Even more angry bears

Now there are two.  First a quick reply to Mike Kimel

Here are his first complaints:

This by itself has a bunch of errors.

1. I agree that adjusting for inflation is un-necessary. That doesn’t mean you don’t want to do it. I picked the first measure I came upon that looked reasonable. Inflation adjusting in a single currency and PPP generally produce the same results. Apparently they aren’t doing it for Sweden to US comparisons for the years he picked. Very odd.
2. I am not Angry Bear. That’s the name of the blog. Several people post regularly at Angry Bear. Rdan, the site owner, is kind enough to put up my posts when I write one. But calling me Angry Bear is like me calling The MoneyIllusion.
3. To which Ivory Tower would he suggest I return? Last I checked, Sumner is the one whose bio says something about spending the last 27 years teaching at Bentley. Nothing wrong with that, of course. And for what its worth, I did the adjunct for five years too, which is the closest I’ve come to being an Ivory Tower guy. But I’ve been in the private sector – working for a Big 4 firm, two Fortune 500 companies, and as a consultant under my own shingle – since leaving grad school. So please, spare me.

1.  No, constant dollar adjustments do nothing to correct for PPP, or changes in PPP over time.  Indeed the only reason you need PPP adjustments in the first place is because real exchange rates change over time.  The real value of the Swedish krona seems to have appreciated since 1980.

2.  Mike’s right about that, I wasn’t familiar with that website and didn’t notice the multiple authors.

3.  He’s half right there.  The ivory tower comment was meant to be a lame joke.  Sorry if I sounded arrogant.  He’s right, I am at little known Bentley, not Princeton like Mr. Krugman.  I didn’t think he’d mind as he made the following rather arrogant comment in his first post:

Without looking at the countries, its obvious to me, a non-ivory tower guy, that the data on Sweden on wrong. He shows Sweden’s GDP per capita as a % of US’ GDP per capita dropping from 1980 to 2008 from .868 to .794.

Wouldn’t someone normally ask which series I used, before suggesting to his readers that my data was false?  Kimel continues:

Argentina was not doing well in the early to mid-90s. That was a, well, a Money Illusion. See, they sold off all the state owned enterprises (and the strangely enjoyable to look at water building ) and then lived high on the hog off the money.

I disagree. The question Kimel raises is whether the growth in output was driven by supply-side factors or demand-side factors.  Wikipedia claims that RGDP growth averaged nearly 6% between 1991 and 1998.  That’s pretty high and pretty sustained for a demand shock.  But you don’t need to trust me, just look at the inflation numbers.  Demand shocks raise inflation and supply shocks reduce inflation.  Between 1991 and 1998 Argentina’s inflation rate fell from 171% to 0.9%.  I think we can safely assume it was supply-side driven growth.  If they had switched from their currency board to inflation targeting in 1998, their subsequent history would be much better.  But of course countries only switch away from successful policies when they run into trouble.  Instead the subsequent deflation and depression (when the dollar appreciated in real terms) opened to door to the left.

  ”I have no idea why a country with statist policies in the 1980s and 2000s and a deflationary monetary policy in the late 1990s, would be expected to do well.”

And yet, he bats not an eye in his first post when he points out that Japan and the US grew about the same. But Japan is probably more statist (think the Ministries) now than privatized Argentina, and the trend away from statism was certainly greater in Argentina during the 1980 to 2008 period than in Japan. As to deflationary monetary policy – exactly how long has Japan’s interest been about zero? So shouldn’t Japan count as a loss in Sumner’s book?

The last point’s easiest.  Near zero rates don’t represent easy money, but rather the effects of deflationary monetary policies (the same occurred in the US during the 1930s.)  In one sense Kimels’ right, deflationary policies shouldn’t have a long run impact on growth. But because he is so determined to show Argentina’s a good example of neoliberalism, he overlooks his strongest argument, which is that Argentina’s recently grown rapidly under statist policies.  Let me respond to the argument he should have made.  I see that growth as analogous to the recovery under FDR.  Impressive when compared to the previous severe deflation, but nowhere near as rapid as it should be.  The new government has done things like confiscate private pensions, so it is very negative in the long run in terms of the incentive to save and invest.  But they also did something good, they devalued to peso.  This led a rapid recovery, as you’d expect after a severe deflation.  Indeed they went too far in devaluation, and saw excessive inflation (which they have tried, but failed, to cover up).  This is the demand-side growth that Kimel (inaccurately) claims occurred in the 1990s. 

I also think Kimel misunderstands my argument.  I am not claiming that bad economic models grow more slowly than the US, I made a much more complicated argument:

Normally poorer countries can growth faster than richer countries, by adopting state of the art technology.  That’s why China grows much faster than the US would if we adopted the same policies.  Much of Japan’s growth until 1990 reflected this catch-up process.  I don’t think this view is controversial.  But if the country has a less productive economic model than the US, it will level off at a point below the US GDP per capita.  Most countries have done this, indeed as Reihan Salam points out they have slightly regressed since 1980 (or 1990 for Japan.)  That’s why I thought it interesting to look at Britain.  Here is a country that moved to a much more efficient economic model, and thus was able to catch up somewhat during a period that most other developed countries stopped catching up to the US.

The surveys I’ve seen suggest that Argentina is much more statist than Japan.  Heritage has Japan at 19, Argentina at 135.   The Fraser Institute has Japan at 28 and Argentina at 105, so either way it’s pretty hard to claim Argentina is the freer economy.  I admit these are highly subjective, but those are pretty big gaps, and they spell out all the criteria they use for each category if you care to check.  BTW, the Fraser data is 3 years older, which may explain why they have Argentina slightly higher.  Things are getting worse down there.

But that’s trivial. A bigger problem is that Argentina’s deflationary monetary policy could be summed up in one word: dollarization. The currency was pegged to the dollar, and the rest was a collection of details (some of which made life miserable for the average person in Argentina).

Now, regardless of the reasons given, the effect of a peg is the same. And it turns out that among the success stories on Sumner’s list was Hong Kong, which has been operating with a similar currency peg for a lot longer than Argentina ever did. (BTW, the Hong Kong government had a cool little study looking at their peg and Argentina’s here.)

I agree with Kimel that the peg hurt Argentina, and agree that HK has done better with the same policy.  But those two countries are about as different as any two countries can be.  Yet even so, both suffered several bouts of deflation in the late 1990s and early 2000s, but of course HK’s economy (and labor markets) are vastly more flexible than Argentina’s.  Even so, HK suffered high unemployment for a while, but toughed it out rather than shifting to a leftist policy.  When the real exchange rate swung back in their favor, they boomed again.  I don’t see what the problem is here.  But this is where Kimel’s point about the long term effects of monetary policy (and AD) is correct.  HK’s growth has not been severely impacted in the long term by the deflationary recessions that have occurred a couple times in recent decades (the same was true of the US in the late 19th century, another flexible economy.)

I’m not all that familiar with Singapore, but I do know the Singaporean central bank is kind of an odd duck in that they use monetary policy to regulate the exchange rate (which is a fancy way of saying they peg the currency, but move the peg). Which is another way of saying that on the big issue, they follow the same monetary policy that Sumner thinks is a no-no with Argentina. And of course, if you had to pick which of two countries, Argentina which sold off its state owned assets, and Singapore which didn’t, liberalized more in the last three decades its a no-brainer. Singapore, complete with its canings, has a more functional rule-of-law, but in his post, Sumner talked about how ” neoliberal reforms after 1980 helped growth.” Argentina had ‘em. I don’t know about Singapore. But he has Singapore as a success story, and Argentina not.

Kimel seems confused here.  Singapore has an adjustable peg, which their government actually adjusts to protect the macro economy.  Argentina had a currency board that was quite rigid.  The systems are totally different.  As for Singapore being more statist than Argentina, perhaps I should refer to the “giggle test” that Kimel mentioned in his last post.  Singapore in #2 in the world in the Heritage rankings, I’d say that’s slightly freer than Argentina’s #135 ranking.  Again, the rankings might be off, but that far off?  (Fraser also has Singapore #2.)

Moving on (this is getting to be a pain in the neck) we have Chile, the other Latin American country on his list… and like Hong Kong and Singapore, also a success story. Now, both Argentina and Chile chucked their military overlords between 1980 and 2008, but the Chicago Boys like to point out they were doing their thing during the Pinochet years too. Put another way, whatever liberalization happened in Chile post 1980 (off the top of my head, I’m thinking mostly a big change to mining law in the 90s… but note that CODELCO, the state owned copper firm, still runs the big show) pales in comparison with Argentina selling off its state owned assets during the same period.

Let me just say this.  The “top of Kimel’s head” doesn’t seem to contain much information on what is universally viewed as a very extensive set of neoliberal reforms in Chile.  Fraser has them at #5, and Heritage puts them at #10.

Time for my “high-hanging fruit?”

And then there is another bear, this one named Spencer:

The objective of the Sumner post was to disagree with Paul Krugman and others about a break in trend in US economic growth because of the Reagan revolution. But rather than look directly at the US data he undertook a complex, convoluted approach that indirectly tried to demonstrate that there had been a break in US growth because of the reforms around 1980.

My question is why go to such an indirect methodology? Why not just look directly at the very good US data? So that is what I have done.

If that were my argument, then I agree the data he suggests would be much better.  But it isn’t my argument.  I agree that growth slowed in the US after 1980 (or perhaps 1973.)  I did a whole post on this a few days ago.  Indeed I think it slowed even a bit more than the US government admits, as I think they have puffed up growth data in recent decades with statistical tricks associated with adjusting for quality changes in areas like computer technology.  So I think the Reagan story is even worse than Spencer suggests.  My point is that growth slowed almost everywhere.  I also claimed that in the less reformed economies it slowed more sharply, and the more reformed economies it slowed less sharply.  There are several issues that need to be weighed in any comparison:

1.  How free is the country’s economy?

2.  How did that freedom change between 1980 and 2008?

3.  What was the initial GDP/person level in 1980?

All have a bearing on the issue.  I argued that normally poorer countries might be expected to gain on the US, if they had a similar model.  Thus it is somewhat embarrassing that much of Europe, (and since 1990 Japan) are actually falling further behind.   I thought comparisons like Britain/France and Chile/Argentina would be “apples with apples” comparisons, or at least as close as we could get.

I’m not going to quibble about his specific points about the long term US growth trends, since I think it is relative growth rates between countries that matter in a world where technological change is uneven.  He may be right that the 1920s were merely catch-up to the 1907 peak–after all the economy was structurally similar in both the 1920s and 1907.

Spencer continues:

While I’m down on Libertarians, what about the recent argument by Bryan Caplan of George Mason University, who blogs at econlog.org. He recently argued that the decade of 1870′s was the peak for Libertarian freedom and economics. Maybe, but I wonder if he is even aware that economic historians label the 1870′s as the “Long Depression”. I find it really amusing that he so proud of what others call a depression — typical Libertarian. Since I am already banned from that web site for pointing out factual problems with their analysis I guess this comment will not make much difference.

This is a common misconception, as many historians confused the terms “deflation” and “depression.”  Much of the 1870s was the good kind of deflation (supply-side) that Austrians like George Selgin discuss.  I believe there was a depression in 1873, but overall real GDP grew rapidly during the 1870s.

BTW, come to my blog, I don’t ban anyone unless they use very bad language.

I hope I don’t find three angry bears at my doorstep tomorrow morning, I am running out of time!

HT:  Marcus,  Tom


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32 Responses to “Even more angry bears”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. May 2010 at 08:16

    One of my pet peeves is libertarians who romanticize deflation. I know you’re definitely not one of those Scott but nevertheless allow me to share some pedantic number crunching I once did on severe deflations of the Industrial Revolution.

    The United States had five major deflations between 1790 and 1914: 1801-1802, 1814-1821, 1822-1824, 1841-1843, and 1865-1878. Three of these are associated with “panics”: the Panic of 1819, the Panic of 1837, and the Panic of 1873. The average rate of real GDP per capita growth during these five severe deflations was the following (ordered sequentially): 0.0%, -0.4%, 1.8%, 1.1% and 1.0%. The average rate of real GDP per capita growth during those 25 years was 0.6%. The average rate of real GDP per capita growth during the other 99 years was 1.6%.

    A similar thing applies to the United Kingdom. There were four major deflations between 1830 and 1914 (that’s all the good data we have): 1830-1833, 1839-1843, 1847-1852 and 1873-1880. Average real GDP per capita growth was the following during these four periods: 0.4%, -2.0%, 2.2% and 0.6%. The average rate of real GDP per capita growth during the 19 years of severe deflation was 0.4%. During the remaining 65 other years average real GDP per capita growth was 1.4%.

    The 1830′s and 1840′s in the United Kingdom were hard times with real wages essentially flat (provided you actually could find a job). To get an idea of what life was like all you have to do is read a Dickens novel like A Christmas Carol or Oliver Twist. And the period after the Panic of 1873 was known as the Long Depression (the contraction lasted 65 months versus 43 months for the Great Depression) when manufacturing and construction literally ground to a halt in the United States and Europe. It was the time in the US when the words “bum” and “tramp” came into vogue because there were so many of them. Severe deflations are rarely good times.

    The 1870s as whole did have good growth but it was almost entirely during 1870-1873 and 1878-1880 when deflation was mild or nonexistent.

  2. Gravatar of Christopher Hylarides Christopher Hylarides
    26. May 2010 at 08:48

    Mark,

    Isn’t it important to clarify what is causing the deflation and specifically what kind it is? If we mean monetary contraction, then that’s usually bad, especially to those who have debts.

    If it’s simple price deflation, usually due to productivity enhancements, then what usually follows in a rise in living standards.

    As for life in Dickens’ time, that was a period of great social change. During that time farm productivity started greatly increasing leaving a massive surplus of labour that would eventually go into the industrial revolution (this is what happened in the 1830s-1840s). Of course, it took a few decades for the surplus labour to redistribute and for workers to begin gaining the upper hand, but life was much better during those times than the serfdom that people existed under before. One of the reasons Dickens is so poignant is that the poverty was apparent when so much of the rest of society was so well off, not the least of which was a growing middle class. The same thing is happening in China now.

    I’m not saying deflation didn’t play a role, but it was hardly the main issue.

  3. Gravatar of Doc Merlin Doc Merlin
    26. May 2010 at 09:22

    @Christopher, absolutely true. The problem is central banks don’t know how to tell the difference between supply side caused price level changes and demand side. This is why they do things like contract during a severe adverse supply side shock.

    This is a problem inherent in monopoly money issuance. While NGDP targeting would fix a lot of the problem, I don’t think it would remove it.

  4. Gravatar of baconbacon baconbacon
    26. May 2010 at 09:23

    Perhaps you wouldn’t be so annoyed if you took the time to understand their position. The basic position is not one of “lets have deflation for everyone!”- it is simply a position that deflation when it reflects market forces is preferred to attempts of governments and central banks to inflate during these periods. I doubt there are many, if any, libertarian economists who suggest central banks should be setting deflation targets for the good of the economy.

    To give you quick number crunching some context real GDP increased 70.8% from 1870 to 1880 and real GDP per capita increased 35.6%. From 1970 to 1980 real GDP grew 36.7% and per capita 23.2%. The gap continues to grow as you extend the time series- from 1870-1890, 1900 and 1910 real GDP grew by 184.1%, 276.5%, 375.3% and from 1970-1990, 2000 and 2010 real GDP grew 88.2%, 162.9% and 204.1%.

    Or from the end of the civil war in 1865 to 1910 v the end of WW2 in 1945 to 1990- 407.1% v 299.2%.

  5. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. May 2010 at 09:24

    Christopher,
    I suppose theoretically that deflation induced by rapid productivity growth would be the “good” kind. The problem is there is little real evidence for such periods. The only periods of above average growth combined with severe deflation I can find are 1822-1824 in the US and 1847-1852 in the UK.

    Real GDP per capita only grew at an average annual rate of 0.5% from 1830 to 1843 in the UK. Thus I really don’t think “society was so well off” during that period. China on the other hand seems to be enjoying very rapid growth (and no deflation).

  6. Gravatar of Doc Merlin Doc Merlin
    26. May 2010 at 09:33

    @Mark:
    It isn’t total economic growth that causes ‘good’ deflation, but rather productivity growth in the economy.
    The 1990′s are a good example, despite absurdly low interest rates (in some cases negative real rates) we didn’t have high inflation, because productivity was growth so rapidly.

  7. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. May 2010 at 09:40

    baconbacon,
    As I said, I don’t doubt that growth was good during the 1870s. But consider this. From 1873-1878 GDP per capita only increased by 2.6%. Almost all of the spectacular growth of the 1870s occured before and after the severe deflation that followed the Panic of 1873. The best parts of the Industrial Revolution were not the severe deflations.

  8. Gravatar of StatsGuy StatsGuy
    26. May 2010 at 09:42

    Mark Sadowski:

    “The 1870s as whole did have good growth but it was almost entirely during 1870-1873 and 1878-1880 when deflation was mild or nonexistent.”

    Thank you for saving me the effort of repeating this _yet again_, but I suppose I still have to remind everyone that the Long Depression was followed by the Gilded Age, so known because of the incredible wealth concentration created by the panic and “recovery”, as well as the creation of tremendous monopolies (which were not destroyed by the ‘free’ market, but rather by Roosevelt the First).

    Moreover, much of the growth in the period was accompanied by massive in-migration.

    ssumner:

    I wish this argument between you and the anti-neoliberals hadn’t become so vicious, because on many things you agree. That said, I think you’re still overlooking at least two major points on the the issue of slowing ‘growth’.

    We have yet to see how much growth in the US is illusory. In other words, PP numbers supported by debt expansion that was enabled by reserve currency status which shielded it from capital flights; if/when that should happen, it will be one for the record books.

    Second, GDP numbers are hokey, as you well know. A mining company digs up a bunch of copper. GDP goes up. Mining company pays off owners, then goes bankrupt (with execs shielded from liability for externalities). Lawyers get paid. GDP goes up. Federal government hires contractors to clean up toxic heavy metal. GDP goes up more. Toxicity requires 50 years of EPA and academic oversight, and increases in cancer rates require millions in diagnosis and treatment (and lawyers fees). A _long run_ gain to GDP!!

    Neo-liberalism wins again!

    Want another example? The _entire_ medical industry. The rise in health care costs and education costs has driven _massive_ ‘GAINS’ in GDP over the last 20 years. Life expectancy? Not so much, eh?

  9. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. May 2010 at 09:49

    Doc Merlin,
    This is mainly speculation but I sometimes wonder if Greenspan accomodated the productivity surge in the 1990s. If monetary policy had been tighter the results might not have been so good. Perhaps it is better to boost AD when there are positive AS shocks. No doubt David Beckworth (of Macro and Other Musings) would disagree but I’m still not entirely convinced by his arguments.

  10. Gravatar of marcus nunes marcus nunes
    26. May 2010 at 10:04

    Krugman gets it wrong on China and fiscal policy but is right on on MP
    http://krugman.blogs.nytimes.com/2010/05/26/reasons-to-despair/

  11. Gravatar of baconbacon baconbacon
    26. May 2010 at 10:12

    “As I said, I don’t doubt that growth was good during the 1870s. But consider this. From 1873-1878 GDP per capita only increased by 2.6%. Almost all of the spectacular growth of the 1870s occured before and after the severe deflation that followed the Panic of 1873. The best parts of the Industrial Revolution were not the severe deflations.”

    The point is that those who “romanticize deflation” are not arguing for deflation per say. They are arguing for an economic system (or lack of one) that allows for deflation when the market deems it necessary produces better results growth wise than attempts to mitigate said deflation in nominal terms. Their view is that the robust growth pre and post deflation is part and parcel of the overall health of the system which includes deflationary periods.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. May 2010 at 10:27

    baconbacon,
    By “economic system” I assume you mean the Federal Reserve. Real GDP per capita growth in the US averaged 1.5% from 1790-1913 (which included the five severe deflations I enumerated earlier) and has averaged 2.0% from 1913-2009 (which includes the severe deflation of the Great Depression). I am unconvinced that the lack of such a system is preferable.

  13. Gravatar of Joe Calhoun Joe Calhoun
    26. May 2010 at 14:29

    Mark Sadowski:

    How many of those deflationary periods you mention are a result of trying to return to a gold standard after leaving it for some reason or another (war of 1812, civil war)? Didn’t we also go through a couple of Banks of the US during that period? Surely that had something to do with the periodic episodes of inflation and deflation? Also, I do believe we had a couple of pretty major gold discoveries during that century that might have had an effect. As someone else pointed out, I think you have to separate the deflations that are a result of monetary factors and those that are due to productivity factors. Not that that is an easy task – it mostly definitely is not especially in real time as we discovered in the 90s – but it does seem the results of a monetary deflation are somewhat more deleterious than a supply side, productivity led deflation.

    I think what libertarians want (or I guess I should just say, what I want) is to be able to enjoy the benefits of deflation that is the natural result of increased productivity without a central bank inflating them away. It seems to me that when the central bank inflates away the benefits of a “good” deflation it is the poor and the middle class that are harmed the most and I find that appalling. They should be the ones that benefit the most from free markets through lower prices and an increased standard of living but if the central bank operates to always generate a positive rate of inflation the benefits go more to the wealthy (and more pointedly, to the bankers) who will receive newly created money first and also have the means to offset the effects.

    I do not have an answer as to how we can make sure the benefits of capitalism are more evenly shared rather than accruing so often to the well connected and the wealthy, but we better figure it out soon because the natives are restless. I tend to think that monetary policy needs to concentrate on stabilizing the currency as I believe a lot of our economic and market volatility is a result of currency instability, but as to how that is best accomplished, I am unsure. I think Mr. Sumner has some pretty good ideas on the subject, although he doesn’t put it in those terms.

    Anyway, libertarians may romanticize deflation but it isn’t just an abstract monetary concept. It is a desire to see the rewards of a properly functioning capitalist system enjoyed by everyone. I am disgusted by what passes for capitalism (and what people assume is capitalism) these days. If we don’t make sure that the benefits are more equally distributed we should not call ourselves libertarians (or more accurately, liberals). Libertarians want everyone to enjoy the fruits of their own labors but in a capitalist system increased productivity – which to me is the essence of capitalism – should benefit all of society. If we allow a central bank to inflate away those benefits to a favored few, we remove the only incentive the poor and middle classes have to support such a system.

    In short the libertarian argument for “good deflation” is a moral argument. We want everyone to benefit from a free market system and “good deflation” is how those benefits are distributed. When the central bank acts to defeat a good deflation they are doing a reverse Robin Hood – stealing from the poor to give to the rich. I’m sure you would agree that is a poor way to conduct our affairs.

  14. Gravatar of JimP JimP
    26. May 2010 at 14:42

    I guess this doesn’t bother ben or larry or paul

    http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. May 2010 at 15:12

    Joe Calhoun,
    You wrote:
    “How many of those deflationary periods you mention are a result of trying to return to a gold standard after leaving it for some reason or another (war of 1812, civil war)?”

    Just one by my count, the appreciation in the dollar from $30.22 in 1865 to $20.69 in 1878.

    You wrote:
    “Also, I do believe we had a couple of pretty major gold discoveries during that century that might have had an effect.”

    That’s probably the best argument against a gold standard there is.

    You wrote:
    “Not that that is an easy task – it mostly definitely is not especially in real time as we discovered in the 90s – but it does seem the results of a monetary deflation are somewhat more deleterious than a supply side, productivity led deflation.”

    You will not get any arguments from me on that score. That’s one of my biggest concerns.

    You wrote:
    “It seems to me that when the central bank inflates away the benefits of a “good” deflation it is the poor and the middle class that are harmed the most and I find that appalling.”

    I’m not sure about that. I think a convincing case can be made for the opposite since the holders of capital, the most unlikely to benefit from sudden inflation, are rarely from the poor and middle classes.

    You wrote:
    “I tend to think that monetary policy needs to concentrate on stabilizing the currency as I believe a lot of our economic and market volatility is a result of currency instability, but as to how that is best accomplished, I am unsure. I think Mr. Sumner has some pretty good ideas on the subject, although he doesn’t put it in those terms.”

    Agreed.

    In any case, perhaps I should point out I voted straight Libertarian from 1982-2000. I still consider myself libertarian except that many exclude me for one reason or another. I’m just opposed to deflation.

  16. Gravatar of Mike Sandifer Mike Sandifer
    26. May 2010 at 17:07

    My impression is that only monetary deflation is bad. That is, when money velocity is allowed to fall.

  17. Gravatar of Joe Calhoun Joe Calhoun
    26. May 2010 at 17:54

    Mark Sadowski,

    I’d have to go back and review the details but I know that specie payment by banks was suspended in 1814 (the First Bank of the US had already been disbanded). The Second Bank of the US came around in 1816 (I think) and eventually a monetary contraction was imposed by the bank. My point was that many of the deflationary periods were imposed purposely (and wrongly in my opinion) and the results were predictable and have nothing to do with deflation that results from improvements in productivity.

    On the gold standard, I have not advocated such, but only meant to point out that monetary policy even under a gold standard can be volatile. Having said that, I think the probability of a large new gold discovery today is fairly low so it might not be as volatile today.

    Living here in the capital of Latin America (Miami) I find the notion that the poor are not the most harmed by inflation to be laughable. Certainly inflation inhibits capital formation but that is also detrimental to the poor who would benefit from the job creation that comes with more rapid capital formation. At least the wealthy have some means of offsetting the effects of inflation – they generally own some real assets – while for the poor it can mean the difference between eating or not.

    Anyway, we don’t disagree about all that much so we should return to commenting about Mr. Sumner’s post. On that note, I think he got the better of the argument by far and really shouldn’t waste much time arguing with these impolite, ill informed angry bears.

  18. Gravatar of marcus nunes marcus nunes
    26. May 2010 at 18:53

    Pretty weak anecdotes/arguments from “Angry Bear” (Mike):
    http://www.angrybearblog.com/2010/05/fundamental-difference-between-scott.html

  19. Gravatar of The Fundamental Difference Between Scott Sumner and Me | economy eyes The Fundamental Difference Between Scott Sumner and Me | economy eyes
    26. May 2010 at 20:41

    [...] Scott Sumner responded to my latest post. There’s a lot I disagree with, and I was all set to start [...]

  20. Gravatar of ETF FOOL ETF FOOL
    26. May 2010 at 22:51

    [...] Scott Sumner responded to my latest post. There’s a lot I disagree with, and I was all set to start [...]

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. May 2010 at 05:38

    Joe Calhoun,
    My point was that there was no dramatic changes in the price of gold during the five severe US deflations of the Industrial Revolution with the exception of the deflation of 1865-1878. That does not mean that don’t think monetary policy was contractionary during those episodes. The price of gold was after all stable in the US during the contractionary phase of the Great Depression. With the lone exception of the deflation of 1822-1824 growth was below average during all of these deflations and thus I find it dubious that a surge in productivity was responsible. Rather I think it was the usual culprit: tight money. Thus I don’t think we disagree about very much.

  22. Gravatar of scott sumner scott sumner
    27. May 2010 at 06:07

    Mark, You said;

    “The 1870s as whole did have good growth but it was almost entirely during 1870-1873 and 1878-1880 when deflation was mild or nonexistent.”

    I think you misunderstood my comment, as I entirely agree. I am a severe opponent of deflation. My point was that mild deflation is consistent with growth if it is expected (as in the 1800s, not today) and severe deflation is not.
    The 1870s were not a depression, there was a recession within the 1870s, which began in 1873. I am certain that the average unemployment rate of the 1870s was well below 10%, probably around 5%. But it is often portrayed as some sort of Great Depression. We still has the safety valve of the frontier, which kept labor markets pretty flexible.

    Dicken’s portrayals may be accurate, but are highly misleading. The same was true of earlier periods, and living conditions were even worse on the continent. It’s like a modern American trying to form an opinion on Chinese living standards. Compared to what?

    Christopher, If wages are rising (due to market forces not government) then deflation may be good, as you say.

    baconbacon, Selgin supports a policy of mild deflation on average, although not through a price level target, but rather a variant on nominal income targeting (productivity norn.)

    Mark#2, I think we are very close here. Between 1865-96 there were both kinds of deflation in the US. Some was productivity caused, and associated with real growth, other deflation went too far, depressed wages and raised unemployment.

    Doc Merlin. I think that’s right about productivity vs. total growth. You need enough nominal growth to keep nominal wages from falling (or hopefully rising.) So productivity growth is the key.

    Statsguy, Is there any evidence that the antitrust laws actually helped consumers? Breaking up Standard Oil didn’t seem to help consumers, and that was the biggest case.

    There was also a lot of corruption and rent-seeking back then, we aren’t talking about a Danish-style free market (which I think both you and I will agree is better.)

    I agree that the official numbers overstate growth, and of course I agree that we waste a lot on money on education (why we need vouchers) and health care (why we need to pay out of pocket for most procedures) I also think we overstate growth through adjustment for quality change in computers. But I think the debt issue probably affects consumption more than GDP, and even for consumption I don’t see it as the primary factor. Unsustainable debt is only a modest fraction of total debt, although the subprime crisis might make it seem otherwise.
    I think our recent growth (to 2007) was sustainable at a slightly lower rate with sound monetary policy.

    Having conceded all that, the dramatic turnarounds in countries like Britain and Chile are very real, not a figment of mismeasurement. Unfortunately Gordon Brown started going back to the bad old days in the early 2000s.

    mark#3, Why would you want to boost AD during productivity shocks? That’s procyclical. If you do that, then you must logically do the reverse, which makes recessions far worse. See late 2008 as an example. Policy wasn’t that bad in the 1990s, a bit too expansionary at the end, but not disastrously so. Even with the tech crash, and 9/11, the 2001 recession was mild.

    marcus, I agree.

    Joe, I believe in the neutrality of money, which suggests stable prices are just as good as mild deflation, because wages rise a bit faster. FWIW, I think the best argument for mild deflation is one you rarely hear. Our tax system taxes nominal interest and other capital earnings, which discourages saving and investment. Mild deflation is like a tax cut on capital, which encourages economic growth. This would not be true with an indexed tax system, but indexing capital income is very complicated, and hence we don’t do it.

    JimP, Thanks, I just posted on that. Great article. People should read the whole thing, because it expresses the well-founded skepticism of the Brits that fiscal policy can solve America’s problems.

    Mike, You must mean “money and velocity” This is the nominal income rule Hayek talked about, which I think is reasonable, although I prefer more than 0% growth in NGDP.

    Joe#2, Regarding gold discoveries, the current feeling is that we have explored the world pretty well now, and future growth in gold may be slower. When combined with fast rising Asian demand, this could make gold something less than a stable measure of value.

    marcus, I may not even comment, as I am short of time. I’ll see what he says.

  23. Gravatar of The Fundamental Difference Between Scott Sumner and Me | Bear Market Investments The Fundamental Difference Between Scott Sumner and Me | Bear Market Investments
    27. May 2010 at 08:37

    [...] Scott Sumner responded to my latest post. There’s a lot I disagree with, and I was all set to start [...]

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. May 2010 at 15:33

    Scott,
    You wrote:
    “The 1870s were not a depression, there was a recession within the 1870s, which began in 1873. I am certain that the average unemployment rate of the 1870s was well below 10%, probably around 5%. But it is often portrayed as some sort of Great Depression. We still has the safety valve of the frontier, which kept labor markets pretty flexible.”

    I once attempted to come up with some unemployment rate estimates for the 19th century based on Christina Romer’s estimates for the period 1890-1930. I would guess that unemployment was about 4-5% in 1873 but probably approached 10% in 1878. Thereafter it probably dropped rapidly until it was about 4-5% in 1882. I agree labor markets were more flexible in those days but rapid labor force growth coupled with a long run productivity growth rate of about 2% annually between 1852 and 1882 meant that 5+ years of relatively stagnant real output still left a lot of people without work by 1878. In terms of peak labor market distress it certainly wasn’t as bad as the Great Depression or the Panic of 1893 but was probably similar to the recession of 1982-1983 or our current recession. Nevertheless it still stands as the longest contraction on record according to the NBER.

  25. Gravatar of ssumner ssumner
    29. May 2010 at 06:23

    Mark, Check out this David Beckworth post:

    http://macromarketmusings.blogspot.com/2010/05/about-that-long-depression-of-1870s_27.html

    In your defense, however, I don’t find Romer’s estimates to be very plausible (at least for the period I studied (the Great Depression.)

    Are those unemployment estimates urban only? Most of the early unemployment rate estimates that I have seen are for urban workers. That excludes the huge rural population back then, who were generally not unemployed for long.

    I’m not trying to disagree with you–I think money was too tight back then, and unemployment was unnecessarily high, but I still doubt whether it was anything like the Great Depression. The Republicans were re-elected in 1876.

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. May 2010 at 08:46

    Scott,
    Thanks, Beckworth’s post was fascinating.

    Actually Romer’s unemployment estimates are for 1890-1930 and were revisions of Lebergott’s. They seem to be the current accepted standard for that period. They are estimates of national unemployment that are meant to be consistent with current data. Obviously urban unemployment was much higher during downturns since manufacturing was more cyclical. That’s perhaps one reason why the Long Depression has the reputation it has.

    Davis’s revisions of the manufacturing data strongly suggest that the NBER needs to revise its dates for business cycles from that period.

    I was going by Balke and Gordon’s data on GNP (probably the current accepted standard). Using their figures I estimate that GNP was about 13% below trend in 1878 which is certainly consistent with about 10% unemployment. As I said it was comparable to the recession of 1982-83 or our current one.

    As you no doubt remember the presidential election of 1876 was one of our most controversial. The Republicans lost the popular vote by over 3.1% and only won by one electoral vote after scraping together 20 disputed votes. Could the economy have had something to do with that?

  27. Gravatar of David Beckworth David Beckworth
    29. May 2010 at 20:03

    Mark and anyone else interested,

    I have temporarily put an article of mine on the Postbellum deflation experience. It seems relevant to this discussion. It can be found here: http://uweb.txstate.edu/~db52/postbellumdeflation.pdf

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. May 2010 at 06:04

    David,
    I enjoyed the article. However a lot of deviation from trend can be obscured by one’s choice of periods. Here’s my simplest argument for a severe recession in the 1870s. Let’s take the trend growth from 1873-1881 as our standard:

    Year GDP/capita(2005$) Percent of Trend
    1873 3,200 100.0
    1874 3,170 95.8
    1875 3,091 90.3
    1876 3,152 89.0
    1877 3,243 88.5
    1878 3,283 86.6
    1879 3,596 91.7
    1880 3,816 94.1
    1881 4,193 100.0

    All data comes from here:

    http://www.measuringworth.org/usgdp/

    which for this period appears to be from Balke and Gordon.

  29. Gravatar of Scott Sumner Scott Sumner
    30. May 2010 at 07:28

    Mark, I find the 13% figure hard to believe. For urban areas the shortfall would be far worse, and hence urban areas would be much worse off than in 1982. The rural economy was huge, and almost always near full employment.

    My comment reflected the fact that the election was close. The depression should have been much worse in the industrial North, yet I presume the Republicans still won the North.

    How did people unemployed for 5 years survive in those days? Why didn’t they go west and set up a farm? I have real questions about the unemployment data.

    Thanks David, I’ll have to defer this debate until I have more time to study the period. I found that Romer and Miron’s data were way off for the 1929-39 period (which I do know something about), which made me doubt all of these exercises.

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. May 2010 at 16:14

    Scott,
    I remember reading somewhere that urban unemployment approached 40% in many cities during that recession. Since the urban proportion of the population was already 25-28% I think a national unemployment rate of about 10% is very plausible.

    The Republicans lost New York, Connecticut, New Jersey and Indiana in that election although the fact that Tilden was governor of New York probably had something to do with much of that.

    Given that the election was only 11 years after the South was defeated and it was the year of the first centennial of the republic the results were pretty embarrasing to the Republicans.

  31. Gravatar of ssumner ssumner
    31. May 2010 at 06:11

    Mark, OK, but for 5 years? I still don’t see how the unemployed supported themselves if not working. Why didn’t they go west? Was this voluntary unemployment?

    That’s a good point about the politics.

  32. Gravatar of Peter Schaeffer Peter Schaeffer
    12. July 2010 at 06:12

    Mark A. Sadowski,

    “All data comes from here: http://www.measuringworth.org/usgdp/ which for this period appears to be from Balke and Gordon.”

    The data sources are described in detail at http://www.measuringworth.com/uscompare/sourcegdp.php. Notably, the data from 1869 to 1909 is from Gallman. See “Gallman, Robert E. “Gross National Product in the United States, 1834-1909.” In Output, Employment, and Productivity in the United States After 1800, Dorothy S. Brady, editor, 3-76. New York: Columbia University Press (for NBER), 1966.”.

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