Other activities (bumped)

[I bumped this ahead of the Lindsey post, so people could see my latest links.  I don't have anything new today, but added a few other blog posts that I recommend.]

Just so you guys don’t think I am completely goofing off, here are a few links:

1.  A paper I wrote for the Adam Smith Institute, a UK think tank. 

2. An article in Bloomberg.com.  I thought the reporter (Scott Hamilton) did a very good job.

3.  An interview with the BBC.  I haven’t listened, but thought it went poorly.  I now realize that I need a much simpler way of explaining NGDP vs. inflation targeting if I am going to do live interviews.  (I believe the link will only last a week.  Thank God!)

4.  I was asked by The Economist.com to discuss the flawed US job market, and ended up discussing NGDP targeting.  Sorry Ryan.  (Insert hammer and nail joke here.)

I’ll add new articles to this post as they come along.  Meanwhile there are lots of good quasi-monetarist posts being done by others.  Check out these by David Beckworth and Marcus Nunes.

5.   Ramesh Ponnuru at the National Reviewdiscusses quasi-monetarism.  (HT:  John Thacker.)

6.  Did quasi-monetarist views reach the White House?  This Christina Romer document (p. 4) suggests the answer is yes.

7.  The Kiwis reject my NGDP targeting idea.  FWIW, I think NGDP targeting works best in large diversified economies.   (HT:  Richard A.)

8.  Ryan Avent does a great job taking apart a lame NYT article on QE2.  I would add that the way to test QE2 is by examining what happens before it is adopted, not after.

 9.  This guy did a Leonardo DiCaprio-like foray into my dreams.

10.  Ed Dolan should get more links—a great resource for economics instructors.

11.  John Papola and Russ Roberts produce another great videoNiklas Blanchard has a insightful critique.

12.  There’s no such thing as “public opinion,” only election results.

13.  It would be an honor to serve with Paul.

14.  Brad DeLong gets it.

15.  And Niall Ferguson most certainly doesn’t:

 ”If the old methods were still used, the CPI would actually be 10 percent.”

16.  Paul Krugman understands the damage done by people like Ferguson:

“What’s going on here? My interpretation is that Mr. Bernanke is allowing himself to be bullied by the inflationistas: the people who keep seeing runaway inflation just around the corner and are undeterred by the fact that they keep on being wrong.”

17.  David Andolfatto responds to the goldbugs.

18.  First he misinterprets Steven Landsburg, then Casey Mulligan.  Paul Krugman needs to take a deep breath before launching his personal attacks.  (I correct him in comment 68, but Noah Smith does a better job.

19.  A good discussion of monetarism in the comment section of Matt Rognlie (and this one too.)  Josh Hendrickson and David Beckworth also comment.

20.  If the Fed is targeting the forecast, then what’s the purpose of fiscal stimulus?

21.  Harold Demsetz on Coase and Pigou.

22. David Beckworth on the Fed as a monetary superpower.

23.  S. Carolina social conservatives want to legalize heroin . . . Matt Yglesias doesn’t.

24. Steve Chapman exposes the foolishness of the inflationistas.

25.  The best argument against Obamacare.

26.  I wish I was able to defend my ideas as skillfully as Andy Harless:

If you wish, you can go further by making the rule forward-looking (using a forecast of nominal GDP instead of a lagged observation) and increasing the coefficient to a very high number. And you can enforce the credibility of the forecast by requiring the central bank to use the forecast implicit in a publicly traded nominal GDP futures contract, so that the market is putting its money where the central bank’s mouth is. You end up with the proposal that Scott Sumner has already made. People seem to think that Scott Sumner’s ideas about monetary policy are far out of the mainstream. But I’m not proposing anything radical here, just trying to fix some problems with the very orthodox Taylor rule.

27.  Someone explain the “hot potato effect” to this guy.  (HT: Kevin Tryon)


Tags:

 
 
 

120 Responses to “Other activities (bumped)”

  1. Gravatar of Benjamin Cole Benjamin Cole
    25. April 2011 at 14:17

    Scott Sumner is not blogging, but the recent NY Fed report on paying interest on QE reserves does call for something.

    It seems to me Bernanke still has yet another ace up his sleeve. Now he can start racheting down on interest paid on reserves, or even migrate to fees on reserves.

    No more QE, or QE3. Nothing the media might even notice. Just a gradual winding down of the interest paid.

    Come on Scott, you can pull a short blog on this out of your rear pocket.

  2. Gravatar of Scott Sumner Scott Sumner
    25. April 2011 at 16:22

    Benjamin, I did call for Bernanke to cut the IOR by 10 bps in a post a few weeks back.

  3. Gravatar of johnleemk johnleemk
    25. April 2011 at 16:51

    Scott, #9 is hilarious. Now if only we could actually *incept* some of the world’s leaders with the ideas from that post! It’s so good, I need to quote it here:

    “Here’s the real fantasy: Germany lets its banks go down and France (I laugh as I type) lets ‘em go, too.

    “The stock market crash makes what actually happened look like child’s play. Nominal GDP expectations plummet and Obama, freaking out, nominates Paul Krugman and Scott Sumner to the fed.

    “Ben Bernanke, stirred from his slumber, shrugs off his chains and leads the emerging Bern-umner consensus on financial crisis management.

    “The new committee to save the world has a majority at the fed and they GO. TO. TOWN. on the money supply.”

    This is what dreams are made of!

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. April 2011 at 20:05

    I’m out there. But probably not in the way you want.
    I’m fighting for progressive causes. The less you blog the more I whine. Just so you are warned.

  5. Gravatar of Gabe Gabe
    25. April 2011 at 22:34

    I worry about the Fed quashing the rally in commodities, but the fervant belief I witness here that more money creation is the answer to our problems gives me hope that the precious metals bull has more legs.

  6. Gravatar of Doc Merlin Doc Merlin
    26. April 2011 at 03:11

    @Gabe:
    Agreed, as long as they keep pumping the supply of money, the precious metals bull market will run high.

  7. Gravatar of Scott Sumner Scott Sumner
    26. April 2011 at 05:56

    johnleemk, Yes, it was very funny. I don’t even know the guy’s name.

    Mark, Then I need to start blogging again. :)

    Gabe and Doc, I just sold some gold and silver last week. A buy signal?

  8. Gravatar of Alex Godofsky Alex Godofsky
    26. April 2011 at 06:26

    Scott, thank you for linking #9, that made my day. Let the banks die!

  9. Gravatar of Benjamin Cole Benjamin Cole
    26. April 2011 at 09:44

    Scott Sumner-A timely short blog on reducing interest on reserves might start a chain reaction again, somewhat akin to how you blogged abou the need for $100 billion a month in QE, and then Bernanke indeed followed suit.

  10. Gravatar of Gabe Gabe
    26. April 2011 at 13:15

    Scott,
    You have friends at the Fed. Their words can move this market if they choose. If they come out tomorrow spouting non sense like:

    “We have a strong dollar policy, but China must allow the Yuan to appreciate against the dollar”

    and “QE2 is not really monetization of debt it is just a asset swap and so yes we will continue to provide significant quantitative easing, look at the stock market we are helping the people, core inflation is very low, as long as wages stay low every thing is fine”

    If these are the statements then buy PM…if they come out hawkish then I expect you can buy back some metals cheaper at a later date.

  11. Gravatar of Gabe Gabe
    26. April 2011 at 13:15

    any insight on what to expect?

  12. Gravatar of Gabe Gabe
    26. April 2011 at 13:17

    We know the CEO of JP Morgan and Goldman has an expectation that is based on his frequent conversations with Fed officials, his priveleges that allow him to call up the fed chairmen at any time.

    Unfortunately, us tax slaves have to wait and see what our monetary masters have in store for us…and hope we guess right.

  13. Gravatar of Gabe Gabe
    26. April 2011 at 13:19

    Did you sell physical or paper? the markets seem to be diverging.

  14. Gravatar of Scott Sumner Scott Sumner
    26. April 2011 at 16:58

    Alex, Thanks, I liked it too.

    Ben, I’ve already gotten sucked into more posts–I need to just take a break. I’ve already done all I can, Bernanke knows about the lower IOR option. I’ll return if a big issue pops up.

    Gabe, I sold a small amount of the physical stuff (for someone else.) I have no idea where markets are going, and I don’t have any friends at the Fed.

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. April 2011 at 19:46

    Scott,
    “Mark, Then I need to start blogging again.”

    Maybe there’s no urgent need after all.

    I got into an argument with Mark Thoma today. I guess I should be honored that he thought my arguments were worth responding to. But after a time when he got tired of my points he shut of my ability to comment.

    *You would never have done that.*

    It makes me wonder what I’m fighting for.

    It made me really sad. :(

  16. Gravatar of David Pearson David Pearson
    27. April 2011 at 05:43

    Scott,

    I took a look at the durable goods orders today to see if QE2 had any impact on the series.

    This is SA new orders for core capital goods (durable goods excluding aircraft and defense):

    Aug $63b
    Sep 64
    Oct 62
    Nov 64
    Dec 67
    Jan 63
    Feb 63
    Mar 66

    In the seven months since QE2 was signaled, core capital goods orders are up a total of 4%. In the seven months prior to that, the increase was 15%.

  17. Gravatar of Gabe Gabe
    27. April 2011 at 06:16

    inconclusive

  18. Gravatar of David Pearson David Pearson
    27. April 2011 at 07:19

    Gabe,

    The lack of an effect is conclusive of the null hypothesis. I’m not saying in general, but with regards to housing and business investment — two economic drivers most sensitive to the path of nominal growth — the effect has been lacking.

  19. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. April 2011 at 09:08

    ‘It makes me wonder what I’m fighting for.’

    Welcome to the club, Mark. I wasn’t even commenting at his blog when Thoma came after me personally. It was because I was having such good fun with his buddies at the Angry Bear. I’m amazed that Thoma is treated with respect by such as Arnold Kling.

    Not that I mind, I like it when I’m attacked ad hominem; let’s me know they know they’re losing the argument. DeLong, Krugman, Thoma; all afraid of honest debate. Does make one wonder.

  20. Gravatar of Silas Barta Silas Barta
    27. April 2011 at 11:33

    Yeah, all Thoma really does is pirate huge chucks of others work for his blog post — rarely gives much of his own analysis.

  21. Gravatar of Scott Sumner Scott Sumner
    27. April 2011 at 17:19

    Mark, That’s too bad.

    David, I think the school’s out on the recovery. Here’s a few comments on QE2:

    1. QE2 was successful before it was adopted, which is what matters to me. It boosted inflation expectations and depreciated the dollar. I favor targeting expected NGDP growth, and it raised expected NGDP growth.

    2. As far as the actual course of the real economy, it is effected by QE2, Libya, Japan, weather, fiscal policy, etc, etc. The data are mixed. Durable goods are a subset of all manufactured goods, which have grown much faster in the 4 months since QE2, than in the previous 8 months. In addition, some of the monthly ISM numbers were the largest in decades during early 2011, before Libya. And unemployment fell at the sharpest rate in decades. And final sales in Q4 were extremely strong. On the other hand 1st quarter RGDP is expected to be weak. So overall I have mixed feelings. Lots of reputable economists think it helped (Romer, Feldstein, Bernanke, etc.) I think much more was needed, but at least it prevented a double dip recession, which looked quite possible last summer. At that time most forecasts were for 10% unemployment this year–it’s now at 8.8%. So overall I see some positive signs, but still a much too weak recovery.

    There’s a lot of uncertainty, as government data are hugely flawed. Does the payroll survey pick up new firms? Who knows?

  22. Gravatar of Full Employment Hawk Full Employment Hawk
    27. April 2011 at 21:11

    It looks like we are coming as close to a controlled macroeconomic experiment as we can reasonably get in Great Britain. The .5% growth in GDP in the first quarter just offset the .5% decline in the fourth of last year, so that during the last 6 months the British GDP remained unchanged.

    Since the Bank of England fortunately can carry out an independent monetary policy, it is in a position to offset the contractionary fiscal effects of the Cameron austerity policies with a more expansionary monetary policy, so that the rate of growth in the British economy continues like it would have been if the fiscal austerity program had not taken place.

    The best outcome, would be that the Bank of England does offset the effects and demonstrates that it is willing and able to offset the effects of the contractionary fiscal policy and keep the economy growing on an even path.

    However, I don’t believe this will happen. I will venture to predict that it will not do this. The Bank of England probably will not reinforce the contractionary fiscal policy with a contractionary monetary policy. But they will not offset, or at least not adequately offset, the contractionary effect of the contractionary fiscal policy of the Cameron administration, so that the contractionary fiscal policy will significantly slow Britain’s recovery, and MAY even kill it. In other words, we will get Keynesian results.

    The proof of the pudding will be in the eating and we will have to wait and see what happens. However this turns out, macroeconomics and monetary economics will greatly benefit because the information that will be gained will be very beneficial. However things are not as great for the people of Great Britain, who are being forced to act as guinea pigs in this experiment, especially if it turns out the way I predict.

    While I would prefer that the Bank of England does fully offset the effect, I will also admit a good degree of ego satifaction if my view of what will happen turns out to be correct. But is will feel sorry for the British working people because I am a Full Employment Hawk for Great Britain too.

  23. Gravatar of Britmouse Britmouse
    28. April 2011 at 02:00

    @FEH Why do you think the Bank won’t QEase further if inflation comes right down? Or do you think inflation will stay above target even if fiscal policy suppresses aggregate spending?

    The Bank are already fudging their inflation target, and good on ‘em. King knows what he has to do, and the chief hawk on the MPC (Andrew Sentance) is getting replaced by hopefully a little less hawkish Ben Broadbent.

    http://www.moneymovesmarkets.com/journal/2011/4/19/dont-be-fooled-by-the-mpcs-smoke-and-mirrors.html

    To a native it seems obvious there are many ways the Government could cut spending and encourage growth and employment: junk the planning system which suppresses badly needed housing construction; a revolution in the welfare system could remove the disincentives to work for benefit recipients.

    I worry less about the fiscal “austerity” of ~1.5% per year in real terms cuts, and much more that the Coalition are not anywhere near radical enough in “supply-side” reform.

  24. Gravatar of Full Employment Hawk Full Employment Hawk
    28. April 2011 at 08:28

    “I worry less about the fiscal “austerity” of ~1.5% per year in real terms cuts, and much more that the Coalition are not anywhere near radical enough in “supply-side” reform.”

    What is holding the British economy back is not lack of supply, but lack of demand. Therefore it is the demand side effects of the austerity that will have the primary effect on output, and the demand-side effect of the austerity is contractionary. Unless the Bank of England offsets this, the result will be as Keynesian economics predicts.

    As I said, the proof of the pudding will be in the eating. We now have as close to a controlled experiment as we can get in macroeconomics, and time will show who is right.

  25. Gravatar of Full Employment Hawk Full Employment Hawk
    28. April 2011 at 08:30

    “Or do you think inflation will stay above target even if fiscal policy suppresses aggregate spending?”

    In the short run, which can last an uncomfortably long time, the primary effect of contractionary fiscal policy will be on output, and not on inflation.

  26. Gravatar of CA CA
    28. April 2011 at 11:43

    Russ Roberts is back with Part 2 of the Keyenes vs Hayek rap battle. Pretty cool regardless which side you’re on.

    http://www.youtube.com/watch?v=GTQnarzmTOc&feature=player_embedded#at=272

  27. Gravatar of CA CA
    28. April 2011 at 11:45

    Of course I meant Keynes.

  28. Gravatar of W. Peden W. Peden
    29. April 2011 at 05:43

    Full Employment Hawk,

    I was under the impression that our problem recently has primarily been supply-side:

    http://www.moneymovesmarkets.com/journal/2011/3/9/uk-nominal-spending-real-gdp-growth-gap-widest-since-1980s.html

    The recent fall in UK inflation seems to be entirely a result of increased Q1 RGDP growth.

    I also think that the BoE has already been loose in response to fiscal austerity. Had there been no emergency budget and had the 2011 budget been less contractionary, we would certainly have higher interest rates by now. It’s hard enough holding the line in favour of loose monetary policy right now given price inflation; it would be impossible if fiscal policy was not so contractionary.

    In other words, the BoE would have been forced into tightening monetary policy, thus forcing a contraction in the private sector in order to facilitate greater public sector growth.

    In a counterfactual world where a Labour/Lib Dem coalition won in June, the best case scenario is that the hawks would have won and monetary policy would have tightened, probably sometime in late 2010 during a period of supply shocks on the private sector.

  29. Gravatar of Full Employment Hawk Full Employment Hawk
    29. April 2011 at 06:08

    W.Peden:

    I am perfectly willing to allow for the possibility that I may be wrong. If the Bank of England can use monetary policy to prevent the fiscal austerity from slowing or killing the recovery, that is the best outcome as far as I am concerned. Since what is happening in Britain is as close to an empirical test as we can hope to get in macroeconomics, I have explicitly stated my hypothesis in order to subject it to the test. I will determine whether I was right or wrong on the basis of what happens to the British economy over the next several quarters. So I will have to wait and see. As I have said, the proof of the pudding is in the eating.

    No matter what the outcome, for our understanding of macroeconomics and monetary economics what is happening in Britain is very good. A lot will be learned from it. For the people of Great Britain, if things turn out the way I have predicted, it is not good, so let’s hope I am wrong. May you live in interesting times is a curse and not a blessing.

  30. Gravatar of W. Peden W. Peden
    29. April 2011 at 07:00

    Full Employment Hawk,

    Your last point is certainly correct. “Happy is the country that has no history.”

    To be fair, the BoE doves haven’t pulled out the “contractionary budget” argument that much thus far, preferring to use a more conventionally Keynesian “output gap” argument. Still, I think that the fact that we’re now on better footing with the bond markets &c. has kept the inflation hawks a bit quieter than they would be if the world was worried about UK debt.

    As I see it, our problem right now is less an AD and more an AS. The financial sector’s record of success since the 1980s deregulation meant that a lot of supply-side deficiences (especially in education and labour training generally) have been allowed to fester over the last 30 years or so. One hypothesis I have is that the decline in vocational training in the UK since the 1960s has been a key factor in the UK’s decline, because high-wage trading economies like the UK are so dependent upon constant gains in labour productivity.

    Sadly, the coalition has largely been taking baby steps that should have been taken at least ten years ago. Their education agenda, while welcome, is largely made up of timid steps that don’t confront the major problems of productivity in the UK.

    Nor do measures like a windfall tax on oil profits or taxes on banking (kick businesses when they’re up, kick them when they’re down) exactly make sense in a country with supply-side problems. The shift from taxes on business to taxes on consumption is a good move; on the other hand, taxes on investment and employment have gone up.

    On the positive side, there are mutterings about merging National Insurance (our equivalent of social security) into income tax, an idea last mooted in the 1980s. That would be a positive measure, because the last thing the UK economy needs is taxes on employing people.

  31. Gravatar of Scott Sumner Scott Sumner
    29. April 2011 at 07:53

    Full Employment Hawk, I have two serious objections to your post:

    1. One should never, ever, cite real GDP numbers when discussing the amount of demand stimulus being provided. What if NGDP rose 20%, but RGDP rose only 0.5%? No one could claim that there was not enough demand stimulus. So I’d like to see UK numbers for NGDP growth in recent years before making any judgments. The slow RGDP growth is meaningless.

    2. This statment is not accurate:

    “However, I don’t believe this will happen. I will venture to predict that it will not do this. The Bank of England probably will not reinforce the contractionary fiscal policy with a contractionary monetary policy. But they will not offset, or at least not adequately offset, the contractionary effect of the contractionary fiscal policy of the Cameron administration, so that the contractionary fiscal policy will significantly slow Britain’s recovery, and MAY even kill it. In other words, we will get Keynesian results.”

    I also don’t believe the BOE will provide the needed stimulus for a fast recovery. But that doesn’t mean the effect of fiscal austerity was contractionary. If that were the case, then the BOE would not be engaged in inflation targeting, and would let fiscal contraction lower inflation below it’s non-fiscal contraction path. But I don’t think this is true. The BOE is doing inflation (or more likely NGDP) targeting, and if fiscal policy was more expansionary the BOE would prevent even higher inflation by tightening monetary policy and raising rates even sooner. They were strongly considering raising them in May, but are probably only holding back because the the fiscal austerity that you refer to.

    Also keep in mind that thus far there has been almost no fiscal austerity. Yes, it may work through expectations, but that would completely contradict the argument many Kenynesians made about Obama’s policies in late 2008 and early 2009.

    Britmouse, I agree.

    FEH, The UK is being held back by both supply and demand. Hasn’t their NGDP growth been about the same as Germany over the past three years? Both countries need more demand, but the Brown government badly hurt the supply-side of the UK economy. Thus Germany is getting a better P/Y split that Britain. It would be interesting to see data from both countries, for comparison.

    CA, Thanks, I should add that link. I loved the first rap.

    W. Peden, Thanks for the data. I consider the NGDP number to be much more meaningful than the spending number, but even so, having 2.8% inflation and 4.3% NGDP growth during a period when there is lots of labor market slack suggests that the UK has both supply and demand problems. That’s a much worse split than the US over the past year.

    %$#*&@% Gordon Brown

    W. Peden, I agree with your counterfactual, but I don’t think FEH sees that this means his “test” won’t really show what he thinks it will show.

    They should eliminate the income tax, and merge everything into a payroll tax. A payroll tax is a tax on consumption.

  32. Gravatar of David Pearson David Pearson
    29. April 2011 at 14:45

    Scott,

    Another quarter of 2% growth and 4% inflation, and we will face the same dilemma as the UK: tighten, and risk sending the economy off a cliff; loosen, and risk an un-anchoring of inflation expectations.

    Its easy to argue that our current 4% inflation is transitory. Frankly, it is impossible to prove this either way. The question, instead, is whether the Fed has the ability to contain inflation if it were not transitory. The answer is clearly “no”. Find me someone that predicts (not argues) that the Fed will tighten with the 5yr TIPS spread spiking above 3% and unemployment above 8.5%. Do you think the Fed would do this? If not, then we are playing soccer without a goalkeeper. Sure, we might still win (inflation might be transitory after all!), but let’s not be surprised if the opposing team ends up raining goals on us.

  33. Gravatar of Lucas Lucas
    30. April 2011 at 14:29

    Scott, I’d love to know your opinion on Brazil’s monetary policy. The currency is appreciating, real interest rates are sky high and the government is planning a fiscal retrenchment, yet inflation is rising. What’s going on? Supply-side problems?

  34. Gravatar of johnleemk johnleemk
    30. April 2011 at 21:26

    Scott,

    There is a somewhat confusing policy study out from Reason on what they call the “Hayek Rule” — they basically want stable NGDP: http://reason.org/files/federal_reserve_monetary_policy_hayek_rule.pdf

    I’m sure someone’s already sent this to you, but do you have any comments?

  35. Gravatar of Scott Sumner Scott Sumner
    1. May 2011 at 05:27

    David, My first suggestion would be to pay no attention to inflation. Focus on NGDP growth expectations, which is what determines wage gains, not inflation.

    If we must focus on inflation, then at least focus on the inflation rate for stuff the Fed can control, products made in the US. The GDP deflator rose by less than 2% in the first quarter, despite adverse supply shocks. And it’s been averaging just over 1%. We need higher GDP deflator inflation (if that’s what we’re targeting.)

    There is no dilemma, as we can never get 1970s-style inflation without fast NGDP growth. In fact, we can’t even get 1980s-style inflation (4%) without at least 6% NGDP growth. And yet NGDP has failed to even rise at its 5% trend for 11 consecutive quarters. Even during the recovery we are getting less than 4% NGDP growth. Inflation is the least of our problems, which is why bond yields are so low. Investors aren’t stupid, they see that we aren’t going to get high inflation.

    You said;

    “Its easy to argue that our current 4% inflation is transitory. Frankly, it is impossible to prove this either way.”

    Can you name one time in of history when high headline inflation led to high core inflation, w/o boosting NGDP growth? We should pay no attention to headline inflation, it is not now and never has been a statistic that tells us anything about the economy. Krugman has lots of posts showing the headline inflation rate means nothing, it’s all about core inflation.

    And even if I am wrong (and I’m not wrong) I’d still be far more worried about unemployment, than the tiny chance of a breakout of inflation to 4% of 5%. Inflation is an annoyance, unemployment devastates millions of people’s lives. But there is no problem of inflation, 5% NGDP growth will deliver both low inflation, and more jobs.

    Lucas, I’d need the data on NGDP growth rates and wage inflation. Price inflation and the exchange rate are not helpful variables. If wage inflation and/or NGDP growth are too strong, then tighten.

    Brazil definitely needs to shrink the state, regardless of their other policies.

    johnleemk. I also favor NGDP targeting, but a slightly higher growth rate (than zero.) With zero NGDP growth you tend to get slightly falling wages. In addition, the zero bound on interest rates becomes a more severe problem.

  36. Gravatar of David Pearson David Pearson
    1. May 2011 at 06:52

    Scott,

    High NGDP growth is a feature of many economies with chronically low investment and stagnant employment growth. Other features are, in no particular order: high public sector borrowing requirements financed by the central bank; serial devaluation; high output gap; stagnant real wages; rising income inequality; chronically negative real interest rates; start-stop growth; large relative price distortions; and rampart financial speculation centered around expected monetary/fiscal policy moves. Which one of these does not fit the U.S. over the past ten years?

    I understand you think this, “can’t happen here,” and have valid arguments to that effect. What I am saying is that one of the missing arguments is, “we have a Fed that has the stomach to tighten to prevent it.”

  37. Gravatar of Scott Sumner Scott Sumner
    1. May 2011 at 08:42

    David, You said;

    “High NGDP growth is a feature of many economies with chronically low investment and stagnant employment growth.”

    I completely agree. Perhaps we are talking past each other. I’m saying that if you have the sort of NGDP growth we experienced 1971-81 (11% a year) you will have high inflation in the US. It’s a necessary and sufficient condition.

    But we aren’t, and will not have that sort of NGDP growth. It won’t happen.

    As far as the Fed having the “stomach” to tighten. They’ve run a tight money policy despite 9% unemployment for several years. Why would anyone think they wouldn’t tighten in the future?

  38. Gravatar of johnleemk johnleemk
    1. May 2011 at 11:14

    Scott,

    “Slightly” is the sticking point here — the Reason study cites George Selgin’s work which estimates that in the recent past, US NGDP growth was 7% per annum, which they think is 7% too high. You on the other hand think it is only about 2% too high.

    The Reason study actually cites price deflation as a benefit of stable NGDP targeting — their argument is real GDP will grow, but because of a deflationary monetary policy to achieve stable NGDP, real wages will rise. That just sounds bass-ackwards to me.

  39. Gravatar of 123 123
    1. May 2011 at 13:07

    Scott, it’s a small world – you have been mentioned in the Lithuanian press. Lithuanian business magazine “Verslo klase” has reprinted Peter Coy’s article “Economics’ Newest Thinking Comes from the Old Masters” from Business Week where they quote you saying “”If you ask 1,000 economists what’s wrong with economics,” says Scott Sumner of Bentley University in Massachusetts, “they’ll all tell you the same thing—which is that other economists don’t believe what they believe.”"

  40. Gravatar of Lucas Lucas
    1. May 2011 at 16:12

    Scott, I couldn’t find data on NGDP but The Economist has a good article about inflation in Brazil: http://www.economist.com/node/18587335
    On wage inflation, I remember reading about fast rising real wages in some sectors and The Economist article mentions a probable hike in the minimum wage which is linked to many other wages.

  41. Gravatar of Larry Larry
    1. May 2011 at 18:54

    I’m beginning to have panic attacks over what comes after QE2. Allegedly the Fed is now buying 70% of treasuries, weighted towards the long end, while China is reducing its holdings and Japan isn’t growing its own. Are interest rates going to explode?

  42. Gravatar of Scott Sumner Scott Sumner
    2. May 2011 at 04:23

    johnleemk, That overstates the difference. The recent trend in NGDP has been 5%, and that’s why I favored 5% growth during the recession. As a steady state policy I’d be fine with 3% growth, if they did level targeting. So we aren’t that far apart.

    I view downward nominal wage inflexibility as a bigger problem than they do.

    123, Thanks. Was the joke just as funny in Lithuanian, or was the subtle brilliance lost in translation?

    Lucas, If both real wages and inflation are rising fast, then I’d say monetary policy is probably too expansionary, the economy may be overheating. There’s a danger that if commodity exports were to slow, the higher wages could leave Brazil uncompetitive.

    Larry, No. The bank markets have already priced in the end of QE2.

  43. Gravatar of David Pearson David Pearson
    2. May 2011 at 10:06

    Scott,

    It is really shortsighted for Bernanke to claim that the markets have already made up their minds about the significance of QE2′s expiry.

    Let’s say Q2 growth appears to come in at sub-2%. In reaction to that news, the Fed makes no indication that QE3 is forthcoming. Markets decide to fixate on the end of QE2 as the “end of stimulus”. This is a recipe for a (stock market) swoon.

    Or let’s we have a budget or debt ceiling impasse this year. The Treasury market is shaken by political brinksmanship, and after June the Fed is no longer there to soak up net issuance. Of course, Bernanke believes in the “stock” view of QE’s impact on rates; but the markets may have a different view, and theirs is the one that matters. So Treasury yields back up, out-year deficit projections blow out, and the process becomes an adverse feedback loop.

    New news gets combined with old to form interpretation. Discontinuities created by new interpretations are totally consistent with EMH.

  44. Gravatar of Morgan Warstler Morgan Warstler
    2. May 2011 at 16:22

    Scott, it is election results that matter – very specifically to you and your policy goals.

    As such, it continues to annoy me that refuse to go earn and maintain your bona fides amongst conservative political circles so that your ideas will given more consideration.

    You said,

    “Excellent post. Any belief attributed to Keynes is probably both true and false, as at one time or another he held a wide variety of contradictory views. He even praised “The Road to Serfdom.”

    We’ve covered this extensively – there should be a HARD RULE about not being allowed to champion just one part of an economist’s theory – as with Fisher, as with Keynes, and as with Sumner.

    The problem is that Sumner himself doesn’t like to publicize the best part of his work – pissing on booms.

    And that’s my whole point: If you spent a good amount of time, telling conservatives that your policies would piss on booms before they got too hot AND prove that when NGDP is 5%+ and unemployment is over 8%, that means the government’s policies on jobs are to blame – that you won’t make the mistake of Greenspan, but you are still a bankable conservative voice – they’d be far more interested in your theories about QEIII.

    When a thinker has something they want to sell, they still have to hike up the old skirt…. to prove it.

  45. Gravatar of Scott Sumner Scott Sumner
    2. May 2011 at 18:04

    David, I agree, but isn’t Bernanke leaving open the possibility of doing QE3 if the economy falters? Of course, I think there is already plenty of reason to do QE3, but he apparently doesn’t.

    Morgan, You said:

    “As such, it continues to annoy me that refuse to go earn and maintain your bona fides amongst conservative political circles so that your ideas will given more consideration.”

    How do I do that? Call for Obama’s birth certificate to be produced?

    You were probably too young to remember when I favored “pissing on booms” in the 1970s and late 1980s.

  46. Gravatar of marcus nunes marcus nunes
    3. May 2011 at 06:03

    And there´s also Ms mees at Vox arguing about the dangers of “runaway haedline inflation”:
    http://www.voxeu.org/index.php?q=node/6448
    And my comment on the absurdity of the suggestion:
    http://thefaintofheart.wordpress.com/2011/05/03/beware-of-dumb-advice/

  47. Gravatar of Philo Philo
    3. May 2011 at 07:16

    Why in the world would Ferguson write: “To ordinary Americans, however, it’s not the online price of an iPad that matters; it’s prices of food on the shelf and gasoline at the pump”? I am an American (who modestly disclaims being extraordinary), and I know that the prices of lots of things besides food and gasoline figure into my cost of living. Everyone knows that the typical American’s expenditure on food and gasoline is only a small part of his/her total expenditure.

    He adds: “The way inflation is calculated by the Bureau of Labor Statistics has been ‘improved’ 24 times since 1978. If the old methods were still used, the CPI would actually be 10 percent.” This is mindless conservatism: assuming that the Old Way is the Right Way! Never mind that the BLS thought the changes it was making were *improvements*. (But perhaps even more improvements are called for.)

  48. Gravatar of David Pearson David Pearson
    3. May 2011 at 08:48

    Scott,

    You raise a good point: QE3 will come into play of the stock market has a steep correction — that has been the pattern since 2008. The question is, at what level of the S&P? The market seems to be a continuous search for the strike price on the Fed “put”. This means that any QE stimulus will tend to be initiated when a robust recovery is really in doubt; and it will tend to expire just as a robust recovery is in view. This is a recipe for constantly falling short of the (RGDP) goal.

  49. Gravatar of Doc Merlin Doc Merlin
    4. May 2011 at 01:25

    @Philo:

    His point is that e have 70′s like inflation now, but CPI, PPI, etc aren’t picking it up. If true it means they are worthless (which I tend to agree with).

    @Scott:

    Well, I called a peak for gold at around 1450 and now its well over 1500, so hell if I know… I suspect its based on probability that the Bernank will keep QEing. I should really get off my lazy butt and fit an LPPL to it and silver price to see if they are following the classic bubble pattern or if its being driven by something else.

    @ Gabe
    Yah, at least in the silver market, people have been suspecting JPM of artificially holding down the paper price of silver (as JPM controls that market), so they started buying physical and caused what looked like a slow motion squeeze.

    @all
    One amusing thing is that buffet sold all his silver on 2006 and missed the 300% increase in price.

  50. Gravatar of W. Peden W. Peden
    4. May 2011 at 06:18

    Doc Merlin,

    What happens when you use these old statistics to deflate US NGDP?

  51. Gravatar of Doc Merlin Doc Merlin
    4. May 2011 at 06:40

    @W. Penden:

    They give us a much lower RGDP growth. The reason is that modern NGDP deflator tries to take into account how good something is. So, a new ipod costs the same as an old one, but a new one has double the memory and a a twice as fast processor, the newer GDP deflators see that as a fairly large “price decrease.” The old GDP deflator wouldn’t.

    Another method looks at the same exact object a year later and then chaining it. So, for example the price difference between a 2009 car in 2010 and in 2009. Instead of the difference between a freshly built car at both dates.

  52. Gravatar of Scott Sumner Scott Sumner
    4. May 2011 at 07:40

    Marcus, I find her interpretation of Figure 1 to be bizarre. It looks to me that wages track core inflation more than headline inflation. I don’t know what she sees.

    Philo, And it’s also incredibly inaccurate. The 10% inflation figure is sheer nonsense on many levels. Even with old techniques inflation would be only about a point higher–and it’s not clear the old techniques are better. I lived through the 1970s and recall what double digit inflation looks like. He obviously doesn’t have a clue to make that sort of silly comment. I doubt even 5% of items in the CPI are rising at double digit rates. And certainly not the biggest–which is housing. Most people spend more on housing than gasoline, by far—why doesn’t he talk about the price of housing?

    Plus, NGDP is only going up by 4%, and it’s completely unaffected by technical changes in the CPI. The 10% inflation estimate implies negative 6% RGDP growth, at a time when 100,000s of jobs are being added each month!!!

    Plus, how average people “feel” about inflation has no bearing on how the Fed should be conducting monetary policy. The Fed should be trying to achieve it’s dual mandate, not make people feel good about the price of gasoline.

    David, I agree that the Fed is way too conservative. We aren’t going to get a strong recovery, I’m just happy that we may get a recovery (which seemed doubtful last August, when people predicted 10% unemployment in 2011.)

    Doc Merlin, Buffett also missed the 2008 stock crash, he can’t predict any better than the rest of us.

    The CPI is very misleading, but 10% inflation is just nuts.

    You said:

    “They give us a much lower RGDP growth”

    No slightly lower. On the other hand Ferguson seems to claim RGDP is falling at a 6% annual rate. ????????

  53. Gravatar of W. Peden W. Peden
    4. May 2011 at 07:45

    Doc Merlin,

    So you’re saying that these figures are accurate?

    http://www.shadowstats.com/alternate_data/gross-domestic-product-charts

  54. Gravatar of Doc Merlin Doc Merlin
    4. May 2011 at 14:25

    @Scott:
    “Doc Merlin, Buffett also missed the 2008 stock crash, he can’t predict any better than the rest of us.”

    True, that.

    “The CPI is very misleading, but 10% inflation is just nuts.”

    Well, my food bill has doubled while I am getting lower quality things (hamburger instead of giant prawns) and my gas bill has gone up about 20% tuition has gone up substantially, and so have text book prices.

    You said:

    ‘“They give us a much lower RGDP growth”

    ‘No slightly lower. On the other hand Ferguson seems to claim RGDP is falling at a 6% annual rate. ????????””

    I wouldn’t take it that far. That sounds a bit extreme, but as the BLS doesn’t release the raw data they use to make the CPI aggregates, I can’t really say specifically.

    Part of the problem is what is increasing in price. The things that are increasing in price right now seem to be heavily weighted towards things that are highly inelastic. While the things decreasing in price are highly elastic. This makes the actual utility loss from inflation /much/ higher than CPI would suggest.

    @W. Peden:
    As the BLS doesn’t release the raw data that they use to make CPI aggregates, I don’t know.

  55. Gravatar of Morgan Warstler Morgan Warstler
    4. May 2011 at 16:03

    “How do I do that?”

    The same way Uncle Milty did it…

    You spend most of your time hating on government. If 50% of your past two years blogging time was spent saying some red meat like, “Democrats are one marshmallow eaters.”

    You have 10x the audience size and still be forcing (even more so) the DeKrugman’s of the world to pay attention.

    Even when I have said, “Scott explain how you would have handled monetary policy, so that 2008 didn’t happen, you begin and end on one note “loosen up money.”

    You don’t say, “well back around 2004, and then in 2005, and then in 2006…”

    You don’t say there was a housing boom and how you would have pissed on it, you try to get away with “what housing boom?”

    It. Won’t. Fly.

    Ultimately, 60% of those who agree with you ONLY agree with you WHEN AND IF they feel like they can’t get any more government deficit spending or higher taxes.

    Your liberal fan base is no more emotionally connected to your work than the belief that printing money is just another way of taxing rich people.

  56. Gravatar of MTD MTD
    4. May 2011 at 17:13

    Scott, one thing the inflation hawks have not been able to effectively answer is why oil and industrial commodity prices rose as the same average annual pace between 2005 and the end of 2007 as they have over the last two years. Why is 2005 to the end of 2007 important? Because US short rates averaged about 4% through this period, the monetary base grew at only 3.4% p.a., and the yield curve was flat-to-inverted. In other words, we saw commodity prices continue to rise at virtually the same pace after the Fed had normalized monetary policy and by some measures had even become tight. The dollar did fall through this period, but the rise in commodity prices between 2001 and 2008 was 4X the decline in the dollar, so the exchange rate argument doesn’t work. Thus, there must be some other force that is dominating commodity price movements. China anyone? Bueller?

  57. Gravatar of W. Peden W. Peden
    4. May 2011 at 23:38

    Doc Merlin,

    If you don’t know that those figures are inaccurate, then you must at least accept the possibility that the US is currently suffering a chronic depression plus a chronic great inflation. And that almost no-one is noticing this problem.

  58. Gravatar of 123 123
    5. May 2011 at 08:30

    “Was the joke just as funny in Lithuanian, or was the subtle brilliance lost in translation?”

    Your joke was the only thing that survived the process of mechanical translation.

  59. Gravatar of Doc Merlin Doc Merlin
    5. May 2011 at 14:03

    @W. Penden:
    1. By chronic do you mean 3 year long depression? Yes, although yes we did have deflation at the beginning of it.
    2. I think GDP (even RGDP) is becoming more and more worthless:
    a) New technologies allow people to do more for themselves more easily instead of having to trade for it, which doesn’t show up in GDP data.
    b) New technologies allow people to get what they want from people who gain utility from providing the good. Open source software is a good example of this. It doesn’t show up in RGDP, but its definitely powerful economic activity.
    c) A lot of economic activity is now in the form of barter-style contracts (credit default swaps for example) and don’t show the full value of the exchange in GDP data.
    d) The national income account identities don’t really hold anymore. The numbers don’t really add up to how the accounting identities used to.
    (I-S)+(G-T)+(X-M) no longer equals 0 and hasn’t for a while. This suggests that there is something wrong with our measurements of national income accounting.

    The effect of 2 shouldn’t be that heterogeneous across similarly developed countries, so GDP is still useful for comparing countries, but it isn’t as useful as it used to be for comparing a country with itself over time.

  60. Gravatar of Scott Sumner Scott Sumner
    5. May 2011 at 14:21

    Doc Merlin, You said;

    “This makes the actual utility loss from inflation /much/ higher than CPI would suggest.”

    Utility loss from inflation has NOTHING to do with monetary policy. Any inflation caused by monetary policy increases real incomes. If you observe a utility loss, it’s due to adverse supply shocks, not monetary policy. That’s no concern of the Fed.

    And 10% inflation is completely nuts–anyone who doesn’t see that has no business writing articles for business publications. You can’t just pull numbers out of the air. You need to look at thousands of goods and services. Does no one remember what the 1970s were like??? This is truly becoming surreal. 2009 and 2010 were the lowest inflation rates of my life (in terms of GDP deflator)–around 1%. Double digit inflation is what we had in 1979-81, totally unlike today. Bond yields were 15%. Workers got 10% pay increases. Car prices soared higher every year. I haven’t noticed much increase in car prices for decades.

    Morgan, I’m trying to convince liberals to see the light. Progress never comes from defeating liberals, it always comes from converting them. Liberalism always wins in the long run. Always.

    MYD and W. Peden, Exactly.

    123, Good to hear.

  61. Gravatar of Doc Merlin Doc Merlin
    6. May 2011 at 01:53

    @Scot:
    “Utility loss from inflation has NOTHING to do with monetary policy. Any inflation caused by monetary policy increases real incomes. If you observe a utility loss, it’s due to adverse supply shocks, not monetary policy. That’s no concern of the Fed.”

    Aren’t you the one trying to convince right wingers that prices and wages are sticky? If thats true then, there MUST be utility loss from inflation.

    2) The seventies had nominal income growth, right now particularly at the low end, incomes are stagnant, but the biggest expenses for low income people are going up.
    I’ve seen several times 10% in the prices I deal with on an every day basis. Manufactured goods haven’t increased in price much (if at all), its almost entirely food and energy prices which have taken a larger and larger chunk of my budget. Again, since I lack the raw BLS data, I can’t say what the actual number is and am limited to what I can observe, I suspect its lower than 10%, but its definitely higher than the ~2% nonsense the BLS is posting.

  62. Gravatar of W. Peden W. Peden
    6. May 2011 at 02:21

    Doc Merlin,

    Those figures suggest something far worse than a 3 year contraction in GDP. They suggest that the US is still mired in the effects of the 1982 recession and has never recovered.

    Also, they give a 7 year contraction, not a 3 year contraction. So, if a 3 year contraction is a depression, how does one describe the US economy?

    And why has no-one noticed this fact? And why has the ratio of GDP to employment in the US gone up so much over the last 30 years?

  63. Gravatar of Luís F. Luís F.
    6. May 2011 at 03:25

    Now that Scott has stopped blogging for a while, I’d like to go back in his archives and read the whole blog from start and learn about monetary policy. Thing is, I dislike reading on a computer, so I’d like to print the posts. Is there any easy way to get all posts in a file to easily print? Can Scott help in any way to do this?

    Thanks

  64. Gravatar of Doc Merlin Doc Merlin
    6. May 2011 at 05:54

    @W. Peden:
    ‘Those figures suggest something far worse than a 3 year contraction in GDP. They suggest that the US is still mired in the effects of the 1982 recession and has never recovered.

    Also, they give a 7 year contraction, not a 3 year contraction. So, if a 3 year contraction is a depression, how does one describe the US economy?’

    Hey, I never supported those figures. Again, I don’t have the RAW BLS data, and so, I cannot say, although I suspect they are a bit high.

  65. Gravatar of Cameron Cameron
    6. May 2011 at 12:32

    The Fed really should have treated QE2 asset purchases like the fed funds rate; buy x dollars of treasuries every month and adjust those purchases according to the state of the economy.

    Until the Fed does something of this nature or announces that it will target NGDP or CPI levels, this cycle of “QE -> Recovery -> End QE -> Recovery stalls -> QEX” will continue… and the Fed’s credibility is falling each time they prematurely halt stimulus!

    BTW: The MacroAdvisors monthly numbers actually are still available if you go to…

    http://www.macroadvisers.com/csx3/csxPage.asp?AppName=Macroecon&Label=CSXGETPAGE&Class=Macroecon.pclsTemplates&Method=pageTemplate2&Message=Public%20Reading%20Room|PAGE_READING_ROOM

    For some reason the site doesn’t work on Chrome, but works with Internet explorer. In any case, it’s great to have it available.

  66. Gravatar of Cameron Cameron
    6. May 2011 at 12:37

    That link isn’t displaying well. Copy it with the “PAGE READING ROOM” at the end and paste it into the IE address bar for it to work properly. Or just go to…

    http://www.macroadvisers.com/content/MA_Monthly_GDP_Index.xlsx

    that should work, even on chrome.

  67. Gravatar of Scott Sumner Scott Sumner
    7. May 2011 at 10:16

    Doc Merlin, You said;

    “Aren’t you the one trying to convince right wingers that prices and wages are sticky? If thats true then, there MUST be utility loss from inflation.”

    Monetary stimulus lowers real hourly wages and raises real GDP (and hence total real income.) The trick is that hours rise. I’ll do a post on that when I return.

    I don’t know if you are old enough to recall double-digit inflation, but it’s nothing like what we have today. How much have house prices fallen in recent years? Houses are a huge part of consumer budgets.

    Luis, I’m not sure, maybe someone else can answer that question.

    Cameron, I agree, and thanks for the MA update.

  68. Gravatar of Doc Merlin Doc Merlin
    7. May 2011 at 17:46

    @Scott
    “How much have house prices fallen in recent years? Houses are a huge part of consumer budgets.”

    The price one pays on their own house doesn’t change when housing prices change. Its new buyers that have lower prices, not the current owners.

  69. Gravatar of Morgan Warstler Morgan Warstler
    7. May 2011 at 21:03

    Scott, liberalism won until 1980, Reagan started spending all the money.

    The failure of liberalism is poor strategic game play. Since they aren’t able pay off their voters once they win, they can’t hold onto the greased pig for a meaningful period of time.

    These “market feelings” we all have… have been able to bloom in a multi-decade narrative that makes us far less susceptible to the promises of technocracy than in the 1930′s – we’re a far, far smarter people. Our great grandparents were functional idiots.

    So, please skip the “always wins in the long run,” stuff. The old school Liberalism we agree on, has been allowed to grow in the modern age, because we proved the systemic failure of BigGov Democracy… now yes, that is a successful meme, but it is a Darwinistic meme – that’s why it won.

  70. Gravatar of W. Peden W. Peden
    8. May 2011 at 13:16

    Further thoughts on fiscalism: is it possible that the idea that fiscal policy only affects real factors is due to the fact that certain government policies DO affect real factors? For instance, if a tax system discourages investment or labour laws distort the labour market, output can be harmed. On the other hand, monetary policy tends to have almost entirely demand-side rather supply-side effects (excluding the effects of credit regulations/exchange controls etc.).

    The confusion comes from extending this dichotomy as extending into demand management, such that the idea that fiscal demand management affects output but not inflation becomes an intuitive yet unstated premise.

  71. Gravatar of Contemplationist Contemplationist
    8. May 2011 at 20:41

    Morgan

    No offence but you are blind. Progressivism has won, root and branch. The old classical liberal system has been demolished and buried for decades. And Reagan was as much a Keynesian in policy as any. The trajectory of federal spending remained unchanged. The only deregulation that happened was under Carter and some energy deregulation under Reagan. Since then the regulatory state has grown monstrously devouring anything in sight.

    Now, its true that among the peasants, there is less skepticism of markets now than, say in the 1930s. But how and when that mayyy translate into change in the system is impossible to imagine. Milton Friedman himself remarked that they had won the debate, but failed the implementation.

    The regulatory state has never been bigger. Government spending has never been larger (save for WW2).

  72. Gravatar of marcus nunes marcus nunes
    10. May 2011 at 04:14

    There´s an interesting debate going on at The Economist:
    http://www.economist.com/debate/days/view/693/showCommentModule:1
    I´ve contributed my 2 cents:
    http://thefaintofheart.wordpress.com/2011/05/10/the-economist-debate-%e2%80%93-motion-could-be-more-interesting/

  73. Gravatar of Scott Sumner Scott Sumner
    10. May 2011 at 14:56

    Doc Merlin, You said;

    “The price one pays on their own house doesn’t change when housing prices change. Its new buyers that have lower prices, not the current owners.”

    True, but we are talking about the rate of inflation, not how good people feel. People feel lousy when oil prices rise and when house prices fall. That doesn’t make both events “inflation.”

    Morgan, Reagan never defeated the liberals on anything. Any success Reagan had came from convincing the liberals to support him. That was my point. Liberals voted for 28% top rates, for deregulation, for Nafta, for welfare reform, etc. etc.

    Bush couldn’t convince liberals on Soc. Sec. privatization, and lost. See a pattern?

    W. Peden, Perhaps. I have no idea what fiscal proponents are thinking. There is clearly confusion on the real/nominal distinction.

    Marcus. I don’t have strong views on that. We could raise the inflation target, and we could also do lots of other even better things. What’s clear is that we should do SOMETHING.

  74. Gravatar of Doc Merlin Doc Merlin
    10. May 2011 at 16:57

    My point is that if you are measuring at the average, lowered “housing prices” don’t actually lower the price of housing in the short term. It lowers the long term expected price of housing. The mean family still pays about the same for housing as they did before, so the price of “housing” hasn’t changed, just the price for “a house.” This is a pretty serious bias in the CPI measure considering the price of housing makes up a substantial portion of family consumption.

    A less micro way of thinking of this is that stickiness in prices is highly nonuniform (and even if prices change in the market, the ACTUAL prices paid at any given time don’t necessarily change much, which is what matters), so in some sectors the stickiness can persist for a very very very long time. That stickiness is so strong that it dominates the stickiness in the overall economy.

    Also, very good point about Reagan in your discussion with Morgan.

  75. Gravatar of Morgan Warstler Morgan Warstler
    10. May 2011 at 18:07

    “Now, its true that among the peasants, there is less skepticism of markets now than, say in the 1930s.”

    Yeah, that’s how long this game is played, your view is too short…. because THAT is the winning point. The “peasant” lesson didn’t just happen (at it isn’t over) by some kind harmoniously glorious creme rising – it happened because of dirty nasty game play. The kind of games that made David Stockman sick.

    My POINT: Of course Government had to get bigger, since 1980 the GOP has been aggressively spending all the money PRECISELY so that Bill Clinton delivered zilch except ending welfare as we know it. He did DADT first precisely because the only free thing he could do for his side – this is a HARD FACT.

    Adding in Doc/Scott,

    You guys never really grok the point that there is a bigger game afoot than just monetary policy and “free markets”

    We as a society have had to learn many lessons over the past 100+ years – learn as in “be smarter than” but then also, learn as in “interpret reality thusly”

    I posit that had Reagan not embarked on a massive spend more, tax less system, and instead had left Clinton with an empty Credit Card, Bush II would have never been possible – even if Clinton molested 20 young women.

    That’s why SCOTUS / GOP destroying Obamacare is so crucial – because it will be a deep and scarring lesson that no one ever actually can deliver goodies to non-payers just for voting.

    And again, the lessons learned by 2011, might not be enough – but after three, maybe four Dem Presidents who deliver nada because each time there is nothing left for them to spend – their side of the electorate will stop believing in a free lunch.

    At the same time, the positive effects of low taxes and biz friendly government (WHICH IS NOTICEABLY DIFFERENT under a Dem Admin) has been able to grow strong since 1980, our reality has shifted and that reality is due to long term game play / strategy – to short circuit the more extreme elements of Democracy.

    —-

    That’s the big game. The little game is Monetary Policy.

    Uncle Milty knew this. Greenspan knew this (and forgot it). If Greenspan had done his job in the mid aughts, the economy would have been softer, but Obama would not have had a “crisis” to capitalize on – McCain could have actually won, because sure as shit, Bush would have figured out ANOTHER way to cut taxes, spend the money.

    Its the same way with Mundell, now there is an economist who has altered things – he’s done more to turn Europe Conservative than 50 Marget Thatchers.

    We have to view the work of economists as part of a larger battle – lord knows (Mundell knows) that ones there is only one currency that no government controls, the age of the state is behind us for good.

    Look, eventually we’ll have a real libertarian vs. the state debate, and you probably won’t live to see it – I wistfully hope to right as I die (and likely won’t).

    But when it happens, it will be because there REALLY is no “more free stuff” option for non-payers.

    That means:

    1. public unions end as a political $ source.
    2. Dems are always given a maxed credit card.
    3. Capital can flee, so taxes have to be low.

    It also means that the smartest Dem play is to support a Balanced Budget Amendment – completely give up the idea of deficit spending WHILE they still have some “free stuff” believers, so they can have a real Guns / Butter fight.

    And that’s when libertarians will matter – FINALLY. When one side says more butter and the other says more guns and libertarians say NO to each.

  76. Gravatar of TGGP TGGP
    11. May 2011 at 06:10

    I criticize Demsetz’ argument here.

  77. Gravatar of Scott Sumner Scott Sumner
    11. May 2011 at 06:42

    Doc Merlin, You said;

    “This is a pretty serious bias in the CPI measure considering the price of housing makes up a substantial portion of family consumption.”

    It’s not a bias if the price of houses is what you want to measure. For purposes of monetary policy, the Fed shouldn’t care at all about a family that has lived somewhere for 15 years, making exactly the same mortgage payment month after month. That’s not a “price” at all, it’s an installment payment on a loan. You could say the same about a five year auto loan.
    For policy purposes, what matters is the price of new stuff getting produced. That’s what the Fed should watch.

    If they want to measure living standards, they should look at how many square feet of housing are occupied per capita; the CPI is not a good way to measure living standards.

    Morgan, So I’m supposed to be pleased that the GOP wastes money on really inefficient spending programs, so that there is less money for the Dems to waste on slightly less inefficient spending programs. I don’t see why.

    TGGP, I left a comment over at your site. I thought it was a brilliant article–the best I’ve read in quite a while.

  78. Gravatar of johnleemk johnleemk
    11. May 2011 at 12:08

    Scott,

    I visit The Money Illusion every day just to follow the conversation in these comments. I think you’re making some really powerful points here in your conversations with Doc Merlin about inflation, and with Morgan about the importance of liberalism, and I think both topics would be a worthy of a post when you return from your sabbatical. In fact, you (or maybe even some underpaid graduate/undergraduate assistant) could probably write one up right now just by editing together these conversations.

  79. Gravatar of Morgan Warstler Morgan Warstler
    11. May 2011 at 23:28

    Scott, because it like everything in life, is really a choice between lessor evils.

    The MORALITY of Dems (legalized theft) is corrupt.

    As such, ANY strategy that removes/weakens positive rights without causing negative rights violations is just.

    It is purely logically; since the money WILL be spent you have to pick your poison.

  80. Gravatar of Morgan Warstler Morgan Warstler
    11. May 2011 at 23:33

    logical

    er, in ten years grammar will be automatic.

    Note: think of the human upside to destroying the “grammar” filter. Suddenly a much larger % of participants sneak through our defenses and force us to weigh their ideas directly.

  81. Gravatar of Scott Sumner Scott Sumner
    12. May 2011 at 07:25

    johnleemk, Thanks, I am pretty sure I have made the points in previous posts, but I’ll do something on inflation when I return. Inflation seems to be an increasing concern, although I really don’t see why the press focuses on 2% inflation when we have 9% unemployment.

    Morgan, You said;

    “It is purely logically; since the money WILL be spent you have to pick your poison.”

    I agree, and military spending is much more poisonous than Social Security spending.

  82. Gravatar of Morgan Warstler Morgan Warstler
    14. May 2011 at 12:56

    Agreed.

    But free and equal healthcare is more poisonous than military spending.

    Until what the Dems want to give away is just the cheap old medical care (what $4k per man, per year can buy) I’d prefer we have a giant stick instead.

    Military you can always cut back on, free healthcare you can’t.

  83. Gravatar of Philo Philo
    15. May 2011 at 20:26

    Prof. Harvey writes: “Because there is a lag between purchasing inputs and selling output, most firms have to borrow money (working capital) to bridge the gap.” This is not true; working capital need not be borrowed. For various reasons many firms leverage themselves, but the time-lag between purchasing inputs and selling output is not forcing leverage upon them. Some businesses, though facing the same time-lag, are financed without borrowing.

    The oil shock must have caused some firms to go out of business, and others to reduce their operations; these firms would not have increased their demands for borrowing, as Harvey assumes. There is no general reason to expect a rise in the price of a particular input to lead, ceteris paribus, to an increased demand for money.

    When a commercial bank tries to sell Treasury bonds to the Fed, the Fed is under no obligation to buy them; it can always let the bank sell them to someone else. This will satisfy the bank’s desire for money–reserves–without increasing the overall money supply. The Fed should have done more of this during the 70s.

  84. Gravatar of Scott Sumner Scott Sumner
    16. May 2011 at 05:11

    Morgan, You said;

    “Military you can always cut back on, free healthcare you can’t.”

    And then there is George Bush, who provided both.

    Philo, I agree. Who is Professor Harvey?

  85. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. May 2011 at 10:02

    Harvey sounds like Arthur Burns testifying before congress; ‘Inflation? Why ask me, I’m just head of the Fed. Ask the labor unions and corporate executives.’

  86. Gravatar of marcus nunes marcus nunes
    17. May 2011 at 05:55

    Patrick
    Exactly. The best reference to Artur Burns views on inflation is from Hetzel:
    http://www.richmondfed.org/publications/research/economic_quarterly/1998/winter/pdf/hetzel.pdf
    The sad part is that Prof Harvey is sending people out into the world with very misguided views about MP!

  87. Gravatar of B B
    17. May 2011 at 07:42

    Can I just say I enjoy seeing Scott pop up in the comment sections of macro blogs?

    http://www.hulu.com/watch/12939/field-of-dreams-if-you-build-it-he-will-come

    “If you blog it* he will come”

    *It being the liquidity trap or inflation rate targeting.

  88. Gravatar of MikeDC MikeDC
    17. May 2011 at 11:28

    Doc Merlin,
    You said:
    “This is a pretty serious bias in the CPI measure considering the price of housing makes up a substantial portion of family consumption.”

    My understanding is that the CPI doesn’t measure the asset price of housing, but instead employs some kind of goofy “rental equivalence” value. While I think the exact method they employ is kind of goofy, I believe it ends accounting for your concern and giving the a “right” answer in the aggregate. It’s pretty much equivalent to measuring mortgage payments.

    Hence, the CPI doesn’t feature a massively negative number for its “shelter” component that’s obscuring massively positive numbers in the food and energy components. By the way, the high level CPI-U breakdown is here. http://www.bls.gov/news.release/cpi.nr0.htm Energy costs are indeed skyrocketing, and I suspect that will ultimately feed into everything else, but I don’t see how the CPI itself is woefully misleading.

    It’s true that energy costs are a bigger problem than falling home values because the former represents a real loss of disposable income while the latter represents only a paper loss, but it still seems to me much bigger problem is if you’re one of the 4-5% of unemployed people who shouldn’t be unemployed, your have less income.

  89. Gravatar of Scott Sumner Scott Sumner
    17. May 2011 at 13:52

    Patrick and Marcus, Who’s this Harvey guy?

    B, Thanks.

  90. Gravatar of Dustin Dustin
    17. May 2011 at 14:53

    Scott, Harvey is the guy who doesn’t understand the hot potato effect. He’s a Professor of Economics at Texas Christian University, and says in response to Marcus in the comments that “Money is the result, not the cause, of inflation”.

    What does that mean? Money is the result, not the cause of inflation?

  91. Gravatar of Scott Sumner Scott Sumner
    17. May 2011 at 16:14

    Dustin, Yes, now I remember.

  92. Gravatar of Jim Glass Jim Glass
    17. May 2011 at 16:32

    Harvey is one of the surprisingly growing number of Chartalist “Modern Monetary Theory” people (as if there is anything modern about chartalism).

    Back in the days of usenet’s sci.econ I met a few of their early interesting characters (as did Patrick). Their chief apostle back then was Warren Mosler, and he’s still a leading one from what I see though there are others now.

    Jamie Galbraith and a few other accredited economists have joined their ranks, and they’ve become signficant enough for Krugman to express puzzlement about them by name in his column a couple times.

    To see what they’re up to, check their Seven Deadly Frauds of Economic Policy. (The tale therein of Mosler lecturing a disbelieving Larry Summers on the paradox of thrift makes it worthwhile for entertainment value alone.)

    What does that mean? Money is the result, not the cause of inflation?

    The supply curve for money is horizontal, so however much is demanded appears as a result of whatever.

    Also: private saving is created by govt borrowing, so we need more deficits. Money gets its value from its use in paying taxes (ye old chartalism). Debt isn’t a concern because the govt can always print money to service it. Govt spending creates money, taxes destroy it and thus control the money supply (the Fed doesn’t). Taxes are used to control consumer consumption and demand, and thus inflation, not to finance the govt, since the govt cannot become insolvent.

    Don’t ask me to reconcile these things. I’m really surprised that this movement is actually thriving and PhDs are joining it. It says something. It seems to be a bit hypnotic to some kinds of people (as well as giving a happy rationale to deficit-spend away as much as one wants).

    Here’s another PhD MMTer replying to Krugman for more flavor of what’s going on with them.

  93. Gravatar of Scott Sumner Scott Sumner
    17. May 2011 at 17:01

    Jim, The Harvey piece made the following claim, if I recall:

    Open market purchases aren’t inflationary, because if someone sold bonds to the Fed for cash, that must mean they want to hold more cash. So the demand for money rises with the supply.

    I’d argue that the Fed pays whatever is necessary to dislodge bonds, and if they pay me a billion dollars cash for my T-bonds, that does not mean I now have a demand for an extra billion dollars in cash. Instead I will probably try to swap that cash for some other good, service, or asset. If everyone else tries to do the same, the value of cash will fall. That seems obvious to me. Why do they deny that argument?

  94. Gravatar of Scott Sumner Scott Sumner
    17. May 2011 at 17:15

    Jim, I tried to get through that reply to Krugman, but it’s pretty incomprehensible. She seems to assume that when the government issues a trillion dollars in debt, the monetary base falls by a trillion, hence net wealth is unchanged. Or at least that’s what I thought she said. Perhaps I misunderstood–but they’re never going to get anywhere without a clearer explanation of their ideas. That post is almost unreadable.

  95. Gravatar of W. Peden W. Peden
    17. May 2011 at 17:30

    As far as I can tell, once one cuts through the (astonishingly obscure) explanations of the MMTheorists, they have three interesting beliefs-

    (1) Money is not neutral, even in the long long run.

    (2) Saving = government deficits

    (3) Money is endogenous.

    (I’m not sure about (3), because it seems to sit uneasily with (1).)

    Like Post-Keynesianism, underneath the obscurity and pretentiousness there are a few central tenets that one can reasonably critique on empirical grounds. So while the MMTheorists seem hopelessly lost on the surface, they actually have a pretty coherent (but unsound) approach that looks impressive when they are attacking certain strawmen and the more bone-headed fiscal hawks.

  96. Gravatar of W. Peden W. Peden
    17. May 2011 at 17:39

    Jim Glass,

    On the point about the magnetism of MMT: the only two theories that I’ve seen attract similar dedicated support are Georgism and Marxism. Even the most dedicated monetarists and Keynesians I’ve known have tended to be “Keynesian BUT”. In fact, in the case of many of them like Robinson, Hicks and Samuelson, they were “Keynesian BUT look how I can make it all much better!”

    I’ll put forward a dubious conjecture: certain theories attract people who aren’t very familiar with economics. The first economic theory one understands always seems very impressive. I thought that Karl Marx was the greatest thinker who ever lived when I was 12/13 years old. If I hadn’t read about money neutrality and the role of money in the economy and the history of finance, I’m sure I’d think that MMT was brilliant.

  97. Gravatar of W. Peden W. Peden
    17. May 2011 at 17:41

    Oh, and there also seems to be some sort of Post-Keynesian ultra-sticky-price thing going on in MMT i.e. an increase in investment has absolutely no affect on aggregate prices while there is spare capacity.

  98. Gravatar of Jim Glass Jim Glass
    17. May 2011 at 17:52

    Jim, The Harvey piece made the following claim, if I recall:

    Yes, and I agree with what you say.

    I read the piece as saying the Fed cannot increase the money supply because if the public’s demand for money is sated, it won’t be able to make anyone take money for a T-bill. Quoting, emphasis in original:
    ~~~~~~

    Remember that Friedman used a helicopter -– indeed, he had to, for there was no other way to make the example work. This wasn’t just a simplifying device, it was critical, for it allowed the central bank to raise the money supply despite the wishes of the public.

    However, that can’t happen in the real world because the actual mechanisms available are Fed purchases of government debt from the public, Fed loans to banks through the discount window, or Fed adjustment of reserve requirements so that the banks can make more loans from the same volume of deposits. All of these can raise M, but not a single solitary one of them can occur without the conscious and voluntary cooperation of a private sector agent.

    You cannot force anyone to sell a Treasury Bill in exchange for new cash; you cannot force a private bank to accept a loan from the Fed…
    ~~~~~~~

    The answer that hit me was, my demand for money balances may be sated but my demand for profit never is. So if the Fed offers me $1,000+ for a $1,000 bill I’m taking the money for the profit. Then because I don’t want to hold money I start buying other stuff with it, and the hot potato is passing along.

    Is there something so wrong with this that a PhD econ professor like him doesn’t consider it or dismisses it out-of-hand?

  99. Gravatar of W. Peden W. Peden
    17. May 2011 at 18:04

    Jim Glass,

    “Is there something so wrong with this that a PhD econ professor like him doesn’t consider it or dismisses it out-of-hand?”

    Well, you’re getting into repeated microeconomic transactions in macroeconomic theory; you’re bringing up the issue of something’s role over time and not just at a particular instant; you’re actually considering the role of microeconomic agents in monetary economics.

    That sounds like dangerous thinking to me!

    How many agents have a demand to hold onto any significant portion of non-interest bearing money? It astounds me how unempathetic some economics can be.

  100. Gravatar of Jim Glass Jim Glass
    17. May 2011 at 18:32

    Jim, I tried to get through that reply to Krugman, but it’s pretty incomprehensible …

    The author is an Assistant Professor of Economics at Franklin and Marshall. I’m glad I don’t have to take notes in her class. :-)

    they’re never going to get anywhere without a clearer explanation of their ideas. That post is almost unreadable.

    I’ve never understood how their view holds together, yet their numbers are growing. Galbraith isn’t a nobody. Krugman’s responded to them at least twice. Go figure.

  101. Gravatar of Jim Glass Jim Glass
    17. May 2011 at 18:35

    underneath the obscurity and pretentiousness there are a few central tenets that one can reasonably critique on empirical grounds. So while the MMTheorists seem hopelessly lost on the surface, they actually have a pretty coherent (but unsound) approach that looks impressive when they are attacking certain strawmen…

    On the point about the magnetism of MMT: the only two theories that I’ve seen attract similar dedicated support are Georgism and Marxism.

    Oh, I agree. Back in usenet sci.econ days I had *a lot* of back-and-forth with Georgists. (Patrick ??) Take a counter-intuitive Ricardian insight, real enough (if state-of-the-art circa 1820s) and build what was for some a near religous belief on it. I wandered into the economics section of reddit.com recently and it was impressively full of Paleo-Austrians acting in much the same way, so it happens.

    (My experience with Marxism was in Eastern Europe, so I’m not going into that. It may have started off as the same process, but scale makes a difference.)

  102. Gravatar of W. Peden W. Peden
    17. May 2011 at 18:46

    I forgot about Paleo-Austrians, although that seems to be far more seductive to people who should know better. In fact, there’s a good analysis to be made of why liquidationism and inflation-phobia are such powerful ideas.

    One of the things about all four of these ideas is that, while there’s a lot of muck and mire, they can all be washed down into a fairly simple idea that has obvious policy implications. Compared with spending ages discussing monetary aggregates or consumption functions or multipliers which may (or may not) have certain policy implications, such simplicity and practicality is obviously going to be attractive to laymen.

    However, that doesn’t explain the fervour these views can attract. As you say, there is something almost religious about it.

  103. Gravatar of Scott Sumner Scott Sumner
    18. May 2011 at 05:18

    I sat next to James Galbraith at a recent AEA panel–I’m surprised he buys into the MMT ideas.

  104. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. May 2011 at 09:22

    ‘…such simplicity and practicality is obviously going to be attractive to laymen.’

    It isn’t just laymen, as this guy from TCU demonstrates. As Jim mentioned, we used to encounter numerous members of the Keepers of Odd Knowledge Society on usenet’s sci.econ, and some had Phd in economics.

    One fine day around Thanksgiving of 2002 I found myself debating Hal Varian (with some help from David Friedman)over something he’d co-written in ‘Information Rules’. We walked him through the illogic of his argument at least four times over two weeks, and each time he just refused to confront it. There was some psychological barrier he couldn’t overcome.

    At least he was polite.

  105. Gravatar of marcus nunes marcus nunes
    18. May 2011 at 13:40

    Scott
    I tried to have a sensible debate with John Harvey (a Professor of Economics at Texas Christian University, where I have worked since 1987. My areas of specialty are international economics (particularly exchange rates), macroeconomics, history of economics, and contemporary schools of thought).
    I can´t make any sense from his “belief system”. Am not going back there anymore!

  106. Gravatar of W. Peden W. Peden
    18. May 2011 at 13:59

    Patrick R. Sullivan,

    I’m not sure if I can find a rationalisation in the case of qualified academic economists.

  107. Gravatar of marcus nunes marcus nunes
    18. May 2011 at 14:31

    Things that make you want to “cry”:
    http://blogs.wsj.com/economics/2011/05/18/the-feds-exit-whats-up-for-debate/?mod=WSJBlog

  108. Gravatar of marcus nunes marcus nunes
    19. May 2011 at 05:30

    Bullard goes “ballistic”
    http://www.stlouisfed.org/newsroom/speeches/pdf/2011-05-18.pdf

  109. Gravatar of Scott Sumner Scott Sumner
    21. May 2011 at 05:19

    Marcus, That Bullard piece is very dismaying. Bullard seems to think the Fed is controlling inflation because the public “cares” about inflation. But the public doesn’t know what inflation is!! Most people think inflation is something that lowers their living standards, which is off course only true for the type of inflation that the Fed has no control over!! Under that model the Fed should only fight supply-side inflation, not demand side inflation. (Because only supply side inflation reduces the aggregate income of Americans.)

    I’ll do a post when I return. Thanks for the link.

  110. Gravatar of johnleemk johnleemk
    22. May 2011 at 18:03

    This sort of analysis linking QE2 to food inflation seems very very iffy to me: http://www.telegraph.co.uk/finance/economics/8492078/How-the-Fed-triggered-the-Arab-Spring-uprisings-in-two-easy-graphs.html

    Do people no longer understand the difference between supply- and demand-side inflation?

  111. Gravatar of W. Peden W. Peden
    23. May 2011 at 04:38

    johnleemk,

    They never really have.

    Nor has the impossible trinity been understood i.e. the inflationary problems in China and India are the natural consequence of trying to hold their exchange rate down against the dollar, rather than a sinister outcome of QE2. Absent capital controls, one can have either a fixed exchange rate or control over domestic monetary conditions, but not both.

  112. Gravatar of Gabe Gabe
    23. May 2011 at 06:16

    So when do you think the QE3 backers will have enough power to get the next round of easing done?

    a) when the dow falls 5%
    b) when the dow falls 10%
    c) when the dow falls 20%
    d) when the dow falls 30%+?
    e) already getting done…just without formal announcement and moniker?

  113. Gravatar of Lucas Lucas
    24. May 2011 at 13:12

    Scott, I’m trying to form a coherent model of your macro theory using a real world example: the inflation of the 70s. Correct me if I’m wrong:
    High inflation appeared in the 70s as a result of various supply-side shocks (oil shocks, slowdown in productivity growth, etc) exposing the loose monetary policy (expressed as high current NGDP growth) and unanchored expectations (expected future NGDP?) due to a lack of credibility of the Fed, the wage/price spiral or both.
    If this view is correct, what’s the practical difference with Robert Gordon’s triangle model [1]?
    Thanks in advance.

    1- http://en.wikipedia.org/wiki/Triangle_model

  114. Gravatar of Scott Sumner Scott Sumner
    24. May 2011 at 13:52

    Lucas, I don’t agree with that model. RGDP growth was normal during the 1970s. That means the 11% NGDP growth between late 1971 and 1981 was both a necessary and a sufficient condition for high inflation. NGDP growth actually slowed during the two supply shocks (1974 and 1980). The problem was easy money causing fast NGDP growth–supply shocks merely moved inflation around a bit, but didn’t affect the average rate of inflation.

  115. Gravatar of Scott Sumner Scott Sumner
    24. May 2011 at 13:57

    johnleemk, Yes, people do confuse supply and demand shocks. I can’t see how US monetary policy would cause food inflation in other countries. If we have easy money, they can always revalue their currencies.

    W. Peden, I agree.

    Gabe, I doubt we’ll see QE3. If they decide to become more aggressive, I hope they use a more effective tool this time.

    I do agree that if the Dow falls 30%, we’ll see QE3. But I doubt stocks will fall that much.

  116. Gravatar of Lucas Lucas
    24. May 2011 at 14:49

    Thanks Scott. So you believe that supply shocks play at best a minor role in most inflationary processes? What’s your opinion of the concept of “built-in inflation”?

  117. Gravatar of Scott Sumner Scott Sumner
    26. May 2011 at 05:39

    Lucas, Yes, supply shocks don’t have much impact on US inflation, except in the very short run.

    I don’t see any value in the “built in inflation” concept. Inflationary expectations are a more useful concept (and is somewhat related.)

  118. Gravatar of Lucas Lucas
    26. May 2011 at 10:56

    So, if I were to synthesize your view of inflation with the New Keynesian view as expressed in the triangle model (built-in inflation, demand-pull inflation, and cost-push inflation) it would be correct to say that:
    - Cost-push inflation has a minor impact, except in the very short run.
    - Built-in inflation is better represented by inflationary expectations which are forward-looking i.e. it’s the expected path of NGDP.
    - Demand-pull inflation is the main culprit in inflationary processes and it’s related to the growth in NGDP that can’t be translated into growth of real output.
    Is it useful to think in limits to real output expansion using concepts like the NAIRU and output gaps?

  119. Gravatar of Scott Sumner Scott Sumner
    27. May 2011 at 17:08

    Lucas, That sounds about right. I don’t care about inflation (only nominal GDP growth), so I don’t focus on output gaps and the NAIRU. It’s difficult to know the level of either the output gap or the NAIRU.

  120. Gravatar of Lucas Lucas
    2. June 2011 at 16:01

    Thanks again Scott. I now think that I understand your perspective and I find myself in agreement with it.
    Now, I’ll use it to explain why we have 25% inflation and 7% growth in RGDP with a slowly depreciating currency, negative real rates and various supply-side shocks.

Leave a Reply