About the GDP numbers
Our GDP numbers are notoriously unreliable, so keep that in mind as you read the following. There are two ways of estimating GDP; income and expenditure. The income numbers are considered more reliable, so naturally the press ignores them and reports the expenditure numbers. The estimated expenditure growth rate fell from 4.4% in the 3rd quarter to 3.2% in the 4th quarter. The income numbers aren’t in yet, but from preliminary data it looks like GDP growth increased from 2.6% in the 3rd quarter to about 4% in the 4th quarter.
BTW, you notice I don’t specify “real” or “nominal” GDP. Obviously when people don’t specify an economic variable, they mean nominal. If you mean real wages or real interest rates, you say so. That’s how it should be for GDP. If it was, perhaps the Great Recession would never have happened.
So the mystery of the slow recovery continues to be no mystery at all. Tight money hasn’t allowed the sort of robust NGDP growth you’d need for a brisk recovery. Period. End of story.
Or at least it should be the end. In the comment section people complain I’m merely stating a tautology, as a fall in NGDP is a recession. No it’s not. Zimbabwe had the fastest NGDP growth in the world a few years back, and was deep in recession.
A more sophisticated argument is that the correlation between NGDP and RGDP doesn’t imply causation, and/or the Fed can’t control NGDP.
There have been a variety of natural experiments throughout US economic history that show how NGDP shocks impact RGDP. A sudden fall in NGDP that is due to a decline in the monetary base (say 1920-21, or 1929-30) will also tend to reduce RGDP. When an expansionary shock like dollar devaluation raises NGDP, then RGDP also tends to rise. That does not mean they are always correlated—as we saw in Zimbabwe, supply shocks can also impact the economy.
As far as the Fed’s ability to control NGDP, I don’t see how that can be seriously questioned. Economic theory says that permanent increases in the (non-interest-bearing) monetary base are inflationary. And there is no example in all of world history where a fiat money central bank tried to inflate and failed.
To summarize, the Fed can control NGDP, and a more stable path for NGDP will produce a more stable path for RGDP. The best post showing that link was produced by Marcus Nunes (graphs 11&12).
Marcus also pointed to a recent NGDP targeting endorsement by John Quiggin. Naturally I agree with him, but at the risk of seeming picky I’m going to contest one small part of Quiggin’s essay:
Last but not least, a nominal GDP target would create room for fiscal policy as well as monetary policy. What is needed now is the abandonment of counterproductive austerity policies as a response to the slump in Europe and the US. Austerity should be replaced by a combination of short-term fiscal stimulus and long-run measures aimed at a sustainable budget balance. That can only be achieved if central banks co-operate with pro-growth fiscal policy, instead of seeking to counteract it in the name of inflation targets.
He’s right that inflation targeting makes fiscal stimulus ineffective. But I’m afraid the same applies to NGDP targeting. The good news (as Nunes pointed out) is that fiscal policy is not needed if central banks target NGDP.
Bill Woolsey sent me a very nice NGDP endorsement from Sven Wilson at the website PileusBlog.com.
Tags:
27. January 2012 at 08:42
Scott
I just posted a visual account of the economy´s predicament:
http://thefaintofheart.wordpress.com/2012/01/27/understanding-the-economy%C2%B4s-predicament/
27. January 2012 at 09:14
Again, what a superb post by Scott Sumner.
I think the first step to properly organizing commerce to benefit all were the insights of Adam Smith.
The second step is Market Monetarism.
With these two conceptual lenses we can create material wealth in abundance and relative economic security.
We have to knock down some hoary, encrusted icons of the left and right to get there, but I think we can do it.
27. January 2012 at 09:45
“The income numbers are considered more reliable, so naturally the press ignores them and reports the expenditure numbers.”
That is only defensible by the use of the passive voice. Who, pray, considers the income numbers more reliable? Why on earth would anyone do so?
“BTW, you notice I don’t specify ‘real’ or ‘nominal’ GDP. Obviously when people don’t specify an economic variable, they mean nominal.”
This just makes me laugh.
27. January 2012 at 09:51
“He’s right that inflation targeting makes fiscal stimulus ineffective. But I’m afraid the same applies to NGDP targeting.”
P changes so slowly with a change in GDPn that fiscal policy could conceivably work with inflation targeting in the short run as GDPn moves off track. If the Fed directly targets GDPn, then the magical fiscal multiplier will be zero.
27. January 2012 at 09:55
Richard:
Correction… if the Fed *successfully* targets NGDP. Of course, the Fed has shown itself either unable or unwilling to do so. Therefore, who cares?
27. January 2012 at 10:13
“So the mystery of the slow recovery continues to be no mystery at all. Tight money hasn’t allowed the sort of robust NGDP growth you’d need for a brisk recovery. Period. End of story.”
No, not period and not end of story.
You’re just presuming your model is true when you say NGDP boosts recovery and that if there is no recovery then it’s because NGDP wasn’t boosted enough.
You can never be wrong no matter what happens with that theory, which is fine in principle, as long as you can trace your non-falsifiable argument back to irrefutable conceptual truths that make your argument the only only consistent one.
“Or at least it should be the end. In the comment section people complain I’m merely stating a tautology, as a fall in NGDP is a recession. No it’s not. Zimbabwe had the fastest NGDP growth in the world a few years back, and was deep in recession.”
That just shows the NGDP model to be incomplete. If NGDP was skyrocketing in Zimbabwe, then why was the Zimbabwe economy in recession at all?
If you can’t explain why Zimbabwe was in recession using NGDP, then what if the US adopts NGDP targeting, and successfully targets the magical 5% rate, and the economy goes into recession? Are you saying it is impossible for economies to go into recession as long as NGDP grows at 5%? If you say economies can’t go into recession if NGDP grows at 5%, then again, how do you explain Zimbabwe?
You see, the NGDP framework suffers from grave flaws that preclude it from being a legitimate set of non-falsifiable propositions.
No individual seller sells into, and no individual investor invests into, “nominal gross domestic product”, or “total money spent on output.”
Sellers sell into and investors invest into DIFFERENCES in demands. They exploit demand differences by buying certain things at certain prices, in order to sell other things at higher prices that they can foresee that others cannot or do not (note: “other things” sold includes the same physical things bought, but bought from a different location, person, and other intangibles, that alter the perceived value of the good sold to buyers).
If “aggregate demand” is boosted, then this says nothing about the differences in demands within the aggregate demand that sellers and investors actually act in accordance with and make their selling and investment decisions.
If the economy is discoordinated in terms of relative prices, because the capital stock invested isn’t geared towards real consumer preferences, on account of past monetary manipulation that misled people, then a higher aggregate demand, higher price for everything utilized in their existing positions, cannot the solve the problem. It didn’t help the employment and productivity situation in Nevada when the government printed and spent money on missiles produced in North Carolina that will be blown up overseas, but that boosted “aggregate demand” anyway. It didn’t help the Zimbabwe economy either, even though NGDP was very high.
The flaw is treating aggregate demand as if it’s some sort of existent in itself that has a causal nature on other things like employment and output. You say “a more sophisticated view” doesn’t treat NGDP as causal, but that’s all you ever argue NGDP is when you utilize it. You just said in your third paragraph that NGDP is causal. You said:
“Tight money hasn’t allowed the sort of robust NGDP growth you’d need for a brisk recovery.”
That is a claim that NGDP growth has a causal influence on economic recoveries. It says that the cause: “NGDP growth”, will have the effect: “economic recovery.”
You tried to explain this causal claim away by deferring to past historical events, which by themselves cannot elucidate causality, but must be inferred using an a priori causal theory. So you deftly switch away from causality, and towards:
“There have been a variety of natural experiments throughout US economic history that show how NGDP shocks impact RGDP. A sudden fall in NGDP that is due to a decline in the monetary base (say 1920-21, or 1929-30) will also tend to reduce RGDP.”
This is just an interpretation of past data that uses the same causal relationship theory between NGDP and economic output. You point to instances of correlations between NGDP declines and RGDP declines, and you infer a causal relationship between the two declines, namely, the fall in NGDP causes a fall in RGDP.
But how can you be sure that the correlations you see in the data are in fact causally related, unless you have already accepted the NGDP theory itself as causal? The answer is you can’t. You must justify the NGDP causality story by laying out the precise arguments using logic and conceptual truths that make it irrefutable, or at least able to stand up to the most easy of criticisms, one of which I included above about differences in demands being the factor, not aggregate demand.
“When an expansionary shock like dollar devaluation raises NGDP, then RGDP also tends to rise. That does not mean they are always correlated””as we saw in Zimbabwe, supply shocks can also impact the economy.”
What if the 2008 crash and subsequent recession was a supply side shock, and NGDP fell because of that, and not the other way around? Are you frustrated with that notion because you think “clearly” it must have been a demand shock (i.e. NGDP) that caused the recession? Wouldn’t that just put you back to presuming your model of “NGDP causality” is true no matter what the data says?
“As far as the Fed’s ability to control NGDP, I don’t see how that can be seriously questioned. Economic theory says that permanent increases in the (non-interest-bearing) monetary base are inflationary.”
Yes, but the spending is proximately under the control of non-Fed entities. Targeting NGDP of a specific rate can and probably will require very large changes in the monetary base, depending on the demand for money. It is possible in an economy with very high demand for money, and cash holdings, that the Fed will have to trade off 1. further inflation to target NGDP and reaching a tipping point where people’s demand for money rapidly collapses and prices spiral out of control, and 2. ceasing further inflation, people still have a high demand for cash, and missing the NGDP target.
NGDP only includes spending, not cash balances, and because of that, the Fed might lose control over NGDP.
“And there is no example in all of world history where a fiat money central bank tried to inflate and failed.”
How about the central bankers of the 1st and 2nd Banks of the United States during the 19th century, who tried to inflate but failed because the central banks were abolished?
Or do you mean just those central banks that exist? Well that isn’t saying much. Their purpose is to inflate. If they don’t inflate, then they aren’t central banks.
What if a future economy is in such shambles, and the demand for money reaches such a high level, that the central bank has to inflate and purchase the assets of, and hence own, whole or parts of manufacturing industries? What if they monetize the entire Treasury’s debt, but it’s still not enough?
How much of the economy are you OK with the Fed owning? When will you reject NGDP targeting on the basis that the government’s central bank owns “too much stuff”?
What is the real difference between a government’s Central Bank owning the means of production in an economy, and the government’s Treasury/Congress owning the means of production in an economy? What do you say to someone who knows central economic planning doesn’t work, regardless if the central economic planners are elected politicians, central bankers, or Uncle Goober?
27. January 2012 at 10:14
I’m surprised by the split between inflation and real growth. From the 3rth quarter to the 4rth quarter, nominal GDP fell from 4.4% to 3.2% , but real GDP rose from 1.8% to 2.8%. With falling NGDP, you would have thought RGDP would have fallen as well according to the “nominal shocks matter” maxim. One could argue that this shows nominal GDP is irrelevant to real GDP. Then again this may also prove that most of the nominal growth will translate into real growth when there’s low capacity utilization and the inflation from the past quarters was mostly do to supply inflation. Or maybe this doesn’t say much because it’s only the preliminary report of just a single quarter.
27. January 2012 at 10:32
“As far as the Fed’s ability to control NGDP, I don’t see how that can be seriously questioned. Economic theory says that permanent increases in the (non-interest-bearing) monetary base are inflationary. And there is no example in all of world history where a fiat money central bank tried to inflate and failed. ”
Huh??!! When did ‘creating inflation’ become equal to ‘controlling NGDP’ ?
27. January 2012 at 11:03
Major_Freedom: “That just shows the NGDP model to be incomplete. If NGDP was skyrocketing in Zimbabwe, then why was the Zimbabwe economy in recession at all? If you can’t explain why Zimbabwe was in recession using NGDP, then what if the US adopts NGDP targeting, and successfully targets the magical 5% rate, and the economy goes into recession? Are you saying it is impossible for economies to go into recession as long as NGDP grows at 5%? If you say economies can’t go into recession if NGDP grows at 5%, then again, how do you explain Zimbabwe?”
You seem to misunderstand Sumner’s theory. NGDP is not all there is to macroeconomics. Sumner has said many times that economies also experience real shocks. If an asteroid wipes out Europe, the world’s real output will fall. There is nothing any economic theory or policy can do about that.
Sumner’s point is that, IN ADDITION to real shocks, there are ALSO nominal shocks. In the long run, the price level of money has no effect on the economy. But in the short run, sticky wages and prices mean that a nominal shock can cause a real recession. A real recession, that is completely, 100%, avoidable, merely by using the proper macroeconomic policy.
A recession very much like the one the US is currently in the middle of.
But don’t confuse Sumner’s analysis of THIS recession, with the idea that he is trying to use the same theory to predict EVERY recession. The oil shocks of the 1970’s were an important part of macroeconomics that had nothing to do with NGDP as a causal factor.
27. January 2012 at 11:08
Major_Freedom: “What if the 2008 crash and subsequent recession was a supply side shock, and NGDP fell because of that, and not the other way around?”
Even if you were right, the point is that NGDP need NEVER fall. Even if there was some kind of a real shock to the economy, there is no benefit in adding an additional nominal shock on top of the real shock. That just makes a bad situation even worse. The nominal shock would cause additional damage to the economy, that had already been damaged by your hypothetical real shock.
27. January 2012 at 14:13
“Huh??!! When did ‘creating inflation’ become equal to ‘controlling NGDP’ ?”
Is your argument that nominal national income would not increase if the monetary authority doubled the money supply?
27. January 2012 at 14:35
Scott,
This came up while you were arguing with the entire internet. John Cochrane was posting about the Fed’s Balance Sheet constraints. Sort of, what would happen if the Fed had to take a huge loss. I’d be curious for your take on the issue.
“http://johnhcochrane.blogspot.com/2012/01/worlds-biggest-hedge-fund.html”
27. January 2012 at 15:11
Scott,
“Or at least it should be the end. In the comment section people complain I’m merely stating a tautology, as a fall in NGDP is a recession. No it’s not. Zimbabwe had the fastest NGDP growth in the world a few years back, and was deep in recession.”
If I may provoke you a bit: Zimbabwe’s NGDP growth simply wasn’t large enough. Bear with me. If people expect NGDP growth to be faster than it really is, as is the case in a hyperinflation, there will be an excess demand for money. The central bank will be passively tightening.
Why will the people expect NGDP growth to be faster than it really is? Because it is essentially a run on currency. People want to sell because they expect other people wanting to sell and those selling will as a consequence ask higher prices. Or if you want to go a different-route: risk-aversion. People will ask higher prices because the cost of asking the expected prices is too high.
Now you cannot solve this by loosening further; you have to tighten and tighten credibly to signal a change. In that sense it’s exactly the opposite of a ‘liquidity trap’. Both however, ‘funnily’ enough, can be explained as an excess demand for money.
27. January 2012 at 15:35
@ Edwin A and others…
IT’S INVENTORY!!!!
In Q3 2011, there was an inventory drawdown. In Q4 2011, there was an inventory rebuild (and then some). In absence of inventory, Q4 2011 was 0.8%… Going into Q1 2012, we have an inventory overhang – if AD doesn’t meet it, we’re all in deep doo doo.
27. January 2012 at 16:00
[…] About the GDP Numbers. […]
27. January 2012 at 16:40
Major Freedom:
As far as I can tell, Professor Sumner has not been participating in the rehashing of the debate over the merits of one monetary system over another, but is offering his insight on appropriate management of the monetary system we currently have based on the characteristics of that system only.
He isn’t an inflationist. His argument is pretty simple (as I understand it): the debt problems we have are a result of the change in the trend of NGDP growth because nominal debt contracts have inflation expectations built in that assume the historic trend. That trend is expected to be managed in an appropriate way, expressed as the dual mandate to the Fed by congress, to avoid a scenario where NGDP growth is either excessive or too little, with a mandated balance between inflation and employment. The NGDP level targeting plan would get us back to the historic trend to stop needless destruction, and provide stability in the future so that nominal shocks don’t add to recessions and cause needless economic ruin.
One of the reasons this recession has been so bad is because the Fed lost credibility in its willingness or ability to effectively manage monetary policy during the crisis, meaning there was and has been the expectation for the Fed to manage it rather than disavow the need to do so and incur the natural consequences of deflation, wildly deviate from its mandate. Expectations matter. And whether you agree that the Fed should have done more or not does not change the fact that markets expected more or change happens when the expectation isn’t met.
My suggestion is that if you don’t like this concept, that your argument isn’t with Professor Sumner, it’s with the government. You aren’t going to get anywhere by coming here and insulting him or the rest of us who understand what he is saying. He is dealing with what is, not some dogmatic view of the ideal political economy, which you, in my opinion, have serious problems being able to differentiate between.
I’d also suggest a study of the social history of the Great Depression to get perspective on what kind of impact needless economic destruction had on average folks. I started it, but couldn’t finish an entire analysis – it was too heartbreaking. It was enough, however, to get an idea of what you so callously describe as “yammering to government to do something.” I really don’t think you have any clue at all the gravity of the issues you come here to discuss or what the kinds of things you say really mean, or you wouldn’t be saying them.
27. January 2012 at 17:29
@ Bonnie
Who said economics has to be dry and dreary? Your passion was heartwarming!
27. January 2012 at 17:47
Major Freeman:
“How much of the economy are you OK with the Fed owning? When will you reject NGDP targeting on the basis that the government’s central bank owns “too much stuff”?”
I don’t think we have to worry about that for a while. The publicly held debt is about $10 Trillion. The Federal Reserve’s balance sheet is $3 Trillion, even in it’s temporarily swollen state. It could triple again before it owns all the Treasury securities. If that’s not enough, it could buy up all the government backed loans (student loans, etc.), that’s well over a trillion. After that, it could buy up the entire municipal bond market of $3 Trillion – secured by future federal aid, so there’s no risk of default. If the Fe’s balance sheet went up to $14 Trillion and NGDP didn’t increase, I’d be quite surprised. But if it happens, the Fed would make enormous profits, saving the Treasury hundreds of billions in interest.
“What do you say to someone who knows central economic planning doesn’t work, regardless if the central economic planners are elected politicians, central bankers, or Uncle Goober?”
As long as the government has a currency, there has to be some planning. If you want to tie it to gold or some other commodity, then that is your plan. If you want the government to control the price of gold, then make that case. But don’t pretend it is any more free market than targeting NGDP or CPI or anything else. It’s not. When the government buys and sells unlimited amounts of gold at a price set by the government, it is engaging in central planning.
27. January 2012 at 19:45
Thanks for the link Marcus.
Ben, Thanks.
DR, A recent study showed that the initial NGDI estimate better predicts the final NGDP number than does the initial NGDP estimate.
Glad you enjoyed the joke.
Richard, That’s right, his argument is even more applicable to NGDP than P.
Major Freedom, You asked;
“What if the 2008 crash and subsequent recession was a supply side shock, and NGDP fell because of that, and not the other way around?”
Adverse supply shocks cause higher inflation, but in 2009 we had deflation for the first time in 50 years. That points to AD as being the likely culprit, although of course we can never be 100% certain.
During the first and second bank of the US we didn’t have fiat money.
If the Fed followed my advice, they’d own much less stuff than they do now.
Edwin, As I said, you are looking at the wrong number. NGDP growth most likely sped up in Q4, as the NGDI numbers are much more reliable. That’s probably why real growth was higher.
Ritwik, Those who deny the ability of the Fed to raise NGDP usually make a “liquidity trap” argument; that’s what I was implicitly referring to.
Charlie, The Fed’s profits are soaring much higher in recent years, and their investments are mostly in safe Treasury notes, so I’m not at all worried about Fed losses. If they took a few losses, then so what? The Treasury would bail them out.
Martin, But the demand for money tends to fall sharply during hyperinflation.
Statsguy, Or more likely the numbers are simply wrong.
Bonnie, You are right that I am not an inflationist. Today Paul Krugman recommended 4% to 5% inflation. If we do NGDP targeting, level targeting, then I don’t think we need higher inflation.
27. January 2012 at 19:48
Don Geddis:
“You seem to misunderstand Sumner’s theory. NGDP is not all there is to macroeconomics. Sumner has said many times that economies also experience real shocks. If an asteroid wipes out Europe, the world’s real output will fall. There is nothing any economic theory or policy can do about that.”
I realize that, and I know there’s more to NGDP. But how about something other than an asteroid, such as artificial low interest rates and credit expansion distorting the economic structure? Bank and financial panics? What happens if NGDP rises by 5% in the long run (with “catch up” inflation), and for some “unexplained” reason, there is an economic crisis? What will happen to the NGDP theory? Falsified? Or does it mean NGDP is still right, but it should have been 10%? Or 20%?
“Sumner’s point is that, IN ADDITION to real shocks, there are ALSO nominal shocks.”
What the heck is a nominal shock? Why would people suddenly stop spending money if it’s not something wrong with the real side of the economy? Nominal shocks are not primary. They are a result of problems on the real side.
“In the long run, the price level of money has no effect on the economy.”
We are never in the long run of a round of inflation, because the Federal Reserve System is almost always inflating, and so we are always in the short run effects of inflation, and thus always in an economy that is distorted by accelerating, then collapsing inflation to save the currency.
“But in the short run, sticky wages and prices mean that a nominal shock can cause a real recession.”
Nominal shocks don’t cause real recessions. That which causes the nominal shocks causes recessions.
Prices and wages are sticky? Compared to what standard? Some real world standard? Or some fantasy land standard of perfect information and instant price changes to every change in demand?
Sticky prices and wages is exacerbated by inflation, because it influences people to expect and hold out for higher prices as a matter of habit, and so when monetary conditions change and prices must fall, wages and prices are stickier downward than they otherwise would be if people grew up in a world of gradual price deflation.
“A real recession, that is completely, 100%, avoidable, merely by using the proper macroeconomic policy.”
Nope. The problems cannot be solved by inflation. The problems can only be solved by recalculation, which inflation hampers and prevents.
“A recession very much like the one the US is currently in the middle of.”
The Fed and the Treasury by their inflation and spending have delayed the necessary corrections, which is why the economy remains in the doldrums. However, the incredible inflation from the Fed accelerating since last July, has generated another false boom, and unemployment has steadily declined.
“But don’t confuse Sumner’s analysis of THIS recession, with the idea that he is trying to use the same theory to predict EVERY recession. The oil shocks of the 1970’s were an important part of macroeconomics that had nothing to do with NGDP as a causal factor.”
The 1970s was a period of stagflation. The oil shocks did not cause it.
27. January 2012 at 19:51
Don Geddis
“Major_Freedom: “What if the 2008 crash and subsequent recession was a supply side shock, and NGDP fell because of that, and not the other way around?”
“Even if you were right, the point is that NGDP need NEVER fall. Even if there was some kind of a real shock to the economy, there is no benefit in adding an additional nominal shock on top of the real shock.”
There is no benefit to adding a POSITIVE nominal shock to an economy that underwent a real shock due to previous positive nominal shocks.
“That just makes a bad situation even worse. The nominal shock would cause additional damage to the economy, that had already been damaged by your hypothetical real shock.”
It will make the situation worse in the short run, yes, because medicine tastes bad. But it’s a cure.
There is great damage from inflation, artificially low interest rates, credit expansion, and government spending.
27. January 2012 at 19:59
Scott, Nicole, etc.:
The desire to reach a state of rest is untenable in human life. Your metaphysics is all screwed up. You believe that optimality is a state of no change, and that change is evil. If changes are needed in the labor market, on account of consumers changing their tastes, if changes are needed in the capital markets, on account of consumers changing their time preferences, then that will require temporary unemployment and temporary idle resources, until the owners of capital and labor figure out where the consumers value them the most.
Your whole worldview is nothing but a violent war against the sovereign consumers. You don’t care about putting capital and labor in the places where consumers want them. You want capital to be used and labor to work, FOR ITS OWN SAKE. You want capital to be used for the sake of being used. You want labor to work for the sake of working. It doesn’t matter to you if the capital and labor are not directed towards voluntary consumer demand.
You want capital and labor to be used for your own desires through government power. But not all capital and labor. Only that capital and labor which is in transition between uses, where you can act like a pickpocket and steal money and wealth from those who are working, in order to put these workers to use in your own plans, like bridges to nowhere and building more government indoctrination camps called public schools.
You crap on consumer’s needs. You take dumps on their values. You want to replace their values, with your own, which you hide behind a veil of democratic wants. There is no individuality in your worldview at all. Such crudeness is why you don’t understand economics. You can’t understand that the foundation of all economics knowledge is through individual action, and in fact only has reality in individual action. By individual action it of course means individual action in groups or individual action alone.
27. January 2012 at 20:13
“I’ll tell you,
Eyes can no longer see
Things that only the heart can understand
The Key is same love,
It is impossible to be happy alone
The rest is Wave,”
http://www.youtube.com/watch?v=AaQGLpLTam4&feature=player_embedded
The rest is wave.
P.S. NGDP targeting now!!!
27. January 2012 at 20:13
Bonnie:
“As far as I can tell, Professor Sumner has not been participating in the rehashing of the debate over the merits of one monetary system over another, but is offering his insight on appropriate management of the monetary system we currently have based on the characteristics of that system only.”
Which is an implicit advocacy.
“He isn’t an inflationist.”
That’s funny. What else should one call a person who advocates for inflation? A deflationist?
“His argument is pretty simple (as I understand it): the debt problems we have are a result of the change in the trend of NGDP growth because nominal debt contracts have inflation expectations built in that assume the historic trend.”
But the debt was created by the very monetary system that produces the NGDP, and is a part of NGDP. If there is no inflation, and money production was put under the control of private property owners, then just like investors price in expected future oil supplies, the same thing could be done with the money commodity or commodities.
Saying that private debt must be respected like it’s some sort of “untouchable”, is just a sneaky way of begging the question. Inflation just rips off those who lent. Why should borrowers be rewarded and coddled?
“That trend is expected to be managed in an appropriate way, expressed as the dual mandate to the Fed by congress, to avoid a scenario where NGDP growth is either excessive or too little, with a mandated balance between inflation and employment. The NGDP level targeting plan would get us back to the historic trend to stop needless destruction, and provide stability in the future so that nominal shocks don’t add to recessions and cause needless economic ruin.”
They said the exact same thing about every single past magical plan of central banking abolishing the business cycle.
“One of the reasons this recession has been so bad is because the Fed lost credibility in its willingness or ability to effectively manage monetary policy during the crisis, meaning there was and has been the expectation for the Fed to manage it rather than disavow the need to do so and incur the natural consequences of deflation, wildly deviate from its mandate.”
Disavowed? Deflation? Where?
It’s always the same. Not enough inflation. Not enough spending.
“Expectations matter. And whether you agree that the Fed should have done more or not does not change the fact that markets expected more or change happens when the expectation isn’t met.”
So the solution is to put better people in charge of the Fed, right? Then the next generation fails. Then there will be a new magic target that this time will work. And so on. Over and over.
“My suggestion is that if you don’t like this concept, that your argument isn’t with Professor Sumner, it’s with the government.”
It’s with both.
“You aren’t going to get anywhere by coming here and insulting him or the rest of us who understand what he is saying.”
Insult? Where did I insult him? Was it before or after he condescendingly told me to open an intro textbook on macroeconomics?
I appreciate your desire to “protect the big fish”, but please don’t be so dishonest so as to accuse me of insulting anyone. I may have a stern and somewhat caustic method of argumentation, but insulting? That’s a stretch.
“He is dealing with what is, not some dogmatic view of the ideal political economy, which you, in my opinion, have serious problems being able to differentiate between.”
Dogmatic? Excuse me, but it’s dogmatic to believe that centrally planning the economy, especially something as important as money production and interest rates, can improve it.
Sumner isn’t dealing with what is at any less idealistic than myself. He doesn’t advocate the system the way it exists. He is also an idealist. He wants the system to change. He says the Fed should change what they do, and in his case, it’s target NGDP. I also am an idealist. I also want the system to change. I say that the Fed should be abolished.
To say that abolishing the Fed is “dogmatic” is the height of ignorance. Please don’t throw around terms you clearly know nothing about. You’re just parroting the same nonsense that others say about those who advocate what I advocate.
“I’d also suggest a study of the social history of the Great Depression to get perspective on what kind of impact needless economic destruction had on average folks.”
I have studied the Great Depression. I have found that your view, Sumner’s view, Bernanke’s view, Friedman’s view, all of you are totally and completely wrong.
“I started it, but couldn’t finish an entire analysis – it was too heartbreaking.”
I finished what I started, and I was not heartbroken.
“It was enough, however, to get an idea of what you so callously describe as “yammering to government to do something.””
Yet that callous description is accurate. What else are pseudo-monetarists and monetarists doing other than yammering at the government to do something? Serious question. Virtually every post is “the government should do this” and “the government should do that”, either explicitly or implicitly.
I NEVER see a post that says what the private, productive sector should do. I never see how social problems can be solved by voluntary cooperation.
“I really don’t think you have any clue at all the gravity of the issues you come here to discuss or what the kinds of things you say really mean, or you wouldn’t be saying them.”
I know you don’t have any clue about the importance of the issues you’re talking about, because everything you have said about them is completely wrong.
27. January 2012 at 20:25
Negation of Ideology:
“How much of the economy are you OK with the Fed owning? When will you reject NGDP targeting on the basis that the government’s central bank owns “too much stuff”?”
“I don’t think we have to worry about that for a while.”
Yes, let’s ignore it, just like past generations didn’t worry about the national debt, and now today’s taxpayers have to foot the bill.
“The publicly held debt is about $10 Trillion. The Federal Reserve’s balance sheet is $3 Trillion, even in it’s temporarily swollen state. It could triple again before it owns all the Treasury securities. If that’s not enough, it could buy up all the government backed loans (student loans, etc.), that’s well over a trillion. After that, it could buy up the entire municipal bond market of $3 Trillion – secured by future federal aid, so there’s no risk of default. If the Fe’s balance sheet went up to $14 Trillion and NGDP didn’t increase, I’d be quite surprised.”
OK, then once the economy busts once again, on the basis of keeping interest rates artificially low, and NGDP collapses once again, then what do they buy?
“But if it happens, the Fed would make enormous profits, saving the Treasury hundreds of billions in interest.”
And what about the costs on those who are legally obligated to accept dollars and own dollars and earn income in dollars? Just more wealth transfer, huh?
“As long as the government has a currency, there has to be some planning.”
What do you say to the person who rejects central economic planning?
“If you want to tie it to gold or some other commodity, then that is your plan. If you want the government to control the price of gold, then make that case. But don’t pretend it is any more free market than targeting NGDP or CPI or anything else. It’s not.”
A 100% reserve gold standard would actually be FAR, FAR more free than a government controlled fiat standard, because the government wouldn’t be able to print money for themselves and their friends and devalue everyone else’s money. In a gold standard, everyone who earns money (gold) would not be subjected to the ravages of inflation and currency devaluation. They would be more free, not less free.
But I don’t personally advocate for any rigid money. I advocate for a free market money. In such a free market, precious metals almost always “win”.
“When the government buys and sells unlimited amounts of gold at a price set by the government, it is engaging in central planning.”
Not if the price is held constant and they don’t print money in addition to the gold. It’s not price fixing because it’s a definition setting. They would define the dollar as such and such ounces of gold. That’s not price fixing, it’s defining what a dollar is.
27. January 2012 at 21:30
Scott,
I’m sure you hear all sort of crap from a right wing libertarian point of view. How about a very left wing point of view for a change?
I tried to preach the left wing point of view on Development Economics (Hey you know me, I’m actually very market friendly). I got nailed. Students coined me a Socialist Totalitarian and my Republican political science dufus of a chairman agreed.
They disconnected my association with the insitution (i.e. they fired me).
Now the bull is that I’m pushing an aggressive violent agenda. (Except when you actually read my emails I pushed exactly the opposite. I’m in favor of control of violent action.)
Now you know why I call myself a Libertarian. It doesn’t matter which end of the freedom pole you push, you’re always labeled a totalitarian.
It suits the Totalitarian’s interest’s.
27. January 2012 at 21:37
P.S. I have done nothing I am ashamed of. I have done nothing criminal. I am and always shall be opposed to violence. But for that I lost my job.
27. January 2012 at 22:56
Actually Krugman often has good taste in music (not that you don’t Scott).
But right now I feel deeply, extremly misunderstood.
http://www.youtube.com/watch?v=T-5o6itdf3g&feature=player_embedded
Right now I feel really, really dissed.
28. January 2012 at 02:53
Scott,
“Martin, But the demand for money tends to fall sharply during hyperinflation.”
Then why do people carry around wheelbarrows full of cash? Nominal balances go up for a while. If the demand for nominal balances goes up fast enough, you’ll have an excess demand.
Now if people demand nominal balances based on the expected money supply, all you need for an excess demand is people expecting the money supply to go up fast enough during a hyperinflation.
I agree with you that it ends with the abandonment of the currency: people will only go for so long with wheelbarrows full of cash to stores that have raised prices so much making the wheelbarrows insufficient. In between however you can easily have an excess demand for money.
28. January 2012 at 04:21
Mark, that’s too bad. Next time be more right wing libertarian!
So glad there is demand for it in colleges still. Amazing.
28. January 2012 at 08:43
Major Doofus. ???????
Mark, Welcome back. Sorry to hear you lost your job. Try to find a place where people are open-minded.
Martin, Money demand is generally defined in real terms.
28. January 2012 at 09:18
Major Freeman:
“Yes, let’s ignore it, just like past generations didn’t worry about the national debt, and now today’s taxpayers have to foot the bill.”
I didn’t say we shouldn’t worry about the national debt – I said we shouldn’t worry about having to buy anything other than Treasury bonds for a while. I favor paying off the public debt. If Congress ran an annual surplus I think it could do it in 30 years or so. But that has nothing to do with the Fed.
Before the Fed started paying interest on excess reserves, its balance sheet was less the $900 Billion. Even if the entire national debt was paid off, that would be less than a third of the $3 Trillion municipal bond market. The EU has no debt, and the ECB manages the monetary base, mostly by buying promissary notes from member banks. That’s what the Fed used to do before 1932. I don’t know where the myth that you need a national debt to have a central bank comes from. But if there are Treasury bonds out there, the Fed might as well buy and sell them.
“And what about the costs on those who are legally obligated to accept dollars and own dollars and earn income in dollars? Just more wealth transfer, huh?”
The only people who are legally obligated to accept dollars are people who voluntarily signed a contract to do so. You are free to refuse to accept the US dollar in trade if you want. You can negotiate to be paid in Euros, Yen, gold, silver or tobacco in trade if you want. Your counterparty is free to accept or reject your terms. It is not wealth transfer if it doesn’t cause inflation or deflation above the expected amount when they signed the dollar based contract. The gold standard is a wealth transfer from the general public to the tiny percentage of people who own gold mines – most of whom live outside the country.
“But I don’t personally advocate for any rigid money. I advocate for a free market money. In such a free market, precious metals almost always “win”. ”
That is what we have now. You are free to conduct trade or write agreements in precious metals, pork bellies, or anything else. You can open an account in gold, purchase gold certificates, etc. You don’t have the right to force others, including the government, to do business in your preferred currency.
I encourage you to stand by your principles and tell your employer that you want to be paid in gold. If he agrees, it’s perfectly legal, provided that you don’t evade taxes. If he refuses, then quit. Then send out your resume and list your desired salary in ounces of gold.
In any case, I think we need to repectfully agree to disagree on this one. You have a quasi-religous belief that only gold is money that I don’t share, and I suspect I’ll never shake you of. I’m more interested in Scott Sumner’s ideas.
28. January 2012 at 09:22
Scott — Nominal domestic demand (nominal domestic final sales) rose only 1.7% AR in Q411– the weakest since Q209. This occurred in part because of a collapse in the GDP price deflator to 0.6% AR in Q411, the weakest since Q409. Even the core price deflator ran nearly 100 bps below the Fed’s 2% long-term goal. This cuts pretty strongly against the small implied bump in the nominal income numbers. It’s also more consistent with the mid 2011 slump in the stock market, jump in credit spreads and plunge in inflation breakeven spreads, all of which anticipated a slowdown in nominal demand in late 2011/early 2012.
28. January 2012 at 10:23
Scott,
“Martin, Money demand is generally defined in real terms.”
If nominal balances go up fast enough, real balances will go up.
If you have Md = P * Y/V or Md/P = Y/V, all you need is that prices (P) move faster up than Y/V moves down for Md to go up in a hyperinflation.
Let’s say that adjusting P has a cost, and P is determined by expected money supply. If the money supply goes up really fast, how do actors minimize the cost of adjustment?
If each Ms has an associated P, such that P(Ms), then actors will minimize the cost of adjustment by setting P(Ms_t+1) at time t when Ms goes up really fast. If otherwise (no adjustment costs) you’d have Ms = Md for each time t, then now you’d have Md>Ms, because Md_t = P(Ms_t+1) * Y/V.
28. January 2012 at 12:48
Negation of Ideology:
Preliminary: I can’t help but point out the inner contradiction of your username. Not sure if it’s intended. To hold the idea that you “negate ideology”, is to hold a particular idea, which of course requires some intellectual and argumentative justification. But that means you would hold a set of ideas, in which case “negation of ideology” itself represents and hence an ideology, and is hence a self-contradiction. Anyway…
“Yes, let’s ignore it, just like past generations didn’t worry about the national debt, and now today’s taxpayers have to foot the bill.”
“I didn’t say we shouldn’t worry about the national debt – I said we shouldn’t worry about having to buy anything other than Treasury bonds for a while.”
OK, but if you say you aren’t worrying about the fact that the Fed can buy national debt for a while, then that means you aren’t worrying about the fact that the national debt can be raised because the Fed can just buy it.
“I favor paying off the public debt. If Congress ran an annual surplus I think it could do it in 30 years or so. But that has nothing to do with the Fed.”
As long as the Fed keeps buying debt, there is little reason for the Treasury to pay off the debt, let along not expand debt by more.
“Before the Fed started paying interest on excess reserves, its balance sheet was less the $900 Billion. Even if the entire national debt was paid off, that would be less than a third of the $3 Trillion municipal bond market. The EU has no debt, and the ECB manages the monetary base, mostly by buying promissary notes from member banks. That’s what the Fed used to do before 1932. I don’t know where the myth that you need a national debt to have a central bank comes from.”
Not sure either. I think it comes from conflating causes with effects. The effect of the Fed is to encourage debt. That probably gives the illusion that there needs to be national debt for there to be a central bank.
“But if there are Treasury bonds out there, the Fed might as well buy and sell them.”
If there is a Fed out there, the Treasury might as well borrow and spend.
“And what about the costs on those who are legally obligated to accept dollars and own dollars and earn income in dollars? Just more wealth transfer, huh?”
“The only people who are legally obligated to accept dollars are people who voluntarily signed a contract to do so.”
False. We must pay taxes in dollars whether we contract with the IRS or not, whether we accept gold or hamburgers in exchange.
“You are free to refuse to accept the US dollar in trade if you want. You can negotiate to be paid in Euros, Yen, gold, silver or tobacco in trade if you want. Your counterparty is free to accept or reject your terms. It is not wealth transfer if it doesn’t cause inflation or deflation above the expected amount when they signed the dollar based contract.”
Even if you contract in Euros, Yen, etc, you still must pay taxes in dollars, which means you must exchange your earnings for dollars, which means you must accept dollars, which means it is wrong to say you don’t have to contract in dollars.
“The gold standard is a wealth transfer from the general public to the tiny percentage of people who own gold mines – most of whom live outside the country.”
You just aptly characterized central banks.
“But I don’t personally advocate for any rigid money. I advocate for a free market money. In such a free market, precious metals almost always “win”.”
“That is what we have now. You are free to conduct trade or write agreements in precious metals, pork bellies, or anything else. You can open an account in gold, purchase gold certificates, etc. You don’t have the right to force others, including the government, to do business in your preferred currency.”
No, that’s completely wrong. We are not free to conduct trade in whatever we want. The FBI raided and stole from the Liberty Dollar vault. Even if I trade for gold, I will still owe taxes in dollars, so I have to accept dollars in transactions.
“I encourage you to stand by your principles and tell your employer that you want to be paid in gold.”
Employers around the country have tried that, and they were charged and imprisoned.
“If he agrees, it’s perfectly legal, provided that you don’t evade taxes.”
LOL, but what taxes in dollars would I owe if I never accept dollars in exchanges?
Don’t you see how by demanding to be paid taxes in dollars, the government coerces people to transact in dollars even if they prefer not to?
Still think the dollar is optional?
“In any case, I think we need to repectfully agree to disagree on this one.”
If we disagree, at least one of us must be wrong.
“You have a quasi-religous belief that only gold is money that I don’t share, and I suspect I’ll never shake you of.”
LOL, I have no such quasi-religious belief that only gold is money. Like I said, I want individuals to be able to transact in any currency they want, but the government uses force to coerce people to transact in dollars.
Ironically, it is precisely YOU that has some quasi-religious belief that fiat paper is money, despite the fact that in a world of respect for private property, virtually nobody would accept paper notes over precious metals if they had the choice on what to accept.
Gold is just the money of the people. Fiat money is the money of states.
“I’m more interested in Scott Sumner’s ideas.”
So you must be interested in fallacious ideas.
28. January 2012 at 16:30
The US and European economies are, in fact, subject to a real supply shock presently: the price of oil. Neither the US nor Europe can sustain oil consumption at current prices. US oil consumption was down 1.6%, European consumption down 1.4% for the year ending December 2011. This was in line in the approach I take in my 2009 article, “Peak Oil Economics”.
28. January 2012 at 19:40
Major Freeman:
Thanks for noticing the username – I got it from the famous Russell Kirk quote “conservatism is the negation of ideology”.
http://www.kirkcenter.org/index.php/detail/ten-conservative-principles/
On your post, I specifically said that you can use whatever you want in trade as long as you don’t evade taxes, and you can’t force the government to accept it. Once you accept the idea that the government can assess a tax – you have to accept it can decide what that tax must be paid in. That is true under a gold standard as well. If I only do business in tobacco, and we’re on a gold standard, would the government accept my payment in tobacco? Of course not. It would say “sell your tobacco for dollars or gold and pay the tax.” So you can do business in whatever you want, but when tax time comes you have to convert it to the government currency. Most people will voluntarily choose to use the government currency out of convenience.
I sometimes think we should just call them “US Tax Vouchers” for that very reason. They derive their value from being able to extinguish tax debt to the state. Since they get their value from the government, the government should keep the profit and lessen the tax burden on the citizens, not redistribute it to Russian and South African billionaires who happen to own gold mines.
28. January 2012 at 22:06
Negation of Ideology:
“Thanks for noticing the username – I got it from the famous Russell Kirk quote “conservatism is the negation of ideology”.”
And thanks to you for enlightening me on where you for the idea, I mean ideology, I mean…
“On your post, I specifically said that you can use whatever you want in trade as long as you don’t evade taxes, and you can’t force the government to accept it.”
Yes, but the key is that we must pay taxes in dollars, which changes everything.
“Once you accept the idea that the government can assess a tax – you have to accept it can decide what that tax must be paid in.”
And that completely collapses the theory that people can buy and sell in whatever they want now doesn’t it?
“That is true under a gold standard as well. If I only do business in tobacco, and we’re on a gold standard, would the government accept my payment in tobacco? Of course not. It would say “sell your tobacco for dollars or gold and pay the tax.” So you can do business in whatever you want, but when tax time comes you have to convert it to the government currency. Most people will voluntarily choose to use the government currency out of convenience.”
That is exactly why people MUST accept US dollars. It’s the threat of violence, not the consensual choice. Don’t you think that is immoral and wrong? To be coerced through violence in having to accept certain commodities that you don’t want, but are compelled to accept because you have to pay a third party in that commodity, and if you don’t, if you peacefully resist, you will be kidnapped and thrown into a cage where you will almost certainly be beaten and sexually assaulted?
“I sometimes think we should just call them “US Tax Vouchers” for that very reason. They derive their value from being able to extinguish tax debt to the state.”
Based on what authority? Based on what right?
“Since they get their value from the government, the government should keep the profit and lessen the tax burden on the citizens, not redistribute it to Russian and South African billionaires who happen to own gold mines.”
Why should the government “lessen the tax burden”? What are the principles you are utilizing in coming to that conclusion?
29. January 2012 at 07:27
Mark Sadowski,
Keep the faith, and remember that what do you always matters, even when it does not seem to. Sometimes we have to start over yet again when all we wanted was to remain on a steady track, I know that’s been the case for me too many times. My own family remains mystified as to why I got this ‘strange’ interest in economics eight years ago. Eventually people will understand why the ‘strange’ interest in finding solutions, when life gets better than it appears in the present.
29. January 2012 at 07:47
As to the ability of the Fed to control NGDP, well if I am sitting at the controls of a helicopter, I can undoubtedly control the helicopter. What is in doubt is whether I can _fly_ the helicopter.
29. January 2012 at 12:26
Tommy, The NGDI numbers look a bit stronger. Combined with the recent fall in the unemployment rate, my best guess is that the economy accelerated slightly in Q4. But still a very weak performance.
Martin, During hyperinflation real balances generally fall sharply. Certainly they did in Germany 1920-23.
Steven, I think what’s deadly is the combination of high oil prices and inflation targeting. With NGDP targeting we’d be doing better, but still not great.
DF, That’s where they need a targeting the forecast approach.
30. January 2012 at 18:50
Becky,
Thanks. Naturally I feel depressed right now. But on the whole I’ve been in worse shape financially. And they may have actally done me a huge favor in the long run.