A suggestion for Mike Kimel
Please take a close look at the data from the Great Depression, before doing more posts claiming I don’t know the facts.
Mike Kimel continues to insist that I don’t know what was going on in 1933, a period I’ve spend 20 years studying. He insists that FDR’s dollar depreciation program began in October 1933, even though all economic historians agree in began in mid-April 1933, when the exchange rate for the dollar began declining (against gold and against other currencies.) He insists prices began rising before FDR took office off, which is not true. He presents a graph that he claims shows prices rising before FDR took office, but his graph shows inflation rates, not the price level. In fact, the graph actually supports my argument that inflation didn’t turn positive until after FDR took office. There’s a difference between the rate of inflation and the price level.
When I complained that Keynesian theory wasn’t able to explain the rapid inflation of 1933-34, a period of massive economic “slack,” he responded:
The problem for Sumner is that Keynesian theory is merely an extension of good old fashioned Adam Smith. Prices depend on supply and demand. You can have a good or service go up in price locally even as it goes down everywhere else.
Keynesian theory is just supply and demand? Then why not call it ‘Smithian Theory.’ In any case, I was discussing the overall price level, not individual prices. I could go on, but perhaps that’s enough.
PS. Ironically, his post is entitled “Scott Sumner digs deeper.”
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15. November 2011 at 12:46
even looking at the CPI levels from FRED, the level dropped until FDR took office and then it started climbing a couple months later
15. November 2011 at 13:14
Hey Scott! Interesting debate. I guess it comes down to how much credit you give the price recovery to fiscal and monetary stimulus respectively. I am a Keynesian but I would instinctively presume that they both had their part to play.
I just got in the mix at Kimel’s blog with this comment
http://federalreservations.com/scott-sumner-digs-deeper/comment-page-1/#comment-59350
I know you think the NIRA either did little to improve things or even held them back. I differ with you though again I believe the currency devluation was important as well.
On an a previous matter, you say that Hayek was for NGDP? This I did not know; I’m currently reading him. I didn’t think I would like it but his “Fatal Conceit: The Errors of socialism” is a lot better than I thought it would be. I didn’t think it would be so good becuase I saw it as a book where Hayek moved from being an economist to a cheap political propagandist but again, turning out better than I thought.
15. November 2011 at 13:27
Hayek wanted a constant “total money stream”, or MV.
15. November 2011 at 13:34
Scott, it might be better to link to the Angry Bear blog post itself, rather than that site (which appears to be some kind of blog post aggregator): http://www.angrybearblog.com/2011/11/scott-sumner-digs-deeper.html
Anyway, I left this comment at Angry Bear criticizing Kimel’s argument:
“And yet… the graph shows very clearly that prices started to rise when FDR came to Washington with spending plans”
Not really. The graph in your post is of the year-on-year percentage change in the price level, not the price level itself. The price level didn’t really begin rising (except for a one-off increase in the PPI between February and March) until after FDR took office, as Sumner argued. I’ve put both the PPI and CPI in a graph and set March 1st, 1933, as the base period (ie. a value of 100) to clearly show this:
http://research.stlouisfed.org/fredgraph.png?g=3mY
To download the data, go here and click “Download Data in Graph”: http://research.stlouisfed.org/fred2/graph/?g=3mY
You can see the PPI reached its lowest point around February. There was then an increase over the course of February, but after that the PPI stabilized. It didn’t begin rising continously until sometime between April and May. The CPI reached its lowest point around March and stabilized. It didn’t begin rising continuously until sometime between May and June. This seems more supportive of Sumner’s theory than yours.
15. November 2011 at 19:09
See my impression of Hayek is that monetary wise he was for delfation. During the 30s he was for the liquidationist position.
15. November 2011 at 19:29
1. “He insists prices began rising before FDR took office off, which is not true.”
PPI (all commodities) was 10.3 February 1. That happens to be the lowest point in the series, a series that begins in 1913. It was 10.4 in March 1, 1933. FDR took office March 4, 1933. (http://research.stlouisfed.org/fred2/graph/?id=PPIACO)
Explain how my statement is not true. I’m genuinely curious. Yes, it was only inching up by then, but then, after the dramatic recent drop that was in itself a pretty big deal. And it happened before the devaluation.
2. ” There’s a difference between the rate of inflation and the price level.” And yet the price level had bottomed out before FDR took office regardless of how you look at things.
3. As to what economic historians have said… well, I am definitely not an economic historian. But I can use google.
I have noted (I’m not going to put up links again – they’re in my earlier post if you need them) that in documents I have seen from the 1940s, the Fed was valuing monthly gold reserves for 1933 using the price of 20.67. Those same documents seem to be written by people who were under the impression that the price remained 20.67 until January 31, 1934.
Sumner and I have had a brief correspondence this afternoon. He kindly shared a piece of a manuscript he is writing that contains a table that has in it the “Annualist Index of Commodity Prices.” The index shows falls from 815 in mid-April (1933) to about 650 the following February, which indicates “falling prices in terms of gold.”
He apparently collected those manually from old hard copies and is unaware of any electronic versions. In my last e-mail message to him I’ve asked him for permission to put the table on-line. Or he can put it up here – its possible he already has somewhere, but a quick google search hasn’t turned it up.
But in any case, we come down to some Fed documents claiming prices were fixed until January 31 1934 v. an index. Assuming the index is correct, why would the Fed et al be under that misimpression?
A few random thoughts by someone who is not an economic historian but wondering about that question….
a. I grew up in South America at a time when the official price of a given currency (in dollars) was usually a work of fiction that had almost no effect on anyone’s behavior but did set a baseline for certain government transactions. Changing the official dollar price of gold can allow more dollars to be printed even if nobody else acts on the official price change.
b. there is such a thing as a manufacturer’s suggested retail price (MSRP) in autos and other goods. There apparently are good reasons for some products to have MSRPs even if nobody pays that price.
c. The existence of a series doesn’t mean the series is correct. A hundred years from now someone might choose to analyze the real estate market over the past ten years or so analyzing “days on the market” data from the MLS. No doubt that someone will have their conclusions well-supported by the data set they are using. But the results will still be wrong.
15. November 2011 at 21:23
I agree Scott. For some reasons the Keynesians always seem to ignore the inflationary busts that occur quite regularly.
16. November 2011 at 03:31
Mike Sax,
You can be a liquidationist (of a sort) and still want stable NGDP growth. So, in the most recent crisis, it is possible to think that the bad banks should have been put into administration, while the economy as a whole got a bailout in the form of monetary stimulus aimed at keeping the NGDP growth rate from falling.
16. November 2011 at 07:04
OK W. Peden. In that case you are kind of liquidationist but not for deflation then?
16. November 2011 at 07:06
Speaking of similarities between Smith and Keynes, according to this working paper by Michael Emmett Brady, Smith and Keynes converge with regard to financial speculation.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1728225
Gavin Kennedy has also cited Brady’s work for his viewers’ reference.
http://adamsmithslostlegacy.blogspot.com/2011/10/adam-smith-jeremy-bentham-and-keynes.html
16. November 2011 at 10:10
Dustin, That’s right.
Mike Sax, You said;
“Hey Scott! Interesting debate. I guess it comes down to how much credit you give the price recovery to fiscal and monetary stimulus respectively. I am a Keynesian but I would instinctively presume that they both had their part to play.”
Then you’d be wrong. The fiscal stimulus was small, far too small to boost prices during 25% unemployment.
The NIRA was a disaster.
Hayek did favor some deflaiton in the 1930s, but later changed his mind and viewed it as a mistake.
inyourhouse, Thanks, I changed the link.
Mike Kimel, Here’s the WPI
1933-01-01 10.5
1933-02-01 10.3
1933-03-01 10.4
1933-04-01 10.4
1933-05-01 10.8
1933-06-01 11.2
1933-07-01 11.9
1933-08-01 12.0
1933-09-01 12.2
1933-10-01 12.3
1933-11-01 12.3
1933-12-01 12.2
The PPI (then called the WPI) was also measure weekly. It was basically flat up through mid-April 1933, then took off like a rocket. I believe we left the gold standard on April 18th.
Things got steadily worse throughout February and the first couple days of March. I don’t have the weekly data in front of me, but I’d guess it bottomed out around the beginning of March. In any case, people knew FDR was going to spend, so if fiscal stimulus impacted the WPI it would have done so when he was elected, not when he took office (according to NK models.)
You said;
“I have noted (I’m not going to put up links again – they’re in my earlier post if you need them) that in documents I have seen from the 1940s, the Fed was valuing monthly gold reserves for 1933 using the price of 20.67. Those same documents seem to be written by people who were under the impression that the price remained 20.67 until January 31, 1934.”
I’d suggest you read the chapters I sent you if you plan to pursue this issue. The official price is meaningless. Last time I looked the officual price of US gold reserves was $42.22 an ounce. Isn’t the actual price about $1700? It’s the actual price that matters for monetary policy and exchange rates.
Doc Merlin, Good point.
W. Peden. Good point.
Blue Aurora–thanks for the links.
16. November 2011 at 10:46
Mike Sax,
Yes. The only time I want there to be inflation is when there is a supply-side shock like a financial crisis, so that the price mechanism can do its work of encouraging production. The flipside of this approval of the market mechanism is that the penalising effect of losses has to take place or else capitalism just doesn’t work properly: banks which fail should be liquidated, with their assets distributed to their creditors (beginning of course with depositors).
In such a model, the monetary authorities become a lender of last resort for the macroeconomy (through monetary stimulus) but not for the financial sector.
16. November 2011 at 13:02
“Then you’d be wrong. The fiscal stimulus was small, far too small to boost prices during 25% unemployment.”
“The NIRA was a disaster” Well you know what they say about opinions Scott. However to push back a little I will point out that Eggertsson has done some interesting research which disagrees with this.
“What ended the Great Depression in the United States? This paper suggests that the recovery
was driven by a shift in expectations. This shift was triggered by President Franklin Delano
Roosevelt’s (FDR) policy actions. On the monetary policy side, Roosevelt abolished the gold
standard and announced an explicit policy objective of inflating the price level to pre-Depression
levels. On the fiscal policy side, Roosevelt expanded real and deficit spending which helped make
his policy objective credible. The key to the recovery was the successful management of expectations
about future policy.”
http://www.ny.frb.org/research/economists/eggertsson/Great_Exp_AER.pdf
As regards the short thrift you give the NIRA, for a different perspective again check out Eggertsson
http://www.ny.frb.org/research/economists/eggertsson/WastheNewDealContractionary.pdf
“Can government policies that reduce the natural level of output increase actual output? In other
words, can policies that are contractionary according to the neoclassical model, be expansionary
once the model is extended to include nominal frictions? For example, can facilitating monopoly
pricing of firms and/or increasing the bargaining power of workers’ unions increase output? Most
economists would find the mere question absurd. This paper, however, shows that the answer is
yes under the special “emergency” conditions that apply when the short-term nominal interest
rate is zero and there is excessive deflation. Furthermore, it argues that these special “emergency”
conditions were satisfied during the Great Depression in the United States.”
“The New Deal policies, i.e. the wedges, are expansionary owing to an expectations channel.
Demand depends on the path for current and expected short-term real interest rates and expected
future income. The real interest rate, in turn, is the difference between the short-term nominal
interest rate and expected inflation. The New Deal increases inflation expectations because it
helps workers and firms to increase prices and wages. Higher inflation expectations decrease real
interest rates and thereby stimulate demand. Expectations of similar policy in the future increase
demand further by increasing expectations about future income.”
16. November 2011 at 14:37
The latest from Kimel.
http://www.angrybearblog.com/2011/11/scaling-to-new-depths-with-scott-sumner.html
16. November 2011 at 16:33
The good news is the grudge match between Sumner and Kimel gave me another post for my blog http://diaryofarepublicanhater.blogspot.com/2011/11/i-weigh-in-on-scott-sumner-vs-mike.html
17. November 2011 at 18:47
Mike, You’ll notice that Eggertsson cites three of my Depression papers. I showed him that the NIRA retarded the recovery, but he doesn’t address my argument at all. If he has evidence suggesting I am wrong about the NIRA, I’d love to see it.
BTW, the NIRA and AAA were set up to reduce output. So if they didn’t, then they “failed.”
The fiscal stimulus was puny–there is no way you could get a big inflation from that. Look at the tiny impact of Obama’s much bigger stimulus!
He has a nice model, and he’s complete right about monetary policy. But there’s not a shred of evidence to support his claims about the NIRA or fiscal stimulus.
CA, I wish Kimel would stop, he hasn’t studied this period. You can’t understand a complex historical period without studying what was going on first. He grabbed some data, and misunderstood the data he was working with. I’ve tried to help him by sending him lots of data that he asked for–but you really need to study the history first.
Mike, Glad to contribute.
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