring everything you are saying? You are mistaking the total lack of agreement as a lack of recognizing you said “something.”

    You are again just using this as a rhetorical tactic to paint me as someone who refuses to even accept the existence of counter-arguments.

    Thats fine, but dont claim “you have not refuted x or y”

    How can something that isn’t true be “fine”? I will continue to identify the utter lack of refutation in your part every time you claim to have done so but nt actually doing so.

    We have.

    No, you have not. If you did, I would have noticed it.

    Dozens of times.

    You have definitely made claims that contain errors dozens of times. I think you’re conflating attempts at refutations, with actual refutations.

    You just refuse to listen.

    I listen very intentlly. I think you are conflating a refusal to agree with your nonsense (which I have shown), with a refusal to listen to your nonsense. The mere fact at you parrot the stuff your intellectual superiors have taught you, but which you don’t understand the context in which these talking points are made, as is the case with your absolutely ridiculous claim that people wait for prices of goods to hit bottom before they purchase them, which is a claim flatly contradicted by copious evidence, theoretical and empirical, and half the time your talking points are not even addressing what I am saying, is not the same thing as presenting a refutation of my arguments.

    Its like the Republicans who keep repeating the zombie lie that 47 million Americans pay no income tax, as if income taxes were the only taxes there are.

    Huh? Look in the mirror. You’re repeating the zombie lie that people postpone consuming indefinitely with falling prices.

    And what is this “what if” you’re talking about? How does the statement “47 million Americans pay no income tax” imply that income taxes are the only taxes? It’s a non sequitur.

    SO… lets try this again.

    Yes, let’s.

    On “real” saving versus money inflation.

    I noticed that Austrians have this amusing tendency to assume that savings have to proceed investment and production, as if savings were some fixed lump.

    The word is PRECEDE, not proceed, and no, the fact that savings must precede investment and production does not imply savings are some fixed lump sum.

    Your claim yesterday that savings can be made available after the initial investment, to complete the investments, suffers from the flaw of assuming that any collective investment trajectory in the economy can find available resources later on, if only we had a money printer. But this is not possible if the aggregate investment trajectory requires resources that are not available when they were expected to be available. No Austrian is claiming that savings are a fixed lump sum. Savings of course can grow in the future, but this is not the same thing as saying that savings can grow to any quantity whatever, such that any investment trajectory, no matter how lengthy and future oriented, no matter how in need of savings, that savings can always be grown by a printing press.

    You can’t make available more real savings at a given time when they are needed, by printing green pieces of paper. This is not real capital. It is a medium of exchanging real capital. If the economy needs a supply of real savings X, given the investments that have been made, then the ONLY thing that can complete those projects is more real savings. But production of real savings TAKES TIME. If real capital is needed ASAP, but it is not available ASAP, then no amount of money printing which stimulates production elsewhere can eradicate the economic law that production takes time.

    Suppose that a car company realizes that it needs more tires than are available. Suppose the tire manufacturer needs more rubber than is available. Suppose the rubber manufacturers need more oil than is available. No amount of money printing can create the oil, the rubber, the tires, and thus the completed cars, instantaneously. All those things take time, and it is precisely times of replenishing savings that you observe in the real world as recessions.

    Since you did not even correctly identify the actual Austrian position, your analogy below:

    It is similar to the lump of labor fallacy. Savings can rise, (Both percentage wise and in total with rises in production income, and monetary inflation. ) The 1950′s were a time when America’s private sector was incredibly UNDER-leveraged and Saving was high, in the 10% range. Were those signals false? (Of course they were. The market is ALWAYS wrong, and weak if there is even the slightest hint of government involvement.. {thats sarcasm for you, in case u dont understand and say Ive acknowledged your point or soemthing})

    Is a red herring.

    Plus, this straw man that you continue to set up, that I believe the market process sends false signals, given the fact that I actually explained my position yesterday, and showed exact,y what the source of those false signals are, and it’s not the market process, only shows me that you are not following your own advice and paying attention to what others are saying. You accuse me of ignoring what you say, and yet it is clear that you ignored what I said about signals yesterday.

    I hope you can see now why I don’t consider your gobbledygook as “refutations”. They are anything but. They are is full of errors, straw men, and these ridiculous “as if you believe” insinuations that show me that you lack an understanding of Austrian theory so you choose to introduce your own idiotic conception of it.

    On cash holders…

    People have the right to save cash. I DO NOT AGREE with Keynes who said a literal tax on cash holding would solve AD problems. What cash holders do not have is a right to gain at the expense of the rest of the economy.

    I already showed you last time that cash savers do not gain at the expense of anyone. It is a FALSE claim that they do.

    Cash holders we eventually spend their money are not taking any property away from anyone in a coercive fashion. In a free market of money, indeed in any monetary system, EVERYONE who takes part in the division of labor is a cash holder for at least some period of time. If prices are falling, then EVERY individual actor is making real gains through cash. Nobody is gaining at the expense of anyone. Those who produce to earn money, are earning a commodity that is rising in exchange value over time.

    In order for your claim to be credible, you have to at least SHOW how those who hold cash longer than others, are gaining at their expense. You have to show how those who hold cash for relatively less longer periods of time, are having their standard coercively reduced by those wh hold cash for relatively more longer periods of time. So far, to have not even come close to doing this.

    Purchasing power is not an absolute entity! Its a jointly shared phenomenon! If I have three hundred dollars in my wallet, those pieces of paper are my property. But purchasing power involves an outside relationship between that $300 and say, groceries, or ipads,iphones computers or mall items. I haven’t bought those things yet, So how in God’s good name do I have a right to profit by demanding that the Fed not print the agreed upon consensus by all rational market particpants , thus forcing those sellers to lower their prices in an unstable way at a loss.

    Falling prices on the basis of productivity growth does not incur losses to sellers. They are selling more goods at lower costs and lower prices. Their profits remain positive (if they are competitive that is).

    You are falsely imagining a scenario where there is an unexpected fall in prices due to a deflation of the money supply. This kind of price deflation is associated with losses, yes, but the falling prices I am referring to, that of costs falling due to capital accumulation that outstrips the production of money, the falling prices here is a healthy falling prices. Again, think electronics. The prices of electronics falls because of increased productivity. Are consumers of electronics benefiting “at the expense” of sellers of electronics? Certainly not! Not only that, but the sellers of electronics are earning money, and they too can hold their money to buy electronics at lower and lower prices too!

    Maybe you just don’t understand the free market enough to see how it should be fought for, but the falling prices in a free market that is based on productivity growth, such that money earns a real return just by holding it, is a BENEVOLENT outcome of free markets! Everyone who takes part in the division of labor can earn real gains by delaying their consumption. Once people settle at a lower quantity of spending relative to their cash balances, then from then on the economy will be very healthy and strong, for not only are real incomes rising, but the economy is so much more liquid, and capable of absorbing real shocks much more effectively, such as unexpected unemployment, or oil crises, and so on.

    This defense of free markets is not ad hoc, where I uncomfortably and embarrassingly try to justify what you consider to be alleged exploitation from cash holders. This is actually an integral part of why I defend the free market from its attackers.

    there is no initiation of force, none whatsoever in the Fed printing more dollars, anymore than there is an initiation of force of a silver mine producing more silver. Yes there are legal tender laws (but remember, legal tender laws do not forbid other currencies, what they do is to mandate the settling of DEBTS in one currency) but the mechanics are the same.

    This is false. Legal tender laws require that people pay taxes in dollars EVEN IF they accept non-dollars, such as gold. If a seller, of shoes say, only accepts gold as payment, then the IRS will charge this seller with tax evasion if he doesnt’t send them the “equivalent” value in dollars.

    The fiat monetary order is in fact based on coercion. The state used force to confiscate the people’s gold in 1933, and then in 1945 the state ceased redeeming dollars for gold to the citizenry, but continued to redeem dollars for gold to foreign central banks, and then in 1971 the state ceased redeeming dollars for gold to foreign central banks.

    There is nothing voluntary in any of this. It is pure naked aggression that unfortunately you don’t seem to want to understand or accept.

    I assume that what you meant to rhetorically ask in your miasma of stupidity, is how do I know that they weren’t delaying and hoping for a HIGHER price.

    I was talking about BUYERS my doltish friend! Buyers! You originally mentioned “consumer preferences” which I assumed meant buying, because a consumer qua consumer is a buyer. You do understand that deflation is a friend of buyers, dont you

    The context in that particular discussion was sellers. That followed from what you said. If you meant buyers, then it is superfluous because I already showed that consumers don’t wait forever and do but e bullet.

    Buyers postpone purchases until a floor has been reached

    This is false. Buyers do not postpone their purchases until a floor has bee breached. They don’t do this for electronics, and that is pretty much our only empirical sample. Do you think it’s a coincidence that for the only example of systematic price deflation, that consumers are very eager about them and do not wait forever for their prices to fall, and do bite the bullet and pay the presently higher price, as opposed to a future lower price?

    Csonumers do not only take into account prices you ninny. They also take into account WHEN they want to consume. If food fell in price over time, and there is no future price floor, would you wait and wait and wait until you starve? No, you’ll eventually buy food when you’re hungry. Well, this principle of desiring certain consumer goods even with falling prices, holds for consumer goods as a concept.

    You may delay your consumption somewhat in a world of falling prices, but you are not going to wait forever. The desire to consume is too overwhelming that the TIME outweighs the nominal price.

    You have a very one dimensional and narrow understanding of economics. You falsely believe that prices are the only thing consumers ever take into account, when in reality there are more reasons than price, such as the VERY important concept of time. Time is always present.

    What perpetual falling prices will almost certainly lead to is a delimited rise in the demand for cash relative to spending. Instead of people holding, say 10% of their assets in cash, they may hold 20%. They certainly will not seek to perpetually increase ear cash balances ad infinitum.

    If 2% price inflation is accompanied by a particular size of cash balance that make up people’s's assets (which are denominated in cash), then 2% price deflation will be accompanied by a higher particular size of cash balance that make up people’s assets.

    Once the higher demand for cash stabilizes given the new price trends, then production
    can go on as before, plus the extra bonuses of higher liquidity, less malinvestment, less unemployment, and a whole host of other improvements over what we have now or anything market monetarists are advocating.

    Surpluses develop because the price is not low enough, and they’re not so easy to get rid of!.

    You say this like investors and entrepreneurs are not already accustomed to falling prices, when everything I am saying assumes people are accustomed to it because that is what people do when the monetary order shifts. Instead of expecting rising prices, people will come to expect falling prices. Surpluses will not be a systematic problem because sellers and investors expect that future prices will be lower, and they will plan accordingly in the present, very much like they do now, but without depending on fallible human beings sitting in ivory towers in charge of the entire economy’s money.

    Imagine if Bernanke was in charge of the entire nation’s food supply. When he makes a mistake, millions will die from starvation. Constrast that with food being produced in a decentralized manner by many independent parties. When one food seller makes a mistake, then the consequences are localized to his own customers, not millions of people.

    after all, target, and dominicks and office max and home depot don’t conduct buyers auctions to get bids on their merchandise, so price discovery isn’t that easy. (And you wonder why I get angry, its like you’re deliberately ignorant)

    You get angry because you are having your core convictions shaken to their root, and you can’t stand it that the empty sponge method that may have gotten you through grade school, doesn’t work on me. Your claims are demonstrably false.

    As for price discovery, sellers and entrepreneurs have a much rougher time with central banking than without it. This is because with central banking, sellers and entrepreneurs have to guess what the subjective beliefs of central bankers happen to be at the time. It would be like trying to guess what mood Bernanke the food Czar is in, in order to plan one’s food intake over time. It’s much more difficult as compared to depending on market trends that are far more objective and less subject to one person’s shenanigans.

    “The fed is not supposed to respond to a signal a that prices fall durinng a productivity deflationary blast.

    Not “supposed to” according to what?!?”

    According to NGDP level targeting

    This is thing being debated in the first place. It’s circular reasoning.

    “According to what? Your own false conception of what central bankers “should” do? Why should your “should” coercively overrule other people’s peaceful shoulds? Where in the hell did you acquire this privilege? Your ass or a hole in the ground?”

    How about truth and reality MF. how about what closely approximates a free market in money production, which I support by the way.

    Are you for real? You just got through spewing a bunch of nonsense on the alleged destructiveness of a free market in money tending towards falling prices, and now you’re saying that you want NGDP targeting because it closely approximates a free market in money production…and not only that, but you SUPPORT a free market in money production?

    You’re worse than Dr. Jekyll and Mr. Hyde. Nothing of what you say carries with it any integrity or conviction. You will say anything to please anyone at the time.

    How can you support a free market in money, AND presume to be explaining how NGDP targeting solves problems that allegedly exist in a free market?

    If you learned that a free market in money will almost always lead to falling prices, and yet you say falling prices are an evil that must be counter-acted by inflation, and you support a free market in money, then you are wanting contradictory things. You can’t do that.

    If the former is the result of inflation, then the essential difference is the distortion to the price system, and hence the hampering of economic calculation, and hence the sustainability of a given set of investment trajectories..

    You were supposed to say zero.

    No, I am supposed to say what I think, not what you want to hear.

    (Sigh) there is zero difference between an 11% increase in nominal wages and a 10% decrease in prices holding wages constant.”

    False. There is a huge difference. You are only looking at a crude aggregate calculation as per a model, and you are not considering that which the aggregates actually consist of at the micro level in the real world.

    Inflation does not work in the way you believe. It doesn’t only affect aggregate real wage average estimates. Inflation is not mechanical only. It doesn’t only affect average statistics.

  18. Gravatar of Jim Glass Jim Glass
    19. September 2012 at 12:53

    “maximum government revenue is not anybody’s real goal”

    Oh, it’s the real goal of lots of people.

  19. Gravatar of Major_Freedom Major_Freedom
    19. September 2012 at 12:57

    ssumner:

    Since you’re not committed to nationn wide NGDP targeting, and prefer nation wide wage level targeting, why not consider individual person NGDP level targeting?

    Every citizen’s income will rise by no less than and no greater than 5% per year, no matter what investments they made prior.

    Never again will any American have to suffer from a “demand side personal recession”.

    This is similar to what you are advocating, except it has the vital improvement that it doesn’t let individual state level NGDPs to collapse, the way your plan allows for it. I mean, your plan would let California go bankrupt, as long as California plus non-California states have a collective NGDP that is 5% higher this year as compared to last year. How cruel! How can you consider yourself so caring for the unemployed and for people’s standard of living when you advocate for a monetary order that would let state level NGDPs collapse?

    I think my plan is a huge improvement, and if I spend the next 10 years fighting for it, then maybe some Fed economist will eventually hear my pleas, and after that, the Fed may start buying 1 year stripped MBS mid risk equity tranch call options from some Fed connected banker in Wall Street, and people can start calling that day Major_Freedom Day.

    Isn’t being a political strategist so rewarding and fulfilling? Gosh maybe they’ll even let me lick their boots! That would be an honor.

  20. Gravatar of Asco Asco
    19. September 2012 at 13:24

    Dennis, you wrote:
    “I see why you would want to be left of the peak in the Laffer curve (maximum government revenue is not anybody’s real goal) but I don’t see why you wouldn’t want maximum innovation.”

    Since there are deadweight losses from the monopoly pricing of patent holders, it seems to me you’d want to be slightly to the left of the top.

  21. Gravatar of Asco Asco
    19. September 2012 at 13:26

    Also, you must live in a country with great politicians to say that maximum government revenue isn’t anyones real goal.

  22. Gravatar of Bill Ellis Bill Ellis
    19. September 2012 at 13:41

    Patrick R. Sullivan
    ‘So we changed our minds…Romney was ,20% right’

    Corporations are 20% people too !

    In newly-published assumptions, TPC figures 20 percent of the corporate income tax is borne by labor and 80 percent by capital.

  23. Gravatar of PetePete PetePete
    19. September 2012 at 14:10

    I think the REAL reason why the Fed is going to enact QEinfinity, is because they are going to psychologically prepare everyone for the upcoming and very much planned global sovereign debt default.

    They need to keep their options open, but not to ensure employment increases, or to boost output. They don’t care about these things. They are simply not the purpose of central banks. Central banks were originally designed to, and are continued to be used for, sustaining sovereign states and bankers despite their shenanigans that would get crucified in a free market.

    The Fed is standing ready to keep the US state solvent as interest rates eventually rise.

    I do think it’s cute though how so many are saying this due to the efforts of market monetarists, and that they are doing this because of MM suggestions.

  24. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    19. September 2012 at 16:35

    Bill Ellis, a journey of a thousand miles begins with one step.

  25. Gravatar of Don Geddis Don Geddis
    19. September 2012 at 18:46

    MF: “What is “essentially everyone” disagreeing with me about human psychology? … Be specific.”

    Oh! Sure, no problem.

    Earlier, you wrote: “…with an economy with a free market money … it is quite straightforward that this inflation psychology would be eliminated … In a free market in money economy, wage rates would be far more flexible in the downward direction…”

    See, there’s where you’re making an unsupported psychological claim, that downward wage stickiness would be significantly reduced, if only … there was a free market in currency? (Presumably, you meant: if only currency had a long-term stable value, rather than very low mild inflation. But I hesitate to speak for you.)

    “I’ll give you a cookie if you cann show what my convictions concerning human psychology even is.”

    Chocolate chip, please! Thanks much.

  26. Gravatar of Benjamin Cole Benjamin Cole
    19. September 2012 at 19:41

    “PS. I did a piece for Yahoo finance. I was told to write it for an average reader, so it’s a bit lower level than my blog posts.”

    This reminds me of my reporting days. I told my editor I was going to go into a car dealership to impersonate an “average consumer.”

    My editor replied, “But you are obviously below average.”

    I hereby request a blog for below-average Market Monetarists!

  27. Gravatar of Morgan Warstler Morgan Warstler
    19. September 2012 at 19:57

    Stop being such a intellectual weakling!

    10% back vs. 3.3% back

    WHY NOT TEST OUT NO MAKE-UP???

    Sure DeKrugman will hate it so much he hats NGDPLT.

    Sure, Sumner wants more.

    BUT, Sumner will TAKE IT! If pushed he’ll take ZERO MAKE-UP.

    Why is there no intellectual curiosity to find out WHY?

    He’s already throwing 2/3 overboard.

    Why are you all so wiling to not ASK????

    What happens IF we do no make-up? How much benefit is our PRECIOUS if it is only future forward???

    man if it works even with no make up, then it is SUPER JUICE.

    And it will work.

    And Scott BELIEVES it will work.

    And nobody wants to know why?

    What’s wrong with you people?

  28. Gravatar of Bill Ellis Bill Ellis
    19. September 2012 at 20:01

    “And Scott BELIEVES it will work.

    And nobody wants to know why?

    What’s wrong with you people?”

    It is like you don’t read Scott’s posts.

  29. Gravatar of Morgan Warstler Morgan Warstler
    19. September 2012 at 20:30

    Bill, you have not yet heard Scott say…

    NGDPLT will not solve our problems unless there is make-up.

    You only get his preferred prescription, no one has pushed him to explain why he’ll accept it, if that’s the only choice.

    And unless you all ask WHY, over and over, he’s not going to say it.

    Saying it out loud immediately draws a violent line between him and DeKrugman.

    So unless you all ASK, it will go unanswered.

  30. Gravatar of Morgan Warstler Morgan Warstler
    19. September 2012 at 20:31

    Don’t be afraid Bill, ask…

    My bet is you will not be enough to get an answer.

  31. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. September 2012 at 01:43

    Your point about the Fed following the consensus of economists makes me wonder what the Bundesbank-cum-ECB follows. It was rather depressing to read Jorg Bibow’s paper (via Lars Christensen) on what the Bundesbank did during the 1990s to push Germany onto a lower growth path and realise the ECB did it all over again.
    http://skepticlawyer.com.au/2012/09/19/they-did-it-again/

  32. Gravatar of ssumner ssumner
    20. September 2012 at 04:07

    Nick, I agree, although I suppose I worry more about unemployment than debt redistribution.

    Thanks Britmouse.

  33. Gravatar of Bill Woolsey Bill Woolsey
    20. September 2012 at 04:48

    Wages and prices have both adjusted to an approximately 2% lower growth path.

    Nominal GDP is on a 15% lower growth path.

    So, it is pretty simple, isn’t it?

    Reduce the target growth path by 2% and reflate about 13%.

    That isn’t anything like 1/3 of the way.

    The CBO estimage is that potential output way below the previous trend–about half. And so, that suggests reflating about 50%. By reflating only that amount, then maybe the price level could return to its previous growth path, and wages would need to drop quite a bit to return to full employment.

    Given the CBO estimate, the price level would need to rise to a 7% higher growth path (over some period of time and then rise 2% on that path.) Wages could return to the past trend with full employment.

    These figures are from memory and very approximate.

  34. Gravatar of nubdaug nubdaug
    20. September 2012 at 06:39

    Reading the comment section of the Yahoo piece gives me the sense that you didn’t dumb it down enough… :)

  35. Gravatar of Saturos Saturos
    20. September 2012 at 06:49

    A new wave of global easing?
    http://online.wsj.com/article/SB10000872396390444165804578006723461538666.html

    David Beckworth has comments:
    http://macromarketmusings.blogspot.com.au/2012/09/qe3-and-feds-shapping-of-global.html

  36. Gravatar of A Little More on the Fed | The Shrike.ca A Little More on the Fed | The Shrike.ca
    24. September 2012 at 23:00

    [...] Little More on the Fed Scott Sumner helps me to see that he and I are (even) closer on monetary policy than I’d thought. He agrees with a point I [...]

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