The real problem is multiple problems

This is a meta-analysis of my blogging. 

Adverse economic shocks seem to be distributed somewhat randomly.  A priori, you’d expect them to occasionally occur in close proximity, especially if one problem might help trigger another.  When we have the bad luck of seeing two or three big adverse shocks back to back, we can get a major economic disaster.

My research on the Great Depression convinced me that it was two depressions, occurring one right after the other.  A demand-side recession that began around September 1929, and a supply-side depression that began in July 21, 1933 (with another demand shock in late 1937.)  Because they occurred back-to-back, most saw them as one “Great” Depression, and looked for explanations of what caused “the” Great Depression.  No mono-causal theory has proved plausible.

I thought of this recently because of my posts arguing the housing vacancy “problem” is actually two problems, or maybe three.  First, we built too many houses in 2002-06, perhaps due to bad regulation, or maybe bad private sector decisions.  Two other factors increased house prices; low interest rates caused by the tech crash (not easy money), and rapid immigration.  Those two reasons are “good” reasons for a housing boom.  So the housing boom was not good or bad, but partly good and partly bad. 

The vacancy problem is also multifaceted.  Partly it was the bursting of the housing bubble.  Partly it was the slowdown in immigration.  And a big part was the huge drop in NGDP relative to trend, which drove unemployment much higher for young first-time home buyers.

And then I realized that my other blogging has a similar pattern.  The financial crisis was really two crises.  The first was caused by lots of foolish sub-prime lending, and led to a bailout of Bear Stearns.  The second was caused by a sharp fall in NGDP after June 2009 [Update: I meant 2008], and led to the failure of Lehman.

The recession itself is complex.  The initial part of the recession (after December 2007) was caused by both a drop in housing construction, and a drop in auto output as a result of soaring gas prices.  It caused RGDP to be flat in the first half of 2009.  Then a completely different problem occurred in late 2008, when tight money drove NGDP and RGDP much lower.  Even the recovery is complex, with the slow recovery being mostly attributable to weak NGDP growth, but also to unusually pronounced wage rigidity triggered by 99 week UI and a 40% minimum wage rise. 

So that’s my shtick.

When I read others I often see what looks to me like overly simplistic views of these problems; “the” Great Depression, “the” financial crisis, “the” housing glut, “the” Great Recession, etc., etc.  But here’s the great irony.  I think others see me as the guy with the one-size-fits-all mono-causal explanation for everything.  Mr. NGDP.  Here’s Tyler Cowen, expressing what I think is the prevailing view of my blog:

I believe that the prominence and persistence of “demand-only” theorists in the blogosphere (DeLong, Krugman, Sumner, and others) give blog readers quite a skewed picture of the actual debate.

I see supply-side labor market problems as being a bit more important in this recession than Krugman and DeLong.  But on the other hand my view of the cause of the drop in NGDP is probably much more focused on monetary policy, whereas they’d give more weight to financial distress, fiscal policy, etc.  That’s what makes me seem so mono-causal, I view monetary policy as being “the” determinant of NGDP growth, more so than almost anyone else.

BTW, when I said that I often see others as offering mono-causal explanations for big problems, I’m excluding most of the best bloggers—especially Tyler Cowen, who is quite open to multiple perspectives.

Part 2:   Immigration

Speaking of multiple problems, Adam Ozimek sent me a post and an article where he discusses how immigration could improve the job market, and indicated Matt Yglesias had done similar posts.  Last year I argued that the immigration crackdown in 2007 might have contributed to the housing slump, but didn’t have much to say about policy implications.

I don’t think it’s realistic to have housing needs drive our immigration policy, but I agree with Ozimek and Yglesias that more immigration would help.  My general view of immigration is that it’s a good thing; indeed I agree with Will Wilkinson that it’s the best anti-poverty program out there.  (It’s ironic that the 1965 immigration bill isn’t usually considered part of LBJ’s “War on Poverty,” given that it was just about the only part of the war that was highly effective, maybe more so than all the rest combined.)

FWIW, I’d recommend increasing immigration enough to raise our population growth rate to Australian levels (2% per year), and I’d diversify to match the world’s population distribution.  That means more Africans and especially Asians, and fewer Mexicans.  I have nothing against Mexicans, and indeed personally I’d benefit more from half of our immigrants coming from Mexico, than a huge upsurge from Asia.  I’ll retire in LA where low-cost Mexican labor raises living standards for upper-middle class people like me.  In contrast, at the recent AEA meetings most of the job candidates we interviewed were Asians.  So they compete with US-born econ professors.

I see two advantages to diversifying immigration:

a.  There will be more political support as it will be seen as fairer–less focused on groups that directly compete with America’s unskilled workers.

b.  It will create more cultural diversity.  Many conservatives worry about a dual culture (Anglo/Latino) creating friction, and eroding America’s traditional culture.  Many Asians (and some Africans) get well-paying professional jobs, and blend into American culture pretty well.  I’m not saying Latinos don’t eventually do so, but the large concentration of Mexican immigrants in certain areas frightens cultural conservatives.

If we are to have a big increase in immigration we’ll have to deal with the opposition of low wage workers and cultural conservatives, and this is one way.


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53 Responses to “The real problem is multiple problems”

  1. Gravatar of bill woolsey bill woolsey
    22. January 2011 at 15:23

    I don’t like your description of the end of the high tech boom leads to low interest rates and so housing should expand.

    It isn’t right, but I would use supply and demand. The demand for investment fell, because firms expected less profit from additional high Tech investment. This reduces interest rates, which increases the quantity of investment demanded, including, for example, residential investment. It also reduces the quantity of saving supplied, and so results in more consumption spending.

  2. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. January 2011 at 15:40

    Scott,
    I like the fact you are open to multiple perspectives.

    However, the title of this blog entry reminds me of the phrase that made me fall in love with your blog:

    “The real problem was not a “real” problem at all. It was a nominal problem.”

    From that point on you had me hooked. I thought, “this guy really gets monetary economics”.

    In other words, don’t be too open minded.

  3. Gravatar of Markus Markus
    22. January 2011 at 15:43

    “The initial part of the recession (after December 2007) was caused by both a drop in housing construction, and a drop in auto output as a result of soaring gas prices.”

    So the recession was caused by? Wait, (drum roll) a recession! Well done. That’s why people think you are being superficial. You sidestep the important questions with one tautology after another.
    Tell me why monetary policy was too tight in late 2008. And don’t say because NGPD was about to fall. I want to know why the market needed money that easy. Why is it that markets sometimes seem to have a need for easy money and sometimes they don’t?

    The soaring gas prices is the closest you have gotten so far to a real explanation of what caused the recession. But I doubt you want to tell us that was the main reason.

  4. Gravatar of Morgan Warstler Morgan Warstler
    22. January 2011 at 15:57

    This is categorically the best post you’ve done, and you should repeat those first couple of paragraphs every time you post.

    That said, for 2.5 years I’ve been screaming we should eliminate H1-B restrictions and give a Green Card to every immigrant who can earn 2x the local salary and who buys a house.

    Technology companies would set up shop in Detroit and Cleveland overnight, and import Indians at $45K per year and help them buy a $40K home – until they ran out of fallow housing.

    We’d see massive job shifts back the US in outsourcing.

    BUT, the real reason is not to do it for HOUSING prices.

    What matters in the 21st Century is being the country where the top 5% of the global workforce WANTS to live.

    This is how our own unskilled will earn the greatest amount of money as they cut the hair, clean the yards, take the tickets and cook the fancy meals of the Indians newly moving to Detroit.

    Service sector jobs pay more in direct relation to disposable incomes of the top 20-30% of the population – so we want as many global citizens to take up here as possible.

    This should define out education and tax policies – it is the only VIABLE solution on the horizon.

  5. Gravatar of Indy Indy
    22. January 2011 at 15:58

    Let me tell a little story in a few steps and see if it’s not entirely crazy.

    1. The “housing bubble” positive effect on AD and employment was actually *not* related very much to over-investment in construction activity and employment, but instead on the wealth-effect and “Home-ATM” phenomenon of refinancing, home-equity loans, and Mortgage Equity Withdrawal which spurred debt-financed consumption. The source is the Federal Reserve’s Flow Of Funds data (last update was in December).

    2. Lets take a look at two charts from Calculated Risk (though I always have trouble posting two links in these posts, something doesn’t make the second link click through on your blog), here and here.

    3. That’s a LOT of equity withdrawal – not trivial or dismissible at all. In 2005 it was 700 Billion Dollars. In 2010 it was negative *$300 Billion* – a Trillion dollars a year less spending money – almost 10% DPI. Now that’s going to hurt your AD.

    4. Keep in mind, there’s “only” something like 50 Million mortgages out there. For the average mortgaged household this circus was generating something like an extra $1,000 *per month* in spending money for several years. That’s a massive addition to average household income. But since this kind of activity was concentrated in certain areas, and only certain households participated, we’re talking about some families essentially doubling their consumption this way. Believe me, I saw people actually do it.

    5. Why did they do it? The simple “consumption smoothing” model. On paper, the bubble had made them equity rich, and instead of taking that windfall in one lump sum tomorrow, they were extracting equity and expanding their consumption today far above what their incomes alone could sustain. Some people are savers, but some are spenders, with very high built-in discount rates (look at the popularity of credit cards and payday loans, for example).

    6. Again, consistent with the consumption-smoothing model, even people who weren’t dipping into their “savings” in the form of their home-equity were shifting some money that would have gone into retirement savings into consumption because they felt secure in the value of their one major asset – their home. Also, capital gains *on your home*, and unlike any other investment, are tax-exempt up to $500K for a married couple. More gravy!

    7. All that is over now, obviously. Let’s run a thought-simulation on a consumption smoothing model of someone. You start with a certain income, assets, life-expectancy, discount-rate, time-to-retirement, etc…

    Then you say “one of your assets has now increased unexpectedly in value, and also, it’s expected future appreciation rate has increased. You are wealthier now, and will be wealthier in the future than you expected. Furthermore, if you like, you can get some of those future gains and spend them right now, and banks will bend over backwards to help you.” What happens to their consumption? It goes up.

    Now, you tell them the opposite, “Your major asset has now declined significantly in real value. Because of leverage, perhaps you are now underwater and your equity is completely wiped out. Even if you have some equity left – future expected appreciation is now much lower than what you expected. Your future looks much less wealthy and you’ve got all these debts to pay off. You might want to make some changes if you’re going to live off anything except Social Security when you retire.” Consumption goes down, obviously.

    8. Now, if during this up and down time period, average household incomes didn’t change all that much, you would expect to see something like four phases:

    Pre-bubble: Consumption and Income correlate well and track together.
    Bubble: Consumption deviates upward from it’s share of income (and you might see this manifested, for example, in a decline in the savings rate).
    Immediately-Post-bubble: Consumption rapidly falls, even below it’s historical track with income – because of shock-response deleveraging and nest-eff rebuilding (manifested as a rise in the savings rate).
    Eventually-Post-Bubble: Consumption and Income track each other consistent with Historical norms.

    Ok, that’s long enough I think. To me, this story seems awfully convincing as to what went on and why. All the blog posts out there that over-focus on the construction industry aren’t getting to the heart about the kind of boost to consumption, employment, and general activity that *new, enthusiastic, debt-fueled, non-housing consumption* was making to AD, *fully apart* from construction activity.

    Now you can tell me why this story is bunk.

  6. Gravatar of Indy Indy
    22. January 2011 at 16:00

    Still having trouble with the links, I have no idea why I can’t do more than one. I’ll have to put them in this and another comment. Here’s the second I tried to include.

  7. Gravatar of Indy Indy
    22. January 2011 at 16:01

    And Here’s the first.

  8. Gravatar of Markus Markus
    22. January 2011 at 16:28

    “What matters in the 21st Century is being the country where the top 5% of the global workforce WANTS to live.”

    As this might apply to me, let me emphazise briefly the importance of it.
    I asked myself the question where I want to live several times. And some decades ago there was a simple answer for every open minded young person: USA.
    A couple of years ago I seriously considered it. I was about to apply for a green card. But while thinking about it I realized that the US had lost a lot of its appeal over the last decades. And I don’t even mean that in terms of economics. What’s left of the old American ideals and dreams? Homeland security? The TSA?
    I still haven’t given up on the US and I sincerely hope you guys will come to your senses and one day be the land of the free again. In the meantime I have taken the other direction and live in Asia now.

  9. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. January 2011 at 16:42

    Markus,
    Reflecting on your destination problem reminded me of my father’s choices. My father was a Polish immigrant to the UK during WW II (special forces paratrooper). He never went back to his home country because of the Communist occupation.

    He married my Sottish mother and decided he wanted to choose a future for our family. His choices came down to the following: the US, the UK, Canada, Argentina, Switzerland, and Australia. He decided English was the language of the future and then decided that the US had the best future among those countries.

    Frankly, I’m second guessing my father’s decision. Based on monetary policy, Australia is looking pretty good right now (and it’s not too far from Asia).

  10. Gravatar of Greg Ransom Greg Ransom
    22. January 2011 at 17:45

    Housing asset boom and bust, the Wall Street boom and bust, and NGDP boom and bust find their shared pivot point in the shadow money boom and bust:

    http://faculty.unlv.edu/msullivan/Sweeney%20-%20Money%20supply%20and%20inflation.pdf

    http://hayekcenter.org/?p=2954

    Sweeney and Lantz:

    “the economy can create its own media of exchange in order to economize on the use of inside and outside money when there is significant demand for some type of money for use in purchasing assets. Of course, when assets can themselves serve as collateral, allowing for leveraged purchases, then they take on money-like properties. And when financial assets serve as collateral for borrowing to purchase yet more financial assets (buying on margin) this form of shadow money can become particularly potent in driving asset price overshoots and bubbles.”

    More — Ellen Brown of Global Research summarizes Sweeney and Lantz:

    “Along with the disappearance of the “shadow lenders,” there has been a dramatic decline in something called “shadow money.” The concept of shadow money was presented by two economists from Credit Suisse, James Sweeney and Carl Lantz, in a Bloomberg interview in May. As explained on DemandSideBlog, shadow money is money the market itself creates in order to finance a boom — “money” in the sense of a medium of exchange. In a boom there is not enough cash to go around, so collateral is used as near money or shadow money. Shadow money can include government bonds, private bonds, asset-backed securities, credit card debt (which can be incurred and paid off without drawing on the M1 money stock), and even real estate (when it is highly liquid and easily tradeable) . . .

    Lantz and Sweeney calculate that at the peak of the boom there were six trillion dollars in the traditionally-defined money stock (or money supply). The private shadow stock accounted for $9.5 trillion, and government-based shadow money accounted for another $11 trillion. Thus the shadow money stock dwarfed the traditionally-defined money stock. This can be seen in the chart below provided by Tyler Durden. The blue strips at the bottom, called “outside money,” are dollars printed by the Federal Reserve. The red sections, called “inside money,” are money created as loans by the banks themselves. The green sections, called “public shadow money,” are money created by the government and the Fed as debt (or loans). The purple sections, called “private shadow money,” are the money created as private debt securities by the shadow lenders.

    Lantz and Sweeney estimate the total drop in private shadow money (the purple blocks) during the current credit crisis at $3.6 trillion. This has been offset by an increase in public shadow money, both from the massive borrowing needed to finance the federal deficit and from the aggressive liquidity measures taken by the Fed in converting private securities into loans. Those measures helped prevent an even worse drop in the commercial money supply than actually occurred, but they were not sufficient to eliminate the credit squeeze from lowered commercial lending, which continues to act as a tourniquet on the productive economy.”

  11. Gravatar of Greg Ransom Greg Ransom
    22. January 2011 at 17:54

    The city of Los Angeles spends $1 billion per year on social services for illegal aliens — not including schooling.

    Most non-high school educated illegal immigrants will never come even slightly close to paying the taxes required to educate their kids, supply their health care, and cover all of the other government services spent on the illegal alien population — and this is without even factoring in interest or the costs of sustaining this population, post retirement.

    And most are not high school educated.

    For what it is worth, 2 years ago I counted over 100 illegal aliens looking for work outside of a Home Depot in LA county.

    Illegals I’ve spoken with talk of friends who have moved by south.

    Unemployment rates in many immigrant cities in California exceed 50% …

  12. Gravatar of Greg Ransom Greg Ransom
    22. January 2011 at 18:00

    No, if at all, you’ll retire in Orange County.

    Upper middle class retirees move out of LA, and out of California.

    LA is for the very wealthy, not retired professors.

    California continues to have a significant out-migration of native born Americans.

    And for the first time in its existence as a state, California did not add new Congressional districts.

    I know lots of aging upper middle income people who have made the move out of LA and into OC or San Diego — and others who have moved to Florida, Idaho, and elsewhere.

    Scott writes,

    “I’ll retire in LA where low-cost Mexican labor raises living standards for upper-middle class people like me.”

  13. Gravatar of Greg Ransom Greg Ransom
    22. January 2011 at 18:23

    The state of California’s debt per person is estimated at $20,000.

    We have among the highest tax rates in the country in any number of different tax categories.

    When you move to LA, you will not be Prop. 13 protected in the way that most of your retired neighbors are.

    The city of LA has massive pension obligations, which are unfunded and can’t be funded without massive tax and fee increases.

    Welcome to Los Angeles.

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. January 2011 at 19:06

    Greg Ransom,

    Thanks to you I’m sick of reading how lousy things are in Orange County or California in general. If things there suck so much why don’t you get the heck out? There’s a million places that are probably somewhat less miserable than there (e.g. I’ve lived in Northern Delaware for 47 years and have no real complaints, even now). For God’s sake give us a break!

  15. Gravatar of marcus nunes marcus nunes
    22. January 2011 at 19:32

    Scott
    Correct some dates in this and the previous post. In some places you mean 2008 and write 2009.

  16. Gravatar of scott sumner scott sumner
    22. January 2011 at 19:37

    Bill, That’s actually what I was thinking, maybe I expressed it poorly. (Ironically I often criticize others for confusing demand and Qd shifts.

    Mark, OK, I won’t be too open-minded. I hope to never forget how nominal shocks have more important real effects than most people realize. But I also think that supply-side factors are more important than many realize (although in that case I’d say less than supply-siders think.)

    Markus, You said;

    “So the recession was caused by? Wait, (drum roll) a recession! Well done. That’s why people think you are being superficial. You sidestep the important questions with one tautology after another.
    Tell me why monetary policy was too tight in late 2008. And don’t say because NGPD was about to fall. I want to know why the market needed money that easy. Why is it that markets sometimes seem to have a need for easy money and sometimes they don’t?”

    If you think I’m talking tautologies you don’t understand my argument. I have no idea what you mean by “easy money” so I can’t answer your last question. Each economist I talk to seems to have a different definition of easy money and tight money. Mishkin’s textbook says tight money is when all sorts of asset prices are falling. Are you OK with textbook definitions?

    Morgan, Looks like we agree on immigration.

    Indy, Yes, I can buy the consumption angle–notice Bill’s post says that should happen, so it’s not a stretch.

    But your analysis only gets you so far. People get deep in debt and then there’s a crisis–should they work more or take a vacation? I say work more. But they can only do that (assuming sticky wages) if the Fed provides enough NGDP to make them employable.

    Markus, If I was 25 years old I might also work in Asia. It’s where the excitement is now–things changing so fast. The US still has a better living standard overall, but the recent changes you describe are frustrating.

    Mark, I’ve lived in Australia, and it’s the only place I’ve been that seemed in many ways better than the US on its own terms. (I realize that Japan, France, Denmark, etc, are better by some people’s criteria, but Australia is quite similar to the US, but better in many ways. That’s partly a nicer climate and less crowded conditions, partly a good economy, also partly the informal culture, more like my home state (Wisc.) than where I live now.

    Greg, The Fed can easily offset the impact of changes in private media of exchange, by changing the base.

    I agree that illegals are leaving because of the bad economy.

    OK, maybe we’ll choose Pasadena. Would I get prop 13 protection?

    You make Orange County seem like a disaster area, but last time I was in Newport Beach it seemed like paradise.

    I’m richer than most people with my income, because I’ve saved half my income pretty much my entire life. (And I’m a Boston area homeowner–Boston ain’t cheap.) Most people with my income save very little. Don’t assume I can’t afford LA. On the other hand, if the stock market tanks it may be Fresno instead!

    Mark, Exactly.

  17. Gravatar of DanC DanC
    22. January 2011 at 19:39

    Regions of the country sank for various reasons. An oil price spike, followed by an announcement by the Fed that they were going to raise rates to fight inflation. This was the straw that broke the back of the auto industry in the midwest. The southeast and Nevada saw a drop in tourism (airline tickets increased.)

    California was just crazy with destructive taxes and regulations.

    So Scott is right that many factors came together to create the current mess.

    I think Indy has causation going the wrong way. increases in housing prices had a wealth effect that increased consumption. Plus lenders were willing to allow people to tap home equity at levels that were, at least in hindsight, reckless. Still if home prices were not increasing the problems that you see go away.

    It was rational to invest in housing. Housing in many markets were increasing at rates much higher then the cost of financing the purchase. If I could buy an asset that was increasing at 9% and I could borrow at 4% (after tax incentives) for some window isn’t that easy money?. Given the leverage it is amazing even more people didn’t jump on the speculation game.

    What is even more amazing is the degree to which lenders thought they could transfer the risk away.

    I’m less certain that the country over built homes or that immigration played a major role. Prices for larger homes, with features that were above previous norms, (square feet and add ons) need to adjust down. But for lower income buyers many of their homes were not kept up (home upkeep is expensive above and beyond the basic mortgage). These homes in some markets are not even worth foreclosing. The rust belt is full of these.

    Government programs to encourage home ownership in marginal buyers can destroy marginal communities. For example, a home slips into disrepair dragging down the value of surrounding homes creating a tipping point for those communities.

    The depth of the economic downturn may have been made worse by the government response. Silly stimulus spending for example.

    How monetary policy could have corrected the problem is still, I think, an open debate. One that I am glad people like Scott are exploring

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. January 2011 at 19:54

    Scott wrote:
    “Mark, OK, I won’t be too open-minded. I hope to never forget how nominal shocks have more important real effects than most people realize. But I also think that supply-side factors are more important than many realize (although in that case I’d say less than supply-siders think.)”

    Don’t forget that my research so far has been mostly on the supply side and that the results are probably those that you would agree with. But in general let me say that’s a beautiful response, I could not have said it better.

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. January 2011 at 20:13

    Scott,
    By the way, I’m still glued to Delaware for the moment, but the things you said about Australia are begining to making me salivate. Gosh it sounds like paradise.

    P.S. I have no children or any other reason to hold me here.

  20. Gravatar of Markus Markus
    23. January 2011 at 00:12

    “If you think I’m talking tautologies you don’t understand my argument. I have no idea what you mean by “easy money” so I can’t answer your last question. Each economist I talk to seems to have a different definition of easy money and tight money. Mishkin’s textbook says tight money is when all sorts of asset prices are falling. Are you OK with textbook definitions?”

    Okay, let’s put it this way: Why did the market need a different monetary policy in 2008 than it did in 2003?
    Why did you need a different monetary policy in late 2008 to keep NGPD constant than in other years?

    BTW: If “The recession was caused by a drop in output” doesn’t look like a tautology in your opinion, what is your definition of recession?

  21. Gravatar of jck jck
    23. January 2011 at 02:14

    “The second was caused by a sharp fall in NGDP after June 2009, and led to the failure of Lehman.”
    Lehman failed in september 2008.

  22. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. January 2011 at 02:48

    Scott, thanks for the plug! :)

    You are right, when going for migration, go multi-source. Australia has a considerably bigger percentage of its population overseas born than the US, and manages that pretty well in large part because our migrants come from lots of different places. (The only real misfire in migration was accepting a lot of Muslim Lebanese in a big lump in the 1970s, and even that is a problem only in Sydney, which is — by Australian standards — a dysfunctional city; Christian Lebanese have proved to be no problem because they plug into the Catholic networks.) We are also very good at cherry-picking our migrants — being an island-continent helps.

    That being said, we have two “bubble” issues. The first is we are currently exporting a lot to China: since China’s economy now looks a lot like the Asian economies prior to the 1997 Asian Crisis and the Japanese economy prior to the 1991 Bubble Economy collapse, a bit of a worry.

    The second problem is our housing now looks like California/UK/Ireland before their housing collapses, only more so. Since 1990, owner-occupied and investment property credit has expanded its share of total credit from 23% to 58%. (Business credit has dropped from 63% to 34%.) One-in-ten Australians owns an investment property (pdf). While I agree with Scott that housing is an asset, that still looks very unhealthy to me. As do the house price trends it is all based on. (We have the British/Californian system of complete official control over land use and building, not the Texan/German system of open land use.)

    Australia had its own “bubble economy” burst in 1974 when an extended mining boom within an economic policy regime based on suppression of risk met global stagflation: our economic performance was flat for the next decade.

    I agree entirely with Scott that you cannot predict either time nor level of tipping points: if there was such a reliable predictor, you could not have asset price bubbles because people would not buy at prices which would get “caught” so the tipping point would happen earlier, in a regress which would preclude any bubble happening in the first place. The inability to predict tipping points is necessary for bubbles to happen. (Besides, how can you predict future information?)

    But, after the event, you can look back and say “that was a bubble” because you now know to what degree the expectations of income growth/continuing capital gain were not realised. We do not have an excess of housing, but we have a lot of highly leveraged housing investment based on an expectation of indefinitely continuing capital gain: that is why prices are so high, systematic discounting of downside risk as a result of the dynamics of regulation-constrained supply generating house prices which might still be vulnerable to a terms of trade shift.

  23. Gravatar of Mike Sandifer Mike Sandifer
    23. January 2011 at 04:49

    I’ve long favored open immigration, with the exception of those individuals who may represent criminal liabilities.

    Some of the costs of immigration I often hear mentioned, such as increased social spending, could be alleviated with a shift toward consumption taxes. Perhaps there could even be a special sales tax non-citizens pay, that citizens can avoid by presenting official IDs, perhaps even present in electronic payment methods and/or other methods.

    Maybe we can make obtaining citizenship a simple matter of establishing residency, as an American does when moving to a new state. Perhaps living here continually for a year should be enough.

    Then, what to do about minimum wages? Obviously, keeping these would restrict immigration, to the extent that you think they kill jobs.

    Recently though, I’ve seen some researchers challenge the idea that modest minimum wage increases significantly hurt employment. My immediate thought is, in times of trend growth and 2% inflation, have minimum wage hikes ever affected employment rates much?

  24. Gravatar of StatsGuy StatsGuy
    23. January 2011 at 06:35

    Ssumner:

    “Even the recovery is complex, with the slow recovery being mostly attributable to weak NGDP growth, but also to unusually pronounced wage rigidity triggered by 99 week UI and a 40% minimum wage rise.”

    That’s a little partial to a particular viewpoint. There are likely many reasons associated with slow job growth vs. recovery. Note, as DeLong has observed many times, that the slower response of jobs to economic growth has been occurring over the last two recessions as well (getting worse each time).

    Consider, perchance, much of the slow response may be due to technological changes and/or international trade. The former increases capital specificity of human capital (such that the economy responds slower to structural changes in demand for different sectors, and being out of work even a short while means more rapid loss of value). The latter means that demand for employment in new sectors can often be met abroad, reducing the willingness of companies to invest in training domestically (something US companies have historically done).

    Also, consider the possibility that the 99 week UI is partly a _response_, not a _cause_, of elongated inter-employment times in this recession. I suspect there’s mutual causation, actually, and I’m not endorsing the policy.

    I think Tyler Cowen (who is usually pretty fair) is a little simplistic in his assessment of this blog and your readers. The message you’ve been preaching is mostly “The Fed took a normal recession and made it much worse.” and “Structural adjustment happens much faster when you level target NGDP.”

    I would like to see the real business cycle and austrian folks argue against these positions, but to be fair to them, you have a habit of arguing extreme opposite positions to deliberately challenge accepted opinion.

  25. Gravatar of StatsGuy StatsGuy
    23. January 2011 at 06:53

    Greg Ransom”

    “Most non-high school educated illegal immigrants will never come even slightly close to paying the taxes required to educate their kids, supply their health care, and cover all of the other government services spent on the illegal alien population — and this is without even factoring in interest or the costs of sustaining this population, post retirement.”

    At the current marginal pay for unskilled immigrant labor this may be true. However, the presence of this labor en masse shifts domestic labor into higher value enterprises. Consider what the price of unskilled labor would be without immigrant labor as a more accurate measure of the value of the overall contribution of the entire group of people. (In other words, it’s not that we have immigrant labor, but too much of it…)

    In general, I agree with the point that arguments for free movement of labor (but ALSO goods) ignore huge externalities. A true libertarian could argue that these externalities are created by government policies, but without these policies, we’d have other externalities (higher crime rates, public health problems due to poor vaccination of children, etc.). There’s no clean solution to free movement of people between countries with vast wealth disparities (or, indeed, within such countries).

    At _some_ level, there are certain services that are better to provide publicly (if nothing else, due to transaction costs).

    Scott – to your point about immigration making life better – there was a recent survey pointing to countries with “prosperity”, and many/most of the top countries had very closed borders and little immigration. Many of these countries also (partly because they had such little immigration) were able to sustain large social safety nets.

    Here’s a way of thinking about it – imagine that a _portion_ of economic activity was more efficient to conduct as the level of the community unit rather than the family unit, BUT ONLY if the mechanism of exchange between _small communities_ of people with homogeneous preferences was libertarian at that level. What would you end up with?

    Norway.

  26. Gravatar of Bob Murphy Bob Murphy
    23. January 2011 at 07:34

    Scott wrote:

    The vacancy problem is also multifaceted. Partly it was the bursting of the housing bubble.

    What’s the “vacancy problem” you mean here?

    Also, are you saying money under Greenspan was never too loose? E.g. even from 2003 – 2005, you don’t think any of the housing surge in that period was caused by monetary policy being too easy?

  27. Gravatar of Morgan Warstler Morgan Warstler
    23. January 2011 at 08:11

    “Recently though, I’ve seen some researchers challenge the idea that modest minimum wage increases significantly hurt employment. My immediate thought is, in times of trend growth and 2% inflation, have minimum wage hikes ever affected employment rates much?”

    I’ve been through this, I’ve seen the same wonky studies, you are welcome to actually do the micro instead:

    AT $1 per hour minimum bid on each unemployed’s manweek in a Ebay / Paypal (pre-funded) model… where the government endlessly guarantees added $5 per hour (instead of UI) and at $2 bid begins to add less (4.25), and for each .50 more bid, the government pays .25 cents less, you get a schedules that runs from 13K-21K without any disincentives.

    Thats where we have the real the unemployment the bottom two deciles.

    And that’s the point mark, fancy math will not get you or anyone else around the fact that at $1 per hour, demand will outstrip supply where EVERYONE who wants government aid, and can work, must register and be bid on.

    If we treat our excess capacity as a good, guarantee incomes, we have a MORAL IMPERATIVE to auction off that capacity to the highest bidder.

  28. Gravatar of DanC DanC
    23. January 2011 at 08:24

    Statsguy
    Please don’t ignore the impact of the health care bill on employment. Or the fear of future tax increases and it’s impact on expected returns on investments.

    Or how about a motivation for investing overseas to avoid these problems.

    Or as the cost of labor increases the returns from technological innovations increase.

    The Black Death may have helped spur the Industrial Revolution. The American Civil War helped open the door for immigrants thirty years later. World War II caused shifts in the economy, based in part, on the devastation of populations (especially young males).

    This is different. The destruction is mostly stupid government policies.

  29. Gravatar of Mike Sandifer Mike Sandifer
    23. January 2011 at 09:40

    I’m sick of the way the importance of UI work disincentives are exaggerated. Even considering the loss of the contribution of the direct beneficiaries, the cost is still hardly worth mentioning in my view. Of course, the direct fiscal costs are miniscule.

    I do wonder what those wanting to throw out UI think the unemployed will to do make a living. Are there enough jobs? Will the associated increase in employment create enough AD to spur employment enough to justify the human suffering?

    99 weeks is an arbitrary number and really, the benefits should be extended indefinitely, or maybe indexed to wage increases that reflect a growing demand for labor.

    Is this issue really worth the attention it’s getting, since it’s presumably the lack of stimulus, of whatever flavor, that’s by far the largest cause of unemployment?

    We are nowhere near insolvency as a country and frankly some Euro-sclerosis is vastly preferable to the ignorant and otherwise cruel attempts at cutting benefits.

    I understand it’s an macroeconomist’s job to try to figure out ways to make an economy as efficient as possible, but let’s keep things in proportion. Nothing’s perfect and we have no reason to act like misers. This is by far the wealthiest country on earth.

  30. Gravatar of Mike Sandifer Mike Sandifer
    23. January 2011 at 09:42

    Scott, I want to point out that I’m not referring to you as ignorant or cruel here, but some legislators and policy makers.

  31. Gravatar of Dirk Dirk
    23. January 2011 at 10:46

    Here’s what I don’t understand about NGDP targeting: how do you do it? In the absence of an NGDP futures market, what indicators do you use to determine what trajectory the economy is on so you know what adjustments to make? In your recent post about Charles Calomiris, you suggested that he may have been against QE2 only because he thought the economy was on a different trajectory than you thought it was. How do we know who was right? In that post, you referred to NGDP forecasts in The Economist, but later you acknowledged you don’t believe much in forecasters.

    I got interested the accuracy of NGDP forecasters and read this fairly recent report from Federal Reserve Bank of Philadelphia:

    http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/data-files/NGDP/SPF_Error_Statistics_NGDP_3_AIC.pdf

    It shows that from 1997-2008 the forecasters did no better at forecasting the final adjusted NGDP numbers than a simple autoreggression for periods more than 1 quarter out. (And if one is skeptical they might suspect the only reason they outperform in quarter 1 is because their forecast is made in the middle of it.)( I posted this yesterday at Nick Rowe’s also.)

    Obviously an autoreggression isn’t paying attention to what Ben Bernanke says or does, or what the stock market or the dollar is doing. So, as of this moment, economists don’t seem to be able to incorporate any information into their models to make more accurate forecasts for NGDP than a backward looking AR.

    So how do we target NGDP if it’s a shot in the dark?

  32. Gravatar of Rafael Rafael
    23. January 2011 at 11:46

    Scott,

    This might be of your interest:

    Did Doubling Reserve Requirements Cause the Recession of 1937-1938? A Microeconomic Approach

    http://www.nber.org/papers/w16688

    In 1936-37, the Federal Reserve doubled the reserve requirements imposed on member banks. Ever since, the question of whether the doubling of reserve requirements increased reserve demand and produced a contraction of money and credit, and thereby helped to cause the recession of 1937-1938, has been a matter of controversy. Using microeconomic data to gauge the fundamental reserve demands of Fed member banks, we find that despite being doubled, reserve requirements were not binding on bank reserve demand in 1936 and 1937, and therefore could not have produced a significant contraction in the money multiplier. To the extent that increases in reserve demand occurred from 1935 to 1937, they reflected fundamental changes in the determinants of reserve demand and not changes in reserve requirements.

  33. Gravatar of Morgan Warstler Morgan Warstler
    23. January 2011 at 13:05

    “I do wonder what those wanting to throw out UI think the unemployed will to do make a living. Are there enough jobs? Will the associated increase in employment create enough AD to spur employment enough to justify the human suffering?”

    Mike,

    With a Guaranteed Income, we would be guaranteeing 20M more people the ability to earn (not just receive) $13-21K per year. ANYONE who wanted a job would have one.

    And we’d do it for less than the cost of UI today.

    Do you understand this? Do you get how it would work?

  34. Gravatar of Mike Sandifer Mike Sandifer
    23. January 2011 at 13:55

    Morgan,

    Of course I understand, and I’ve read a formal paper on the subject, but the UI system is the one we have in place. Presumably, it may be more politically feasible to extend current benefits than alternatives.

    But, yes, it’s easy to imagine superior alternatives.

  35. Gravatar of Morgan Warstler Morgan Warstler
    23. January 2011 at 15:41

    “Presumably, it may be more politically feasible to extend current benefits than alternatives.”

    This is nuts. It lacks imagination and borders on nihilism. A policy proposal that removes the Fed’s dual mandate and basically solves for illegal immigration…. has a strong shot at becoming policy. Unlike most memes, it doesn’t have lots of natural predators – save for unions, which I score as near no-factors.

    Systems that are broken, actually have to be fixed, arguing for a new approach to UI, Minimum Wage, and transfer payments in general seem lore likely – than targeting NGDP.

  36. Gravatar of Mike Sandifer Mike Sandifer
    23. January 2011 at 17:59

    Morgan,

    Well, UI benefits have been extended several times and the Fed has gone much further toward long term trajectory NGDP than these sorts of proposals you’re talking about. Yeah, I agree with you in principle, but is there even anything like this being considered in Congress?

  37. Gravatar of scott sumner scott sumner
    23. January 2011 at 18:05

    DanC, I’d put it this way. It was rational of America to have a housing boom. That was a wise use of labor. It was not rational to have a sub-prime mortgage boom, and encourage F&F.

    Mark, Go, it’s a nice place to live.

    Markus, You said;

    “BTW: If “The recession was caused by a drop in output” doesn’t look like a tautology in your opinion, what is your definition of recession?”

    I don’t believe the recession was caused by a fall in output, I believe a recession is a fall in output. I believe it was caused by a fall in NGDP expectations.

    The market needed the same policy in both 2003 and 2008–5% expected NGDP growth.

    jck, Thanks, I fixed the typo.

    Lorenzo, Those are good points about Australian land use. There will be a sharp fall in house prices at some point–a pity they don’t have the Texas/German system, there’s certainly plenty of land in Australia.

    Mike I also favor immigration. I suggested 2% pop. growth not because it’s optimal (I’d favor much more) but because it might be politically feasible.

    Statsguy, You said;

    “That’s a little partial to a particular viewpoint. There are likely many reasons associated with slow job growth vs. recovery. Note, as DeLong has observed many times, that the slower response of jobs to economic growth has been occurring over the last two recessions as well (getting worse each time).”

    Yes, and the UI extension has been getting longer each time (39 weeks, 52 weeks, 99 weeks.)

    You said;

    “Also, consider the possibility that the 99 week UI is partly a _response_, not a _cause_, of elongated inter-employment times in this recession. I suspect there’s mutual causation, actually, and I’m not endorsing the policy.”

    Yes, I must have made the same argument 20 times in this blog.

    But the main problem is off course NGDP, which has nothing to do with technology, etc. If we had 11% NGDP growth like in the 1983-84 recovery, we’d be swimming in jobs.

    You said;

    “Scott – to your point about immigration making life better – there was a recent survey pointing to countries with “prosperity”, and many/most of the top countries had very closed borders and little immigration. Many of these countries also (partly because they had such little immigration) were able to sustain large social safety nets.”

    I’d like to see that study. The US Sweden and Switzerland are “happy” countries with lots of immigration. Vice versa for Japan. You may be right, but those studies are tricky to do.

    (The quotes refer to survey results, who knows what happiness is.)

    I’d be happy if I had as much oil as Norway!

    Bob, The high rate of housing vacancy.

    Mike, You said;

    “I do wonder what those wanting to throw out UI think the unemployed will to do make a living. Are there enough jobs? Will the associated increase in employment create enough AD to spur employment enough to justify the human suffering?”

    I hope this isn’t directed at me, as I didn’t advocate throwing out UI.

    Oops, I should have read this first:

    “Scott, I want to point out that I’m not referring to you as ignorant or cruel here, but some legislators and policy makers.”

    Dirk, You said;

    “Here’s what I don’t understand about NGDP targeting: how do you do it? In the absence of an NGDP futures market, what indicators do you use to determine what trajectory the economy is on so you know what adjustments to make? In your recent post about Charles Calomiris, you suggested that he may have been against QE2 only because he thought the economy was on a different trajectory than you thought it was. How do we know who was right? In that post, you referred to NGDP forecasts in The Economist, but later you acknowledged you don’t believe much in forecasters.”

    You do the best you can by relying on TIPS spreads for inflation, and all sorts of indicators for real GDP. Stocks, private consensus forecasts, etc. But nothing is perfect. Of course if we do level targeting, as we should, there is no doubt we are far below target. It’s a disgrace we have no NGDP futures market, with subsidized trading.

    Rafael, Yes, that’s a good paper. I agree that the effect of reserve requirement increases is overrated. However I have different views on what caused the recession–I focus mostly on wage increases and gold hoarding.

  38. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. January 2011 at 18:20

    Scott wrote:
    “Mark, Go, it’s a nice place to live.”

    Tonight it will be 5 degrees Farenheit here in Northern Delaware and the furnace is already working overtime to heat my oversized house (I’m having nightmares about the “kerching, kerching” going to pay the heating oil man). Northern Australia is sounding better and better all the time.

  39. Gravatar of TGGP TGGP
    23. January 2011 at 19:36

    I agree that Canadian-style genuine multiculturalism is better than biculturalism. I’m less enthused than Adam by the prospect of rising housing prices, but I’m a renter rather than homeowner. I’d like to think though that I had the economic sense to look at lower prices generally as a good thing, even for labor.

  40. Gravatar of Fed Up Fed Up
    23. January 2011 at 22:21

    “My general view of immigration is that it’s a good thing”

    “I’ll retire in LA where low-cost Mexican labor raises living standards for upper-middle class people like me.”

    Let’s set up an immigration program for economists only that drives down wages 50% or more for them. Let’s also keep a price inflation target or NGDP target that means a big hit to their budgets so real earnings go negative and no savings. Maybe economists will never be able to retire then.

  41. Gravatar of Tom Grey Tom Grey
    24. January 2011 at 01:57

    Great post, and comments.
    First, we built too many houses in 2002-06, perhaps due to bad regulation, or maybe bad private sector decisions.

    The housing vacancy metric shows this well.
    I wish you had mentioned your own preferred policy response to this mistake. I believe it would be, Fed to have HIGHER rates, to reduce the money supply.
    But a few lines later you write about this problem:
    Partly it was the bursting of the housing bubble.

    No, not really, unless you mean that vacant houses bought for speculation in a boom are no problem, because of the bubble, but only become a problem when the bubble pops.
    I flatly claim the increase in housing vacancy was the indication of house-buying speculation, on borrowed low-cost money, and was a real problem before the pop. It just wasn’t a nominal problem before.

    2009->2008 typo: It caused RGDP to be flat in the first half of 2009. Then a completely different problem occurred in late 2008, when tight money drove NGDP and RGDP much lower.
    It was “tight money” by what metric??? Interest rates were dropping, fast thru 2008 (reverse chron):
    December 16 … 75-100 0-0.25
    October 29 … 50 1.00
    October 8 … 50 1.50
    April 30 … 25 2.00
    March 18 … 75 2.25
    January 30 … 50 3.00
    January 22 … 75 3.50
    http://www.federalreserve.gov/monetarypolicy/openmarket.htm

    What else were they supposed to do?
    What if NGDP targeting results in the same Fed policy, so it’s not any better?

    Great “wealth effect” consumption boom note, @Indy.

    Too much on immigration in general, without specifying the difference between tough legal immigration (which we need far more of), and too easy illegal immigration, heavily concentrated in the construction industries and other low-capital investment areas. The failure of the data to be good on illegals means the “best” data we have is lousy.

    When illegals leave, as domestic customers of domestic services, there is a lagged effect of much lower sales, tho there can be higher profits (with less employment).

    Another reason for slow job growth is the new cultural idea that the rich are rich enough, and the rich should NOT be getting richer. But it is mostly the rich who hire workers. And they only hire workers to get richer. If the culture doesn’t want the rich to get richer, it shouldn’t expect them to hire workers to get richer — and it’s silly to expect them to hire workers to get poorer!

    Perhaps more economists, professors, and bureaucrats should be out creating new businesses, and hiring folks, rather than paper pushing (or blogging? Oh no! )
    [It looks like I'll be going from Slovakia to Rwanda for some creative destruction soon.]

  42. Gravatar of Joe Joe
    24. January 2011 at 04:06

    Every effect always has multiple “causes” or factors, and mono-causal explanations are always too simple to be complete. You should be beginning with the assumption that there are multiple causes – and this applies everywhere, not just in economics – not “discovering” this universal principle this late in the game.

  43. Gravatar of David E David E
    24. January 2011 at 05:52

    Why is it that small business owners are much more willing to cite the health care bill (and fear of additional regulations) as being a drag on reducing unemployment than economists are?

  44. Gravatar of scott sumner scott sumner
    24. January 2011 at 09:28

    Tom grey, You said;

    “I wish you had mentioned your own preferred policy response to this mistake. I believe it would be, Fed to have HIGHER rates, to reduce the money supply.’

    The Fed should not be targeting rates at all, that’s how we got into this mess. The highest Fed funds rates in my life were around 1980-81, which was also the most expansionary monetary policy of my life. We needed better (not more) regulation of the banking sector. Right now the government subsidizes subprime lending, that’s nuts.

    TGGP, I agree, low housing prices are a good thing.

    Fed up, Yes, that’s what I want.

    Joe, I don’t agree, monocasual explanations can be useful. Sometimes a single shock has a big effect (earthquakes, etc.) Obviously there is always more than one factor, but a single factor explanation can be useful at times.

    David E, Small business owners are likely to talk about what they can easily visualize, like taxes and regs, but not NGDP. Still they often mention low demand, which is essentially NGDP.

  45. Gravatar of Bababooey Bababooey
    24. January 2011 at 09:34

    “I’ll retire in LA [Pasadena] where low-cost Mexican labor raises living standards for upper-middle class people like me.”

    How much of that savings will get lost to sales & income tax (and payroll tax, if you pay above-board), fees & costs?

    Prop 13 freezes your property’s “base year year value” (e.g., what you bought it for) and permits only tiny increases. With property taxes capped at 1%, plus bonds payments, fees and charges, you’ll be at about 1.3% of the base year value. That’s unless Jerry Brown leads a repeal of Prop 13.

  46. Gravatar of Fed Up Fed Up
    24. January 2011 at 16:20

    “Fed up, Yes, that’s what I want.”

    I can’t tell on a blog. Sarcasm or serious?

  47. Gravatar of Scott Sumner Scott Sumner
    25. January 2011 at 14:07

    bababooey, From an economic perspective I’d much rather retire in Vegas or Texas or Florida. But they don’t offer what I’m looking for.

    Fed up, Yes, I favor an immigration policy that would reduce the wages of economists. (I was joking about the specifics of a 50% pay cut, I don’t have a target, but in general more immigration from Asia would increase the supply of economists.)

  48. Gravatar of Fed Up Fed Up
    27. January 2011 at 14:21

    OK. I’m not joking about the 50% wage cut because I have read that meat packers’ wages fell from about $19 per hour to about $9 per hour and dry wallers’ wages fell from about $20 per hour to about $10 per hour because of illegal immigration.

    Let’s say economists’ salaries started falling 4% per year until it totaled around 50%. How would that affect their ability to pay back debt, standard of living in the present, and the ability to save for retirement, assuming prices stay flat to rising 2% per year?

  49. Gravatar of scott sumner scott sumner
    29. January 2011 at 10:34

    Fed Up, They’d have a harder time repaying debt. What’s your specific point? Are you saying you oppose allowing creative destruction? You wish America was still 60% farmers? I favor destroying jobs–it’s how we progress.

  50. Gravatar of Tom Grey Tom Grey
    30. January 2011 at 14:39

    I’m still very unsatisfied, Scott, at what policies you recommend:

    The Fed should not be targeting rates at all, that’s how we got into this mess. The highest Fed funds rates in my life were around 1980-81, which was also the most expansionary monetary policy of my life. We needed better (not more) regulation of the banking sector. Right now the government subsidizes subprime lending, that’s nuts.

    OK: not rates.
    High rates went with expansionary money (??really? didn’t the rates lag?).
    Better regs.
    It’s nuts to subsidize subprime lending.

    The USA in 2011 needs to deal with money using the institutions we have. (echoes of Rumsfeld)
    Saying we should use a different tool [NGDP], one we don’t now have, is very unhelpful for critiquing the past.
    Tho as I write, I’m rethinking (is this your answer?):
    We need NGDP targeting because using rates, like in 2008, doesn’t work in a big bubble pop. And there’s no way of avoiding a bubble pop while allowing financial innovation

    Murphy & Austrians feel the bubble could have been avoided by higher rates, earlier. (So NGDP policy is not needed? is not as good? is not talked about…)

    While I think you’re both right (in the way I understand you, above), I think the NGDP policy need is stronger (Scott wins!), because higher rates in the boom are so politically difficult.

    But I think you, Murphy, and Kling are all wrong on employment, because the not-well counted illegals are drivers of the aggregate GDP data, but aren’t quite in the employment data.

  51. Gravatar of Scott Sumner Scott Sumner
    3. February 2011 at 10:49

    Tom Grey, You said;

    “The USA in 2011 needs to deal with money using the institutions we have. (echoes of Rumsfeld)”

    What does this mean? Is it interest rate targeting? If so, how does that work when rates are stuck at zero? If it’s inflation targeting, then why is the Fed allowing inflation to fall below their 2% targe?. Whatever policy you assume is the current institution, they are doing a poor job.

    You said;

    “Murphy & Austrians feel the bubble could have been avoided by higher rates, earlier.”

    Murphy said we’d have double digit inflation in 2010, I said really low inflation. Who’s model do you trust?

    Interest rates aren’t the price of money, they are the price of credit. The price of money is the inverse of the price level. The level of interest rates doesn’t tell us whether money is easy or tight. The highest rates occured during hyperinflation, when monetary policy is the most expansionary.

  52. Gravatar of Morgan Warstler Morgan Warstler
    3. February 2011 at 12:41

    “Murphy & Austrians feel the bubble could have been avoided by higher rates, earlier.”

    “Murphy said we’d have double digit inflation in 2010, I said really low inflation. Who’s model do you trust?”

    Scott you have ADMITTED money was too loose 200-2006 – why not just say that?

    You have to say that your policy would have tightened up money – which would have kept the really messy stuff from happening.

    The most compelling thing you can say, is not what to do now, it is how if we used you earlier we wouldn’t be in the mess.

    If you WIN that argument, you have the credibility for you now policy proposals.

  53. Gravatar of ssumner ssumner
    5. February 2011 at 09:13

    Morgan, You said;

    “Scott you have ADMITTED money was too loose 200-2006 – why not just say that?”

    Ever since the late Roman Empire? Or is that a typo? Seriously, maybe a bit too loose, but it wasn’t a major factor in the crisis.

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