What we’re talking about when we talk about inflation
Some days I want to just shoot myself, like when I read the one millionth comment that easy money will hurt consumers by raising prices. Yes, there are some types of inflation that hurt consumers. And yes, there are some types of inflation created by Fed policy. But in a Venn diagram those two types of inflation have no overlap.
So here’s my plan. Beginning tomorrow, November 1st, I will ban all discussion of inflation from the comment section. I won’t respond to questions on inflation. (God knows how Bob Murphy will react to this—something tells me it won’t make me look good.)
Before everyone starts whining, I am about to provide a substitute language for you to use, and tell you when to use it:
1. Let’s start with the easiest type of inflation to consider, and the only one people really care much about—supply side inflation. Suppose the AS curve shifts to the left because of a cutoff in oil production, crop failures, bad government tax and regulation policies, etc, etc. Real GDP will fall, if we do nothing to aggregate demand. And prices will rise. People think it is the price rise that is making them worse off, but that’s an illusion; it’s really the drop in RGDP. How do we know? Because consider the case where the Fed responds with tight money, which shifts AD far enough to the left to prevent any inflation from the adverse supply shock. In that case there are two possibilities; the drop in real GDP and real living standards would be just as bad (if money is neutral) or it would be even worse, if money isn’t neutral. It is the fall in RGDP that is the key problem, and any price change is incidental to what’s really going on. So if you ever envision an inflation problem that makes consumers worse off, please don’t call it “inflation,” call it “falling real incomes.”
2. Now let’s turn to demand-side inflation, which either makes people better off in the short run (via higher RGDP, higher real incomes), or has no effect (if money is neutral.) Here there are many cases to consider:
2.a. Some argue that low inflation makes a liquidity trap more likely. But as we can see by comparing Japan, China, and Hong Kong, mild deflation creates liquidity traps only when real growth is persistently low. The problem isn’t low inflation, it’s low expected NGDP growth. That’s because real interest rates are strongly correlated with real GDP growth, and of course expected inflation in nominal rates is perfectly correlated with the expected inflation component of NGDP growth. So from now on please talk about the danger of low NGDP growth leading to a liquidity trap, not low inflation. China had deflation in the late 1990s, but fast RGDP growth—hence no LT.
2.b. This also applies to the phony tears people shed for the savers hurt by inflation. Let’s assume savers buy long term nominal bonds. Those bonds promise a fixed amount of money, at specified futures dates. The standard argument is that inflation hurts savers by reducing their real return on bonds. But savers don’t care about the nominal interest rate minus the inflation rate, they care about the nominal interest rate minus the per capita NGDP growth rate. I’ll give you an example. Years ago the British government indexed the initial starting point for retirement pensions to the cost of living, not average wages (as we do.) The Thatcher reforms led to real increases in living standards iGn reat Britain, and so over time the living standards of retirees fell further and further behind living standards of the employed (who received nominal wages increases that exceeded inflation.) Eventually the old-timers looked at the flashy lifestyles of their younger neighbors, and revolted. The UK government was forced to change the indexing scheme. People don’t care about real incomes they care about how they’re doing relative to their neighbors. If NGDP rises faster than expected, then a bondholder is paid back a smaller share of national income than he anticipated when he bought the bond. And that hurts.
2.c. The Fisher effect applies to nominal interest rates minus NGDP growth, not minus inflation. Some Keynesians fear that the Fed can’t stimulate the economy, because it finds it politically difficult to increase the expected rate of inflation. But they don’t need to increase the expected rate of inflation, just the expected rate of NGDP growth (and the SRAS is pretty flat right now.) When expected NGDP rises you get more investment whether firms expect more inflation, or more RGDP growth. So just shoot for more nominal growth.
2.d. Some people say inflation and deflation are bad because wages are sticky. A sudden bout of deflation will raise real wages, and lead firms to lay off workers. But that’s only true if the deflation comes from falling NGDP growth expectations. Suppose it is the “good deflation,” produced by rising productivity. Then if wages are sticky the deflation raises living standards. This occurred during the 1927-29 boom, when the price level fell in America. Of course that was followed by a “bad deflation,” sharply falling NGDP during 1929-33. So rather than talk about good and bad deflation, let’s just talk about what we really mean, rising and falling NGDP.
2.e. Some people think the Fed should target inflation. When you mention oil shocks they say “well that’s an exception, I favor a flexible inflation target that allows prices to rise during supply shocks.” OK, but then why not just target NGDP, so you don’t have to make exceptions? Why totally confuse the public?
2.f. One of the supposed costs of inflation is the excess tax on capital caused by the fact that capital gains taxes and taxes on interest are not indexed. But that’s really a problem of high nominal returns on capital, not high inflation. You say the two are correlated? I say they’re even more correlated with NGDP growth. So let’s talk about how rapid NGDP growth imposes inefficient tax burdens on capital.
2.g. Menu costs? Maybe, but it’s ambiguous, which is not enough to overcome my presumption for NGDP growth. After all, many economists think the biggest menu costs apply to wages, which seem very hard to adjust. Costly strikes result from attempts to adjust wages. Or workers occupy the capital building in my hometown of Madison. And wages are arguably more closely linked to per capita NGDP than inflation. In early 2008 inflation rose rapidly while NGDP did not. Wages remained well contained.
2.h. The inflation tax from printing money? It comes from the opportunity cost of holding cash, which is the nominal interest rate. And the nominal interest rate depends on NGDP growth. (I should add that it also depends on lots of other things, like economic slack and budget deficits. But those other things are also “not inflation.”)
2.i. Inflation can reduce the burden of the national debt? No, NGDP growth reduces the burden of the national debt. Does unexpected disinflation trigger debt crises? No, it’s unexpected falls in NGDP that trigger debt crises.
To conclude: If you are about to type the word “inflation,” please stop. If you have in mind something that implies lower living standards, please type “falling real incomes.” If it is a demand-side inflation (all the items in category 2 above) then type “NGDP growth” or “nominal income growth.”
So you have 12 hours to convince me to rescind this ban, before it goes into effect. If you cannot come up with a scenario where I need the word “inflation,” then it will be banned.
Happy Halloween!
Tags:
31. October 2011 at 08:00
Ouch from now on I’m gonna have to talk about increases or decreases in the supply of money and credit. That’s what I should’ve done all along but it is a pain to type.
31. October 2011 at 08:12
John, Money or credit? They are completely unrelated concepts.
31. October 2011 at 08:16
I’ll actually agree with Scott that inflation is an unscientific term. It just refers to price changes that result from changes in the money relation rather than talking about the supply and demand for money itself. That’s pretty misleading. When people talk about inflation, they are usually talking about changes in purchasing power which can be cash induced or goods induced (supply shocks or productivity gains). When Austrians talk about inflation they’re talking specifically about the only cause of continually rising prices; increases in money and credit. I think that’s the best way to think about it compared to other economic views.
31. October 2011 at 08:22
Scott,
Both, banks create money out of the base by granting credit. In the old days, banks with gold reserves would create inflation in the system by lowering the ratio of outstanding loans to gold holdings. It seems pretty straightforward that there could be more money in the system when banks make a lot of loans. I thought that in that sense, credit created money. Where am I wrong here?
31. October 2011 at 08:26
Scott, I think this move is heavy handed and a tad totalitarian. Inquiring minds genuinely want to understand and discuss this important issue, and ‘inflation’ is a keyword in the related vocabulary. Impeding discussion like this will ultimately prevent the public from coming to know the truth about this fundamental issue. It is clear you wish to hold a veil over the mountain of evidence that shows the importance of inflation, but ultimately putting a sheet over the elephant in the room will not make the elephant disappear.
I’m disappointed Scott, I never pegged you for a Young Earther. How can you deny the [cosmological] inflation, when the evidence is all around us?
31. October 2011 at 08:26
NGDP = RGDP + INFLATION
You can try to call effects of Peak Oil reduced RGDP, but no one is dumb enough to do economics under and assumption of infinite supply.
And when we do the math on NGDP, we don’t ask ourselves if 3% RGDP was really 4%, but the cost of oil went up.
Look, the Fed as you say moves last.
So the real economy runs and has growth and supply side inflation / deflation, and then after the fact, the Fed comes in and increases decreases the money supply.
I don’t know anyone complaining about inflation who is talking about supply side, they are all complaining about the Fed’s bit.
31. October 2011 at 08:27
Professor Sumner, I’m an undergrad at North Carolina State university and I’ve been reading your blog for several years now but this is the first time I’ve commented. I just want to say thanks for helping me learn a lot in regards to economics and monetary policy, and I think your one of the best economists out there. Also, I just found out today about the We the People site by the white house where people can create and sign petitions to the Obama administration. So I created one to get the administration to influence the fed to set an explicit ngdp target. It needs 25,000 signatures in order to get reviewed by the white house. I don’t expect much, but maybe it can help a little. Here is the link to the petition: http://wh.gov/b1f
31. October 2011 at 08:33
“I don’t know anyone complaining about inflation who is talking about supply side, they are all complaining about the Fed’s bit.”
@Morgan, really?
In both the blogosphere and on the ground I constantly run into people who conflate Fed activity and supply side inflation. Some of these people are deeply involved in financial markets. These people are [rightly] suspicious of the Fed’s preferred measures of inflation, but they universally have it backwards, expecting a downward bias in CPI and attributing growth in commodity prices to QE.
31. October 2011 at 08:37
The money prices of particular goods and services play create signals and incentives that allow for microeconomic coordination. These signals and incentives involve relative prices, and the exact same constellation of relative prices can exist at any _____________. (level of nominal GDP or Price level.)
In an __________ (inflationary or rapid nominal GDP growth) environment, changes in preferences and production technology result in some prices rising faster than other prices, providing the needed signals and incentives to adjust consumption and shift resources and production.
Woolsey: “poor people are better off because money incomes rose more than prices.”
Sumner: “poor people are worse off because their share of nominal income fell. That is all people care about.”
Woolsey: “Suppose nominal GDP falls in half and the price level doubles. Sumner’s personal income falls by 40%. He is now making a slighly larger miniscule fraction of nominal GDP. I think Sumner is poorer.”
Sumner: “No, I have no problem with being able to purchase 30% fewer goods and services because other people on average purchase 25% fewer.”
Smith lent out $100 and received $105 back. Prices rose 2% during the period. Smith has increased his real purchasing power by $3. He can purchase more goods.
Smith lent out $100 and received $105 back. Nominal GDP rose 2% over the period. What happened to Smith’s command over goods and services?
Most importantly, suppose the Fed sees the light and decides to raise nominal GDP at a 10% annual rate for the next two years, and then has it grow 4.5% thereafter.
I want to know how much of this will be inflation (price hikes) and how much will be real output growth. How can I talk about this without inflation?
Of course, I am completely against having monetary policy target the “cost of living.” But I don’t see how the concept of the price level and inflation can be avoided.
31. October 2011 at 08:43
“If NGDP rises faster than expected, then a bondholder is paid back a smaller share of national income than he anticipated when he bought the bond. And that hurts.”
Corollary to 2.b
IF NGDP rises more slowly than expected, then a bondholder is paid back a larger share of national income than he anticipated when he bought the bond. And that feels good. So the bondholder will lobby for policies that will lead to low NGDP growth.
I’m fine with this, but I think it is appropriate to discus “inflation” as it pertains to trends in nominal wages, and perhaps shelter rents.
31. October 2011 at 08:51
ok.shut down inflation discussion here.but after 2 months of nonstop debate on purely inflation alone. ban NGDP talk for 2 months first!
31. October 2011 at 08:52
Cthorm,
Wait there bucko.
During the last run up in the price of Oil. The Saudi’s said out loud, hey every cent the US dollars falls, the cost of oil goes up $4 a barrel.
So, the Fed WAS causing the cost of oil to go up.
And according to Scott’s OWN numbers, the Fed should have been raising rates in 2004-2006, reducing the money supply.
Now sure yes, there is greater supply demand for oil, but nobody complaining about inflation is an idiot denying this, they are all complaining about there being ANY finger on the scale by the Fed.
There is no way around this fact, if Scott is right, 2008 can’t happen, because 2005-2006 can’t happen. Scott’s thinking doesn’t make 2005-2006 ok, it FAILS if 2005-2006 happen.
And conservatives are complaining about inflation are complaining about 2005-2006.
31. October 2011 at 08:56
Your plan is double-plus good Mr. Orwell.
31. October 2011 at 09:05
Sorry, Scott. I like your post, but I don’t like the idea of banning the discussion of inflation. Bill Woolsey has good points. Also your point, “People don’t care about real incomes they care about how they’re doing relative to their neighbors.” is true to some extent, but for large differences in real incomes, rationality takes over. Otherwise you wouldn’t have as much immigration to the US as you currently have. Mexicans who move to the US are most likely falling in relative status. But their real incomes are rising significantly. So they come.
31. October 2011 at 09:08
While I agree with the sentiment of this post – that a lot of people are performing a bunch of fallacies of equivocation between different senses of the word “inflation” – I suspect a ban like this isn’t going to work. Something like “I won’t respond to comments using the word ‘inflation'” would probably work at lot better.
I also don’t really agree regarding bonds – it’s perfectly fair to say that greater (inflation | NGDP growth – RGDP growth) hurts bondholders, if it’s unexpected. The response is that under NGDP level targeting, you only get unexpected (inflation | NGDP growth – RGDP growth) if the Fed misses the target or if RGDP growth is lower than expected. Thus fixed-income securities become an equitylike share of national output. That seems like a perfectly reasonable system – macroeconomic risk gets shared equally between lenders and creditors. If you want to hedge against it you would buy an inflation-protected bond.
31. October 2011 at 09:09
I’m very excited to see what Bob Murphy will say.
31. October 2011 at 09:16
Fantastic post Scott.
I have argued for a long time that one of the biggest hurdles we face in getting to more rational economic policy is our stunted vocabulary surrounding price changes.
The fact that we use a single term to describe many entirely different phenomena is the surest possible sign that we have a long, long distance yet to travel.
It is like having only one term – precipitation – to describe all the forms that precipitation can take.
Until we deepen our collective understanding of the system to the point where we have a well-developed vocabulary, we really have little hope of getting to a meaningful shared understanding of how the system works.
31. October 2011 at 09:36
I think this is a useful discipline. After all, if people want to discuss the I-word, they can do it on other blogs. On this blog you can force them to refer to it as “the difference between nominal and real income growth” if they insist on talking about it. It forces people to rethink their arguments: in most cases it should be possible to restate valid arguments without resorting to my cumbersome euphemism.
I don’t buy most of Bill Woolsey’s arguments. Poor people are better off if their real income is higher. Why do you need to use the I-word to make that statement? If the Fed decides to raise NGDP (and successfully implements that decision), this might result in a large increase in RGDP or it might not. Why do you need to use the I-word to talk about that?
The argument about lending, though, carries a bit more weight with me. Are we really going to throw the Fisher equation out the window by disallowing one of the terms? There is a problem with talking about “command over goods and services,” though, because relative prices are always changing, so one inevitably has more command over some goods and services and less command over others.
31. October 2011 at 09:47
‘I’m an undergrad at North Carolina State university….’
Say hello to Steve Margolis for me. Who once, along with his friend Stan Liebowitz, had to remind Paul Krugman that, when unlike things are treated as if the were the same, error is assured.
Which is the point I think Scott is getting at with this post.
31. October 2011 at 09:52
I think the detractors are looking at this wrong. This isn’t about whether “inflation” really exists or doesn’t exist. It’s an exercise to expand our perspective, to make sure we aren’t using inflation as an analytic crutch.
It’s just like when you play a sport, you often intentionally practice at a disadvantage to build compensatory skills. Dribble with your off hand. Touch the ball a max of three times before passing. Give the defense an extra man. Etc.
31. October 2011 at 09:59
John, I can’t imagine why people would want to call changes in the quantity of money “inflation.” Has the US had 200% inflation since 2008.
Also, what do Austrians call rising prices?
I define money as the monetary base. Credit is loans. I fail to see the connection.
Cthorm, Can we call that NCSG? (nominal cosmological spacial growth)
Morgan, You said;
“I don’t know anyone complaining about inflation who is talking about supply side, they are all complaining about the Fed’s bit.”
Just the opposite–they all seem to think inflation hurts consumers–which means they are focusing on the non-Fed inflation.
Bill You said;
“I want to know how much of this will be inflation (price hikes) and how much will be real output growth. How can I talk about this without inflation?”
I think we need to focus on what the Fed can control, which is NGDP and hours worked. So hours become my indicator of the business cycle.
I will admit that long run economic growth estimates (for living standards) imply a estimate of inflation. I.e. NGDP growth minus RGDP growth (both per capita). But economic theory says real economic growth should raise utility, and surveys show Americans aren’t getting happier. So I’d rather focus on hours worked as my “real” indicator of the business cycle. I don’t know how to measure inflation and/or real growth long term.
Master of None, I should have mentioned some complications here. Faster real growth can raise the total share of income going to capital–so that might also factor into the equation.
BTW, I hope people understand that I was being a bit provocative here. I don’t mean to suggest that people care only about their share of NGDP, just that it’s a big factor in perceived well-being. In the short term people also care about how RGDP is doing relative to the recent past. One can think of the recent past as like a close neighbor. But in that case I’d refer to my comments on supply shocks.
Pravin, Heh, start your own blog!
Thanks Bret.
Travis A, I agree, and see my answer to Master of None. But note that we can discuss the Mexican immigration issue without any reference to inflation. I’m still wondering whether we really need to use the term ‘inflation’ to discuss the sorts of problems that I focus on in this blog.
Alex, You said;
“I suspect a ban like this isn’t going to work. Something like “I won’t respond to comments using the word ‘inflation'” would probably work at lot better.”
That’s actually what I had in mind. I’m too lazy to go through and censor every comment.
Alex, Your argument about equity shares is one developed earlier by George Selgin, and I agree. But to me that means inflation isn’t very interesting, NGDP growth is. As long as NGDP is on target, bond holders are doing OK.
John Hall, You said;
“I’m very excited to see what Bob Murphy will say.”
The main reason I did this post, which was about 50% tongue-in-cheek and 50% serious, was to get his reaction. It better be good.
Brett, Yes, good point. There are many words that are vague and inhibit discussion. Investment can mean financial or physical investment. “Money” can mean all sorts of things. Buffett has lots of money. Obama pumped lots of money into the economy. The Fed pumped lots of money into the economy. Those three are actually; wealth, deficit spending, and money.
31. October 2011 at 10:02
You need the word inflation to refer to what some central banks wish to target.
31. October 2011 at 10:05
Andy, Those are all good points, including your criticism of my dismissal of the Fisher equation. My only defense is that for the issues discussed in the blog, I think the NGDP growth rate is more useful than inflation, when thinking about nominal rates. I give examples with the liquidity trap and the taxation of capital. But obviously there are a few cases where the traditional Fisher equation might give more useful answers.
Thanks Kenan, Sorry I missed you first time around.
Patrick, Clever how you worked that “qwerty” issue in.
Kevin, Yes, that’s a very good way of putting things.
31. October 2011 at 10:07
Excellent post by Scott Sumner.
And I will never again mention “enphlashun.”
31. October 2011 at 10:37
I agree that tabooing the I-word would improve the overall quality of discussion. Still, I disagree with some of your points:
Re 2b, it’s not clear that folks care more about their relative share of income than they care about their real living standards. Thus, I still think it makes more sense to index annuity payments to “inflation”, not NGDP.
There’s also an argument that “inflation” measures are easier and more reliable than measures of NGDP/NGDI growth, because the former only involve prices, as opposed to a combination of prices and quantities for NGDP.
Overall, I agree with the spirit of this post. Of course, we’ll still want to use the I-word to report on what monetary authorities and macro wonks are saying, and in expository material. But in arguments here, we should routinely expect people to taboo “inflation” and rephrase their point in terms of real supply shocks and nominal income growth.
31. October 2011 at 10:43
“And conservatives are complaining about inflation are complaining about 2005-2006.”
@Morgan, you’re just rationalizing their views. Yes, 2005-2006 the loose money argument would have been valid for commodity price inflation, but the people I’m talking to are not talking about 2005-2006, they are talking about post-2008. The rebound in industrial commodity prices (e.g. Oil, uranium, coal, copper, steel etc.) since about March 2009 has nothing to do with QE and everything to do with adjusting expectations about global growth (i.e. NGDP).
31. October 2011 at 10:54
“No NGDP growth reduces the burden of the national debt.”
There’s a missing comma between “No” and “NGDP growth” (you want “No” to modify the entire sentence, not the noun phrase “NGDP growth”).
31. October 2011 at 11:04
The more I think about it, the more Bill Woolsey’s point about lending seems cogent. One can’t dismiss concerns about how buy-and-hold fixed income investors will be affected by unexpected changes in NGDP that are not matched by changes in RGDP. Obviously what they care about is the price level, and if they’re retirees, they may not care much at all what happens to NGDP or RGDP individually.
31. October 2011 at 11:31
November 1 cut off huh. Okay. I’ll try and not use the “I” word.
I will note that yesterday for lunch I spent $13 dollars (including a generous $2 tip) on two eggs over easy, hash-browns, coffee, 3 sausage links, and two biscuits.
I was shocked when I got the bill. I hadn’t bothered looking a a menu prior to ordering the food, and just figured I would pay the normal range I’ve paid in the past at various restaurants for a similar order.
I don’t know what you want to call that, but I call it nuts.
31. October 2011 at 11:32
Yikes! OK I’ll rush to get this in before the deadline:
Sumner you’re nuts, you love bankers, you hate consumers, inflation inflation inflation, the dollar has lost 98% of its value since the Fed came on the scene, inflation inflation inflation.
Go gold!
31. October 2011 at 11:43
Scott: David Glasner won´t be allowed to place comments here. Early this month I did a post on the I word.
http://thefaintofheart.wordpress.com/2011/10/07/two-words-you-should-never-use-inflation-stimulus/
In DG´s latest post Yes, Virginia, the stock market loves inflation I commented:
That´s why I think mentioning the I word is bad. Even among “like thinkers” it gives many the “goosebumps”. What the stock market loves is to envision (even if temporarily) the possibility that NGDP will climb towards trend.
He answered:
Marcus, I think inflation is important because it focuses on the choice between holding assets and holding money.!
31. October 2011 at 11:51
Scott,
I think I get the meat of the post–that the word inflation has a host of meanings which causes problems for any argument that uses the word–but I’m a little puzzled about the lead-in paragraph.
What does this have to do with whether or not consumers are hurt by rising prices? For example, suppose a negative RGDP shock in a sticky wages model leads lay-off for some and a rise in their real wages for those others. If the fed increases NGDP in response, so that all wages return to their pre-shock levels.
Would you not agree that those consumers who were lucky enough to keep their jobs were negatively impacted by the increase in NGDP, even if total real income increased? Or if I was sloppy about my choice of words, those consumers were hurt by an increase in inflation?
31. October 2011 at 12:01
Scott,
Inflation hurts consumers.
A woman with $1000 in her banks acct. sees the price of butter go up from $2 a lb. to $2.35 a lb. She sees the price of beef go up.
Now you want to say that this is from DEMAND.
No it isn’t it is from the Fed.
This is what happened, I told you about it here as it happened:
1. The Fed printed money, and we saw investor cash flood into commodities.
2. Businesses, already facing a slow down in demand, fired more people to become more productive to cover for their higher input costs… to be as Herman Cain correctly told Bill Clinton, to be the last one standing.
3. They could no longer fire anybody, so prices then got raised.
There was no real increased demand for more butter in the store.
There was no real increased demand for beef in the store.
She is able to buy less food, prices went up BECAUSE of the Fed.
The Fed caused Arab Spring.
You can’t deny this stuff. You have to work with it.
31. October 2011 at 12:18
Scott,
Awesome post. I think I basically fully agree. To me the challenge goes beyond the literal law of not using the i-word, to the full spirit of it which is not to use the RGDP word either. I think you are absolutely right that utility, especially longer run (and for those who aren’t starving), is almost entirely about relative wealth, envy not greed. That is what wins you the best mates, and that, not hyper-consumption, is what evolution has programmed us for. At the very least, as Kevin Dick says, this will be a really good exercise in mental discipline. I know I’ve confounded these matters before myself: the liquidity trap is indeed all about the relative values of NGDP growth and nominal rates.
One quibble: while the PY decomposition is flawed, MV is just utter nonsense. *Nobody* should talk about the size of the base, present or future.
31. October 2011 at 12:21
can you please extend the ban to the WSJ comments section too, that would be extremely helpful. thanks again.
31. October 2011 at 12:28
Scott, can you explain again what you mean by “liquidity trap”? I had bought into your notion that liquidity traps are impossible because a central bank is always capable of roughly reaching whatever nominal expenditure target it wants to (provided it actually wants to and not just says that it wants to).
31. October 2011 at 12:44
I have to say that I
Now feel that this policy
Fiercely restricts free speech and is incompatible with a
Laissez-faire thinker such
As yourself and
That
In the long run you will find that you have
Overstepped the bounds of the polite discourse that
Naturally abounds on the internet
31. October 2011 at 13:25
How about “so and so said something really stupid and totally misguided about inflation, when he could have explained himself much more succinctly by talking about NGDP”.
On a more serious point, surely it’s important, even to you, whether growth in NGDP is caused by price rises – inflaton – or real gdp? If ngdp rose by 5% a year for ten years, but that was all inflation, surely that would be bad. It’s not difficult to think of a scenario where that’s possible.
What if there was 5% NGDP growth, but 7% inflation, and GDP was falling? Wouldn’t you want to know you where in a recession? If you say that’s GDP, that’s an an INFLATION adjustment to NGDP. Inflation is more fundamental an economic determinate than real GDP.
31. October 2011 at 13:42
Does anyone have a suggestion for Halloween lawn ornament inflation? My air compressor’s inflation velocity tears those things to bits, but my aspiration inflation makes causes air-headedness.
Suitable inflation is my only hope to prevent deflated ghosts & witches from triggering negative trick o’ treater expectations, which puts egg on my house and face.
31. October 2011 at 14:55
I too avoid using the word inflation. I think of it this way:
Inflation over the last 10 years has been tepid compared to the 70s – late 90s. But household income has been flat the last ten years. Moreover many of the things that households buy have increased very rapidly; education and health care. Yglesias points out that there is an asymmetry in consumption of these goods. Still you can see how typical households have lost purchasing power over the last decade. Inflation has been low, but wage growth lower still, and families were squeezed by those asymmetric goods and of course the loss of their assets (home equity). This is why I frame it as purchasing power, but I understand why you prefer NGDP.
31. October 2011 at 16:09
@Morgan
How much of the rise in prices at the grocery store is related to oil? How much of it is attributable the ObamaCare premium or rabid regulatory agendas? I agree that the Fed has driven us down this path, but only because its incompetence led to obfuscation of what were serious supply-side issues to start with, only to pile more on top of it with gangster government and mob rule. Those who pin the recent increase in prices of food and energy entirely on the Fed aren’t doing us any favors. Even if it were supposedly for those who save, it really is a terrible idea to have to deal with the uncertainty of political instability and what may come as a consequence of that if we cannot come up with an equitable solution to national discontent.
31. October 2011 at 16:31
Can we still use apoplithorismosphobia?
31. October 2011 at 22:33
[…] Sumner thinks he can play me like a game of classic Donkey Kong: Some days I want to just shoot myself, like when I read the one […]
31. October 2011 at 22:59
It’s still Oct 31 here on the west coast. inflation, inflation, inflation, inflation! Specifically what our bike tires will need in your “type 1” above (“a cutoff in oil production”) if we want to get around. Work the bike pump and contemplate the meaning of the word.
1. November 2011 at 00:01
[…] – ‘If you are about to type the word “inflation,” please stop.’ […]
1. November 2011 at 00:46
If we think about “falling real income” AND “NGDP growth”, are we allowed to use stagflation ?
1. November 2011 at 01:13
For 2.h : tell that to the Chinese Savers ! If you don’t know what I mean, check mpettis.com
1. November 2011 at 01:28
If money is the monetary base then bank deposits are not money.
There is only credit. The monetary base is Fed credit. Perhaps a better word to ban would be “money”.
NGDP – RGDP may increase exponentially under a NGDP targeting regime, no matter what you call it.
Does your proposed ban extend to the articles? That might come in handy for you and anyone else proposing NGDP targeting.
1. November 2011 at 01:32
Well Im not gonna say the word, but not saying the word is like playing a game. Writing about a game has made me think about “the game”. So indeed, this post has just made me and indeed all of you who have read it lose the game. Good day ladies and gents!
1. November 2011 at 02:35
Paul Andrews,
“NGDP – RGDP may increase exponentially under a NGDP targeting regime, no matter what you call it.”
Why?
1. November 2011 at 03:04
“This also applies to the phony tears people shed for the savers hurt by inflation. Let’s assume savers buy long term nominal bonds.”
Well, my mom, who is 77 has a small CD portfolio. The yields have gone from almost 5% to about 2%. That and social security is all she gets That combined with about 4% inflation for food hurts.
1. November 2011 at 03:22
@W. Peden, you can see this fairly simply in a spreadsheet.
Set up column 1 as NGDP ($) and column 2 as RGDP (apples).
Have the first column start at 100 and increase by 5% per row.
Have the second column start at 100 and decrease by 5% per row.
Make a third column NGDP – RGDP and plot in a graph.
To see the effect on the price of apples, set up a fourth column NGDP / RGDP and plot that.
1. November 2011 at 03:48
Paul Andrews,
So if output falls 5% forever, then NGDP – RGDP would rise exponentially? Why is this interesting and who disagrees?
1. November 2011 at 03:50
Yes, there are some types of inflation that hurt consumers. And yes, there are some types of inflation created by Fed policy. But in a Venn diagram those two types of inflation have no overlap.
This is wrong. You are fallaciously grouping all consumers together into one group, meaning all of humanity, when consumers are in reality individuals. Within the group of individual consumers, meaning within the population of people, some people, i.e. some consumers, receive the newly printed money first before others, and when they spend their newly received money on consumer goods, it raises the prices of those consumer goods, and all those consumers who receive the newly created money later on, will pay higher prices and thus have a decreased purchasing power. And all this has nothing to do with supply. It is purely demand driven.
When people say “consumers are hurt by the ‘i word'”, they don’t mean EVERY consumer, meaning every person, together. They mean SOME people. Of COURSE ‘i word’ has to benefit at least some people, or else it wouldn’t be chosen as an action by some people.
You have to take into account the Cantillon Effect, as well as the fact that SOME consumers, namely the citizenry who are forced to use the US dollar through legal tender laws, cannot use their own money freely and without coercion.
‘I word’ does in fact hurt consumers, if you properly understand it to mean those consumers on fixed incomes, or whose income is flexible but only to the extent that their respective companies cannot raise wages until the company owners earn more revenues on account of a given round ‘i word’ reaches them later on, but by that time, other flexible wage earners at other companies have already had their nominal wages grow since their companies have already earned more nominal revenues on account of them being closer to the printing press, for example bankers and military contractors.
While you’re getting upset that you have been told a million times that “easy money will hurt consumers by raising prices”, those consumers who are in fact getting hurt by easy money are getting upset.
It’s like we’re all just imagining that certain consumers aren’t paying higher tuition, higher food and energy prices, and higher gas prices. It’s all “an illusion” isn’t it?
1. November 2011 at 05:38
Prof. Sumner, this move is consistent with your approach to force all of your opponents to use your terminology so that you can defeat their arguments without expanding your theory.
It will have the intended effect. I stopped reading your blog a long time ago and only surfed here today on a lark. You will lose readers. You will be left with only those people who already agree with you. You will not win new converts.
In short, your blog will enter the same wasteland as Brad DeLong’s: plenty of fanboys and no real discussion.
I don’t agree with a lot of the stuff posted on Marginal Revolution, but their open comments policy makes for a rich discussion below virtually each of their posts.
Signing off now.
1. November 2011 at 06:02
“People think it is the price rise that is making them worse off, but that’s an illusion; it’s really the drop in RGDP.”
You are aware that inflation is one of the two factors used to calculate RGDP, and that inflation is the entire reason that NGDP and RGDP can differ, right?
1. November 2011 at 07:58
Scott_Sumner, could you add a script to your site that does a simple find/replace of all instances of “inflation” in a submitted comment with “inability of consumers to purchase as many goods with their monetary savings as before”?
If your website handles regex, the code would be:
[begin code]
s/inflation/”inability of consumers to purchase as many goods with their monetary savings as before”
[end code]
1. November 2011 at 09:41
Ryan Long,
Man I gotta tell you, you need to think a bit more as a libertarian.
I mean read this:
http://mises.org/daily/5772/Are-Government-Jobs-Productive
And sure as shit, you are right on.
But dude, I’m 40! And I have no more time for Mises crowd pussyfooting around writing noble bits and submitting them into the fake virtual world.
A couple years ago, Papola pointed me to Sumner and asked my opinion, and it took me a while to get Scott to give me the answers I needed to grasp the stuff.
But Selgin was right on, And Scott deep down won’t really care if the the level target comes in a 3 or 4%.
It’d be GREAT if Woolsey would explain why he favors 3%.
But, look this stuff is as close as we can get to locking a low inflation rate, and removing the Fed from the equation.
And I don’t know why every single libertarian isn’t grabbing this thing and raising it up to god and saying, “thank you!”
Ron Paul ought to be shown 3%, and asked about it publicly.
1. November 2011 at 10:43
Morgan, thanks for reading my article. If you read it and agreed with it, then that sure helps me feel like the world is a lot less fake and virtual. But if you really think my article is “right on,” then you already completely disagree with Sumner’s ideas. (I hate to break it to you.)
It really is a choice between Sumner’s ideas and the non-neutrality of money. I don’t fault you for choosing the theory that makes the most sense to you, but you do have to choose. You can’t simultaneously accept Sumner’s ideas AND the non-neutrality of money.
That, at least, is either-or.
Thanks again for reading my article and linking it on Sumner’s blog. I appreciate that. 😉
1. November 2011 at 11:55
Ryan, I don’t have to choose. YOU DO.
Your side (our side) has no credible choice before the elctorate, it is a choice between two evils, what we have now and perhaps a level target NGDP.
Ron Paul is not going to be President, as much as I wish he it so.
Sorry dude, it is going to be a long hard slog, where you constantly choose the lesser of two evils. If you say Pox on both their houses, you are an idiot. One side is more evil.
But since 1980, we (the right) have been spending all the money moved the nation are to right of where it was before 1980.
Anyone who wants to End The Fed has to pull the lever for a low level target on NGDP it makes it to a vote.
1. November 2011 at 12:25
“Now let’s turn to demand-side inflation, which either makes people better off in the short run (via higher RGDP, higher real incomes), or has no effect (if money is neutral.) Here there are many cases to consider”
No no no no! It has a very real negative effect in the long run, because it causes people to move from more liquid assets to less liquid assets which increases risk in the entire economy.
1. November 2011 at 13:38
Morgan, you’re responding to an imaginary argument I haven’t made. Whatever is going on in that imaginary argument, I think you win! Well done.
Now talk to me about money neutrality.
1. November 2011 at 13:49
A 3% level target on NGDP is zero inflation.
It doesn’t even preclude the outright fun deflation during good times, it in fact encourages it.
1. November 2011 at 14:13
A 3% level target on NGDP is zero inflation.
No, that’s 3% inflation.
Or did you mean that targeting 3% NGDP growth per year, and real productivity growth being 3% per year, leads to zero inflation?
OK, suppose that last year, 10 shirts were sold for $10 each, and 10 pairs of shoes were sold for $50 each. Then suppose that this year a new product was developed, the iBrain. Suppose then that this year, 10 shirts, 10 pairs of shoes, and 10 iBrains are produced and sold.
What should the Fed target NGDP to be this year in order to create zero price inflation?
I’ll give you a cookie if you can add up heterogeneous goods and services into a single digit of “real growth.”
Finally, are you going to respond to Ryan’s arguments or what?
1. November 2011 at 16:36
“Or did you mean that targeting 3% NGDP growth per year, and real productivity growth being 3% per year, leads to zero inflation?”
Yes of course that is what I meant.
Historical RGDP has come in just a bit over 3%, so if you go back to 1999, or some other random time, we’d have had no increase prices.
We’ve got great price stagnation to the wage stagnation the dirty hippies are always whining about.
“OK, suppose that last year, 10 shirts were sold for $10 each, and 10 pairs of shoes were sold for $50 each. Then suppose that this year a new product was developed, the iBrain. Suppose then that this year, 10 shirts, 10 pairs of shoes, and 10 iBrains are produced and sold.
What should the Fed target NGDP to be this year in order to create zero price inflation?”
3% level like an relentless drumbeat.
Productivity gains are the only form of growth, but if we have to roll dice on 3% and pay at the window if me miss, that’s a fat improvement over what we have now.
Look, I’ve got libertarian anarcho-capitalist bonafides, I favor a digital currency infinitely divisible with a known limited universe of trackable units.
I’ll sell abortions for profit, let people marry animals, and privatize EVERYTHING including defense.
But since we can’t do that shit, I look for the stepping stones that lever us towards perfection.
And as such, I do’t see any real question in what Ryan wrote, REAL libertarians get dirty, they don’t play nice, they hack shit, and corrupt things, and fight to destroy the dreams of their enemies FASTER than going galt allows.
And Sumner’s NGDP is a very nice way to reduce future inflation, and turn the Fed into a computer, AND FORCE THE GOVERNMENT TO SHRINK.
Later, we can pull everyone further to my digital currency.
But right now, you boys need to repeat after me, “3% level target on NGDP is HARD MONEY.”
1. November 2011 at 18:04
@Morgan:
‘It’d be GREAT if Woolsey would explain why he favors 3%.’
I suspect its because then prices won’t grow very fast, and we are less likely to get Austrian Business Cycles from malinvestment due to inflation.
‘Ron Paul ought to be shown 3%, and asked about it publicly.’
He would probably say its better than what we have now but its still horrible compared to competitive currencies (which is the bill he was trying to push through congress).
1. November 2011 at 18:10
Patrick, Good point.
Anon, You said;
“There’s also an argument that “inflation” measures are easier and more reliable than measures of NGDP/NGDI growth, because the former only involve prices, as opposed to a combination of prices and quantities for NGDP.”
No, NGDP is easier to measure, as no quality adjustments are needed. Just ask firms for their revenue, that’s much easier than quality adjust prices for a dizzying array of goods.
You misunderstood my annuity argument. I was talking about the starting point for new recipients of public pensions. Once people are retired they can accept a smaller and smaller share of NGDP, because as they get older they do less and less, until they just watch TV.
Jonathan, Thanks, I added that.
Andy, You said;
“Obviously what they care about is the price level, and if they’re retirees, they may not care much at all what happens to NGDP or RGDP individually.”
If it’s not NGDP that causes P to change, then it’s a supply shock. In that case falling RGDP is the “real” problem, not inflation.
Hal, I call that a relative price change.
Bob, I’m expecting great things out of you.
Marcus, We’ll see how David reacts to this post.
Jeff, Sure, there are relative effects from inflation or NGDP changes, when contracts are denominated in nominal terms. But I think NGDP shocks can pick that up.
Morgan, Everyone’s a consumer. If the aggregate real income rises (as NGDP rises) consumers in aggregate aren’t hurt.
Thanks K, The base is what the Fed actually controls, even when they target rates (or used to control before IOR.) But I agree that the size of the base isn’t really very important, it’s PY that matters.
dwb, I’ll try.
Federico, I mean so-called liquidity trap–basically zero nominal rates.
Shane, At first glance I thought you were an idiot, now I realize that you are more clever than me.
Adam, you said;
“On a more serious point, surely it’s important, even to you, whether growth in NGDP is caused by price rises – inflaton – or real gdp? If ngdp rose by 5% a year for ten years, but that was all inflation, surely that would be bad. It’s not difficult to think of a scenario where that’s possible.”
I’d say to the Fed “job well done.” And to Congress, start supply side reforms NOW!!
Bababooey, You’ll be happy to know that snow ruined our Halloween.
Benny, Good point,
von Pepe, I guess so.
Charles, You said;
“If we think about “falling real income” AND “NGDP growth”, are we allowed to use stagflation ?”
Only if NGDP growth is too high.
China doesn’t have market interest rates.
Paul, The ban doesn’t apply to me. The base is credit in name only. It’s the medium of account.
Bill Smith, Your mom in getting killed by supply shocks and low NGDP growth. They combine to make the economy weak, and drive real interest rates to negative levels.
Major Freedom, If consumers were in fact getting hurt by easy money, then we’d see M*V accelerating. But it isn’t, which means they are hurt by supply shocks.
The past three years have seen the lowest average inflation in 50 years–whatever problems consumers have, it ain’t inflation.
RPLong. I clarify the ban in my newer post.
Kavram, You said;
“You are aware that inflation is one of the two factors used to calculate RGDP, and that inflation is the entire reason that NGDP and RGDP can differ, right?”
I am now!
Silas, thanks for the tip.
Doc Merlin, No, it is NGDP growth that has that effect.
1. November 2011 at 18:17
“Doc Merlin, No, it is NGDP growth that has that effect.”
Can you explain why?
1. November 2011 at 21:34
“Major Freedom, If consumers were in fact getting hurt by easy money, then we’d see M*V accelerating. But it isn’t, which means they are hurt by supply shocks.”
No, M*V doesn’t need to “accelerate” before consumers are hurt by easy money. Consumers are hurt whenever there is any inflation whatsoever that raises prices before it raises their nominal incomes. Accelerating M*V would mean accelerating harm, not the introduction of harm.
“The past three years have seen the lowest average inflation in 50 years-whatever problems consumers have, it ain’t inflation.”
Irrelevant. I wasn’t referring to history. I was referring to the theory of “NGDP targeting” and the inherent Cantillon Effect, as well as continuous exploitation through legal tender laws and monopoly control over money production.
Targeting 5% NGDP growth would harm consumers whose cash balances and incomes don’t rise as fast as prices, due to either their contractual arrangements, or the fact that their companies are further away from the printing press which means a delay in the increase in their company’s nominal revenues which makes increasing nominal wages impossible for those firms at the margin, or both contract and their company circumstances.
Even if prices are not rising, ‘i word’ still harms consumers by compelling them to pay higher prices than they otherwise would have paid. Instead of gaining 3% in purchasing power, say, they gain only 1%.
The standard should not be Zimbabwe. We can do better.
1. November 2011 at 21:36
Oops, I said the “i word” in full.
1. November 2011 at 22:56
Scott: if the ban doesn’t apply to you, doesn’t that preclude people from commenting about anything you write that includes the word “inflation”?
Will we be allowed to write “NGDP / RGDP”? How about “implicit price deflator”?
Aren’t you concerned that your credibility will take a hit from this policy?
4. November 2011 at 18:33
Doc, NGDP growth raises nominal rates, which causes people to move out of cash into less liquid assets.
Major Freedom. I don’t believe in Cantillon effects.
Without higher MV, there is no mechanism by why monetary stimulus could cause inflation.
Paul, If you explain to me where you need to use the word, because others words don’t better express the concept, then I have no objection. But I don’t see any situation where someone needs to use the word.
I’m not really worried about whether my credibility takes a hit–I just say what I believe.
6. November 2011 at 19:59
Scott, Even before I started blogging, I couldn’t keep up with you and now that I am blogging I have been falling farther and farther behind. So I just saw your kind invitation to weigh in on your “modest proposal.” I actually am not opposed to your proposal, and I greatly sympathize with and share your frustration with the confusion that attributes a fall in real income to an increase in prices as if it were the increase in prices that caused the fall in income rather than the other way around. On the other hand, on my blog I will continue to talk about inflation and every so often, despite annoying you and Marcus, I will continue to point out that since 2008 the stock market has been in love with inflation, even though it normally is indifferent or hostile to inflation.
I also don’t think that you have properly characterized the Fisher equation in terms of the real interest rate and expected NGDP growth. As a rough approximation the real interest rate (r) equals the rate of growth in real GDP; and the nominal interest rate (i) equals the rate of growth in nominal GDP. So stating the Fisher equation in terms of GDP should give you r = i + p (where p is the rate of inflation or the ratio of nominal to real GDP).
Finally, I am wondering whether you also want to ban use of the world “deflation” from polite discourse. I think it would be a shame if you did, because you and I both think that it was an increase in the value of gold (AKA deflation) that caused the decline in NGDP in the Great Depression, not a decline in NGDP that caused the increase in the value of gold.
6. November 2011 at 21:28
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10. November 2011 at 20:44
David, I think I answered these somewhere else, but I can’t remember where.
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11. November 2015 at 10:00
[…] Trying to ignore the humour in an absolute commitment to a flexible policy, there is nothing special about 2%. The figure was plucked out of the air one day by central bankers as an ad hoc number around which to organise their weapons to fight much higher inflation. It worked for a while in bringing down inflation from those higher levels, and helped create the space for the Great Moderation. But Inflation Targeting’s time has come to an end as it has become a ceiling and started to interfere with optimal monetary policy. Monetary policy should be set to secure stable nominal income growth along a trend level, not “inflation”. There would be no disaster if we all just stopped talking about “inflation”. […]
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26. October 2018 at 07:12
Morgan, it would be more meaningful to say
RGDP := NGDP – Inflation
The thing is that NGDP is relatively easy and uncontroversial to measure. Measures of inflation require basically arbitrary choices, but once you make them, the value of RGDP falls out at the other end.
Basically, how do you compare this year’s computer with last year’s computer etc.