How macroeconomists ruined the world economy

I first became radicalized about 3 years ago when I realized that my fellow economists did not see the seemingly obvious need for greater monetary stimulus.  Here are a few facts:

1.  The number one monetary textbook tells us that monetary policy is still highly effective at boosting nominal spending at the zero bound.

2.  There are many prestigious academic papers discussing how the Fed can boost nominal spending at the zero bound.

3.  American economists were highly critical of Japan’s refusal to boost NGDP growth in the 1990s and 2000s.

4.  I’ve never met a right-of-center economist who worried about “liquidity traps.”

5.  Lots of progressives (Romer/Krugman/DeLong/Yglesias, etc) favor more Fed stimulus.

6.  Ben Bernanke keeps insisting that the Fed is not out of ammunition, a view he’s held from the beginning.

OK, there are some economists who worry about the Fed running out of ammunition.  But rates weren’t even at zero in the fall of 2008, and there was still no pressure on the Fed to ease.  None at all.  And nothing’s changed in the subsequent 3 years.

Clare Zempel sent me a new survey from the National Association of Business Economists:

Given a budget of 10 points, what are the major factors holding back the recovery?  You may allocate all 10 points to one factor or divide the points among them.

16.9% Uncertainty about future economic policies
13.7% Low consumer and business confidence
13.5% Financial headwinds caused by tight credit conditions and balance sheet restructuring
11.0% A tepid housing market
7.4% State and local government spending cutbacks and tax increases
7.3% Uncertainty about economic prospects in the rest of the world.
6.5% The burden of new regulations
6.3% Structural imbalances requiring the reallocation of labor and capital across sectors
6.1% Lack of progress in reducing long-term fiscal imbalances
4.9% The removal of near-term fiscal stimulus
3.1% High and rising commodity prices
1.6% Inadequate monetary stimulus.
1.2% Nothing is holding back the recovery. The economy is poised for a strong rebound.
0.4% Ongoing supply disruptions associated with the earthquake and tsunami in Japan

Just three of the 49 respondents selected “inadequate monetary stimulus” — and just one considered it to be quite important (by allotting 5/10 points to it).

So my fellow economists don’t think we need more monetary stimulus.  And I have no doubt that this is why the Fed isn’t doing more.  If the monetary stimulus choice was 98.4% rather than 1.6%, you can be sure the Fed would be doing all sorts of aggressive stimulus right now.

Here’s the big puzzle; do my fellow economists oppose more monetary stimulus because they don’t think it will work, or because they fear it will work?  In other words, do they want more AD or not?

When I look at all the responses, I see at least a half dozen that implicitly point to AD being a problem.  But in that case why wouldn’t they favor more monetary stimulus?  Is it really possible that 46 out of 49 economists think the Fed is out of ammo?  Or is there some sort of third possibility, which I miss because the model is completely off my radar screen?  I.e. do they think monetary stimulus creates inflation and fiscal stimulus creates real growth?  God only knows.  All I can say is that I am part of a profession that I know nothing about.  I can’t even fathom what is going on in the minds of my fellow economists.

Of course it’s very possible that this whole blog is wrong, and that we don’t have a demand shortfall.  Or that we do, but a more expansionary monetary policy can’t boost nominal spending.  But if I am right then there can be no doubt as to who is to blame for the current crisis (in both America and Europe.)  It’s not politicians.  It’s not bankers.  It’s not voters.  It’s macroeconomists.

PS.  In my view the top 4 choices are mostly a consequence of tight money, of low NGDP.

PPS.  Maybe I should look at the bright side.  Four times as many point to monetary policy being the problem, as compared to the tsunami in Japan.



53 Responses to “How macroeconomists ruined the world economy”

  1. Gravatar of foosion foosion
    21. November 2011 at 09:56

    What is “The number one monetary textbook”?

  2. Gravatar of Andy Harless Andy Harless
    21. November 2011 at 15:43

    The survey isn’t just macroeconomists, is it? I suspect the fraction implicating “inadequate monetary stimulus” would be higher if the survey were just macroeconomists.

  3. Gravatar of TravisA TravisA
    21. November 2011 at 15:51

    The only thing that I can think of is that the answers are trying to get at the ‘deeper reasons’. But if so, they should say 1) prices are sticky 2) bankruptcy laws are inefficient.

    After all, if 1 and 2 were satisfied, we wouldn’t have any need for any monetary policy and you’d be out of a job 😉

  4. Gravatar of Brito Brito
    21. November 2011 at 15:51

    “Of course it’s very possible that this whole blog is wrong, and that we don’t have a demand shortfall. Or that we do, but a more expansionary monetary policy can’t boost nominal spending.”

    Also possible is that monetary policy can boost nominal spending, but at cost in the future that outweighs the gain, this might be what many of them think.

  5. Gravatar of david david
    21. November 2011 at 15:57

    Like Harless, I note that this is a survey of business economists, who are ever so slightly more Republican that economists in general.

  6. Gravatar of david david
    21. November 2011 at 15:59

    Er, that looks like a cheap shot against Republicans, so I hasten to add that the point is that their demographic is significantly different from the “average economist” or “average macroeconomist” in some non-trivial manner.

  7. Gravatar of Liberal Roman Liberal Roman
    21. November 2011 at 16:32

    Economists love this recession. Whether they are conservative or liberals, this recession is an excuse for all of their favorite policies.

    If you are a liberal, the recession is an excuse for major “stimulus” and “investments” on hare brained schemes. Like building a solar plant in an area where no new manufacturing facilities have been built in decades (Silicon Valley) and say they created green jobs.

    For conservatives, it’s an excuse to cut the entire social safety net. And any opponents to their plan can just be waved away by pointing at the deficit and calling them irresponsible.

    You coming in and saying the whole thing is just cause not enough money is being printed…well you are definitely bumming out their party.

    I bet this is a great time to be a well known macroeconomist. Politicians are calling you from all over the world asking for your advice. When you pick up the phone to give advice, you better have something better than “Print more money” to offer.

  8. Gravatar of Benjamin Cole Benjamin Cole
    21. November 2011 at 16:34

    If exasperation were water, I could make the Mississippi look like small brook.

    My guess as to why macroeconomists are not avid Market Monetarists is that “inflation” has become some sort of bugaboo, like Communism or homosexuality in other periods. You have to be “against” inflation.

    The right-wing starts from the premise that any inflation is Satanic, and that when one genuflects, it is to gold only.

    The left-wing believes in FDR and government spending.

    No one believes in stimulating the economy by printing more money (unless you are telling Japan what to do). That would be too easy.

    Calvinism? Puritanism? Anti-Obamaism? An unhealthy fixation on gold and reported inflation rates? Protection of academic stances and fancy models? Mental illness? What further explains macroeconomists today?

    I can’t explain macroeconomists today. Maybe they are channeling General McClellan of the Union Army.

    Meanwhile, the central bank of China is printing money. They are growing. You will have 1.5 billion middle-class Chinese in 10-20 years. Discover where they are going to vacation, and open up a bar. Keep enough booze on hand for yourself.

    If we do a Japan, your stock and real estate portfolios will be about worthless in 20 years. Invest in bars instead.

  9. Gravatar of biL. biL.
    21. November 2011 at 16:36


    “The number one monetary textbook” would be the Frederic Mishkin’s textbook – used far and wide by many of us as students of and as teachers of money and banking courses.

  10. Gravatar of anon/portly anon/portly
    21. November 2011 at 16:58

    “PS. In my view the top 4 choices are mostly a consequence of tight money, of low NGDP.”

    Does the number two choice, or at least the “consumer confidence” half of it, make sense as a factor “holding back the economy?” I thought its usefulness was as an indicator, e.g. of labor market conditions. I certainly hope we don’t need to see a reduction in unemployment before businesses can start hiring again.

  11. Gravatar of kai kai
    21. November 2011 at 17:02

    Here is what Adam Posen said in the New York Times:

    Is it possible that the Fed is so scared of losing its political independence? If the Fed chooses to buy some mortgage-backed securities or Italian bonds from the banks, do you think the Fed would be heavily grilled?

  12. Gravatar of james james
    21. November 2011 at 17:06


    Has the Fed or any other developed world central bank ever publicly said it was out of ammo?

  13. Gravatar of StatsGuy StatsGuy
    21. November 2011 at 17:22

    I would love to see the internals on that survey. Among other things, what the distribution is by question – especially the degree to which scores are driven by a handful of people vs. broad agreement.

    Also, the correlation structure – like the correlation between “burden of new regulations” and “state and local cutbacks”.

    Also, a breakdown of the survey by their political affiliation/leaning.

  14. Gravatar of Bill Woolsey Bill Woolsey
    21. November 2011 at 17:26

    This was a poll of forecasters.

    I am pretty sure that the usual approach is to forcast the elements of aggregate demand and add them up. (C + I + G + X.)

    Why would you expect “business economists” to have any concern about liquidity traps and whether or not quantitative easing or manipulating expecations of future policy would impact it?

    Was there a poll of economists who publish in the Journal of Monetary Economics or the Journal of Money, Credit and Banking?

    Or perhaps we could go with economists who teach gradual level macro? Or undergraduate money and banking?

  15. Gravatar of P Jones P Jones
    21. November 2011 at 18:09

    Is it not possible that, at some point, governments and central bankslose the ability to create a recovery? An economy is a complicated condition involving many entities, especially consumers and producers, and fueled by enthusiasm.

    It is my sense that US consumers and producers are in a detached period–a period between eras. The era just ended was one of government assisted bubbles and artificial enthusiasm. The era ahead is not yet defined, but it is almost certain that it must have real demand from capable consumers, and producers who can employ some of those consumers. Housing and credit bubbles created by the government and the Federal Reserve aren’t likely again; and, government borrowing and spending has reached a point of extremes that seems to not have a highly expandable future.

    The current political climate is not producing much of the needed enthusiasm to assist in the needed recovery; and, my sense is that we are some time away from solving the political problem.

    So, I expect that the new era, and recovery, are years away from beginning, and that the new era will not be like the old era, and that we must expect to do new things before we start seeing a real recovery.

  16. Gravatar of dwb dwb
    21. November 2011 at 18:47

    i think all the smart economists have left for Asia. with a budger deficit of 6% of GDP they are doing all the opposite things being done in the US and Europe. i dont hear any debt worries…

  17. Gravatar of ssumner ssumner
    21. November 2011 at 19:31

    foosion, Frederic Mishkin.

    Andy, I assume they are macroeconomists, they are asked all sorts of questions about GDP growth in 2011, 2012, inflation, etc. I can’t imagine they’d have highly specific forecasts if they weren’t macroeconomists.

    travisA, You may be right, but then I think failed monetary policy is the deepest reason. Others don’t agree. I would add that I’ve seen other polls showing that the vast majority of economists opposed an additional “QE2” So I think the problem is much deeper. I still say the Fed does what most economists want, indeed perhaps a bit more. The Fed might well be to the left of the profession.

    Brito, Perhaps, but in that case the standard models says any demand boost would be harmful, and these economists seem to think the economy needs more demand.

    David, Maybe, But I see no reason to think academic economists would be any different. Has anyone ever wondered why this blog caught on?

    Liberal Roman, Pretty cynical, but I was amused by your comment about me ruining the party.

    Ben, If everyone had your common sense we wouldn’t be in this mess.

    anon/portly, Very good point.

    kai, Thanks for the link. I may do a post.

    James, I believe the BOJ says both that it’s out of ammo, and that more money would lead to hyperinflation. Scratches head.

    Statsguy, I’ll see if they have anything.

    Bill, As I said above, I’d expect a poll of all American economists to show the same result. I started blogging because I couldn’t find ANYONE calling for easier money, at a time almost everyone now agrees it was needed. I’ve even met people who disagree with me now, but agree easier money was needed in 2008-09. But almost no one favored it then.

    P. Jones. People were also defeatist about money in the 1930s, but FDR showed it was possible to turn things around quickly.

    dwb, Yes, Asia is doing much better. Singapore must be laughing at our debt problems.

  18. Gravatar of Brito Brito
    21. November 2011 at 21:09

    “Brito, Perhaps, but in that case the standard models says any demand boost would be harmful, and these economists seem to think the economy needs more demand.”

    I dunno, I agree that the problem is demand side, but I’m still undecided regarding monetary policy. I largely agree with and have learned a lot from your technical views on monetary policy. I agree that monetary policy can boost nominal spending, even at the zero lower bound. I agree that most people misdiagnose the tightness or looseness of monetary policy based on lousy indicators like short term interest rates, something your blog has reinforced for me. I also agree that targeting NGDP or the NGDP forecast would be a lot more successful at increasing and stabilizing nominal spending at least in the medium run.

    However I’m still concerned about moral hazard. It just seems to me that monetary expansion by fiat isn’t tied to anything real, there doesn’t seem to be an incentive to spend efficiently if we can just print money to maintain low borrowing costs or (indirectly) finance our deficit. Likewise for banks, surely the insurance of easy money is an incentive against being cautious or removes some incentive for sounder risk management. I think, even if we need demand increased now, there are arguments that loose money will set dodgy precedents for the future, and banks and businesses will lend/expand based on expectations of constant future money growth to accommodate it, rather than on something like available resources. It’s really hard to explain this. Do you understand what I’m getting at at all?

  19. Gravatar of John John
    21. November 2011 at 21:16


    Here’s a tidbit from one of your favorite economists;”We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.” That’s from Hayek’s Prices and Production written in 1932. Things are hardly different today, and you’re just proposing more of the same just done harder and better. I’m sure it’ll work THIS time.

  20. Gravatar of Bob Murphy Bob Murphy
    21. November 2011 at 21:59

    Not sure if I ever spelled this out to you, Scott, but here’s what I think:

    (1) You are right that macroeconomic theory says Bernanke should print more.

    (2) That is nuts.

    (3) Most professional economists know that it is nuts, but in their models there is hardly any capital structure, and the interest rate merely serves as a brake for spending. So they ended up spouting contradictory slogans to justify their (correct) view that Bernanke and the ECB don’t need to print more.

    (4) You are obediently following what your model tells you, even though it leads you to describe a doubling of the monetary base in four months as “tight money.”

    (5) You are nuts.

  21. Gravatar of Mike Sandifer Mike Sandifer
    21. November 2011 at 22:46


    The more I read posts like this, the more I think back to the intro to macro course I took in the early 90s. In retrospect I passed that course having learned little about macroeconomics. I couldn’t have even defined “economy” at the time.

    This was in sharp contrast to some “hard” science courses I took in which I learned vastly more in terms of comprehensive theory, formulas, applications, etc..

    I wonder how many have similar experiences and if so, why macroeconomic teaching’s so poor.

  22. Gravatar of Edward Edward
    21. November 2011 at 23:29

    Scott, speaking of insane macroeconomists, Keynes has conteneded for that slot. This is a little of topic, but could you explain to me why the “classical” view cutting real wages in a recessionwas even considered a a good idea? Especially insane is Keynes opposition to nominal wage cuts, partly because of debt concerns and partly because he thinks prices would FALL AS WELL LEAVING REAL WAGES UNCHANGED. He instead advocated usaing inflation to cut workers real wages and restore employment. To me that is just batshit crazy

    Um, why in the world would we ever want to cut real wages when the real problem is not “real” problem at all, but nominal. In a flexible price world, if demand deflation would ever work shouldnt it work by the real balance effect and prices falling in the present relative to those in the future, generating an expansionary monetary policy? ANd in a sticky price world, shouldnt easy money work by raising nominal wages greater than the rate of inflation, in effect, RAISING REAL WAGES, instead of lowering them?

  23. Gravatar of Edward Edward
    21. November 2011 at 23:31

    Wouldnt cutting real wages across the board just reduce AD?

  24. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 00:08

    “Here’s the big puzzle; do my fellow economists oppose more monetary stimulus because they don’t think it will work, or because they fear it will work? In other words, do they want more AD or not?”




    What puzzle? Jesus Scott, you are SECOND, you are the lessor god, MACRO is the lessor god…

    You must PAY HOMAGE to the major god micro, which demands subservience from the public sector.

    Look dude, I love ya, but I love me and people like me more – and we want public employees to get paid less, we want them to DARE to strike and get their legs chopped off, we want the EPA to KNOW we chose to silence them, we want everyone who isn’t a businessman to lose power.

    And now is when that happens.

    IF you, or Keynes want to keep this moment from happen…

    THEN, when things get going again, after everyone learns their lesson, YOUR JOB is to keep SCREAMING at them, not to try and raise salaries and wages for public employees in the gravy…

    Because if you can’t keep them from from bulking up in booms, you ARE NOT ALLOWED to keep them from getting screwed hard in during the bust.

  25. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 00:24

    Definitive proof of Mundell kicking Matty’s ass…

    “Here we see a person who ought to be hedging his exchange rate risk in futures markets. Foster is a cheese guy, not a currency guy. The idea is that he should know cheese. In particular, he should know how to identify a good price on a good cheese. But what he’s become is an accidental currency speculator.”

    Mundell’s WHOLE ARGUMENT is that a free trade agreement means we peg currency, precisely so this BS doesn’t happen.

    Matty is that dumb, he wants to act like a free trade agreement happens with our fingers crossed behind out backs.

    Free Trade HAS to mean free trade.

    Words mean things.

    When we say out loud we want free trade with someone is MEANS just the Euro has codified, we’re not supposed to “pick up hundreds”

    And Scott, until you shave off any part of your thinking that Friedman wouldn’t endorse, you will continue to grow dough boy barnacles.

  26. Gravatar of Derrill Watson Derrill Watson
    22. November 2011 at 02:27

    Stumbled on this quote from Salerno you might find interesting if you do another “Thou shalt not take the name of inflation in vain” post:

    “By the time Human Action was published in 1949 (actually, by 1940 when the German-language forerunner to Human Action, Nationalökonomie, was published) Mises had come to recognize that the concept of inflation was completely empty and useless for the purposes of technical monetary theory.”

  27. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 04:12

    “Since medieval times, writers and ethicists have counted envy among the seven deadly sins. In utilitarian terms, envy is at best a zero-sum game because it can only be satisfied when someone loses.

    Given this moral and practical failing, it is a shame that envy plays such a large role in the Occupy Wall Street protests spread around the country. And, yet, the Occupy movement does have a point that transcends this negative emotion: the financial industry has grown large on the backs of government handouts, manipulated regulation, and taxpayer bailouts.”

    We have now two Mrrgan rules Sumner must follow:

    1. Someone has to lose. The tide must be able to go out so we can see who is swimming naked.

    2. If public employees don’t want to get gutted (again in the future, they are going to get gutted this time), then they will not try and get fatter in good times.

    Scott, both you and Fisher and Mundell agree with these.

    You don’t make it apparent you accept these facts.

  28. Gravatar of ssumner ssumner
    22. November 2011 at 06:34

    Brito, I do understand your criticism, but I think it results from you misinterpreting my overall strategy. I’m not calling for the Fed to pull easy money out of their toolkit, and try to fine tune the real economy. I want a stable monetary policy, that doesn’t react to financial crises, that doesn’t bail out debtors who make bad decisions.

    Then we need to think about what “stable money” means. To men it means steady and predictable growth to M*V. That expected M*V growth gets factored into nominal interest rates, so borrowers would never again be bailed out be easy money.

    You instinctively view my proposal as a change in monetary policy, whereas I’m actually saying the pre-2008 policy never should have been changed. That the mistake was changing policy in 2008, and that disrupted credit markets.

    John, I much prefer Hayek’s later writings, where he repudiates those views from 1932.

    Bob, We’ll see who’s nuts in January.

    Mike, I don’t think many economists have a very good grasp of macro. If you took the course from someone like Nick Rowe you would probably have felt much better about the course.

    Edward, The Fed controls AD. Cutting real wages might boost AS, and hence employment.

    Keynes would argue for cutting real wages through inflation, others would advocate nominal wage cuts.

    Morgan, Fine, but then why do they favor other policies to boost AD, like fiscal stimulus?

    Thanks Derrill, I’ll do a post.

  29. Gravatar of Ryan Ryan
    22. November 2011 at 06:42

    Scott, your faith in the almighty Federal Reserve verges on naivete. This isn’t the first time I’ve seen you effectively write, “If the Fed is out of ammunition, then why doesn’t Bernanke say so? Well, then I guess they’re not out of ammunition.”

    That argument is patently absurd. It’s like saying, “I believe in Santa Claus because if he didn’t exist, my parents would have told me so.”

  30. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 07:32

    Scott, the fiscal stimulues hey “ask for” is ALWAYS couched with long term debt reduction.

    True or false?

    What accomplishes that? Seriously, stop just hearing the piece you like, what policy changes get you both near term fiscal stimulus and long term debt reduction?

    Whatever it is rhymes with: tax reform, cutting public employee unions, and entitlements.


    Ya know< I tell you all the time that liberals read you and don't hear that your thinking REQUIRES both the sweet and sour.

    You are doing the same thing here.

    The REALITY is what you REALLY mean to say is PUBLIC EMPLOYEES NEVER should have gotten bumps from 1998, since they were making no productivity gains, and since according to Keynes (and you), you can't grow the state during boom times precisely so in busts, we don't have to gut them.

    C'mon Scott, confront what is really being said, and make others confront what you are really saying.

  31. Gravatar of Becky Hargrove Becky Hargrove
    22. November 2011 at 07:52

    Macroeconomists of all stripes have been blindsided by the absolute need to include service-based economies as a part of wealth creation equally as valid as production-based economies that are the true sources of money-based wealth creation. Had they not done so, the very direction which the developed countries took in recent decades would have been questioned to such a degree that they would have felt compelled not to even allow their own citizens to travel to the rest of the world to spread production-based wealth. Can we really blame any macroeconomist for sincerely hoping that service-based economies could do for the world, what production-based economies were able to do?

    However the day of reckoning has come. And where I give Scott credit is the fact that he does not want the entire system to blow itself to bits. Anyone who thinks the whole system can just collapse and somehow make itself better needs to consider some of the sadder aspects of the Arab Spring, it ain’t as easy at it looks. Give money a chance to preserve the world we have until we can understand the differences between the wealth of services, and the wealth of production, because if money collapses first we may not get the chance. Ammo is one thing, using it after the battle is already lost is pointless.

  32. Gravatar of SHocking SHocking
    22. November 2011 at 07:59

    What’s absolutely mystifying is that business economists have absolutely no grip on the problems real businesses are actually confronting. The NFIB survey has consistently shown weak demand for products and services is the single dominating problem faced by businesses.

    And yet business economists are still somehow blind to the importance of reviving AD. Moreover, tell me a model that develops a compelling mechanism for policy uncertainty to undercut an expansion in the presence of strong AD. It’s an absurd assertion and conservative fantasy. This is where foolish libertarian dogma gets in the way of actual understanding.

    It’s a good think you’re as smart as you are Prof. Sumner.

  33. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 08:04


    I have virtually unlimited wants, but very few of them are production based. What I want most is cheap personal labor, so that more of the things I do for myself, I can outsource.

    Seeing as we have a TON of low cost labor just laying around right now, I want to auction them… and win some auctions myself.

    The problem is you are looking at the economic gain of putting 20M unemployed to work…

    You aren’t looking at the economic gains that comes from tens of millions getting their more valuable time freed up to do more productive things.

  34. Gravatar of Becky Hargrove Becky Hargrove
    22. November 2011 at 09:03

    You’re right in that liquidity auction of labor is more production efficient than wealth redistribution to services. However, look at the aggregate monetary wealth loss that could result if the latter were primarily transferred to the former. Were it possible for primary asssets to devalue in real time, new equilibriums or sustainability circles could be created. However, no creditor is ready to let that happen and the powers that be agree. Therefore the devaluation of skills time can not match asset realities unless sticky markets are completely broken up. The same powers that be have the same disincentive to ignore what people would actually buy, that exists in debt valuations. While I have plenty of ideas to unstick markets that’s another discussion.

    Where is it possible then to find sustainability of wealth? In this example I just want to show how skills wealth can be grown in the aggregate. First, I want you to think of your economic relationship with the person who you would hire in auction. Yours is the primary relationship often defined in monetary terms – a certain inequality of (monetary) economic access means you have excess income that can be transferred to someone who likely has less income. Anyone who really thinks about this agrees that it is “good”. However, the relationship exists only to the degree that income inequality exists. More importantly, with complete income equality in monetary terms, it would not exists at all.

    This is where the complex relationships of money now point us to freedom, for they show endless possibilities of matched economic activity that no one even dreamed of prior to the Industrial Revolution. What does that mean in practical terms? It means that we have skills options (the multitude of what we have learned in our lifetimes) that others could actually benefit from. And the fact that we have learned so much means that we carry massive skills portfolios that – in relation to the next individual – have a combined potential wealth aggregate that is often impossible to tap into at the level of monetary activity. How so? The individual you hire provides you x dollars of labor. But that is all it is worth to you, what you were able to pay for it. When two individuals find a way to match skills, the worth to both of them is capable of far outweighing that minimal auction benefit. Governments in the present have stopped skills exchange from happening, and exchanges have also externalized the process so that the power of such exchange has been destroyed by external valuation. The power of lateral skills exchange lies in internal record keeping of all activity (social capital) and the one in five mechanism where the individual chooses the skill to give back. That is taxation and direct democracy at the same time.

    As you said, very few of your needs are production based, and yet you have a limited amount of money at any given time that you can actually provide to employ those displaced from the job market. When skills are tapped in non-monetary ways, the demographic realities of our present do not have to work against us.

  35. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 10:27

    “However, the relationship exists only to the degree that income inequality exists. More importantly, with complete income equality in monetary terms, it would not exists at all.”

    This is wrong in so many ways.

    1. First and foremost, income and hours worked are not the same thing.

    2. More importantly, People have hours worth far different amount of other hours. This actually gets to what I do find interesting… personal digital currency backed by someone’s hours… but that’s another story.

    You need to start with: given income inequality is a fact forever, it is merely a reflection of what people are worth in the localized, going globalized market, what can we do to take special care of those in our club (the US)?

    1. We can give them money from the general tax pool to cover their nut.
    2. We an require them to work at auction.

    Becky, let’s get down to brass tacks. Mowing my lawn takes 1 hour. I don’t mind doing it. But when a kid came over and said I’ll do it for $15, I thought HOLY SHIT, I can’t pass that up!

    My wife wants a personal breakfast cook to come over and cook a couple times each week.

    Etc. Etc. This is THE FUTURE. It has to be. Truly local jobs are hands on space invaders.

    The point is you should forget about the concept of excess capacity, and even income inequality… the decision to care of other Americans is a group decision that has NOTHING to do with what people are worth.

    What does it matter is that everyone have a boss, everyone is required to work, and that they get great signals on which jobs / skills in their immediate purview pay marginally more.

    Making people work, and having the work not be “make work” is crucial to creating a sense amongst society that EVERYONE is in this together.

    Also, we do know is that the cost per call of an American sitting at home answering a phone basically works if they make less than $10 per hour as a sub-contractor on a per-call basis, and at that rate, we don’t need most call to go to Bangalore.

    So when you auction labor, it is possible that we won’t see as many jobs shipped overseas, besides the awesome gains we get from localized service labor.

  36. Gravatar of Ryan Ryan
    22. November 2011 at 11:22

    Morgan, I don’t think you’re actually disagreeing with Becky, but it sure looks like her point flew right over your head.

    I’m looking at her beautiful description of marginal subjective value of labor and wondering why on Earth anyone would read such a nice, concise summary and say that it is “wrong on so many levels.”

    Becky, that was great, thanks for that. Very de Soto-esque. I agree with you.

  37. Gravatar of Becky Hargrove Becky Hargrove
    22. November 2011 at 12:24

    de Soto is someone I really admire. Thanks so much.

  38. Gravatar of Peter K. Peter K.
    22. November 2011 at 12:24

    The economists at Goldman Sachs and JP Morgan have advocated NGDP level targeting. Harless works in the financial sector, too, right?

    What is the difference? Smart economists and dumb ones? Saltwater and freshwater educations?

  39. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 12:37

    A man who works an hour a year can have the same income as one who works 5200 whether by tool or by brain it doesn’t matter… the income inequality is meaningless. It is impossible to write off the market value difference.

    Becky start there where do you land?

  40. Gravatar of Becky Hargrove Becky Hargrove
    22. November 2011 at 12:44

    If you were just a little older, you would have noticed the degree to which human skills – not to mention knowledge of all kinds – have been devalued in recent decades, a devaluation which has also caused many people to withdraw from society itself. And it’s just not necessary! When people look at optimal ways to spend their time, as entrepreneurs of anything life dishes out, it becomes like playing a game with life itself. We wake up in the morning and we are excited because we get to play with others in the economic and social realm. That is often what my work felt like, when I lived in places where social capital was still strong and others felt the same way. I just want to recapture that feeling of what life was like.

  41. Gravatar of Becky Hargrove Becky Hargrove
    22. November 2011 at 13:10

    I saw your question after my last remark and it’s a good one. It starts when we are young and this model has no formal school. Lateral skills exchange begins among others who might be close to our age but not necessarily so. Their time to ours might be to help us understand the material, or perhaps to debate the material (do we disagree with it?), or to help us find the sources we want to study from, you get the idea. Part of that shared time (for both parties) is to record the degree to which we understand the material, i.e. validate the time we spend in learning (much of which we undertake on our own), and approximate where we are at with that learning in specific, sometimes concrete examples. In other words we incorporate at individual levels what had previously been done outside of ourselves. The records we both keep become part of public record.

  42. Gravatar of Doc Merlin Doc Merlin
    22. November 2011 at 14:35

    Of course, it could also be that looser money will only keep the unsustainable borrowing high, which raises systematic risk, and the crash be much later the next time.

    This worries me.

  43. Gravatar of Nishant Tharani Nishant Tharani
    22. November 2011 at 14:44

    As you pointed out, many of the listed causes are indirectly the result of tight monetary policy. Maybe the economists taking the survey interpreted the question as asking their opinions on the proximate causes.

  44. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 15:57

    Becky frankly, this sounds like hippie talk. And my rule is no hippie talk.

    I’m 40 years old. I’m plenty old. You say skills are devalued.

    I say not in the aggregate. You are upset that some people, many people have skills that won’t cover their nut. I could care less. I can’t even grasp why you care.

    The mathematical reality is that each new network based tool that levers more and more raw power into a smart end user – say self-publishing, what will happen is that the VERY SMARTEST will use those tool and MORE tools better and so you will have giant outsized outcomes.

    This is just a fact.

    Also a fact is that we ought to take care of those who can’t cover their own nut. FINE.

    But you are not allowed to complain that these people feel some kind of psychic suffering from having to admit that they can’t cover their own nut, so instead we should tinker with the system to give them the ILLUSION of being more valuable than they are.

    That’s what I hear you saying.

    I’m saying IT IS GOOD:

    1. for them to KNOW their real honest worth in such a world.
    2. DEAL WITH IT.

    And to pay for what I want, I am willing to cover their nut.

    How is that not fair?

  45. Gravatar of Becky Hargrove Becky Hargrove
    22. November 2011 at 16:34

    Morgan, absolutely fair. And to claim that there is actually a spiritual component to economic thought is not about hippiedom, it is however about finding a new middle ground for the one that has completely left the premises in D.C. I’m saying that what I propose covers just about every base in ways that dethrone the non-solutions the radicals have offered so far.

    In such a world where LSE coexists with technology and the not-so-fun work that people still get paid for, people would totally get the difference between actual production / efficiency links and the irrational complexity that once bled them dry with services. Plus, the work you propose would be the primary monetary link in many communities, especially where – for whatever reason – there were no factories or other money-based production in any real quantity. It would be easy for central banks to determine a base quantity of money for such communities in that the actual monetary base needed would not be completely distorted by the present financial needs of retirement and government money flows that completely obscure actual sources of wealth at local levels.

  46. Gravatar of ssumner ssumner
    22. November 2011 at 16:48

    Ryan, I certainly don’t think the Fed is not out of ammunition because they claim they aren’t out of ammo. I have other reasons. I am forced to keep saying that because journalists keep writing articles saying the Fed claims to be out of ammo. Which is false.

    Morgan, I’m not as obsessed with public employee salaries as you are.

    Becky, Yes, reallocation is much easier at full employment.

    Shocking, Good point.

    PeterK, There is support from both sides of the political spectrum.

    Doc Merlin, Then don’t just talk about monetary stimulus, do it.

    Nishant, But I still see those as symptoms, not causes. And other surveys showed that 36 out of 38 business economists opposed extended QE2.

  47. Gravatar of JPIrving JPIrving
    22. November 2011 at 18:07

    Baffling. I sat through a two hour meeting on the European outlook today and was the only one who mentioned money might be tight and inflation expectations in the toilet. Everyone else is hung up on the side effects of tight money trying to come up with just so stories to implicitly explain falling V.

  48. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 21:16

    Scott, I’ll admit that you don’t have as many failings as most, but anyone who doesn’t have a problem with public employees in today’s system essentially outs themselves as a shitty economist… real economists LOVE the private sector.

    That’s just a fact. Whatever the guys are doing who doesn’t bow down to the free market, it isn’t economics.

  49. Gravatar of Becky Hargrove Becky Hargrove
    23. November 2011 at 07:02

    Just wanted to wrap up the above conversation with a few more thoughts. Wherever monetary activity is the only measured economic activity, there is incentive to echo the layered distribution effects in social relationships. While this can create inequality and discord, a bigger reality is the ongoing incentive to capture power in ways that distort actual production efficiencies. Civilizations can figure out how to maximize economic access only to have it knocked down again and again. Which is why a parallel non-monetary economy helps to keep a monetary economy on track by allowing the economic activity of the individual to remain a vital ongoing part of the entire process. When all measurements remain monetary, the lower bound of labor efficiencies is never really resolved.

  50. Gravatar of Nishant Tharani Nishant Tharani
    23. November 2011 at 12:46

    @ Scott:

    A symptom of one thing can also be a proximate cause of another.

    For example, if you get a bad infection (NGDP crash), you may come down with a fever (lower confidence, the symptom). Your productivity/physical activity may then decrease, both as a direct result of the infection, and also indirectly through the fever. You could argue that the fever is the proximate cause of decreased activity, even though this is misleading in the sense that it implies that a treatment regimen should focus on the fever.

    My point being that it is perhaps possible that the respondents did not answer the question they should have – ie maybe the answered ‘whats the direct/proximate cause of poor economic performance’ instead of ‘what’s the ultimate reason for poor performance that we should be tackling.

    Of course the other survey you cited contradicts my argument, but I just thought I’d expound to explain my original point.

  51. Gravatar of ssumner ssumner
    24. November 2011 at 06:57

    JPIrving, Depressing but true.

    Morgan, I love the private sector and have posts praising privatization, universal school vouchers, etc. It’s just not the focus of this blog. Check out the blog title.

    Nishant, Fair point, but also look at JPIrving’s comment above–I have other reasons for thinking I am right.

  52. Gravatar of TheMoneyIllusion » Giving thanks to commenters TheMoneyIllusion » Giving thanks to commenters
    24. November 2011 at 08:38

    […] growth expectations are absolutely central to the euro crisis is beyond my comprehension.  Yet JPIrving just sent me the following comment, which supports my recent post on the NABE poll: Baffling. I sat through a […]

  53. Gravatar of toolkien toolkien
    8. May 2012 at 11:47

    Of course what is glossed over is the 42% combined concern over the counterproductive/contradictory actions of foolish macro economists and idiot politicians. The hilarity of these erudite debates, as we sit on a mountain sized powder keg of economic misallocations, is boundless. Everyone is acting as if sitting on a $55 Trillion accrual basis debt, adding $1.4 Trillion more of hard debt per year on top, is nothing of concern. Just a little more chin wagging about zero bounds and stimulation and rubbing a lucky rabbit’s foot and everything will work out. Rome is burning and the erudite intelligentsia fiddles.

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