Ed Balls almost sounds disappointed

***Bruce Bartlett sent me a link to the now famous Goldman Sachs endorsement of NGDP targeting.***

And now back to my regular post  . . .

It’s amusing to analyze all this from a market monetarist perspective:

LONDON””The Bank of England’s decision to restart its bond-buying program will give the U.K. government breathing room to continue its austerity drive, which has come under increasing fire amid sluggish growth.

But the legacy of this round of so-called quantitative easing will depend on a number of factors. Neither the government nor the central bank has much control over many of them””including inflation and the euro-zone crisis.

. . .

Treasury chief George Osborne welcomed the decision, calling it a “positive move” for the British economy. The bank’s own research suggests that when it spent £200 billion in 2009 and 2010, that helped to lift GDP by 1.5% to 2%.

Mr. Osborne’s austerity measures have achieved much of what they aimed at””in particular, calming market fears about Britain’s ability to pay its debts. That has reduced government interest rates to record lows even as other European nations have watched their cost of capital balloon.

But that has come at a cost, with billions of pounds of spending cuts and tax increases taking demand out of the economy and raising unemployment. The central bank’s latest move gives the economy a boost the government won’t provide at present, though it also provides fodder for critics to say the bank is bailing out the government because the economy hasn’t rebounded.

“The Bank of England has been left with no choice but to step in and try to offset the contractionary effects of George Osborne’s budget plans,” said Ed Balls, the opposition Labour Party’s finance spokesman.

Most economists still back the government’s austerity moves, and so do the ratings companies. But as economic data have worsened, critics outside opposition politics have stepped forward as well.

The biggest danger to Britain may be the debt crisis in the euro zone, which the U.K. isn’t a member of. Another danger often driven from abroad is inflation, which typically increases with quantitative-easing programs. The bank’s announcement is a bet that the major threat to the U.K. is renewed recession, not rising prices. The bank has forecast that inflation will peak at 5% next month before falling rapidly.

Others aren’t so sure. U.K. factory-gate prices rose in September at the strongest annual rate in almost three years, data released Friday showed, while the average monthly increase in consumer prices in Britain is 0.23%””an annualized rate of nearly 3%””according to AXA IM.

I was particularly amused by the Ed Balls quotation. Balls seems to think it’s the fiscal authority’s job to control NGDP growth, and the BOE is having to step in because the Conservatives aren’t doing their job. Of course it’s the fiscal authority’s duty to focus on the optimal levels of spending and taxes, and the monetary authority’s job to make sure they can do in in an environment of stable NGDP growth. Since when is the term “bailing out” applied to a central bank trying hard to do its job?

The BOE hasn’t been doing a great job of maintaining NGDP growth, although they are not doing as poorly as some other central banks. But Britain also has structural problems, which show up in a rather unpleasant RGDP/price level split. Meanwhile roughly 100% of Keynesians point to low British RGDP growth as evidence that monetary policy can’t offset fiscal austerity, even though the relevant variable is NGDP, not RGDP. The low RGDP growth actually supports the structural problem hypothesis. If I was as sarcastic as Paul Krugman, I might say:

The fact that these guys don’t even get the implications of their own models right tells us that the problem runs deeper than believing too much in abstract math.

But I’m not that sarcastic.


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101 Responses to “Ed Balls almost sounds disappointed”

  1. Gravatar of Britmouse Britmouse
    17. October 2011 at 13:29

    “Balls seems to think it’s the fiscal authority’s job to control NGDP growth”

    This is the same Ed Balls who was chief architect of the plan to return control of monetary policy from HM Treasury to the BOE in 1997.

    And if you follow the logic here… if fiscal policy drives NGDP, the blame for the 2008/9 NGDP collapse lies with the Labour government. Which is an interesting position for Balls.

  2. Gravatar of Morgan Warstler Morgan Warstler
    17. October 2011 at 13:38

    “Balls seems to think it’s the fiscal authority’s job to control NGDP growth, and the BOE is having to step in because the Conservatives aren’t doing their job. Of course it’s the fiscal authority’s duty to focus on the optimal levels of spending and taxes, and the monetary authority’s job to make sure they can do in in an environment of stable NGDP growth.”

    Matty comes close to making this mistake too.

    The reality is we can be convinced to target NGDP precisely BECAUSE it allows us to make the cuts to Fiscal we need to make.

    Proper Monetary gives us cover to silence cries of Austerity!

  3. Gravatar of John John
    17. October 2011 at 13:42

    I really don’t get how setting an NGDP target is going to help a country that already has inflation around 5%. I’m eager to see how Scott is going to argue that monetary tightness is any kind of problem in Britain.

    I’ll actually argue that loose money is more of a problem than tight money in Britain. Loose money, which was often due to countries in Europe, Britain included, following Greenspan’s insanity, misallocated lots of resources during the housing boom years. Instead of letting the malinvestments clear, cutting rates down to zero prevented or slowed the necessary liquidations and adjustments.

    The continual desire to keep the good times rolling with cheap money and credit is the worst problem afflicting modern economies today. The market system can adjust to things like high taxes and income redistribution. The market economy can’t stand having its money manipulated. Artificially cheap credit, which I’d define as interest rates lower than the available pool of savings justifies, falsifies economic calculation in a way that high taxes or redistribution does not.

  4. Gravatar of John John
    17. October 2011 at 14:08

    I’d like to add that Milton Friedman, Scott’s icon, grasped the way that inflation created businesses dependent on increasing money rather than real consumer demand; “If monetary growth does not speed up further, the initial stimulus to employment and output will be replaced by the opposite; both will tend to go down in response to the higher wages and prices. A hangover will succeed the initial euphoria” (Free to Choose 275).

    Looking at M2 on the FRED database, it has grown at a rapid rate from about 1995 but growth has failed to accelerate. This backs up Friedman’s idea that in when money starts growing faster than normal business picks up; similar to someone who feels good after they start drinking. However, since money growth hasn’t steadily accelerated, we’re now in the middle of a hangover.

    There are two ways out. The responsible one would be to let money contract and let a recession play out. The Fed opted out of this in late 2008. The option they seem to be pursuing, without going all in, is to accelerate the rate of money growth and accept much higher inflation.

    Scott seems to be wanting them to pursue this ridiculous course of action with more determination. I think me and Friedman would agree that the only way back to sound economic conditions would be to endure another recession. As Friedman says, “slow growth and high unemployment are not cures for inflation. They are the side effects of a successful cure” (Free to Choose 273).

    People might argue that I’m crazy because inflation hasn’t been high since 1995. I’d argue back that the money supply growth has created distortions in the same way the Friedman talked about. The reason for low price inflation since then has to do with two main factors; the cheap goods coming from surging mercantilist economies in Asia and the desire on the part of foreign central banks, especially China’s, to hold US dollars as a reserve currency.

  5. Gravatar of grcridlan grcridlan
    17. October 2011 at 14:36

    Scott:

    I agree that “structural problems” are a possible explanation for a poor RGDP/inflation split in NGDP growth. However, there is another possibility; that the “natural rate” of NGDP growth is still above the actual rate of NGDP growth, and therefore the below-trend path of liquidity remains a drag on real growth; that is, deflationary pressures can be a problem despite real growth, if there is a big enough backlog of deflationary pressures.

    Put into a “sticky prices” narrative, I’m suggesting that if a financial crisis and asset depreciation event (like a housing crash and later bank paroxysm) causes a recession due to sticky prices, then monetary growth will reduce unemployment and trigger real growth only to the extent that it overcomes the sticky price problem.

    If workers are 120% as expensive as they should be, you need 20% nominal growth to completely fix the problem, and until you get it, you’re going to have higher than expected unemployment and more inflation than RGDP growth.

  6. Gravatar of Richard W Richard W
    17. October 2011 at 14:37

    It is politics, Prof. Sumner. The BoE last conducted QE in 2009. Mr Osborne in opposition had this to say about QE.

    “Printing money is the last resort of desperate governments when all other policies have failed. It cannot be ruled out as a last resort in the fight against deflation, but in the end printing money risks losing control of inflation and all the economic problems that high inflation brings.” Apparently QE was all a “leap in the dark”.

    Vince Cable the current Business Secretary said that QE was ‘Robert Mugabe economics’.

    In government those two politicians specifically intruded on monetary policy by dropping heavy hints that the Bank should recommence QE. A big about turn in views when they are actually in power. The contrast to the ideological bitterness in the U.S. about monetary policy is interesting. Apart from a few eccentrics that no one pays attention to the politicians from all sides will support the Bank in doing whatever they consider necessary. No threats of treason and sent to the Tower for governor King for the crime of buying long-bonds.

  7. Gravatar of johnleemk johnleemk
    17. October 2011 at 14:42

    Richard W,

    But isn’t that the case in the US? Well, ok, it’s a bit worse in the US, since the left wing won’t even contemplate more easing because it’s just so orthogonal to their politics/policy goals. But although I think Rick Perry is crazy, it’s not indefensible to believe, as Morgan does, that he would do an Osborne-/Cable-like 180 on monetary policy if elected.

  8. Gravatar of johnleemk johnleemk
    17. October 2011 at 14:43

    (Also, Balls, Osborne and Cable all probably know more about economics than Perry, Bachmann, and Cain, I’m pretty sure.)

  9. Gravatar of Morgan Warstler Morgan Warstler
    17. October 2011 at 15:25

    John, Matty stumbles past it here:

    “One interesting consequence of this model that may appeal to some Fed folks is that they say the more rapid recovery means that the Fed would exit the zero interest rate policy faster under the NGDP/QE scenario than under the baseline scenario.”

    http://thinkprogress.org/yglesias/2011/10/17/345932/what-goldman-sachs-thinks-appropriate-monetary-stimulus-could-achieve/

    The reality is nuanced, what will appeal to the Fed, is that they can use targeted NGDP to LOCK IN near inflation for decades to come.

    We set the NGDP target at 3%, which historically we’ve hit, and basically where we have normal growth, fed rates are after 0% inflation.

  10. Gravatar of John John
    17. October 2011 at 16:30

    Morgan,

    What I said above was that 15+ years of money growth, measured in M2, has created an economy that depends on accelerating money growth which the Fed has been failing to deliver since around 2004 when Greenspan started raising the target rate. In fact money growth has been remarkably steady but it hasn’t accelerated enough to keep the boom going. There are only two options: accelerate money supply growth or allow a correction. Right now we’re in a limbo between the two areas, stagnating with moderate price inflation.

    The reason we haven’t had higher price inflation over the last 15 years is the mercantilist tigers in Asia and the dollar’s reserve currency status. The two really correspond since in order to export, the Asian countries have to accept dollars. This strengthens the dollar and provides cheap goods; keeping a solid lid on price inflation. The 3% or so we’ve averaged over the last 15 years is actually kind of alarming.

    Keep in mind that at this point, a 3% NGDP target would require the Fed to clamp down.

  11. Gravatar of ChrisA ChrisA
    17. October 2011 at 17:03

    So the UK has “structural” problems which means that monetary expansion is creating inflation rather than RGDP growth. So why couldn’t the same be true of the US? Meaning that your preferred approach (NGDP targeting) also creates inflation. And how does “structural” problems differ from Kling’s recalculation hypothesis?

  12. Gravatar of Morgan Warstler Morgan Warstler
    17. October 2011 at 17:07

    “Keep in mind that at this point, a 3% NGDP target would require the Fed to clamp down.”

    That’s EXACTLY what I mean.

    Woolsey says 3% (he backs dates it), and so will all the hawks at the Fed, that will be quid pro quo, for the “radical” new level NGDP approach.

    John, whats incredibly hard is getting people to think past tomorrow on Scott’s policy – I mean its hard like communicating with aliens. For a couple years now, I have been looking at targeted NDGP from the pissing on booms side of it, which to me is WHY Friedman would like this…

    You give up a meth infection in throat when things slow down, but you gain a Wall Street in the backseat behind Main sreet.

    Try mentally flipping this over…

    Assume a world where whenever RGDP runs over say 2% a truly evil and independent god like Fed clamps down (jacks rates through the roof).

    Suddenly the Fiscal authority (Congress), of a country which can easily hit 2% has to decide who gets the growth, and ENJOYS chalking up lost growth (productivity gains) to keep the Fed god’s happy.

    Similar to carrying tax losses forward, suddenly Congress wants to fire as many public employees as possible, and automate the government, so they contribute lower GDP on the public side, so that the extra growth can be afforded on the private side where they get their political donations.

    Likely voters like to punch hippies:

    http://thehill.com/polls/187837-the-hill-poll-voters-say-dc-worse-than-wall-street

  13. Gravatar of ssumner ssumner
    17. October 2011 at 18:50

    Britmouse, That’s a good point.

    Morgan, I agree about cover for austerity.

    John, I believe that current forecasts show much lower than 5% inflation. If it stays at that level during 5% NGDP growth, then Britain’s got really severe supply-side problems.

    grcridlan, I don’t follow. If workers are overpaid then the growth should be mostly real, not much inflation. Wages should stay constant.

    Richard, Thanks—a taste of the quick about face we can expect from the GOP in 2013.

    Morgan, Three percent may or may not be a good idea, but not with our current monetary regime. We’d fall into one liquidity trap after another, unless we had level targeting.

    John, You said;

    “What I said above was that 15+ years of money growth, measured in M2, has created an economy that depends on accelerating money growth”

    You do realize that since 1980 money has been getting steadily tighter, and NGDP growth and inflation have been trending downward, don’t you?

    ChrisA, It certainly could be true, as I’ve said repeatedly. But I doubt it, as does the stock market. I’m not even sure it’s the problem in the UK, the inflation might be a one time burst due to oil and higher VAT.

    But if it is 100% structural, I’d still favor steady 5% NGDP growth, as inflation DOESN’T MATTER IN ANY WAY AT ALL. It’s NGDP growth that matters. Name any problem supposedly caused by inflation, and it ain’t so.

    Steady NGDP growth also greatly reduces the severity of banking crises.

  14. Gravatar of Dan Kervick Dan Kervick
    17. October 2011 at 19:23

    Well if Goldman Sachs endorses it, it must be amazing! But I’m a little perplexed, because I never noticed anything in the NGDP level targeting plan that offers clear assistance for people in the business of stealing from their own clients, crashing economies, and running the US Treasury Department for the benefit of private interests.

  15. Gravatar of Morgan Warstler Morgan Warstler
    17. October 2011 at 20:01

    Jesus Kee-Ryst Sumner!

    Put the meat in the window! Sell the sizzle, not the steak.

    If you’ll finally agree / grant / say out loud that level targeting NGDP gives cover to austerity…

    Then SCREAM IT. Repeat it over and over and over and over and over and over.

    You love your family. You love your idea. You want both to have the very best opportunity to survive.

    So why in the hell would you not be pitching targeting NGDP to conservatives this way???

    Matty doesn’t have a pot to piss in, his readership comes exclusively for .gov public employee IP addys – and he knows it, he is compromised. The only truth that comes from his mouth is when he is forced to feed them bad news.

    Besides, he’s gone on the hook for your ides, it is time to reel him in.

  16. Gravatar of grcridlan grcridlan
    17. October 2011 at 20:26

    If the problem in a recession caused by tight money is failure to utilize productive resources, because sticky prices for inputs (particularly labor) result in idle resources, then returning those idle resources to work requires that either productivity of labor (and capital) increase, or “inflation” erode real wages. Once this happens, labor and capital are put back to work and, in theory, growth returns to trend.

    RGDP growth, however, won’t happen until this actually occurs; and after a deflationary panic or a tight money recession, there should be a substantial price gap (that is, wages for currently employed workers should be “stuck” at a level well above the full employment rate). And employers will have insufficient incentive to hire, expand, and increase RGDP until after a substantial NGDP increase has occurred.

    Obviously, for any given employer, the situation could be different. But if the sticky wages story of monetary recessions is true, then I would think the above “inflation before RGDP growth” story has to work too.

    Or am I missing some important facet of the story?

  17. Gravatar of FT Alphaville » Further reading FT Alphaville » Further reading
    17. October 2011 at 23:01

    […] – The politics of (UK) NGDP targeting. […]

  18. Gravatar of James in London James in London
    18. October 2011 at 01:39

    From City AM, the free business paper distributed to all London commuters. There is no escape.

    http://www.cityam.com/forum/the-real-central-bank-target-not-inflation

  19. Gravatar of W. Peden W. Peden
    18. October 2011 at 02:10

    James in London,

    We’re in a comparable position to the mid-to-late 1980s, when the government was pretending target M3/M0 and was actually targeting exchanges rates. The worshippers of inflation targeting at the BoE have lost their faith, but they still attend the church once a month.

  20. Gravatar of Bob Murphy Bob Murphy
    18. October 2011 at 03:27

    Well Scott, now you’ve managed to pull even Goldman Sachs under your trance. Your victory is almost complete. But let me at least throw in a shoulder to slow your trot to the endzone. When you write:

    Balls seems to think it’s the fiscal authority’s job to control NGDP growth…

    it is absurd. Of course Balls doesn’t think anything of the sort. Balls doesn’t know what “NGDP” even stands for, I’m guessing.

    You might be right that central banks should implement level targeting of NGDP growth. But you would sound more persuasive if you didn’t write like everyone else on earth already thinks like you do. You know, stuff like, “Workers took out mortgages expecting 5% NGDP growth,” which they clearly did not.

  21. Gravatar of MMJ MMJ
    18. October 2011 at 03:57

    Scott wrote “Britain also has structural problems, which show up in a rather unpleasant RGDP/price level split.”

    what are the structural problems?

  22. Gravatar of W. Peden W. Peden
    18. October 2011 at 04:03

    MMJ,

    Here’s a good summary:

    http://www.tullettprebon.com/Documents/strategyinsights/Tim_Morgan_Report_007.pdf

  23. Gravatar of Bill Woolsey Bill Woolsey
    18. October 2011 at 04:16

    grcridlan:

    I think for your argument to work, the price level would need to have been well below trend. In the U.S., anyway, the price level is a little bit below trend, but nothing like nominal GDP.

    Because production is for the future, expectations of higher future prices should help expand production now (assuming a contant trajectory of wages,) so prices don’t have to increase first.

    I am more worried about the expectations problem. If the increase in the flow of money expenditures on output is temporary, then prices may rise now and not real output.

  24. Gravatar of MMJ MMJ
    18. October 2011 at 04:53

    W Peden – thanks, I’ve already read that (not a bad piece, as far as broker/dealer research goes). I’m interested in what Scott thinks the structural problems are given his policy prescriptions, views on inflation etc.

  25. Gravatar of John John
    18. October 2011 at 04:53

    Scott,

    The M2 stat which Friedman favored as well as the other monetary aggregates indicate that money growth picked up in ’95 and has been on a steady growth pace since. It shows a slight uptick after a very modest contraction in 2008. By these measures money isn’t tight. The only way to argue it was tight would be to say that a weak economy is everywhere and always due to tight money.

    Morgan,
    I’m glad we’re on the same page about clampig down. Personally if a target has to be in place I’d prefer a zero percent target and I prefer them to target measures of private sector growth.

  26. Gravatar of Brian Brian
    18. October 2011 at 05:15

    Scott,

    Looks like Chicago Fed President Evans is fighting the good fight.

    http://www.chicagofed.org/webpages/publications/speeches/2011/10_17_11_mcee.cfm

  27. Gravatar of Gabe Gabe
    18. October 2011 at 05:28

    Great summary of NGDP movement is written up over at thedailybell.com today.

  28. Gravatar of Peter N Peter N
    18. October 2011 at 05:47

    John:

    If you go to Fred at the St. Louis Fed and plot narrow M1 (M1SL) money, Broad MZM (MZMSL)money and the sum of financial and non-financial debt (TODNS + DODFS), You see M1 flattening out around 2004, MZM slope decreasing but continuing rising, and total debt climbing in a beautiful smooth exponential curve until 2007 where it starts turning, turns negative slope in 2008 and then flattens out.

    I read this as the financial wizards of Wall Street finding ways of expanding the effective money supply, to keep the party going after the Fed tries to close the bar and turn off the music in 2004. And then in 2007, the booze runs out and everybody heads for the door.

    Monetary policy is hard when you have people who can invent ways to counteract it. Maybe a $12 trillion Repo market had something to do with it.

  29. Gravatar of W. Peden W. Peden
    18. October 2011 at 05:50

    John,

    And from the fact that oil production is higher now than in 1961, we know that there are no problems with the supply of oil. Plus M2 is very out of date, since it excludes a very large number of time deposits.

    The true proposition that you are skirting around is that money is neutral in the long run and supply-side problems don’t have demand-side solutions.

  30. Gravatar of Rob Rob
    18. October 2011 at 06:21

    “Britain also has structural problems, which show up in a rather unpleasant RGDP/price level split”

    I know that MM theory says that NGDP growth will always be split between RGDP growth and inflation but is the UK experience a bit more worrying than just saying it has “structural problems ” ? It does have structural problems especially in the finance sector but it also has depressed AD in almost every sector so one assumes it it is well below productive capacity and it is not clear to me why things have not moved along the aggregate AS curve more than they have and higher RGDP growth emerge.

    Maybe the UK govt has not done a good job of setting expectation around future NGDP trends (indeed they seem to present the current QE as purely tactical) but I am interested in what lesson we can learn from an economy that has increased NGDP growth path and got mainly inflation.

  31. Gravatar of John John
    18. October 2011 at 06:33

    W. Peden,

    I’m really really glad you posted the “proposition that I’m skirting around” is exactly what I think. The idea that money is neutral in the short, medium, or long run completely batshit insane. And yes, supply side problems DO NOT have demand side solutions; supply and demand are two sides of the same coin just like buying and selling or spending and income. To have demand, you have to first have supply. To avoid over simplification I’ll put it this way demand = supply in line with consumer preferences.

  32. Gravatar of Gabe Gabe
    18. October 2011 at 06:36

    http://www.thedailybell.com/3102/The-Return-of-Milton-Friedman-Via-NGDP-Revenue-Targeting

    The increasing reach of the NGDP targeting meme is fun to watch.
    Scott, congratulations on your success! You are making a impact on the world. I hope good things happen for you and I hope we get to see what really happens when NGDP targeting is really followed. In my heart I believe it will either not be followed as you prescribe as there are powers that will implement in certain ways to benefit their particular interests at the expense of many others(your idea will be co-opted for the purproses of benefiting the same people who just stole a few trillion from us) and or if it is implemented the asse managers will see what is happening, the private sector GDP will continue to shrink and more assets will

    1. flee
    2. be directed towards more regulatory capture and lobbying
    3. be directed toward gaming the NGDP targeting money flows intead of real production, innovation that increases standards of living.
    4. this will result in the more rapid price growth of basics of middle class consumption(food, housing, education, medical, fuel inflation) while real wages stay stagnant.

  33. Gravatar of Rob Rob
    18. October 2011 at 06:53

    “Balls doesn’t know what “NGDP” even stands for, I’m guessing.”

    If you want a laugh, check his Wikipedia page.

    He’s a politician; more to the point, he’s an Opposition spokesman. It’s his job to beat up on the government, even if that means being unreasonable or acting as if he wouldn’t be doing the exact same things in office. Up to a point, this is a respectable way to behave in an adversarial democracy.

    Labour’s attack on the government’s policy is predicated on the notion that the government is cutting the deficit too quickly – the government wants to eliminate the deficit by 2015, Labour wants to cut it by 50%. Labour believes that the fiscal stimulus made possible by the higher deficit would grow the economy, principally by keeping a lot of public employees in their jobs (or paying them more). Ed Balls, like his former boss Gordon Brown, has a general belief that government spending is good spending, and can be justified both as good value for money and as stimulus (Brown had a habit of referring to any government spending as “investment” precisely because he assumed a fiscal multiplier for any government spending even during economically good times).

    This puts Balls in a tricky position. He can argue that greater public spending is good because it buys valuable, high-quality public services, and about 30% of the electorate will automatically agree with him. To win the rest over, he needs to add on the argument that public spending is doubleplusgood because it also boosts economic growth for those not employed by the public sector. If the Conservative/Lib Dem coalition can demonstrate that there’s a way of getting stimulative policy without greater public spending, and if the public believes that this has happened, Ed Balls has a much harder job to do.

  34. Gravatar of Peter N Peter N
    18. October 2011 at 07:14

    John, You said –
    “supply and demand are two sides of the same coin just like buying and selling or spending and income. To have demand, you have to first have supply. To avoid over simplification I’ll put it this way demand = supply in line with consumer preferences.”

    This isn’t right. First spending = income + borrowing. Economics would be a lot simpler if you couldn’t spend what you ain’t got, but, in fact, you can.

    Nor does supply = demand. This only works in a static model, that is, one which doesn’t account for the time it takes things to happen. Marx, for all his faults, got this one right. Supply results from previous demand and previous supply.

    GM designs today the car they think will be in demand in 2015 based on current market research and estimated resource costs. Come 2015, tastes could change, or materials costs could rise (like the Chinese buying up all the world’s copper), or the economy could weaken.

    Control theory will show you that feedback systems with delays are often unstable, particularly when there is uncertainty in the observables. Why should the economy be magically stable, when simpler analogous physical systems are known not to be?

    Your talking faith based economics.

  35. Gravatar of Salem Salem
    18. October 2011 at 07:21

    Balls’s enemy is not George Osborne. It is Ed Milliband. And his comments need to be seen in that light.

  36. Gravatar of StatsGuy StatsGuy
    18. October 2011 at 07:47

    @ Bob Murphy

    “Well Scott, now you’ve managed to pull even Goldman Sachs under your trance. Your victory is almost complete.”

    So, just when exactly will you publicly proclaim that you were severely wrong about hyperinflation (By 2009? 2010? 2011?).

    One of the latest trends in the hyperinflationary (hyperventilating?) press is redefining hyperinflation. Now, some are calling the 1970s inflation a hyperinflation.

    I notice you deleted my comment on your blog asking when you were going to make-do on your bet with Scott… Very noble of you.

  37. Gravatar of StatsGuy StatsGuy
    18. October 2011 at 07:49

    @ Bill

    “I am more worried about the expectations problem. If the increase in the flow of money expenditures on output is temporary, then prices may rise now and not real output.”

    Can you elaborate? Is that a failure to invest problem?

  38. Gravatar of W. Peden W. Peden
    18. October 2011 at 08:01

    John,

    “To have demand, you have to first have supply.”

    How do you apply this to money?

    Also, I know of few facts more established than that money is neutral in the long run.

  39. Gravatar of Gabe Gabe
    18. October 2011 at 09:11

    stats guy is right, hyperinflation is not a problem. So who is standing in the way of NGDP targeting?
    only 2 options:the Fed is either filled with idiots wielding unbelievable power or it is filled with people doing the work of a money power elite and not looking out for our best interest.

  40. Gravatar of Gabe Gabe
    18. October 2011 at 09:15

    your daughter will revert to plain old carbon in the long run…doesn’t mean you want to lend her out to primary dealers first.

  41. Gravatar of Daniel Daniel
    18. October 2011 at 09:30

    Side question about the goldman report. I’ve noticed they ran a simulation to determine the effects of NGDP targeting, what model did they use in this simulation? I’m sure we’ll never know but it might be of importance to Beckworth and Hendrickson since they’re working on an analytical framework for MM.

  42. Gravatar of John John
    18. October 2011 at 09:31

    W Peden,

    In the case of money, supply always equals demand. There’s two kinds of money demand: exchange demand and reservation demand. What I was getting at was Say’s Law; the most important law in economics. With functioning market price system, people create demand by supplying others with the goods and services desired. Monetary shocks often convulse the whole system of exchange but if prices are allowed to naturally adjust, economic health is restored.

    Preventing convulsions in money involves not flooding the system with cheap money and credit. Markets can function regardless of how much people decide to save.

  43. Gravatar of Andrew Andrew
    18. October 2011 at 10:23

    Scott,

    Looks like Bernanke is signally NGDP targeting. At least according to Bill Gross…

    http://twitter.com/#!/PIMCO/statuses/126350960808300544

    And it looks like a large aggregator site is picking up your blog;

    http://www.businessinsider.com/the-hottest-idea-in-monetary-policy-2011-10

  44. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. October 2011 at 10:58

    Speaking of Krugman, I hope this from Democrat pollster Doug Schoen makes him uncomfortable:

    http://online.wsj.com/article/SB10001424052970204479504576637082965745362.html

    ————–quote————–
    Today, having abandoned any effort to work with the congressional super committee to craft a bipartisan agreement on deficit reduction, President Obama has thrown in with those who support his desire to tax oil companies and the rich, rather than appeal to independent and self-described moderate swing voters who want smaller government and lower taxes, not additional stimulus or interference in the private sector.

    Rather than embracing huge new spending programs and tax increases, plus increasingly radical and potentially violent activists, the Democrats should instead build a bridge to the much more numerous independents and moderates in the center by opposing bailouts and broad-based tax increases.
    ————-endquote————-

  45. Gravatar of John John
    18. October 2011 at 11:06

    W Peden,

    I don’t care what mainstream macro says. Money is most definitely not neutral in the long run. Even in the hypothetical case where everyone gets $10000 added to their banks account, the people who spend the money first will gain from being able to buy before prices have surged upwards.

    Money continually injected through the same points, the banking system, is the least neutral situation possible. Imagine if you were in charge of the national printing press and you distributes all the new money by giving it to your 10 best friends. Would you really argue that money was neutral? Your friends and their friends would be filthy rich no matter what they did with the money.

  46. Gravatar of Peter N Peter N
    18. October 2011 at 11:08

    John,
    You say “Monetary shocks often convulse the whole system of exchange but if prices are allowed to naturally adjust, economic health is restored.”

    So the system is in equilibrium except when it’s not, and any deviation from equilibrium must be the result of a “monetary shock”.

    “Preventing convulsions in money involves not flooding the system with cheap money and credit.”

    If this could be accomplished, it would definitely help, but people are remarkably good at finding ways to create money. There are endless examples of this. Banks are involved in money creation, because they’re usually so accomodating, but where they haven’t been, people have been quite creative. Even now you see Linden dollars , Bitcash and casino chips used as money.

    Many societies used tally sticks or IOUs. Some had some form of hard money as well. Sometimes semi-fiat money like bronze coins, sometimes gold and silver that rarely circulated in any quantity (it was dangerous and expensive to transport).

    Long before there was money, there was debt. No one has ever found a barter economy, and not for want of looking. However all societies had some form of debt.

  47. Gravatar of W. Peden W. Peden
    18. October 2011 at 11:24

    John,

    What do you mean by “neutral” here?

  48. Gravatar of W. Peden W. Peden
    18. October 2011 at 11:30

    John,

    “In the case of money, supply always equals demand.”

    Demand desired or demand obtained?

    I agree on Say’s Law and price adjustment, but I think that it’s a lot easier to say that “prices adjust” than to actually admit what is involved in that process.

  49. Gravatar of W. Peden W. Peden
    18. October 2011 at 11:31

    And if there are two different demands for money (transactions/exchange and reservation/holding) then there is absolutely no reason to think that the supply of money will be in equilibrium with either.

  50. Gravatar of Stephan Stephan
    18. October 2011 at 11:52

    Hmmm … So Scott Sumner is totally excited that Jan Hatzius endorses NGDP targeting. This looks indeed totally convincing. It will take years of NGDP targeting to bring the unemployment rate down to 6%.

    You know what? I’ve a better idea. Elect me to the FED dictator for one day and I’ll deliver. I will offer a job to anyone who’s able and willing to work for US$ 9/hour. He/she can start tomorrow. And NGDP is where it should be within months.

    Plus: The unemployment rate will go down to 2%!

  51. Gravatar of Gabe Gabe
    18. October 2011 at 12:00

    W Peden,

    I don’t know where John is to clarify and I can’t speak for him, but I think he is talking about a critical issue which defenders of the central bank always ignore(unless they break down and admit like Scott Sumner that yes the Fed was a mistake in 1913, but where do we go from here).

    Reread John’s quote in order to understand what he meant by “neutral”:

    “Even in the hypothetical case where everyone gets $10000 added to their banks account, the people who spend the money first will gain from being able to buy before prices have surged upwards.

    Money continually injected through the same points, the banking system, is the least neutral situation possible. Imagine if you were in charge of the national printing press and you distributes all the new money by giving it to your 10 best friends. Would you really argue that money was neutral? Your friends and their friends would be filthy rich no matter what they did with the money.

    Peden,
    You know it is technologically possible to have money injected into our bank accounts or in cash in the mail or in accoutns with the government…the monetary distribution could occur in this theorietically mroe equitable way!

    NOW ASK WHY ISN’T?! and don’t tell me it is because nobody has thought of the idea and the altruistic central bankers are just trying their best to help out all us poor idiots to keep us from wasting money on tuition, clothes,food and other such wasteful crap.

  52. Gravatar of W. Peden W. Peden
    18. October 2011 at 12:04

    Stephan,

    And when 2% is reached, NGDP will be a little bit more than 5%…

  53. Gravatar of John John
    18. October 2011 at 12:25

    Gabe,

    You covered for me perfectly. Occasionally work interrupts my procrastination breaks.

  54. Gravatar of John John
    18. October 2011 at 12:29

    By neutral I meant doesn’t harm some groups at the expense of others. Money clearly benefits some people at the expense of others, especially when the same groups always get new money first.

  55. Gravatar of W. Peden W. Peden
    18. October 2011 at 12:29

    Gabe,

    So “non-neutral” here means “inequitable”?

  56. Gravatar of W. Peden W. Peden
    18. October 2011 at 12:32

    John,

    “By neutral I meant doesn’t harm some groups at the expense of others. Money clearly benefits some people at the expense of others, especially when the same groups always get new money first.”

    Then I might have uncovered the source of the misunderstanding here. By “money is neutral in the long-run”, I mean in the sense of being neutral with respect to output and employment-

    http://en.wikipedia.org/wiki/Neutrality_of_money

    – in other words, it’s impossible to print one’s way to prospertiy, a proposition I imagine you agree with!

    By the way, if quantity demanded always = quantity supplied in the market for money, then in what sense can there be a “monetary shock”?

  57. Gravatar of John John
    18. October 2011 at 12:57

    W Peden,

    Thanks for the clarification. I’ve heard people say that money is neutral in the long run to imply that there is nothing unfair or distortionary about rapidly producing paper money. I’d agree that in the weird world of economics models money would be neutral on production but I actually think that fast money growth slows down real growth over the long run primarily by discouraging capital accumulation.

    You caught me using an equation, always a mistake in economics and I’m not really sure how to answer it so I’ll tell you what I (and Mises, Rothbard, and Bob Murphy) think. Large changes in the supply and/or demand for money affect different prices at different times and to different extents. This causes a revolution in production, which follows prices in a profit loss system. Some businesses and people benefit, others lose. Either way, everyone has to shuffle around to adapt to a price revolution. That’s a crucial part of the non-neutrality of money as I meant it.

  58. Gravatar of Gabe Gabe
    18. October 2011 at 12:58

    Giving money to one group….which in turn steals value from the money everyone else holds….benefits some at the expense of others and yes that is “inequitable” if you want to call it that. Why do I get the feeling you don’t even want to understand what we are talking about?

  59. Gravatar of John John
    18. October 2011 at 13:04

    To sum it up, I don’t think it’s possible to print your way to prosperity, but it’s definitely possible to print your way into misery. I think economists underestimate how much it takes because I think we’ve done it already!!

  60. Gravatar of W. Peden W. Peden
    18. October 2011 at 13:08

    John,

    I agree that rapid inflation has negative effects that are at least severe enough to offset any short-term gains over the long-run and that, at a certain level of accelerating increase, inflation becomes too severe for a society to adapt to at any time ever.

    I also agree that money is non-neutral in the sense you mean. Another sense in which it is non-neutral is that lending to governments is more creditworthy than lending to the private sector, so a credit boom can increase the relative size of the government and/or its debts. Equally, in the reverse case, a contractionary shock is likely to hurt the private sector more than the public sector.

    Gabe,

    “Why do I get the feeling you don’t even want to understand what we are talking about?”

    Bad faith? Paranoia? Negative experiences in past expositions? You’re a better authority on your feelings than I am.

  61. Gravatar of Cahal Cahal
    18. October 2011 at 13:08

    A lot of the split between RGDP and inflation is a result of commodity/oil price rises and indirect tax increases, rather than anything structural.

  62. Gravatar of Gabe Gabe
    18. October 2011 at 13:09

    Well over time if money is stolen from productive people in order to fund corrupt mercantilist groups that make their living bribing government(or otherwise gaining control of the monopoly on violence that is the state) in order to stifle competition and startups with regulation and increasingly complex tax codes….well then yes growing mercantilism morphing into crony capitalism morphing into police state homeland security fascism can hurt economic growth and productive employment.

    if the money was always neutral then why not engage in monetary policy by putting it in our personal accounts instead of all the transactions and trickery of buying and selling bonds through primary dealers…taking interest paying it back later(after expenses) etc…why all the smokescreens?

  63. Gravatar of John John
    18. October 2011 at 13:09

    We did the same thing in the late 70s. Both then and now were about 15 year processes. We had much lower price inflation because of cheap stuff from Asia and their desire to hold dollars, two sides of the same coin.

    When Scott points out the fall in housing prices as evidence for tight money/deflation I’d shoot back what about medical expenses or college tuition.

  64. Gravatar of Scott Sumner Scott Sumner
    18. October 2011 at 13:12

    Morgan, It’s all going according to my master plan. Business Insider said I’ll soon be the “hottest” economist in the world.

    grcridlan, You seem to be describing an L-shaped AS curve, but in the real world it slopes up gradually. Some firms are right at the margin, a bit more demand and they’ll hire workers right away.

    James, Thanks for the link. I recall often waiting for Underground trains in January while running a fever of 102 (39 C) because of the British “health” service giving me aspirin for pneumonia. The trains were usually late, and it was very cold. That’s all triggered by your suggestion about what they are reading on the tube.

    Bob, You said;

    “You might be right that central banks should implement level targeting of NGDP growth. But you would sound more persuasive if you didn’t write like everyone else on earth already thinks like you do. You know, stuff like, “Workers took out mortgages expecting 5% NGDP growth,” which they clearly did not.”

    Not so fast. If you think in terms of the “Wisdom of Crowds” then individual members of a crowd don’t know what the crowd collectively know. Let’s apply that to NGDP, i.e. gross national income. Recall that the average Joe thinks in terms of his nominal income, not his real income. Some guys expect 3% raises, some expect 5%, etc. Now assume the average guy expects a 4% raise, and also assume 1% pop. growth. You could say that the public, when taking out their mortgages, collectively expect about a 5% growth in NGDP. I’m not claiming that anyone even knows what the term NGDP means, but I am claiming that they are implicitly thinking about the concept when they decide whether to take out a mortgage. If NGDP actually falls, then people have less nominal income with which to repay those nominal loans than they anticipated. Given many expenses are fixed, even a modest fall in income can make it much harder to repay loans. It’s not like people are going to stop eating.

    Back in the gold standard days when trend inflation was zero, people may have been more conservative when deciding how much they could borrow at a given interest rate.

    MMJ, Huge growth in government under Gordon Brown. Yes, the G/GDP ratio normally rises during recessions, but it even rose 4% points during the preceding boom, when it should have been falling. Britain lost that neoliberal edge that Thatcher gave it, and now they have just as high taxes on the rich as most continental countries.

    John, I put zero weight on M2.

    Brian, Yes, he’s been great recently.

    Gabe, Thanks, I’ll look for it.

    Rob, I have an open mind on the issue, and am waiting for more data not contaminated by rising oil prices and VAT increases. If Britain get a 5% NGDP growth over the next 12 months, there will be no excuses. If RGDP growth is low, then both Balls and I will have been wrong, it will be a structural problem, not AD. My hunch is that inflation would fall to 2% and RGDP growth would be 3%. Of course if you don’t have fast NGDP growth, then we won’t find out. It’s hard to get a read on things when both oil and VAT are soaring, those are like adverse supply shocks, but they are one time shocks. Maybe big government has reduced the long run growth trend. I still think the recession in the UK is at least 50% an AD problem, but I think we need a bit more data.

    I know that sounds wishy-washy, but I’m not going to pretend I know things that I don’t know. I still think 5% NGDP growth is the right policy to counteract austerity, even if they do have structural problems. But then you just can’t expect much growth.

    Gabe, Does this mean I’ll be blamed if it doesn’t work. :)

    Rob, Yes, I’ve seen Balls interviewed, so I have a sense of where he’s coming from. And I do understand how politics works, it’s not like an academic seminar.

    Statsguy, In fairness, I never formally bet with Bob, so he can’t be blamed for that. I seem to recall he bet someone at Econlog, but am not sure. Bob once told me he admitted inflation was lower in 2010 than he expected, so he seems like a stand up guy to me.

    And I’ve been wrong about things too–I didn’t see the huge crash of 2008 coming until it was underway.

    Daniel, I haven’t had time to take a close look (lots of grading to do) but I don’t think I agree with their generally Keynesian way of thinking through the policy.

    Andrew, Thanks for the link.

    Patrick, Yes, that guy is right about where the swing voters are.

    Stephan, “Totally exited?” I got about 10 emails before I decided I really ought to put up a link. But I am pleased that the idea is getting publicized. I agree that we should try to bring down unemployment more quickly.

  65. Gravatar of Gabe Gabe
    18. October 2011 at 13:12

    It seems cash flow generated by primary dealer bond transaction fees are the most “neutral” form of money.

  66. Gravatar of dwb dwb
    18. October 2011 at 13:17

    Bernake details better communication strategy (below). Really? is it communication? Maybe they are clearly communicating bad policy. I would rather have a garbled message about a good policy than a clear understanding of bad policy. What they really need is better policy rule. Meanwhile Dallas and Kansas City Fed call for higher rates. Can i buy what they are smoking please?

    http://online.wsj.com/article/SB10001424052970204346104576639143205155516.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsForth#printMode

  67. Gravatar of W. Peden W. Peden
    18. October 2011 at 13:17

    I also wonder about the fluctuations in broad money during the Great Moderation.

    I’m as sceptical of equations as you are, John, but let’s go back to MV = PY. We use NGDP as a proxy for PY to derive a working definition of V, but that’s inaccurate in the strictest sense: P represents ALL prices and Y represents ALL transactions. However, the overwhelming majority of transactions are not sales of final goods (NGDP) but in intermediate and (almost as overwhelmingly) in financial assets (stocks, bonds, derivatives etc.) & non-financial assets (property and wealth in general).

    So even if final goods don’t suggest excess money growth (i.e. NGDP was growing at a steady rate during the Great Moderation) that doesn’t mean that there’s no inflation as represented by P in the equation of exchange. If broad money (defined as the stock of currency in circulation + the stock of deposits held by the non-financial sector) grows rapidly but NGDP doesn’t grow rapidly and V DOESN’T fall proportionately, then you would see a rapid appreciation of asset prices.

    Now, can we think of a period where NGDP was stable, the money supply was growing rapidly, and we saw a rapid appreciation of assets? Maybe the velocity money IS very stable & predictable, but only as defined by M + PY, rather than M + NGDP. The k% rule and Gold Standard suddenly seem more attractive…

  68. Gravatar of W. Peden W. Peden
    18. October 2011 at 13:19

    Gabe,

    I think that the neutrality of money is an empirical rather than theoretical question. Such questions are precious things in economics!

    “if the money was always neutral then why not engage in monetary policy by putting it in our personal accounts instead of all the transactions and trickery of buying and selling bonds through primary dealers…taking interest paying it back later(after expenses) etc…why all the smokescreens?”

    And how would you take it out when you want to contract the money supply?

  69. Gravatar of W. Peden W. Peden
    18. October 2011 at 13:23

    John,

    “We did the same thing in the late 70s. Both then and now were about 15 year processes. We had much lower price inflation because of cheap stuff from Asia and their desire to hold dollars, two sides of the same coin.”

    I don’t think that low NGDP growth is caused by expensive imports or that low inflation is a product of cheap imports. What you are suggesting is just the reverse of the “general price” fallacy as used to try and blame the consequences of government profligacy on greedy Arabs.

    Of course, the “China” effect was not irrelevant, because it mean that Americans could spend more money on property and oil rather than electronics & other consumer durables.

  70. Gravatar of Morgan Warstler Morgan Warstler
    18. October 2011 at 13:32

    Scott, as soon as the Tea Party hears about:

    1. The Fed being neutered.
    2. Pissing on booms.

    They’ll learn to accept level NGDP at 3%.

    http://www.businessinsider.com/the-hottest-idea-in-monetary-policy-2011-10

  71. Gravatar of Morgan Warstler Morgan Warstler
    18. October 2011 at 13:36

    Read the comments there.

    The conservative right, not the Mitt Romney right, will have to hear about how this quickly raises rates and make sit easy for Republicans to force the government into Austerity.

    Give that speech. Over and over.

  72. Gravatar of Scott Sumner Scott Sumner
    18. October 2011 at 14:11

    John, You said;

    “We did the same thing in the late 70s. Both then and now were about 15 year processes. We had much lower price inflation because of cheap stuff from Asia and their desire to hold dollars, two sides of the same coin.
    When Scott points out the fall in housing prices as evidence for tight money/deflation I’d shoot back what about medical expenses or college tuition.”

    Asian money hoarding never happened, it’s a myth. They hoarded bonds. Asian imports don’t lower the inflation rate when the central bank is targeting inflation. They may boost RGDP growth a tiny bit.

    I only mention housing in response to others who think inflation’s really high. How many historical episodes of high inflation are accompanied by a 32% fall in housing prices?

    In any case, I am still waiting for someone to give me an intelligent reason why inflation matters at all. Every reason I’ve heard thus far is simply a mistake in reasoning. They all apply to NGDP or RGDP, not inflation. Inflation doesn’t matter. Maybe I’ll have to offer a $100 reward: “Why should I care about inflation?”

    Even Austrians like Hayek agree with me.

  73. Gravatar of Morgan Warstler Morgan Warstler
    18. October 2011 at 14:22

    “Why should I care about inflation?”

    1.Because it rewards savers.

    2. Because money is an invention by and exists as a subset for people, not the whole society. The tag alongs don’t get a real vote.

    3. So you can appeal to the people in #2 who after all make the decisions.

    —-

    Scott admit that 3% level targeted NGDP over the past 20 years is virtually the same thing as hard money.

    Historically we’d be bouncing up against it all the time, and raising rates so often, a dollar today would by much more than it currently does.

    You can make all other kinds of noise, but it is this fact, when discovered by the people in #2, which will move them to agree.

  74. Gravatar of John John
    18. October 2011 at 14:35

    W. Peden,

    Nothing economically can hurt the government. They have a printing press.

    Scott and others,

    I’m going to respond to every single point here when I have a little time later.

  75. Gravatar of MikeDC MikeDC
    18. October 2011 at 16:48

    Scott,
    Give me a definition of what you mean by inflation and I’ll tell you why it matters.

  76. Gravatar of Bob Murphy Bob Murphy
    18. October 2011 at 17:43

    StatsGuy wrote:

    So, just when exactly will you publicly proclaim that you were severely wrong about hyperinflation (By 2009? 2010? 2011?).

    One of the latest trends in the hyperinflationary (hyperventilating?) press is redefining hyperinflation. Now, some are calling the 1970s inflation a hyperinflation.

    I notice you deleted my comment on your blog asking when you were going to make-do on your bet with Scott… Very noble of you.

    I realize this borders on thread-jacking, but my blogosphere honor is at stake. So:

    (1) I never made a bet with Scott. Does that matter?

    (2) I never gave a specific prediction of hyperinflation; in fact I publicly repudiated Marc Faber for using the term so loosely. I publicly made specific predictions about large CPI increases at various points, and I have dedicated blog posts (e.g. here) saying I was wrong.

    (3) StatsGuy, how could you possibly read my blog for even one week and conclude that I would delete a comment because I couldn’t face the heat? Have you seen the stuff from David S. that I let sit on there? I think he has a recurring appointment on his iCalendar every Tuesday to “swing by Murphy’s blog, call him an idiot, wonder if NYU really gave him a PhD, and also mock his religious beliefs.”

    I don’t know what would be worse, if you (A) know full well I didn’t intentionally delete your comment but made the charge anyway because you face zero consequences or (B) are actually that paranoid that you think I intentionally deleted your comment. Assuming you didn’t deny the Holocaust or suggest people engage in sex acts, it was a blog malfunction or I accidentally deleted it.

  77. Gravatar of John John
    18. October 2011 at 17:56

    W. Peden,

    MV=PY makes my face red. It contributes nothing to economic understanding and diverts people from the real issues. To start with, GDP/Y is a terrible stat, there’s no such thing as a price level, money doesn’t move at a velocity (someone is always holding it) and no one can agree on the best measure of M. Second, if you break that equation down, it assumes that if you sell something for $10, then the value of the thing is equal to $10. This is a blatant fallacy exploded by the subjective theory of value. It’s possible to fill entire volumes with useless equations like that. Here’s Rothbard’s example $0.70= 100 grains of sand x number of students in class/100 grains of sand+ $0.70-number of students in a class. As Rothbard says, the equation of exchange should be expunged. It’s one of those things people should never learn because it makes them dumber.

  78. Gravatar of Morgan Warstler Morgan Warstler
    18. October 2011 at 18:21

    This is why it is imperative to draw a line between who money and monetary policy is for and who it is for not:

    “By much the same token, if Fisher held Barack Obama’s daughters hostage and said they wouldn’t be released until he agreed to steep cuts in Social Security benefits, that would increase his incentive to make hard choices on fiscal policy. At the same time, most of us would think it would be morally wrong to make Sasha & Malia suffer in order to extract unrelated policy concessions. Holding unemployed Americans’ livelihoods hostage is less graphic, but also wrong.”

    http://thinkprogress.org/yglesias/2011/10/18/347041/richard-fisher-wants-to-make-you-poor/

    If you don’t draw the distinction, you’ll make this idiot mistake, where the Fed is supposed to use Monetary to cover for liberal efforts.

    We as a society have set things up PRECISELY so liberal efforts have to swim upstream against “independent” monetary authority which views government interference in the free market.

    Matty and DeKrugman and MMT all want to pretend that there isn’t a structural conservatism built directly into the rules of the game.

    Not admitting the rules skew to favor private interests that OWN things means whoever is speaking is really just lamenting, they aren’t figuring out real policy.

  79. Gravatar of John John
    18. October 2011 at 20:13

    Scott,

    With an inflation targeting Fed, wouldn’t a flood of cheap goods cause them to pump in more money than they would have otherwise? That actually makes my point.

    About Asian hording. First, the term hording should be kicked out of Econ forever. Everyone has a cash balance so the term I’d totally arbitrary. Second, in order to send us stuff, they had to accept dollars. China keeps large dollar reserves and plugs a lot of the money back into bonds. This demand for dollars both to hold and invest keeps the dollar strong and clamps down on prices, again requiring the Fed to pump in more money.

  80. Gravatar of John John
    18. October 2011 at 20:20

    I think different people mean different things when talking about inflation. At least I do sometimes. From now on I’ll mean inflation as a catchall for increases in the supply of money. I’ll use price inflation to refer to what the Fed targets.

    Morgan,

    You really should join the call to end the Fed. Mises was able to see back in 1913 that the establishment of central banks was just an attempt to make everyone rich through credit expansion. Independence is a joke; they just inflate and inflate to bail out banks and appease voters (think of Greenspan bailing out Bush). The nature of central banking is a deliberate attempt to make everyone rich by creating money. If you want them to clamp down, tell them to close their doors.

  81. Gravatar of Morgan Warstler Morgan Warstler
    18. October 2011 at 23:17

    John, I would do it in a heart beat, but I’m 20+ years into libertarian discussions going nowhere.

    Now I try to think about policy hacks that force a libertarian future on people without regard to whether they want it.

  82. Gravatar of W. Peden W. Peden
    19. October 2011 at 02:55

    John,

    I’d put more faith in criticisms of the equation of exchange if more of the critics understood it. For one thing, GDP is a proxy for Y in the equation.

    I regret that you are unwilling or unable to address the substantive point in my comment, since it seems to be down your alley.

  83. Gravatar of MMJ MMJ
    19. October 2011 at 04:52

    @ Scott – thanks for your response. I have lived in the UK and US and it seems to me that there are plenty of structural problems in both countries (e.g.
    http://www.economist.com/node/18678963 for the US). I accept that they are worse in the UK, however.

  84. Gravatar of John John
    19. October 2011 at 05:06

    W. Peden,

    Me? Dodge a substantive point? Never. I wanna start by saying that I’m well aware that GDP and Y are the same thing, I thought I had made that clear in my comment on the subject. I’d highly suggest you read Rothbard’s little mini section on the equation of exchange in Man, Economy, and State. It’ll cost you nothing but your time (15 mins maybe) and it’s time well spent. I’ve never seen an idea so thoroughly demolished anywhere. Just look it up on the Mises.org website.

    If I read you correctly, I think you were basically saying that you could see price increases in producer goods and financial assets that wouldn’t reflect in NGDP, right? I very much agree with you that a lot of the money created over the past 15 years (looking at the M2 chart) was, for various reasons, not reflected in price increases. Economics is complicated like that and it is impossible to shift out exactly what is driving prices. The first real economists, the Spanish Scholastics in the 16th century, pointed out that so many factors determine a price only God could have an accurate knowledge.

    Thanks for backing up my point that money supply growth, which is how I think of inflation, is a very insipid process. If you look at a chart of real GDP and the CPI since we left gold in ’71, they mirror each other almost identically. Has the economy really been that awesome since then? Experience says no. Theory says that the real answer is that even real GDP growth is a reflection of inflation, they fail to deflate properly.

    Think about a hypothetical situation with a fixed amount of money. Since GDP represents the final value of goods and services in dollar (or whatever money your using) terms, the only way for the final value of output to grow over the long haul is for there to be more money. There is simply no other way. Increasing productivity and production drive up the demand for money, driving prices down to match the increased output. GDP would fluctuate within a certain band based on how much people wanted to save. The essence of GDP growth is money growth. It doesn’t matter all that much whether you’re using real or NGDP.

  85. Gravatar of John John
    19. October 2011 at 05:14

    Morgan,

    I see where your coming from, as much as it pains me to admit it, I think the Fed will outlive me. I still feel obligated to say what I believe. When I lose inspiration, I read Mises; a man who was ridiculed all his life for providing an intellectual defense of civilization.

  86. Gravatar of Rob Rob
    19. October 2011 at 06:14

    “inflation DOESN’T MATTER IN ANY WAY AT ALL. It’s NGDP growth that matters. Name any problem supposedly caused by inflation, and it ain’t so.”

    Is this just a scary way of saying that the thing that generally causes inflation is NGDP growth above the ability of RGDP to grow with it(which I agree with) or that literally inflation does not cause any problems (which seems insane).

    Can someone clarify ?

  87. Gravatar of Rien Huizer Rien Huizer
    19. October 2011 at 07:34

    Scott,

    “Of course it’s the fiscal authority’s duty to focus on the optimal levels of spending and taxes, and the monetary authority’s job to make sure they can do in in an environment of stable NGDP growth.”

    Why all this blogging if you can say it in one sentence?

  88. Gravatar of John John
    19. October 2011 at 07:38

    Rob,

    Scott has told me that first off he doesn’t buy think the inflation numbers are accurate and second he just thinks NGDP growth is more useful.

    Also, inflation has nothing to do with NGDP being larger than RGDP and everything to do with the central bank inflating (like a ballon, that’s where the term comes from) the available supply of money and credit. Money is not productive, based on marginal utility analysis, more money just leads to higher prices.

  89. Gravatar of Gabe Gabe
    19. October 2011 at 08:13

    Peden,

    “And how would you take it out when you want to contract the money supply?”

    oh you mean when I wanted to create cascading defaults so I could use my inside information to pick up some bargains? I guess that would be more difficult to do.

  90. Gravatar of W. Peden W. Peden
    19. October 2011 at 08:38

    Gabe,

    So helicopter drops can only do one very small part of monetary policy?

  91. Gravatar of Gabe Gabe
    19. October 2011 at 09:03

    Peden,

    I think empirical questions/issues and logical questions/issues are good to ask and think about. I don’t turn off my brain and plug my ears when switching from one type of analysis to another.

    In fact all empiral studies require critical logical thinking. Do the metrics you are using make sense for what you are trying to measure? are they consistently calculated over time? etc

    Court “empirical” economist under the Mao regime were happily reporting record crops while 30 million people starved to death.

    Real private GDP is below where it was 42 months ago! this has been the case for over two years…In the 82 double recession this only occurred for 9 months.

    Print more money and filter it through primary dealers and the biggest banks is the best solution being offered by goldman sachs and the establishment who has led us to this huge decline in private gdp growth. I consider that a problem.

  92. Gravatar of Gabe Gabe
    19. October 2011 at 09:27

    Peden,

    According to Friedman we don’t need monetary contractions ever, just consistent or varying degrees of expansion. What of the fears of disinflation? the evils of all kinds of deflation?

  93. Gravatar of Gabe Gabe
    19. October 2011 at 09:30

    If you are targeting a NGDP level then you will only need monetary expansion as you can always hold money constant while allowing productivity and economic growth to catch up if NGDP is overshot…or are you planning on managing us into negative productivity?

  94. Gravatar of Gabe Gabe
    19. October 2011 at 09:32

    Peden,
    Do you see that you ignore the obvious answer?…they like it where they can have the money printing power under their full control not because they love us so much but because the money filtering into the economy through the channels they control is beneficial to THEM?

  95. Gravatar of Gabe Gabe
    19. October 2011 at 09:35

    It seems issues you need to read some empirical analysis studies regarding human behavior.

  96. Gravatar of W. Peden W. Peden
    19. October 2011 at 09:40

    Gabe,

    “According to Friedman we don’t need monetary contractions ever, just consistent or varying degrees of expansion. What of the fears of disinflation? the evils of all kinds of deflation?”

    I’m not talking about monetary contraction; I’m talking about contractionary monetary policy.

    I’m uncertain as to whether we will be able to get a discussion going here.

  97. Gravatar of Scott Sumner Scott Sumner
    19. October 2011 at 19:41

    Morgan, Whatever inflation does NGDP growth does better.

    MikeDC, Take CPI inflation, for instance.

    John. No such thing as a price level? That’s music to my ears.

    I agree about Chinese imports and inflation targeting.

    MMJ, I got new data from Britmouse that suggests NGDP in the UK is lower than I thought. So maybe I overdid the structural problems angle.

    Rob, I meant the insane version.

    Thanks Rien.

  98. Gravatar of StatsGuy StatsGuy
    20. October 2011 at 06:14

    “Watch City Brewing. Oct 29. A toast to Trichet’s departure.”

    Open to all, but let us know Scott what time is best and whether the date works for you, if not we’ll move it. No sense throwing a party without the birthday boy.

  99. Gravatar of Britmouse Britmouse
    20. October 2011 at 06:35

    No response expected, just for the record, here are annualized quarter-on-quarter growth rates for UK NGDP, since the beginning of 2010:

    2010 Q1 6.0%
    2010 Q2 6.0%
    2010 Q3 4.5%
    2010 Q4 1.6%
    2011 Q1 3.6%
    2012 Q2 2.2%

    Fiscal “austerity” announced during 10Q2; I’m pretty sure Larry Summers would have a good laugh about expansionary fiscal contraction if he saw those numbers.

    ONS series YBHA

  100. Gravatar of Rob Rob
    20. October 2011 at 09:59

    Scott:

    I still can’t get past:

    “Name any problem supposedly caused by inflation, and it ain’t so.”

    Are you are defining inflation here as ‘expanding money supply” or “rising prices” ?

    Assuming the latter: “Inflation (defined as rising prices) wipes out the savings of people on fixed incomes”. Thats a problem. The only way I can think of to say its actually a NGDP problem is to say that “NGDP ran too far ahead of RGDP and caused prices to rise – the problem is excessive NGDP growth not inflation”. But you have rejected that interpretation.

    Please can you explain what I’m missing ?

  101. Gravatar of ssumner ssumner
    27. October 2011 at 17:46

    Statsguy, Is that still on?

    Britmouse, Thanks, Britain does need easier money, that’s obvious now.

    Rob. The UK tried indexing public pensions to inflation and after a few decades there was a revolt, as the living standards of the old fell further and further behind the rest of society, who were getting real increases. Turns out the older British people cared about NGDP, not inflation.

    Try indexing pensions in China to inflation (where real wages are rising 10% a year.) There’s be a revolt there too.

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