When should the Cameron government opt for fiscal stimulus?

Several commenters have asked me what I think about the new head of the Bank of England, Mark Carney.  I don’t have much to add beyond what’s been said by people like Nick Rowe and Matt Yglesias.  In my view the Cameron government has several options:

1.  Tell the BOE to change its policy to a 5% or 6% NGDP target for 2 years, 4% thereafter.

2.  Tell the BOE to continue with its 2% inflation target.

If they opt for the NGDP target, then fiscal stimulus would be pointless.

It they opt for the 2% inflation target, then they are essentially telling the BOE to sabotage any fiscal stimulus that might be done (Britain has averaged 3.3% inflation over the past 5 years.)

When would fiscal stimulus be appropriate for a country averaging 3.3% inflation?  Give me a minute to think about it . . .

. . . still thinking . . .

. . . don’t rush me . . .


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78 Responses to “When should the Cameron government opt for fiscal stimulus?”

  1. Gravatar of Benjamin Cole Benjamin Cole
    27. November 2012 at 19:42

    The insistence and persistence of targeting rates of inflation that will also suffocate an economy is remarkable.

    There is a peevish fixation, an unhealthy obsession, and near religious fervor associated with the desirability and putative morality of zero inflation (forget even how to measure that accurately).

    See the Bank of Japan. See their enormous fiscal deficits.

    Then look at Europe. A replay, with some variations.

    Dudes, zero inflation, or even too-low inflation, just does not work.

    Probably better to err on the upside, and live with moderate inflation—and prosperity—than to undershoot and keep inflation too low, and endure monetary asphyxiation.

    In that regard, I think Sumner’s proposals for Britain (and the USA) are a bit timid. Man, blow the money out the door, and get these economies going. We can worry about inflation later, after a long boom.

    Iy would be nice to have a sinecure with a central bank or academic institution. Then you can pompously pontificate about inflation, and the evils thereof.

  2. Gravatar of Major_Freedom Major_Freedom
    27. November 2012 at 20:31

    Still laughing at Yglesias’ insinuation (lack of explicitness) that the US banking system is not a cartel, whereas Canada’s banks are a cartel.

    Both countries have state privileges of banks who have a monopoly in money production.

  3. Gravatar of Major_Freedom Major_Freedom
    27. November 2012 at 20:40

    Benjamin Cole:

    The insistence and persistence of targeting rates of spending that will also drown an economy is remarkable.

    There is a peevish fixation, an unhealthy obsession, and near religious fervor associated with the desirability and putative morality of NGDP growth (forget even how to measure that accurately).

    Dudes, NGDP inflation, or even price inflation, just does not work.

    Probably better to err on the downside, and live with moderate deflation—and prosperity—than to overshoot and keep inflation too high, and endure monetary drowning.

    In that regard, I think Sumner’s proposals for Britain (and the USA) are a bit timid. Man, blow the money out the door, and get these economies going. We can worry about inflation later, after a long boom.

    Iy would be nice to have a sinecure with a central bank or academic institution. Then you can pompously pontificate about inflation, and the evils thereof.

  4. Gravatar of Suvy Suvy
    27. November 2012 at 23:27

    The main advantage of fiscal stimulus versus the central bank buying assets is that rather than injecting money into the asset markets; you’re injecting money into the real economy. I think there is a role for fiscal stimulus in a situation like we have now.

    However, I also agree that targeting inflation makes no sense. Not all goods move the same amount; so targeting 2% inflation could mean an actual inflation higher than 2% or lower than 2%. It makes no sense. I certainly agree that shooting for a NGDP target of 6% would do all of these countries a lot of good.

  5. Gravatar of Phil_20686 Phil_20686
    28. November 2012 at 04:40

    You ask ‘when is monetary stimulus appropriat for an economy with 3.3% inflation’

    Answer: when the CPI is yielding an inappropriate meausure. As you yourself have pointed out, during an oil embargo it would be irrational to attempt to hit a 2% inflation target. Monetary stimulus might well be warranted even with 10% inflation. The arguments for 2% ( or whatever small number) are micro, about helping business adjust wages down with the minimum pain. We should be concerned more with inflation in the mean and median sectors than a few outliers distorting the CPI. In the oil embargo example the bank should target two percent after removing oil from the CPI.

    In the case of the uk, they publish the sector subindices which allows you to look at price inflation by sector and sub sector. Obviously changes in the price of money should be a common regress or, with the noise roughly normally distributed around it. A normal distribution has mode=median=mode, so targeting the weighted average is targeting the median.

    I have done this on my blog for the uk, which demonstrates conclusively that since the ngdp crash, the median sectors have averaged roughly one percent. The distribution is bunched up at zero, as industries without productivity growth cannot lower wages and so cannot lower prices inline with changes in the price of money.

    I think this is kinda obvious in your framework, the ngdp shock was, by definition, deflationary. So the question is where did that deflation go? Answer: many industries have found it hard to lower wages in real terms sufficiently to offset deflation so they are rapidly becoming zombies, with uncompetitive prices, which suppresses demand.

    I think this also accounts for the low productivity growth puzzle. Since wages did not fall during the deflation a lot of productivity growth will be needed just to bring wages inline with competitive equilibrium.

    You can see the details of my analysis on my blog worldofinterest.wordpress.com

  6. Gravatar of Benjamin Cole Benjamin Cole
    28. November 2012 at 05:12

    Major Freedom:

    At least your post was refreshingly short!

    Seriously, explain Japan. They have been doing many of the right things—liberalized their labor and retail markets for example—for the last 20 years.

    But they are suffocating.

    Property markets still falling after 20 years, down 80 percent. The yen is very strong. The stock market down by 75 percent from the peak of 20 years ago, and wallowing around. Real wages going down.

    Japan has excellent labor force, stronger culture than that of the USA’s, better workers. But they are falling behind.

    Tight money just does not work. It is not a question about what is right morally or theoretically.

    It is about what works.

    Japan is a 20 year experiment in minor deflation, The results are horrible.

    China’s central bank, btw, targets 4 percent annual inflation. They are booming.

    Does that suggest anything to you?

    Or, will you say all of Japan’s shortfalls are due to fiscal and regulatory policies, and all of China’s stupendous growth is due to fiscal and regulatory policies, and that monetary policy has nothing to do with it in either country?

    In that case, who cares about monetary policy?

  7. Gravatar of ssumner ssumner
    28. November 2012 at 05:55

    Suvy, Monetary policy does not inject money into asset markets. Indeed money doesn’t go into markets at all. For every purchase there is a sale. Money goes through markets.

    And even if money did go “into” asset markets, I have no idea why that would be a worse outcome that fiscal stimulus.

    Phil, You said;

    “You ask ‘when is monetary stimulus appropriate for an economy with 3.3% inflation’”

    No I didn’t, read it again.

    I agree with most of your comment.

  8. Gravatar of Saturos Saturos
    28. November 2012 at 06:02

    Scott, a follow-up on Singapore, have you seen this? http://www.guardian.co.uk/world/2012/nov/21/singapore-least-emotional-country-poll

  9. Gravatar of ssumner ssumner
    28. November 2012 at 06:22

    Saturos, I commented on that in the other thread. And Philippines is the most emotional. Those two observations suggest a negative correlation between economic success and emotion–but some of the other countries don’t fit that theory.

  10. Gravatar of Saturos Saturos
    28. November 2012 at 06:29

    Ben, even Scott agrees that tight money can’t explain most of the Japanese stagnation. And we all agree that money is neutral in the long run, unless inflation is very high or unpredictable.

  11. Gravatar of Major_Freedom Major_Freedom
    28. November 2012 at 06:49

    Benjamin Cole:

    Seriously, explain Japan.

    What is there to explain? Real GDP per capita (PPP) in Japan has been steadily growing for the past 20 years. Since 1987 Japan has performed better than Iceland, Italy, New Zealand, Czech Republic, Portugal, Slovak Republic, Hungary, Poland, Mexico, Turkey, and the OECD as a whole. They have performed roughly equal to Switzerland, Belgium, Korea, France, Spain, and the Euro Area as a whole.

    See, the problem with Japan is not Japan, but the data that is chosen as representative of a country’s health. Most data is biased upwards with inflation and downwards with deflation, even if the data is statistically “corrected” for inflation.

    Then there is the fallacy of conflating correlation with causation, in which case we must say even if Japan did perform the worst out of all other countries, it still would not prove that lack of loose money was the root cause of it.

    Japan’s property market fell 80% percent because of a prior massive inflationary boom. How is that prove that inflation is the solution again?

    Japan is not “falling behind”. They are performing better than many “loose” money countries, countries that you would believe are doing better because you’re looking at data that isn’t as reliable as real GDP per capita (PPP).

    Tight money does indeed work. Japan has had competitive real growth for the last 20 years. You said Japan has had tight money and has done horrible, and that China has had loose money and is booming, and then you asked me if that suggests anything to me. Yes, it does. It suggests to me that you are a very sloppy and agenda driven thinker. If I did what you did, then I would cherry pick a country that did worse than Japan since 1987 that just so happened to have had looser money, and then assert that looser money is the reason the worse country did worse. But I won’t do that, because I know better.

  12. Gravatar of Major_Freedom Major_Freedom
    28. November 2012 at 06:56

    ssumner:

    Suvy, Monetary policy does not inject money into asset markets. Indeed money doesn’t go into markets at all. For every purchase there is a sale. Money goes through markets.

    Is this a joke? OK, monetary policy goes “through” asset markets. The “sales” encompass higher than otherwise prices, because there is higher than otherwise nominal demand. It’s why we have price inflation. More money leads to non-market money production prices, not market money production prices.

    And even if money did go “into” asset markets, I have no idea why that would be a worse outcome that fiscal stimulus.

    I won’t rank one in terms of the other, but I will say that fiscal stimulus, because it utilizes already existing money, and doesn’t artificially reduce interest rates, it doesn’t generate the business cycle. So if one prefers to have business cycles and less government spending, or more government spending and no business cycles, then that would determine what one holds as “better”.

  13. Gravatar of Major_Freedom Major_Freedom
    28. November 2012 at 06:58

    Saturos:

    Ben, even Scott agrees that tight money can’t explain most of the Japanese stagnation.

    Seriously, what stagnation?

    http://i.imgur.com/6pHkr.png

    Source: International Monetary Fund, “World Economic Outlook,” April 2010.

    http://i.imgur.com/6hCAj.png

    Source: “OECD in Figures 2008,” OECD Observer.

  14. Gravatar of Saturos Saturos
    28. November 2012 at 07:13

    Everyone: What the hell is going on right now?

    http://www.businessinsider.com/november-28-gold-just-tanked-2012-11

  15. Gravatar of SG SG
    28. November 2012 at 08:59

    MF:

    Between 1980 and 1991, the GDP deflator rose at an annual pace of 1.6%, real per capita GDP rose at 8.28%, and unemployment averaged 2.4%

    Between 1991 and 2010, GDP deflator fell at 0.7% rate, real per capita GDP rose at 2.79%, and unemployment averaged 4%.

    You can’t deny there was an abrupt shift in the health of the Japanese economy in the early 90′s. The only question is why it happened.

  16. Gravatar of Phil Phil
    28. November 2012 at 09:08

    Markets crazy these days. Big players can take advantage of the algo’s which try to exploit correlations. E.g, suppose there is an HF hedge fund that attempts to exploit the gold-silver correlation by betting that a move in one will be replicated in the other. A second hedged fund that wants to buy gold can exploit this by aggressively selling silver on a low vol day, and getting the gold more cheaply when it is dragged down alongside the silver.

    If this is the case the move will be a prelude to aggressive yin in one market only.

  17. Gravatar of Suvy Suvy
    28. November 2012 at 09:57

    “ssumner:

    Suvy, Monetary policy does not inject money into asset markets. Indeed money doesn’t go into markets at all. For every purchase there is a sale. Money goes through markets.

    Is this a joke? OK, monetary policy goes “through” asset markets. The “sales” encompass higher than otherwise prices, because there is higher than otherwise nominal demand. It’s why we have price inflation. More money leads to non-market money production prices, not market money production prices.”

    I agree with Major Freedom on this one.

    “And even if money did go “into” asset markets, I have no idea why that would be a worse outcome that fiscal stimulus.”

    I never said that it was a worse outcome. It’s simply a different outcome. The advantage of fiscal stimulus is that you could be directly producing more and I think it will also have a larger impact on increasing production in general. For example, right now we have 12 million people unemployed and unable to find a job. That’s a labor resource that’s not being used. Normally, fiscal stimulus is counterproductive because you crowd out private investment; however, when the private sector, for whatever reason, isn’t putting the resources to use; the government can come in and increase production. If we use those resources that aren’t being used by the private sector for things like infrastructure and public investment, we’re producing more. If the central bank purchases financial assets; we’re not producing more.

    Note: I’m not saying that more fiscal stimulus is a good thing. It can create its own problems, especially when public debt increases. However, there are advantages to fiscal stimulus as well.

  18. Gravatar of Doug M Doug M
    28. November 2012 at 10:17

    SG,

    When you are an “emerging” economy it is possible to grow rapidly. You can leapfrog many generations of technology. Once you are a rich country, it becomes harder to maintain the same rate of productivity gains.

    I don’t think 8.3% per capita real growth was sustatainable for any longer than it had lasted. While Japan Japan’s growt rate since 1990 may still be underwhelming, The era of rapid expansion was surely destined to come to a close.

  19. Gravatar of Doug M Doug M
    28. November 2012 at 10:35

    Saturos,

    Well clearly there are more sellers of gold than there are buyers!

    A $20 price fluctuation is not abnormal.

  20. Gravatar of Major_Freedom Major_Freedom
    28. November 2012 at 10:40

    SG:

    Between 1980 and 1991, the GDP deflator rose at an annual pace of 1.6%, real per capita GDP rose at 8.28%, and unemployment averaged 2.4%

    Between 1991 and 2010, GDP deflator fell at 0.7% rate, real per capita GDP rose at 2.79%, and unemployment averaged 4%.

    You can’t deny there was an abrupt shift in the health of the Japanese economy in the early 90′s. The only question is why it happened.

    You have already decided on the theory and believe it correct. You’re just using this example as if it somehow proves your theory.

    A 2.79% real GDP per capita (did you correct it for PPP?) and 4% unemployment would probably be considered by you to be a success if the context was a more inflationary economy like Spain or Italy, or in some other country with relatively high inflation and unemployment.

    Japan, after an unsustainable inflationary boom, saw stimulus after stimulus after stimulus (which, as an aside and is not crucial to my point, lead to higher than otherwise inflation), made history one where an inflationary boom with unsustainable real production was then followed by a reduction in output, sooner rather than later because the central bank chose abstaining from accelerating the printing rather than continuing to accelerate towards infinity. Hmmm, I wonder where we’ve heard this story before? Sounds familiar.

    If I looked at an example of a country that had a period of lower inflation, higher output and lower unemployment, and then a subsequent period of higher inflation, lower output and higher unemployment, then I would not conclude that higher inflation is better than lower inflation. I wouldn’t argue the correlation is a causation.

  21. Gravatar of Major_Freedom Major_Freedom
    28. November 2012 at 10:40

    The point is that Japan is not mired in a decades long depression like many believe. The growth they have had has been competitive. More inflationary economies have been less productive.

  22. Gravatar of dtoh dtoh
    28. November 2012 at 10:56

    Re: Japan,

    Benjamin Cole, you’re right.

    MF, You owe me a new keyboard. The fit of laughter caused by the ludicrosity of your assertion made me spill my coffee on my computer.

    I lived in Japan for 30 years. If you believe Japan is doing well economically you’re living in an alternate reality. Japan has been undergoing 20 years of economic and psychological impoverishment caused by bad monetary policy…. adult children unable to move out of the parents’ houses, a shrinking population caused by the inability to afford marriage and child raising.

    Japan has a particular problem because of the inflexibility of its labor markets. With the wage rigidity which results, Japanese monetary policy has been a cancer on the society.

  23. Gravatar of Major_Freedom Major_Freedom
    28. November 2012 at 11:11

    MF, You owe me a new keyboard. The fit of laughter caused by the ludicrosity of your assertion made me spill my coffee on my computer.

    Isn’t it uncomfortable when precious worldviews are shattered?

    I lived in Japan for 30 years. If you believe Japan is doing well economically you’re living in an alternate reality.

    I didn’t say they are doing “well.” I’ve lived in Japan for two years teaching English after the real estate bubble burst, and I can tell you that Japan is not so mired in depression as it is repeatedly told by the usual suspects. It’s doing about average.

    Japan has been undergoing 20 years of economic and psychological impoverishment caused by bad monetary policy….

    No, that’s your theory.

    adult children unable to move out of the parents’ houses, a shrinking population caused by the inability to afford marriage and child raising.

    Haha, so higher prices ought to fix that? You’re not making any sense.

    Japan has a particular problem because of the inflexibility of its labor markets. With the wage rigidity which results, Japanese monetary policy has been a cancer on the society.

    Higher inflation prior was the cancer. They’re in remission.

  24. Gravatar of SG SG
    28. November 2012 at 12:26

    MF:

    You present zero evidence for the theory that Japan’s growth in the 80′s was the result of an “inflationary boom.” Indeed, the data indicate that inflation, as measured by the GDP deflator, was about one and a half percent. You’re calling that an inflationary boom? Has the US been in an inflationary boom for the last 70 years?

    http://oregonstate.edu/cla/polisci/faculty-research/sahr/sumprice.pdf

    btw, my GDP per capita data was adjusted for PPP.

  25. Gravatar of SG SG
    28. November 2012 at 12:29

    MF:

    You seem to believe that changes in nominal variables have real effects. Do you believe that these effects (“malinvestment”) persist over the long run? If so, how to you explain US prosperity post-WWII. If not, how long do they last?

  26. Gravatar of SG SG
    28. November 2012 at 12:50

    Scott:

    The marginal tax rate lie continues. A plurality of tax professors in this survey believe that the highest tax rate on ordinary income in 2013 will be 39.6%:

    http://taxprof.typepad.com/taxprof_blog/2012/11/tax-prof.html

  27. Gravatar of Sarkis Sarkis
    28. November 2012 at 13:07

    @SG Pointless to engage with MF using logical arguments or basic economic theory. The problem with MF is that he bases all his arguments on a giant conspiracy. He rarely justifies his arguments rather he sets them as axioms (that is true because I say that is true e.g. the fed is an evil institution). Also he rarely answers directly, usually he answers questions with other questions.

  28. Gravatar of Major_Freedom Major_Freedom
    28. November 2012 at 13:16

    SG:

    You present zero evidence for the theory that Japan’s growth in the 80′s was the result of an “inflationary boom.”

    I didn’t think it needed evidence because I thought it was common knowledge.

    Indeed, the data indicate that inflation, as measured by the GDP deflator, was about one and a half percent.

    GDP deflator is not a good indicator of how inflation affects relative prices.

    You’re calling that an inflationary boom? Has the US been in an inflationary boom for the last 70 years?

    There has been a dollar bubble since 1971.

    btw, my GDP per capita data was adjusted for PPP.

    Thanks.

    You seem to believe that changes in nominal variables have real effects. Do you believe that these effects (“malinvestment”) persist over the long run? If so, how to you explain US prosperity post-WWII. If not, how long do they last?

    Humans change in terms of their knowledge and preferences, so booms and busts are not limited to a particular time frame.

    Sarkis:

    @SG Pointless to engage with MF using logical arguments or basic economic theory.

    I would LOVE to see logical arguments and basic economic theory from you. So far, bupkus.

    The problem with MF is that he bases all his arguments on a giant conspiracy.

    That is a giant straw man meant solely for the purposes of discrediting me instead of my arguments.

    He rarely justifies his arguments rather he sets them as axioms (that is true because I say that is true e.g. the fed is an evil institution).

    I always justify my arguments where appropriate, and when asked.

    Also he rarely answers directly, usually he answers questions with other questions.

    I almost always answer questions directly. Where I answer a question with a question, it’s when those questions have answers that are grounded in self-reflection, rather than being lectured to by me.

    In all your charges against me, you have not provided a single shred of evidence. You want SG to take you on faith. You are preying on his ignorance and hoping that by you ganging up on me, he’ll be convinced through ex cathedra assertions, that what you are saying is accurate.

    You are obviously not interested in honest and open debating.

  29. Gravatar of Major_Freedom Major_Freedom
    28. November 2012 at 13:21

    Sarkis:

    It is not a logical argument to assert that because Japan had lower growth during low inflation, and higher growth during higher inflation, that is means higher inflation causes the higher growth. That is conflating correlation with causation.

    You seem to be still smarting from our last debate, such that you felt compelled to go out of your way and telling SG that I don’t use logical arguments. Yet I am the one adhering to basic logic here!

    It would be great if you could back up your accusations. But we both know you won’t.

  30. Gravatar of Sarkis Sarkis
    28. November 2012 at 13:42

    Sorry for hurting your feelings, just stated my personal opinion which I formed after engaging with you.

    I’m still waiting for a reply in our last debate. I think we both know that you will never reply don’t we now?

    If you were a proper debater you wouldn’t abandon debates just because you have nothing to back up your arguments with.

    Don’t forget that you base most of your arguments on a giant conspiracy against competition in money but you have never backed this up with a shred of evidence.

  31. Gravatar of Jim Glass Jim Glass
    28. November 2012 at 13:46

    MF, obstinately refusing to learn from what was explained to him previously, and not taking the clue from Occam’s Razor that “when your opinion about a fact differs from that of everybody else in the world, *probably* the opinion that’s wrong is yours”, repeats himself from nine months ago, with…

    Seriously, what stagnation?

    http://i.imgur.com/6pHkr.png

    Source: International Monetary Fund, “World Economic Outlook,” April 2010.

    Dude! LOL! *I* gave you that IMF WEO source!

    And as I pointed out to you last March when you were selling this same bunkum, using these same charts you cherry picked from Web searches but clearly didn’t understand, you are including US inflation in your Japanese growth there!

    Those numbers you cite are “real GDP by PPP per capita in current dollars“. You are comparing Japan’s 1987 GDP in current 1987 dollars to Japan’s 2010 GDP in 2010 dollars. US inflation over 1987-2010 was 92% — and that you of all people (!) still insist on counting 92% of US inflation in Japan’s GDP growth, to conclude it is “healthy” … the irony!

    Of course you did tell me back then that you didn’t know how to make the inflation adjustment(!!) — not that you’ve let it stop you from apparently repeating ever since these numbers that you admitted then you didn’t understand.

    OK, so here’s how you do it the right way, for your future reference:

    Go to the IMF WEO Database, October 2012. Not the old one. Look up for Japan, “Gross domestic product based on purchasing-power-parity (PPP) per capita GDP, Current international dollar” for say the last 20 years. And you get, “1991: 20,465.62; 2011: 34,748.15″ — the numbers you so happily build your church upon.

    BUT … those are in current 1991 dollars and current 2011 dollars. So we have to remove US inflation from Japanese growth to get “real GDP at PPP per capita”. BLS.gov tells us that the US CPI over 1991 to 2011 rose from 100.00 to 165.15. Thus to get 1991 Japanese GDP in 2011 dollars (to compare to its 2011 GDP in 2011 dollars) we have to multiply by 1.6515.

    Thus the relevant numbers for Japan’s per capita PPP GDP are….

    1991, in 1991 dollars: 20,465.62

    1991, in 2011 dollars: 33,798.97
    2011, in 2011 dollars: 34,748.15, = +2.8% … over 20 years!!

    Repeating this process for all the countries you claimed Japan has bested or equaled, we get…

    Poland, 117.7%
    Korea, 114.7%
    Turkey, 53.1%
    Hungary, 39.8%
    New Zealand, 25.0%
    United States, 23.7%
    Spain, 22.7%
    Iceland, 19.8%
    Belgium, 19.4%
    Portugal, 16.7%
    Mexico, 13.9%
    France, 12.3%
    Switzerland, 5.5%
    Japan, 2.8%
    Italy, 2.1%

    Advanced Economies, 22.9%
    European Union, 22.5%
    Japan, 2.8%

    Say “hello” to the real world!

    Again, simple common sense tells you – well, should have told you — that when the entire world including the Japanese(!) think the Japanese have been stuck in a long-lasting slump, but you think they haven’t been, *probably* the opinion that’s wrong about that is yours … so you might want to re-check your numbers!

    Before today I haven’t read any of your comments for nine months, since I corrected you on this nonsense back then, due to your insistence on creating your own alternate world to live in. To see you today repeating the exact same thing, using the very same charts (always instead of actual numbers) that you still don’t understand even after they were explained to you … very impressive!

    But if I read another comment of yours nine months from now … don’t let it happen again!!

    See, the problem with Japan is not Japan, but the data that is chosen as representative of a country’s health. Most data is biased upwards with inflation…

    LOL!!! :-)

  32. Gravatar of Sarkis Sarkis
    28. November 2012 at 13:50

    Also your proposed system of competition in money cannot work unless we return to the gold standard.

    So effectively you are arguing for a return to the gold standard. For some reason you prefer to call this “competition” in money production.

    If I’m wrong please correct me otherwise it’s you that you are not interested in a honest and open debate.

  33. Gravatar of dtoh dtoh
    28. November 2012 at 13:50

    MF
    I didn’t say they are doing “well.” I’ve lived in Japan for two years teaching English after the real estate bubble burst, and I can tell you that Japan is not so mired in depression as it is repeatedly told by the usual suspects. It’s doing about average.

    The real estate bubble burst more than 20 years ago. The problem has been since then.

    No, that’s your theory.

    It’s not a theory. It’s an observation. I assume you know the difference.

    So higher prices ought to fix that? You’re not making any sense.

    No, but higher expected real incomes will.

    They’re in remission.

    ROFL. Dude, you have absolutely no idea what you’re talking about.

  34. Gravatar of Doug M Doug M
    28. November 2012 at 14:16

    Dtoh,

    Inflation plus unemployment equals decling real incomes.

    At the crux of the Sumner NGDP arguement is that wages are sticky. High unemployment is a function of real incomes that are too high. A stable level of NGDP growth gernerates inflation if the real economy stalls. That is, when unemployment rises, higher inflation will push down the real wage to a market clearing level. Ultimately this should create a more stable and lower average level of unemployment.

    As for rising the cost of living for the unemployed, it sucks to be one of them.

  35. Gravatar of dtoh dtoh
    28. November 2012 at 14:35

    Doug M
    I totally agree and understand. That’s why Japan has such a serious problem. Very low inflation and very sticky wages.

  36. Gravatar of Bill Ellis Bill Ellis
    28. November 2012 at 17:12

    Saturos asks …. “Everyone: What the hell is going on right now?”

    The “Always right ” markets are having an irrational reaction to the “fiscal cliff” ?

  37. Gravatar of Major_Freedom Major_Freedom
    28. November 2012 at 18:34

    Sarkis:

    Sorry for hurting your feelings, just stated my personal opinion which I formed after engaging with you.

    My feelings are not hurt. That you suspect they are may suggest that is what you intended to do.

    Your personal opinion contained accusations without proof. That is what I am addressing.

    I’m still waiting for a reply in our last debate. I think we both know that you will never reply don’t we now?

    If you were a proper debater you wouldn’t abandon debates just because you have nothing to back up your arguments with.

    Do you know how difficult it is to get the last word in every single debate I engage myself in? I debate a lot of people. I am not avoiding your post, I just don’t know there is a post. Maybe you can link to it.

    Don’t forget that you base most of your arguments on a giant conspiracy against competition in money but you have never backed this up with a shred of evidence.

    Yes I have. I have specifically referenced works that go into more detail. The fact that you say I hVen’t provided evidence shows that you, like me, don’t read every single post addressed to me. But, contrary to you, I won’t accuse you of purposefully evading my posts.

    —————–

    Jim Glass

    MF, obstinately refusing to learn from what was explained to him previously, and not taking the clue from Occam’s Razor that “when your opinion about a fact differs from that of everybody else in the world, *probably* the opinion that’s wrong is yours”, repeats himself from nine months ago

    Jim, I have already showed you what was wrong with your original attempt to refute my arguments about Japan the last time, I find it rather strange that you would interpret that last debate as me somehow not accepting an alleged truth.

    Dude! LOL! *I* gave you that IMF WEO source!

    No you didn’t. I gave you that source. I cited the same exact source the last time I argued Japan is not in a depression. You know, the argument to which you responded with a challenge. How in the world can you claim to have given me the source that I myself used to argue Japan is not in a depression? Maybe you yourself cited the same source, and you just didn’t know I already cited it.

    And as I pointed out to you last March when you were selling this same bunkum, using these same charts you cherry picked from Web searches but clearly didn’t understand, you are including US inflation in your Japanese growth there!

    First, it’s not “bunkum”. Second, the charts are not cherry picked; they show what I consider to be superior (yet still flawed) measurements of standards of living. If I consider Real GDP per capita (PPP) to be superior to the statistics you want to look at, then it isn’t “cherry picking.”

    Those numbers you cite are “real GDP by PPP per capita in current dollars“. You are comparing Japan’s 1987 GDP in current 1987 dollars to Japan’s 2010 GDP in 2010 dollars. US inflation over 1987-2010 was 92% — and that you of all people (!) still insist on counting 92% of US inflation in Japan’s GDP growth, to conclude it is “healthy” … the irony!

    I can see statistical economics is not your strong suit. No, I am not including 92% of US inflation in Japan’s GDP growth. The same method is used for all countries in the second chart I linked to. The standardization does not bias Japan’s data.

    Don’t you even know what Real GDP per capita (PPP) means?

    Of course you did tell me back then that you didn’t know how to make the inflation adjustment(!!) — not that you’ve let it stop you from apparently repeating ever since these numbers that you admitted then you didn’t understand.

    I said no such thing. You seem to be having tremendous difficulty understanding fairly rudimentary charts.

    Go to the IMF WEO Database, October 2012. Not the old one. Look up for Japan, “Gross domestic product based on purchasing-power-parity (PPP) per capita GDP, Current international dollar” for say the last 20 years. And you get, “1991: 20,465.62; 2011: 34,748.15″ — the numbers you so happily build your church upon.

    This time period includes the financial collapse, with the aftermath of reduced output. It is not necessary to include post 2010 data, because the PURPOSE of the charts, the reason why I linked to them, is to show that, contrary to the claims otherwise, Japan has NOT experienced a 20 year depression. Sure, if you cherry pick GDP in 1991 and post collapse 2011, then you will get a lower inferred annual real gdp per capita (PPP). The reason why I showed the chart over time is because it shows growth that rivals many other countries in the world. Japan has outcompeted many more inflationary countries, if we look at the above statistic.

    BUT … those are in current 1991 dollars and current 2011 dollars. So we have to remove US inflation from Japanese growth to get “real GDP at PPP per capita”. BLS.gov tells us that the US CPI over 1991 to 2011 rose from 100.00 to 165.15. Thus to get 1991 Japanese GDP in 2011 dollars (to compare to its 2011 GDP in 2011 dollars) we have to multiply by 1.6515.

    That is not what you are supposed to do. That is just ridiculous.

    Thus the relevant numbers for Japan’s per capita PPP GDP are….

    1991, in 1991 dollars: 20,465.62

    1991, in 2011 dollars: 33,798.97
    2011, in 2011 dollars: 34,748.15, = +2.8% … over 20 years!!

    Dear God. This has got to be the most uninformed intellectual catastrophe I have ever seen on this blog. And that is saying something.

    The only other thing I can say, considering the fact that you are hopeless, is that you have absolutely no clue how to read those charts.

    Repeating this process for all the countries you claimed Japan has bested or equaled, we get…

    And even bigger catastrophe?

    Again, simple common sense tells you – well, should have told you — that when the entire world including the Japanese(!) think the Japanese have been stuck in a long-lasting slump, but you think they haven’t been, *probably* the opinion that’s wrong about that is yours … so you might want to re-check your numbers!

    Oh I get it, You’re an intellectual follower. I bet if you were around during the 1960s, when most economists thought socialism worked, that you would chastise free market advocates and say “Don’t you think that because so many economists believe socialism works, that *probably* the opinion that’s wrong is yours?”

    I don’t follow what most economists say. Most of the time most economists are wrong.

    Before today I haven’t read any of your comments for nine months, since I corrected you on this nonsense back then, due to your insistence on creating your own alternate world to live in.

    You didn’t correct anything. You were wrong then, and you are even more wrong now.

    To see you today repeating the exact same thing, using the very same charts (always instead of actual numbers) that you still don’t understand even after they were explained to you … very impressive!

    hahaha, look in the mirror.

    Thanks for making me laugh. You should be a comedian rather than whatever it is you are doing. Wait, are you joking the whole time? Please tell me this is all just a joke. Speaking of Occam’s razor, if you calculate a real growth for Japan of under 3% total over a period of 20 years, you’re doing something wrong.

    ———————-

    Sarkis:

    Also your proposed system of competition in money cannot work unless we return to the gold standard.

    Not necessarily. Monetary competition means there is no state imposed standard. not gold, not fiat, not anything. The market process determines what commodity becomes dominant for the purposes of money.

    If a gold standard is imposed by the state, then that would be a non-competitive monetary order as well.

    So effectively you are arguing for a return to the gold standard. For some reason you prefer to call this “competition” in money production.

    ???

    It seems like for some reason you prefer to call “monetary competition” a state imposed gold standard. I am not arguing for a gold standard for those who don’t want to use it.

    If I’m wrong please correct me otherwise it’s you that you are not interested in a honest and open debate.

    How does that make sense? You make wild and sweeping (and false) pronouncements about my convictions, and you assert that if I don’t go out of my way to correct you, that it is me who is not being open and honest?

    You have got me all wrong. I am not secretly plotting to get a gold standard. I really do want individuals to use whatever commodity they want for the purposes of medium of exchange (and the subsidiary uses such as unit of account). I don’t want the state to point its guns at you, demanding that you pay them protection money in gold, even if you don’t even earn gold, such that if you want to avoid getting shot, or kidnapped, that you will have to go out and sell your goods or labor for other people’s gold, which would make gold the de facto money. No, I want you to accept any commodities you want, on whatever terms you want with your trading partners. The only prohibition is on violating other people’s property rights.

    ————————

    dtoh:

    The real estate bubble burst more than 20 years ago. The problem has been since then.

    Seriously, what problem? Other than the usual hampering of free market activity that is.

    You keep saying there is a problem there, but I have shown that if we look at Real GDP per capita (PPP), Japan is right there in the mix. It’s doing better and worse than a lot of countries.

    “No, that’s your theory.”

    It’s not a theory. It’s an observation. I assume you know the difference.

    Observations are meaningless random information without an a priori theory. You are doing what sooooooo many positivist minded people do. You have an a priori theory that is almost taken for granted and pretty much unanalyzed, and you understand the data using that theory, and then you believe that the data alone somehow a posteriori reveals the very theory you already had in mind. You guys are like theists who subconsciously believe God is doing everything, and then you go out and observe the real world, and you claim that your observations somehow suddenly and unexpectedly prove God exists.

    “So higher prices ought to fix that? You’re not making any sense.”

    No, but higher expected real incomes will.

    Inflation does not accomplish that.

    “They’re in remission.”

    ROFL. Dude, you have absolutely no idea what you’re talking about.

    How so?

    —————————

    dtoh:

    I totally agree and understand. That’s why Japan has such a serious problem. Very low inflation and very sticky wages.

    Wage earners aren’t going to insist on higher than market wages until they starve to death. If wages are sticky, you have to find out WHY unemployed people refuse to take pay cuts, and how they are able to survive.

  38. Gravatar of Sarkis Sarkis
    28. November 2012 at 19:32

    MF

    “You have got me all wrong. I am not secretly plotting to get a gold standard. I really do want individuals to use whatever commodity they want for the purposes of medium of exchange (and the subsidiary uses such as unit of account). I don’t want the state to point its guns at you, demanding that you pay them protection money in gold, even if you don’t even earn gold, such that if you want to avoid getting shot, or kidnapped, that you will have to go out and sell your goods or labor for other people’s gold, which would make gold the de facto money. No, I want you to accept any commodities you want, on whatever terms you want with your trading partners. The only prohibition is on violating other people’s property rights.”

    Yes that’s the point, with competition in money you need a unit of account. Some commodity which could be gold or anything. Shouldn’t have said gold standard should have said commodity driven competition in money. You are arguing for a “commodity” standard (with multiple issuers of mediums of exchange). Why is that better than fiat money? Why should we link our money to some commodity or even a basket of commodities. Isn’t the MM proposal for stable nominal growth going to allow real market forces operate without nominal shock hindrances?

  39. Gravatar of Benjamin Cole Benjamin Cole
    28. November 2012 at 20:34

    Major Freedom:

    “See, the problem with Japan is not Japan, but the data that is chosen as representative of a country’s health. Most data is biased upwards with inflation and downwards with deflation, even if the data is statistically “corrected” for inflation.”

    If your premise is that we cannot trust official numbers, then we are all just in a huge mud bath throwing mud at each other. None of us have secret and better information on real economic output.

    Yes, there are some other explanations for Japan’s relatively weak performance in their tight-money era of the last 20 years. Some people point to demographics.

    But I note they have instituted pro-market reforms, in labor and retail markets. You can read Japanese literature today in which the demise of the old-fashioned neighborhood and mom-and-pop neighborhood retailers is lamented. They have opened up for trade more.

    Despite pro-market reforms, Japan’s performance–by official measures–has been very weak. On par with France, you say? Statist France?

    Side note to Saturos: I don’t know why Sumner thinks most of Japan’s poor performance is not attributable to tight money.

    It may be that in the long run money is neutral. But the “long run” may be multi-generational. Japan is 20 years into zero inflation, and it is still not working.

    I could even argue, as does DTOH, that a long enough recession dulls the cultural appetite for material success, and so waiting for the neutrality of money will take who knows how long? Decades more, on top of the 20 already lost?

  40. Gravatar of dtoh dtoh
    28. November 2012 at 23:16

    Benjamin Cole,
    You are right with respect to long term neutrality of money in Japan. In Japan, the unemployed are certainly willing to work at lower wages. The problem is that in a stagnant economy, the only way to hire them is to replace existing workers, and in Japan it is very difficult to terminate employees and requires very large severance payments so that any wage savings from replacing higher paid existing workers with new employees are dwarfed by the cost of termination.

    Scott is right though that Japan has a lot of other structural problems. IMHO the big ones are i) confiscatory tax rates, ii) the high cost of compliance and regulation, and iii) an illiquid (albeit improving) real estate market, and iv) the lack of well developed capital markets for new and small businesses.

    As a result, a lot of the economic transition which is occurring is in the gray/black economy….primarily cash businesses where flexible tax compliance is possible, which explains why Tokyo has by far the best restaurants in the world.

  41. Gravatar of dtoh dtoh
    28. November 2012 at 23:25

    MF:
    You said,
    Observations are meaningless random information without an a priori theory.

    If I’m sitting in San Franciso and you send me an email from Miami stating that it’s sunny and 70 degrees in Buffalo, I might be willing to listen to your theory. If you send me the same email and I’m sitting on my porch in Buffalo and it’s snowing outside, then (to put it politely) you have a serious credibility problem.

  42. Gravatar of dtoh dtoh
    28. November 2012 at 23:37

    Benjamin Cole,
    Just by way of clarification, I don’t believe that a prolonged recession dulls the appetite for material success, but I do believe it dulls the expectation that action will result in material success.

  43. Gravatar of Major_Freedom Major_Freedom
    29. November 2012 at 05:04

    dtoh:

    “Observations are meaningless random information without an a priori theory.”

    If I’m sitting in San Franciso and you send me an email from Miami stating that it’s sunny and 70 degrees in Buffalo, I might be willing to listen to your theory. If you send me the same email and I’m sitting on my porch in Buffalo and it’s snowing outside, then (to put it politely) you have a serious credibility problem.

    Please note, dtoh, that the context of that argument I made was economics. Observations should be understood as economic data (human action) observations.

    For example, if you’re in San Francisco and your head is over a microscope, and I observe you, then I would not be able to claim that you are making an observation unless I understand what observation is in theory. I cannot garner from the sense data that is entering my eye that aha, you are making an observation. If I didn’t know what it means to make an observation, I would not be able to know you are making an observation.

    The same is true for all other economic observations.

    You misunderstood me when you tried to insinuate that a priori theory is some sort of crystal ball, or supernatural, or mystical revelation mechanism that allows one to know that there are, say, 450000 craters on the far side of the moon without observing them. A priori theory is associated with empirical information, but does not predict empirical information. It constrains empirical information and allows us to make sense of what we are observing. It is the logical structure of our active minds. It doesn’t “distort” sensory data, it filters and integrates it into what is called knowledge. Sensory data without an active mind is not knowledge.

    Economic propositions are not empirically derived, but this does not mean that economic propositions are totally cut off from empirical observations. Knowledge starts with empirical knowledge, but over time, certain propositions become known to us by self-reflection. These are necessary truths because we learn how our mind works by how it interacts with the outside world.

  44. Gravatar of Major_Freedom Major_Freedom
    29. November 2012 at 05:06

    dtoh:

    In Japan, the unemployed are certainly willing to work at lower wages. The problem is that in a stagnant economy, the only way to hire them is to replace existing workers

    If lower wages will do the trick, then the same payment to wages can be paid to more workers at lower prices.

    and in Japan it is very difficult to terminate employees and requires very large severance payments so that any wage savings from replacing higher paid existing workers with new employees are dwarfed by the cost of termination.

    Is that a regulation?

  45. Gravatar of dtoh dtoh
    29. November 2012 at 05:55

    Is that a regulation?

    MF, I’m assuming that’s a real question and you’re actually trying to learn something so I’m happy to answer.

    No. It’s primarily case law. The labor statutes and regulations are actually relatively benign in Japan, but the labor law is primarily determined by case law and the courts have historically been highly protective of employees and very draconian in their decisions. It’s getting a little better but not much.

  46. Gravatar of Major-Freedom Major-Freedom
    29. November 2012 at 07:11

    dtoh:

    MF, I’m assuming that’s a real question and you’re actually trying to learn something so I’m happy to answer.

    It was a rhetorical question (although I do not know the precise details in 2012).

    No. It’s primarily case law. The labor statutes and regulations are actually relatively benign in Japan, but the labor law is primarily determined by case law and the courts have historically been highly protective of employees and very draconian in their decisions. It’s getting a little better but not much.

    I lump that in with government intervention, which I generalize as “regulation.”

    In other words, the core problem is not “tight money.”

  47. Gravatar of dtoh dtoh
    29. November 2012 at 07:24

    MF – Have you been paying any attention to anything on this blog for the last year. Without sticky wages, tight money is not a problem. And yes… sticky wages can exist without government regulation.

  48. Gravatar of Major-Freedom Major-Freedom
    29. November 2012 at 07:37

    MF – Have you been paying any attention to anything on this blog for the last year. Without sticky wages, tight money is not a problem. And yes… sticky wages can exist without government regulation.

    And if you have been paying attention to anything I have said for the last year on this blog, I argue that wages are made stickier when there is inflation, as wage earners and wage payers become conditioned to expecting rising prices despite the fact that occasionally existing monetary conditions justify lower wage rates to “clear the market.”

    But having said that, even if wages weren’t sticky, market monetarists would still advocate for NGDP targeting.

  49. Gravatar of Saturos Saturos
    29. November 2012 at 09:26

    According to the CBO, only 1/3 of the slow recovery is cyclical: http://dmarron.com/2012/11/18/why-is-the-economic-recovery-so-slow/

  50. Gravatar of Saturos Saturos
    29. November 2012 at 09:27

    Scott will respond by talking about AD-AS interaction effects, I bet.

  51. Gravatar of Saturos Saturos
    29. November 2012 at 09:28

    “I argue that wages are made stickier when there is inflation, as wage earners and wage payers become conditioned to expecting rising prices”

    Again, your conclusions don’t follow from your premises. When will you stop doing this, MF?

  52. Gravatar of Major-Freedom Major-Freedom
    29. November 2012 at 09:45

    Saturos:

    Again, your conclusions don’t follow from your premises. When will you stop doing this, MF?

    When did you show me doing that a first time, that would make your “when will you stop doing that?” justified?

    You don’t agree that inflation makes wages more sticky downward? The conclusion does follow, I am having difficulty seeing how you can’t see it.

  53. Gravatar of Doug M Doug M
    29. November 2012 at 11:53

    Reacive expectations — with persistant inflation people expect cost of living increases in their pay and benfits. The economy may stagnate and people will still demand a raise. It certainly happened in the 1970s.

    Taking it a step further would be rational expectations. If you believe in rational expectations, it should be very difficult to move the real wage via inflation. If the Fed inlates the value of the dollar, wage contracts should almost immediately adjust.

  54. Gravatar of John John
    29. November 2012 at 14:12

    Benjamin Cole,

    You’re mocking the intellectual tradition that Scott is writing in. The father of the monetarist tradition, Irving Fisher was a proponent of price-level stabilization which he called his compensated dollar plan. The idea being that a dollar would not be a fixed weight but instead would be a fixed purchasing power. Irving Fisher is the intellectual originator of all index numbers and their targeting. A rather unsuccessful tradition in which Scott is the latest and greatest name.

  55. Gravatar of John John
    29. November 2012 at 14:16

    Ben Cole,

    Your empirical evidence is suspect. In the late 1990s, China experienced deflation and growth due to rapid increases in productivity outpacing increases in the money supply. A similar phenomenon happened in the 1920s in the U.S. Just because you can cite a few instances of low growth and low inflation does not establish any causal relationship between the two.

  56. Gravatar of dwr dwr
    29. November 2012 at 15:01

    RE: Sumner in his original post:

    I think there are various good arguments against fiscal stimulus and Keynesian policy proposals, but I don’t think an average of 3.3% inflation is one of them.

    I’m currently using horrible wifi so I can’t research this as much as I would like, but I think a crucial question is whether inflation represents structural reasons (contracts, microeconomic regulations of wages and prices) or an increase in aggregate demand for goods. In the former case, inflation has some debt-relieving effects but isn’t indicative by itself of a booming or ready-to-boom economy. Only in the latter case would I agree that, under a Keynesian framework, fiscal stimulus would be deemed unnecessary.

    Aside from a brief drop immediately following the crisis, UK core inflation has been, since mid-2008, always above 1.9% and hovering around 2.5%. I think this is pretty good evidence that it is structural inflation. It’s certainly not a bad thing but I don’t think that carries with it any policy implications.

    The Keynesian case is that, with interest rates near an all-time low, the BoE could use a little upward pressure on its interest rates because whatever they have now obviously isn’t enough. I’m not sure if 3.3% inflation contradicts the Keynesian case; what matters more is that interest rates have reasonable room to move both upward and downward.

  57. Gravatar of Benjamin Cole Benjamin Cole
    29. November 2012 at 18:27

    dtoh:

    Interesting that you mention restaurants and black markets. Much the same is happening in Los Angeles, where street-side stands pop up, offering excellent BBQ, and food trucks have become popular. (The street side stands flourish until the LAPD shuts them down). “Underground” restaurants have become hip in L.A. too, by invite only and pre-pay.

    I agree with you about the negative effects of too-high taxes, or any income or capital gains taxes, as I much favor sales taxes (perhaps exempting food and medical care, for humanitarian reasons).

    All that said, Japan had these problems in the 1980s, no? And they boomed. Every nation has a tangled mess of local, state and national taxes and regs, and we can always point to undulations in the heaving mess as the cause of economic retardation.
    Yet some nations grow more rapidly than others.

    It seems to me the constant is better monetary policy. China vs. Japan sums it up.

    The People’s Bank of China has a 4 percent inflation ceiling, the Bank of Japan for the last 20 years had a o percent ceiling.

    BTW, I enjoy your commentary.

  58. Gravatar of Mike Sax Mike Sax
    30. November 2012 at 00:58

    “I won’t rank one in terms of the other, but I will say that fiscal stimulus, because it utilizes already existing money, and doesn’t artificially reduce interest rates, it doesn’t generate the business cycle. So if one prefers to have business cycles and less government spending, or more government spending and no business cycles, then that would determine what one holds as “better”.

    Major if you’re saying that fiscal stimulus doesn’t generate the business cycle, that would seem to be quite a point in its favor. So you can do fiscal stimulus and not suffer through boom-bust?

  59. Gravatar of dtoh dtoh
    30. November 2012 at 02:38

    Benjamin Cole,

    1. Interesting about LA…not all surprising. In Japan it extends to high end restaurants as well since many customers in Japan still pay with cash. It doesn’t take much in the way of cash receipts (5 to 10% of total sales) to be able to completely eliminate any profit by under-reporting the cash receipts.

    2. I would just offer a exemption for the first $20k/family on a progressive sales tax rather than exempting certain items like food, health card. Administratively it’s a lot simpler.

    3. I’m not sure how much of Japan’s stagnation is due to monetary policy and how much is due to structural problems unique to Japan. It’s something I’ve thought about a lot but don’t have any idea how you would quantify this in an analytical manner. I do think some things have gotten worse since the 80s, and if I were to take a wild guess, I’d say that if Japan had the same economic/regulatory environment as the U.S., then Japan would probably do 2% better than the U.S. on RGDP growth. With the Japanese economic/regulatory structure, they do 2% worse than the U.S., and when you combine their economic/regulatory structure with bad monetary policy you get exactly what the Japanese have achieved….essentially 20 years of economic stagnation with very little growth.

    I enjoy your comments as well.

  60. Gravatar of Bill Ellis Bill Ellis
    30. November 2012 at 09:41

    Mike… Good point. :-)

  61. Gravatar of ChargerCarl ChargerCarl
    30. November 2012 at 13:51

    speaking of japan, Abe is apparently wimping out on NGDPLT/higher inflation target.

    Thats disheartening.

  62. Gravatar of TravisV TravisV
    30. November 2012 at 18:16

    I’m sorry but I must block-quote these observations from Iceland’s president, who devalued their currency by 40%+ and let their banks fail:

    http://www.businessinsider.com/olafur-ragnur-grimsson-iceland-2012-4?op=1

    when the Icelandic banks collapsed, what we saw was that a great number of companies in these creative sectors, IT, high-tech, and all of those, who had the large growth potential in the previous years, but had not been able to realize it because they couldn’t get the people, due to the fact that the banks were buying up all the best engineers and mathematicians and computer scientists, suddenly had the pool of talent available to them. And within six months, all these people who came out of the banks with these qualifications had been hired. So since then you have seen a great growth period in the Icelandic IT sector, the high-tech sector, the manufacturing sector, because they could suddenly get the engineers, the mathematicians, the computer scientists.

    So the lesson from this is: if you want your economy to excel in the 21st century, for the IT, information-based high-tech sectors, a big banking sector, even a very successful banking system, is bad news for your economy. You could even argue based on this that the bigger the banking sector is, the worse is the news for your economy, because their magnetic attraction of taking engineers and technically qualified people and computer scientists into the banking sector is due to high bonuses and higher salaries prevents these creative growth sectors from realizing their full potential.

  63. Gravatar of KainIIIC KainIIIC
    30. November 2012 at 20:24

    So Scott, how would your beliefs change if NGDP targeting is attempted by the BoJ but fails? What if credibility and expectations only go so far, and that there does indeed have to be an injection of money into the real economy (and not giving money to the financial sector, who cannot lend if there are too few willing borrowers)?

  64. Gravatar of dtoh dtoh
    1. December 2012 at 05:08

    Travis,
    Excellent point. It’s worth noting though that efficient capital allocation is extremely important for economic growth so in one sense, it’s not a bad idea to have good talent in the banking/finance industry. I think the real issue is that in the U.S. and some other markets, we have a distorted allocation of capital because the government provides an implicit guarantee to financial institutions through the TBTF guarantee. If we were to get rid of that or more tightly regulate asset/equity ratios by asset class, we would have a lot less talent and lower compensation in the financial industry.

  65. Gravatar of ssumner ssumner
    1. December 2012 at 07:13

    dwr, In that case why not do monetary stimulus?

    Kain, Then I’d tell the BOJ to print lots of currency notes and buy all the assets in the US and Europe, using cash.

  66. Gravatar of dwr dwr
    1. December 2012 at 08:40

    Sumner,

    That is true and that is something I would advocate.

    I read your original post as if you were saying that fiscal stimulus is less valid when inflation is 3.3%, or that an inflation rate of 3.3% contradicts the call for fiscal policy even within a Keynesian framework. I don’t think that would be true; I’m not sure if the case for or against fiscal policy is influenced by a naive look at the inflation rate. But if you were just saying monetary stimulus is always preferable whatever inflation may be, then I won’t argue that. Although if you can give a reason why 3.3% inflation makes it even harder to make a Keynesian argument, I’d be interested in hearing that.

  67. Gravatar of Saturos Saturos
    1. December 2012 at 09:15

    dwr, that’s why you should always look at NGDP not inflation. In the UK what seems to have happened is that the recession was supply as well as demand side, so RGDP fell more than NGDP. Then NGDP growth recovered faster than RGDP growth, so the difference showed up as a rising price level. The CPI overstates this inflation, but it is still symptomatic of an underperforming supply-side. But NGDP shows that demand is not too excessive; quite the contrary, it seems to be dropping.

  68. Gravatar of Saturos Saturos
    1. December 2012 at 09:16

    dwr, demand is below the level path it should be on, but that calls for monetary stimulus, which is cheaper and more effective. And the headline inflation rate, or any inflation rate for that matter, will only mislead you, you should look at NGDP instead.

  69. Gravatar of Saturos Saturos
    1. December 2012 at 09:18

    dwr, demand is below the level path it should be on, but that calls for monetary stimulus, which is both cheaper and more effective. You shouldn’t look at the headline inflation rate, or any inflation rate for that matter, to check where demand is as it will only mislead you. Look at NGDP instead.

  70. Gravatar of Saturos Saturos
    1. December 2012 at 09:19

    Stupid WordPress…

  71. Gravatar of Nic Johnson Nic Johnson
    1. December 2012 at 10:02

    Narayana Kocherlakota: Lets use market based metrics to do financial regulation. Only a few steps away from using market based metrics to do monetary policy?

    http://www.minneapolisfed.org/news_events/pres/speech_display.cfm?id=5000

  72. Gravatar of Max Max
    1. December 2012 at 10:16

    “Then I’d tell the BOJ to print lots of currency notes and buy all the assets in the US and Europe, using cash.”

    Oddly enough the equilibrium consistent with this is deflation (starting from a higher price level). That’s because cash would effectively be shares in an investment fund, and deflation would deliver the return.

  73. Gravatar of Mike Sax Mike Sax
    1. December 2012 at 16:47

    Yeah Bill if that’s really the choice: less government spending and the business cycle-ie, recessions-or more government spending and no business cycle-no regular recessions every few years-it doesn’t sound like a very tough choice.

    That’s what I want too-more government spending and no business cycle. What exactly is the downside here?

  74. Gravatar of dwr dwr
    1. December 2012 at 21:51

    Saturos:

    Point taken on NGDP. I had actually only ever thought of NGDP targeting as a way of satisfying the dual mandate with one metric. I guess I don’t read this blog often enough, because I had never looked at it like that and when you made me look at it in those terms, it just blew my mind thinking about how NGDP targeting completely and beautifully addresses that concern.

  75. Gravatar of Saturos Saturos
    2. December 2012 at 00:31

    dwr, yes and NGDP is also a more “ontologically real” variable than the CPI index, as Scott regularly (and somewhat annoyingly) points out. And there’s a whole bunch of other points as well, such as political and pragmatic considerations; you should really read Scott’s longer articles, such as the ones linked to in the sidebar.

  76. Gravatar of ssumner ssumner
    2. December 2012 at 07:15

    dwr, Keynesians generally assume that monetary policy becomes less effective when trend inflation falls. Or at least I had thought they did.

    Max, Even if deflation was the outcome (it obviously would not be) it wouldn’t matter, as Japan would become fabulously rich.

  77. Gravatar of James in London James in London
    2. December 2012 at 11:09

    Is MF really a pseudonym used by Scott Sumner to keep his supporters fit and alert, ready for arguing with real opponents of NGDP targetting?

  78. Gravatar of Why Are We Still Stuck in 1981? « uneconomical Why Are We Still Stuck in 1981? « uneconomical
    14. December 2012 at 00:27

    [...] to think about either monetary or fiscal policy.  But I think the basic point is sound (as does Scott Sumner).  The last thing we should worry about is the Bank’s ability to hit their nominal [...]

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