Comments on Selgin and White

Lots of people, including both Austrians and market monetarists, use the concept of “monetary disequilibrium” to analyze the role of monetary policy shocks in the business cycle.  I generally stay away from that framework.  It’s not that monetary disequilibrium never occurs, but rather that I think it lasts for just a brief period.  The bigger problem is that equilibrium is re-established at a new and different NGDP level, which creates disequilibrium in the labor market.  So I see labor market disequilibrium as the essence of the business cycle.

Larry White recently had this to say:

Market Monetarists who have been celebrating the Fed’s recent announcement of open-ended monetary expansion (“QE3′) seem to believe that Sumner’s 2009 diagnosis still applies. But what is the evidence for believing that there is still, three years later, an unsatisfied excess demand for money? Today (September 2012 over September 2011) real income is growing at around 2% per year, and the price index (GDP deflator) is rising at around 2%. If the evidence for thinking that there is still an unsatisfied excess demand for money is simply that we’re having a weak recovery, then as Eli Dourado has pointed out, this is assuming what needs to be proved.

.  .  .

While saluting Sumner 2009, like Dourado I favor an alternative view of 2012: the weak recovery today has more to do with difficulties of real adjustment. The nominal-problems-only diagnosis ignores real malinvestments during the housing boom that have permanently lowered our potential real GDP path. It also ignores the possibility that the “natural” rate of unemployment has been hiked by the extension of unemployment benefits. And it ignores the depressing effect of increased regime uncertainty.

To prefer 5% to the current 4% nominal GDP growth going forward, and a fortiori to ask for a burst of money creation to get us back to the previous 5% bubble path, is to ask for chronically higher monetary expansion and inflation that will do more harm than good.

I don’t know of any theoretical models where steady 5% NGDP growth would create bubbles.  And even if bubbles did occur, I can’t imagine why they would represent a public policy problem if NGDP continued to grow at 5%.  I’d also point out that the US has experienced 3 major equity or residential real estate bubbles in periods of relatively low inflation and NGDP growth (1929, 2000, 2006) and zero major bubbles in periods with high inflation and NGDP growth (1968-81).  The 1987 stock market bubble was an intermediate case (which did zero harm, as NGDP continued growing after the bubble.)

However I do agree with some of Larry’s observations.  As I mentioned in my previous post, you’d expect the extended UI benefits to have raised the natural rate of unemployment (although I doubt it’s risen to 8.1%.”)  I also agree that the current situation is different from 2009. In 2009 I advocated going all the way back to the old trend line.  I currently favor going about 1/3 of the way back.  If we keep on the same track for a few more years I’ll through in the towel and advocate starting a new 5% trend line from where we are.  So my policy views have changed to reflect the changing nature of the crisis, and the fact that some wage adjustment has occurred.

In reply to David Beckworth, George Selgin makes the following claim:

All these appeals to different measures of the money stock as offering evidence as to the extent to which money is in short supply or has been exposed to demand shocks really are, or should be, considered quite beside the point in the MM and other nominal spending targeting frameworks. After all, nominal spending targeting makes sense precisely to the extent that fluctuations in nominal spending serve as a good indicator of money shortages or surpluses. So who cares what M2 or M3 or m$ or other still fancier M measures are of have been up to? If spending has remained stable, the presumption is that the economy has been getting all the liquidity or exchange media it needs, and that it is therefore not tending to ride up or down a short-run Philips curve. It is precisely because NGDP targeting and similar schemes dispense with the need to track particular monetary aggregates, or worry about the stability of demand for them, while still sticking to a nominal target, that they constitute an alternative and appealing alternative to conventional “monetarist” rules.

So, when it comes to demonstrating that money is or has been in short supply, a consistent Market Monetarist has no reason to appeal to the behavior of any measure of M. What matters is whether a plausible case can be made that spending is too low, or has been growing too slowly. That of course leads to thorny questions concerning the choice of an ideal growth rate and, what amounts in the short run to the same question, the fitting of a trend to past data with the aim of finding the once that would have been most conducive to the avoidance of booth booms and busts. This latter task, it seems to me, is not quite as simple a matter as some MM’s have made it out to be.

I completely agree about the redundancy of money data in the MM model.  NGDP is a sufficient statistic for any problems with monetary policy.  And I agree that finding the optimal trend line for NGDP is a non-trivial exercise.  All I would add is that showing the folly of the actual 2007-2012 path of NGDP is a trivial exercise.  I am pretty sure that George agrees with me on that point.


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41 Responses to “Comments on Selgin and White”

  1. Gravatar of RPLong RPLong
    26. September 2012 at 05:24

    I’d also point out that the US has experienced 3 major equity or residential real estate bubbles in periods of relatively low inflation and NGDP growth (1929, 2000, 2006) and zero major bubbles in periods with high inflation and NGDP growth (1968-81).

    What? Prof. Sumner? Really???

  2. Gravatar of ssumner ssumner
    26. September 2012 at 05:30

    RPLong, Yes, stocks did poorly during 1968-81, and RE was basically flat in real terms.

  3. Gravatar of Jim Crow Jim Crow
    26. September 2012 at 05:44

    Are Selgin’s “thorny questions concerning the choice of an ideal growth rate” even answerable? I like optimality as much as the next geek but practicing Central Banks make judgment calls all the time based on a ridiculously limited and unreliable data set. The real world’s messy. I’ll be happy with just convincing our elites to stop with the unforced errors.

  4. Gravatar of nickik nickik
    26. September 2012 at 06:59

    @Jim Crow,

    Well the hole point of the free banking school is that the do not think it is answerable.

  5. Gravatar of Greg Ransom Greg Ransom
    26. September 2012 at 07:03

    You’ve just given a full bear hug embrace of Hayekian macro:

    “It’s not that monetary disequilibrium never occurs, but rather that I think it lasts for just a brief period. The bigger problem is that equilibrium is re-established at a new and different NGDP level, which creates disequilibrium in the labor market. So I see labor market disequilibrium as the essence of the business cycle.”

    Hayek, of course, talked of sticky, inflexible wages before Keynes ever published his “General Theory”.

    But is is absolutely pathetic to talk of equilibrium in the labor market — and to have absolutely NO production goods of any kind in your “model” — an economy without production goods and trade offs between production processes of alternative lengths and outputs has Nothing to do with our world. Ditto a world without flu hating shadow money / changing liquidity & value assets used as substitutes for money. Or trade-offs and changing relative prices in raw inputs or change consumption patterns between cheap short period consumption goods or expensive long period consumption goods.

    So you’ve embraced Hayek — monetary disequilibrium creates disequilibrium in real goods markets involving changing relative prices.

    Your world simply fails to include:

    Alternative labor input

    Production goods

    Shadow money / money substitutes

    Changing alternativs consumption choices

    Raw inputs

    Goods which move from economic goods status to non-economic goods status with changing relative prices & changing alternative productions structure

    Relative price relations between all of the above.

    In other words, you simply have Not engaged any possible world that all of us actual inhabit.

  6. Gravatar of George Selgin George Selgin
    26. September 2012 at 07:16

    “All I would add is that showing the folly of the actual 2007-2012 path of NGDP is a trivial exercise. I am pretty sure that George agrees with me on that point.”

    I do indeed, Scott.

  7. Gravatar of Morgan Warstler Morgan Warstler
    26. September 2012 at 07:44

    If NGDPLT has to have make-up to work, WHY is it so great?

    If it doesn’t need make-up to work, how does that happen?

  8. Gravatar of Major_Freedom Major_Freedom
    26. September 2012 at 07:49

    ssumner:

    Lots of people, including both Austrians and market monetarists, use the concept of “monetary disequilibrium” to analyze the role of monetary policy shocks in the business cycle. I generally stay away from that framework. It’s not that monetary disequilibrium never occurs, but rather that I think it lasts for just a brief period.

    This is only true if “monetary policy”, i.e. inflation, is a one shot deal. For example, if a central bank comes into existence, prints a trillion dollars, and then closes its doors, after which inflation ceases, then THAT would be a real world event to which you can say that the effects last for just a brief period.

    On the other hand, when Austrians refer to monetary disequilibrium, they are referring to the real world monetary policy that is more or less continuous in nature. Sure, if inflation was a one shot deal, then Austrians may end up agreeing with market monetarists that the real side effects of inflation are long term neutral. Inflation in our economy is however not a one shot deal. Thus, we can never get to this long run neutrality utopia that market monetarists like to think we can get to by way of stable aggregate this or that targeting.

    Austrians reject the notion that a complex division of labor society, of which individuals act in partial ignorance of each other and can only rely on unhampered prices to signal their savings and consumption preferences, can eventually and perfectly “adapt” to a continuous, “expected” inflation of price levels or NGDP levels, such that over the long term, monetary policy allegedly ends up generating only a nominal effect on prices and spending levels, with no lasting effects on the “real” side.

    The reason they reject this notion is because they hold money to be non-neutral…period. Whereas Austrians and Market Monetarists would agree that money is not neutral in the short run, Austrians and Market Monetarists diverge when it comes to the long run. Why? Because Austrians hold that the market can never “settle down” in a world of continuous inflation.

    Even if inflation of price levels or NGDP levels is announced by and then followed through by a central bank, such that market actors correctly expect the future aggregate statistic, it has no bearing on their individual plans to the extent that their plans depend on unhampered relative prices and spending. Aggregate statistic inflation targeting effects the very relative prices that individuals depend on if the capital structure of society is to be physically sustainable.

    The reason Austrians hold this “unsettling theory” (double entendre intended) is because what “credible”, “stable” price level targeting or NGDP targeting cannot do is promise a particular relative price and relative spending matrix that results in capital and employment allocations that are long run physically sustainable. This is not to say that I demand the Fed change their ways to accomplish this feat, but rather that the Fed cannot do what market monetarists want it to do, which is prevent recessions through the use of inflation.

    It is extremely important to understand that it is not possible for a central bank to only affect an aggregate statistic, within which the market process takes care of relative price and spending statistics without being hampered in any way. Even if they only intend to target the aggregate, they can’t. This is because the central bank does not stand as a buyer for all final goods and services. They stand as a buyer for SOME goods and services (typically treasuries from primary dealers) and they also stand as a lender (giver? do we know?) of newly created money to SOME agents (typically the state, banks, and some firms the banks have large stakes in), and then, they DEPEND on subsequent receivers of money to spend the money such that the Fed later observes a particular aggregate statistic to increase the way they want it to increase.

    This political process necessarily generates relative price and relative spending alterations away from where they would have been if money were driven instead by the free market process. In addition, as alluded to above, if inflation is continuous, as it is in the real world, then there is a continuous stressing of the complex of relative prices and spending, and the market will not “settle down” and accept the new program in the long run. The market will become increasingly strained and stressed.

    As the free market forces continually put increasing pressure on the relative prices to reverse course, the Fed in turn keeps increasing the pressure of reversing the reversing market force. This is why the Fed finds itself having to continually inflate in order to prevent recessions! It is because once it starts inflating, it has changed relative prices and spending, such that as soon as it stops inflating, relative prices and spending trajectories reverse course to where market forces reign supreme, and owners of resources and labor find that their previous deployments are no longer profitable, which we observe as recessions.

    The Fed has been inflating to prevent recessions for many years, and in case anyone has noticed, the amount of inflation needed each time there is a correction, has been increasing as well.

    Recessions, to Austrians, are actually periods of relative prices and spending adjustments, which of course includes real side destruction and creation activities. Whether or not aggregate spending levels or aggregate price levels or aggregate employment levels change during this process, only have relevance to the extent that they are a part of the relative price and spending correction process. If these aggregates need to change so that the relative prices can change in the proper way, then so be it.

    Why can’t I argue that much like a badly expanded firm can only correct if it experiences a reduction in revenues, that so too a badly expanded couple of firms can only correct if BOTH experience a reduction in revenues? If you say “hey wait a minute, you can argue that”, when why can’t I argue that US based firms expanded too much relative to the firms in other countries, such that the only way to correct the errors at US firms vis a vis foreign firms, is for US firms to experience a reduction in revenues, i.e. falling US NGDP?

    —————-

    What aggregate spending targeting will end up doing, if it is adopted, is not only introduce a new force of inflation against the reversing free market forces on relative prices and spending, but it will also represent an additional force on top of prior inflation, as all of the relative price and spending corrections only market forces can correct, have not yet been made, as the Fed has never stopped inflating!

    This is why NGDP targeting seems to more and more political strategists as the solution. It calls for more inflation NOW. That’s it. Short term political minds are giddy.

    Economists on the other hand will hopefully be numerous enough and influential enough to explain why this newest political strategy will have effects contrary to the intended ones.

  9. Gravatar of Greg Ransom Greg Ransom
    26. September 2012 at 07:52

    “One definition of an economist is someone who sees something happen in practice and wonders if it would work in theory.” — Ronald Reagan

    Fact — steady 5% NGDP growth resulted in a giant unsustainable bubble in the US economy in the 200-2007 period.

    “I don’t know of any theoretical models where steady 5% NGDP growth would create bubbles.” — Scott Sumner

    The job of economists is to show how the actual is possible.

    Massive economic ‘science’ FAIL ….

  10. Gravatar of Major_Freedom Major_Freedom
    26. September 2012 at 08:14

    ssumner:

    I don’t know of any theoretical models where steady 5% NGDP growth would create bubbles.

    That’s because you deny the existence of bubbles in the first place.

    A denier of X who said “I don’t know of any theoretical models where 5% NGDP targeting would create X” wouldn’t be saying what they appear to be saying, which is that they accept X can appear in principle, and they are just inviting others to shown them models of how X can appear due to their central plan proposal.

    There is the Austrian model that shows how bubbles can be created by central banks even with steady “price level” and “output” expansion (which approximates steady NGDP growth).

    Very briefly, inflation of the US money supply does not affect the prices of either US or World goods and services equally to the same extent, and so US investors and World investors make malinvestments (combination of partial relative over-investment and partial relative under-investment). NGDP targeting will affect relative prices and spending, and thus resource and labor allocations, away from what unhampered prices would otherwise regulate into physically sustainable allocations, such that only continuously increasing aggregate money supply inflation can prevent the inevitable correction, which itself includes a heightened demand for money and fall in NGDP, exactly what NGDP targeting attacks!

  11. Gravatar of Saturos Saturos
    26. September 2012 at 08:15

    Greg, and your world fails to include the flavor of my breakfast cereal. A model doesn’t have to include everything, only what’s relevant to the problem being solved.

    And Scott does accept the reality of sticky nominal wages, even without a fully satisfactory theoretical explanation for them.

  12. Gravatar of Major_Freedom Major_Freedom
    26. September 2012 at 08:49

    ssumner:

    I also agree that the current situation is different from 2009. In 2009 I advocated going all the way back to the old trend line. I currently favor going about 1/3 of the way back. If we keep on the same track for a few more years I’ll through in the towel and advocate starting a new 5% trend line from where we are. So my policy views have changed to reflect the changing nature of the crisis, and the fact that some wage adjustment has occurred.

    After 1 year go back 100%, after 4 years go back 33%, after 7 years go back 0%.

    To what principle are the millions upon millions of people’s lives depending on for their economic lives here? Please don’t say that you are doing what FDR did back in the 1930s when he decided on the new par value for gold redemption: he thought the number sounded good and lucky.

    ——————————-

    George Selgin:

    After all, nominal spending targeting makes sense precisely to the extent that fluctuations in nominal spending serve as a good indicator of money shortages or surpluses. So who cares what M2 or M3 or m$ or other still fancier M measures are o[r] have been up to?

    How about the possibility that M$, as well as the demand for money, rises so much during a prolonged period of “steady” NGDP growth, that later on, the demand for money may suddenly fall and the central bank is incapable of soaking up sufficient liquidity through assets purchases on account of its balance sheet being too small?

    If your response is something akin to “This would be a situation in which NGDP grows at more than 5%, and since that violates the criteria of 5% NGDP growth, your criticism is therefore not applicable to 5% NGDP targeting.”, then please note that my argument is about the central bankers being unable to control NGDP in the upward direction.

    Will the next generation of political strategists have to deal with that potential problem, for example by calling for a new “liquidity soaker upper” institution, sort of like the IRS, but run by bankers? Maybe they can pick a number than sounds good and lucky and then start closing the bank accounts of those whose SS numbers start with that number.

  13. Gravatar of curiouseconomist curiouseconomist
    26. September 2012 at 08:50

    Scott, if a central bank was going to switch to an NGDP level target then rather than shoot for a somewhat arbitrary new trend line, wouldn’t an intermediate target based on a a weighted average of the CB’s internal forecasts for inflation and the output gap (or unemployment gap) make more sense? I’m thinking of something similar to Evans’ proposal – say, “we will conduct asset purchases of $x billion per month up until the point where either our internal forecast for inflation 1 year hence is above 3% or our forecast for the output gap 1 year hence is 0% – at this point we will adopt a 5% NGDP level target”

    It’s true that we are not very good at estimating potential output (and consequently the natural rate of unemployment), so targeting that alone would probably lead to unstable NGDP growth (and thus unstable inflation and RGDP growth). However, with the inflation rate in there we have a sort of “buffer” that gives us a hint as to whether we’re being overly pessimistic/optimistic with our output gap estimates. It would not be a good long term target, but as a transition policy I think it would likely be more welfare enhancing than just going 1/3 of the way back to the previous trend line.

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. September 2012 at 09:24

    Scott,
    I know you like Tyler Cowen but this statement is just plain dumb:

    “I get nervous at how ngdp lumps together real and nominal in one variable, and I get nervous at how the passive voice is applied to ngdp.”

    http://marginalrevolution.com/marginalrevolution/2012/09/the-private-sector-can-manufacture-its-own-nominal-gdp.html

    No, NGDP is *all* nominal. That’s why it has the “nominal” in front. RGDP is an artificial concept requiring that we estimate an index of the aggregate price level. (I’m almost at the point where I would make any reference to inflation or price levels a capital offence.)

    Regardless of my “mood affiliation” I get really nervous when supposedly smart people start saying really stupid things because of their nerves.

    Most of the rest of his post is gibberish. What he calls his “framing” I would call a hallucination.

  15. Gravatar of Doug M Doug M
    26. September 2012 at 09:31

    “I don’t know of any theoretical models where steady 5% NGDP growth would create bubbles.”

    One of the problems of models, is that they verify the preconcieved notions of the model builder. I have a nice model that shows that the performance of the San Francisco Giants drives the Dow Jones Industrial average. It is not hard to build a model that fits a set of sample data.

    Disequalibrium — I would say that the economy is never “in equalibrium.” It is dynamic, always moving, and always somewhere off ballance.

  16. Gravatar of Greg Ransom Greg Ransom
    26. September 2012 at 09:48

    The “God did it” causal mechanism/explanation for adaptation and the origin of species included everything that everyone believed was “relevant to the problem being solved.”

    But that turned out to be incredibly bad science — and excluded from consideration the actual causal mechanism at work.

    I find this sort of argument BRAIN DEAD:

    “Greg, and your world fails to include the flavor of my breakfast cereal. A model doesn’t have to include everything, only what’s relevant to the problem being solved.”

  17. Gravatar of Greg Ransom Greg Ransom
    26. September 2012 at 09:55

    This is called BEGGING THE QUESTION.

    Get a textbook in informal argument / critical thinking and look up the concept, learn it, then stop making this incredibly unhelpful intellectual blunder:

    ““Greg, and your world fails to include the flavor of my breakfast cereal. A model doesn’t have to include everything, only what’s relevant to the problem being solved.”

  18. Gravatar of George Selgin George Selgin
    26. September 2012 at 10:11

    Mark Sadowski: “No, NGDP is *all* nominal. That’s why it has the “nominal” in front. RGDP is an artificial concept requiring that we estimate an index of the aggregate price level.”

    Amen! The occasional, if tacit, treatment of NGDP as a value that is “derived” by taking the product of two directly observable magnitudes, real output and the price level, is as mischievous as it is wrong. We must understand the behavior of both P and y to depend, the first in the long run and the second in the short run, on that of Py, rather than the other war ’round. That is why it is also important to insist that stabilizing NGDP is not just a rough-and-ready way of minimizing a loss function in which fluctuations of P and Y are separable components. No and no again: if the natural rate of y plummets (natural disaster or war, say), what is desirable is not that we should minimize both P and y movements subject to the supply-shock “constraint. It is rather than we should see P move the opposite way from y, which is done by stabilizing Py.

  19. Gravatar of Morgan Warstler Morgan Warstler
    26. September 2012 at 10:32

    Selgin / Sadowski:

    If NGDPLT has to have make-up to work, WHY is it so great?

    If it doesn’t need make-up to work, how does that happen?

  20. Gravatar of Peter N Peter N
    26. September 2012 at 10:42

    There’s a huge shortage of safe assets, particularly safe collateral, since around $5 trillion or so has been downgraded.

    This is bidding up the price and lowering the yield on what’s left. At the same time, many of the European banks are effectively insolvent and will have to have a fire sale of assets to meet the Basel III capital standards. Santander, for example has been unloading subsidiaries all over the world.

    If banks being unwilling or unable to lend counts as tight money, then money is tight. Large companies with good credit can still tap the bond market (like IBM did), if you’re small or your credit is poor, you have a problem (like Spain paying 7% to borrow).

    And a shortage of safe assets lowering the return on treasuries doesn’t make money loose.

  21. Gravatar of OGT OGT
    26. September 2012 at 10:57

    Interesting post, I hope Beckworth answers. I see ‘safe assets’ demand as both a helpful intuitive confirmation of the need for higher NGDP growth (especially as the pre-crisis trend line potentially depreciates in relevance to current conditions).

    Also, I’d love to see your response to the new Tim Duy piece, which completely coincides with my priors.

    http://economistsview.typepad.com/economistsview/2012/09/fed-watch-why-i-agonize-about-the-zero-bound.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EconomistsView+%28Economist%27s+View%29

  22. Gravatar of Saturos Saturos
    26. September 2012 at 10:59

    George Selgin: Exactly!

    Greg Ransom: Actually, that’s not what the problem with using God as an explanation was: http://lesswrong.com/lw/it/semantic_stopsigns/

    But yes, models can be wrong. You could have just said so about Scott’s, rather than having charged him with being a bad modeler.

  23. Gravatar of John Papola John Papola
    26. September 2012 at 11:44

    Scott,

    If we keep on the same track for a few more years I’ll through in the towel and advocate starting a new 5% trend line from where we are.

    Why 5%? Why not 3% or 2% or 0%?

    Yes, I get the sticky wages point, though that seems to be something that could change and is likely changing given the fall of unionization and the rise of flexible commission/bonus work, networks of freelancers and one-man companies.

    Yes, I get the especially “sticky” price of nominal debts… but that’s still just a contract. Is it really that hard to imagine a new regime of indexing clauses in debt agreements or “price level insurance” or who knows what else people would come up with?

    I don’t know of any theoretical models where steady 5% NGDP growth would create bubbles.

    Isn’t Less than Zero all about how excessive spending growth beyond a productivity norm can produce cumulative credit excess such that it triggers a Hayekian cycle of malinvestment? Maybe that’s not a “model”, but the argument in the book seems pretty strong and rooted in microfoundations.

  24. Gravatar of Saturos Saturos
    26. September 2012 at 12:24

    The Economist explains QE: http://www.economist.com/blogs/schumpeter/2012/09/economist-explains

    John, the 5% trendline really isn’t the most important part of what Scott advocates, NGDPLT is far more important. He thinks that 5% would be a good idea due to wage stickiness and the difficulties that central banks get themselves into with the zero lower-bound on interest rates, but he and George Selgin are largely in agreement – especially after the latest round of back-and-forth between them, I think.

  25. Gravatar of Saturos Saturos
    26. September 2012 at 12:25

    Obviously that’s a terrible explanation of QE – or perhaps a good one according to the Woodfordian definition. I hope one day Ryan Avent gets to do those segments though.

  26. Gravatar of Saturos Saturos
    26. September 2012 at 12:37

    This graph says it all: http://thefaintofheart.files.wordpress.com/2012/09/eli-scott.png

  27. Gravatar of Morgan Warstler Morgan Warstler
    26. September 2012 at 12:51

    Saturos, you cannot jump the gun.

    Scott hasn’t yet said:

    If NGDPLT has to have make-up to work, WHY is it so great?

    If it doesn’t need make-up to work, how does that happen?

    —–

    And you’re not right in your answer to Pappy, Scott has said he thinks it needs to be 4.5% or higher (he’s said he’ll take 4.5%) so we don’t run into the ZLB easily… that’s not an “it doesn’t really matter.”

    And again, I got $10 for your version of Applebees if you can get
    Scott to actually discuss a LT with no make-up that soon / immediately has us raising rates.

    That soon raises rates is the important piece here. What happens after rates go up in short term using NGDPLT? That’s what he hasn’t delved into.

    And THAT is a real “it doesn’t really matter” Scott will agree with, he just won’t say it out loud and explain why.

  28. Gravatar of Alex Salter Alex Salter
    26. September 2012 at 13:04

    “It’s not that monetary disequilibrium never occurs, but rather that I think it lasts for just a brief period. The bigger problem is that equilibrium is re-established at a new and different NGDP level, which creates disequilibrium in the labor market. ”

    How can this be? Monetary equilibrium is restored through a change in the price level. If the price level has changed, then we’re looking at a time period long enough for prices to become “unstuck.” Or are you suggesting that enough prices have changed such that the price level changes, but not yet labor prices (wages)?

  29. Gravatar of Ritwik Ritwik
    26. September 2012 at 15:26

    Saturos

    On pg 143 of his 1941 masterpiece ‘A Pure Theory of Capital’ Hayek solved the problem of world poverty.

    On pg 197, in a footnote, he also solved death and disease.

    Greg, I hope you’ll forgive me. :)

  30. Gravatar of Bill Woolsey Bill Woolsey
    26. September 2012 at 18:08

    John Papola:

    An inflationary equilibrium does not result in bubbles. The higher expected price level increases nominal credit demand, matching the growing nominal credit supply that matches the growing nominal quantity of money. There is no decrease in the real market interest rate (sustainable or otherwise) and so no tendency for real asset prices to rise (sustainable or not) and so there is no bubble.

    Where a 1% growth path for nominal GDP and 2% trend deflation is workable, so is a 3% growth path for nominal GDP and a stable price level. As well as a 5% growth path with 2% trend inflation.

    A regime shift might cause a bubble as people learn the new regime.

    But the inflationary trend ends up with real credit demand, real credit supply, the real interest rate, the relative prices of assets, and the real quantity of money all approximately the same.

  31. Gravatar of Saturos Saturos
    27. September 2012 at 03:57

    Alex, money demand also depends on real income.

    Ritwik, you’re too smart for me. Here’s page 143 of Pure Theory of Capital:

    The first of these two circnmstances means that in all cases where different kinds of input are applied in the different stages of anyone process of production, the
    relative amounts of waiting involved in different processes
    will depend on the relative values of the different kinds
    of input. In order to arrive at an aggregate figure of the
    amount of waiting involved in each process we have to
    assign definite weights to the different units of input,
    and these weights must necessarily be expressed in terms
    of value. But the relative values of the different kinds
    of input will inevitably depend on the rate of interest,
    so that such an aggregate cannot be regarded as something
    that is independect of, or as a datum determining, the
    rate of interest.
    Still more serious is the second difficulty. This is
    directly connected with the fact already noted that in
    some cases only the input function (i.e. the range of
    periods for which we have to wait for the produc+js of
    different units of input) and in other cases only the output
    function (i.e. the range of periods for which we have to
    wait for the different units of output) is directly given
    and that the one can only be converted into the other on
    the assumption that the rate of interest is given. This
    means that in many cases (in all cases where durable goods
    are concerned) we cannot say in any general way, and on
    purely technical grounds, how long the different parts of
    the total amount of input invested will remain invested.
    But this is not all. The fact that the value of any investment grows gradually (at compound interest) into the
    varying value of its product means that larger and larger
    quantities have to be regarded as being invested at each
    successive period for which the given investment is continued.
    If, e.g., the product of one year’s investment of
    a given quantity of input is reinvested for another year,
    the amount that is reinvested includes the interest…

    And here’s the footnote on pages 196-7:

    “Value” is here measured in terms of anyone commodity on the assumption that identical quantities of this commodity available at different dates will be identical in value. The” growth of value in time” means that at successive dates the product of the investment of a given quantity of input at a particular date will be equal in value
    to increasing quantities of the commodity chosen. Under the stationary conditions here postulated, it is immaterial what commodity is used as the ” standard of value” .

    I don’t get your joke (?) at all.

  32. Gravatar of Browsing Catharsis – 09.27.12 « Increasing Marginal Utility Browsing Catharsis – 09.27.12 « Increasing Marginal Utility
    27. September 2012 at 04:01

    [...] Sumner on Selgin and White. [...]

  33. Gravatar of ssumner ssumner
    27. September 2012 at 05:26

    Greg, You said;

    “Fact — steady 5% NGDP growth resulted in a giant unsustainable bubble in the US economy in the 200-2007 period.”

    I thought you were the expert in logic, who understood the difference between “resulted in” and “was correlated with.”

    I gather the bubble was also correlated with the popularity of cable TV shows about home buying. Why not blame TV for the bubble? Let me guess, you have a “theory” connecting money policy. QED.

    curiouseconomist, You are exactly right, but I don’t think they know the size of the output gap, and neither do I. I’m giving you a guesstimate. But yes, if I were the Fed I’d do what you suggest.

    John, Money is approximately superneutral, so faster NGDP trend growth should not create bubbles according to any reasonable macro theory. Bubbles can occur when NGDP growth is unstable, and there is a debate about whether the increase in NGDP growth around 2004-06 was enough to create a bubble. But that’s a different issue.

    There are pros and cons to raising or lowering the NGDP growth rate. There are good arguments for 3% or 7% (as in Australia.) It depends on all sorts of factors, such as money illusion and taxes on capital. I viewed 5% as a pragmatic compromise, which was consistent with highly successful past Fed policy (1990-2007) .

    Alex, Before prices have adjusted monetary equilibrium has already been restored via a change in interest rates and NGDP.

  34. Gravatar of Greg Ransom Greg Ransom
    27. September 2012 at 15:46

    Scott, you are the one asserting without argument and in opposition to sound causal theory that 5% NGDP growth year after year after year is sustainable — but powerful evidence counting against that claim is staring us in the face.

    This leaves you with massive and significant empirical pattern demanding explanation — which you don’t have.

    We had a policy. That policy had a set of results.

    Those results need to be explained, is not by the policy then by something’s.

    But you don’t have any something to offer.

    Some handwaving, but not a causal explanatory mechanism grounded in sound theory.

  35. Gravatar of ssumner ssumner
    28. September 2012 at 05:39

    Greg, There’s a difference between “evidence” and “theory” I thought you understood that difference.

    Two things happening in the same decade doesn’t count as “evidence” without a theory. All the econ textbooks explain the theory of superneutrality of money. What’s your theory?

  36. Gravatar of Greg Ransom Greg Ransom
    28. September 2012 at 07:30

    The pattern needs _some_ explanation — you need to explain I away in some ad hoc fashion or other, and if not, then it counts as a counterexample.

    And if you theory ends up forcing us to endless ad hoc explanations as far as the eye can see — where an alternative offers explanatory unification and power — then the ad hoccery begins to add up to falsifying evidence.

  37. Gravatar of Greg Ransom Greg Ransom
    28. September 2012 at 07:37

    The superneutrality of money isn’t a causal mechanism / theory it is a stipulation — and a falsehood to boot.

    Stipulated definitions as not causal mechanisms or causal facts.

    My theory is the causal mechanism first pioneered by Cantillon.

    The real world constantly vindicates and exhibits that causal pattern.

    And a stipulated definition for a failed science does not count as evidence against what we actually witness in the world.

  38. Gravatar of Major_Freedom Major_Freedom
    28. September 2012 at 10:29

    ssumner:

    Money is approximately superneutral

    Superneutral money is a super oxymoron. Not even the caveats “approximately” or “in the long run” can rescue it.

    Money is a commodity. It is subject to the law of diminishing marginal utility. If more is created, then the marginal utility of it is otherwise lower. This in turn implies a different exchange value vis a vis other goods.

    The question is, how is this different exchange value manifested in the real world market?

    Since in the real world, money is introduced, i.e. inflated, into only some people’s bank accounts, rather than everyone’s bank accounts at the same time, what happens is that the diminished marginal utility of money manifests itself in a change in the exchange value of money as against only a finite collection of other goods and services in the economy, in accordance with the individual preferences of those initial receivers, rather than affecting all goods and services equally which is in accordance with everyone’s preferences, which is what superneutral money theory would have us believe.

    If the Fed sent me a check for $10 billion in exchange for my trash, then the marginal utility of money for me would be radically reduced. But it will not, at that moment, be accompanied by a changed matrix of 300 million other diminished marginal utilities of money such that their marginal utility of money falls at the same rate, such that all prices everywhere increase at the same rate, such that the real economy is unaffected, as per superneutrality.

    On the contrary, I would bring about a diminished marginal utility of money for only a certain selection of other individuals, those I trade with. Then their marginal utility of money would be affected, and so on. This process has an effect on the real economy. If it weren’t for the $10 trillion money printing, and if it weren’t for my spending of that money, the actual matrix of marginal utilities of money for those 300 million people would have been something else. Even if the money stream is steady, spending patterns won’t necessarily be.

    Inflation changes relative prices from what they otherwise would have been. This in turn affects the production of capital and consumer goods. This change in productive structure introduces a new history, permanently. Money is thus not neutral, and not superneutral.

    ANY change in money, either from central bank monopoly or from the process of the free market, will have the implications above. Yet under central bank monopoly money, the changes to the real structure it brings about are harmful. They are harmful because it violates free market principles of mutually consensual trades, and introduces non-consensual toilet paper money whose value is backed by threats of theft, and kidnapping if one refuses to pay protection money in the form of said toilet paper. In a free market individuals can choose their own money and not be threatened by a state to pay what the state “issues” to others.

  39. Gravatar of Free Banking » Intermediate Spending Booms Free Banking » Intermediate Spending Booms
    1. October 2012 at 07:46

    [...] number of recent exchanges between Market Monetarists and their critics, and especially those of their critics associated with the Austrian school, have [...]

  40. Gravatar of The was no “Intermediate Spending Boom” in 2003-07 | Historinhas The was no “Intermediate Spending Boom” in 2003-07 | Historinhas
    2. October 2012 at 13:01

    [...] Boom”) was capable of contributing to the housing boom: A number of recent exchanges between Market Monetarists and their critics, and especially those of their critics associated with the Austrian school, [...]

  41. Gravatar of Sumner Courageously Admits He Can’t Explain Housing Bubble Sumner Courageously Admits He Can’t Explain Housing Bubble
    2. October 2012 at 20:46

    [...] the above excerpt. This is the second time I’ve seen Scott do this in the last few weeks. In another post, responding to White (who had warned that moving from the current NGDP trajectory to 5% growth [...]

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