AD bleg

What does “aggregate demand” mean?

And why am I asking this question after using the phrase about 1000 times over the past 5 years in this blog?  Shouldn’t I have found out before I started using the term?  Perhaps I was too embarrassed to admit my ignorance.  But now that the esteemed macroeconomist Chris House has admitted a similar uncertainty, I’m less embarrassed:

. . .  I admit that I don’t have a particularly clear definition of what we really mean by “aggregate demand.”  I think often this is meant to capture changes in consumer sentiment, fluctuations in government demand for goods and services or other incentives to purchase market goods – incentives which would include tax subsidies, monetary stimulus, … etc.

I do have a very clear idea as to what I think the profession should mean by AD—nominal GDP. And I’ve seen the AD curve drawn as a rectangular hyperbola in a few textbooks (although the number is gradually diminishing.  But it’s clear that most people don’t agree with me.  So what do they think AD is?

On some occasions people discuss AD as if it’s a real concept.  Changes in the real quantity of goods and services purchased by consumers, investors, governments, and (in net terms) foreigners.  But that can’t be AD, as it would imply that all changes in RGDP were caused by shifts in AD.  After all, all purchases are also sales, so the total aggregate quantity supplied equals the total aggregate quantity demanded.

In the textbooks AD is a downward sloping line in P/Y space, which is not generally assumed to be unit elastic.  That means when AS shifts, NGDP may also change.  But why does NGDP change? What is held constant along a given AD curve?  Presumably a given AD curve is supposed to be holding constant things like monetary and fiscal policy, animal spirits, consumer sentiment, etc.

But that raises another question; what is monetary policy?  If the profession is not too clear about AD, they are completely mixed up about monetary policy.  Indeed even elite macroeconomists have such wildly varying definitions of monetary policy that in any given monetary situation (such as the early 1930s—with ultra-low interest rates and lots of QE), one set of respected macroeconomists will claim policy is ultra-tight (Friedman, Bernanke, Mishkin, etc) while another (even larger) set of economists will claim policy is ultra-accommodative (because interest rates were really low and there was lots of QE.)  So it doesn’t much help to say we are holding monetary policy constant along an AD curve, as no one seems to have a clue as to what the term ‘monetary policy’ actually means.

Hence my bleg.  Can anyone give a short concise definition of AD?  One that I can understand.  Not the definition I’d prefer (a given level of nominal spending), but rather the definition that other economists have in their heads.  I mean other than House and myself, who seem to lack any clear understanding.

PS.  I looked at Wikipedia, but it was no help.  They suggest AD = C + I + G + NX.  But that’s simply GDP.  In that case doesn’t AS also equal GDP?  So how is that definition useful?  Surely AD means more than “GDP?”

Maybe the issue can be resolved by figuring out whether Wikipedia means real GDP or nominal GDP.  Nope:

These four major parts, which can be stated in either ‘nominal’ or ‘real’ terms.

So if a student asks us if AD means RGDP or NGDP we tell them either one is fine?  Even in Zimbabwe, where RGDP plunged by double digits as NGDP rose a zillion-fold?  Wikipedia continues:

Sometimes, especially in textbooks, “aggregate demand” refers to an entire demand curve that looks like that in a typical Marshallian supply and demand diagram. Thus, that we could refer to an “aggregate quantity demanded” (Yd = C + Ip + G + NX in real or inflation-corrected terms) at any given aggregate average price level (such as the GDP deflator), P.

So not only is it not clear whether AD means real GDP or nominal GDP, it’s not even clear whether it means the entire demand curve or a point along the demand curve.

Now I’m even more confused.  I suppose that people will tell me that it doesn’t matter because when economists like Paul Krugman talk about AD, other economists know what he is talking about.  And yet I suspect Chris House and I are more the rule than the exception.  Even worse, as with the stance of monetary policy, the biggest problem with AD is not that economists don’t have a consensus definition, but that they don’t even realize that they lack a consensus definition.  Thus when I talk about how the Fed’s “tight money” policy caused AD to plunge in 2009, other economists aren’t able to disagree with me, because they don’t even know what I am talking about. “What tight money policy?”

When I watch from the sidelines, it seems like Paul Krugman makes his points in Portuguese, and John Cochrane responds in Norwegian.  Neither understands the other, so they each assume the other side is clueless.

PPS.  And didn’t Krugman once argue that the AD curve might currently be upward sloping?  Now I’m really confused!


Tags:

 
 
 

134 Responses to “AD bleg”

  1. Gravatar of Joseph Joseph
    16. July 2014 at 06:44

    Something like this is what I suspect Krugman has in mind formally, where AD is derived as mapping of the IS-LM model in (r,Y) state space to (P,Y) state space. This is also along the lines of what I learned in Undergrad Macro using Mankiw’s macro text book so I assume it’s the standard Keynesian thought process, although most people would probably formally use the NK IS-LM model.

    http://isites.harvard.edu/fs/docs/icb.topic647573.files/1010b_11_aggdemandII.pdf

  2. Gravatar of benjamin cole benjamin cole
    16. July 2014 at 06:54

    The more I waded in, the shallower the water became.

  3. Gravatar of Dan W. Dan W.
    16. July 2014 at 07:02

    Scott,

    Krugman means to say whatever the facts mean him to have said. The only time he was wrong was when Bush was president, clearly that was Bush’s fault.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. July 2014 at 07:14

    ‘Neither understands the other, so they each assume the other side is clueless.’

    Krugman also assumes the other side is evil. Consider his remarks about the infamous Rick Santelli rant;

    http://krugman.blogs.nytimes.com/2014/07/14/rick-santelli-and-affinity-fraud/?_php=true&_type=blogs&_r=0

    ‘Santelli is their kind of guy; he hates the poors, he hates people who want to help the poors, he was trashing Janet Yellen for suggesting that she actually cares about the plight of the unemployed. And the traders feel the same way. So they like Santelli even though he’s been wrong about everything.’

  5. Gravatar of Kevin Donoghue Kevin Donoghue
    16. July 2014 at 07:14

    “…in a given situation of technique, resources and factor cost per unit of employment, the amount of employment, both in each individual firm and industry and in the aggregate, depends on the amount of the proceeds which the entrepreneurs expect to receive from the corresponding output. For entrepreneurs will endeavour to fix the amount of employment at the level which they expect to maximise the excess of the proceeds over the factor cost.

    “Let Z be the aggregate supply price of the output from employing N men, the relationship between Z and N being written Z = φ(N), which can be called the Aggregate Supply Function. Similarly, let D be the proceeds which entrepreneurs expect to receive from the employment of N men, the relationship between D and N being written D = f(N), which can be called the Aggregate Demand Function.”

  6. Gravatar of ssumner ssumner
    16. July 2014 at 08:06

    Kevin, Thanks, but what did Keynes mean by “proceeds?” Revenue?

  7. Gravatar of Nick Rowe Nick Rowe
    16. July 2014 at 08:10

    1. Distinguish between quantity of apples demanded (which is the quantity people offer to buy), and quantity of apples actually bought. These two things are usually equal, but they are not the same thing (like when there is rationing and excess demand).

    2. Remember that it makes a difference whether we are talking about a monetary exchange or a barter economy. In a monetary economy, you only demand apples if you offer money in exchange. In a barter economy, an unemployed worker could offer his labour in exchange for apples. We are going to be talking about a monetary exchange economy.

    3. Add up the quantities demanded of all the newly-produced goods and services. If you use current-period prices to add them up, that’s nominal aggregate quantity demanded. If you use inflation-adjusted prices to add them up, that is real aggregate quantity demanded. Decide which one you want to use.

    4. Whichever of those two you use, write down the demand function you think it depends on. That’s the nominal (or real) aggregate demand function.

    5. Pick one of those several arguments in the demand function that interests you, put it on the vertical axis, put (either nominal or real) aggregate quantity demanded on the horizontal axis, hold the other arguments constant, and draw a curve. That’s the AD curve.

    I and most economists prefer to put real aggregate quantity demanded on the horizontal axis.

  8. Gravatar of GF GF
    16. July 2014 at 08:15

    Reminds me of Fischer Black in Exploring General Equilibrium’:

    ‘I don’t know how to define “aggregate demand”, so I don’t know how to measure it or use it in a theory of business cycles. Thus I ignore it.’

  9. Gravatar of Nick Rowe Nick Rowe
    16. July 2014 at 08:16

    In 3, that should have been “newly-produced *final* goods and services”.

  10. Gravatar of Doug M Doug M
    16. July 2014 at 08:30

    AD is a Platonic ideal. It cannot be observed or measured. It doesn’t really exist in any real fashion.

    It is a pure concept that exists (as it does) to be a describe economic phenomina… why did unemployment rise… it must be AD. So, AD in one respect, AD is whatever your model needs it to be.

    AD = AS = GDP
    C+I+G+X-M is the demand side.
    Hours Worked * Productivity is the supply side.
    is C+I+G+X-M real GDP or nominal GDP
    It is both.

    Without a time element there is no difference between Real GDP and NGDP! It is like saying the difference from New York to Chicago is different in kilometres than in miles. The distance is the same; the units are different.

    It is only when we look at changes in GDP (GDP growth) does the distinction between real and nominal become relevant.

  11. Gravatar of Scott Sumner Scott Sumner
    16. July 2014 at 09:21

    Doug, That sounds right. But my definition of AD (i.e. NGDP) can certainly be measured.

    Thanks Nick. But I’m still not sure what most economists mean by an “increase in AD.” Is that a shift in the AD curve, or an increase in aggregate quantity demanded? Most of the discussion by Keynesians seems to use RGDP as a proxy for AD, so I presume they mean aggregate quantity demanded. But in that case AD=AS, and one could just as well talk about stimulus boosting AS.

    You said:

    “I and most economists prefer to put real aggregate quantity demanded on the horizontal axis.”

    So do I. But I consider AD to be the entire curve, and hence consider it a nominal concept (since I use a hyperbolic AD curve.)

  12. Gravatar of Major-Freedom Major-Freedom
    16. July 2014 at 09:27

    The classic definition is I think the most clear and straightforward:

    AD is the sum total of ALL spending, on everything sold for dollars, excluding spending on labor.

    Similarly, AS is everything sold for dollars, excluding labor. Impossible to quantity as a single variable, but the idea is clear enough I think.

    NGDP is a portion of the classic definition of AD, for NGDP excludes spending on financial securities (one reason among many that an NGDP targeting regime would be susceptible to financial bubbles), and it excludes some other expenditures.

    The basic idea is that AD is every expenditure which earns revenues (and profits or losses).

  13. Gravatar of Kevin Donoghue Kevin Donoghue
    16. July 2014 at 09:37

    Scott, yes, I take it keynes’s “proceeds” = revenue.

    While I don’t strongly disagree with Nick Rowe’s account, I (and more to the point, Keynes) would emphasize that production takes time therefore the decision to produce must be based on expected revenue. (I’m ignoring the fact that some goods are made to order, e.g. by barbers.) So you could say that aggregate demand is the sum of the sales numbers which producers have in mind when they decide on their level of activity. That obviously implies that gloom will be self-fulfilling. That could happen in a barter economy just as easily as in a monetary economy. In fact I’d guess that gloom, or even desperation, would be the normal state of things in a barter economy!

  14. Gravatar of Matt McOsker Matt McOsker
    16. July 2014 at 09:43

    Why does AD = AS? What about over-production that exceeds actual demand? 1000 apples produced but only 500 purchased, and the other 500 rot. What about capacity to produce 2000 apples in an economy that only demands 500 – idle labor and production. That seems to all equal higher unemployment and lower prices on goods, lower wage growth. And don’t you have to differentiate the short and long run? Thus efforts are mostly focused on increasing demand. If we had a supply problem say we need 2000 apples and can only produce 500, then you might focus on the supply side of the equation to stimulate it.

  15. Gravatar of Fed Up Fed Up
    16. July 2014 at 10:41

    Matt McOsker said: “Why does AD = AS? What about over-production that exceeds actual demand? 1000 apples produced but only 500 purchased, and the other 500 rot.”

    Matt, I believe the best way to say that is Q demanded = 500, Q bought = 500, Q sold = 500, and Q supplied = 1,000. Q of 500 goes into inventory. Inventory goes to 0 with the rot. The supply side writes down the 500.

    “What about capacity to produce 2000 apples in an economy that only demands 500 – idle labor and production. That seems to all equal higher unemployment and lower prices on goods, lower wage growth.”

    Here is what I believe will happen. The supply side will take out capacity to get back down to Q supplied = 500 to match Q demanded = 500 and maintain pricing. Hours worked will fall, probably thru lower employment.

  16. Gravatar of ssumner ssumner
    16. July 2014 at 10:54

    GF, Love that quotation.

    Kevin, Revenue is good. That implies expected NGDP, which is of course the key variable in the MM model. Current AD is heavily impacted by expected future AD (NGDP.)

    Matt, Depreciation is considered part of GDP, and hence part of AD. A recession is not when a lot of stuff gets produced that people don’t want to buy, a recession is when less stuff gets produced.

  17. Gravatar of F. Zoutman F. Zoutman
    16. July 2014 at 11:01

    From a purely econometric perspective the AD-curve represents the relationship between the price-level and GDP traced out by supply shocks. It could be estimated by instrumenting the price level by some exogenous shock outside of the economy (e.g. earthquakes in Japan although the instrument would likely be weak and it would generally be very difficult to find strong instruments), and then regressing GDP on instrumented prices. Instrumenting for demand shocks to trace out AS would obviously be even more difficult, so I wouldn’t encourage econometricians to dive into this. However, conceptually shocks that are entirely outside the economy should shift the AS curve and shift along the AD curve.

  18. Gravatar of Morgan Warstler Morgan Warstler
    16. July 2014 at 11:14

    In my mind, Aggregate Demand isn’t a nominal monetary thing.

    Instead Aggregate Demand is the Equilibrium at given price level.

    So to increase AD we need to lower the price level.

    Said another way, AD = current demand + all missing production / consumption if we properly priced labor (using GICYB to clear the market).

  19. Gravatar of TravisV TravisV
    16. July 2014 at 11:18

    Morgan Warstler,

    What do you think about David Beckworth’s rebuttal of “Secular Stagnation”?

    http://thefaintofheart.wordpress.com/2014/07/14/deleveraging-secular-stagnation

  20. Gravatar of Kenneth Duda Kenneth Duda
    16. July 2014 at 11:21

    Scott, I can tell you what an economics-blog-reading layperson thinks of as “aggregate demand”.

    Aggregate demand is the propensity to consume. It is a relative measure of the extent to which people are willing and able to spend money and buy stuff. A negative AD shock is when people all at once overall lose their ability/desire to consume. For example, if lending standards suddenly tighten and demand for MBS suddenly falls and housing prices fall all at once, then homeowners can’t borrow like they used to and are forced to save more to pay down debts. If rich people and China and the federal government don’t suddenly become more inclined to spend, then that’s bad news for AD. Likewise, higher interest rates make saving more desirable than spending, thereby reducing AD. If you want to boost AD, nothing would beat a helicopter drop.

    In this layperson way of thinking, aggregate demand is different from NGDP (which I’d call “aggregate quantity demanded”). And it’s totally different than aggregate supply, which (from a lay viewpoint) is the economy’s ability to produce. Aggregate supply is basically the same (I think) as nominal potential GDP. When NGDP is less than GDPPOT, that’s when you’ve got an AD shortfall and a recession that could be reversed simply by getting people to spend more.

    Then I can go on and define “tight money” as monetary policy that winds up with an NGDP shortfall (NGDP < GDPPOT) and "loose money" as monetary policy that winds up with excessive inflation.

    I'm not sure how satisfying any of that is to a smart professional economist, but it's the best I've got.

    Thanks for listening,
    -Ken

    Kenneth Duda
    Menlo Park, CA
    kjd@duda.org

  21. Gravatar of Matt McOsker Matt McOsker
    16. July 2014 at 11:25

    Scott – less stuff gets produced because business sees that there won’t be demand for that stuff, or demand dries up. They will have layoffs and invest less until the consumer comes back.

    That was my point on more apples produced than were demanded, the business will adjust their production down. So yes huge component is future expectations of demand. So, I guess my definition of AD is what (or maybe how much) people/businesses can buy, and their marginal propensity to consume more.

  22. Gravatar of ssumner ssumner
    16. July 2014 at 11:26

    Ken, You said;

    “Aggregate demand is the propensity to consume.”

    Remember that AD is defined to include C + I + G + NX, not just consumption.

  23. Gravatar of ssumner ssumner
    16. July 2014 at 11:28

    Matt, You need to be much more specific. That concept may be clear to you, but terms like “can buy” mean nothing to me. I “can buy” far more than I actually buy.

  24. Gravatar of Morgan Warstler Morgan Warstler
    16. July 2014 at 11:29

    There is big giant wind sucking gash in consumption, and Economic definitions shouldn’t forgive bad policy or accept them as fact.

    There HAS TO BE a Economic term for the price level / consumption if there is no welfare…. it is surely morally unacceptable, but it is the baseline we ought to be measuring against.

    The policy goal then is to get as close to that baseline price level as possible to maximize consumption, while being humane and loving.

    GICYB gets us there.

    And another thing! There is ONLY consumption poverty, there is no other kind.

    “How many people can’t earn enough themselves to live the life we think Americans deserve?”

    This isn’t a measure of poverty. It’s a measure of pity and loathing. Measuring by income leads to either deeming people not worth employing or reducing what we think people can have.

    Only consumption poverty accurately reflects who we are as people. It asks a pure question: “what do people deserve to have?”

    And then delivers it.

    And then looks around and say, ok, everyone is sated, let’s sate everyone even more, “everyone, you have to work for someone, if even for $40 per week.”

  25. Gravatar of Morgan Warstler Morgan Warstler
    16. July 2014 at 11:49

    TravisV,

    I sent Scott that article bc Beckworth went full invisible RGDP, which I think is the entire story, and why we ought to reduce the NGDPLT to 4% to start:

    “There are a few more reasons to be skeptical about secular stagnation. For one, productivity growth might not be as bad as we think. That’s because the way we measure it is having a harder and harder time capturing the real gains in the economy. Just think, for example, about the way smart phones are replacing books, newspapers, cameras, scanners, bank ATMs, voice recorders, radios, encyclopedias, GPS systems, maps, and dictionaries, among other things. All of these items used to be sold separately and each counted as a part of GDP. Now, many of them are available as free apps, and aren’t counted as a part of GDP. This under-measuring of economic activity translates into slower observed productivity growth. And this problem is only going to get worse as more of the economy becomes digitized.”

    There’s not much light between myself and Andreessen on this stuff and I’m sure he’ll find MM in time.

    Anytime I hit these blogs, I wonder who could convince Scott/Beckworth/ et al that eventually we’re all just jacked into VR rigs bc it’s cooler than real life. He wouldn’t need to be convinced 100%, just enough to see that that’s the final destination.

    Because from here to there is less atoms every year and more electrons, and you can’t “add value” to electrons for any length of time (bc copying), and soon you won’t be able to “add value” to atoms (bc 3D printing).

    This coming thing, is a once in humanity economic occurrence. As river rapids go, it makes Great Depression look like drippy faucet.

    And NGDPLT is basically a:

    “look guys, we can’t even measure this RGDP shit anymore, all we know is people prefer VR rigs to cell phones, cars, toilets, and fire, and that stuff keeps getting cheaper to make too.”

    But don’t freak out!

    “we’ll keep the nominal path on a laser which removes all the other macro variables, so over the next 50 years everybody can just get comfy in their gravity hammock”

  26. Gravatar of Matt McOsker Matt McOsker
    16. July 2014 at 11:51

    Scott I will admit this is a tough one for me to state clearly. Yes you can buy far more that you do, and there may be demand leakages that exist like saving in a retirement account. You could also borrow and buy more. New population can buy more. I look at the things that stimulate that buying of what is produced. We all have to buy a certain level of food, how do we get people to buy more food – or add value to charge a higher price.

    Here is my best example:
    Back in the tech bubble businesses bought a lot of internet related hardware and software to build our web infrastructure. And, we bough a lot of it (I did a lot of that buying). But we reached a point where we had what we needed for the time being, so we stopped buying so much, all the while people kept trying to sell us more, but we had to say sorry we have all we need. The result was the tech slowdown, companies with no valuable products a meltdown, and we had the 2000 recession.

    I admit I am probably using the wrong definition of AD all together, but maybe how I define it is how the mainstream does – even if it is technically wrong. I mean if for a month everyone went on strike, and bought nothing then GDP would suffer – how many time do we hear weather as an excuse for less consumption like the last quarter. So maybe my definition of AD is consumption and propensity to consume.

  27. Gravatar of Matt McOsker Matt McOsker
    16. July 2014 at 12:06

    Scott, just saw your other post above. The way I see AD used is in reference to to the consumption component, and I will admit that is how I use it.

  28. Gravatar of Nick Rowe Nick Rowe
    16. July 2014 at 13:35

    Scott: ” But I’m still not sure what most economists mean by an “increase in AD.” Is that a shift in the AD curve, or an increase in aggregate quantity demanded?”

    It could be either, depending on what caused it, and whether that thing that caused it is on the vertical axis.

    “Most of the discussion by Keynesians seems to use RGDP as a proxy for AD, so I presume they mean aggregate quantity demanded.”

    Unless you are in an economy like Cuba, with rationing, quantity demanded and quantity sold are usually equal, so it is normally a good proxy.

    “But in that case AD=AS, and one could just as well talk about stimulus boosting AS.”

    NO! Quantity supplied is not the same thing as quantity sold. Quantity supplied is the quantity they *want* to sell.

    Normally, in market economies (and especially in recession):

    Qd = Q > Qs

    In Cuba, normally:

    Qd > Q = Qs

  29. Gravatar of Doug M Doug M
    16. July 2014 at 13:37

    Matt McOsker,

    “Yes you can buy far more that you do, and there may be demand leakages that exist like saving in a retirement account.”

    What is true for the individual is not necessarily true in the aggregate. When you put money into your retirement / savings account, you are making money available to be lent… (or you are buying securities which starts a cycle that allows that money to be lent.) In the end, every dollar of income is spent…

    income = output.

  30. Gravatar of CMA (@CMAMonetary) CMA (@CMAMonetary)
    16. July 2014 at 14:24

    Morgan Warstler

    “GICYB gets us there”

    Dont you think if the gov had the money from taxes it would be better spent on infrastructure, investment and education than just transfers?

  31. Gravatar of Jason Jason
    16. July 2014 at 14:27

    Hi Scott,

    I know you weren’t blegging for “heterodox” ideas, but the information theory model says AD is a source of information that is communicated through the price mechanism.

    For a single good we have something like “I would like a pound of bacon for $6″ (demand information) is received by a physical pound of bacon (supply) being sold … with the price paid “detecting” the information transfer.

    Of course, you have people who would buy bacon at $2 or at $10. This information is “lost” at the supply; in the former case because the sale doesn’t happen and in the latter case because the extra $4 is not collected.

    This information from the demand includes all kinds of expectations and theories as well. “I think the price of bacon will rise tomorrow to $8″ is also communicated by a purchase of bacon at $6 today — but again with some information loss. “Bacon is yummy at any price” or “I am making bacon wrapped shrimp for dinner tonight” also comes through, but again with some information loss.

    In this way, IS < ID generally, but IS ~ ID is a good approximation for a functioning market. And only in the case of IS ~ ID do you get supply and demand curves (otherwise you get supply and demand "regions" bounded by the supply and demand curves).

    This picture means that AD is the aggregate of all kinds of economic information, from everyone's future expected path of monetary policy, exchange rates or the size of the tech sector to the current price of commodities and your paycheck. AS is the set of all the things that get made and/or sold because of that information. Typically, AD ~ AS is a good approximation in a functioning market, and that gives you AD and AS curves which represent the effect on the price level of a given set of information being sent (AD) or received (AS).

    If you gathered up all the information people put forward at one point in time and then varied the amount of stuff produced by the economy, that would trace out the "AD curve". In that sense, you can say the entire curve is the AD … at one point in time.

    Sorry for the long comment! Here's a link for a starting point:

    http://informationtransfereconomics.blogspot.com/2013/04/the-previous-post-with-more-words-and.html

  32. Gravatar of Morgan Warstler Morgan Warstler
    16. July 2014 at 14:31

    CMA! a new convert!!!

    You’re gonna LOVE this! GICYB increases consumption for the poor by at least 30% and doesn’t cost one new red cent!

    https://medium.com/@morganwarstler/guaranteed-income-choose-your-boss-1d068ac5a205

    Really try to beat my numbers up, they’ll take it.

    Glad to have you aboard!

  33. Gravatar of TravisV TravisV
    16. July 2014 at 14:41

    Morgan,

    I’m not sure I understand the following that you wrote:

    “And NGDPLT is basically a:

    “look guys, we can’t even measure this RGDP shit anymore, all we know is people prefer VR rigs to cell phones, cars, toilets, and fire, and that stuff keeps getting cheaper to make too.”

    But don’t freak out!

    “we’ll keep the nominal path on a laser which removes all the other macro variables, so over the next 50 years everybody can just get comfy in their gravity hammock””

  34. Gravatar of Kolobok Kolobok
    16. July 2014 at 14:46

    Wow! how confusing? Please do not confuse people with bringing in incomes, payments, barter, monetary, etc.
    Has anyone considered the standard national accounts where supply=demand? It is also written in compact form Y+M=C+I+G+X. As Prof. Rowe pointed out, this can be expressed in nominal as well as real terms.

  35. Gravatar of Morgan Warstler Morgan Warstler
    16. July 2014 at 15:12

    TravisV,

    I basically think if we could properly measure RGDP, Money Illusion would have to disappear.

    I actually still think it might.

    Meaning, I think it’s possible that humans will consume 3X more stuff and do it for $10K in today’s dollars.

    More frames of video of projected onto their eyeballs showing them all this stuff they own. Wanna go skydiving with 30 naked women? FREE! Wanna have a flying car you drive Mach 5 to your business meetings? That’s $10, mostly reflecting the actual electricity used to project the experience on your eyeballs over the next year.

    You know how the mobile web, allowed everyone to get out from behind their laptop and before that their desktop?

    I think VR will be preferable to most things people go do witht heri cell phone in their hand.

    Go to the concert? Or be in the front row in VR (everyone is in the front row).

    In this future, most people literally say, “I need less money, and I can still pay off my old world debts, and be happier than I have ever been.”

    Loaning money becomes REALLY hard, because nobody needs lots of money to start a flying car business, and NGDPLT is basically a way of keeping deflation of the old world at bay. But then I also I think Bitcoin will work, if another one doesn’t beat it. So I think there’s going to be some more there too.

    Basically, I think we’re in for the most destabilizing old order toppling humanity has ever confronted, and I think of a nice low NGDPLT as the the easiest way to keep the guys who make their living loaning money and the guys who make their money moving and shipping things from do nasty stuff to the rest of us.

  36. Gravatar of Fed Up Fed Up
    16. July 2014 at 15:13

    Nick said: “Normally, in market economies (and especially in recession):

    Qd = Q > Qs

    In Cuba, normally:

    Qd > Q = Qs”

    Shouldn’t the first one be:

    Qd = Q < (less than) Qs?

  37. Gravatar of Fed Up Fed Up
    16. July 2014 at 15:20

    Doug M said: “What is true for the individual is not necessarily true in the aggregate. When you put money into your retirement / savings account, you are making money available to be lent… (or you are buying securities which starts a cycle that allows that money to be lent.) In the end, every dollar of income is spent…

    income = output.”

    What if I “save” in the MOA/MOE?

    I don’t think putting “money” in a savings account means it is available to be lent.

  38. Gravatar of CMA (@CMAMonetary) CMA (@CMAMonetary)
    16. July 2014 at 15:46

    Morgan Warstler

    What happens to income taxes under your proposal? Doesnt the gov lose alot of that revenue?

  39. Gravatar of Matt McOsker Matt McOsker
    16. July 2014 at 15:59

    I like Nick’s definition of AS. What they want to sell in anticipation of demand. And Nick same question as Fed Up should that be less than?

  40. Gravatar of CMA (@CMAMonetary) CMA (@CMAMonetary)
    16. July 2014 at 16:00

    SSumner

    Sorry to stay on the issue of last post.

    “Helicopter drops are incredibly wasteful and will not happen.”

    Could you just briefly explain why? In another post you made you seemed in favor of them if they werent debt financed.

    “Heli drops” can mean alot of things. To clarify I mean if done by fed through direct money issuance to people (reserve accounts) maybe weekly with base growing at historical rate of roughly 5% per anum adjusted in quantity to hit ngdp target.

    Do you not think an asset purchase is inferior in the sense that you remove one safe asset and replace it with another? A transfer from fed would add safe assets in order to offset risk adversity.

    Also is it not inequitable to maintain a lending market where only a few entities can benefit from preferential lending rate (FFR). Why cant everyone also deposit money risk free at the fed? Wouldnt this add to systemic safety?

  41. Gravatar of ssumner ssumner
    16. July 2014 at 17:10

    Nick, Now I’m totally lost. I thought the intersection of AD and SRAS was a point where the aggregate quantity demanded equalled the aggregate quantity supplied. Obviously the term “supply” at the macro level doesn’t have the same meaning as supply at the micro level, where it only applies to price takers. But the economy is always on the short run AS curve, even if it’s not at the long run equilibrium consistent with flexible wages and prices. At least that’s what I thought. The SRAS curve shows where the economy is when it’s not on the LRAS. Now suppose the SRAS curve (and LRAS too) shifts to the right. There is a new equilibrium with a greater quantity demanded and a greater quantity sold–which means “supplied” in the lingo of macro, doesn’t it?

    Let’s consider a specific example. America opens its borders and another 100 million people rush in. RGDP rises by 20% within one year. In aggregate Americans are buying vastly more goods and services. Shopping carts are overflowing. Stores are packed. But the Fed holds NGDP constant. Assume all markets are in equilibrium. I say the rise in RGDP and the fall in the price level was an increase in aggregate supply. But lots more C + I + G + NX were purchased. What do you say? Did AD increase? If so, why did prices fall by 20%? If you graph it out is sure looks like a positive supply shock.

    Jason, How is that model more useful than the standard model? What problem does it solve that the standard model cannot solve?

    CMA, You are confusing lots of issues:

    1. Maybe everyone should be able to have checking accounts at the Fed.
    2. Maybe the government should inject more risk-free assets into the economy.

    But surely they shouldn’t just give these assets away? There is the concept of opportunity cost to consider.

  42. Gravatar of ssumner ssumner
    16. July 2014 at 17:16

    Zoutman, It might be hard to trace out if the BOJ responded to the earthquake by changing monetary policy, and hence shifting the AD curve.

  43. Gravatar of CMA (@CMAMonetary) CMA (@CMAMonetary)
    16. July 2014 at 17:30

    “CMA, You are confusing lots of issues:

    1. Maybe everyone should be able to have checking accounts at the Fed.
    2. Maybe the government should inject more risk-free assets into the economy.

    But surely they shouldn’t just give these assets away? There is the concept of opportunity cost to consider.”

    1. Yes this makes heli drops directly by fed efficient plus you get the added bonus of risk free pmt and dep system which is highly systemic anyway.

    2.It would happen by default everytime the fed expanded money through heli drop.

    Yes fed should issue money into people’s accounts. Monetary policy in simple terms is currently about conferring a benefit to fed counterparties (lower rate) and hoping it gets acted upon somehow (greater lending, investment). Issuing money to people is about conferring a benefit to everyone (greater money, lower rate) and hoping people act upon it by spending more.

  44. Gravatar of TallDave TallDave
    16. July 2014 at 17:37

    I’d say it means very little. Certainly less than intended by most who bandy it about.

    AD is the merely amount of supply that was accepted in exchange. There are no AD shocks, because there is no AD to shock. There are only limits on production, which reduce the amount of supply that people can exchange.

    Where this all comes to a head is the concept of “slack.” But there is no slack, because there is no AD. There is only overinvestment.

    When we say “AD shortfall” what we really mean is “production was either misallocated or limited by other factors, reducing the amount of supply that could be exchanged.”

  45. Gravatar of TallDave TallDave
    16. July 2014 at 17:47

    I think that’s conceptually similar to what Scott said about there being no bubbles. There can be no slack (and no AD) for the same reason there can be no bubbles: there is no fixed definition of value which any object can ever hold. Nothing has any intrinsic economic value, all utility is in the eye of the beholder.

    So when we say NGDPLT would reduce AD shortfall, I think what we are really saying is that it will create conditions in which the useful exchange of supply is maximized, which is such a nebulous web of factors that we have taken to calling it “aggregate demand” in hopes of taming its ineffability.

  46. Gravatar of Peter N Peter N
    16. July 2014 at 18:27

    If you treat the economy as having a single good, then AD and AS are ordinary micro-economic supply and demand. The question then becomes how you make the necessary transformation to a single good.

    I’m don’t believe there is any single “right” way to do this, and I expect the way you choose will matter.

    Of course the validity of such an aggregation is easy to question, but it still may be useful (though it’s not clear exactly how useful or how you tell when you exceeded the bounds of its usefulness ).

  47. Gravatar of Lee A. arnold Lee A. arnold
    16. July 2014 at 19:06

    I think AD is something like the bottom half of the circular middle transaction in this graph:
    https://www.youtube.com/watch?v=-Sm5nVAr4FY

    So AD is composed of money spent out of income and wages, + money spent as residential investment out of the household sector. But economists usually book residential investment on the supply side. so it goes against the strict (and rather arbitrary) standard definition, but the graph makes it possible to see that the housing crash could cause a sustained drop in spending on goods and services, which then ratchets down wages and incomes.

    The current depression could therefore have two different solutions, a “supply-side” solution which crams down mortgages and gets credit housing going faster again by deleveraging, or a “demand-side” solution which ramps up fiscal jobs to help households deleverage in that way.

  48. Gravatar of Tom Brown Tom Brown
    16. July 2014 at 19:07

    Nick, I second Fed Up’s question above: you essentially wrote:

    “During recessions Qd > Qs”

    Why is Qd > Qs during recessions?

  49. Gravatar of dtoh dtoh
    16. July 2014 at 19:15

    Scott,
    Stop acting deliberately obtuse.

  50. Gravatar of Morgan Warstler Morgan Warstler
    16. July 2014 at 19:26

    CMA, perhaps, but I doubt that when 30M people, who are currently not working (or working on the sly), start working (altho not paying taxes) actually increases the deficit.

    I’d expect slightly more revenue and less spending. I’m one of those Hauser’s Law guys I think that Govt should never spend more than 20% of GDP and never expect more than 19%.

    But more importantly…

    Those 30M begat a couple million new millionaires, entrepreneurs who suddenly have an advantage against Fortune 1000.

    Some of those 30M help drive down cost of daycare, some help drive down cost of local and state government.

    And since the machine runs on the same codebase state-by-state, the welfare administration system not only becomes automated, but it becomes cookie cutter.

    This allows passing your cred-ID from state to state, as either a boss or a worker, so Data Darwinism can force everyone to get serious about their reputation…

  51. Gravatar of Kenneth Duda Kenneth Duda
    16. July 2014 at 20:04

    Scott: sure, I’d include in my layperson notion of “aggregate demand” all sources of spending: consumer, business spending (not counting buying financial assets), government spending, and foreigners spending on US-made goods (net exports). (That’s what I think you mean by C + I + G + NX.)

    I don’t think that really changes my point, which is that “aggregate demand” is the total propensity of people to spend, and if that falls in aggregate — if more people decide that they’d rather hang onto their money than spend it — we wind up with an output gap and needless unemployment. On the other hand, if Americans all decide to save more at the same time, but foreigners suddenly decide to buy lots of spiffy American products, then there will be no AD shortfall.

    My view is that the key job of the FOMC is to regulate AD to match it to potential aggregate output (GDPPOT on Fred2). Things that make spending more desirable boost AD, things that make saving more desirable lower AD, by my definition of AD. The traditional policy tool is interest rates — the Fed makes spending more desirable by lowering rates — but as Krugman likes to remind us, that stops working at the ZLB. NGDPLT looks like such a fantastic way to eliminate that problem, as it will drive real rates as negative as needed to boost AD such that NGDP reaches GDPPOT. At least, that’s how I understand your approach.

    I am of course telling you this to give you insight into how a reasonably intelligent non-economist thinks about it. I realize your understanding of the economics is more than sufficient here :-)

    -Ken

  52. Gravatar of wufwugy wufwugy
    16. July 2014 at 21:53

    I think CMA’s question is trying to understand why it’s better for the Fed to give a handful of institutions money instead of regular people. I don’t understand the difference, but I have seen people far more knowledgeable than me sorta just blow it off and say it makes no difference who gets the money the Fed lends (or whatever it is they do), but that isn’t the conception the public has

    The public hates the Fed because they think all it does is create money to give to rich bankers. I am a layman and would have that perception as well if I didn’t read blogs like this where y’all tell me otherwise, but that doesn’t mean I understand why it makes no difference that the Fed adds liquidity to banks with millions in assets instead of to working consumers who make 30k a year. It makes perfect sense to every non-economist why the former is just a scheme to make the rich man richer by inflating the poor man’s dollar

  53. Gravatar of CMA (@CMAMonetary) CMA (@CMAMonetary)
    16. July 2014 at 22:52

    wufwugy

    The fed doesnt give institutions money. It gives them exclusive access to lower interest lending than non banks (fed funds). It provides banks with a priviledge which is neither equitable nor efficient and is the cause of the current imbalances.

  54. Gravatar of Doug M Doug M
    16. July 2014 at 23:13

    “Let’s consider a specific example. America opens its borders and another 100 million people rush in. RGDP rises by 20% within one year.”

    As I learned that one in school, they would have said that both AD and AS were increasing.

  55. Gravatar of Morgan Warstler Morgan Warstler
    16. July 2014 at 23:13

    Ladies and Gentlemen, I beseech you, tell me how this is not the future?

    http://3dprintingindustry.com/2014/07/16/japanese-artist-arrested-distributing-3d-printable-vagina-selfie/

  56. Gravatar of J.V. Dubois J.V. Dubois
    17. July 2014 at 00:22

    Interesting debate. There is this chapter on Khan university that I think explains pretty good what the concept of aggregate demand means: https://www.youtube.com/watch?v=oLhohwfwf_U

    So the most simple definition is that Aggregate Demand is a function that describes relation between change in a price level in relation to change in quantity of real goods demanded.

    Now you can start playing with different assumptions and see how it affects AD. Now in some models of an economy you can get a situation called “insuficient demand” – this occurs when boosting aggregate demand (shifting the curve) can have welfare improving effects.

  57. Gravatar of Nick Nick
    17. July 2014 at 03:09

    Morgan,
    I don’t want to nitpick since I broadly agree with what you are saying, but it’s really you who have to come to Scott and not the other way around. As you point out, the best thing about ngdplt is that is doesn’t try to break things all the way down to the point where the fed is basing its decision making on multifactor productivity growth or other, totally artificial, ‘real’ variables.
    The whole genius of it is that it’s sensible policy in the future you think likely, but also sensible policy in any number of other futures. It’s appropriately humble: it doesn’t force us to decide on some grand story of a new 21st century economics … Secular stagnation, end of scarcity, end of average, or whatever.
    So anyway, forget the VR rigs … If they come they come. Maybe we’ll discover a parasitic slug that gives humans telepathy, or maybe we’ll all have photosynthetic flora powering us in fifty years … Who knows? The important thing is to get central bank policy that doesn’t need to change as new products hit the market …. Something that was somehow already incorporating people’s ability to substitute new behaviors and products for old …

  58. Gravatar of Nick Rowe Nick Rowe
    17. July 2014 at 03:14

    All: yes, my typo. I meant: Qd = Q < Qs in recessions.

    Scott: the LRAS curve shows Qs. The SRAS curve is not really a supply curve. I expect I should do a post on this.

    "There is a new equilibrium with a greater quantity demanded and a greater quantity sold–which means “supplied” in the lingo of macro, doesn’t it?"

    Macro, and the English language, have very bad lingo. We really ought to switch to French for the supply curve, and call it the "offer curve".

    In normal (non-economics) lingo, "quantity supplied" usually means "quantity actually delivered to the buyer". In economics, "quantity supplied" means "quantity offered for sale to the buyer".

  59. Gravatar of ssumner ssumner
    17. July 2014 at 05:17

    CMA, You are not addressing the issue, I’m not sure if you even understand the issue. There is an opportunity cost of giving money away. Do you see that point? The money could be sold, producing revenue for the Treasury. If you give it away the Treasury must get their funds elsewhere. You are proposing a sort of welfare program, with no logical justification. That’s not to say you are wrong, but you are not providing convincing arguments.

    Peter, That’s not correct, unless it’s a good sold in a perfectly competitive market.

    Lee, I can’t understand a single word of what you wrote. Can you use economic terminology? Otherwise no one will understand what you are saying.

    dtoh, I’m afraid that I am far more ignorant than you imagine. I really can’t understand a word that Lee said in the comment above yours. Can you translate it for me?

    Ken, You said:

    “and if that falls in aggregate — if more people decide that they’d rather hang onto their money than spend it”

    If “hang on” means increased saving, you are wrong, if hang on means lower velocity, you are right.

    wufwugy, You said:

    “I think CMA’s question is trying to understand why it’s better for the Fed to give a handful of institutions money instead of regular people.”

    No one is even proposing that the Fed “give” money to institutions. They sell money to bond holders. It’s not at all clear why this helps bondholders, they tend to favor tight money, don’t they?

    Doug, You were taught in school that when both AS and AD rise there is no increase in NGDP? You should ask for your diploma back.

    JV, You said.

    “So the most simple definition is that Aggregate Demand is a function that describes relation between change in a price level in relation to change in quantity of real goods demanded.”

    Doesn’t it depend on why the price level changed? If the price level rises due to an increase in the money supply, the quantity of real goods demanded will rise in the short run. That is certainly not tracing out a AD curve.

    Nick, You said:

    Scott: the LRAS curve shows Qs. The SRAS curve is not really a supply curve. I expect I should do a post on this.”

    But the SRAS is the sine qua non of the AS/AD model. When people only draw one curve, (and label it AS) it is always the SRAS. That was the only AS curve before the natural rate hypothesis. The vertical LRAS is the classical model, but the whole point of the AS/AD model is to address the business cycle.

    So again, if the SRAS curve represents the aggregate supply function in a AS/AD model, and if you have a positive supply shock, then the quantity of real goods and services demanded will rise. And the quantity of real goods and services supplied will rise. And they are equal.

    BTW, the AS/AD model works fine in a world with sticky wages and perfect comp in all goods markets. So any GENERAL explanation of the meaning of “AD” must be consistent with the case of the sticky wage economy. But even with sticky prices, there is the problem of how to describe a positive supply shock, when SRAS moves to the right. The quantity of real goods and services demanded increases in that case.

    I think the problem we are both having is that neither the AD nor the AS curve have anything to do with “supply and demand” in the micro sense. But people want to think in those terms when describing the model. We both have a very clear idea of what’s actually going on in the economy, but are struggling to agree on a common lingo to describe those events.

  60. Gravatar of J.V. Dubois J.V. Dubois
    17. July 2014 at 05:44

    Scott: “Doesn’t it depend on why the price level changed? If the price level rises due to an increase in the money supply, the quantity of real goods demanded will rise in the short run”

    Now we are talking the shape of AD curve based on your assumptions and the model. But in its purest form the AD as the concept is about this relation real goods demanded vs price level.

    I am sure that the same thing can be said about the concept of microeconomic demand. Demand for apples is a function of quantity of apples demanded by buyers with relation to its price (relative to other goods).

    Maybe you have a model that based on some assumptions explains a change in “market size” (quantity supplied times unit price – which is equivalent to NGDP in macro Demand) as a change in “demand”. But that depends on the model. Micro demand it is purest form just describes the relation. The shape of the curves and interpretation is up to the model and assumptions.

  61. Gravatar of Kenneth Duda Kenneth Duda
    17. July 2014 at 06:16

    Scott, this is off topic, but have you seen this work:

    http://econbrowser.com/archives/2014/07/guest-contribution-taylor-rule-legislation#comment-183275

    It basically argues that when times are tough, the Fed does not follow the Taylor rule, and therefore, the Fed should be forced to always follow the Taylor rule.

    This strikes me as bad logic pushing us the wrong direction. It’s bad logic because they have causality backwards. In reality, the Fed comes off the Taylor rule to respond to shocks, and shocks cause bad economic outcomes. It’s the wrong direction because further enshrinement of the Taylor rule makes it harder to get the Fed to target the right thing.

    I’d be very curious about your reaction.

    Thanks,
    -Ken

    Kenneth Duda
    Menlo Park, CA
    kjd@duda.org

  62. Gravatar of Dustin Dustin
    17. July 2014 at 06:48

    If

    NGDP = AD = Qd = Q < Qs

    Then, All of the chairs that I make but couldn't sell (excess production, or 'Qs – Q') are not computed in Gross Domestic 'Product'? This is very bizarre to me… See the P in GDP.

  63. Gravatar of Dustin Dustin
    17. July 2014 at 06:51

    Kenneth

    Interesting. My immediate reaction was that if the Taylor rule is so good, and it is followed in good times, how do we even get to bad times?

  64. Gravatar of TallDave TallDave
    17. July 2014 at 06:56

    I think the problem we are both having is that neither the AD nor the AS curve have anything to do with “supply and demand” in the micro sense. But people want to think in those terms when describing the model.

    Yep. That’s the problem with any model — what are the limits of the analogy’s usefulness? Newton’s laws of motion work fine unless you’re dealing with large masses or velocities near lightspeed.

    That’s kind of how I try to explain NGDPLT — it’s not that different than IT in most situations, but works a lot better in recessions, especially at ZLB.

  65. Gravatar of TallDave TallDave
    17. July 2014 at 07:02

    I’ll just add, in my career as a business analyst and programmer, nothing produces bad answers like doing lots of math on numbers rooted in ill-defined concepts :)

  66. Gravatar of Maximum Liberty Maximum Liberty
    17. July 2014 at 07:04

    @ Nick Rowe / 16. July 2014 at 08:10 said the most intuitive thing, so it seems like he ought to get a more in-depth examination:

    > 3. Add up the quantities demanded of all the newly-
    > produced [later edited to "final"] goods and services.

    I think better graphically, so let me describe graphs to show the problem with this. The idea is that you sum all the demand curves. This is essentially staking the curves rightwards. Problems:

    a. What is the unit of measurement on the X axis? It is units of goods and services, but in what units? The graphs that you have added are typically thought to be in product units, like “20 widgets.” To create a common unit, you have to convert to dollars-worth of goods and services. To do so, you have to use a price. But price is variable, on the Y-axis! (Maybe the X-axis represents an index, where a unit is based on current production, 100 means the total quantity of everything now produced, 99 means 99% of everything now produced, etc. This at least brings out the point that an assumption of aggregate demand is that it cannot account relative changes in products’ prices and quantities.)

    b. How do you account for the need to omit substitution effects when summing the micro-curves to get to the macro-curve? For most products, most of the reason for the slope of the micro-curve is the propensity for consumers to switch to other products when the price of the product rises relative to the other product. If the Y-axis represents the general price level, you must somehow strip out the substitution effect from all the micro-curves before summing them. (Put another way, each micro-curve assumes that al other product prices are fixed. When you transition to the macro-curve, you must account for losing this assumption.)

    c. If the macro-Y-axis represents a general price level, does it also represent the price of labor? If so, then you also lose the income effect on demand in summing the micro-curves to get to the macro curve. (If you strip out both substitution and income effects, the macro-curve seems to be getting awfully vertical.) If not, then your macro-Y-axis must be the price of final goods and services relative to the price of labor (or perhaps all non-final goods and services, or something similar).

    Based on all that, I don’t have an answer. The way I think about micro-demand is that the demand curve is like the first derivative of the preference function where good on the Y-axis is money. (Yes, I know this isn’t right. It is an intuition.) If we applied that to a preference function where the two axes were money (Y-axis) and final goods and services (X-axis), we would get something akin to the propensity to hold money. That intuitively appeals to me as an explanation for an aggregate demand curve. If I think prices are high relative to the future, I will hold money. If the reverse, then I will deplete my savings. Oddly it hints that the shape od the aggregate demand curve is primarily a monetary phenomenon, and that causation runs from price to quantity, rather than the other way around. But the problems with this intuition are just as extensive as the ones with summing the micro-curves.

    Max L.

  67. Gravatar of Tom Brown Tom Brown
    17. July 2014 at 07:08

    Morgan, funny link, thanks.

  68. Gravatar of Dan W. Dan W.
    17. July 2014 at 07:34

    How many economic transactions does it take to make an aggregate?

  69. Gravatar of J.V. Dubois J.V. Dubois
    17. July 2014 at 08:09

    Maximum Liberty: I think it is wrong to think about aggregate demand in terms of summing all partial market demands. Aggregate demand is there to answer this question:

    “What would happen to peoples willingness to buy things if suddenly some aliens halve all the prices while leaving everything else constant”?

    Now this is completely fictional scenario. It is not even remotely realistic as with a micro demand – like for instance how many apples would people like to sell if their price halved. This micro version of demand is a thing that you can run experiments with and that have some real world explanation because everybody intuitively knows what it feels like when price of apple halves and nothing else changes.

    However Aggregate Demand is a completely different beast. The slope of this curve has power to explain things like what portion of a money supply increase is wasted in “hot-potato” effect as opposed to employing idle resources given we have sticky prices.

  70. Gravatar of Jason Jason
    17. July 2014 at 08:19

    Hi Scott,

    You asked: “How is that model more useful than the standard model? What problem does it solve that the standard model cannot solve?”

    If it was just the fact that you can use information theory to get supply and demand diagrams [1], then it’s true that it wouldn’t be that useful, just a curiosity.

    However, since NGDP and the money supply (M) are both measured in units of money, and the information content of that unit of account depends on the size of the economy and the amount of money, the information theory model tells us how the medium of exchange (~ M, the quantity of money) is modified by the unit of account (~ log M, the information content of money). The resulting function

    P ~ c (log NGDP/log M) (M/M0)^(log NGDP/log M – 1)

    fits the price level extraordinarily well [3] for many countries (US, Japan, Canada, UK, EU, Australia, Sweden, Switzerland, Russia) and is even predictive of trends in inflation [4]. (Which measure of the money supply seems to be an empirical question, and it turns out to be M = currency in circulation for the price level and long term interest rates … if you’re talking about short term interest rates you add central bank reserves).

    This model of the price level also reduces to the quantity theory of money when inflation is high, and explains the deviation from the quantity theory at low inflation. [5]

    It also has other uses, including helping explain how “easy money” both raises and lowers interest rates [6], and allows you to derive Okun’s law [3].

    I also made a prediction about Canada undershooting its inflation targets in the future. [7]

    If that prediction turns out to be wrong, then maybe the macro stuff is all just a case of fitting current trends. But it still would be nice to derive supply and demand diagrams from information theory :)

    [1] http://informationtransfereconomics.blogspot.com/2013/04/supply-and-demand-from-information.html

    [2] http://informationtransfereconomics.blogspot.com/2014/06/money-unit-of-information-and-medium-of.html

    [3] http://informationtransfereconomics.blogspot.com/2014/06/the-information-transfer-model.html

    [4] http://informationtransfereconomics.blogspot.com/2014/05/out-of-sample-predictions-with.html

    [5] http://informationtransfereconomics.blogspot.com/2013/07/recovering-quantity-theory-from.html

    [6] http://informationtransfereconomics.blogspot.com/2014/01/strange-new-monetary-worlds.html

    [7] http://informationtransfereconomics.blogspot.com/2014/07/worthwhile-canadian-prediction.html

  71. Gravatar of Maximum Liberty Maximum Liberty
    17. July 2014 at 08:46

    @ J.V. Dubois / 17. July 2014 at 08:09
    > I think it is wrong to think about aggregate
    > demand in terms of summing all partial market demands.

    I agree. I was giving some of the reasons why I think it is wrong, in response to Nick Rowe. Whether AD has any explanatory power is really part of the question of how it is constructed. I’m skeptical.

    Max L.

  72. Gravatar of Morgan Warstler Morgan Warstler
    17. July 2014 at 09:54

    Nick, I’m with you.

    But Beckworth has now gone with Invisible RGDP, and I’m not an Economist, and this subject makes my brain turn into goo… so I’m kinda looking Scott to take it up.

    Normally Econos say productivity gain driven growth (vs. population) is “deflationary,” as in it kinda slows down inflation. It’s like hey this X invention makes Y cheaper freeing up money for other things.

    And what I’m trying to describe is what if ALL REAL GROWTH (besides population) = DEFLATION, as in reduces demand for money.

    As in, all new inventions will make us not need as much money to live anymore. No car loans, no school loans, no office buildings (CMBS)… Even goofy stuff like bc of tech + Homes now are built with closets that make you not need dressers, armoires, desks, filings, book shelves, etc. I’m thinking it just ends up with chairs tables and beds.

    Meaning, the faster our economy grows in digital productivity gains (the better things are), but the more inflation we need just to keep GDP from shrinking outright.

    Again, this stuff turns my brain to goo.

    But it almost seems like, 2014, 2015, 2016 RGDP, shouldn’t even be able to be higher than 2013.

    That cant right.

    We use less electricity every year. That falling electricity produces a nearly exponential improvement in our consumption every year. And it has no positive impact on GDP, except that the price of electricity is increasing (inflation).

    Somehow it feels like if we have some more inflation, and people are start wanting to invest it even more than today, it’s going to increase the speed of digital real growth (faster deflation), so we need even more inflation.

    Again, i find the subject incredibly confusing.

  73. Gravatar of Doug M Doug M
    17. July 2014 at 10:36

    Doug, You were taught in school that when both AS and AD rise there is no increase in NGDP? You should ask for your diploma back.

    I didn’t major in economics…I studied math…

    As you have suggested in this space, if everyone woke up with twice as much money in their pocket, nothing would change in real terms. i.e. money is neutral. I have argued that money is not neutral, but that is beside the point…Lets assume that money is neutral.

    We all wake up with twice as much money as we had in our pockets the day before. Prices and wages double. Would you call that an increase in AD? I wouldn’t.

    So, to your scenario, in two steps — the supply curve shifts to the left, and the demand curve shifts to the left. Output increases; consumption increases; prices stay more or less constant. Next day everyone wakes up with less as much money in our pockets… prices fall. NGDP stays constant.

    You would call that a fall in AD, even though everyone everyone is buying more stuff?

  74. Gravatar of Lee A. arnold Lee A. arnold
    17. July 2014 at 11:04

    Scott Sumner, You are asking what “aggregate demand” means. We may as well ask what “aggregate supply” means.

    So my question really is, what is the complaint under which “aggregate demand” is entering the conversation, and thus is causing your confusion? Is it about people talking about the lack of spending and jobs after the housing crash?

    The proximate cause of the spending crash, was the crash in available consumer credit and mortgages, which in turn was caused by the crash in house prices + the simultaneous crash in the value of mortgage derivatives that were being purchased for use as reliable collateral in the $15 trillion overnight repo market.

    This caused a fall in almost $1T a year of spending from the household sector, and thus the persistent shape of the output gap since. This is loosely referred to as a fall in “aggregate demand” (such as by Krugman). It is not precisely that, clearly. But it really isn’t a fall in “aggregate supply”, either, unless we change another definition and start to book residential investment on the supply side.

    Is your question instead about the status of “aggregate supply” and “aggregate demand” as standalone concepts?

  75. Gravatar of Lee A. arnold Lee A. arnold
    17. July 2014 at 11:18

    Because if the latter is the case, i.e. you are wondering about the ontological status of “aggregate supply” and “aggregate demand”, you will find that by the early 1980s in introductory textbooks (Samuelson, Lipsey-Steiner-Pruvis, Baumol & Blinder) it was already admitted to be fuzzy stuff, and some of them were already warning about the analytical usefulness.

  76. Gravatar of Nick Rowe Nick Rowe
    17. July 2014 at 11:28

    Scott:

    AD. There is one big difference between the micro and macro AD curves. The quantity of apples people want to buy does not depend (much) on the quantity of apples actually sold, in micro. In macro it does, because realised sales determine income, which affects demand.

    The macro AD curve is really a semi-equilibrium condition. It shows combinations of Y and P, holding other stuff like (say) M constant, such that Yd(Y,P,M)=Y.

    AS. Suppose the AD curve falls. If the price of labour is sticky, but the price final goods is perfectly flexible, we are off the labour supply curve, but on the supply curves for final goods.

    If the price of final goods is sticky, we are off the supply curve for final goods. Are we on the supply curve for labour? If W is sticky too, we are off both supply curves. If W is perfectly flexible, we are on the labour supply curve, but it doesn’t matter, because employment will fall roughly the same amount either way.

    The only sensible way to do it is to draw a LRAS curve that shows what output would be if we are on *both* the labour supply and the output supply curves. Then draw a “SRAS” curve, that isn’t a supply curve at all, that shows what actually happens, whether or not anyone is on or off his supply curve.

  77. Gravatar of Andrew_M_Garland Andrew_M_Garland
    17. July 2014 at 11:51

    ( http://www.alice-in-wonderland.net/books/alice-in-wonderland-quotes.html )
    Alice in Wonderland
    === ===
    Humpty Dumpty:  (in a rather a scornful tone)  When I use a word, it means just what I choose it to mean — neither more nor less.

    Alice:  The question is whether you can make words mean so many different things.

    Humpty Dumpty:  The question is which is to be master, that is all.
    === ===

  78. Gravatar of ssumner ssumner
    17. July 2014 at 11:56

    JV, Demand is much more than a relationship between P and quantity demanded. It’s also a set of factors being held constant as you change P.

    Ken, I agree. The Taylor Rule doesn’t work when you most need it, at zero rates. It’s not the best policy rule.

    Jason, Does the model forecast P better than alternative approaches, like TIPS spreads?

    Doug, Clearly if the money supply doubles and all wages and prices double and output is unchanged then AD has doubled. Just draw it on the graph–you’ll see.

    Lee, You need to be more specific. Nominal spending or real spending? And why does less credit affect total spending? Does it reduce M? V? M*V? What are you assuming about monetary policy?

    Nick, I think I agree with all that. But let’s take the SRAS curve. Suppose both LRAS and SRAS shift to the right. The AD curve does not shift.

    I see Keynesians calling that situation an “increase in aggregate demand” which seems crazy to me. They justify it on the basis that actual real GDP does go up, so AD = C + I + G + NX does go up. But in my view it’s a rise in aggregate supply, and an increase in quantity demanded. So it can’t be accurate to say AD can be defined in real terms. As soon as you define things in real terms you are talking about output, not a demand relationship.

  79. Gravatar of dtoh dtoh
    17. July 2014 at 13:00

    Scott,
    You use “AD” in a well defined and consistent manner. I think you know what you mean when you use it.

  80. Gravatar of Bonnie Bonnie
    17. July 2014 at 13:28

    And the conclusion (not the consensus)is …? I am on the edge of my seat waiting for the “sum up” post. Any one passing around popcorn? :)

  81. Gravatar of Lee A. arnold Lee A. arnold
    17. July 2014 at 14:07

    The housing crash appears to have reduced both nominal and real spending. Less credit reduced spending due to the fact that households buy less when they can’t charge it. (And it was not only reduced credit; mortgages went underwater.) This would reduce V, since M can sit still as bank reserves and business firms’ and top households’ cash on hand. Thus monetary policy becomes ineffective at zero interest rates so you would have to expand the definition of monetary policy to directly accelerate household deleveraging by unorthodox policies such as mortgage cramdowns.

  82. Gravatar of Jason Jason
    17. July 2014 at 14:48

    Scott, you asked:

    “Does the model forecast P better than alternative approaches, like TIPS spreads?”

    For long run trends, I think it might be better. The model “predicted” a falling inflation trend starting in the 1980s based on just using NGDP data from 1960-1970.

    http://informationtransfereconomics.blogspot.com/2014/05/out-of-sample-predictions-with.html

    I think I’ll do a little research into this since the model gives not only inflation trends but interest rate trends — in essence you should be able to predict TIPS spread trends with the model.

  83. Gravatar of Tom Brown Tom Brown
    17. July 2014 at 15:04

    Scott & Jason (Jason I hope you don’t mind), but I thought this was a good example of how Jason’s model stacked up against a Fed model in forecasting P:

    http://informationtransfereconomics.blogspot.com/2014/07/notes-from-ben-bernanke-and-p-model.html

    And to re-iterate what he explains in the post, his model is 3 parameters vs 7 to 8 parameters for the Fed, his doesn’t incorrectly predict deflation for 1992 (based on data from 1960-1990) like the Fed’s model does, and his does a great job predicting P from 1990-2014. He also has a favorable comparison with another Fed model on inflation (this time the Fed model having 42 parameters).

  84. Gravatar of Nick Rowe Nick Rowe
    17. July 2014 at 15:13

    Scott: “I see Keynesians calling that situation an “increase in aggregate demand” which seems crazy to me.”

    It seems wrong to me too. But I don’t think a *good* Keynesian would say that, if he were being *careful*. (No good Scotsman would say that either!) Put it this way: Keynesians *might* be more prone to saying that, but they don’t have to. They could say that an AS curve shift causes an increase in aggregate quantity demanded, just like you.

    The difference is that Keynesians are more likely to think the AD curve is (roughly) vertical, in {P,Y} space, unless the central bank “does something”. (They hold different things constant when they draw the AD curve. New Keynesians are happier drawing the AD curve with r on the vertical axis. And if they think of the central bank as setting r, a fall in P will not increase Yd, unless the central bank “does something” (lowers r) in response.

  85. Gravatar of CMA (@CMAMonetary) CMA (@CMAMonetary)
    17. July 2014 at 16:53

    SSumner

    “CMA, You are not addressing the issue, I’m not sure if you even understand the issue. There is an opportunity cost of giving money away. Do you see that point? The money could be sold, producing revenue for the Treasury. If you give it away the Treasury must get their funds elsewhere. You are proposing a sort of welfare program, with no logical justification. That’s not to say you are wrong, but you are not providing convincing arguments.”

    The treasury can still receive seignorage from fed if that concerns you. The fed would impose fees on users of its payment system by deducting from heli drop whatever is required which would actually be small proportion of the heli drops. We can easily increase it if you like so the seignorage is double. I dont see why the treasury needs seignorage the fed can just pass those profits to people directly.

    Monetary policy is always a welfare programme though. Providing lower rates to banks is welfare just as higher monetary wealth to the public is.

    Expanding money to people will reduce rate and increase monetary wealth directly.

  86. Gravatar of Jason Jason
    17. July 2014 at 18:07

    Hi Scott,

    I compared the ITM prediction of inflation from 2007 to today to the TIPS spread prediction for the same period.

    The ITM was 5 times more accurate: on average off by only 12 bp compared to 66 for the TIPS spread.

    http://informationtransfereconomics.blogspot.com/2014/07/better-than-tips.html

  87. Gravatar of ssumner ssumner
    17. July 2014 at 18:32

    dtoh, I use it to mean NGDP. That’s not standard. I am interested in what other people mean by AD. I honestly don’t know.

    Lee, But we now know that monetary policy is effective at the zero bound.

    Jason and Tom, Interesting. I hope people with more time and skill that I have will investigate your model.

    Nick, Keynesians claimed that AD in the UK had done poorly under the Conservatives, and cited RGDP data. But why isn’t that assumed to be a negative supply shock? After all, the low British RGDP number was productivity, not employment. And these were very smart Keynesians, Krugman, Wren-Lewis, etc. Keynesians also cite RGDP data in the US as evidence of AD changes. That makes no sense to me.

    CMA, The Fed does not provide “lower rates to banks.”

  88. Gravatar of Lee A. arnold Lee A. arnold
    17. July 2014 at 19:11

    Scott, it has not been effective at closing the output gap, and the employment population ratio has barely budged since the crash in 2008. What are you saying it has been effective at?

  89. Gravatar of Lee A. arnold Lee A. arnold
    17. July 2014 at 19:24

    I should write, monetary policy has not been effective at closing the output gap, what we see is an historically unprecedented downward deflection in the potential GDP line, to close the output gap.

  90. Gravatar of Tom Brown Tom Brown
    17. July 2014 at 19:35

    Scott, you write:

    “Lee, But we now know that monetary policy is effective at the zero bound.”

    That’s where Jason’s theory has something very interesting to say: his theory says it depends on the particular economy. There’s a slowly varying value called the information transfer index (kappa) that can be calculated for each economy as:

    kappa = log (M0/c) / log (NGDP/c)

    kappa indicates how sensitive P is to changes in M0 (I’m using “M0″ for the currency component of the base) over a class of central bank policies (i.e. those using a market based target such as IT, NGDPLT, etc.). When kappa is close to 1/2, then the QTM applies. As kappa approaches 1, P becomes insensitive to changes in M0.

    He’s calculated kappa for a number of economies over several decades, and used the results to plot the empirical data from these economies vs a set of theoretical curves showing the distribution to expect over a set of economies, each comprised of a set of random markets (this is my personal favorite chart of his):

    http://informationtransfereconomics.blogspot.com/2014/06/output-and-price-level-behavior-across.html

    In this case only a single parameter per economy (M0o) was required to be fit to allow Jason to plot the data. He’s since added at least one more economy (Russia).

  91. Gravatar of CMA (@CMAMonetary) CMA (@CMAMonetary)
    17. July 2014 at 19:35

    Ssumner

    “CMA, The Fed does not provide “lower rates to banks.””

    It provides a payment and depository system of reserves in which only banks can participate directly. The cost of borrowing of these reserves is targeted by the fed and the lending rate is lower which equals a welfare system. I cant borrow at less than 1%.

  92. Gravatar of Tom Brown Tom Brown
    17. July 2014 at 21:46

    Scott, you might have gathered that Jason’s theory indicates that economies with inflation-targeting CBs tend to move from QTM to non-QTM regimes over the long run. Interestingly enough, Mike Freimuth’s conclusion isn’t so different, based on his (I think it’s fair to say) much more mainstream model that he’s just posted:

    http://realfreeradical.com/2014/07/16/a-model-of-endogenous-money/

    Here’s Mike’s final paragraph:

    “The thing you should take away from this is that monetary policy, as we are currently doing it (inflation targeting) works much the way we think it works but that I think it either leads, in a predictable way, into a “liquidity trap” and a deflationary recession in the long run or it requires ever-expanding “fiscal policy” to keep this from happening.”

    Nick Rowe comments there too.

    (also, just for background info, I don’t think there’s a partisan motive behind Mike’s conclusion: he seems to me to be more libertarian than you are in his writings as a whole)

  93. Gravatar of ssumner ssumner
    18. July 2014 at 04:55

    Lee, You must be new here. I’ve been a consistent critic of Fed policy. But saying the policy has been far too contractionary since 2008 has nothing to do with whether monetary policy is effective at the zero bound. We know it is. The Fed has engaged in tapering precisely because the economy has hit the Fed’s targets. The problem is that they have the wrong target–they are too conservative.

    CMA, That makes no sense. By that logic a central bank that targeted the exchange rate would be “subsidizing” tourists who use the forex market when they take a trip. “Target” does not mean subsidize.

    In addition, “reserves” are nothing more than a name for cash held in the banking system. Walmart also holds lots of cash. A better argument is that IOR subsidizes banks. I’ve opposed IOR.

    Tom, I don’t view fiscal policy as a partisan issue. The GOP loves tax cuts, for instance. Bush did a tax cut in 2008 for AD reasons.

    What’s the intuition behind his result? Does he assume monetary policy is ineffective at boosting AD at the zero bound? Obviously it’s not ineffective, but I’m just trying to figure out where that result comes from.

  94. Gravatar of Dan W. Dan W.
    18. July 2014 at 05:15

    Scott,

    In context of Lee Arnold’s comments, what do you make of the observation of people “living beyond their means”? If aggregate economic activity was elevated as a consequence of people assuming excessive debt than a change in debt preference, brought on as people realized such debt levels were unsustainable, invariably leads to lower AD. If this is the case then how can any macro lever “fix” the gap?

    If you watched any TV in the mid-2000′s you may recall a TV ad of a man bragging about all his material possessions and then exclaiming “I am in debt up to my eyeballs”. If the populace has now decided it doesn’t want to take on such levels of personal debt I would think the AD curve must decline as the level of demand in the economy has decreased. Do any “macros” ever recognize this effect? Or is AD such an abstract entity that it exists independent of decisions of individual economic agents?

    The same questions applies to NGDP theory. If there is a decline in total economic demand how can one argue that nominal GDP can or should be targeted? If the population decides it wants less debt how can macro policy realize more spending? At some level there simply is going to be a conflict between what the people want and what policymakers want. A conflict no different than if people express a preference for the color blue and “leaders” were to argue that the preferred color should be yellow.

  95. Gravatar of Daniel Daniel
    18. July 2014 at 05:41

    Shorter Dan W

    If people want to go on vacation, by the millions, all at the same time – who are we to stop them ?

  96. Gravatar of Dan W. Dan W.
    18. July 2014 at 06:05

    Daniel,

    I don’t recall everyone going on vacation in 2005. But I do recall them buying homes and borrowing money with loans on terms that could not be repaid. If 2005 is a point on the trendline you believe the economy should be on then how are you going to get millions of Americans to take on debt when it turned out so badly for them the last time they tried it?

  97. Gravatar of Daniel Daniel
    18. July 2014 at 06:16

    Last time I checked, when people are in debt, they work a bit extra, so they can pay it back (in theory, at least).

    They don’t go on vacation, by the millions, all at the same time.

    In other words – I’m really tired of this praxeology bullshit being used as justification for inflicting economic pain.

  98. Gravatar of Dan W. Dan W.
    18. July 2014 at 06:33

    Who’s inflicting economic pain?

    The tautology you argue is that great numbers of people can never be wrong about their financial decisions. But history proves otherwise.

    According to your tautology if great numbers of Americans quit working, gambled away their wealth and ended up destitute on the street it would be the fault of “tight money” that they were in financial pain. But no. In truth it would be their fault for being stupid and for listening to the bad theories of people like Daniel.

  99. Gravatar of ssumner ssumner
    18. July 2014 at 06:42

    Dan, That makes no sense. Living beyond one’s means means consuming too much. It doesn’t mean you are producing to much. Indeed production is the economy’s “means.”

    If you were consuming too much you wouldn’t stop producing, you’d produce even more, and reduce leisure time.

    Your last paragraph makes no sense, as you are confusing real and nominal variables. When you target NGDP you are targeting the value of money, a nominal variable. The real economy reflects the preferences of the public.

  100. Gravatar of Dan W. Dan W.
    18. July 2014 at 07:01

    Scott,

    Were too many houses produced in 2005 in the deserts of Arizona and California? Why did this happen?

    Some people “consumed” these houses. Many others speculated that someone would consume them. The houses were produced, built using borrowed money, and then never consumed. How can those who lent money on houses worth far less than their production value be paid back?

    When a person borrows from his existing home and spends the money what happens when the debt cannot be paid back? The person can no longer borrow and he cannot liquidate. The mirage of wealth has been destroyed. Is monetary policy to blame or is there the basic lesson that one should not bite off more than he can chew?

    When the euphoria of debt evaporates and millions of consumers stop borrowing and stop buying new cars and swimming pools what replaces this loss in demand?

    An economic policy that requires one to reject booms & busts and to deny the “animal spirits” of humans is worthless since it denies the reality that exists.

  101. Gravatar of Lee A. Arnold Lee A. Arnold
    18. July 2014 at 07:14

    Scott, it looks to me like monetary policy is “effective” at the zero lower bound, BUT the “effectiveness” changes its direction or intention, into a certain limited sense of preventing further shrinkage — not enabling expansion.

    Monetary policy can no longer expand the economy at the zero bound; it simply tries to prevent further shrinkage by trying to prevent further shrinkage of the credit channels to households (and firms). Thus the idea that the economy has “hit the Fed’s targets” is a misuse of language by the Fed.

    What the Fed has been doing instead, is in essence preventing the collapse of the financial subsystem of the economy. All these last 6 years. The various paper-buying facilities and the explosive increase in bank reserves were done to allow the banks to continue to unwind their trades in repo and to keep their own accounts solvent while bad debt elsewhere (mortgages, consumer credit) were resolved. We must do this, because the private banking system has an ownership structure extending around the globe, and it would be impossible (and perhaps silly) to replace it with another system.

    Thus there has been no “positive” Fed target, no target that could be increased or decreased. The target sign really changed to “zero and holding”. The injected money stayed inside the financial system; it did not get out into the “aggregate demand” of the real (i.e. non-financial) economy of goods and services. The talk of “tapering” is ostensibly about reducing bank reserves or liquidity so that, as the credit channel strengthens from the household side due to deleveraging, there isn’t a sudden rush of new credit so much as to cause inflation.

  102. Gravatar of Tom Brown Tom Brown
    18. July 2014 at 07:43

    Scott,

    re: fiscal as partisan issue: I agree.

    re: intuition: definitely a job for Mike (I let him know you were asking)

    re: monetary policy at ZLB being effective: I don’t know about Mike, but it sounds like he’s referring to a long term evolution… so *maybe* it depends on where in the evolution you’re at when you’re also at the ZLB? If that’s the case, then that’s similar to what Jason is saying. However, Jason’s assumption is the CB has a “market based” class of targets… he calls those “endogenous” solutions to his fundamental price differential equation. There’s also an “exogenous” solution that applies when a CB removes itself from the “feedback loop” of paying attention to what the market is doing. The exogenous solution is available at any time *I think!*, and it can result in accelerating inflation or even hyperinflation (and maybe deflation too… that’s not clear to me):

    http://informationtransfereconomics.blogspot.com/2013/09/hyperinflation.html

    Here Jason looks at the exogenous solution as a potential means of exit from the “information trap”:

    http://informationtransfereconomics.blogspot.com/2013/09/exit-through-hyperinflation.html

    So, yes, in a sense he agrees that monetary policy is “effective” at the ZLB, but in some cases that might mean a CB that adopts a policy in an entirely different class, and it could result in a bout of accelerating or even hyperinflation.

    Honestly, that’s one of the more mysterious parts of the theory to me: the transition from the endogenous solution to the exogenous solution and back again. But that’s almost certainly due to me not grasping other aspects. I’d be surprised if my mystification wasn’t my own fault.

  103. Gravatar of Lee A. Arnold Lee A. Arnold
    18. July 2014 at 08:05

    Dan W., 18. July 2014 at 07:01 — “Is monetary policy to blame or is there the basic lesson that one should not bite off more than he can chew?”

    A little bit of the latter (don’t bite off more than you can chew), but really, neither one.

  104. Gravatar of Daniel Daniel
    18. July 2014 at 09:16

    Dan W

    Are you trying to fail the Turing test ?

    You said that people were living beyond their means – and I sort of agree with you on that one.

    And then you said that leads straight into “less AD”.

    How in the world does that make sense ? It’s like saying “if you eat too much, you’ll lose weight”.

    And no, I’m still not impressed by praxeology-derived conclusions. In fact, I think they’re bullsh*t. Spewed by idiots.

  105. Gravatar of Dan W. Dan W.
    18. July 2014 at 10:44

    Daniel,

    I wrote that the reset of people’s expectations of debt and their ability to pay it lowered their demand.

    “When the euphoria of debt evaporates and millions of consumers stop borrowing and stop buying new cars and swimming pools what replaces this loss in demand?”

    As to Scott’s point debt enables both enhanced consumption and production. Houses would not have been built in the desert if builders could not have secured funding to do so. Builders borrowed money to build homes and buyers borrowed money to buy those homes. Builders went bankrupt when the number of unsold homes consumed their balance sheets. Home owners went underwater as the tautology of ever rising home prices proved false. Home prices do not rise forever and within individual markets they can fall a long ways as demand for homes can collapse for any number of reason.

    The debt boom was followed by a debt bust which has been followed by a debt reset. This leaves a gap from the trend line. But that trend line was based on fraud such as no-doc loans and the lie of ever rising real estate prices. On what basis should fraudulent activity and the outcome of that fraud be used as a benchmark?

  106. Gravatar of Major-Freedom Major-Freedom
    18. July 2014 at 11:31

    Daniel:

    “In other words – I’m really tired of this praxeology bullshit being used as justification for inflicting economic pain.”

    Innocent people are getting real tired of your anti-praxeology bullshit being used as a justification for inflicting economic pain.

    Your ridiculously ignorant and myopic “solution” is itself the very cause of widespread economic pain you are referring to.

    Eliminating initiations of force against individual property does not “inflict” pain on anyone. It is removing inflictions of pain by way of removing economic parasitism you prattle on about in your warped mind as beneficial. Unemployment results from people adapting to having to find projects that individual sovereign consumers actually want? That is a cure. Pain or not. Just like having surgery to remove a tapeworm leads to temporary discomfort and pain. You are insinuating that because removing a tapeworm has pain associated with it, that this means the doctors are masochistic psychopaths who relish in watching people hurt.

    You have everything totally and completely BACKWARDS. Pain felt by parasites being eliminated is a good thing. A healthy thing. Something to welcome and not be afraid of experiencing.

    People like you who view all pain as evil are like little children who don’t understand the difference between good pain and bad pain. What, do you not work out because it will make your fat ass sore? Evil pain right? Get a life.

  107. Gravatar of Daniel Daniel
    18. July 2014 at 13:22

    Dan W

    Your whole reasoning is based on the assumption that money is scarce. Which it isn’t.

    Try harder, this time using your brain.

    Major_Moron,

    Good to see you’re still a retard. Don’t you have an ATM you need to run to ?

  108. Gravatar of Major-Freedom Major-Freedom
    18. July 2014 at 17:59

    Daniel:

    You are clueless about the concept of scarcity. Money is indeed scarce. That is why money has a price, whereas air and sunlight do not. Scarce goods are rivalrous goods. Money is certainly rivalrous.

    Your foolery over the ATM debacle has already been refuted countless times.

    Try again.

  109. Gravatar of Daniel Daniel
    18. July 2014 at 22:10

    When I see an Austrian claiming to have refuted anything, I’m reminded of Hegel “proving” that there cannot be an eighth planet orbiting the Sun.

  110. Gravatar of ssumner ssumner
    19. July 2014 at 05:31

    Tom, Jason needs to work on explaining the intuition behind his results–that’s how you convince people to spend the time necessary to work through the model.

  111. Gravatar of Major-Freedom Major-Freedom
    19. July 2014 at 06:42

    Daniel:

    Whenever I see your refuted argument about converting an existing, already exchanged sum of money from one form to another by the same money owner, as if this is supposed to disprove the Cantillon effect, and inflation caused wealth transfer, I am reminded of my late grandfather who had Alzheimers and kept asking when his long since dead dog is coming home. Except you don’t have Alzheimers.

  112. Gravatar of Philippe Philippe
    19. July 2014 at 07:00

    if you spend a new $10 note, and then a few weeks later someone pays you that same $10 note, does that mean your past self robbed your present self?

  113. Gravatar of Tom Brown Tom Brown
    19. July 2014 at 09:11

    Scott, sorry I thought you were referring to the intuition behind Mike Freimuth’s results. He could probably convey that to you pretty quickly since his model is much more mainstream I think. I learned some about it from asking him questions in the comments.

    Re: Jason’s theory, I’m starting to develop some feel for it, but he’s definitely the guy for the job.

    If you’re interested in getting a feel for the general purpose information transfer theory Jason is using, I recommend this brief post:

    http://informationtransfereconomics.blogspot.com/2014/07/information-transfer-is-state-of-mind.html

    This one is a simple explanation of in what sense money transfers information:

    http://informationtransfereconomics.blogspot.com/2014/03/how-money-transfers-information.html

  114. Gravatar of Tom Brown Tom Brown
    19. July 2014 at 09:31

    … I think Jason has made some effort to translate into normal econ speak (see above comment for example), but apparently not successfully yet.

    BTW, Jason went on to do two more posts on forecasting inflation (he went out to 2020 in the US) with his model yesterday, making this bold claim at the end of the first of them:

    “That is a pretty startling piece of information. It means you likely can’t do any better than the information transfer model in predicting inflation in the medium term (5-15 years out)”

  115. Gravatar of Major_Freedom Major_Freedom
    19. July 2014 at 14:34

    Philippe:

    “if you spend a new $10 note, and then a few weeks later someone pays you that same $10 note, does that mean your past self robbed your present self?”

    No.

    The argument being made is based on mutuum sums, not bailment objects.

  116. Gravatar of Philippe Philippe
    19. July 2014 at 14:42

    “The argument being made is based on mutuum sums, not bailment objects.”

    Please state clearly what you mean by that and how it relates to my question.

  117. Gravatar of ssumner ssumner
    20. July 2014 at 12:12

    Tom, That was one of Hayek’s themes—expenditures transmit information.

  118. Gravatar of Major.Freedom Major.Freedom
    20. July 2014 at 14:28

    Philippe:

    “Please state clearly what you mean by that and how it relates to my question.”

    I mean the commonly understood definitions.

    Once you become aware of the commonly understood definitions, you’ll likely figure out why I made that comment.

  119. Gravatar of Major_Freedom Major_Freedom
    20. July 2014 at 14:29

    Philippe:

    “Please state clearly what you mean by that and how it relates to my question.”

    I mean the commonly understood definitions.

    Once you become aware of the commonly understood definitions, you’ll likely figure out why I made that comment.

  120. Gravatar of Tom Brown Tom Brown
    20. July 2014 at 15:15

    Scott, Interesting. I wonder if Jason has ever tried to find a correspondence between his theory and Hayek. AFAIK, this is the only place he mentions him:

    http://informationtransfereconomics.blogspot.com/2014/05/the-effect-of-expectations-in-economics_5.html

    Regarding Mike Freimuth’s model, he did write a follow up post (addressing your question above) explaining what he meant by “fiscal policy.”

    http://realfreeradical.com/2014/07/18/fiscal-policy/

  121. Gravatar of Philippe Philippe
    20. July 2014 at 15:55

    MF,

    please tell me what you mean by the commonly understood definitions, and how they relate to my question. Thanks.

  122. Gravatar of Major-Freedom Major-Freedom
    20. July 2014 at 15:56

    Philippe:

    That is something you can Google, thanks.

  123. Gravatar of Philippe Philippe
    20. July 2014 at 17:12

    ok, so how does it relate to my question. I can’t google that.

  124. Gravatar of Major-Freedom Major-Freedom
    20. July 2014 at 17:45

    Philippe:

    Do you see how your scenario of past self robbing present self rests on money as a bailment?

    The wealth transfer from Cantillon effects of inflation rests on money as mutuum (i.e. fungibility).

  125. Gravatar of Philippe Philippe
    20. July 2014 at 20:25

    “The wealth transfer from Cantillon effects of inflation rests on money as mutuum”

    could you explain how this does or doesn’t work in the case of my example?

  126. Gravatar of flow5 flow5
    21. July 2014 at 11:03

    AD is equal to nominal-gDp only under the Keynesian exegesis. AD is actually aggregate monetary purchasing power or money times velocity. Keynes and the current pundits are completely lost.

  127. Gravatar of flow5 flow5
    21. July 2014 at 11:03

    AD is equal to nominal-gDp only under the Keynesian exegesis. AD is actually aggregate monetary purchasing power or money times velocity. Keynes and the current pundits are completely lost.

  128. Gravatar of flow5 flow5
    21. July 2014 at 11:03

    AD is equal to nominal-gDp only under the Keynesian exegesis. AD is actually aggregate monetary purchasing power or money times velocity. Keynes and the current pundits are completely lost.

  129. Gravatar of flow5 flow5
    21. July 2014 at 11:03

    AD is equal to nominal-gDp only under the Keynesian exegesis. AD is actually aggregate monetary purchasing power or money times velocity. Keynes and the current pundits are completely lost.

  130. Gravatar of flow5 flow5
    21. July 2014 at 11:03

    AD is equal to nominal-gDp only under the Keynesian exegesis. AD is actually aggregate monetary purchasing power or money times velocity. Keynes and the current pundits are completely lost.

  131. Gravatar of flow5 flow5
    21. July 2014 at 11:03

    AD is equal to nominal-gDp only under the Keynesian exegesis. AD is actually aggregate monetary purchasing power or money times velocity. Keynes and the current pundits are completely lost.

  132. Gravatar of flow5 flow5
    21. July 2014 at 11:03

    AD is equal to nominal-gDp only under the Keynesian exegesis. AD is actually aggregate monetary purchasing power or money times velocity. Keynes and the current pundits are completely lost.

  133. Gravatar of flow5 flow5
    21. July 2014 at 11:03

    AD is equal to nominal-gDp only under the Keynesian exegesis. AD is actually aggregate monetary purchasing power or money times velocity. Keynes and the current pundits are completely lost.

  134. Gravatar of flow5 flow5
    21. July 2014 at 11:03

    AD is equal to nominal-gDp only under the Keynesian exegesis. AD is actually aggregate monetary purchasing power or money times velocity. Keynes and the current pundits are completely lost.

Leave a Reply