Can we all please stop pretending . . .

.  .  .  that the Fed wants 2% inflation?

I was about to make fun of this quotation from Ryan Avent:

Meanwhile, the Fed got little to worry it on the inflation front. Its favoured inflation measure””the core price index for personal consumption expenditures””came in at a 0.4% annual growth rate. That measure has declined steadily from the fourth quarter of last year.

And then I thought to myself; don’t be a smart-ass.  I’ll bet most macroeconomists would read that without batting an eye.  Sure the Fed claims to want 2% inflation.  But if that were true then economists and reporters would say “increasingly bad news on the inflation front,” not good news.  The fact that they don’t means that at some level everyone understands the Fed wants more NGDP, and would prefer any increase in NGDP to be as much real growth and as little inflation as possible.  So why can’t we drop the pretence that they want 2% inflation, and start talking about NGDP?  Why can’t we say what we mean?

PS.  I’ll start being a smart-ass again in my next post—on Paul Krugman.



30 Responses to “Can we all please stop pretending . . .”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. January 2011 at 19:59

    I was looking at the GDP deflator today. It has averaged 0.7% at an annual rate since 2008 Q3. Need I say more?

  2. Gravatar of ssumner ssumner
    29. January 2011 at 20:00

    Mark, That says it all.

  3. Gravatar of Michael Michael
    29. January 2011 at 22:46

    But inflation is coming! Hyperinflation! At some point. In the future. You’ll see!

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. January 2011 at 22:56

    Pleeease! (I assume you’re kidding.) I’ve been waiting for the hyperinflation for near on 30 years now. If it doesn’t come soon I may not live to see it.

  5. Gravatar of Michael Michael
    29. January 2011 at 23:00

    Sorry, I was bashing my head on the keyboard for fun and that just happened to be what came out.

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. January 2011 at 23:11

    Damned. I thought you had inside information. Well, as they say, next year in Jerusalem.

  7. Gravatar of Lorenzo from Oz Lorenzo from Oz
    30. January 2011 at 00:32

    Mark & Michael: great double act, made me laugh.

    There are folk out there who think the loss of value of rectangular bits of paper with the faces of Presidents on them since the Fed was founded is one of the great evils of our time. (A few months ago I listened to a young Austrian economist describe the Fed as ‘the most evil institution in the world’ and he wasn’t kidding — he also thought you could win economic arguments by playing games with definitions, a particularly irritating habit from a certain sort of Austrian.) My problem is that I look at those graphs of the loss of value of said rectangular bits of paper from 1913 to now and think how much life expectancy and income has gone up from 1913 to now and fail to get all outraged.

    Particularly given the most reckless acts of the Fed have been to drive the value of those rectangular bits of paper sharply up and consequently nominal GDP sharply down.

    But if you can only see the evil of inflation, and so the Fed is evil, then it has to be really evil and so be about to really drive the value of those rectangular bits of paper down. Or something.

    There is not much point getting them to look at the history of actual hyperinflations, and how they are associated with weak/deeply stressed regimes, because they seem to have an Apocalypse Looming mindset that is a bit of a tendency of deductive systems of analysis which think they have the secrets of history all worked out and get very frustrated when events fail to cooperate. So imminent hyperinflation becomes their equivalent of the Ever Sharpening Crisis of Capitalism.

  8. Gravatar of Michael Michael
    30. January 2011 at 00:46

    “Mark & Michael: great double act, made me laugh.”

    For my next performance, I’ll bash my head with a rock begin to speak only in Morgan Warstler quotes.

  9. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. January 2011 at 01:03

    I assume that will begin with a complaint about the latest DeKrugman post.

  10. Gravatar of Michael Michael
    30. January 2011 at 01:18

    Like so many before you, you have forgotten about society’s greatest enemy: The Public Servant.

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. January 2011 at 01:24

    You’ve got me there. Indeed, it’s unfunded public pensions that have been the undoing of Western Civilization.

  12. Gravatar of marcus nunes marcus nunes
    30. January 2011 at 03:47

    One question: What time did you get to sleep? Or didn´t?

  13. Gravatar of Ryan Ryan
    30. January 2011 at 05:55

    Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.

    — Mises, “Economic Freedom and Interventionism”

  14. Gravatar of 1 picture=1000 words, 3 pictures=3000 words? « Historinhas 1 picture=1000 words, 3 pictures=3000 words? « Historinhas
    30. January 2011 at 06:08

    […] Both Scott Sumner and David Beckworth say the same thing: What the Fed wants is that nominal expenditure growth (NGDP) gets translated into as much real growth as possible. So, “talking” about “wanting” 2% inflation is “bollocks”. As David makes clear, that´s true IF inflation expectations are anchored. In that case stabilizing nominal expenditures is the “trick” that allows smooth growth, low unemployment and low inflation. […]

  15. Gravatar of Michael Michael
    30. January 2011 at 06:18

    Austrians sure do love their quotes. Do people attend Mises & Hayek bible classes or something?

  16. Gravatar of scott sumner scott sumner
    30. January 2011 at 06:19

    Mark and Micheal, Nice to see that kind of rapport develop among commenters over here.

    Lorenzo; You said;

    “he also thought you could win economic arguments by playing games with definitions,”

    Over in another post a commenter insisted that the inflation was already here, as the price of gold was soaring. When I pointed out that the CPI wasn’t soaring, he said the CPI didn’t properly measure inflation, that an accurate index would show the relative value of gold is stable. Others treat a rising money supply as “inflation.”

    Ryan, You said;

    “But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise.”

    When I studied the Great Depression the term “inflation” usually referred to rising prices, not a rising money supply. That means the current definition has been around for at least 80 years, and probably longer. Maybe it’s time people accepted that, and communicate in a way that allows them to be understood.

    BTW, Your assertion is wrong, as Japanese history since 1992 shows. That’s why it’s important not to blur the concepts of a rise in prices and a rise in the money supply, instead of treating the quantity theory of money like a tautology, which it isn’t.

  17. Gravatar of scott sumner scott sumner
    30. January 2011 at 06:26

    Ryan, At first I didn’t see that was an older quotation. I would have responded slightly differently. When did Mises say this? It must have been it before the world’s central banks started fighting against inflation with tight money policies in the early 1980s. The rise of monetarism is the late 1970s didn’t seem inhibited by the lack of a single term for rises in the money supply.

    But I can slightly sympathize, as I often complain that there is no term for a rise in NGDP.

  18. Gravatar of bill woolsey bill woolsey
    30. January 2011 at 07:09

    Even today, you can find people shocked and appalled to discover that money isn’t really backed by anything. Mises was writing at a time when money was partially backed by gold. In his view, “inflation” in the popular usage had a negative connotation, and it had to do with creating money not backed by anything, in particular, not backed by gold. Mises actually defined inflation as an increase in the quantity of money beyond the demand to hold it. But this is about propoganda.

    Then, inflation somehow changes its meaning to be a rising price level. Isn’t this awful. This word with the negative connotation now means the consequence of an excess supply of money rather than meaning issuing this unbacked money.

    Well, once we have left the gold standard, using the term inflation to mean, “more money” doesn’t sound all that bad to me. Inflation sounds good. On the other hand, what Mises might call “purchasing power falling tion,” does sound bad.

    Surely, by now, it is the rising “cost of living” that is the problem. And we, as economists, must explain that it is caused by an excess supply of money. Trying to convince people that more money is bad in and of itself, independent of some negative indirect consequence it has (like increased prices,) is a fools errand.

    At some point, Mises should have seen this. But keep in mind that most of his work occured before the final end of the gold standard in the Nixon administration.

    I don’t think he lived to see the disinflation of the eighties (well other than the very start.) Orthodox Rothbardians were all expecting that the higher unemployment due to the disinflation would result in a return of inflation. But “we” toughed it out. Also, those who really thought that the post world war 2 expansion in money expenditures was an even longer boom that the twenties with more malinvestment really beleived that we would have to have a worse recession than the great depression. You know, it is all liquidation of malivestment.

  19. Gravatar of Morgan Warstler Morgan Warstler
    30. January 2011 at 07:21

    3.2 RGDP and .4% CPI is similar to

    5 RGDP and 2% CPI right?

    I mean I know you target the ladder, by generally thats the amount of actual growth we want, right?

    And coming from exports to boot!

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. January 2011 at 11:30

    Marcus Nunes,
    Yes, I was up much too late. I need better habits.

  21. Gravatar of marcus nunes marcus nunes
    30. January 2011 at 11:40

    Now that you´re up again you can read my latest, liked above as 1 picture=1000 words

  22. Gravatar of Benjamin Cole Benjamin Cole
    30. January 2011 at 13:28

    I echo Sadowski’s comments about the GDP deflator. Inflation is deader than Jimmy Hoffa.

    I fear we are going to do a Japan. The BoJ is obviously more concerned with fighting inflation than having growth. The Fed?

    Fighting inflation becomes a fetish at some point. Soon, three percent inflation seems intolerable and dangerous–despite the fact the US economy flourished in the the 1980s and 1990s with five and even six percent inflation. Now people lose their bowels at the mere talk of three percent inflation.

    I worry too that bondholders can become too powerful–a constant voice, usually cloaked in virtue and moral honor, calling for ever-lower inflation rates. Maybe this happened in Japan.

    There are times to fight inflation–the Volcker years come to mind. Yes, output has to be curtailed and people hurt.

    Now is not one of those times. Now is time to print money until the plates melt. I would rather live through moderately inflationary boom times than a long, Nipponese perma-recession.

  23. Gravatar of Full Employment Hawk Full Employment Hawk
    30. January 2011 at 20:17

    “But inflation is coming! Hyperinflation! At some point. In the future. You’ll see!”

    Hyperinflation will only come after the rapture.

  24. Gravatar of Full Employment Hawk Full Employment Hawk
    30. January 2011 at 20:24

    “Austrians sure do love their quotes. Do people attend Mises & Hayek bible classes or something?”

    You mean that you do not believe in the verbal inspiration of Von Mieses writing by the Holy Spirit?

  25. Gravatar of ssumner ssumner
    31. January 2011 at 10:35

    Bill, Those are good points. People who always predict disaster will only be right on the rare occasions when we have disaster.

    Morgan, That’s too cryptic for me. I’ll say this, it shows those who say more NGDP will just lead to inflation were wrong.

    FEH, I don’t think Hayek would associate himself with the modern Austrians, except a small number of academic Austrians like Selgin, While, Garrison, Horwitz.

  26. Gravatar of James in London James in London
    1. February 2011 at 03:13

    You guys are all wonderfully cocooned in your reliance on government data. The GDP deflator showed 0.4% annual growth, so bad news. I understand your position, but I think you should be more sceptical over government data. Chinese government data on inflation is rightly ridiculed at the moment, but your own government is unimpeachable, apparently.

    What about this as a source?
    And, yes I can see what it shows happening in Q3 2008. I thought that might give you confidence in the data. But what of the acceleration now?

    The enormous amount of money not in circulation, but being hoarded by individuals and companies could more suddenly than you think turn into something not very nice, perhaps it already is.

    Then, there is no guarantee that the sages at the Fed will do the right thing to cool the economy, just as you claim they didn’t do the right thing in Q3 2008, when they bailed the banksters.

  27. Gravatar of James in London James in London
    1. February 2011 at 03:31

    For a good discussion on the dodgy Q4 GDP data see this:

    That should read 0.26% not 0.4% in the previous post.

  28. Gravatar of scott sumner scott sumner
    1. February 2011 at 16:55

    James, I also don’t trust GDP data, and have said so. But there’s lots of other evidence inflation is low. I feel my cost of living is lower than mid-2008. Houses and gas are much cheaper, and most other things are flat. And most workers are getting about 2% raises, so core inflation will remain low. Headline inflation may rise a bit due to commodities, but nothing like the 1970s.

  29. Gravatar of Tom Grey Tom Grey
    1. February 2011 at 23:40

    Here in Slovakia, prices of food and gas have certainly gone up. I think the DPI data is better for tracking prices than CPI — and it is price rises, without pay changes, that most people think is the negative of inflation.

    While I think more inflation is a good cost to pay for the benefit of more growth, and especially far fewer foreclosures, it’s not clear what policy Scott thinks the Fed should be doing.
    OK, I think NOT paying interest on reserves is one.

    And bashing of the Austrians seems to be supporting the 2002-2006 boom in “easy” money, especially for houses. I’m confident most economic historians will conclude that those boom policies were a mistake, and the Austrian-bashers who implicitly support the boom policies were therefore wrong.

    Volatile housing always messes up “inflation” measures, because so relatively few people actually buy new homes every year, but the price level changes for all houses.

    We have M1 & M2, and used to have M3, to describe the quantity of money. An increase in M1, without an increase in DPI, would be fine.

    I think the key missing term is for the “money” which was AAA rated financial products (CDOs, CDAs) based on MBS, and it was this “Ma” money, legally available for use in Big Banks as Tier 1 capital, which disappeared in 2008. Because products that seemed to be risk free, based on the wrong house prices always go up assumption, started meeting a reality of house price declines. So the products are not AAA, and can’t be sold except at a loss, so the banks don’t have the legally required reserves to justify the quantity of loans, etc.

    The point is, while I support NGDP targeting as an idea, I don’t see the mechanisms the Fed should be using. And right now, the huge housing bubble pop – recalculation is going to cause slow growth … unless there is much more price-increase inflation to reduce the number of underwater mortgages.

  30. Gravatar of ssumner ssumner
    2. February 2011 at 19:51

    Tom Grey, I certainly don’t favor “boom policies.” I agree with the Austrian economist Friedrich Hayek that we should target NGDP. I can’t imagine anyone doesn’t know what policy I favor, I must have said I favor NGDP targeting 1000 times. Read my FAQs in the right margin.

    I think monetary policy should pay no attention to the housing market, and focus on the economy instead.

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