I just checked Econlog, and there are two more posts challenging my views. One is on monetary policy, the other on utilitarianism. Let’s start with Arnold Kling, who claimed that the Fed is not able to quickly change the inflation rate, at least with conventional policies that exclude cases such as hyperinflation. I responded with examples like 1921 and 1933, where powerful, clearly identified monetary policies did quickly change the inflation rate, and also the NGDP growth rate, which is what I am actually interested in. Here is his response:
Beware of proof by selective example. Some thoughts:
1. The monetary regime in 1920-21 was different than today’s regime. It could be that relative to the gold standard, prices had risen way too much in 1919, and everybody knew it. That would have made it easy to bring prices back into line.
2. As to the 1933 episode, what was the long-term impact on general wages and prices? In the short run, the wholesale price index (WPI) can be dominated by commodity prices, which are volatile. Today, in order to gauge the trend of inflation, economists use broader price indexes, and they remove changes in food and energy prices in order to focus on “core inflation.” I wonder how “core inflation” behaved during the episode in question.
3. I can do “proof by example” going in the other direction. Consider how long it took for inflationary expectations to rise from the early 1960′s to the late 1970′s. Consider how long it took for inflationary expectations to fall from 1980 to 2000, even though the “regime change” under Paul Volcker was sharp and highly publicized.
Let’s take these in reverse order. I consider the Volcker disinflation a perfect example of what I am talking about. A brief bout of tight money in late 1979 had little impact, which is what I have been saying all along. Monetary policymakers need a credible policy changing the expected future path of nominal aggregates. In late 1981, a more determined Fed went at it again, and this time they achieved almost instantaneous results. CPI inflation, which had been running at double digit rates from mid-1979 to mid-1981, fell almost immediately to rate of about 4% in late 1981, and basically stayed around that rate for the rest of the decade. Doesn’t this show the power of monetary policy to quickly change the rate of inflation? And if you use my preferred NGDP target, there was a similar abrupt slowdown in late 1981. It is true that the speed of the slowdown caught the public off guard, but that’s not surprising as it also caught the Fed itself off guard. The had hoped for a more gradual fall in inflation.
In the late 1960s and the 1970s inflationary expectations did rise more slowly than actual inflation, but that has no bearing at all on my argument. I was arguing that the Fed can quickly change actual inflation rates. To the extent that I mentioned expected inflation, it was to argue that the Fed has an easier time moving actual inflation if they also shifted inflation expectations. But in the 1970s the Fed was not trying to raise inflation, nor did they have an explicit inflation target or even a prediction of rising inflation. So the public’s delay in recognizing the problem of inflation exactly mirrored the Fed’s overly optimistic inflation forecasts. The public was flying blind in the 1970s. Inflation was far higher than peacetime norms, and the Fed itself kept claiming that each upsurge was just a temporary blip. In contrast, I was proposing that in mid-2008 the Fed set a target for NGDP growth that was consistent with what had been happening for the past 15 years. That is far easier than suddenly shifting NGDP growth (or inflation) expectations
Regarding 1933-34, it is true that the broader indices rose at a slower rate than the WPI, but all of them rose, which itself was quite a turnaround from the severe deflation of 1929 to early 1933. In addition, I don’t like using “core inflation,” which I have argued is a very inaccurate measure of monetary conditions. I prefer NGDP growth, and that changed dramatically after FDR adopted a more expansionary monetary policy. BTW, the WPI was the actual price index that FDR decided to target, so that’s one reason I focused on that index.
Arnold Kling argues that prices were too high in 1919 and “everybody knew it.” Does “everybody” include all those traders who bought commodities just before the price of those commodities plunged by 40%? Or the workers in 1919-20 that signed wage contracts without any cut in nominal pay? Nevertheless, I do think Arnold is partly right about the gold standard, and I would agree that its effect on expectations helps explain why the 1921 depression was shorter than one might have otherwise expected. But think about what that means. If the gold standard did affect inflation expectations, doesn’t that show the importance of having an explicit price level or NGDP target? The gold standard is a sort of nominal anchor, albeit a crude one. If the Fed announced it would target the price level to follow this path:
100, 102, 104, 106, 108 . . .
Then it might be easier to move the actual price level back to that path, if it temporarily diverged. We should be trying to raise prices, or even better NGDP, back to some optimal path (which the Fed won’t even specify.) And we are now trying to do so with fiscal policy, which is extremely costly and highly ineffective. Why aren’t we using monetary policy to try to get back onto a specified path?
In a more recent post, Bryan Caplan takes me to task for my views on utilitarianism. More specifically for my claim that liberals are approximately utilitarian and that utilitarianism is a pretty good value system for evaluating public policies. Before defending utilitarianism, let me point out that I am a pragmatist, someone who thinks social issues are very messy, and don’t fit neatly into ideological boxes. In the paper I also said that most liberals I know are illiberal on at least one or two issues, and that includes me. Rather, I consider utilitarianism to be a sort of Platonic ideal of liberalism, something that real world liberals more or less approximate.
OK, so if I am making a pragmatic argument, the next question is whether it is useful to think of liberals as having this value system. In my paper, I cite a few examples to illustrate what I see as the distinctive liberal way of looking at things, and how it differs from illiberal ideologies. One case is the Swedish laws on prostitution, which make it illegal to be a customer, not a prostitute. In most countries prostitution is viewed as being immoral, and the prostitute is seen as a villain. Hence she is thrown in prison. In Sweden the prostitute is viewed as a victim. This seems a very utilitarian way of looking at things, as social science research suggests that prostitutes are often abused. Another example is welfare, where liberals focus on the well–being of the poor, and pay much less attention than conservatives to the notion of the “deserving poor.” The concept of “just deserts” is of course foreign to utilitarians. I could go on and on. Liberals view issues like condoms for high schools students, needles for addicts, euthanasia, the well-being of illegal immigrants, etc, from a utilitarian perspective, not a moralistic or nationalistic perspective. Are they precisely utilitarian in all cases? Of course not, but I don’t see any other moral considerations that reliably trump utility. Bryan mentions that some basic rights are given up only under extreme duress, and I think that is a very good counterargument. Let me respond in two ways:
1. There is an argument for “rules utilitarianism,” which I think helps explain at least some of the cases Bryan might have in mind. Thus liberals might favor a broad free speech rule, on the grounds that limitations on free speech will, on average, reduce aggregate utility. Part of this argument is based on the assumption that it may be too costly to determine the few cases where total utility might rise with censorship, so it’s not worth even bothering. Better to have a blanket prohibition on censorship. But note that this argument does open the door to allowing censorship in broad categories, like commercial speech, if liberals though the benefits of censorship exceed the costs in those well-defined areas. (BTW, I think they are wrong, but I do understand their reasoning process.)
2. But I also think Bryan is partly right here. Earlier I alluded to cases where liberals (including me) do not slavishly adhere to utilitarianism. One case I could cite for myself would be seat-belt laws. I think these laws probably do “work,” but they offend my sense of dignity. The government treats adults like children. Of course I could argue that “dignity” should go into my utility function; but that would be unfair, it would turn utilitarianism into a virtual tautology. So I’d rather just grant Bryan’s point in that case. BTW, most real world liberals do support seat-belt laws, precisely for utilitarian reasons.
I recently had lunch with Brink Lindsey, and he gave me a good example of where liberalism and utilitarianism diverge. He noted that liberals would oppose a system of requiring prisoners to donate kidneys, even though it could save many lives. I agree.
So with all my concessions what is left? What’s left is that I can’t think of any real world policy disputes facing Congress, now or in the past, where liberals did not take what they saw as the roughly utilitarian position. And I can see lots of cases where conservatives, dogmatic libertarians, or econ-nuts took non-utilitarian positions. Until I see a real world policy counterexample, not a hypothetical, I will continue to view liberalism as having roughly utilitarian values, for the very pragmatic reason that it is useful to do so.
Thus my defense of utilitarianism is roughly the same as a civil engineer’s defense of Newtonian physics. A very bright engineering student named “Bryan” might tell the civil engineer: “How can you use the discredited Newtonian system of physics, when the famous “eclipse” experiment of 1919 showed that theory is false.” The engineer might reply: “It’s not precisely true, but it is accurate enough for designing the Golden Gate Bridge.” I hope Bryan likes this argument, as I recall in his blog he once argued that it was OK to call something “true” that was only approximately true. I think the specific example he used was if someone said the next town was 5 miles down the road, the statement will still be true if it was actually 4.93 miles away. That’s how I look at utilitarianism.
PS. Please don’t assume I agree with the liberal policies that I discussed. I think liberals are wrong in many of the policies they advocate (such as the Swedish prostitution laws.) I am just trying to explain their mindset, not argue they reached the right conclusion given their values.