Inflation doesn’t matter (NGDP growth does)
Simon sent me a new NBER paper on inflation by Coibion, Gorodnichenko and Kumar. Here is the abstract:
We implement a new survey of firms’ macroeconomic beliefs in New Zealand and document a number of novel stylized facts from this survey. Despite nearly twenty-five years under an inflation targeting regime, there is widespread dispersion in firms’ beliefs about both past and future macroeconomic conditions, especially inflation, with average beliefs about recent and past inflation being much higher than those of professional forecasters. Much of the dispersion in beliefs can be explained by firms’ incentives to collect and process information, i.e. rational inattention motives. Using experimental methods, we find that firms update their beliefs in a Bayesian manner when presented with new information about the economy. But few firms seem to think that inflation is important to their business decisions and therefore they tend to devote few resources to collecting and processing information about inflation.
I can’t imagine why a firm would care about inflation. On the other hand NGDP growth would be at least somewhat important, as it would be linked to the growth in revenue they could expect to earn, and also the growth in costs such as wages that they’d have to pay their workers.
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2. May 2015 at 14:04
In table 11, page 42, they report that only 41% of firms tracked inflation but 80% of firms tracked GDP and 70% tracked unemployment. While this probably refers to real GDP, it does illustrate that firms are more interested in the business cycle than in inflation.
2. May 2015 at 14:21
“I can’t imagine why a firm would care about inflation. On the other hand NGDP growth would be at least somewhat important, as it would be linked to the growth in revenue they could expect to earn, and also the growth in costs such as wages that they’d have to pay their workers.”
An individual firm’s revenues are not “linked” to NGDP in the sense that should a firm’s owner expect NGDP to rise say 5% means their own revenues are expected to rise by f(5%).
Very few business firms care about NGDP. The only people who really care about it are academics who have very little experience working at business firms.
No business school teaches students about individual firm forecasting, corporate structure, accounting and operations management based on a foundation of NGDP. This is because there is neither theory nor empirical evidence of any relationship between total spending and what goes on at an individual firm.
Questions such as “What if NGDP declines 10%? Surely we can be more right than wrong in estimating that Apple’s or Walmart’s revenues will fall.” This question is really not asking what you might believe it is asking. What it is really asking is “What if the revenues of the average or representative firm declines 10%?”. It is not asking “What if everyone reduces their spending on everything by 10%?”
If NGDP is expected to rise 3% next year, this fact tells us absolutely nothing about what the revenue of Starbucks or Toyota vehicles will be. There is no causal connection between what will occur in the future for the abstract sum of all revenues, and an individual firm’s revenues.
Never reason from an NGDP change.
2. May 2015 at 14:34
The easiest way of knowing the uselessness of NGDP is that if Walmart’s revenues (about $485 billion in 2014) declined to zero, because they went bankrupt for example, and every other firm earns the same revenues, which is possible, then NGDP will have fallen by $485 billion, a substsntial sum to be sure, yet if all we did was ask the abstract question “What if NGDP fell by $485 billion?” then Sumner logic would have us say this will cause most or all other firms to earn fewer revenues.
Just because you can add my income and your income, it doesn’t mean the total acquires some magical power to determine our individual incomes. The causality goes from individual incomes to total incomes, not the other way around.
Nobody asks what NGDP will be next year and then decide to spend some mathematical sum of that total out of their own incomes.
If you tell me NGDP will rise by 5% next year or fall by 5% next year, I would not have any way to connect that to my own firm’s revenues. But if you tell me the revenues of my own firm will rise by 5% or fall by 5%, that would matter. This is true for everyone.
2. May 2015 at 15:00
“then Sumner logic would have us say this will cause most or all other firms to earn fewer revenues.”
No it wouldn’t.
“I would not have any way to connect that to my own firm’s revenues. ”
You’re kidding me. NGDP is expected to drop by 5% and that doesn’t affect your expected earnings at all? Most sensible medium to big size business knows if the company’s earnings is pro-cyclical or not (or market beta as they might call it).
2. May 2015 at 16:03
“So when the Fed cut the discount rate aggressively in the early 1930s, was money easy or tight?
Do you see the problem?”
I see the problem as the tool not being effective, not that the stance wasn’t highly expansionary.
I could very aggressively dig a hole with a shovel and wouldn’t achieve much compared to someone operating a digger machine at a 50% pace.
Maybe a better way to frame this is that easy money (a large increase in money) doesnt always mean a lot of NGDP growth. Monetary policy should be about money.
2. May 2015 at 17:13
Zathrus, Good point.
CMA, We’ll have to agree to disagree about the Depression. So can I assume that when interest rates are very high during hyperinflation you think money is “tight?”
I don’t know why you’d choose the most ambiguous indicator of all—one that can go up or go down in response to tight money. Why not pick something less ambiguous?
You said:
“Monetary policy should be about money.”
NGDP is every bit as much “about money” as interest rates.
2. May 2015 at 18:37
Scott Sumner
“We’ll have to agree to disagree about the Depression. So can I assume that when interest rates are very high during hyperinflation you think money is “tight?”
If money is expanding rapidly I would say loose. I agree that rates dont indicate stance of policy.
“NGDP is every bit as much “about money” as interest rates.”
Money and NGDP are two separate things though. Monetary should be about money because of the name. We could use other terminology such as NGDP policy or central bank policy. This type of terminology makes things clearer and more specific.
Would it be clearer if we said something like “central bank policy wasnt very expansionary or tight in terms of ngdp” or “NGDP policy was tight”?
2. May 2015 at 19:00
[…] PS: Scott Sumner once again reminds us that “Inflation doesn´t matter (NGDP growth does)“ […]
2. May 2015 at 22:33
I guess many central bankers think ngdp targeting as nothing but a tool to pull the economy out of zlb. Much of CB literature does not seem to consider ngdp targeting as a monetary policy rule in normal times.
2. May 2015 at 23:15
Sumner makes a decent point about not caring too much about inflation, as during the height of Brazilian hyperinflation (Brazilian inflation tax as a percentage of GDP, 1947-87, from Fig. 13.2 Calomiris latest bank book) was about 3-5%/yr of GDP. That would put the US economy into negative territory, but it’s not the end of the world (i.e., -20%/yr might be). However, it’s only that “low” because business learned to adjust (again, money is neutral or super-neutral in the short and long run).
3. May 2015 at 02:31
I spent 20 years in and around furniture and cabinet-making in Los Angeles. I thought constantly how to generate sales, wanted strong housing and restaurant markets.
I wanted boom times in Fat City.
3. May 2015 at 03:28
@Scott,
I think it’s not quite correct to say businesses don’t care about inflation. They care very much about changes in the price level but only for those things they either buy or sell.
3. May 2015 at 03:43
Firms should care about the real interest rate to compute the NPV of investment.
3. May 2015 at 05:24
CMA, Friedman said money was tight when M2 fell sharply and the base rose sharply. Do you agree?
You said:
“Monetary should be about money because of the name.”
Again, NGDP is “about money.” It’s one way of measuring the value of money. Changes in the quantity of money and the value of money are both about money. I’d add that exchange rates are also about money. The CPI measures the purchasing power of money, that’s about money. The real question is which one is useful.
Chun, Unfortunately you are probably right. We need to change that. Eventually the profession will see that NGDP is far more important than inflation, as it will signal the key turning points.
dtoh, My point is that the CPI does not measure the average cost of stuff they buy, as wages and salaries are a big cost for many businesses (and more than 50% of GDP)
But yes, individual price do matter. However I’d say they care more about the relative prices of things, than the absolute price level.
M. I don’t see why. Just use the nominal rate and the nominal cash flow.
3. May 2015 at 06:18
If New Zealand targeted inflation and, in addition, a stable price path, then why should businesses care about inflation? Yes, it might be a little high or low, but if targeted, it will go back to its original path. The survey appears to show this.
3. May 2015 at 10:02
@scott,
Just to clarify a little more. I do think that companies care quite a lot about the price/volume breakdown on output since it will impact production planning. Or to put it another way, firms care about the mix between real and nominal growth. I think the difference is probably just that there is a better correlation for an individual firm’s actual output volume with real growth rates than with pricing where there tends to be more variability for a specific firm’s product pricing relative to the CPI.
3. May 2015 at 10:52
Britonomist:
“No it wouldn’t.”
Yes it would. If NGDP is a cause of “recession”, and recession is being used to refer to the whole economy, then a change to NGDP must affect the whole economy.
“I would not have any way to connect that to my own firm’s revenues. “
“You’re kidding me.”
I am quite serious. So is every other firm owner who doesn’t even look at or think about NGDP when forecasting their own revenues.
“NGDP is expected to drop by 5% and that doesn’t affect your expected earnings at all?”
Again you have the direction of causality completely backwards. You’re reasoning from an NGDP change.
Expected NGDP is an outcome of all individual firm expected revenues. Nobody who owns a business asks what will NGDP be this upcoming year and then using the answer to estimate what their own revenues will be.
The way the market works is each and every individual firm does an estimate of their own revenues, and the sum total of all individual firm expected revenues is then how you get to expected NGDP.
“Most sensible medium to big size business knows if the company’s earnings is pro-cyclical or not (or market beta as they might call it).”
EARNINGS are neither NGDP nor firm revenues.
Earnings are an accounting difference.
There is no economics course and there is no business firm that calculates a firm’s Beta with the independent variable being NGDP.
This is because there is not a shred of theory or evidence that connects NGDP to an individual firm’s revenues.
There is no mathematical constant that has ever been found.
If you didn’t reason from an NGDP change, then you would have realized that expected NGDP is not any one individual’s decision. It is the sum of all individual firm expected revenues, and there is no firm that utilizes NGDP in any formula to make estimates of their own revenues.
You are compelled to ignore all those firms that are NOT “medium to big sized” and NOT “sensible”, and you are compelled to equivocate “pro-cyclical” and “pro-NGDP” and pretend the latter is what everyone is thinking about when they say the former.
Maybe it is because you think about NGDP 24 hours a day that you have come to believe it is not only under every major economic movement, but in everyone else’s mind too. You have to ask people what they think about NGDP before making all these assertions. The reason why NGDPLT is so fringe is precisely because of the small number of people who even think about it. I should know about fringe theory, so this isn’t me attacking it because it is fringe, I’m just telling it like it is.
3. May 2015 at 11:06
And even if the Fed changes how much it prints so NGDP rises at a constant rate, what they will in fact be doing is raising the revenues of specific firms in such a way that the sum total of all revenues is a constant rate of increase.
MMs have a very difficult time accepting the fact that the Fed’s printing affects different firm’s revenues differently by virtue of the constraints inherent in inflation as well as in the market itself. Individuals do not all experience a 5% rise in income all equally if NGDP rises 5%.
All NGDPKT really is at root is a way for some firms to experience a greater increase in revenues than other firms, and we’re supposed to ignore this because we can add up everyone’s incomes to get a single number.
Inflation benefits some at the expense of others. That is the whole point of it. The Fed was created so that fractional reserve banks, and the state who protects them, can externalize losses instead of incurring those losses themselves. The losses are covered up because it is virtually impossible to quantify REAL losses in a money based society. Inflation is perhaps the most insidious form of wealth transfer ever devised.
3. May 2015 at 11:55
“Yes it would. If NGDP is a cause of “recession”, and recession is being used to refer to the whole economy, then a change to NGDP must affect the whole economy.”
A fall in NGDP is a recession by definition. Just because it’s the result of one gigantic firm going bankrupt, doesn’t stop it from being a recession by definition (and don’t pretend that this gigantic firm does not buy a huge amount of product from other firms, don’t pretend it doesn’t affect other firms massively, but that’s besides the point regardless).
“Nobody who owns a business asks what will NGDP be this upcoming year and then using the answer to estimate what their own revenues will be.”
Not directly ‘NGDP’, but they will definitely worry about the strength of the economy, and various other indicators of the strength of the market and spending. You’re being ridiculously overly literal here. But this isn’t even about a hypothetical firm, this was about you. You said you would not be able to infer anything about your own businesses revenue, even if you expected a massive recession in the future. That’s absolutely insane, you are either grossly incompetent and have failed to do any market research at all about the demand for your product, or you’re actually autistic and are just completely unable to connect the dots – and I strongly suspect you may actually be slightly autistic (no offense), since that would explain your bizarre prose.
You’re also ignoring endogeneity here, because it’s not just firms estimating all their individual revenues in a vacuum, and then somebody else adding them up. Their expectations of revenues in turn will certainly depend on their expectations of revenues of other firms, as well as even their expectations of other firms /expectations/ of their revenues. There are layers and layers of complexity here, it’s an integrated system, when something happens to one large firm, it will always affect some other firms. It’s impossible to make expectations of your own revenues without first forming expectations of other firms & peoples’ revenues and incomes, and their spending. This is obvious to everyone on the planet but you, because you’re extremely invested in your fundamentalist religion.
“There is no economics course and there is no business firm that calculates a firm’s Beta with the independent variable being NGDP.”
Not NGDP specifically (again you’re being overly literal here), but in finance people spend a lot of time and get paid a lot of money to figure out how pro-cyclical revenues of various businesses are, which in turn allows them to figure out the co-variance of their stock price with the stock market in general.
And this is just one small example. Firms care about the strength of the market, about the strength of the economy, and about demand.
This is why private forecasters are used in the market and hired by firms all over the UK for instance.
“you are compelled to equivocate “pro-cyclical” and “pro-NGDP” and pretend the latter is what everyone is thinking about when they say the former.”
Is this what it has come to? You’re now denying that NGDP is related to the business cycle? Do you understand how extremely unconvincing you are, how tremendously non compelling your arguments are?
“Maybe it is because you think about NGDP 24 hours a day that you have come to believe it is not only under every major economic movement, but in everyone else’s mind too.”
It should really be obvious that I don’t think firms /literally track an NGDP indicator/, nobody does, not even economists (honestly it’s really hard to find NGDP stats, try finding it for the UK for instance). When I (and basically everyone else) talks about NGDP, that’s just our econospeak proxy for demand. It’s a stupid and irrelevant pedantic point/strawman, nobody is saying firms literally use NGDP stats (which barely exist).
3. May 2015 at 13:55
@MF: “if Walmart’s revenues (about $485 billion in 2014) declined to zero, because they went bankrupt for example, and every other firm earns the same revenues, which is possible”
You’re being misled by your silly hypothetical. That’s not how economies react. I’m not going to say that it is logically impossible, but there is no known way to take our current economy, have Walmart go bankrupt and cease operations and reduce revenue in one year by $485B, and have every other firm’s revenues be unaffected. There isn’t any (known) way to get from here, to there.
You can’t just wave a magic wand, and move from the current real economy, to your imagined economy. You can only take actual actions in the real world. And no action you (or anyone else) could name, would have the effect that you hypothesize.
So your attempt to draw a strong conclusion about this artificial case is useless. You’re misleading yourself, by not understanding how economies react to different kinds of shocks.
3. May 2015 at 15:15
I confess that I don’t know how the Fed “targets” NGDP, as a pracical matter. Is there only one way to do it, or does the Fed use only one or a few ways, and are they all equivalent in effect?
Say the Fed buys $100 billion of Treasury bonds. The government spends it. NGDP goes up $100 B by definition, no matter what the government buys. Is that prosperity? Is there an expected multiplier, and what is it? What portion is supposed to be production and what part is inflation? How does the government pay back the loan, and shouldn’t taxpayers resent this burden placed upon them?
This may not be the mechanism that the Fed uses. Even so, why would the above “fiscal” intervention promote lasting prosperity? And, whatever mechanisms the Fed does use, what are they, do they promote lasting prosperity, and do they place a further burden on taxpayers?
3. May 2015 at 15:52
“Friedman said money was tight when M2 fell sharply and the base rose sharply. Do you agree?”
If the MB rose then MP was expansionary. The fed doesnt issue broader money. Unless the fed somehow forced M2 to decline through regulations of some sort.
Again, NGDP is “about money.” It’s one way of measuring the value of money. Changes in the quantity of money and the value of money are both about money. I’d add that exchange rates are also about money. The CPI measures the purchasing power of money, that’s about money. The real question is which one is useful.”
I completely agree that NGDP and exchange rates are all about money. But that doesnt mean they are money. A wooden lamp post is made out of wood but that doesnt make it a tree. I think its clearer to differentiate between money and ngdp.
3. May 2015 at 15:56
Britonomist:
“A fall in NGDP is a recession by definition.”
I will accept that it is your definition, but please do not presume that it is my definition, or the definition of most other people.
I define a recession in terms of coordination, or lack thereof. Declines in NGDP to the extent they are related to recessions, I consider to be one among many conequences of recession, not recession itself.
“Just because it’s the result of one gigantic firm going bankrupt, doesn’t stop it from being a recession by definition (and don’t pretend that this gigantic firm does not buy a huge amount of product from other firms, don’t pretend it doesn’t affect other firms massively, but that’s besides the point regardless).”
Just because you define a recession in terms of dollar spending, that doesn’t make a recession a fall in NGDP by definition. That is your definition, not “the” definition. If you’re going to claim it is “the” definition, then it must become generally accepted. It is not at this time.
“Nobody who owns a business asks what will NGDP be this upcoming year and then using the answer to estimate what their own revenues will be.”
“Not directly ‘NGDP’, but they will definitely worry about the strength of the economy, and various other indicators of the strength of the market and spending.”
The strength of an economy is not a function of how many units of currency are being exchanged. See Zimbabwe or Weimar as examples.
“You’re being ridiculously overly literal here.”
That is a meaningless statement.
“But this isn’t even about a hypothetical firm, this was about you. You said you would not be able to infer anything about your own businesses revenue, even if you expected a massive recession in the future.”
No, I said there is no mathematical constant that can tell me what my revenues will be next year if I expect NGDP to rise by 5%.
If I expect my revenues to grow by 5% next year, it will not be because I calculated my firm to earn X% of total NGDP.
Vague statement like “If I expect a recession next year, then chances are my revenues will decline” is not a statement about NGDP. It is a statement about my own expected revenues given my own individual market and industry conditions.
“That’s absolutely insane, you are either grossly incompetent and have failed to do any market research at all about the demand for your product, or you’re actually autistic and are just completely unable to connect the dots – and I strongly suspect you may actually be slightly autistic (no offense), since that would explain your bizarre prose.”
You mad bro?
“You’re also ignoring endogeneity here, because it’s not just firms estimating all their individual revenues in a vacuum, and then somebody else adding them up. Their expectations of revenues in turn will certainly depend on their expectations of revenues of other firms, as well as even their expectations of other firms /expectations/ of their revenues.”
Perhaps I should simplify this down for you.
Yes, firms do indeed take into account the revenues of other firms, but not the revenues of ALL other firms, which they would have to be doing in order for your claim about NGDP to be correct.
Individuals demand classes of goods over other classes of goods. Individuals do not think “I have $X to spend, how much spending in percentage terms should I allocate to each and every firm in the economy?”
Firm owners get this. They take into account the revenues of their industry.
“There are layers and layers of complexity here, it’s an integrated system, when something happens to one large firm, it will always affect some other firms. It’s impossible to make expectations of your own revenues without first forming expectations of other firms & peoples’ revenues and incomes, and their spending.”
That is a totally false statement, for if that were really true, then no one individual firm could ever form any expectations of revenues, since each and every firm would be waiting for every other firm to first make their expectations.
You still have the causality backwards. Yes it is indeed true that firms take into account what they expect other firms to earn, but it is not true that each and every firm does so “first”.
Your sensitivity and appreciation for entrepreneurship seems to be completely absent. Innovators who bring new products to market cannot possibly “first” man estimates of what other firms will earn for that same product. It is not yet being produced anywhere else!
What you are talking about is like everything else market monetarist related, a mere subset of total economic activity, the contrapositive of which you are blind to, and cover up with hollow appeals to “the market has layers and layers of complexity” rhetoric.
I am not saying firms make revenue estimates “in a vacuum”. You misunderstood. I am saying that in the specific case of NGDP, the order of causality is from individual firm revenue estimates, and then the sum of these are NDGP estimates.
You can not have NGDP estimates without individual firm estimates, but you can have individual firm estimates without NGDP estimates. That should have been the obvious fact that would enable you to understand you had the causality backwards. Apparently not.
To deny that individual firms do not “first” take into account NGDP in order to estimate their own revenues, is absolutely not a denial that firms take into account the revenues of “other” firms.
Other forms is not necessarily all other firms!
“This is obvious to everyone on the planet but you, because you’re extremely invested in your fundamentalist religion.”
Look in the mirror pal, because socialism (your collectivist monetary socialism) is derived from religious milleniallist creeds.
There is no eye in the sky concept, let alone God, in praxeology. In praxeology, the ultimate foundation is individual HUMAN action. You are cavalierly throwing around the term “fundamentalist religion” clearly totally oblivious to the fact that your worldview is grounded on the fallacy of hypostatization. That is how religious thought works.
“There is no economics course and there is no business firm that calculates a firm’s Beta with the independent variable being NGDP.”
“Not NGDP specifically”
We’re done. You clearly don’t care about honesty in debates.
Come back when you become sufficiently emotionally and intellectually mature.
3. May 2015 at 16:01
Geddis:
@MF: “if Walmart’s revenues (about $485 billion in 2014) declined to zero, because they went bankrupt for example, and every other firm earns the same revenues, which is possible”
“That’s not how economies react.”
Economies don’t react to anything. Specific individuals react.
“I’m not going to say that it is logically impossible, but there is no known way to take our current economy, have Walmart go bankrupt and cease operations and reduce revenue in one year by $485B, and have every other firm’s revenues be unaffected. There isn’t any (known) way to get from here, to there.”
Imagine every consumer who reduces their spending on Walmart goods, increasing their spending on other goods.
This is an extremely stretched hypothetical designed solely to highlight the fact that one firm earning fewer revenues will reduce NGDP.
“You can’t just wave a magic wand, and move from the current real economy, to your imagined economy. You can only take actual actions in the real world. And no action you (or anyone else) could name, would have the effect that you hypothesize.”
I know.
“So your attempt to draw a strong conclusion about this artificial case is useless.”
Non sequitur.
“You’re misleading yourself, by not understanding how economies react to different kinds of shocks.”
Economies don’t react. The economy is not a machine.
Your worldview is at root flawed.
3. May 2015 at 16:46
@MF: “Economies don’t react to anything. … The economy is not a machine.” Your ontology is broken. Things other than “machines” can “react”. Economies are a fine example of such a thing. You mistakenly think that “human beings” are somehow more fundamental in the universe than “economies”, but they aren’t. Both economies and humans are made up of smaller parts that operate according to very different laws, yet the abstract concept we call “economy” or “human” still exhibits emergent properties.
“Imagine every consumer who reduces their spending on Walmart goods, increasing their spending on other goods.” Yeah, sure I can do that. Sadly, that isn’t the scenario you yourself outlined: “every other firm’s revenues be unaffected“. You’re already inconsistent, even in your own example. And once you allow consumers to “increase spending”, then your hoped-for conclusion, “one firm earning fewer revenues will reduce NGDP” no longer follows at all.
You know, for someone who rejects all empirical data, and claims to rely only on logic … your command of logic itself is rather shaky.
3. May 2015 at 16:58
@Andrew_M_Garland: Your model of how monetary policy works, is wrong in essentially every particular.
“how the Fed “targets” NGDP, as a pracical matter” A combination of communications about forward guidance, in order to set expectations (see Nick Rowe’s Concrete Steppes: http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/engdp-level-path-targeting-for-the-people-of-the-concrete-steppes-.html ), plus Open Market Operations (buying [or selling] Treasury debt in the secondary market).
“Say the Fed buys $100 billion of Treasury bonds. The government spends it.” The Fed doesn’t buy bonds from the government. It buys them from the open market. Fed purchases or sales (monetary policy) have nothing at all to do with government choices to spend money (fiscal policy). When the (fiscal) government decides to spend, it needs to balance its accounting budget, either with taxes or borrowing. There is no connection between government expenses, and Fed purchases.
“Is there an expected multiplier, and what is it?” The expected fiscal multiplier is ZERO (if the central bank is competently targeting a nominal aggregate). Monetary policy works through the Hot Potato Effect on changes in the monetary base, not through a government fiscal multiplier (nor bank lending, nor interest rates, nor…)
“What portion is supposed to be production and what part is inflation?” An ideal policy like NGDPLT would be agnostic between real growth and inflation. That mix would depend on fiscal policy, supply side factors, etc. All very important, to be sure — but unrelated to monetary policy.
“shouldn’t taxpayers resent this burden placed upon them?” Fiscal stimulus implies future (or current) taxpayer burden. Monetary policy (changes to the monetary base) are costless, both now and in the future. There is no “burden”.
“why would the above “fiscal” intervention promote lasting prosperity?” It wouldn’t, but that has nothing to do with NGDPLT.
3. May 2015 at 17:08
” It is not at this time.”
No, it really is.
“The strength of an economy is not a function of how many units of currency are being exchanged. See Zimbabwe or Weimar as examples.”
Again, this is just the insane pedantry that makes me strongly suspect you have autism. Yes, it is true that in very extreme cases like Zimbabwe or Weimar, the amount of times money exchanges hands ceases to be a good approximation of growth in demand. That literally has no bearing on my point whatsoever. If you can’t understand this, you should stop having conversations with people, because you lack rudimentary logic skills.
“Vague statement like “If I expect a recession next year, then chances are my revenues will decline” is not a statement about NGDP.”
Yes. It. Is. It absolutely is an implicit statement about NGDP. There is absolutely no reasonable way you can expect a decline in NGDP and not expect a recession. It seems you’re just unable to grasp the concept of implication, that a change in one thing can imply a change in another thing too.
“Yes, firms do indeed take into account the revenues of other firms, but not the revenues of ALL other firms, which they would have to be doing in order for your claim about NGDP to be correct.”
They would have to, if they wanted to make 100% accurate predictions about the future of the economy (they’d need a lot of other data too, but this would be part of it). Of course this is impossible, it’s a cognitive limitation. This is why, instead, they use proxies for the health of the economy, like market forecasts of economic growth.
“That is a totally false statement, for if that were really true, then no one individual firm could ever form any expectations of revenues, since each and every firm would be waiting for every other firm to first make their expectations.”
No, you can make reasonable guesstimates about how bullish or bearish investors and businesses will be about the economy without knowing, and are able to update your beliefs when new information is learned.
“They take into account the revenues of their industry.”
And in turn, the revenues of their industry can vary depending on whether the economy is booming or in a recession, and industry analysts make predictions about how an industry is expected to do, these predictions are partly based on whether the economy is expected to grow or not, as well as various other industry specific factors.
“I am saying that in the specific case of NGDP, the order of causality is from individual firm revenue estimates, and then the sum of these are NDGP estimates.”
No, the causality is both ways. You’re relying on a really really lousy Austrian approach that even rudimentary classical economics will debunk.
“What you are talking about is like everything else market monetarist related”
I’m not a market monetarist.
“but you can have individual firm estimates without NGDP estimates.”
No, medium to large firms take into account their expectations of economic growth when they forecast their revenues, and if they don’t do explicitly, they do so by implicitly assuming growth will be sufficiently stable, without any unexpected shocks.
“because socialism”
I’m not a socialist.
“There is no eye in the sky concept, let alone God, in praxeology. In praxeology, the ultimate foundation is individual HUMAN action. ”
Praxeology is hidden models, unstated assumptions, and hidden or missing variables. This is why models are superior to verbal ‘praxeology’, because models force you to be explicit about your assumptions. I have never seen you have the honesty to be explicit about yours.
“We’re done. You clearly don’t care about honesty in debates.”
Yes we are done. Because you clearly are unable to converse with people and engage in logical inference about what they’re saying beyond the strictest most literal interpretation; if you can’t see how saying “firms care about NGDP” doesn’t mean they actually know specifically about what NGDP as a technical statistical concept is, if you don’t realize that people can care about things they’re not sure how to define, or if they care about one thing, they’re implicitly caring about a broader thing that encapsulates that, then there is no point in discussing things further with you.
3. May 2015 at 17:46
Geddis:
“@MF: “Economies don’t react to anything. … The economy is not a machine.” Your ontology is broken. Things other than “machines” can “react”. Economies are a fine example of such a thing.”
No, they are not. Economies are neither an object, nor are they an individual actor.
Your ontology is broken, not mine. I do not reify an abstract concept whose only reality is the individual human actors and the objects of economic action they utilize.
“You mistakenly think that “human beings” are somehow more fundamental in the universe than “economies”, but they aren’t.”
I never said anything about alien economies. The whole time the concept of “the economy” referred to the economy on Earth.
Yeou mistakenly believe that “economies” of individual human actors are somehow more fundamental than the human actors. They aren’t.
“Both economies and humans are made up of smaller parts that operate according to very different laws, yet the abstract concept we call “economy” or “human” still exhibits emergent properties.”
Biology is outside the scope of economics. Economics deals with non-reducible egos and value judgments. You presume this when you claim that myself, this “I”, is wrong, where I should change my mind, whereas you, your “I” is right, where you are not to change your mind.
Subjective value judgments, not the chemical properties and behaviors of molecules, are the datum of economic science.
“Imagine every consumer who reduces their spending on Walmart goods, increasing their spending on other goods.” Yeah, sure I can do that.”
Then we’re done.
“Sadly, that isn’t the scenario you yourself outlined.”
I never intended to outline just one scenario.
3. May 2015 at 18:48
@MF: “I never intended to outline just one scenario.” Yet the one scenario you explicitly outlined is incoherent. Try to stay on topic.
“I do not reify an abstract concept” Sure you do. You talk about “humans” all the time. But the concept of “human” is only approximate, and quickly breaks down when you start looking at the details. There is no logical (nor universally accepted) definition of “human” that could resolve all questions we might ask about that concept. As long as you don’t probe too deeply, “human” is a fine approximate concept. Just like “economy” or “weather”.
“I never said anything about alien economies.” Neither did I. You’re not very good at reading comprehension.
“You mistakenly believe that “economies” of individual human actors are somehow more fundamental than the human actors.” No, I don’t — and I never said that. Now you’re demonstrating not only poor reading comprehension, but also poor logic abilities. See if this is clearer for you: I said that A is not greater than B. You asserted that I must therefore believe that B is greater than A. You seem to have accidentally ignored the case where A = B.
Really, for someone who bases their entire worldview on logic, you could really stand to use a little more practice at the skill.
3. May 2015 at 19:08
Britonomist:
” It is not at this time.”
“No, it really is.”
No, it really isn’t.
“The strength of an economy is not a function of how many units of currency are being exchanged. See Zimbabwe or Weimar as examples.”
“Again, this is just the insane pedantry that makes me strongly suspect you have autism.”
Childish insults only reinforce my existing suspicion that you don’t have strong arguments, and that at some level you know this.
“Yes, it is true that in very extreme cases like Zimbabwe or Weimar, the amount of times money exchanges hands ceases to be a good approximation of growth in demand.”
No, it is true in ALL cases. Two economies can be identical in real terms with the sole exception that one has a non-extreme additional 1% money supply and volume of spending (and prices).
The fact that one economy has 1% more money and spending, does not imply it has a 1% “stronger” economy, I.e. 1% more output.
I used the “extreme” examples so as to show you what is always true in what should be an easy to understand example.
What should aso be easy to understand is that if you can accept that Zimbabwe was not that much stronger by virtue of that many more dollars exchanging hands, then you have no good reason to reject the same principle applying when there is 5% less money and spending, or 10% less. There is no good reason to arbitrarily set the boundary of logic at Zimbabwe yes, USA no. There is no good principle here. You are merely asserting because you lack sound principles.
To deny that more money and spending does not imply a “stronger” economy, I not to any that money and spending has nothing to do at all with economic health. It can have something to do with health, but not necessarily causal in the way you believe.
“That literally has no bearing on my point whatsoever.”
It as everything to do with your point. You made a universal claim that fails to accommodate, and so you have to now backpeddle and change it.
“f you can’t understand this, you should stop having conversations with people, because you lack rudimentary logic skills.”
Ah, the ol’ ex-girlfriend “If you don’t know, then I won’t tell you” debating tactic.
How refreshing.
Noam Chomsky: “If you don’t know, then it is because you ‘lack rudimentary logic skills.”
Michel Foucault: “???”
“Vague statement like “If I expect a recession next year, then chances are my revenues will decline” is not a statement about NGDP.”
“Yes. It. Is.”
No. It. Is. Not.
It is a statement about the specific spending on that specific firm’s goods given that individual firm is expecting a recession as typically defined by two consecutive quarters of real GDP decline.
One has to believe first, a priori, that lower NGDP IS a recession. But then we’re already presuming the conclusion of thinking about one’s own revenues by virtue of total revenues.
It is quite possible for the revenues of a firm to fall when NGDP rises, and use when NGDP falls. A good example is the firm I co-own. Not once during 2007 to the present have we earned lower revenues one year compared to the previous year.
If one believes that one’s revenues will decline, it will not be “because” other firm revenues decline. It will be because one expects one’s own revenues to declines based on a myriad of factors NONE of which is everyone’s revenues in total.
“It absolutely is an implicit statement about NGDP.”
Ah, the ol’ “it is implicit” rebuttal.
Tell me, why is it not explicit? Why do you blow a gasket when I actually address NGDP, rather than vague words that are meant to “implicitly” refer to it?
Could the reason be that it doesn’t hold up to even the most basic of standards of inquiry? Could reasoning from an NGDP change be as untenable as reasoning from a price change?
The ultimate ground of economics buries its undertakers.
“There is absolutely no reasonable way you can expect a decline in NGDP and not expect a recession.”
Well not when you DEFINE falling NGDP as a recession!
“It seems you’re just unable to grasp the concept of implication, that a change in one thing can imply a change in another thing too.”
Oh on the contrary, I do understand the concept of implication, I just do not attribute recessions to falling NGDP, but rather correctly understand falling NGDP as one consequence among many of what is going on during what you call a recession.
People do not just capriciously and arbitrarily reduce their spending on mass for no good reason. There are reasons they do this, and this blog’s owner has no idea and refuses to even question or study those reasons. My guess for why that is, is that at some unconscious level he’ll end up having to face the very deceitful system he’s spent years trying to tinker with and “advocate” a “better way”.
“Yes, firms do indeed take into account the revenues of other firms, but not the revenues of ALL other firms, which they would have to be doing in order for your claim about NGDP to be correct.”
“They would have to, if they wanted to make 100% accurate predictions about the future of the economy. (they’d need a lot of other data too, but this would be part of it). Of course this is impossible, it’s a cognitive limitation. This is why, instead, they use proxies for the health of the economy, like market forecasts of economic growth.”
See how your approach here suddenly shifted from what firms allegedly do, to what they should do but can’t? That initially you said firms do take into account total revenues, but now you’re saying well if they want to make good predictions then this and that and the other and if not then a proxy?
Forecasts of economic growth are not forecasts of NGDP.
“That is a totally false statement, for if that were really true, then no one individual firm could ever form any expectations of revenues, since each and every firm would be waiting for every other firm to first make their expectations.”
“No, you can make reasonable guesstimates about how bullish or bearish investors and businesses will be about the economy without knowing, and are able to update your beliefs when new information is learned.”
But those other investors won’t be able to make any estimates because they too would according to your logic have to “first” find out what other investors estimate.
You did not address the response I made to your claim, you just moved it back a step.
The response is: If individual firms have to “first” know other firm expected revenues before it can make a choice, then no firm could make a choice because every firm would be sitting on their thumbs waiting for other firms to act in the market ans provide other firms with market based information .
I see you don’t understand the concept of information very well either, in addition to not understanding entrepreneurship. Information in a market arises from actual market activity. It is those individuals who act without passively following what others do, that moves markets.
Innovators and entrepreneurs do not “first” wait and see what other firms do. They make choices that others follow. They have zero regard for the things you claim are so vital to every firm. Elon Musk never cared at all about NGDP. He had a vision about how cars should be, and he went out and tried his best to get them to market, even as he made losses initially, even if NGDP was expected by others to decline. He didn’t give a shit. Those are who move the market.
You are talking about the passive, near brain dead approach of taking Hypermind’s 3% estimate, and then…well you aren’t doing shit about it even if it were 4%. The only thing you are doing with the Hypermind estimates is bitching about it on this blog.
I will bet you $100 that not once when you were at the bank making last year’s investment, that you had a regression formula on hand that you used to decide that last year’s investment will be 25% of your income as opposed to something else if NGDP were slightly higher.
“They take into account the revenues of their industry.”
“And in turn, the revenues of their industry can vary depending on whether the economy is booming or in a recession”
Can anyone else see how Britonomist is just assuming his conclusion in the process of proving it?
You are engaging in circular logic. Remember, you DEFINE a recession in terms of NGDP. So in your deduction and explanation that firms do take into account total revenues, is that firms take into account whether there is a recession or not, which you have already defined as falling NHDP.
So your reasoning boils down to this:
Individual firms take into account NGDP when they take into account NGDP.
Well duh.
Now show me firms that actually take into account NGDP.
Oh that’s right, you already admitted they don’t, because NGDP is not literally NGDP. NGDP is literally something other than NGDP. It is whatever serves to make a sloppy argument for the day.
“and industry analysts make predictions about how an industry is expected to do, these predictions are partly based on whether the economy is expected to grow or not, as well as various other industry specific factors.”
No mention of NGDP there either.
“I am saying that in the specific case of NGDP, the order of causality is from individual firm revenue estimates, and then the sum of these are NDGP estimates.”
“No, the causality is both ways.”
Hahahaha, OK that’s funny.
“You’re relying on a really really lousy Austrian approach that even rudimentary classical economics will debunk.”
You have not shown it to be lousy.
You also have not shown how NGDP is its own thing that causally affects the very individual firm revenues that NGDP is comprised.
You are falling prey to the fallacy of hypostatization. Look it up, please.
NGDP is an outcome, a result, both logically and temporally.
If you tell me that NGDP has fallen, then you have told me what has happened to a very specific set of firms. You can’t even measure NGDP without measuring individual firm revenues. You come to know what NGDP is by “first” knowing what individual firm revenues are.
You can’t know NGDP without knowing individual firm revenues, but you can know an individual firm’s revenue without knowing NGDP.
You have causality totally and completely backwards.
“What you are talking about is like everything else market monetarist related”
“I’m not a market monetarist.”
In the closet.
“but you can have individual firm estimates without NGDP estimates.”
“No, medium to large firms take into account their expectations of economic growth when they forecast their revenues, and if they don’t do explicitly, they do so by implicitly assuming growth will be sufficiently stable, without any unexpected shocks.”
Economic growth is not NGDP growth.
“because socialism”
“I’m not a socialist.”
Yes you are. You support socialist money.
Not all socialists wear brown shirts or wave red flags.
“There is no eye in the sky concept, let alone God, in praxeology. In praxeology, the ultimate foundation is individual HUMAN action. “
“Praxeology is hidden models, unstated assumptions, and hidden or missing variables.”
Such as?
crickets
“This is why models are superior to verbal ‘praxeology’, because models force you to be explicit about your assumptions. I have never seen you have the honesty to be explicit about yours.”
Yet it is you who keeps claiming “implicit” factors in your reasoning, and the reasoning of thousands of firm owners.
Mathematical models don’t force you to be more explicit that verbal models. All mathematical models are understood verbally anyway.
Calling me dishonest requires you to have a model that forces you to be explicit about your assumptions.
Verbal reasoning is superior to mathematical modeling in economics, because there are no constant causal relations between variables in human action.
It takes more mental fortitude to think verbally. It is why the greatest geniuses in other fields like physics could do what the more dimwitted academics could not, which is explain complex theories verbally and effectively.
“We’re done. You clearly don’t care about honesty in debates.”
“Yes we are done.”
Good. Hopefully the next time you decide to post replies you’ll have a much better grasp of basic logic, and perhaps more importantly at least initially, practise what you preach and be more “explicit” with your assumptions and rely less heavily on “implicit” assumptions.
———-
Sumner:
I recommend you uphold a much higher standard on how you encourage your readers here. Pats on the back and good job for comments that are quite frankly very poor arguments, has created an environment that stunts intellectual growth and also encourages the readers to believe in these poor arguments as if they are so obviously true.
But I guess that is the result of being more concerned with politics than truth. Truth is the oppressor in political thought. Rally the troops, even if they are poorly armed, and march them to their doom, and hope that your political battle wins.
You should be more critical of those who “support” you personally and your political cause.
3. May 2015 at 19:27
Geddis:
“Yet the one scenario you explicitly outlined is incoherent.”
They are both “coherent”. One firm experiencing a decline in revenues while all other firms experience no change, and one firm experiencing a decline in revenues while all other firms experience an increase.
Those are both coherent.
“Try to stay on topic.”
Whose topic? Yours? Why not the one at hand?
“I do not reify an abstract concept”
“Sure you do.” You talk about “humans” all the time.”
You conveniently left out “individual”.
I talk about individual humans all the time yes.
Now if you catch me reasoning from “humanity”, with me claiming ” humanity” has some causal effect on me or anyone else, THEN you can rigntfully identify me as reifying “human”.
Praxeologists always refer to individual humans when they say humans. It is what fundamentally distinguishes it from all other schools.
You don’t know what you’re talking about. You’re just playing ” no you.”
“But the concept of “human” is only approximate, and quickly breaks down when you start looking at the details. There is no logical (nor universally accepted) definition of “human” that could resolve all questions we might ask about that concept. As long as you don’t probe too deeply, “human” is a fine approximate concept. Just like “economy” or “weather”.”
Good thing I don’t reason from “humanity”.
I reason from individual human action. Human is an approximation yes, but individual is not. I am absolutely me, not you or anyone else or anything else.
I believe Sumner seeks refuge in philosophical worldviews that attack or reject individualism, because at some deep level he knows subjective value theory exposes the reef upon which his economic beliefs crumble.
“I never said anything about alien economies.” Neither did I. You’re not very good at reading comprehension.”
What other economies can exist if not human? Please don’t tell me you consider ant colonies economies. Ants don’t act. They behave automatically. They do not make choices, weigh costs and benefits, or set prices for worms.
Yes I assumed you were talking of aliens if not humans. Bad reading comprehension? Not really, just good old Wittgensteinian debates turning to semantics every now and then.
“You mistakenly believe that “economies” of individual human actors are somehow more fundamental than the human actors.”
“No, I don’t “” and I never said that.”
That is the only other option given you reject individual human actors being more fundamental than economies.
You need to think about your premises a little more.
“I said that A is not greater than B.”
No, you never used the word “greater”. You continue to make things up.
Here, let me restate what you wrote, because clearly your memory is as poor as your reasoning:
“You mistakenly think that “human beings” are somehow more fundamental in the universe than “economies”, but they aren’t. Both economies and humans are made up of smaller parts that operate according to very different laws, yet the abstract concept we call “economy” or “human” still exhibits emergent properties.”
“You asserted that I must therefore believe that B is greater than A. You seem to have accidentally ignored the case where A = B.”
I didn’t accidentally ignore it. I purposefully did. I do not believe the case exists where an individual human actor is equal to the economy.
3. May 2015 at 19:33
What I do think is that “the economy” is nothing but the population of all individual human actors and their means of production.
When people talk of the economy, they are necessarily talking about these things, even if they imagine reified concepts that are more fundamental that that which gives it existence.
3. May 2015 at 19:34
“Childish insults”
It’s not a childish insult, it is a genuine suspicion. You so clearly lack basic heuristics that most others have, that enable us to interpret and grasp the concepts people are trying express without engaging in ridiculous reductionism or semantics, that it’s impossible to converse with you properly. I’ve spoken with many Austrians and ‘libertarian’ philosophers (in fact my background was in philosophy and epistemology before I studied economics) and they do not act or interpret information like you do here, so it’s nothing to do with your ideology, it’s just the way you are. There is such a fundamental difference that for me it is like talking to an alien. And clearly, we are all ‘evil-statist’ aliens to you; we’re essentially talking in an entirely different language to each other, you will never, ever be able to make a convincing or compelling argument for your beliefs to us, and likewise we will never be able to convince you of anything. You’re completely wasting your time here.
3. May 2015 at 20:14
@MF: “Praxeologists always refer to individual humans when they say humans.” How convenient. Because I had the exact same usage!
“Good thing I don’t reason from “humanity”.” Doesn’t help you at all, because I said nothing about “humanity”. You suffered again from reading comprehension, as I was only talking about “humans”, not “humanity”. As in (you now say), “individuals”. So you once again completely misunderstood my point.
“Human is an approximation yes, but individual is not.” Yes, it is. There are many disturbing questions I could easily ask you about what exactly is or is not part of, or a whole, “human individual”, for which there is no good answer (because the concept “human individual” is not precisely defined at a logical level).
“What other economies can exist if not human?” I neither said nor implied anything about non-human economies. You just misunderstand much of what you read, that’s all.
“That is the only other option given you reject individual human actors being more fundamental than economies.” No, it isn’t the only option. The option you ignored (which I happen to believe) is that both economies and human actors are at equivalent levels of “fundamentalness”.
“No, you never used the word “greater”.” I was obviously attempting to simplify the example, for someone (you) who seems to be having trouble with basic logic. Just in the hope you might understand what your basic logical error was. But apparently hoping that you could reason by analogy was asking for too much.
“I didn’t accidentally ignore it. I purposefully did.” So you deliberately committed the logical fallacy of the excluded middle. I suppose there is no point in discussing things with someone who is proud of their irrationality.
“I do not believe the case exists where an individual human actor is equal to the economy.” Neither do I, since they’re obviously completely different things. But that was never the point, of course. On the other hand, I do believe they are both approximate concepts at the same “fundamental” ontological level.
4. May 2015 at 02:40
Major Freedom wrote:
“What should aso be easy to understand is that if you can accept that Zimbabwe was not that much stronger by virtue of that many more dollars exchanging hands, then you have no good reason to reject the same principle applying when there is 5% less money and spending, or 10% less. There is no good reason to arbitrarily set the boundary of logic at Zimbabwe yes, USA no. There is no good principle here. You are merely asserting because you lack sound principles.”
I think the point is that the dose makes the poison (the U shaped curve is a common phenomenon in nature). Too much or too little money will drive spending decisions and thus drive real exchanges. If the economy is suffering from a shortage of money, more money is a solution. One can believe that without endorsing Zimbabwe. Drinking too much water can cause heart failure. That fact does not contradict the fact that water is essential for human life.
4. May 2015 at 06:07
Walter, Good point, although I also doubt they’d care much about inflation if NGDP were targeted.
dtoh, Individual firms can usually determine the price of their product. Again, they care a lot about wages, and total expenditure on their product. IF GM knows that wages will rise 2% and total expenditure on cars will rise 10%, that’s very good news regardless of whether inflation is 2% or 8%.
Andrew, You are mixing up monetary and fiscal policy. I’m talking about monetary policy.
CMA, Almost no one agree with you, and almost no one agrees with me, so we are even. But I still find my definition more useful. I really don’t care about the base.
4. May 2015 at 07:22
Dr. Sumner,
I think the key point is that inflation has been rather steady for the last 25 years. It in fact has had no impact on business decision making. As such, the survey participants rightly dismiss its importance. However if the survey had been taken in the United State in 1980, following a period of intense inflation, when it did impact business decision making, such a survey would have found very different opinions.
It is not that inflation does not matter ever, it just has not mattered for the last 25 years.
5. May 2015 at 06:11
David, But even when it matters, NGDP growth matters more.
6. May 2015 at 13:07
ssumner: Andrew, You are mixing up monetary and fiscal policy. I’m talking about monetary policy.
Yes, that example is fiscal, but as I confessed, I don’t see the mechanism between monetary policy (whatever that refers to) and NGDPLT.
What is the “monetary policy” being referred to, as a practical matter? Is it trading in government bonds? How does this affect NGDP. And then, my other questions. Is there a proven, good, and lasting effect?
Large inflation is not associated with prosperity. So, is small inflation good, and what is the ideal balance?
7. May 2015 at 05:29
Andrew, Inflation doesn’t matter, read my short course on money in the right column.