Saving conservatives from themselves: Forbes magazine and anti-intellectualism
I’ve always liked Forbes magazine, and I’m a big fan of Malcolm Forbes’ proposal to “blow-up” the income tax. So I don’t have any big problem with the magazine on ideological grounds. But I do have a problem with several recent Forbes articles by John Tamny, who seems proud of his lack of expertise in the subject he writes about.
In a new column, Tamny has accused me of calling anyone who favors the gold standard a “knuckle-dragger.” I don’t recall making that accusation (in this post), nor do I believe it to be true. Indeed many highly intelligent economists favored the gold standard, as Tamny accurately points out. Here’s the statement that led me to accuse Forbes magazine of anti-intellectualism:
Assuming the Fed could do what it cannot; as in fine tune economic activity on the way to stable prices, we would be much worse off if Bernanke et al were to actually succeed.
To see why, it has to be remembered that the cure for high prices is in fact high prices. Or better yet, high prices foretell low prices.
If producers create a consumer product that fulfills unmet needs on the way to high prices, the latter is the signal to other producers to enter the market for the same good on the way to lowering its cost. Gyrating prices are the necessary market signal telling businesses what we need.
Taking this further, if price stability were policy, it would still be the case that a phone call from Houston to Dallas would cost $15 for a half hour of conversation. It would similarly mean that we’d be paying thousands of dollars for flat-screen televisions, not to mention even more for computers that perform very few functions.
When I tell other economists about this passage, even Tamny’s fellow libertarians, they break out laughing. That’s not good. I want libertarians to succeed. We both favor small government. But we won’t get anywhere if Forbes keeps publishing articles than make conservative/libertarians the laughing stock of the blogosphere. Just imagine what a Krugman or DeLong would do if they stumbled across this defense of the gold standard. We need arguments that can stand up to the best the other side has to offer.
In his rebuttal Tamny points out that I am not famous (like he is?) That’s true. But the quality of an argument isn’t related to the fame of the person making the argument; it is based on reason, evidence, and even a familiarity with basic terminology. In the new article Tamny seems to not understand the meaning of the term ‘deflation:’
For that we need stable money values, nothing else. Gold has historically served as the measure meant to make the tickets in our pockets most stable in value. As the great financier J.P. Morgan put it, “Gold is money. Nothing else.”
After that, the money prices of goods change with great regularity for reasons ranging from consumer preference to productivity enhancements. Confused about what deflation is, Sumner presumes that it’s a function of falling prices, but were he to ever emerge from the campus one of these days, he’d understand by virtue of walking the aisles of most any retailer that prices fall all the time.
If this were true, then the Great Deflation of 1929-32 would never have happened, as the price of gold was stable throughout that period. Then he compounds his mistake, by citing Mill:
Or, as Mill put it, “If one-half of the commodities in the market rise in exchange value, the very terms imply a fall of the other half.” Put more simply, what Sumner presumes to be deflation is not that. The price level can only be altered through a change in the value of money itself, and with the dollar at near all-time lows against gold and nearly every foreign currency, the presumption of deflation promoted by Sumner is laughable, and also sad.
Obviously Mill cannot be referring to the nominal price of goods, as the statement would be absurd. While I don’t have the Mill volume in front of me, I assume he must be referring to the real or relative price of goods. But of course in that case the statement has no relevance to the case Tamny is trying to make, as it’s equally true of Zimbabwe and Switzerland. Indeed it’s merely a property of averages.
Tamny then engages in false modesty:
To answer Sumner’s initial presumption, I should first say I’m decidedly not an intellectual, and will leave what is now a debased adjective to people of his ilk at obscure colleges. But a curious sort, I’ve long sought to read intellectuals of the past and present who actually impacted the policy debate.
It’s clear from reading Tamny’s column that he is an intellectual, quite engaged in policy ideas. And a very well read intellectual as well. What makes these two Forbes column’s anti-intellectual is that Tamny is writing on a topic that he knows little about, monetary economics. He cites famous economists of the past, like Keynes, who supported a fixed price of gold. But Keynes would be horrified by the arguments that Tamny is making in support of a gold standard. The problem isn’t so much Tamny, it is Forbes, for choosing columnists who pander to crude populist prejudices, rather than those with expertise in the issues being discussed.
Sometimes I feel like I am trying to save conservatives from themselves. The free market is a great idea. Taking monetary policy decisions away from the Fed and letting the market determine the money supply is a great idea. But when conservatives/libertarians show a contempt for everything that’s been learned in the past 80 years, including the scholarship of distinguished fellow libertarians such as Milton Friedman, they are not going to win out in the battle of ideas. I don’t have any problem with Forbes publishing a piece with which I totally disagree. I do have a problem with conservative outlets that publish authors who are ignorant of the key tenets of monetary theory, that do not know the meaning of basic economic terminology, indeed that seem to have created a private language that has nothing to do with the real world. We won’t get anywhere unless we offer solid reasoned arguments written by people who have the expertise to handle the issues they are writing about.
My criticism of Tamny was not personal; most highly intelligent people know nothing about monetary theory. He’s obviously very intelligent. But he’s writing on the wrong topic. I’d sound like an idiot if I wrote on nuclear physics (a simple field compared to monetary economics.) Forbes should be publishing pieces on monetary policy that are written by distinguished monetary economists. (And I don’t give a damn about credentials. A distinguished monetary economist is someone who understands the field, not someone who happens to teach at a big name university or work at the Fed.)
PS. It’s Bentley University, not College. I couldn’t care less, by my bosses do care.
PPS. I’m not generally viewed as a “quantity theorist” as I don’t favor targeting money, nor do I think the money supply is a good monetary policy indicator. But it’s a forgivable mistake, as I occasionally make quasi-monetarist arguments.
PPPS. But I’m definitely not a fan of “collectivist economics.” That’s unforgivable.
PPPPS. I am greatly indebted to Bruce Bartlett, without whom I would be a complete nobody. His encouragement pushed me up to the exalted position of “little-known Bentley College economics professor.” I’d also like to thank John Tamny, who has pushed me up from the position of being an obscure professor at Bentley, to someone so famous that Forbes devotes an entire article to trashing my “droolings” on monetary economics. Ma! Top of the world!
Tags: conservatism
3. January 2011 at 17:05
Scott
Right on! And he´ll surely be pissed by realizing he´s doing you a BIG Favor!
3. January 2011 at 17:10
Who’s John Tamny?
3. January 2011 at 17:16
Lance, he’s the son of Mr. and Mrs. Tamny.
3. January 2011 at 17:17
I remember Milton Friedman being appalled, in the 1980s, at the explosion of conservative intellectual journals; ‘There isn’t that much talent available.’
3. January 2011 at 17:28
I never got the impression you were a ‘thoroughgoing Keynesian’, Prof. Sumner.
John Tamny has a habit of making a fool of himself when he attacked Paul Volcker in 2005.
http://delong.typepad.com/sdj/2005/04/why_oh_why_cant_6.html
3. January 2011 at 17:49
I’d sound like an idiot if I wrote on nuclear physics (a simple field compared to monetary economics.)
What would you sound like to nuclear physicists if you wrote that?
3. January 2011 at 17:51
1. I assumed from the peevish tone of Tamny’s column that he suspected his wife was having an affair with Sumner. I suppose Sumner will deny this.
2. Milton Friedman thought the gold standard was for, well, knuckle-draggers, and led to “men unproductively tunneling in the earth like moles.”
3. I don’t understand having the free market control the supply of money–how would this work? I like the idea of me printing my own money! But seriously, given problems of counterfeiting, doesn’t this have to be handled by a central bank?
3. January 2011 at 17:58
Scott, I was actually going to try to defend the first half of his article, because I generally “got” what he was saying. But then when he started talking about money supply, I heard Twilight Zone music.
3. January 2011 at 18:40
“Ma! Top of the world!”
http://www.youtube.com/watch?v=bytoID_SNnE
James Cagney in White Heat(1949). I love those old classic movies.
3. January 2011 at 19:22
[…] famous, “Render unto Caesar what is Caesar’s.” The man is a force of nature. Look what he did to the last guy who tilted at the Sumnerian Worldview a bit too recklessly. No Responses to […]
3. January 2011 at 19:30
If it walks like a duck,looks like a duck and acts like a duck-it’s a duck.
“unforgiveable” is a strong word especially from a person who prides himself on non-inflametory rhetoric. Tamny has obviously hit a senstive spot. Seems to me he made a correct call. If wrong , tell us clearly where you stand, simply and honestly.
3. January 2011 at 19:34
I know there are many ideas for how private money would work, but here are a few.
1) Shares in a mutual fund like Pimco’s massive, diversified bond fund. A sufficient number of shares would be remediable for a fraction of the fund’s assets. Delivery of assets to the fund could be swappable for shares of the fund.
2)A multi-commodity etf where a portfolio of commodities could be redeemed in a two-way manner for shares in the fund.
Gold currencies are basically idea two with one asset. They have be run by governments in the past but they don’t have to be.
The government could agree to take any conforming (subject to operating regulations and capitalization) currency in payment of taxes and we’d be all set. They could compete on capitalization, low transaction fees, and low expenses.
3. January 2011 at 19:49
Thanks Marcus, Lance, Dustin, Patrick, Richard.
Bob, An idiot. But it really is more complicated in my view. There are more layers of subtlety, and the math in DSGE models is over my head.
Benjamin,
1. No one can produce proof.
2. That’s not surprising about Friedman.
3. I was referring to my NGDP futures targeting idea.
Richard, Thanks for the film clip. I hope I don’t end up that way.
MooseH, That was a joke.
OneEyedman, What’s your medium of account? In monetary economics is all about the medium of account.
3. January 2011 at 20:30
To some degree, Tamny understands classical microeconomics. He is arguing in favor of Say’s law. In the article where he attacks price stability, he describes the classical theory about how prices adjust to cost of production in the long run.
It is microeconomics without marginal utility and demand and cost of production as opportunity cost.
His error regarding the money supply is to identify “the money supply” with money expenditures on output. There are stock flow issues, but really, the assumption that velocity is one.
And Scott…
You don’t favor inflation or stable prices. You favor a stable growth path for money expenditures.
3. January 2011 at 20:31
Benjamin,
The production of money certainly does not “have to be” handled by a central bank, as central banks are a fairly new institution, and money has been around for a very long time. At least two Nobel Prize winners, Hayek and Nash, have recommended returning to competition in money production.
Notice also that a central bank does not solve the problem of counterfeiting (it’s still with us), and if you issued your own money (with “Bank of Benjamin” printed on it), it would not be counterfeit! (It might be worthless, but not counterfeit.)
Now, whether privately issued money is a good idea is debatable, but whether it is possible certainly is not, since we’ve had it at any number of times in the past, and it at least played the basic part money is supposed to play in exchange well enough that those economies did not collapse into barter.
3. January 2011 at 20:51
“Gold currencies are basically idea two with one asset. They have be run by governments in the past but they don’t have to be.”
My coin pricing book has pages of privately issued gold coins from the US alone. They circulated especially on the frontiers, whatever those were at the time. And many private banks formerly issued paper notes redeemable in gold.
3. January 2011 at 20:55
OK, naive comment from an observer.
Why is it that any reference to “the gold standard” (or any other standard based on mining some substance) makes my head hurt? Money is a human construction, given value by human behavoir. In a real debacle, gold would lose all value compared to say food, just like green pieces of paper.
Whence comes this obsession with minerals?
3. January 2011 at 20:55
I agree that the unit of account problem exits as described above. Maybe there isn’t a solution to the unit of account problem.
However, brainstorming it about it briefly, I recall when I go to the book store I often see books with prices in US dollars, Canadian dollars, and UK pounds. That seems to work okay. In industries with low menu costs (that is, most of them) where there are a few major currencies, we could employ the book strategy by simply posting the prices in all currencies. In circumstances where that is impractical, quoting a price in one private currency and the exchange rate with all other accepted currencies might do. I’ve seen the later strategy employed in border areas or those frequented by many international travelers. Ex-pat workers are often paid in home currency when abroad, so I don’t think this carries a huge cognitive load.
Am I missing something obvious about why this is problematic?
In a world with hundreds of rival currencies maybe this is all a huge mess. But we have only 3 major credit card companies and perhaps a few more small ones. Should we expect more currencies than varieties of credit cards?
3. January 2011 at 22:35
Regarding his misunderstanding of deflation, I think he is working with the classical definition of inflation and deflation. I can’t cite anything off the top of my head, but I’m under the impression that pre-Keynesian macro used “printing money,” not “increasing the price level,” as the definition of inflation. Some extremist Austrians insist on using this definition today (Thomas Woods does so in Meltdown) and I think that’s where he’s getting it from. I think it’s silly and essentialistic to use such an antiquated definition, but that background might make his statement’s slightly less absurd, or at least comprehensible.
At least one prominent Austrian has already commented and did not bring this up, so I might be completely off base.
4. January 2011 at 02:40
You bring all this righteous scorn on yourself Scott…
You REFUSE to focus on when your theory will piss on booms. Your ideas ONLY can work if when NGDP is running over 5%, we’re raising interest rates – no matter what.
If you spent even 1/10 of the time focusing on this part of the equation, you’d chase away ALL your liberal followers, and conservatives would trust you more.
Because when we target NGDP and we’re running over 5% – then IF unemployment is sticking above 7%, Sumner says, “screw you, Krugman, this problem MUST BE structural, it must be government policy, because growth over 5% is unsustainable.”
It’s just like Fisher, everyone only pays attention to him when we’re in this position.
But if you aren’t winning the argument in good times, you aren’t allowed to win the argument in bad times.
Sumner breaks down if we don’t have the strength to piss on booms.
4. January 2011 at 02:56
I like to do a mind experiment with any “new” system theory. The gold standard as money won’t pass my small island economy test. For example, start with ten people and ten pieces of gold. Where did the gold come from? Well, Number 10 is the island’s gold miner…so he dug it up out of the ground. Now comes the auction. Number 1 is the coconut farmer. Number 2 is his coconut picker. Neither Number 1 or Number 2 cares for gold…they would rather be paid in coconuts. Number 3 and Number 10 collude and threaten Numbers 1 and 2 to take gold as payment for coconuts. A government has been formed. It has coined money and set the value of it. Thus, the gold standard is the bodily harm standard…just as paper money would be.
4. January 2011 at 04:49
@Morgan
“Sumner breaks down if we don’t have the strength to piss on booms.”
I agree.
4. January 2011 at 05:50
@Doc & @Morgan, while I agree with you, in defense of Scott I have to point out that no politician ever wants to “piss on booms”.
Of course, no macro-theory actually explains booms very well, either, or even how to identify them reliably in real time.
This is exactly where “irrational exuberance”, in 1996 instead of 1998 is caution too soon. The Economist in 2003 or so was calling it a housing bubble, too soon (?).
The key change to macro economists must be the intellectual willingness to call booms as they occur, and support policies to reduce the boom. Instead of waiting for the bust, and the populist calls for bigger gov’t to reduce the punishment of the prior mal-investment.
I fear that Scott supporting over-paid financiers with passion reduces the political will needed to have policies which reduce booms.
4. January 2011 at 05:53
This is an honest question. Tamny cites Ricardo saying, “A currency, to be perfect, should be absolutely invariable in value.” I hear similar statements a lot when people talk about the gold standard, but I don’t understand it because doesn’t gold vary in value. Why is a money pegged to a fluctuating asset going to produce stability? This is stated as fact when authors defend the gold standard, but I seriously don’t get it.
4. January 2011 at 07:39
Bill, You are far too generous. He doesn’t understand the difference between a stable price level and stable individual prices, or that it’s a tautology that one half of prices rise in relative terms.
And I never said I supported stable prices, did I? He was attacking Bernanke, not me. I just pointed out he didn’t know what he was attacking.
Bryan, Keynes correctly called it a “barbarous relic.”
OneEyedMan, I was referring to the medium of account problem, not the unit of account. But I also think a single medium of account is more convenient, and I think most people would agree with me. Imagine grocery shopping where each item is in a different currency, you think the average housewife would go for that?
Ryan, Yes, I know that, but I’m still going to call him out. And if you assume that definition it doesn’t correct all his other errors. And by that definition if a chemist turned lead into gold, and we had hyperinflation, he’d insist there was no inflation at all (on a gold standard.)
Denim, Yes, gold doesn’t really solve any fundamental problem.
Morgan and Doc Merlin, I agree with the Morgan line quoted by Doc.
MikeMcK, They just like to pretend the value of gold is constant. It’s a delightful fiction.
4. January 2011 at 09:40
Gene-
I enjoyed your comments. However, in such a large economy as the US, it seems to me we need only one, or at best a handful, of currencies.
Does it not become impractical to have dozens of currencies–in terms of limiting counterfeiting, or even acceptability? Some guy comes into my store with one of several hundred currencies in exchange–this strikes me as unworkable. Is the money real? Is the bank backing it solvent?
Yes, we have counterfeiting now, but keeping a currency “clean” strikes me as easier than monitoring and cleaning 100 currencies. (BTW, supposedly it is easier to create passable bills than ever, something I find endlessly fascinating).
Private insurance on private banks, so I would accept bank notes from Bank of America? Yeah, and tell me about AIG. What is private insurance, if the insurers can just declare bankruptcy (no one is executed, or even imprisoned).
I contend there is somethng comforting about the authority and prestige of a nation backing a currency. And men are social animals in addition to being rational beings.
I understand there are some Midwestern cities where people put in hour at “job banks” that they can “draw out” hours at a later date, in effect creating a “scrip” sconomy.
However, if ever we have many currencies in circulation, perhaps I can profit from the confusion by ginning up my own printing press…
4. January 2011 at 10:48
My mistake. I was thrown by your use of “medium of account” I was used to learning the three features of money as
Unit of Account
Medium of Exchange
Store of value
Can I assume by “medium of account” you mean what I learned to call “medium of exchange”?
Why couldn’t you have credit cards that draw upon balances in private currencies? Why couldn’t you have private cash work like travelers checks, in that they are not free and fully backed.
In all would this be worse than government run currencies? In a sensible first world nation, probably not. The transition costs alone would be likely to do it in. The cognitive load would be heavier but workable because you really only have to track a few extra prices (the exchange rates to the unit of account currency of a given store). But I think private currencies could meet the three functional requirements of money, and so I think it is a workable if perhaps undesirable alternative to government currencies.
4. January 2011 at 10:56
“In all would this be worse than government run currencies? In a sensible first world nation, probably not. ”
I meant “would this be better” where I wrote “would this be worse”
4. January 2011 at 11:55
Unfortunately for the intellectuals of the world, the greatest and most successful populist movements in history had little room for them. Intellectuals are great for coming up with original ideas – i.e. Marx, Machiavelli, Keynes, etc. – They’re very useful in giving any populist movement the intellectual legitimacy it needs. However, as the movement gains momentum, the intellectuals themselves find themselves silenced.
This “conservative revolution” as some populists in the Tea Party have termed it, seems to be doing just that. They are cherry-picking the concepts and ideas that they think the average person with a HS diploma can understand and they trash-talk anyone with a more clear understanding of the issues into silence. If the economy continues to get worse, we can count on the rhetoric from the populists to get stronger and their arguments to get weaker. We’ll know when we’ve crossed a line when they start saying you’re wrong because “God told them so”.
4. January 2011 at 12:36
@Benjamin Cole,
You say: “Does it not become impractical to have dozens of currencies-in terms of limiting counterfeiting, or even acceptability? Some guy comes into my store with one of several hundred currencies in exchange-this strikes me as unworkable.”
If it’s impractical to have more than a handful of currencies then we would expect there to only be a handful of currencies under a free market system.
4. January 2011 at 13:11
My god! I feel like I’ve ascended Jesus style. And Tom
The rearguard of the argument for both Fisher and Scott is that people only pay attention to them when we get here.
Tom Grey says, “The key change to macro economists must be the intellectual willingness to call booms as they occur, and support policies to reduce the boom. Instead of waiting for the bust, and the populist calls for bigger gov’t to reduce the punishment of the prior mal-investment.
I fear that Scott supporting over-paid financiers with passion reduces the political will needed to have policies which reduce booms.”
And that’s really all that matters.
Because IF their ideas are only used in the hole, they ARE the moral hazard.
They are all carrot and no stick.
They are all hat and no cattle.
They are all Dionysus and no Appollo.
This is WHY I say Scott has the leading agent of the idea actually has to drag out Fiscal Spending proponents and flog them publicly, he cannot “find common ground” with liberals who only love him when he’ll debase the currency.
It isn’t honest. Reality is far meaner, being nice is lying.
4. January 2011 at 13:42
Blackadder–
A good point. But then, why is that better than having a currency with full faith and credit of the US government behind it?
BTW, our economy has expanded by 150 percent in the last 20 years. The Japanese economy, with zero inflation and a very strong yen, has expanded by 15 percent.
This suggest to me a monetary heresy–it is better to overwater your crops (soggy fields create mild inflation) than underwater (parched soil and deflation and decreased yields).
I think monetay illusion can be a very healthy thing. Sorry for these terrible analogies.
4. January 2011 at 14:32
OT and sorry to beat a dead horse.
But John Taylor–John Taylor!– in 2006 praised Japan’s then QE. I was looking–in vain–for anything contemporary on his website that revealed he was against the Fed being too loose on Bush’s watch. He evidently gave no papers then sying the Fed ought to tighten up.
The following paper is great–and meaningful today.
“Lessons from the Recovery from the “Lost Decade” in Japan:
The Case of the Great Intervention and Money Injection”
by
John B. Taylor
Stanford University
Background paper for the International Conference of the
Economic and Social Research Institute
Cabinet Office, Government of Japan
14 September 2006
In the last three years, the Japanese economy has improved greatly compared to the decade-long period of near zero economic growth and deflation that began in the
early 1990s. Once again Japanese economic growth is contributing to world economic growth as the expansion in Japan begins to set records for its durability.
What has been responsible for this recovery?
The banking and other economic reforms of the Koizumi administration have been very important, and such reforms will need to be continued to sustain strong economic growth in the future.
However, the key to the recovery, in my view, has been the quantitative easing of monetary policy that began in March 2001, but which really took off in 2003 and 2004 with substantial increases in the rate of growth of the monetary base. Since I had been of the view that a primary cause of the lost decade in Japan was a change in monetary policy, it is particularly gratifying to have seen these monetary injections and resulting economic recovery in these years.”
Now, Taylor says QE is bad for America–while we have imperceptible inflation, and feeble job growth.
4. January 2011 at 19:24
My opinion is that people like Tamny, gold-bugs, suffer from fantasies about the grass being greener on the other side of the fence. This was one of the reasons I posted that Abraham Lincoln speech excerpt regarding his thoughts on the sub-treasury in the comments section a couple of posts ago, besides for the purpose of pointing out that effects from restrictions in the money supply were well known at least that far back. Lincoln was correct about the sub-treasury, by the way.
It is one possible alternative to the Fed that can be pointed out, among many other possibilities, but none who are out there pushing the gold standard and wanting to can the Fed have put out any plausible alternative scenario in which the government is not affecting the supply of money, thus prices and public economic well being. It does not matter which medium of exchange is used, prices will be impacted by actions taken on the part of the government whether we have the Fed or congress or folks at the treasury managing what is done with it. There is simply nothing supporting their argument that the gold standard is preferable to any other in preventing monetary episodes such as what occurred in 2008. That is the history of money in this country and likely the inescapable future as long as the government needs money to function which is something they conveniently forget, resulting in a sort of intellectual dishonesty whether it is intended or not.
I agree that in order to have any credibility they need to be able to answer some basic questions about why we should go back to gold, what we’ll get from it, and why it’s better than what we have now. And it needs to be historically accurate or they are just wasting their time and ours in addition to preventing a timely cure for the current debacle by distracting us with things we’ll never get anywhere with. If they aren’t a part of the solution, they are part of the problem and should be treated as such.
4. January 2011 at 20:05
@Benjamin Cole,
See here. Incidentally, thinking that we would be better off without the Fed is not equivalent to thinking that QEII is of the devil, etc.
4. January 2011 at 20:25
Disturbing Thought:
What if “bubbles” are actually long-term necessary? That is, what is some really important sorts of structural changes ONLY occur during bubbles and busts? Put another way, could the rate of innovation, adjustment, change, in the economy over the long term (say 10s of years) be sustained without bubbles or at least booms, and busts?
Obvious-To-Me-To-You-Too-Thought:
There can be no such thing as a “constant value” currency, because “value” arises entirely from human behavoirs. In the extreme, humans would barter only for food, clothing, etc., and likely only trade with those things.
4. January 2011 at 22:27
Morgan: your argument style is deeply unpersuasive. The moral hyperbole is a real value-subtractor. Not to mention launching in about 5 steps into the argument.
And, down here in Oz, Scott’s policy preferences do not look like it involving “pissing on booms” at all.
4. January 2011 at 23:15
@Lorenzo from Oz
‘And, down here in Oz, Scott’s policy preferences do not look like it involving “pissing on booms” at all.’
He means that if the income level path is above the market projected path (that the income targeting futures project), then the market must adjust to return to the expected path in order to avoid other problems. Its nothing Scott hasn’t said before, its just something he doesn’t really emphasize much.
4. January 2011 at 23:19
@Bryan Williams
“What if “bubbles” are actually long-term necessary? That is, what is some really important sorts of structural changes ONLY occur during bubbles and busts? Put another way, could the rate of innovation, adjustment, change, in the economy over the long term (say 10s of years) be sustained without bubbles or at least booms, and busts?”
The old school Keynesians actually say this is true, as did a lot of 19th century economists.
The 19th century guys also have some pretty good arguments why bubbles are necessary (or at least unavoidable). I think while some “bubbling” is unavoidable and just the product of creative destruction , the government should resist the temptation to create bubbles by distorting the market.
5. January 2011 at 06:47
Scott,
Speaking of monetary theory, ADP came out with +297k jobs – the most since it has been keeping track a decade ago – for December. We can’t be certain why the sudden spike occurred, or even if it will be confirmed in the BLS data out Friday, but it is interesting that it occurred in a month after QE2 began. ADP also tracked a gradual rise in private sector employment growth from September – November as well.
http://www.reuters.com/article/idUSN0517195720110105
5. January 2011 at 07:14
Lorenzo,
Doc answered it, and you’ll find I don’t want to be persuasvie first, I want to be right.
And I’m right. Scott spends little or no time, explaining how if unemployment is 7.5% and we are running over 5% NGDP, we’ve just proven that the government is the problem – and it causing the unemployment.
It’ll be time to raise interest rates, and tighten the money supply and kill the emerging boom, even if it means unemployment stops going down.
I think Scott does this on purpose, because he wants to have liberal followers around who think Scott is somehow on their side – and he’s not…. because he hates fiscal stimulus, and his NGDP level targeting is a decent way of forever making both Krugman and Ben meaningless…. locking everyone and everything into a basically conservative structure save that the money supply grows when it needs to.
I also think that this passivity reflects poorly on the likelihood that Scott can turn the corner.
To me the far more compelling (and honest) way for Scott to make his argument is like this:
“Ok folks I can solve this crisis, it is easy, BUT WAIT – you need to understand what the real medicine really is… you are basically all going to owe me your first born son…. because just when this thing starts to turn around and we’ve gotten some respite, and things start to look pretty cheery – I’m going to come stomping back in, and pee in the punch bowl, and you CAN’T argue – because if you argue, and I expect you to argue, my plan won’t work.”
“And oh btw, if you do this, and even after we’ve gotten back to a modest trend over 5% NGDP, if unemployment is 7.5% – that means it is the liberals fault, and government policy is in the way.”
“Who’s with me?”
To me, that makes it far clearer to everyone – because what Scott is really saying is, “if we piss on booms, we won’t ever get into this mess, and we will hardly ever need to use aggressive monetary policy like this.”
And that’s what conservatives need to hear, that Scott has locked the liberals down, and that by controlling for these variables, we’ll be a more conservative economy than we have been since 2000.
5. January 2011 at 09:16
(psst. You’re a collectivist because collectivists cannot just be people who advocate collectivizing all capital; that would imply that most existing liberals are not collectivist, which cannot be! So collectivism includes anybody who advocates any kind of economic intervention, right up to and including monetary policy. Rothbard called Friedman a court jester for statists; at least you’re only a collectivist.
Which is where Warstler’s talking points are coming from; they are not new. At the acme of Friedman’s influence there was a rearguard action by gold-standard libertarians that the Fed couldn’t possibly be disciplined or independent enough to adhere to any kind of stable growth path. The Great Moderation silenced them but now they’re all popping out of the woodwork again.)
5. January 2011 at 09:38
And, um, don’t hold out any hope for conservatives to give up on the gold standard; they’ll probably do so at some point in the distant future – maybe when we all use digital money – but anti-inflation conservatives date from 1873 and earlier, when the US gave up bimetallism and adopted the gold standard. At any given point I’d rate the probability of their giving up and going away at very low.
Reading speeches from the Free Silver campaigns is instructive; battle lines were drawn, as now, between people who favored inflation and ‘sound money’ people who favored deflation (or zero inflation). But the intellectual camps have shifted – anti-Federal-power populists and Southerners were on the side of silver and inflation then, arguing that the inflation of the bimetallic dollar was right and natural.
I wonder whether Warstler will cheer for silver as loudly as he cheers for gold.
5. January 2011 at 10:09
David,
Watch as I end unemployment and kill Ben’s printing press:
http://biggovernment.com/mwarstler/2011/01/04/guaranteed-income-the-christian-solution-to-our-economy/
Look, I am OK with Sumner IF the he becomes a vocal liberal basher, a prolific pisser in the punchbowl based on the above AND he supports a policy of the new money going into the hands of regular folk (like Cochrane’s futures market) and not buying T-Bills from the Goldman Sachs.
And I’m not a gold bug, but I am a digital currency freak. I want every unit of currency numbered and knowable, and trackable through its history – so there perfect knowledge about the money supply, transparency in loan performance, and basically much smaller margin in risk capital.
Finally, Scott’s liberal fan base here spends A LOT of time hoping against hope that his policies are going to be net positive for underwater home owners, for public employee salaries, and Obama in general…. and in the long run, they aren’t.
The thing is Scott needs the buy-off from the Conservatives, Dems are so desperate they’ll take anything, and he doesn’t make the most compelling case for his cause:
Peeing on booms reigns in Wall Street. It promises conservatives we don’t need to hear any noise about Keynes ever again. And these are the compelling promises that can woo them.
5. January 2011 at 11:01
@Warstler
Your miracle program is workfare? Really? In its crudest and most naïve form?
A requirement to take any job offered? Here’s a job for your retrenched daughter: $10 for a handjob in the back yard, or she misses her next rent. If I don’t find it satisfactory, I’ll tell the unemployment office she slacked off at work, too, so you can remind her to be enthusiastic. Sound good?
But never mind that. Let’s talk economics. Consider a job, any job at all, that pays less than $200 per week in the labor market. You obsess over the employee’s incentives. What’s the employer‘s incentive to pay $200 per week at all under your glorious scheme? Just pay $1 per week for unemployed labor (who will earn $201!). Draw your labor market supply and demand curves and please note where the new equilibrium is when you put a hilariously high price floor on low-wage labor – at $9 an hour, no less. Now run your numbers and see if you can still claim, with a straight face, that the subsidy will be really cheap to fund and the number of people formally on unemployment won’t skyrocket. Why take a check from just your employer when you can take one each from your employer and the government?
Do you know what your implied marginal tax rate is, here? At $200 per week with minimal work, to $0 at $9/hour work – I’m not even sure how you intend to make this coherent – “on a schedule that still incentivizes them to work more” doesn’t allow you to wish into existence an implied schedule of less than 100%. You earn $200/week at $9/hour by working a 22 hour week. Underemployment is common whenever there is excess unemployment, so shorter weeks are not surprising – nobody wants to employ for longer periods. Resulting tax rate: 100%.
You still don’t get how inflation works, or what effects it has or is intended to have, but that is nothing new.
5. January 2011 at 12:37
David, you just spoke gibberish.
It is not workfare, it is GI set at $5 per hour, as long you register into an private-employers auction for your work.
Minimum bid per hour: $1
Minimum time bid: week / day
Handjobs: no
Schedule: something like for every $1 more you earn, you only lose .50-75 cents of your $ from the government.
This isn’t complicated. It beats the hell out of Minimum Wage and Unemployment Insurance. It replaces BOTH programs. And since, ending those with no alternative is politically unfeasible, I present a compelling solution that adds no more than $58B to public debt per year.
Bonus: with FULL EMPLOYMENT we never have to hear about printing money again.
Double Bonus: this helps end the silly canard of sticky wages.
5. January 2011 at 16:02
OneEyedman, No, it’s not the medium of exchange. It’s the object the embodies the unit of account. Under a gold standard it is a fixed weight of gold. Today it is currency.
Bill Gee, Let’s hope not.
Bonnie, The problem the gold standard proponents have is as follows:
1. The real world gold standard didn’t work well toward the end.
2. They counter that the government mismanaged it.
3. But the whole point of the gold standard is that it’s automatic–if we also have to hope the government doesn’t mismanage it, why not let them manage a fiat currency?
Bryan, I can’t imagine why bubbles are needed.
Justin, Thanks, I already started a post on that before I even heard the number.
Morgan, You have set the record for the most frequent use of the term “pee” per comment. Just saying.
David. Good point.
5. January 2011 at 17:07
Scott, I dare ya, spend a week explaining what your liberal followers are really committing to under targeted NGDP on the upside.
Let them taste Scott Sumner when everything except jobs is hunky-dory, and Scott is rabidly screaming RAISE RATES!
And how, they have to promise NOW, agree NOW – not to argue then, or your stuff won’t work… expectations and all.
Then you won’t have to try and convince conservatives, there will be no doubt who’s side you are really on.
If targeting NGDP is really a way to PROVE we have structural unemployment from regulations and minimum wage, for those who are sure these things are true… they’ll let you print money just to win the debate once and for all.
5. January 2011 at 19:13
@Morgan,
I too was a fan of a guaranteed income for a long while too (without any restrictions, or clawbacks other than income taxes), though it concedes the principle to the left that income can be redistributed. Once you’ve done that, you’re just arguing over amounts, and the left can always buy more votes than you. The moral right to keep one’s property is lost.
There are also pragmatic difficulties with any guaranteed income scheme. In mine, it was very expensive and discouraged work, but at least no nanny state (more on absentee rich uncle state).
The $1/hr job isn’t very appealing when not working pays you $10,400/yr, and you only net $0.25 or $0.50/hr in addition. Even a $6/hr job only nets a person $1.50/hr to $3.00/hr, less if they have to pay other taxes. Can you imagine the morale of a workforce that takes home peanuts? What incentive do they have to work hard – if they get fired they’re right back on the guaranteed minimum. Kick them off the guaranteed minimum, and the liberals are right back at you for unemployment insurance and minimum wages.
What stops two sets of three guys living in a house together from “employing” the other set in the opposing house for $1/hr or $1,000/yr (20hr weeks, year round, 2 weeks’ vacation), losing the $500 clawback each, and each set of three nets $29,700 which funds their rent, clothes, food and Xbox? It would be like college, only no classes and a lot longer than 4 years. Once you see people doing that, who wants to be the guy cleaning up after someone’s dog for $2/hr, netting very little extra?
I do get the appeal of the program on paper, but I think it will be more difficult to operate in practice.
5. January 2011 at 20:58
I thought I laid out the object the embodies the unit of account was laid out in the initial post. If you could have it be 1/900th of an ounce of gold in a gold standard then it could easily be a portfolio of commodities like could be 1/10000 of an ounce of gold, 1/42 a barrel of oil, one ounce of copper, and so on. That would have the advantage of being less volatile in value than any individual commodity but at the cost of tying up real resources. TNSTAFL
As I consider the bond portfolio proposal, I realize it has something of a circularity problem. They would need to be shares of assets paying real dividends and not money ones and that sounds like a mess.
5. January 2011 at 20:58
“Forbes, for choosing columnists who pander to crude populist prejudices”
Real populists, like William Jennings Bryan, were opposed to the gold standard.
“YOU SHALL NOT PRESS DOWN UPON THE BROW OF LABOR THIS CROWN OF THORNS!
YOU SHALL NOT CRUCIFY MANKIND UPON A CROSS OF GOLD!”
Now there is a real populist message.
5. January 2011 at 21:02
“As the great financier J.P. Morgan put it, “Gold is money. Nothing else.””
The gold standard was, in general (but not in the 1930s), good for Wall Street, but bad for Main Street, so J.P. Morgan simply knew on which side his bread was buttered.
5. January 2011 at 21:06
“this helps end the silly canard of sticky wages”
Name calling does not change the fact that in the short-run prices and wages are sticky.
David Hume already understood that if the money supply changes, prices change only gradually and sequentially and until the price changes have worked their way through the economy changes in the money supply affect output.
Belief in continuously flexible wages and prices is faith-based economics, not based on the empirical evidence.
6. January 2011 at 09:43
Justin, you’re not grasping what really happens.
Every guy in the program WORKS. Why? Because from day one, someone is bidding $1 nationally. So no one ever gets to experience free money, it’s always a job, always, always a job.
What just happened is a live auction of man weeks, with a $40 floor.
You can’t get online? You can’t be in the program. You don’t have a phone? You can’t be in the program. As someone in the comments said, this is very Starship Trooper – the program exists for workers, and non-workers are suddenly a very small group.
To the end user, they get a debit card or a cash deposit to their bank, and UI ends at 90 days. You the recipient, never see $5 for the government, you just make $6-10 per hour and you work in the private markets.
Besides, and this where it gets fun, this lays the ground work for running ALL AID through this platform.
You are in a wheelchair? No worries, you can still answer the phone at your house and someone will give you $1 to do it.
You need energy assistance? You need food stamps? You need Section 8?
Hey are you able bodied and registered in the GI program?
6. January 2011 at 10:27
I giggled at the proximity of “do not know the meaning of basic economic terminology” and “that seem to have created a private language that has nothing to do with the real world“.
I know you mean to contrast the two, but the contrast only works for the faith based group of jargon speakers.
6. January 2011 at 21:05
Morgan (and Doc Merlin?) this seems to be an argument about the 5%. As I understand it, you are arguing that Scott’s policy would block the economy from moving on to a permanently higher growth path.
(1) Does not the final version, which allows the market to set the policy, get away from that?
(2) Surely the likelihood of said permanently higher growth policy is not worth betting on compared to minimising the likelihood of major/severe downturns?
As for the 7.5% unemployment example, has not Scott argued that you compensate all the way — i.e. to what the level of NGDP would have been if the 5% growth rate had been continued with?
7. January 2011 at 19:38
Bababooey: I know you mean to contrast the two, but the contrast only works for the faith based group of jargon speakers. Groan. I think Marxism and Thomist natural law moral reasoning are nonsense on stilts, but I am not so silly as to think that empty sneering at their terminology proves anything.
8. January 2011 at 04:12
‘Morgan (and Doc Merlin?) this seems to be an argument about the 5%. As I understand it, you are arguing that Scott’s policy would block the economy from moving on to a permanently higher growth path.’
Not really, it is an argument about dynamic time inconsistency and the belief that policymakers would try to expand money hard during the boom.
“(1) Does not the final version, which allows the market to set the policy, get away from that?”
Mostly yes. Although under a single national currency you still have the same problem as you don’t have competitive forces driving different moneys towards the proper path.
Its like the problem of optimum currency areas only seen in a non-geographical light. It makes no sense that an optimum currency area should be geographical, and Selgin’s and White’s (and Woolsey’s) free banking ideas handle this beautifully.
“(2) Surely the likelihood of said permanently higher growth policy is not worth betting on compared to minimising the likelihood of major/severe downturns?'”
If you mean real growth? I completely disagree. Even small changes in real growth path compounds over time and so has absolutely massive effects given enough time. Giving up short term growth for decreased volatility (assuming thats even possible) is a loser’s strategy.
8. January 2011 at 04:12
woops, the above should be directed at Lorenzo from Oz
9. January 2011 at 18:43
Doc Merlin: It was clear who you were addressing.
It makes no sense that an optimum currency area should be geographical That depends on the pattern of transactions, does it not? I don’t want to have to change currencies between shops or shopping centres. But I well might over wider distances or online while the ability to freely exchange clearly has advantages to users of currencies (mainly in restraining abuse by the issuers thereof).
I thought the proposal to have the euro as legal tender throughout the EU as well as, not instead of, local currencies was a sensible suggestion: but then it would have operated more like the US$ in the developing world, as a common alternative. That is still rather different than a currency cacophony.
Giving up short term growth for decreased volatility (assuming thats even possible) is a loser’s strategy. Yes, but monetary policy which creates or aggravates downturns is surely to be avoided: which is how I should have made my point.
it is an argument about dynamic time inconsistency and the belief that policymakers would try to expand money hard during the boom. Could you elaborate on that please?
9. January 2011 at 23:27
@Lorenzo
“Yes, but monetary policy which creates or aggravates downturns is surely to be avoided: ”
Complete agreement there.
“it is an argument about dynamic time inconsistency and the belief that policymakers would try to expand money hard during the boom. Could you elaborate on that please?”
/Early/ in a boom, the money supply needs to be restricted but the fed has no incentive to quash the boom early on. However during a bust the fed has lots of incentive to ramp up money supply. This creates a time inconsistency in the fed’s behavior. In order for monetary policy to work it needs to get rid of that inconsistency.
10. January 2011 at 19:03
Morgan, That time will come, but not yet.
OneEyedman, Your proposal is called “symmetallism.” It was proposed in the 1800s.
Full Employment Hawk, I mostly agree (about sticky wages and crosses of gold.) But there wasn’t as much difference between the interests of Wall Street and Main Street as it might appear. They both did pretty well with stable prices, and horribly with severe deflation.
Bababooey, I may have missed your point–too little information.
11. January 2011 at 12:04
Keep doing what you are doing Scott – it’s obviously working given the success of your excellent blog (seriously).
12. January 2011 at 14:27
Thanks Eric.
14. January 2011 at 07:42
[…] Scott, that’s the closest you are ever going to get to a compliment from Krugman. But remember, […]
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“… nuclear physics (a simple field compared to monetary economics.) ”
Careful, those are fighting words my friend!
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19. January 2011 at 18:30
Andrew, It takes a higher IQ to understand physics, but it takes a mind that can understand nuance and complexity to get monetary econ. It really is more complicated than physics.
On the other hand I don’t understand physics, so how can I know? 🙂
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Scott,
Just wanted to note that while you have a Wikipedia page, John Tamny does not.
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