Russ Roberts interviews Lawrence H. White

Over the years I’ve sometimes complained about “internet Austrians.”  Larry White, who teaches at George Mason University, is definitely not an internet Austrian. Russ Roberts at Econtalk has a very good podcast interview of Larry (designated “guest”), and also provides a written summary (I’m not sure if it’s exactly verbatim.)  Here’s the portion on GDP targeting that starts a bit after the 40 minute mark:

Guest: Many constraints are better than no constraint. And so, a popular constraint which a lot of central banks have adopted in the last 30 years is an inflation target. And it seems to me that that’s better than no constraint. And the Fed has adopted an inflation target now, explicitly; except that the Fed adopted it, rather than Congress imposing it on the Fed. So the Fed could abandon it at any time. It’s not a constraint in the same way as a legislatively- or Constitutionally even better-imposed constraint. But I’m persuaded by arguments in the volume and elsewhere that as far as fastening a rule on the Fed, a nominal income rule would be better, one that says– Russ:Explain how that would work. Guest: Yeah. So, what the Fed should be concerned about is the total amount of spending in the economy, not just the stock of money and not just the price level. Guest: And not the interest rate or the overnight Federal Funds rate. Guest: Certainly not interest rates, that’s right. But what that would mean is if there isn’t any additional hoarding going on, or any dishoarding going on, then the Fed just pursues even money growth. But if people want to, for whatever reason, want to hold money–they want to hold more money balances relative to their spending, then the Fed should supply the additional money that people want to hold, because the alternative is that spending drops off; and that has real repercussions that we’re better off avoiding. It’s true that if the price level adjusted instantly, the market would clear– Russ:It would be irrelevant– Guest: and we’d be fine. But prices are sticky, I think is a fact about the world we are living in. Russ: Well, and information is imperfect. A bunch of people show up at your store; you don’t know if they are there because they have more money in their pocket or less desire to hoard money, keep money, or whether your product is really great. So you could make a lot of real mistakes in the short run– Guest: That’s right– Russ: trying to figure out what’s going on. You can’t ever figure out what’s going on. So you will inevitably make mistakes. So, the argument I think is it would be better if what I saw coming into my store was real rather than nominal–that would be one way to put it, right?Guest: That’s right. And actually stabilizing nominal income is a better way of reducing that signaling problem that people have, that sellers of goods have, than stabilizing the price level. So, some people who want to stabilize the price level acknowledge this in the case of an adverse supply shock. So, there’s an oil price rise, let’s say, and the United States is an oil-importing country. The price of oil goes up; the price of gasoline goes up; the price of things made with oil go up. If you want to stabilize the price level, you have to push other prices down so that the average level of prices doesn’t rise. But the rise in the price of things made with oil is providing information. It’s not clear why you want to cloud that information by pushing other prices down, because that means a tight monetary policy, tighter than people expected. Russ: At least in the short run. Guest: So you’re hitting the economy with a double whammy. It’s got a real shock and now it’s got a monetary shock on top of that. Both of them negative. And some people who favor a stable price level will say, ‘Okay, yeah, we grant it in that case.’ But then they should also grant it in the other case. If you have an increase in the productivity of the economy, either a positive supply shock or improvements in technology, improvements in labor productivity or total factor productivity, you should let the prices of those particular goods that are now being produced more cheaply, let those prices fall. Don’t try to offset that by raising other prices. Russ:Is that going to happen naturally? An oil price shock doesn’t cause inflation; the Fed wouldn’t have to do anything. Or are you talking about in the short run, when the signals are confused, right? Guest: Yeah. Russ: Those prices are going to have to fall–the Fed doesn’t have to drive down the other prices. They are going to go down anyway, on their own, right? Guest: Oh. Eventually they’ll go down on their own if people are spending more on oil. Russ: Yeah. Guest: Depends on the elasticity of demand for oil. But if they are spending more on oil, right–they’ll be spending less on other things. Russ: So the Fed wouldn’t intervene there. To me, the issue is just measuring price indices accurately in a time where we are blessed to live, where quality is changing every day. Every day, almost, the world is getting better and the products are getting better. And so assessing what’s actually happening, the overall price level, seems to be much more difficult than it was 25, 50 years ago, when the economy was much more static. So to me the question is, given that uncertainty, that measurement uncertainty, is nominal GDP (Gross Domestic Product) targeting–are they going to be better? I’m not sure. I’m not sure it makes any difference. I’m not sure that really gets around that. Guest: Yeah, it actually is easier on that score, because you don’t need to know the right price index to do it. Russ: You don’t need to, but the question is are you still–are you doing the right thing? Guest: Yeah. I think for the reasons we talked about earlier. It is a problem if you want to stabilize the price level that you have to take account of quality changes, and that’s difficult. There are all kinds of, as you’ve been saying, quality changes that goods experience. So, if it’s a simple thing like your tire lasts 60,000 miles instead of 40,000 miles, you can make an adjustment. But what if it gives you a better ride? How do you adjust for that? Russ: What if it has a microwave oven in it? While you’re driving along? How do you weight that? Guest: So, some people are under the misapprehension that it’s harder to stabilize or to target nominal income because it’s the product of real income and the price level. But that’s actually not how it works. First the statistical authorities gather information on nominal income and then they derivereal income by dividing by a price level. Russ: Which they also have to derive.Guest: Which they have to construct by going out with clipboards and writing down prices and then trying to make adjustments for quality changes. So you save yourself that trouble if you are just looking at total spending.

Notice Larry’s emphasis on the symmetry in the argument that NGDP targeting is better than price level targeting.  This suggests that there are times where you want to undershoot the average inflation rate because productivity is growing fast. His comments can be seen (I think) as an implied criticism of Paul Krugman’s recent claim that monetary policy was not too easy in the late 1990s, as inflation was pretty much on target. I don’t think money was far too easy at that time, but given the very strong productivity growth during the tech boom, somewhat tighter money would have been appropriate, and of course easier money in 2008 when oil prices soared but NGDP did poorly.

HT:  Michael Byrnes


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55 Responses to “Russ Roberts interviews Lawrence H. White”

  1. Gravatar of marcus nunes marcus nunes
    10. March 2015 at 08:59

    Krugman is talking about the mid-90s. Towards the end of the decade MP became a little too expansionary (“tricked” by the productivity surge). By then, Krugman was saying that Greenspan was “behind the (inflation) curve”. So was Yellen!
    But where both PK and Steve Williamson err is to associate MP with interest rates (level and change):
    https://thefaintofheart.wordpress.com/2015/03/09/the-confusion-stems-from-thinking-monetary-policy-is-interest-rate-policy/

  2. Gravatar of bill woolsey bill woolsey
    10. March 2015 at 09:03

    Russ is mistaken when he says that if the price of oil goes up due to an adverse supply shock, other prices must go down. People are spending more on oil, so they must be spending less on other things.

    Of course, his argument assumed constant spending on output, but more importantly, it ignores the decrease in the quantity of oil. Spending on oil is price times quantity. With an adverse supply shock, price goes up and quantity goes down. The impact on spending is ambiguous, and depends on elasticity of demand. If unit elasticity of demand, there is no change in spending on oil and so no tendency for less spending on other things and so no tendency for lower prices of other things. It takes a monetary contraction to do that.

    Russ’ implicit assumption is that the increase in the price of oil was due to a shift in demand–more demand for oil and less demand for other things. That isn’t an adverse supply shock.

    If the demand for oil is inelastic, then a decrease in supply will raise price more than in proportion to the decrease in quantity, and so spending on oil will rise. If total spending is held constant (and implicit assumption–what NGDPLT would generate,) then other spending will fall. Unless the demand for oil were perfectly inelastic so that the quantity of oil was unchanged, then the price level will still end up higher. The decrease in the demand for other goods and the needed decrease in prices will be less because the quantity of oil falls.

  3. Gravatar of marcus nunes marcus nunes
    10. March 2015 at 09:06

    And Krugman also does a misleading comparison of recoveries from two deep recessions:
    https://thefaintofheart.wordpress.com/2015/03/10/krugman-remains-confused/

  4. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    10. March 2015 at 10:46

    What I really appreciate about NGDP targeting is precisely its symmetry. We can’t know for sure, but maybe if money was tighter in the late 90’s and 2005/2006 maybe the two recent bubble phenomena wouldn’t have happened, or at least, would have been smaller in terms of systemic impact. What I don’t really grasp still is how does NGDP targeting work in a world where we have a more “normal” banking sector. I explain: in the world of interest rate rules, banks expand credit responding to lower short term interest rates, and reduce credit expansion responding to higher short term interest rates. That would be the same under NGDP targeting ? How high would rates have to be in 2005/06 in order to reduce money growth, for instance, and maybe reduce the size of real estate bubble? I am not asking this in order to make a futile exercize of rewriting history, but instead, I am worried about the practical implementation moving forward: if by adopting NGDP targeting we will live under interest rate ranges between 2% and 10% (similar to what we had before, just at diferent points in time), or would we live in a world where we have almost binary rates, meaning, zero for extended periods of time (thus actually under some kind of QE) or 20% for extended periods of time as well. Because the former regime would be acceptable, in many dimensions, but the latter maybe would be politically difficult (although technically a good choice). Any ideas? Thank you.

  5. Gravatar of ssumner ssumner
    10. March 2015 at 11:02

    Marcus, Recently he said the same about 1999-2000, but I can’t find the link.

    Bill, Good point.

    Jose, I think interest rates would be more stable.

  6. Gravatar of ChargerCarl ChargerCarl
    10. March 2015 at 13:18

    Scott, Im very sympathetic to your skepticism regarding the existence of bubbles, but doesnt that imply that the only cost of too expansionary monetary policy is higher inflation? If inflation isn’t rising, why should we care at all?

  7. Gravatar of TravisV TravisV
    10. March 2015 at 14:01

    Noah Smith and Brad DeLong criticize Robert Lucas:

    http://noahpinionblog.blogspot.com/2015/03/the-pincer-attack-on-macro-models.html

    For macroeconomics, isn’t downward nominal wage rigidity pretty much the only irrational behavior that has a significant impact?

  8. Gravatar of TravisV TravisV
    10. March 2015 at 14:12

    Is this Krugman post consistent with Market Monetarism?

    http://krugman.blogs.nytimes.com/2015/01/05/thinking-about-international-bond-yields

    “Thinking About International Bond Yields”

  9. Gravatar of Michael Byrnes Michael Byrnes
    10. March 2015 at 14:42

    George Selgin posted a link to this nice definition of “sound money” from Will Luther:

    http://www.freebanking.org/2015/03/09/will-luther-on-sound-money/

    http://soundmoneyproject.org/2015/03/what-is-sound-money-a-macroeconomic-perspective/

    Luther: “In brief: a good money is one that expands to offset increases in money demand and contracts to offset decreases in money demand.”

  10. Gravatar of benjamin cole benjamin cole
    10. March 2015 at 15:48

    With the Austrians on board, the George Masonites too, and a GOP White House-Congress in 2016—look for Janet Yellen getting grilled in a couple years…for being too tight, an academic who never ran a business.

  11. Gravatar of Saturos Saturos
    10. March 2015 at 19:24

    Fantastic macroeconomics joke: http://smbc-comics.com/index.php?id=3666

  12. Gravatar of Ray Lopez Ray Lopez
    10. March 2015 at 20:42

    Short summary: even Austrians can drink the Kool-Aid. The relevant assumption is here: “Guest: It’s true that if the price level adjusted instantly, the market would clear- Russ:It would be irrelevant- Guest: and we’d be fine. But prices are sticky, I think is a fact about the world we are living in.”

    It’s NOT a fact. During the gold standard, prices adjusted fine. In fact, during and after WWII, prices adjusted fine says Gordon. The money illusion is by Sumner et al who believe NGDPLT is some sort of magic elixir. Where is their evidence? Cite please? Pied Pier pipes on…

  13. Gravatar of Major.Freedom Major.Freedom
    10. March 2015 at 23:42

    “Internet Austrian” here, and by the way proud to be labelled as such by socialists of all stripes and colors…

    TL;DR If you want to be promoted, cited, recognized and supported on this blog, and your ideas are what might likely be called “Austrian”, then you can be so recognized if you contradict the principles of Austrianism for just money, and advocate for central banks to inflate the money supply to whatever degree is necessary to stabilize aggregate spending.

    Kumbaya, hakuna matada, amen.

  14. Gravatar of Major.Freedom Major.Freedom
    11. March 2015 at 00:14

    “But if people want to, for whatever reason, want to hold money-they want to hold more money balances relative to their spending, then the Fed should supply the additional money that people want to hold, because the alternative is that spending drops off; and that has real repercussions that we’re better off avoiding.”

    That’s fallacy number 1. Conflating a desire to abolish spending declines along with the short term symptom “cure” in the form of monopoly money printing, with there somehow being an objective fact in the world that a decline in spending IS at the same time a desire among the public for only that much more money as would bring AD back up again, but no more! After all, um, when an individual holds onto their earnings just a little while longer than before, they are, uh, communicating to the Fed to print whatever is necessary to reverse that decline in spending. Yeah, that makes sense.

    White is confusing his own ideology about how much money and spending their ought to be, with the reality of what his fellow men do want, which by the way he can only know in a free market of money. He is engaging in mythology, not economics. It is not true that people “want more money” only when they hold what they have for a little longer than before, and only that additional amount as would result in stable AD.

    White and the rest of the monetarists are failing to take into account opportunity costs. Of there being a balance, subject to change, between a desire for more of X, and a desire for more of everything else.

    The illusion is brought about by the alleged truth that state monopoly money printing is “almost costless”. This has warped the economics profession into relenting and finding “busywork” in studying and strategizing about money in abstracta. Hence, we see the deplorable notion that the market’s desire for more or less money, can be abstracted from all other goods, and can become known through the revelation that is NGDP changes from a permanently rigid, and non-market derived choosing of, growth rate.

    In reality, money is one among many commodities that not only is significantly costly (whole states are necessary to impose fiat money, and states are the most costly human institutions on the planet by a wide margin), but there are also unseen opportunity costs, namely, the effects inflation has on the real underlying capital structure of the economy by way of distortions to economic calculation that result from socialist money with its utter lack of a profit and loss signalling mechanism in money production and selling.

    The truth is nobody knows if say a 5% reduction in NGDP should be associated with 5% of firms going backrupt with a reallocation of capital and labor, after which NGDP goes back up to what it was before, or if the market wants all firms to keep doing what they are doing and the people just want to have 5% more money in the bank accounts, or some combination between the two extremes.

    When White asserts ex cathedra that a fall in NGDP “has real repercussions that we’re better off avoiding”, that is not from economic theory. He asserts that as a political strategist. As someone who believes himself to know that firms going bankrupt with stable localized sub-NGDP is fine, but firms going bankrupt with falling NGDP is not fine. He is merely eliciting a religion that the whole, the entirety, must be controlled by a single mind.

    He doesn’t see how falling NGDP that is market driven, as Sumner argued took place 2008-2009, can be a good thing, because it may be the case that the real underlying economy was distorted too much because of prior inflation that raised NGDP prior, which only a fall in NGDP can cure. We of course can’t know this for sure, because we can’t observe the relative profit and loss signals in money production itself.

    The absence of price signals has lead White to take a stand, which is necessarily extreme, and ignore the destruction that any new rule for inflation would have on the economy.

  15. Gravatar of Major.Freedom Major.Freedom
    11. March 2015 at 00:23

    Saturos:

    The comic is ironically tragic.

    As long as statism is the ideology behind banking, as is the case with “non-political” central banks (try saying that with a straight face) leads invariably to states taking over banking.

    Socialism and markets do not mix. Oil and water. A persistent ideology of “states have to do something!” to fix the very problems states caused (markets did not cause zero interest rates!) cannot but result in more and more statism. The government spooks in the banks will turn into pseudo-bank managers. Then more. Then as the failures continue to pile up, and the same ideology persists, it will only get worse.

    The pathetic rhetoric we have to read and listen to is from those who believe they can know when too much is enough, and that they can stop the growth at the right point. More than once in history there have been cries of “But we didn’t intend THAT!” despite being repeatedly warned by what must be honestly described their intellectual superiors.

  16. Gravatar of Major.Freedom Major.Freedom
    11. March 2015 at 00:31

    White wrote:

    “Many constraints are better than no constraint.”

    Well he can’t really mean that, because he is advocating for money to be unconstrained to market forces. For that is what central banking is. Uncomstrained money printing. But of course constrained to his non-market single constraint of “stable means rising” NGDP.

    —————

    Off topic: New theory of mine: Cops stealing people’s cash in broad daylight (“civil asset forfeiture”) is being encouraged and facilitated by the elite as one more step in their goal to turn the world into a cashless society, with everyone being implanted with microchips, so that they can turn off your chip whenever they want so as to better control you.

  17. Gravatar of david david
    11. March 2015 at 04:51

    Slightly easier to read:

    Guest: Many constraints are better than no constraint. And so, a popular constraint which a lot of central banks have adopted in the last 30 years is an inflation target. And it seems to me that that’s better than no constraint. And the Fed has adopted an inflation target now, explicitly; except that the Fed adopted it, rather than Congress imposing it on the Fed. So the Fed could abandon it at any time. It’s not a constraint in the same way as a legislatively- or Constitutionally even better-imposed constraint. But I’m persuaded by arguments in the volume and elsewhere that as far as fastening a rule on the Fed, a nominal income rule would be better, one that says-

    Russ:Explain how that would work.

    Guest: Yeah. So, what the Fed should be concerned about is the total amount of spending in the economy, not just the stock of money and not just the price level.

    Guest: And not the interest rate or the overnight Federal Funds rate.

    Guest: Certainly not interest rates, that’s right. But what that would mean is if there isn’t any additional hoarding going on, or any dishoarding going on, then the Fed just pursues even money growth. But if people want to, for whatever reason, want to hold money-they want to hold more money balances relative to their spending, then the Fed should supply the additional money that people want to hold, because the alternative is that spending drops off; and that has real repercussions that we’re better off avoiding. It’s true that if the price level adjusted instantly, the market would clear-

    Russ:It would be irrelevant-

    Guest: and we’d be fine. But prices are sticky, I think is a fact about the world we are living in.

    Russ: Well, and information is imperfect. A bunch of people show up at your store; you don’t know if they are there because they have more money in their pocket or less desire to hoard money, keep money, or whether your product is really great. So you could make a lot of real mistakes in the short run-

    Guest: That’s right-

    Russ: trying to figure out what’s going on. You can’t ever figure out what’s going on. So you will inevitably make mistakes. So, the argument I think is it would be better if what I saw coming into my store was real rather than nominal-that would be one way to put it, right?

    Guest: That’s right. And actually stabilizing nominal income is a better way of reducing that signaling problem that people have, that sellers of goods have, than stabilizing the price level. So, some people who want to stabilize the price level acknowledge this in the case of an adverse supply shock. So, there’s an oil price rise, let’s say, and the United States is an oil-importing country. The price of oil goes up; the price of gasoline goes up; the price of things made with oil go up. If you want to stabilize the price level, you have to push other prices down so that the average level of prices doesn’t rise. But the rise in the price of things made with oil is providing information. It’s not clear why you want to cloud that information by pushing other prices down, because that means a tight monetary policy, tighter than people expected.

    Russ: At least in the short run.

    Guest: So you’re hitting the economy with a double whammy. It’s got a real shock and now it’s got a monetary shock on top of that. Both of them negative. And some people who favor a stable price level will say, ‘Okay, yeah, we grant it in that case.’ But then they should also grant it in the other case. If you have an increase in the productivity of the economy, either a positive supply shock or improvements in technology, improvements in labor productivity or total factor productivity, you should let the prices of those particular goods that are now being produced more cheaply, let those prices fall. Don’t try to offset that by raising other prices.

    Russ:Is that going to happen naturally? An oil price shock doesn’t cause inflation; the Fed wouldn’t have to do anything. Or are you talking about in the short run, when the signals are confused, right?

    Guest: Yeah.

    Russ: Those prices are going to have to fall-the Fed doesn’t have to drive down the other prices. They are going to go down anyway, on their own, right?

    Guest: Oh. Eventually they’ll go down on their own if people are spending more on oil.

    Russ: Yeah.

    Guest: Depends on the elasticity of demand for oil. But if they are spending more on oil, right-they’ll be spending less on other things.

    Russ: So the Fed wouldn’t intervene there. To me, the issue is just measuring price indices accurately in a time where we are blessed to live, where quality is changing every day. Every day, almost, the world is getting better and the products are getting better. And so assessing what’s actually happening, the overall price level, seems to be much more difficult than it was 25, 50 years ago, when the economy was much more static. So to me the question is, given that uncertainty, that measurement uncertainty, is nominal GDP (Gross Domestic Product) targeting-are they going to be better? I’m not sure. I’m not sure it makes any difference. I’m not sure that really gets around that.

    Guest: Yeah, it actually is easier on that score, because you don’t need to know the right price index to do it.

    Russ: You don’t need to, but the question is are you still-are you doing the right thing?

    Guest: Yeah. I think for the reasons we talked about earlier. It is a problem if you want to stabilize the price level that you have to take account of quality changes, and that’s difficult. There are all kinds of, as you’ve been saying, quality changes that goods experience. So, if it’s a simple thing like your tire lasts 60,000 miles instead of 40,000 miles, you can make an adjustment. But what if it gives you a better ride? How do you adjust for that?

    Russ: What if it has a microwave oven in it? While you’re driving along? How do you weight that?

    Guest: So, some people are under the misapprehension that it’s harder to stabilize or to target nominal income because it’s the product of real income and the price level. But that’s actually not how it works. First the statistical authorities gather information on nominal income and then they derivereal income by dividing by a price level.

    Russ: Which they also have to derive.

    Guest: Which they have to construct by going out with clipboards and writing down prices and then trying to make adjustments for quality changes. So you save yourself that trouble if you are just looking at total spending.

  18. Gravatar of ssumner ssumner
    11. March 2015 at 05:42

    ChargerCarl, No, there is also the cost of output instability, i.e. the business cycle. Excessive NGDP growth makes the business cycle worse.

    You can’t have mountains without valleys.

    Thanks Travis, I’ll take a look.

    Michael, Yes, but how do you define “money demand?”

    Saturos, Decrease savings or decrease money hoarding? 🙂

    Thanks David.

    Ray, You are the only one on the planet who claims Gordon doesn’t believe in sticky prices.

  19. Gravatar of ssumner ssumner
    11. March 2015 at 05:46

    Travis, I agree with both Smith and Krugman.

  20. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    11. March 2015 at 06:28

    All, I am sympathetic to austrian ideas, not being an economist I don’t consider myself “an austrian”. Mises lived in a time when probably there was not much monetary innovation, and Hayek wrote extensively about monetary policy sending wrong signals to economic agents. Hayek was primarily worried about relative prices in the economy. I don’t think the gold standard is the only way to keep relative prices “distorsionless”. If you think hard about it, I think NGDP rate target fits that bill as well…

  21. Gravatar of TravisV TravisV
    11. March 2015 at 06:58

    China: “If it’s stable between 1 and 2 percent, it’s very, very comfortable. But above 2 percent, there is a little bit of worry about inflation. Below 1 (percent), there will be bit of a worry about deflation,” he said.

    http://www.reuters.com/article/2015/03/11/us-china-economy-pboc-idUSKBN0M71E320150311

  22. Gravatar of Ray Lopez Ray Lopez
    11. March 2015 at 07:19

    Prof. Sumner – below is the paper by Gordon. You’re welcome, glad I could help. Everybody: short answer by Gordon–‘prices and wages are not that sticky’. Slightly longer answer: ‘…because unions in JP, UK actually work with management to adjust wages, the USA is slightly more sticky due to stubborn post-WWII unions’. Bottom line: money illusion based on sticky wages, prices is itself an illusion…held by most economists.

    WAGES AND PRICES ARE NOT ALWAYS STICKY: A CENTURY OF EVIDENCE FOR THE U.S., U.K., AND JAPAN Robert J. Gordon, Working Paper No. 847 January 1982
    ABSTRACT Arthur M. Okun’s last book, Prices and Quantities, contributes a theory of universal wage and price stickiness, but provides no explanation at all of historical and cross country differences in behavior. The core of this paper provides a new empirical characterization of price and wage changes over the last century in the U.S., U.K., and Japan, in order to demonstrate the wide variety of historical responses that have occurred. Equations for changes in the GNP deflator, in the hourly manufacturing wage rate, and in the real wage rate are estimated, with attention to the influence of both demand and supply disturbances. Because of the long sample period involved, extending back to 1875 for the U.K. and to 1892 for the other two countries, there is extensive attention to shifts in parameters. My description of U.S. data differs from Okun’s framework by rejecting his wage””wage formulation of the postwar U.S. inflation inertia process, by allowing the impact of demand disturbances to depend on both the level and rate of change of aggregate demand, by allowing demand to influence price”” setting as well as wage””setting behavior, and by stressing the fact that inertia in the U.S. adjustment process is purely a postwar phenomenon rather than the universal fact implied by Okun. The results for the U.K. and Japan com- pound the conflict with Okun’s analysis, since in these two countries wages have been far from sticky, even in postwar years. Prices and wages were particularly flexible in the U.S. during World War I and its aftermath, in Japan since 1914, and in the U.K. since the mid””1950s .

  23. Gravatar of Michael Byrnes Michael Byrnes
    11. March 2015 at 07:20

    I’m always astonished by the way so many self-styled Austrians deny price stickiness. To have prices that adjust smoothly and rapidly would require perfect information, yet a central tenet of Austrian economics is that we live in a world of imperfect information.

    Someone (might have been Scott, but I forget who), made the point that “price stickiness” is really better described as “price inertia”. It takes time to assemble, appraise, and process the information that would lead to a decision to raise or lower prices. In some cases it will be difficult to obtain accurate information and to filter out disinformation.

  24. Gravatar of Daniel Daniel
    11. March 2015 at 08:04

    I don’t think Ray is an “internet Austrian”, he’s more of a random moron.

    Also, nobody who matters takes Misesian nonsense seriously.

  25. Gravatar of CA CA
    11. March 2015 at 08:47

    I think Ray and Major Freedom are the same person.

  26. Gravatar of Don Geddis Don Geddis
    11. March 2015 at 08:54

    @CA: And don’t forget “Geoff”! “Major Freedom” spent a year pretending to be taking a break from commenting here, but of course he couldn’t actually stay away, so instead he just adopted a different sock puppet persona in order to try to “trick” us that he was someone different.

    Really funny how not just the content of his ideas, but even his basic personal appearance, is a lie.

  27. Gravatar of CA CA
    11. March 2015 at 09:04

    Yep, exactly. Geoff, MF and Ray are all the same person.

  28. Gravatar of TravisV TravisV
    11. March 2015 at 09:13

    Prof. Sumner recently wrote the following:

    “a weaker set of IP laws would benefit relatively poor Asian consumers in places like China against rich US companies. And while Democrats may care a little bit about inequality, they care far more about national self-interest. Because the US dominates the global market for high tech/biotech/movies and lots of other IT intensive industries, cracking down in IP abuses would hurt the US.

    But why should Democratic politicians care about the welfare of big US corporations? Because they pay lots of taxes. And big government is an issue that Democrats care about even more than inequality….”

    And this Brad DeLong conversation seems like a good illustration of Prof. Sumner’s point:

    http://equitablegrowth.org/2015/03/11/debate-trans-pacific-partnership-focus

  29. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    11. March 2015 at 09:14

    I don’t think Austrians believe that prices adjust instantaneously, what I understood in my readings is that their view is: prices are processes that take time to develop, prices are always converging to “an quilibrium of supply and demand”, whithout ever reaching equilibrium, because supply and demand change over time as well. Absence of stickiness does not fit this definition …

  30. Gravatar of Ray Lopez Ray Lopez
    11. March 2015 at 09:50

    @Robazzi – good point about Austrians, who in any event don’t believe in empirical evidence so Gordon’s paper is irrelevant to them. For those MM diehards who believe in sticky prices, why do prices for gold paid to artisan miners change so quickly if prices are sticky? Within hours, the price of gold paid for to miners deep in the jungles of the Amazon and Africa reflect the world price (even back before cell phones). Likewise, during a downturn workers are fired (i.e., wages are cut) almost immediately. Small wells in Texas are shuttered when oil prices drop. And on and on… PS–I’m not MF, shows how paranoid you people are. Sure there’s money illusion and sticky prices in laboratory experiments involving college students and trivial amounts of money, but in the real world it’s different.

  31. Gravatar of Michael Byrnes Michael Byrnes
    11. March 2015 at 10:21

    Ray,

    That some prices are very flexible (eg commodities such as gold) is not evidence that all prices are equally flexible or that some prices are not sticky.

  32. Gravatar of Derivs Derivs
    11. March 2015 at 11:12

    C’mon Ray, you are talking about products priced to spot market. Of course those are not sticky. If cotton prices went limit up 10 days in a row how long would it take until you saw the price of clothes increase? I would bet my right nut prices are going to rise significantly, but I would expect it to take months.

  33. Gravatar of Ray Lopez Ray Lopez
    11. March 2015 at 12:12

    @Michael Byrnes, @Deriv — then do a thought experiment: in any economy that matters, it’s the spot markets that matter. Do we really care that Aunt Mildred’s restaurant in the middle of nowhere has stale prices (and stale food)? No. But if a Fortune 500 company does not have unsticky prices, I posit it will lose business fast. Same for wages, though I agree that’s a harder sell.

  34. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    11. March 2015 at 13:01

    Ray, Austrians do believe in some sort of price stickiness, if you take the beginning of Hayek’s cycle, earlier stages prices (commodities) grow faster then later stages prices (consumer prices, which maybe don’t grow at all, initially, they may even fall, according to their theory). That looks like some price stickiness to me, and goes well with the idea of prices as processes that take time to develop, meaning, they don’t adjust instantaneously.

  35. Gravatar of Ray Lopez Ray Lopez
    11. March 2015 at 20:40

    @Jose Romeu Robazzi – what you could be describing is simply building up of inventories. Once consumer demand picks up, then prices of goods in inventory are ‘passed onto consumers’. This is not sticky prices as MM define it, just rational inventory changes. Sticky prices as MM define it is a believe that people are irrational when it comes to buying and selling, and they won’t sell for less than what they bought something for, kind of like those ignorant folk who won’t sell a stock unless they get at least as much as they paid for it. That’s what Sumner et al base their theories on: ignorant folk that you can exploit as a central bank. Not much of a theory if you ask me.

  36. Gravatar of Andrew_FL Andrew_FL
    11. March 2015 at 21:31

    Yeesh the commentariat here is hostile and confused. It wouldn’t take much at all to figure out that Lopez and MF disagree on way too many things to possibly be the same person. I can’t say I’m surprised either one of them is hostile, if commenters can’t bother to read either of them well enough to tell the difference between a Rothbardian and…whatever the heck Lopez is.

    Anyway.

    @Jose Romeu Robazzi-I don’t think most Austrians like the term price stickiness or sticky prices, but yes I’d say Austrians would say the “correct” prices have to be found through an ongoing process of entrepreneurial discovery.

    Anyway a Gold Standard is not enough to prevent money from distorting relative prices. You need a totally free market in money in both the narrow sense (ie Gold, or whatever the base money/reserve commodity is) and the broader sense (ie inside money). This is actually Larry’s first best ideal (most of what MF is angry at him about essentially pertains to whether it is acceptable at all to talk about what the Fed should do given that it exists.)

    If only we could Kumbaya indeed! Ah, well, Ceterum censeo Subsidium Foederati esse delendam.

  37. Gravatar of Prakash Prakash
    12. March 2015 at 01:45

    @Ray – We heard plenty of criticism of NGDPLT coming from you.
    What is your prefered monetary policy and why?

    @Andrew – Larry and Russ talked about a free market in money as well. The question Russ asked was whether a contract nominated in gold would be enforceable in a court and Larry answered that he wasn’t sure.

    Isn’t the lack of capital account controls effectively a free market in “savings” and isn’t that basically your concern? You can invest anywhere in the whole world and get whatever return that you get.

  38. Gravatar of Ray Lopez Ray Lopez
    12. March 2015 at 03:09

    @Prakash – This is not my blog, it’s not important what I believe in, but it is important what Sumner believes in, and he seems to stand for everything and nothing, or play semantics with his critics. But since you ask, I am like MF, I favor something closer to Free Banking as defined by historical precedent (see the books by economist Kevin Dowd), and, as a distant second best, maybe something like George Selgin’s productivity norm monetary proposal (which is suspiciously close to what Sumner proposes, so it’s a distant second best).

  39. Gravatar of Prakash Prakash
    12. March 2015 at 07:03

    @Ray

    If the answer is free banking, then my reply on Andrew is probably a question to you too. Most countries in the world have capital account convertiblity atleast within the ranges where most people have savings. So, what more is needed from your perspective?

    Also, another point is – which currency does the government choose to use? That would inevitably become the monopoly currency irrespective of the initial free banking structure.

  40. Gravatar of ssumner ssumner
    12. March 2015 at 07:04

    Ray, He’s talking about the degree of stickiness assumed by Okun. Please look at Gordon’s textbook, you might learn something.

    Everyone, Ray believes that each day that workers show up at work their boss tells them what their hourly wage will be—a new wage rate every day.

  41. Gravatar of Don Geddis Don Geddis
    12. March 2015 at 07:07

    @Ray Lopez: “Sticky prices as MM define it is a believe that people are irrational when it comes to buying and selling, and they won’t sell for less than what they bought something for, kind of like those ignorant folk who won’t sell a stock unless they get at least as much as they paid for it.

    Nope, you got it wrong. You think maybe it might be worth your time to try to understand what people are talking about, before you confidently criticize it?

    Hint: the concern is far, far more about sticky wages (which causes nominal shocks to result in unemployment) and sticky debts (which causes nominal shocks to result in financial crises), than the typical “prices” that you seem to be talking about.

    P.S. What happened to your promise to retire from commenting here?

  42. Gravatar of Ray Lopez Ray Lopez
    12. March 2015 at 08:54

    @Prakash – http://en.wikipedia.org/wiki/Capital_account_convertibility – I see, an obscure and ill thought out Indian theory of finance, something you probably learned in school, and you parrot it here. Well FYI there’s no CAC in most parts of the world I have visited, and that includes: Greece, Thailand, Philippines and the USA. Maybe in India it’s different, though I doubt it. It’s hard to move money Prakash, and if you had any experience in high finance you would know that. That’s why most multinationals set up foreign shells, since it’s not cost effective to move capital from country to country. The Asian Crisis of 1997 proved that. Anyway, this has nothing to do with free banking, so your point is?

    @ssumner – so, you concede there is no stickiness in prices, and, like Don Geddis, you fall back on there being stickiness in wages? If so, we’re making progress, as I’ve said that wages are a bit more sticky than prices. But to use your analogy: (Sumner) “Everyone, Ray believes that each day that workers show up at work their boss tells them what their hourly wage will be””a new wage rate every day.” – yes I do, how true. Have you ever heard of overtime? Sample conversation: (worker): ‘Hey Boss, can I do overtime this week?’ (boss): ‘No, sales are down, we don’t need the extra manpower’. Flexible wages at work, literally.

  43. Gravatar of Don Geddis Don Geddis
    12. March 2015 at 10:08

    @Ray Lopez: “during a downturn workers are fired (i.e., wages are cut)

    These are not at all the same thing, and in fact this misunderstanding of yours is one of the keys to nominal shocks having real effects. Workers being fired increases unemployment, wages being cut wouldn’t. The fact that wages are not cut quickly is exactly the problem of “sticky wages”.

    Sticky prices as MM define it is a believe that people are irrational when it comes to buying and selling

    Will you now apologize for having mischaracterized the MM view? In fact, have you ever apologized for any of the many, many erroneous things that you constantly write here?

  44. Gravatar of Andrew_FL Andrew_FL
    12. March 2015 at 10:33

    @Prakash-No, my concern is that I want freedom of note issue. As did Mises for that matter. That is (the main feature) of a free market in inside money.

  45. Gravatar of CA CA
    12. March 2015 at 10:34

    Why do any of you waste your time with Ray-MF-Geoff?

  46. Gravatar of Prakash Prakash
    12. March 2015 at 22:27

    Even with freedom of note issue, you would not be able to mark your note as “THE” dollar, right?

    You could issue Andrew_FL_bucks even today. Nobody would stop you from doing that. On the notes, you could write redeemable for an ounce of gold at Andrew’s warehouse. Nobody would stop you from doing that as well, right?

  47. Gravatar of Prakash Prakash
    12. March 2015 at 22:37

    @Andrew, I apologise. If andrew_FL_bucks are sold anywhere for official currency, that point of sales needs to be AML compliant. It would not be totally free.

    @Ray – The international situation of the various currencies is analogous to the situation of free banking. You’re currently free to move money anywhere in the world, but no one can promise that it is going to be easy. Similarly, in the free banking world, you can convert to any money you want, but it is inconvenient. This happens until a single monopoly supplier emerges. Then this supplier has the greatest temptation to print a lot of money and we’re back where we started. White spoke about this in the podcast saying bitcoin’s pre-determined algorithm avoids this.

  48. Gravatar of ssumner ssumner
    13. March 2015 at 04:47

    Ray, No, I concede there IS stickiness in prices. Do you not know how to read?

    If your claim is true about no price stickiness, then there must not be any paper catalogs issued by companies that list things for sale at fixed prices. Is that your new claim? Ray believes that catalogs don’t exist? After all, catalogs have sticky prices.

  49. Gravatar of Ray Lopez Ray Lopez
    13. March 2015 at 06:11

    @Don Geddis – thanks for this, but from a societal point of view (i.e., GDP) I don’t think it makes any difference whether workers are fired (and owners get enriched) vs your world where workers are not fired. You live in the past Don. GDP is agnostic whether all of GDP is produces by 5% of the population working, and the rest unemployed, or 95% of the population working with 5% UE.

    @Prakash – thanks for the clarification. “The international situation of the various currencies is analogous to the situation of free banking” – I doubt it. As George Selgin and others have written, the ‘various currencies’ tend to converge at par value, meaning $1 for all the different notes. Your analogy is simply wrong.

    @ssumner – “f your claim is true about no price stickiness, then there must not be any paper catalogs issued by companies that list things for sale at fixed prices. Is that your new claim? Ray believes that catalogs don’t exist? After all, catalogs have sticky prices.” – yes, that is my claim. You too, like Don, are living in the past, when Sears & Roebuck paper catalogs ruled. In today’s e-world, prices change minute by minute. With geolocation, Amazon even offers for the same product different prices (in USD) depending on what country you are browsing from. As for catalogs, their prices are always higher than the market price due to the fact they must have a factor of safety since they cannot print daily catalogs, so indeed for Sears dealing with remote mail orders, their prices are ‘sticky’. So why don’t Sears customers revolt? Because Sears traditionally offered something, even with sticky (read ‘high’) prices that could not be found elsewhere, namely, convenience and wide selection and so forth. This is not a macro issue but a micro issue. I would not extrapolate for today’s economy from sticky prices found in a Sears mail order catalog. In short, in today’s economy, your MM/Keynesian type theories are better suited for the 1930s, when union membership was at a high, when factory workers and Fordism meant sticky wages, and when people were ignorant about inflation (hence ‘money illusion’, hence no TIPS or indexed bonds). You are a man ahead of your time–and your time has passed (the 1930s).

  50. Gravatar of Jeff Jeff
    13. March 2015 at 13:38

    @CA Why do any of you waste your time with Ray-MF-Geoff?

    Every once in a while one of them [I’m not taking a position on Ray-MF-Geoff’s (RMG) cardinality.] says something that is almost right, and that suckers some of us into thinking there’s hope of teaching him something. Of course, it never works. Having witnessed hundreds of attempts at doing so, and even having attempted it myself a few times, I’ve come around to the view that no one could possibly have as many fully-formed misconceptions in his head by accident. RMG is a troll, not someone who is actually trying to understand anything.

  51. Gravatar of Andrew_FL Andrew_FL
    13. March 2015 at 13:44

    @Prakash-I would not be legally allowed to do it, but regardless I don’t want freedom of note issue because I want to personally issue notes, funny as the suggestion is. But I’m not talking about “free warehousing” anyway. I’m talking about free banking. If you don’t know what that means (and it really seems like you don’t) they I can only suggest you read the extensive extant literature on the subject. A good place to start would be http://www.freebanking.org/ which should be a good place to find links to more information on the subject.

  52. Gravatar of ssumner ssumner
    14. March 2015 at 05:45

    Ray, You said:

    “so indeed for Sears dealing with remote mail orders, their prices are ‘sticky’.”

    Finally! QED.

    Soon you’ll be admitting that each day that McDonald’s workers show up to work their hourly wage does NOT change from the day before.

    Soon after that you’ll be a MM.

  53. Gravatar of Ray Lopez Ray Lopez
    14. March 2015 at 07:38

    @Sumner – sticky prices in mail order catalogs and sticky wages for McDo workers (who get the minimum wage at least, which is a sticky lower bound by law), is not a good reason to destroy a $16T+ dollar economy with NGDPLT.

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