Krugman’s right; China should stop whining

Paul Krugman recently discussed the charge that QE2 is stoking inflation in the developing world:

Oh, and what about Ben Bernanke? Well, to the extent that emerging markets are insisting on a fixed exchange rate against the dollar in the face of obvious overvaluation, that contributes to the boom and hence to demand. But I don’t think it’s reasonable to demand that the Fed stop fighting US unemployment in order to keep Chinese currency manipulation from leading to cotton hoarding by Chinese farmers.

He’s right, all the Chinese would have to do is raise the value of the yuan.  You might argue that this would slow their economy.  But if inflation is shooting upward they need to slow the (nominal) economy.

For China to blame the US for its inflation, when they refused to cut back on the number of Treasury bonds they bought as a way of tightening monetary policy and boosting the yuan, would be like the US blaming China for high unemployment, when we refused to buy more Treasury bonds to weaken the dollar and boost the prices of commodities, stocks, TIPS and foreign currencies.  Bernanke and company showed in November that they are quite capable of taking affirmative steps to solve our own problems (although I’d like to see even bigger steps.)  Now China needs to show the same can-do spirit, and stop blaming foreigners for its problems.

BTW, it’s good to see Krugman talking about how the Fed is “fighting unemployment.”  A clear message to all those old Keynesians who whine that there is nothing monetary policy can do once rates hit zero.  Their hero FDR didn’t whine that there was nothing he could do about deflation because rates were at zero.  He engaged in level targeting—set a goal of getting prices back up to 1926 levels.  And he got prices rising fast.


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41 Responses to “Krugman’s right; China should stop whining”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. January 2011 at 20:21

    Scott wrote:
    “A clear message to all those old Keynesians who whine that there is nothing monetary policy can do once rates hit zero. Their hero FDR didn’t whine that there was nothing he could do about deflation because rates were at zero. He engaged in level targeting—set a goal of getting prices back up to 1926 levels. And he got prices rising fast.”

    And in that spirit, an oldie but a goodie:

    “December seventh nineteen-hundred and forty-one
    Our land of freedom was defied
    December eighth nineteen-hundred and forty-one
    Uncle Sam replied.
    We did it before and we can do it again
    And we will do it again
    We’ve got a heck of a job to do
    But you can bet we’ll see it thru.
    We did it before and we can do it again
    And we will do it again
    We’re one for all and all for one
    They’ll get a licking before we’re done
    Millions of voices are ringing
    Singing as we march along
    We did it before and we can do it again
    And we will do it again
    We’ll knock them over and then we’ll get the guy in back of them
    We did it before, we’ll do it again

    We did it before and we can do it again
    And we will do it again, we’ll take the nip out of Nipponese
    and chase them back to the cherry trees
    We did it before and we can do it again
    And we will do it again
    When we get going and start to click
    We’ll put the ax in the axis quick
    Millions of voices are ringing
    Singing as we march along
    We did it before and we can do it again
    And we will do it again
    This country never has lost a war since days of William Penn
    We did it before, we’ll do it again
    Millions of voices are ringing
    Singing as we march along
    We did it before and we can do it again
    And we will do it again
    And even though it may take a year
    or two or five or ten
    We did it before, we’ll do it all over again.”

    http://dbellel.blogspot.com/2007/09/we-did-it-before-and-we-can-do-it-again.html

  2. Gravatar of CA CA
    29. January 2011 at 21:18

    Today on his nationally syndicated radio show, Larry Kudlow was blaming Bernanke for food riots across the world, and even(no I’m not kidding) blamed Bernanke for the social upheaval in Egypt-again, suggesting Bernanke-induced inflation led to the uprising.

  3. Gravatar of Full Employment Hawk Full Employment Hawk
    29. January 2011 at 21:30

    Many Keynesians are increasingly accepting the reality that the expansionary fiscal policy that they want is not going to happen under the current political environment and that if they want the economy grow more rapidly to bring the unemployment rate down, monetary policy is currently the only game in town. Quasi-monetarists need to agressively push for a more expansionary monetary policy. This is a great opportunity to demonstrate that monetary policy can still be effective when the federal funds rate reaches the zero rate floor. And they need to debunk ideologues like Kudlow.

  4. Gravatar of scott sumner scott sumner
    30. January 2011 at 06:05

    Mark, That’s the spirit.

    CA, Of course the charge is not true, and if it was shouldn’t Bernanke be praised for fermenting revolution against a tyrant?

    Full Employment Hawk, All good points.

  5. Gravatar of david david
    30. January 2011 at 06:08

    This is a test. Did something eat my earlier comment?

  6. Gravatar of david david
    30. January 2011 at 06:11

    Okay, I think the spam filter is chewing my comments. Sorry for commenting multiple times. TL; DR version – you may be interested in Bagehot at The Economist’s latest blogpost.

  7. Gravatar of Morgan Warstler Morgan Warstler
    30. January 2011 at 07:25

    Scott, don’t worry we don’t blame you personally for food riots in Egypt… yet.

    When the hordes are roaming the streets because their food prices are up 50%, please keep talking about China.

    Man up Scott, look the camera in the eye and say, “Other countries may suffer political unrest, but that is not my concern – my concern is maximizing US advantage with monetary policy.”

  8. Gravatar of Full Employment Hawk Full Employment Hawk
    30. January 2011 at 08:10

    “Man up Scott, look the camera in the eye and say, “Other countries may suffer political unrest, but that is not my concern – my concern is maximizing US advantage with monetary policy.”

    When foreign countries shoot themselves in the foot with counterproductive economic policies, like China is doing in keeping its currency undervalued, that is no reason for the United States to bail them out by keeping the U.S. economy depresssed.

    China is a classical case. The inflation in China appears to be largely composed of increases in food prices. Letting the Yuan (or Remibi for purists) rise to its equilibrium value would reduce the price of imported food, like from the United States, and directly reduce the inflationary pressure.

    In any case the increase in the price of food is the work of the law of supply and demand and not U.S. monetary policy. The recovery of the emerging economies has increased the demand for food while poor harvests have reduced the supply. Therefore this is caused by the real sector of the world economy and would happen regardless of what happens in the monetary sector.

  9. Gravatar of Full Employment Hawk Full Employment Hawk
    30. January 2011 at 08:16

    Also, countries that are suffering from inflation have a remedy, less expansionary monetary policy. If they fail to take the available domestic action to control their inflation, that is no reason for the U.S. to bail them out by keeping the U.S. economy depressed.

  10. Gravatar of Morgan Warstler Morgan Warstler
    30. January 2011 at 08:53

    “In any case the increase in the price of food is the work of the law of supply and demand and not U.S. monetary policy.”

    Do you think before you post this stuff?

    2008 – the US dollar is falling, and it is well known to the point where the Saudi minister puts an exact number on it, he says, “For every 1% drop in the dollar, the price of oil goes up $4 per barrel.”

    We see food prices spike aggressively. Now you can pretend, it was ethanol, or you can pretend China wanted more beef – but what we were actually being told by everyone from WalMart to ADM to Kraft Nabisco, was that rising prices on pesticides, fuel, energy were forcing price increases.

    And then when we saw oil prices tumble, we have seen price cuts in every grocery store – and now they head back up – as commodity prices are going up.

    So again just say it clearly, US monetary policy is able to drive prices up globally, and you don’t care.

    That’s an fine answer, but say it – stop talking about China. There are riots in Egypt. Talk about Egypt. They have no oil. Their major economic strength is peace with Israel. Food prices are meaningful.

  11. Gravatar of Dirk Dirk
    30. January 2011 at 09:33

    Maybe I am wrong, but shouldn’t Egypt be a net beneficiary of higher commodities prices? I understand, of course, that that doesn’t necessarily benefit the poorest Egyptians at the moment.

    Or does the oil and cotton they export not make up for the food they import?

  12. Gravatar of justanothereconomist justanothereconomist
    30. January 2011 at 14:48

    Scott-

    Maybe Roosevelt had that target, but he didn’t try very hard to hit it- recovery was weak until the fiscal stimulus drive of 1939-1941.

    The GDP deflator for 1926 is 10.75 [2005=100] In 1941 the deflator was 9.28. It wouldn’t exceed the 1926 level until 1944 when it reached 10.80, after several years of war. I guess Roosevelt could only hit his target until he was almost in his fourth term?

    Incidentally, Nominal GDP per capita, which is at $781.97 in 1926, was still below this level in 1940 [767.47]. 6 years after the gold depreciation! While the depreciation helped the US economy turn the corner, recovery was very weak until fiscal stimulus finally kicked in.

    To get a better look, let’s examine monthly industrial production data from HSUS (Cb30). The lowest level of industrial production in 1926 is 7.909. By June 1938, the recession had undone all the work of the gold depreciation, and industrial production sat at a level of 7.19, below the levels of 1926 (and far below 1929). So the gold depreciation, while helpful at ending the collapse, was not enough to generate a robust recovery.

    Despite the presence in the this period of the Wagner Act, Minimum wages, high marginal tax rates, etc. all the things that right-wingers would say were preventing recovery were in place. Of course none of it impeded recovery once there was sufficient spending.

    From the lows of June 1938 (7.19) (still below 1929 levels), Industrial Production would *more than double* to 14.997 in November 1941. There’s no way to blame this on wartime rationing, central planning, drafts, etc. All spending that occurred under peacetime capitalism.

    Unfortunately the only way to get sufficient spending in a democracy is war. It’s unfortunate, but it doesn’t change the facts that spending got us out of the Great Depression. See Gordon’s recent paper for a good exposition.

  13. Gravatar of Full Employment Hawk Full Employment Hawk
    30. January 2011 at 15:11

    “For every 1% drop in the dollar, the price of oil goes up $4 per barrel.”

    Things are not that simple. In spite of what the oil minister said, the dollar price of oil also depends on the world demand for oil and as the emerging economies boom and the world demand for oil increases, the price of oil goes up, even with the dollar exchange rate unchanged. Where is your proof that the increase in the dollar price of oil is primarily due to the return of the trade-weighted dollar exchange rate to approximately to the 1997 level, rather than the increase in the demand for oil in the booming emerging nations?

    Obviously a decline in the dollar causes the price of oil in the United States to increase since it will increase the dollar price of oil at any given world demand for oil. But in the United States this is offset by the disinflationary pressure from the idle resources, so that the disinflation continues.

    As far as the price of food abroad, the United States is one of the world’s leading producers and exportes of food and a decline in the dollar with respect to foreign currencies will make U.S. produced food less expensive abroad. This puts downward pressure on the world price of food.

    As far as the price of oil in other food exporting countries are concerned, the decline of the dollar against their currency will mitigate the effect of the increase in the dollar price of oil in terms of their own currencies. A complete analysis of the degree that it does that requires more than a simple comment.

    As far as who does not care is concerned, a good case can be made that you don’t care about the hardship the high unemployment is imposing on American workers, but I am not interested in exchanging insults.

  14. Gravatar of Dirk Dirk
    30. January 2011 at 15:30

    I spent the afternoon talking with investment bankers who seem to think QE2 is causing rise in commodities prices around the world, but I still don’t get how that could be the case. Specifically in the case of oil — and I was talking to oil investment bankers — they think that because oil is denominated in dollars that when the dollar declines relative to oil that means the whole world is paying more for oil. I don’t see why that should make any difference, unless an importer is pegged to the dollar. Sometimes I think even Wall Street folk get half their opinions from CNBC.

  15. Gravatar of Full Employment Hawk Full Employment Hawk
    30. January 2011 at 15:32

    Obviously the United States will demand more resources at potential output than when it is depressed. Therefore if economic stimulus returns the U.S. economy to potential output, this increased demand for oil and other raw materials will increase their world price, whether quoted in dollars or not. But should we really keep the U.S. economy depressed in order to hold the world prices of these resourced down?

  16. Gravatar of scott sumner scott sumner
    30. January 2011 at 15:33

    David, Thanks, I’ll take a look.

    Morgan, You said;

    “Man up Scott, look the camera in the eye and say, “Other countries may suffer political unrest, but that is not my concern – my concern is maximizing US advantage with monetary policy.””

    I’m not a racist, and if I was I certainly wouldn’t brag about it.

    You said;

    “Talk about Egypt. They have no oil.”

    Hmmm, when did they run out?

    Dirk, Good questions.

    justanothereconomist,

    You need to do your homework on the Great Depression:

    1. Between March 1933 and July 1933, the WPI rose 14%, and industrial production rose 57%. That’s probably the fastest growth in AD in American history, and it was triggered by expansionary monetary policy (dollar devaluation). IP regained half the losses of the previous 4 years in just 4 months. So much for the Keynesian liquidity trap theory. Without the NIRA the Great Depression would have been over by 1935.

    2. In late July 1933 FDR raised wages roughly 20% by executive fiat. Nearly 2 years later IP was still LOWER than the July 1933 peak. He aborted a promising recovery. This occurred even though AD continued to rise, as did prices. So much for your theory that higher wages under the NIRA did not slow the recovery. Indeed there were 5 government created wage shocks during the New Deal, all five sharply slowed the growth of IP.

    3. FDR gave up on the dollar depreciation program in January 1934, before pre-Depression price levels were reached. Later he admitted that was a mistake. His advisers told him (wrongly) that it was enough to restore pre-Depression price levels.

    4. The NIRA was declared unconstitutional in May 1935, almost immediately IP started rising fast.

    6. Another wage shock occurred in late 1936 and 1937, as a result of the Wagner Act, the recovery slowed, and then IP fell sharply when gold hoarding led to renewed deflation.

    7. The first two minimum wage increases, late 1938 and late 1939 led to 4 to 6 month pauses in the recovery of IP.

    8. FDR’s monetary policy produced rapid growth in NGDP. When FDR didn’t screw things up with wage shocks, RGDP also grew fast. When he artificially raised wages, the recovery stalled. Krugman doesn’t know any of this as he’s never really studied the Great Depression.

    The Great Depression is a textbook example that monetary policy is highly effective at zero rates, and that wage raising policies are a disaster.

    The only think I agree with in your comments is that the huge military buildup after the invasion of France in mid-1940 led to a faster recovery. (As did the gold inflows, as Christy Romer pointed out.) Since we aren’t going to do that again, monetary policy is a much more sensible option today.

  17. Gravatar of scott sumner scott sumner
    30. January 2011 at 15:36

    Dirk, I think QE2 is raising dollar prices of commodities, although other factors like the boom in China are probably more important. But it doesn’t raise prices in foreign countries unless their central banks let prices rise.

    FEH, That’s exactly right.

  18. Gravatar of Full Employment Hawk Full Employment Hawk
    30. January 2011 at 15:40

    “I don’t see why that should make any difference, unless an importer is pegged to the dollar.”

    Clearly there are many people on Wall street who do not seem to understand that at a first level of approximation, if foreign countries let their currency float against the dollar, any increase in the dollar price of oil CAUSED BY THE DEPRECIATION OF THE DOLLAR should be offset by the increase in their exchange rates, so that the price of petroleum in terms of their own currency remains unchanged.

  19. Gravatar of David Pearson David Pearson
    30. January 2011 at 16:09

    Scott,

    Raising the value of the Yuan would of course re-transmit inflation back to its source: the U.S.

    4q10 import prices from China accelerated to a 4% annual rate. This is the fastest rate since the summer of 2008, when the Yuan was appreciating faster and our headline inflation also reached 4%. A China revaluation would likely result in China import price inflation of over 5%. It would also provide a price umbrella for other emerging market revaluations. Lastly, the higher China domestic demand created by a reval would place yet more upward pressure on dollar commodities prices.

    You say you want more inflation, and it is precisely the import/commodities channels that will produce it should China revalue. What are the implications for U.S. domestic demand? In theory, lower real wages lead to higher employment and income. In reality, higher prices at Walmart and the pump would hurt consumer confidence. Further, businesses would face margin pressure that would make future returns on investment uncertain. Its getting from the “point A” of falling real wages to the “point B” of higher employment that seems problematic.

    I find it interesting that interventionists deny the Fed is responsible for rising dollar food and energy prices globally. My question is, how exactly do you think the Fed SHOULD create inflation? By raising causing shelter prices to rise with 10+ months of inventory? A difficult proposition. What little increase in TIPS inflation expectations we have seen (since QE2 was signaled) is due to rising commodity prices. Should they stop rising, TIPS inflation expectations would likely crash.

  20. Gravatar of justanothereconomist justanothereconomist
    30. January 2011 at 16:39

    Scott-

    1) I agree that the depreciation allowed the USA to turn the corner. Depreciation continued until January 1934, when it stopped. The price of gold went from $20.67 to $35, and yet nominal GDP increased nowhere near as much. Can your theory explain this? I think not.

    2)”In late July 1933 FDR raised wages roughly 20% by executive fiat. Nearly 2 years later IP was still LOWER than the July 1933 peak.”

    Yes, and prices rose as well. Wages continued to rise, throughout even in the 1939-1941 recovery. Does your theory of real wages explain any of the 1939-1941 recovery? No, as real wages rose sharply with NGDP.

    3)”His advisers told him (wrongly) that it was enough to restore pre-Depression price levels.”

    But he didn’t restore pre-Depression levels until the 1940s. If pre 1929 price levels had been restored this would have been great, but monetary stimulus wasn’t enough for this, despite a massive depreciation.

    4. “The NIRA was declared unconstitutional in May 1935, almost immediately IP started rising fast.”

    NIRA was bad, we agree. But wages continued to rise in the recovery, which doesn’t fit with a theory that a weak recovery is largely determined by real wages.

    Let’s put it this way- extend your famous real wage/industrial production graph. Instead of stopping in 1939, show from 1938-1941, and you’ll see that industrial production and real wages are moving together (apart if one is inverted). There is nothing special about 1939, other than it being a decade after 1929, so there’s no reason to end there. In 1939, the final recovery was just beginning.

    6. The Wagner Act was passed in 1935. I don’t get why 1936 and 1937 matter, maybe you can elaborate? In any case, it’s still in place in the runup to the war, when the recovery acceleerates.

    7. Here is the industrial production data for jan 1938-dec 1939. (year+month/12)

    Where’s the dreadful effects of minimum wage? The National Labor Standards act is signed in June 1938, when Industrial production is at its trough. If anything, the expectations of the minimum wage seem to drive the recovery- it’s hardly evidence of negative impact of the legislation on industrial production.

    1938.083333 7.259
    1938.166667 7.327
    1938.25 7.43
    1938.333333 7.259
    1938.416667 7.19
    *1938.5 *7.19
    1938.583333 7.567
    1938.666667 8.149
    1938.75 8.628
    1938.833333 8.868
    1938.916667 9.039
    1939 8.799
    1939.083333 9.039
    1939.166667 9.039
    1939.25 9.039
    1939.333333 8.868
    1939.416667 8.902
    1939.5 9.21
    1939.583333 9.381
    1939.666667 9.518
    1939.75 10.237
    1939.833333 10.888
    1939.916667 11.196
    1940 11.128

    8. I’m not interested in what Krugman thinks. Gordon is the one to check out. http://www.nber.org/papers/w16380

  21. Gravatar of Morgan Warstler Morgan Warstler
    30. January 2011 at 18:53

    http://www.almasryalyoum.com/en/news/petroleum-expert-egypt-oil-and-gas-may-dry-2020

    “Egypt has been a net importer of petroleum and gas for some time, since its production no longer meets domestic demand, said Abdallah.”

    Who called you a racist Scott, I simply noted that you like DeKrugman changed the topic of ME Unrest due to food prices into a discussion about China.

    You could say:

    1. Food prices globally are not higher in dollar terms because of US Monetary policy – which seems specious.

    2. Who cares? Let those other countries print more money.

    3. They aren’t rioting over food prices.

  22. Gravatar of Full Employment Hawk Full Employment Hawk
    30. January 2011 at 19:41

    “Food prices globally are not higher in dollar terms because of US Monetary policy – which seems specious.”

    To the extent that monetary policy has increased output and income in the United States so that domestic consumption of food has increased, this has increased the dollar price of food. And to the extent that increased output and income in the United States has had a stimulative effect on other economies, so that the people in those countries consume more food this will also have increased the dollar price of food. Clearly an increase in the demand for food by the United States and other countries will increase the price of food. But that is the extent of the effect of U.S. monetary policy.

    The problem with the argument that expansionary monetary policy, by causing the depreciation of the dollar, has increased the dollar price of raw materials, like petroleum, that are denominated in terms of dollars, is that, when the dollar depreciates the price of the dollar in terms of the foreign currencies also decreases, so that, at a first level of approximation, the price of the raw materials in terms of the countries’ own currencies, which is what matters to them, remains unchanged (provided, of course that the do not peg their currency against the dollar). There is every reason to concude that the main increase in the world price of food faced by these countries is caused by an increase in demand for food in the booming emerging countries (not just China) and bad harvests in parts of the world, a fundamental response to the law of supply and demand.

    In addition, the United States is one of the world’s leading producers and exporters of food. A decline in the dollar reduces the price of food in terms of the foreign currencies and puts downward pressure on the world price of food.

  23. Gravatar of Full Employment Hawk Full Employment Hawk
    30. January 2011 at 19:52

    There is a vocal anti-recovery faction among conservatives which are desperately looking for arguments against stimulating the U.S. economy to bring the unemployment rate down at a significant rate. (Obviously quasi-monetarists do not belong to this faction.)

    If the argument that the unemployment rate is largely structural does not stand up to scrutiny,

    And the claim that expansionary monetary policy will cause inflation in the U.S. is falsified by the fact that the United States is experiencing disinflation, all is not lost.

    Try arguing that the expansionary monetary policy is the main cause for the increase in the price of food abroad and the rioting.

    (And I haven’t even mentioned the devotees of Austrian economics, in its current interpretation.)

    The primary divide with respect to macro policy is currently between the recovery faction, which wants to stimulate aggregate demand to make the economy recover more rapidly and the anti-recovery faction which is ideologically opposed to this (what Krugman calls the “pain caucus.”)

    Keynesians and Quasi-Monetarists disagee about what is the best way to stimulate aggregate demand, but are both on the same side in this divide, they are members of the recovery faction.

  24. Gravatar of Full Employment Hawk Full Employment Hawk
    30. January 2011 at 20:04

    “Raising the value of the Yuan would of course re-transmit inflation back to its source: the U.S.”

    Since the U.S. economy is currently experiencing disiflation, how is the U.S. the source of the inflation? China’s policy of undervaluing the Yuan(or Remibi)in terms of the dollar is the source of inflation in China.

    The real exhange rate of the Yuan relative to the dollar is too low. But there are two ways a real exchange rate can go up.

    1. An increase in the nominal exchange rate.

    2. An increase in the price level in China with the nominal exchange rate unchanged.

    Due to the unwillingness of China to allow the first option, the real exchange rate is now adjusting up through the second mechanism. Due to the fact that prices are sticky in the short run, that the Chinese economy far from being a fully a free market, and the existence of exchange controls, the second adjustment process is slower, but in the long run, market forces will win out.

  25. Gravatar of Jon Jon
    30. January 2011 at 20:18

    Its clear now that we are most definitely not in a liquidity trap. Our greatest danger is the slavish devotion of our President and his Allies to their debt fueled fiscal policies creating ever more dead-weight loss and inefficiency.

    Now I hear that Chinese are investing in the thorium fuel cycle. The SOTU was so flat, no vision. If this is a sputnik moment, our course seems bleak with Obama at the helm.

    Let’s hope Krugman is finally losing faith too–willing to put his country ahead of his politics.

  26. Gravatar of Benjamin Cole Benjamin Cole
    30. January 2011 at 21:53

    Oh, Boo-hoo-hoo, the Chinese have complaints about trade?

    Yeah, and Milli Vanilli says the world needs more authenticity.

    Liberace said conspicuous consumption was in poor taste.

    Richard Nixon said the key to leadership was to be seen as creditworthy.

  27. Gravatar of david david
    31. January 2011 at 01:15

    Hmm, no, the comment is still tripping the spam filter, I think. Weird.

  28. Gravatar of marcus nunes marcus nunes
    31. January 2011 at 04:30

    Scott: But Krugman may be wrong in putting the blame on the 1893-97 “depression” on Gold. Check this out:
    http://thefaintofheart.wordpress.com/2011/01/31/uncanny-resemblance/

  29. Gravatar of Scott Sumner Scott Sumner
    31. January 2011 at 09:52

    David; You said;

    “Raising the value of the Yuan would of course re-transmit inflation back to its source: the U.S.”

    Yes, but I favor targeting NGDP, which is not affected by import prices.

    You said:

    “You say you want more inflation, and it is precisely the import/commodities channels that will produce it should China revalue. What are the implications for U.S. domestic demand? In theory, lower real wages lead to higher employment and income. In reality, higher prices at Walmart and the pump would hurt consumer confidence. Further, businesses would face margin pressure that would make future returns on investment uncertain. Its getting from the “point A” of falling real wages to the “point B” of higher employment that seems problematic.”

    This is precisely why it is so misleading to talk about inflation, and why it is much better to focus on NGDP. If inflation rises but NGDP growth is slow, it doesn’t create jobs, just as you said. (And example is the first half of 2008.)

    You said;

    “I find it interesting that interventionists deny the Fed is responsible for rising dollar food and energy prices globally.”

    What is an interventionist? I don’t consider myself to be one. I favor a stable monetary policy rule, implimented by the market. I do believe that QE2 raised commodity prices in dollar terms, and welcome that increase. I don’t think it caused commodity inflation in yuan terms, that’s on the PBOC.

    Justanothereconomist; You said:

    “1) I agree that the depreciation allowed the USA to turn the corner. Depreciation continued until January 1934, when it stopped. The price of gold went from $20.67 to $35, and yet nominal GDP increased nowhere near as much. Can your theory explain this? I think not.”

    If by “my theory” you mean the articles I have published on the interwar gold standard, obviously it can and does explain this pattern. The US sharply increased its real demand for gold in the 1930s. You may not agree with my theory, but you can’t claim it doesn’t explain it.

    You responded to me;

    “2)”In late July 1933 FDR raised wages roughly 20% by executive fiat. Nearly 2 years later IP was still LOWER than the July 1933 peak.”
    Yes, and prices rose as well. Wages continued to rise, throughout even in the 1939-1941 recovery. Does your theory of real wages explain any of the 1939-1941 recovery? No, as real wages rose sharply with NGDP.”

    Yes, prices rose between July 1933 and May 1935, but far less than wages, so real wages rose dramtically. Real wages were highly countercyclical throughout most of the Depression. You are right about 1940 and 1941, as I said the huge military buildup was an important factor during that period. My gold and wages model explains up until early 1940, your fiscal stimulus model explains the tail end of the Depression.

    You said;

    “But he didn’t restore pre-Depression levels until the 1940s. If pre-1929 price levels had been restored this would have been great, but monetary stimulus wasn’t enough for this, despite a massive depreciation.”

    I don’t see how that conflicts with what I said. Look, the inflation we got was plenty to restore full employment by 1935. During the 1921 recession wages fell sharply and we quickly got back to full employment at a much lower price level. If FDR hadn’t raised wages 20%, the dollar depreciation would have looked like a huge success in real terms. It was a huge nominal success, nominal GDP rose very rapidly. Unfortunately because of the wage shock more of that increase was inflation, and less was RGDP, than would have normally occurred.

    You said;

    “NIRA was bad, we agree. But wages continued to rise in the recovery, which doesn’t fit with a theory that a weak recovery is largely determined by real wages.”

    I don’t know what series you are using. I use monthly nominal manufacturing wages deflated by the WPI. Annual data in the Depression is almost worthless, as there were many high frequency shocks. As I recall, real wages were flat during the upswing of late 1935 and 1936, or maybe even down a bit. Then real wages rose strongly in 1937, when the recovery first stalled, and then relapsed into depression.

    I have never claimed real wages tell us everything we need to know, but I look at high frequency fluctuations because they are the most informative. The 1930s saw the fastest gains in technology of the 20th century, so the economy was able to gradually recover despite somewhat higher real wages. But the recovery always seemed to stall after a sudden surge in wages, at least until 1940.

    You said;

    “6. The Wagner Act was passed in 1935. I don’t get why 1936 and 1937 matter, maybe you can elaborate? In any case, it’s still in place in the runup to the war, when the recovery acceleerates.”

    The Wagner act was different than the NIRA. It didn’t force up wages, it made unionization easier. We have numbers on unionization, and the big surge was late 1936 and 1937. That’s also when the nominal and real wage surge shows up.

    I’m going to respond to your 1938 data with a separate comment, so I don’t lose this whe linking to older posts.

  30. Gravatar of Scott Sumner Scott Sumner
    31. January 2011 at 10:19

    justanother economist:

    This post discusses the data suggesting wage shocks slowed the recovery. I’d be the first to admit that the two minimum wage increases were an order of magnitude less important that the two NIRA shocks, or the Wagner act unionization drives. I used the Fed’s IP series, as Miron-Romer is flawed. See what you think.

    http://www.themoneyillusion.com/?p=48

    By the way, nominal wages did fall somewhat in the 1937-38 recession, so that needs to be taken into account when you say the Wagner Act was still in effect during the final recovery from the recession. And I’m not arguing wages prevented recovery, I’m arguing they delayed recovery.

    The graph in the link below shows real wages and IP during the 1930s. The real wages are inverted to make it easier to see the strong countercyclicality. I do stop at 1940, because as you point out the strong fiscal push did speed up the recovery, despite fairly high real wages.

    http://www.themoneyillusion.com/?p=4220

    Take a look at 1933, a good example of why high frequency data is essential, and it also shows how rapid the recovery was during dollar depreciation, before wages were raised sharply. BTW, I am not blaming workers for the Depression. The cause was conservative economic policies like tight money and Smoot-Hawley, under Herbert Hoover. The NIRA was a reaction to that failure.

    Morgan, Food prices are higher in dollar terms because of easy money, and also because of booming demand in developing countries, where people are now rich enough to eat meat. My hunch is that the latter effect is more important, but I don’t recall denying the former.

    Full Employment Hawk, You said;

    “Keynesians and Quasi-Monetarists disagee about what is the best way to stimulate aggregate demand, but are both on the same side in this divide, they are members of the recovery faction.”

    Yes, and I’d go even further. Some Keynesians say monetary stimulus is also the best way, but they favor fiscal stimulus because the Fed won’t do it (enough.) (Here there are slight differences from one Keynesian to another.)

    Jon, Yes, it’s clear that liquidity traps aren’t holding back monetary stimulus. QE2 did work a little bit. If we want more—do more. Don’t waste more money on big deficits.

    David, Sorry, I don’t know how the span filters work. Is there something we could Google to look at the site you wanted to show?

    Marcus, Thanks for that link I think it partly depends on what one means by “putting the blame on gold.” In Krugman’s defense, the fear of devaluation led to hoarding of gold, which led to a higher purchasing power of gold. Or maybe some supply leaving the US.

    Friedman’s right that better policies could have prevented this, but my criticism of the gold standard is that we often don’t get “better policies” as there was a lot of debate at that time about what the country should do. Indecision creates problems. (And I think Friedman would agree with this.) Of course critics of fiat money point out that we also generally don’t get optimal fiat policies. So we are comparing the lesser of evils.

  31. Gravatar of ssumner ssumner
    31. January 2011 at 10:28

    Justanothereconomist. I recall reading that during WWII the US government basically told manufacturers that they would buy as much war material as the factories could churn out, at a price set above MC. That’s a very different type of fiscal stimulus from anything we have today. Imagine the current US government telling business “we’ll buy all the steel, cars, washing machines, houses, etc, that you can produce, at a price equal to your normal list prices. IP would rocket upward so fast your head would spin. I’d never deny that that sort of stimulus would quickly put people back to work. I still think monetary stimulus is more efficient, but I’d never deny that could “work” in a crude GDP sense. If you are talking about stuff we really (supposedly) need, like high speed rail, it might take too long to get all the premits approved; construction might occur when the recession is already over. The modern economy is much more complex.

    I’m not dogmatically opposed to fiscal stimulus, just skeptical about its effectiveness for all sorts of reasons, including monetary offsets.

  32. Gravatar of David Pearson David Pearson
    31. January 2011 at 14:30

    Scott,

    In response to my argument that commodity/import inflation would hurt consumer confidence and employment, you said, “This is precisely why it is so misleading to talk about inflation, and why it is much better to focus on NGDP. If inflation rises but NGDP growth is slow, it doesn’t create jobs, just as you said. (And example is the first half of 2008.)”

    I think “create jobs” needs to be better defined. 2% RGDP growth creates jobs (about 120k a month), but it is too slow to reduce unemployment. A combination of 2% RGDP growth and 4% inflation yields an NGDP rate overshoot. Repeat for a few years and you have even a level overshoot. Would the Fed tighten if unemployment were 9%? Of course not. This is a recipe for inflation accelerating in the face of a manacled Fed: a predictably asymmetric scenario under a “rules-based” policy.

    And why should inflation stay at 4% in the above scenario? Why not accelerate? After all, if they perceive the Fed’s hands are tied, speculators would seek further gains from commodities, and other countries will defend against imported inflation with more revaluation (raising our import prices). Inflation would have a self-reinforcing dynamic at that point.

  33. Gravatar of Morgan Warstler Morgan Warstler
    31. January 2011 at 15:04

    “While the mainstream media focuses on the political aspects of this turmoil, they are overlooking the impact of rising inflation, driven mainly by record food prices. For example, former Bush advisor Dan Senor notes that Egypt is the world’s largest wheat importer. Yet because of skyrocketing prices, Egyptian inflation is now over 10 percent, while some experts estimate that Egyptian food inflation has risen as much as 20 percent.

    So I have to ask this tough question: Is Ben Bernanke’s ultra-easy QE2 money pump-priming partially to blame?

    Commodities are priced in dollars, and the Federal Reserve has been overproducing dollars for more than two years. Consequently, emerging markets throughout the world — and the food sector in particular — are suffering from rising inflation.

    The CRB food index is up an incredible 36 percent over the past year, including 8 percent year-to-date. Raw materials are up 23 percent in the past year. Inflation breakouts have occurred in China, among various Asian Tigers, and in India, Brazil, and other Latin American countries. Even Britain and Germany are registering higher inflation readings.

    In dollar terms, the price of wheat has soared 114 percent over the past year. Corn has surged 88 percent. These are incredible numbers.”

    http://www.nationalreview.com/articles/258506/bernanke-and-ethanol-sink-egypt-larry-kudlow

  34. Gravatar of Morgan Warstler Morgan Warstler
    31. January 2011 at 15:06

    Scott this is not the way to convince people you are the next Friedman:

    “I’m not dogmatically opposed to fiscal stimulus, just skeptical about its effectiveness for all sorts of reasons, including monetary offsets.”

    If you wanna go to the dance, you kinda gotta plan on just dancing with them!

  35. Gravatar of Stuart Stuart
    31. January 2011 at 17:35

    You tell him Morgan!

    Damn tricky how QE2 caused the world’s leading exporting of wheat to halt all exports until at least next year’s harvest (aka Russia). Causing the price to nearly double very shortly thereafter. In fact having this all occur before QE2 was announced or begun was just more of the pure evil genius that is QE2.

    Sure, you could try and blame it on the record breaking drought Russia experienced combined with numerous fires. But that would be crazy and would undermine the “QE2 is evil” narrative.

  36. Gravatar of Rien Huizer Rien Huizer
    31. January 2011 at 20:23

    Stuart,

    Wheat is in serious difficulties. Not only Russia. Australia is a much bigger exporter and has a perverse combination of floods and drought..

  37. Gravatar of Rien Huizer Rien Huizer
    31. January 2011 at 20:50

    Scott,

    What you say is we do not know enough to choose, size and administer fiscal stimulus and comparisons with the past are not relevant enough. I completely agree with that.

    But (1) we know a little about bits and pieces, especially the things that have too many side-effects (OK, externalities) that are unfavorable to the desired outcome, or are too unpredictable. We know a little about crude forms that work with certainty (fort instance it would not be too difficult to design a program and set of institutions to refloat the US housing industry AND fund that program from (1) cuts in fiscal benefits for home-owners in the medium term future plus (2) much lower transaction cost for housing finance.
    And but (2) in a universal franchise democracy, politicians cannot be seen to do nothing (i.e. not be redistributing) once the median voter feels the pain. So they will behave rationally (hence opportunistically -but they do that all the time, hmm) and come up with things that are optimal from their perspective: short term political impact at minimal long term political cost. And there may be an element of “gambling for survival” close to elections where the longer term cost becomes irrelevant. I suspect that much of the policies adopted by the current and former administration can be explained by that and not by economic utility.

    The combination of these two aspects makes me reasonably confident that with an -involuntarily- bipartisan set of policies (containing a lot of “do nothing” fiscally) we may gain a little more insight in the merits of active fiscal- and monetary policy and combinations thereof. The one aspect that I would still miss is aggregate uncertainty, one of the other things the New Deal may have affected positively. Where does that fit now and how to reduce it?

  38. Gravatar of scott sumner scott sumner
    1. February 2011 at 16:44

    David; You said;

    “Would the Fed tighten if unemployment were 9%? Of course not.’

    There’s two problems with this. They ran tight money in 2009 despite 9% unemployment. But let’s say you don’t believe that. I have a more powerful argument. We’ve just seen France stumble through 30 years of 10% unemployment. You are basically saying “suppose we became like France, the Fed would be pressured to try to reduce unemployment, and that would increase inflation.” OK, why didn’t that happen in France, or Germany or Italy or Spain? They have all had low inflation and high unemployment in recent decades.

    Morgan, If inflation is a problem then raise the exchange rate. That’s what exchange rates are for, so you don’t have to import inflation.

    Stuart and Rien, Food prices reflect lots of issues. Temporary supply imbalances, demand growth due to more Asians eating meat, and pure inflation, which is the least important factor. I think I agree with what you guys are saying.

    Rien, You said;

    “We know a little about crude forms that work with certainty (fort instance it would not be too difficult to design a program and set of institutions to refloat the US housing industry AND fund that program from (1) cuts in fiscal benefits for home-owners in the medium term future plus (2) much lower transaction cost for housing finance.”

    Be careful, markets are forward-looking. Asset prices reflect expected future changes in things like tax deductability of interest. I’m not saying it’s a bad idea, just don’t assume it won’t affect current housing prices just because it will be phased in gradually.

    My general view is to do things that make good sense as public policy, and let monetary policy do the heavy lifting. The US government is a big and clumsy organization. They can quickly dispense tax cuts, but they aren’t good at quickly spending lots more money.

    BTW, The New Deal actually created lots of uncertainty, and worked less well than many economists assume.

  39. Gravatar of Morgan Warstler Morgan Warstler
    2. February 2011 at 06:45

    “Morgan, If inflation is a problem then raise the exchange rate. That’s what exchange rates are for, so you don’t have to import inflation.”

    In the words of Robert Mundell, “The whole idea of having a free trade area when you have gyrating exchange rates doesn’t make sense at all. It just spoils the effect of any kind of free trade agreement.”

  40. Gravatar of ssumner ssumner
    2. February 2011 at 19:53

    Morgan, Mundell is wrong, if he thinks the US and Egypt are an optimal currency area. If he’s right then we should both use the same currency. Is that what you want?

  41. Gravatar of Bernanke’s Response To Commodity Price Inflation Accusation | Energy and Metals Bernanke’s Response To Commodity Price Inflation Accusation | Energy and Metals
    4. February 2011 at 14:33

    [...] Scott Sumner and Paul Krugman would agree with this assessment.  Here is an update figure from an earlier post that shows the year-on-year growth rates of industrial production in emerging economies and the CRB Commodity Spot Index: [...]

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