I consider myself a moderate supply-sider, however . . .

.  .  .  does this look like a supply shock?

Screen Shot 2014-01-17 at 3.14.11 PM

I’ve seen economists like John Cochrane express doubts as to whether demand-side models can explain what’s going on with the US economy.  If he means “can fully explain” then I’m completely on board.  If someone wants to argue that Obamanomics has shifted the trend line for real GDP down by 1% or so (not the growth rate), I can entertain that hypothesis.  What I don’t get is how people explain this sort of cycles without discussing AD?  Why does industrial production plunge from 101 to below 84 in less that 2 years, and then soar by 22% in the next 4 1/2 years?  Did something incredibly bad happen to the supply-side of the economy between December 2007 and mid-2009?

Believe it or not the answer is “perhaps.”  There were things like a 40% jump in the minimum wage and an unprecedented extension of unemployment insurance benefits.  Casey Mulligan has documented other policies as well.  But here’s my problem—those factors haven’t gone away. Indeed we’ve added Obamacare.  So why the steep recovery?  This is exactly what demand shocks look like–an output gap opens, and then a reversal.  Can someone explain to me why there is so much skepticism that this was an adverse demand shock?  NGDP fell.  Check.  Both RGDP and inflation slowed.  Check.  The ratio of nominal wages to NGDP rose. Check.  Lots of involuntary unemployment.  Check.  Stocks start reacting strongly and positively to TIPS spreads changes. Check.  Stocks start reacting to monetary policy surprises as if AD is the problem.  Check.

PS.  Industrial production rose at a blistering 6.8% rate in Q4.  I was one who argued that the October shutdown would be a modest negative supply-shock, and hence a slight drag on the economy.  Looks like I was wrong.  Remember that nursery rhyme—When the cat’s away the mice will play.

PPS.  The post was partly motivated by this comment by John Cochrane:

I think we’ve left the point that we can blame generic “demand” deficiencies, after all these years of stagnation.

OK, that’s vague enough where perhaps we aren’t far apart.  I agree that the trend RGDP growth rate is slowing.  But it also seems almost certain that industrial production in the US is still rising at well above trend (which is only about 1% to 2% for IP).  The unemployment rate is still falling. That tells me that we are still recovering.  Could we be overheating?  Possibly, but I don’t see any signs of it, nor do the asset markets.  AD is still a problem, that’s why we are still recovering.

Update:  Several people mentioned the mining component as possibly driving the cycle.   Manufacturing has a deeper drop and a more rapid recovery (up 23.6%.)  Here’s manufacturing:

Screen Shot 2014-01-18 at 10.16.35 AM


Tags:

 
 
 

118 Responses to “I consider myself a moderate supply-sider, however . . .”

  1. Gravatar of Michael Michael
    17. January 2014 at 17:48

    How does a supply shock lead to LOW inflation?

  2. Gravatar of Steve Steve
    17. January 2014 at 17:59

    Well, domestic oil and gas production fell, and then grew strongly starting in 2009. So there was exactly one supply shock that coincided with the nadir of the IP chart.

    I’ve argued for the past half decade that the crash was:
    50-75% monetary (AD)
    25-50% energy supply
    0% banks+bubbles+private sector overreach+income inequality+Bush+Obama+healthcare+minimum wage+unemployment benefits+skills mismatch+uncertainty+deficits

  3. Gravatar of Geoff Geoff
    17. January 2014 at 18:16

    What I don’t get is how people explain this sort of cycles without discussing AD? Why does industrial production plunge from 101 to below 84 in less that 2 years, and then soar by 22% in the next 4 1/2 years? Did something incredibly bad happen to the supply-side of the economy between December 2007 and mid-2009?

    Believe it or not the answer is “perhaps.” There were things like a 40% jump in the minimum wage and an unprecedented extension of unemployment insurance benefits. Casey Mulligan has documented other policies as well. But here’s my problem””those factors haven’t gone away. Indeed we’ve added Obamacare. So why the steep recovery?

    OK, I am going to try and restate the “real side” reason one more time.

    Economies do not grow by more money and spending. They grow only via more capital equipment, more sophisticated technology, and extension of the division of labor.

    Does more money from central banks boost output? Ever? The answer to that is yes, with an extremely important caveat: A higher aggregate output and higher aggregate employment rate can be brought about by more money beyond the rate of money production that a free market in money otherwise would have generated, which is always in force, pushing back against the central bank’s interests, in the form of free market forces driven by individual, as opposed to centralized, economic choices and actions.

    In other words, and I am not exaggerating when I say this: we live in a world with a “legalized” counterfeiting operation, meaning enforced by a group of people with territorial monopoly power (the state). This group can indeed succeed in boosting output and employment, BUT, they can only do so temporarily.

    The reason they can boost output and employment only temporarily is that the forms of output and allocations of employment are being boosted through misleading investors who are essentially blind as to what the aggregate economy should look like. The people on this blog are primarily holistic thinking, hypostasis conceptualizing, central planning ideologues when it comes to money. There is a strong belief that central planners are able, and have a duty, to know what the level aggregate output and what the level of employment should be.

    So we see claims that the economy should be this or should be that, and if we only enact a central plan, then we can have permanent prosperity. After 100 years of progressivism, has this thinking not been empirically falsified? Is the temptation that if we only tinker a little differently, then the problems of central planning will go away, so strong that we have to try just one more time?

    On the ground however, where individuals produce and trade in a market where they are more ignorant of other individual preferences than they are informed, the delicate harmony that is the division of labor is easily thrown out of balance with non-market activity, especially a coercive money monopoly.

    Central banks inflate in the dark vis a vis the market. They don’t know how many resources should be devoted to money production, nor do they know how much money should be produced. Their activity covers up the relative prices and relative spending that otherwise would have existed in the division of labor. Each individual when faced with the resulting relative prices and spending, will be easily misled into taking advantage of profitable opportunities even though their REAL ACTIVITY is not coordinated with other individual’s real activity. Money is being made, yes. Production of something is taking place, yes. People are employed doing something, yes. But this kind of output and employment cannot last. It has to correct at some point.

    What I notice in market monetarism circles is a sort of crocodile tear mentality over the question of whether “the market” is able to assimilate central banking in such a way that individuals will no longer be misled. The idea is that “the market should be left to deal with the micro side” and “the state should be responsible for the macro side”.

    That idea right there is the main flaw. There is no separation of economic activity into macro and micro. This is an artificial distinction. Everything is individual action. Call that macro or micro if you wish, but when a central bank inflates, it is affecting micro activity. The ideal situation of MM where the central bank just inflates the right way, and “the market” is left to do the rest, is not a pro-free market position, it is not even a correct position. The market cannot properly function in the micro sphere when money is socialist.

    So back to the rhetorical questions in the quote above. Yes, the real side of the market was definitely distorted 2007 to 2009. But the distortions were built up over many years prior during the 1990s and 2000s inflationary run. There is always a blind spot in MM for inflationary periods prior to the recessions they focus on.

    The main difference between 2007-2009 and now is that a large portion of distortions 2007-2009 were able to be revealed, precisely because the central bank (wisely) did not continue to accelerate inflation, whereas the distortions now are not, precisely because the central bank lost its wisdom and reinflated. So the boosts to output and employment since 2009 are again only temporary. It is unsustainable growth. It’s the same class of unsustainable growth that preceded 2007-2009.

    The quick “recovery” has occurred in large part because of the central bank once again misleading investors to make the same class of mistakes, but of course a different content of mistakes, that took place prior to 2007. Investors cannot “learn” to overcome blindness to free market prices and interest rates. As long as central banks exist, investors will always be blind to the true preferences of the individuals they are connected to in the market. Nobody who is blind can learn to see. If they are blind, then there is no visual sensation that would enable them to learn of what the world looks like.

    The guilt that MMs feel of their own theory is overcompensated by the churlish “You think the market is weak and investors are stupid, whereas I think they are able to overcome price distortions. That means I am actually more pro free market than you!” This of course is a cover-up. It is the same cover-up that a thug would say as he is beating his victim, and having to listen to others telling him to stop. The thug replies “Oh you just think this man is weak and incapable of taking care of himself. I on the other hand think he is strong, so I have no problems continuing to beat him. You’re against individuals standing up for themselves!”

    It is silly to look at aggregate employment and aggregate output and conclude from these that the economy is healthy or unhealthy. What matters are what kinds of individual production that make up the aggregate output, and what kinds of employment that make up the aggregate employment. This is what matters, because it is what matters to individuals in a division of labor.

  4. Gravatar of Saturos Saturos
    17. January 2014 at 19:04

    You forget financial frictions and deleveraging and related stuff as a supply-side factor. No, I don’t know how that causes low inflation either.

  5. Gravatar of JohnB JohnB
    17. January 2014 at 19:16

    Industrial production collapses because entrepreneurs discover that they have been investing in projects that will not give them the returns they projected. Therefore they have to retool and rediscover what the customers most urgently desire. The reason for the cluster of errors, which should not happen in a free market economy, is an interest rate that is not doing its job of balancing the consumer’s desire for spending now versus saving for the future. In addition the central bank is usually hiking interest rates rapidly on the eve of the bust because they lowered them too much in the past.

    When an economy becomes uncoordinated and capital goods processes don’t dovetail with consumer goods processes in the way consumer’s desire, industrial production will fall. This has nothing to do with demand and everything to do with money and interest rates that are not determined by the market.

  6. Gravatar of Greg Ransom Greg Ransom
    17. January 2014 at 19:24

    “What I don’t get is how people explain this sort of cycles without discussing AD? ”

    Scott — it is no accident that you don’t get it, you’ve stuffed foam in your ears and gouged out your eyes when it comes to the Econ 101 of how systemstivally across all price margins and all networks of production the systemstic choosing of longer production processes which promise superior output over shorter production processes whcih promise inferior output can be set in motion via increasing liquidity, securitization the expansion of shadow money, endogeneous money creation, and Federal Reserve policies — or how this process can be unsustsinable do to systematically related unanticipatible supply, demand and price changes across the complete interconnected network of all price and supply relation.

    Willful ignorance and lack of understanding on your part is no scientific argument — its simply a marker of your own lazyiness, and — to the extent you continue to pretend this alternstive does not exist — your own dishonesty.

  7. Gravatar of TravisV TravisV
    17. January 2014 at 19:40

    Prof. Sumner,

    Any idea why this is happening?

    http://andolfatto.blogspot.com/2014/01/us-inflation-expectations-low-but-rising.html

    “What is even more interesting the reaction of inflation expectations after the December 2013 FOMC meeting, where the taper was actually implemented (the timing of which came as a surprise to most market participants). Short-run inflation expectations, in particular, appear to be on an upward trajectory. The effect is less evident at longer horizons.”

  8. Gravatar of Greg Ransom Greg Ransom
    17. January 2014 at 19:47

    Scott, your argument is exactly equivalent to the argument of a creationists — a creationist completely ignorant of Darwin’s mechanism, ie the mechanics of the causal rival — saying that the gross pattern of the fossil record and gross pattern seen out the window in the living world clearly confirms special creation.

    If you are completely ignorant of the Darwinian mechanism — which does not operate on gross aggregates of natural kinds — you would think as a creationists that the only possible mechanism is a mechanism that operating at once upon whole aggregates of particular natural kinds, instantly bringing them into and out of existence.

    It’s only when an individual comes to grasp that the causal mechanism operates at the margin and upon each individual in a process which changes the whole network of relations across time, do you get that this isn’t a casual process that could possible act as a causal agent acting univocally on a particular gross aggregates of natural kinds.

    But — in an equivalence or augment — this is exactly what you claim, Scott.

    You claim that economics is not about causation at the margin changing an infinite multitude of interrelated structures of production and price relations — rather you claim that it is some magical process where one whole gross aggregate natural kind impinges directly upon one gross aggregate natural kinds — and economics changes at the margin (especially those involving choice over longer or shorter production processes) magically don’t exist. Indeed, causation at the margin involving rival production processes and lengths, ie the economic way of thinkin, *can’t* exist in your picture.

  9. Gravatar of Geoff Geoff
    17. January 2014 at 20:47

    “You claim that economics is not about causation at the margin changing an infinite multitude of interrelated structures of production and price relations “” rather you claim that it is some magical process where one whole gross aggregate natural kind impinges directly upon one gross aggregate natural kinds “” and economics changes at the margin (especially those involving choice over longer or shorter production processes) magically don’t exist. Indeed, causation at the margin involving rival production processes and lengths, ie the economic way of thinkin, *can’t* exist in your picture.”

    That pretty much sums it up.

  10. Gravatar of Tom M. Tom M.
    17. January 2014 at 20:58

    Is Geoff really as dumb as it appears?

    This is the reality before “100 years of progressivism”:

    http://www.youtube.com/watch?v=jIfu2A0ezq0

  11. Gravatar of Tom Brown Tom Brown
    17. January 2014 at 22:43

    Scott, if you woke up and discovered that Geoff had been selected as the new Fed chairman, what would your reaction be?

  12. Gravatar of Geoff Geoff
    17. January 2014 at 22:51

    Tom M.:

    Your response means you have no rebuttal.

  13. Gravatar of Geoff Geoff
    17. January 2014 at 22:53

    Tom Brown:

    I wouldn’t take the offer, so your question is moot. To accept an offer of head of the counterfeiting operation is to accept a position that harms millions of innocent people.

    One has to be a psychopath to accept such a position.

  14. Gravatar of Kevin Erdmann Kevin Erdmann
    18. January 2014 at 00:20

    Is it possible to believe both? For instance, if the Fed is keeping us at 1.5% inflation, and structural issues such as EUI, the minimum wage, etc. are increasing inflation at the expense of real production, then these structural issues mean that Fed policy is even tighter than it looks, if it still has us pegged at 1.5% in light of these issues.

  15. Gravatar of Ralph Musgrave Ralph Musgrave
    18. January 2014 at 02:10

    My answer to Scott’s question is that there are large numbers of people, e.g. Austrians and Republicans, who just can’t accept that stimulus, i.e. additional demand, effected by central bank or government can have any effect. The long and nonsensical comment by Geoff above is an example.

    Thus those people scratch around for supply side explanations for everything.

  16. Gravatar of Daniel Daniel
    18. January 2014 at 02:43

    Woah, apparently it’s enough to mention “aggregate demand” to have the austro-obscurantists coming out of the woodwork to give lectures on “malinvestment”.

    Because the entrepreneur is both the engine of progress and a dim-witted moron – at the same time. Thus spake Mises.

  17. Gravatar of Vivian Darkbloom Vivian Darkbloom
    18. January 2014 at 02:49

    “Why does industrial production plunge from 101 to below 84 in less that 2 years, and then soar by 22% in the next 4 1/2 years? ”

    I took a look at the performance of the various sectors comprising “Industrial Production” from the period June 2009 (which appears to be the bottom of the trough) and the latest period. “Mining” started at 93.8 versus a total index of 95.8. (In this index, 2002 = 100)

    http://www.federalreserve.gov/releases/g17/current/

    In the current index cited above “mining” stands at 123.6 and the total composite index is at 101.8. (in this index, 2007 =100).

    A significant portion of that upwards trend line seems to be attributable to fracking.

  18. Gravatar of Benjamin Cole Benjamin Cole
    18. January 2014 at 04:06

    Excellent, excellent blogging.

    This simple chart posted by Sumner, and his clear logic, absolutely crushes the “supply side is crimped” argument. Cochrane has lost his perspective somewhere.

    Besides that, we have global supply now, anyway. And global markets. The whole globe is constrained? Really, we boost aggregate demand, and the whole globe cannot come up with the supply?

    Don’t get me wrong, I am all for improving the supply side.

    Good luck with that. Reform or eliminate the USDA? Open up US markets to Cuban sugar?

    How about trimming the 3.7 million vets who collect disability payments? The $1 trillion sucked out of the private economy to fund DoD, DHS and the VA needs to be cut, no?

    What about wiping out the licensing of lawyers?

    How about a constitutional amendment legalizing push-cart vending and sidewalk restaurants?

    Yeah, and cut unemployment insurance, the minimum wage and SSDI too.

    Like I said, good luck with that. We can wait for supply-side improvements, but we can wait for bananas to grow in Montana too.

    Print more money and let it rip. That is the answer.

    The USA economy expanded by 20 percent coming out of the 1976 recession, in just four years.

    The Carter years.

    We can’t do that again?

  19. Gravatar of Michael Byrnes Michael Byrnes
    18. January 2014 at 05:15

    Scott,

    I think the Econlog readers would be interested in your views on mini-recessions.

  20. Gravatar of Jeff Jeff
    18. January 2014 at 05:34

    Geoff, you say that if the Fed creates more money than would have been created by a truly free banking system, bad things happen. But what if the Fed creates less money than a free system would have? What happens then, and how does it differ from 2008?

    We have a central bank. That is highly unlikely to change in my lifetime or yours. If it’s possible for the Fed to create too much money, is it not also possible for it to create too little? How would you know? Scott’s answer is that you look at expectations for the level of nominal GDP. What is yours, aside from decrying the existence of central banking?

  21. Gravatar of Roger Sparks Roger Sparks
    18. January 2014 at 06:55

    I think of the current economic situation as a “demand shock” but I also consider it a natural result of variation in stimulation.

    My model follows the example of a perpetual borrower, an individual who borrows each year going deeper and deeper into debt. That life style can continue in a stable fashion until it can not. For the individual, stop happens when no further credit is given. It is a stable life style until “stop” arrives.

    If we extend this example to government, we can see that stimulation does increase consumption and employment. A single money supply jump will create new but temporary conditions. Temporary conditions can only be continued by sequential, equal, repeated money supply increases. By doing the same money supply increase each measuring period, STABLE CONDITIONS have be created.

    Based on these comments, we can see that John Cochrane’s comment about “years of stagnation” is really disappointment with the results of years of government stimulation. His disappointment is widely shared but the only solution proposed is to increase the stimulation-normal to a higher level of normal stimulation.

    We economist should seek a more basic holistic solution.

  22. Gravatar of ssumner ssumner
    18. January 2014 at 07:25

    Steve, But oil and gas cannot explain the steep decline of 2007-09. Plus it’s only a very small part of IP, manufacturing shows a similar pattern. Check out my outdate.

    Donal, Not sure who that is addressed to.

    John B, You said;

    “The reason for the cluster of errors, which should not happen in a free market economy, is an interest rate that is not doing its job of balancing the consumer’s desire for spending now versus saving for the future. In addition the central bank is usually hiking interest rates rapidly on the eve of the bust because they lowered them too much in the past.”

    So you agree that the cycle was caused by a monetary shock?

    Greg, You said;

    “systemstivally across all price margins and all networks of production the systemstic choosing of longer production processes which promise superior output over shorter production processes whcih promise inferior output can be set in motion via increasing liquidity, securitization the expansion of shadow money, endogeneous money creation, and Federal Reserve policies “” or how this process can be unsustsinable do to systematically related unanticipatible supply, demand and price changes across the complete interconnected network of all price and supply relation”

    Gee, there’s a lot of big words in that sentence, wish I knew what they meant.

    Tom, That would certainly help my blog readership.

    Kevin, Yes, could be both, and probably is. But the “cycle” part is mostly AD.

    Vivian, check out my update.

  23. Gravatar of W. Peden W. Peden
    18. January 2014 at 07:31

    “I am going to try and restate the “real side” reason one more time.”

    Promises, promises.

  24. Gravatar of Peter N Peter N
    18. January 2014 at 07:34

    If you start at 101, go to 84 and then increase 22% you reach 102.5. I’m not sure soar is exactly the right word. Recover more quickly than the economy as a whole, however – definitely.

    The decrease can be explained by tight credit and a huge fall in investment, and the initial bit of recovery correlates well with the stimulus. Whether the stimulus effect was direct or due to expectations is debatable.

    For what happened after that I’d go for consumers repairing their balance sheets, since the consumer debt numbers show a huge improvement, falling until around last year, then rising a bit. That would certainly count as aggregate demand.

  25. Gravatar of Dustin Irwin Dustin Irwin
    18. January 2014 at 08:10

    Geoff, your first post intro’ed well regarding growth factors. Keep in mind, though, growth due to fundamental growth factors relates to potential output. Following the steep decline, our fixed capital, human capital, and level of technology were unchanged while our output was significantly decreased – we were badly underperforming (could be viewed as the output gap). Therefore there was an opportunity for some sort stimulus to drive growth at a rate sufficient to close the gap (beyond which any sustainable growth would require increases in the underlying growth factors).

  26. Gravatar of ssumner ssumner
    18. January 2014 at 08:23

    Peter, I said output went “below 84.”

    In order to figure out whether you are describing supply-side or demand-side problems (it’s not clear to me from your answer) consider this counterfactural: Suppose the Fed had done a more stimulative monetary policy and succeeded in keeping NGDP growing at 5% through 2007-13. What would have happened to IP? That’s the portion of the change that reflects supply-side factors.

  27. Gravatar of tesc tesc
    18. January 2014 at 08:26

    Dr. Sumner,

    This post is closely related to a question I had. The low inflation and high unemployment does let us know that it is a demand problem. I am with you that M ought to increase until PY is stable.

    But lets say we become New-Keynesians for a moment, we would believe the M is not so important, but interest rates control AD.

    Why are not New-Keynesians asking the FED to lower 10 year, 20 year or even 30 year interest rates trough buying those treasury notes until inflation is higher and unemployment considerable lower?

    Is there something in New-Keynesianism that makes short term rates the only interest rates that matter?

  28. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. January 2014 at 09:16

    Kevin Erdman has yet another informative post (complete with spiffy graphs) http://idiosyncraticwhisk.blogspot.com/

    It’s a little hard to blame *everything* on a lack of AD when you notice the performance of long term unemployment. As Kevin put it;

    ‘…there isn’t much unemployment left to lose among the short-duration unemployed. So, even if we are optimistic about a rebound in long-duration unemployment, an unemployment rate at 5.5% by the end of 2014 is probably the lower bound on what we could expect.’

    ‘Optimistic’ if EUI is not extended, that is.

  29. Gravatar of Geoff Geoff
    18. January 2014 at 09:17

    Daniel:

    “Woah, apparently it’s enough to mention “aggregate demand” to have the austro-obscurantists coming out of the woodwork to give lectures on “malinvestment”.”

    “Because the entrepreneur is both the engine of progress and a dim-witted moron – at the same time. Thus spake Mises.”

    Woah, you like, totally didn’t read my post that addressed that precise accusation. The claim isn’t that innvestors are dim-witted morons. The claim is that everyone, including investors, you, me, Sumner, everyone, we cannot see free market prices. We can only see prices that are a function of both market and central bank forces. As a result, we are all being misled. Including central bankers.

    Daniel, this point has been addressed by Mises. You claim “thus spake Mises” as if he actually believed what you claim.

  30. Gravatar of Geoff Geoff
    18. January 2014 at 09:33

    Jeff:

    “Geoff, you say that if the Fed creates more money than would have been created by a truly free banking system, bad things happen. But what if the Fed creates less money than a free system would have? What happens then, and how does it differ from 2008?”

    Bad things also happen. You’ve hit on the point on why central banking is always worse than a free market. They are either too loose, or too tight. Never exactly free market, and thus always disruptive.

    The failure of socialist economies applies fully to socialist banking in particular. They are “groping in the dark”. The Fed is not subject to market forces of profit and loss. It is imposed by force.

    “We have a central bank. That is highly unlikely to change in my lifetime or yours. If it’s possible for the Fed to create too much money, is it not also possible for it to create too little? How would you know? Scott’s answer is that you look at expectations for the level of nominal GDP. What is yours, aside from decrying the existence of central banking?”

    We live in the USSR. It is highly unlikely that it will rapidly collapse. My suggestion is for the production of cars and food to grow at 2% and 3% per year respectively.

    Given that we live in the USSR, and you disagree with 2% and 3% respectively, what’s your answer? (Hint: I will disagree with your answer and accuse it of being non-pragmatic, non-useful, non-etc.)

  31. Gravatar of Geoff Geoff
    18. January 2014 at 09:42

    Dustin:

    “Geoff, your first post intro’ed well regarding growth factors. Keep in mind, though, growth due to fundamental growth factors relates to potential output. Following the steep decline, our fixed capital, human capital, and level of technology were unchanged while our output was significantly decreased – we were badly underperforming (could be viewed as the output gap). Therefore there was an opportunity for some sort stimulus to drive growth at a rate sufficient to close the gap (beyond which any sustainable growth would require increases in the underlying growth factors).”

    Inflation isn’t the right stimulus, because it is precisely inflation that caused the perceived need for non-market stimulus. Unhampered economic calculation is the right stimulus. Free market interest rates, free market money supply, free market relative and aggregate spending. That is what gets capital and labor into the lines most closely associated with consumer preferences, both cross-sectionally and inter-temporally.

    You see aggregates only. You see aggregate output decline, and you believe inflation, because it can temporarily boost aggregate output, is the right kind of stimulus. That is out point of disagreement. I see relative production and relative labor allocations. You see aggregates. I look at the economy as individual actors, seeking to maximize their utility through production and exchange, constrained to profit and loss, without initiating violence against other individuals. You see the economy as an impersonal “machine”, where various “statistics” must go this way or that and that’s enough, even if your solution calls for harming a portion of the population through brute physical force, the way a man uses brute physical force to turn knobs and press keyboard keys to make a machine “work” after it has already been designed through reasoned activity, and not brute force.

    Strictly speaking, Sumner’s political worldview would call for and welcome the slaughter of a few innocent individuals if it meant the greater number of individuals are better off in some dubiously calculated way. He calls this “pragmatism”. And, if the greater number of individuals BELIEVE that this activity is justified, moral, beneficial, productive, etc, then his worldview would also consider the arguments backing it as “true.”

    He is influenced by the philosopher Richard Rorty. Sumner’s mind has become warped as a result. Rorty’s philosophy is self-contradictory, and maybe in the near future I’ll show you how.

  32. Gravatar of Daniel Daniel
    18. January 2014 at 09:44

    We can only see prices that are a function of both market and central bank forces.

    And how exactly does that result in recessions ? (lookin’ forward to another wall of text of incoherent rambling)

    What I do know is that to an obscurantist is goes something like this

    Step 1 – “human action”
    Step 2 – ???
    Step 3 – “malinvestment”

  33. Gravatar of Donald Pretari Donald Pretari
    18. January 2014 at 10:05

    Please delete my comment. Turns out, it was about Me being too clever by half.

  34. Gravatar of Peter N Peter N
    18. January 2014 at 10:06

    “Suppose the Fed had done a more stimulative monetary policy and succeeded in keeping NGDP growing at 5% through 2007-13. What would have happened to IP?”

    I’m not sure it was possible to do that in 2007 unless you use a very broad definition of unconventional monetary policy. In that case, of course anything allowed by exigent circumstances could be done. It could have started buying asset backed commercial paper and subprime securities, at least those backed by Fannie and Freddie, much sooner. I believe the political fallout would have been disastrous. As with the effect of the stimulus, it’s hard to justify actions by citing counter-factuals, however well founded. Would the reaction have forced the Fed to back off, or congress to change the Fed’s authority if Bernanke had taken drastic action sooner? He and Paulson initially didn’t believe they could even justify taking over Lehman. Later they did AIG, Fannie and Freddie without even blinking. It takes an emergency to make the impossible possible, not just the possibility of a future emergency.

    As for supply side, versus demand side, I view a commercial credit crunch as a supply side problem, since production is prevented by a huge fall in investment, regardless of demand.

    Beyond that I think Aristotelian style causation analysis isn’t very productive. It involves multiple counter-factuals. We don’t know what it would have taken to achieve your 5% NGDP. Furthermore that would have left all the leverage problems unresolved. We could have had something worse, only starting later and in Europe. Nothing the Fed could do would have stopped Greece, Ireland, Portugal, Spain or Cyprus.

    The huge repair of consumer balance sheets that has occurred had to happen sometime. Things that can’t go on forever eventually stop, usually by forcible contact with something hard and unpleasant. The Netherlands situation is a good example of this. Everything looked great, and then suddenly it didn’t.

  35. Gravatar of Daniel Daniel
    18. January 2014 at 10:13

    I’m not sure it was possible to do that in 2007

    What exactly is the reasoning behind this ? I mean, we have 100% fiat currency. The Fed can print as much of it as it wants.

    And yet, somehow … it cannot be devalued.

    How does that even work ?

  36. Gravatar of Geoff Geoff
    18. January 2014 at 10:25

    Daniel:

    “And how exactly does that result in recessions ? (lookin’ forward to another wall of text of incoherent rambling)”

    Well, when you refuse to read the original walls of texts in the treatises and papers, what else do you expect?

    And didn’t you say “thus spake Mises”? I thought you were an expert on his writings.

    The shortest way I can think of explaining why prices influenced by non-market money causes recessions is by explaining it in a more personable way, between you and I. Thus, in a division of labor between you and I, free market prices are what coordinates us given that we are almost completely ignorant of each other’s economic preferences and activity. You know very little about my economic preferences and activity, and I know very little of yours. It is possible for you and I to produce goods that are not physically in line with each other. The only way my errors can be revealed to you, or your errors to me, is if we are able to communicate this through exchange prices that are purely a function of your behavior and mine. If there is a third party influencing the exchange prices, then those prices won’t be purely a function of our behaviors. Thus, you would be lead to alter your behavior, and productivity, and I would be lead to alter my behavior, and productivity, in ways that do not reflect the other person’s actual preferences and behavior. I would be seeing prices that change in ways apart from your behavior, but I wouldn’t be able to tell whether most of the price change, or some of the price change, or even none of the price change, was caused by your preferences change.

    So any mistakes I make, and any mistakes you make, in terms of REAL activity, will not be communicated clearly to the other person. Mistakes therefore get prolonged and exacebrated, and if the monetary influence is sufficiently non-market, and long term, our errors can radically diverge which of course will require radical change (painful correction, which is what you and I call “recession”).

    Of course, the above is a summary, and not meant to be exhaustive. If you want the exhaustive explanations, I invite you to the original source material. Please do not think that you have enough information given to you, for you to form an informed response that takes into account all the other factors that I did not explain here. For then you would just be responding with assumptions that have already been addressed, and we’d go back and forth for ages as you continue to not read the source material, and expect me to teach you on a blog what takes years of self-study on your own.

    What I do know is that to an obscurantist is goes something like this

    Step 1 – “human action”
    Step 2 – ???
    Step 3 – “malinvestment””

  37. Gravatar of Geoff Geoff
    18. January 2014 at 10:28

    Daniel:

    Sorry, I quoted a portion of your post in my last post, at the bottom, without putting quotes around it. But no big deal, since it was essentially just a puerile and churlish “F U”.

  38. Gravatar of Daniel Daniel
    18. January 2014 at 10:37

    So, in other words, the theory of phlogistion austrian business cycle theory does not predict changes in employment.

    Thank you for acknowledging that.

    The next question would be – why do you obscurantists pretend that it does ? Other than your ignorance, that is.

  39. Gravatar of Dustin Dustin
    18. January 2014 at 10:59

    Geoff, Assuming there is such thing a malinvestment (and I think it is a self-evident truth) you really claim the 20% decrease in production index was entirely due to ‘correction’, getting back to good??

    The point is that cyclical behaviors evolve into depressions unnecessarily. Monetary policy won’t prevent cyclical behavior, it will prevent unnecessary depressions.

    Why not both…?

  40. Gravatar of Geoff Geoff
    18. January 2014 at 11:03

    ‘So, in other words, the theory of phlogistion austrian business cycle theory does not predict changes in employment.”

    Predictions of subject matter that learns and changes from very the testing of predictions themselves, cannot possibly be based on constant causal operative factors, i.e. “scientific empiricism.” It’s self-contradictory. Why is that? To test any theory based on a constancy in causal factors, for example testing MM predictions of employment, is to presume that the subject matter does not change over time. Yet if the empiricist claims to be learning from it, then he is implicitly claiming no constancy for himself as an actor. Action therefore cannot be scientifically predicted.

    So yes, business cycle theory does not claim that an individual is able to predict their own future learning, and thus their own future knowledge, and thus their own future actions, before they actually go out and learn in as of yet unknown ways.

    What you are doing is essentially nonsense. Have you ever stopped to think why economists cannot find any economic constants, the way physicists and chemists have found constants of non-acting matter (atoms, molecules, elements, etc) such as Planck’s constant, the fine structure constant, and so on? It’s because the subject matter of economics, human actors, are affected by the very learning process of testing theories.

    In other words, the very fact that empirical economists are testing economic theories at all is proof that what they are doing is nonsense. They are trying to find out truths of their future selves before they go out and actually learn and become those future selves. We can’t know something before we learn it. In other words still, learning affects our actions, and action is the subject matter of economics.

    “Thank you for acknowledging that.”

    I don’t understand why you find it necessary to be thankful for me “acknowledging” something that you seem to have already known. It’s almost as if you’re more concerned with appearances, than truth and engaging the arguments.

    “The next question would be – why do you obscurantists pretend that it does ? Other than your ignorance, that is.”

    We don’t, which means you’re ignorant. You’re calling me ignorant, which is true, for I am indeed ignorant of many aspects of other humans. I don’t know your personal economic preferences and behavior for example. But for some reason, you expect the prices that prevail in the economy to be able to communicate those preferences and behaviors, despite the fact that the prices are a function of factors apart from those preferences and behaviors.

    Daniel, you’re not going to succeed in refuting what I am saying, the way you’re going about it now, so you might as well just relax, think about how to approach this differently, and then try again. You do know of the expression that the definition of insanity is doing the same thing over and over, expecting a different result, right?

  41. Gravatar of Greg Ransom Greg Ransom
    18. January 2014 at 11:17

    Scott writes: “Gee, there’s a lot of big words in that sentence, wish I knew what they meant.”

    Pathetic.

  42. Gravatar of Daniel Daniel
    18. January 2014 at 11:20

    you’re not going to succeed in refuting what I am saying

    That is correct, for it is impossible to refute pseudo-science.

    So, to recap – you have a theory that claims the entrepreneur is the engine of progress – except they’re all so stupid it results in everyone going bankrupt at the same time. Because the central bank prevents their brains from functioning properly (via magical brainwaves). Repeat ad infinitum.

    Also, said synchronous-going-belly-up somehow magically fails to result in inflation. Because aggregate demand is for pussies.

    And if the theory above doesn’t make sense, it’s because one is not bright enough to understand the wisdom of Mises. Who totally wasn’t making stuff up as he was going along.

    Truly, Austrian economics is a disease of the brain.

  43. Gravatar of Kevin Donoghue Kevin Donoghue
    18. January 2014 at 11:27

    “Gee, there’s a lot of big words in that sentence, wish I knew what they meant.”

    The one I liked best was “systemstivally” – that was brillig, the borogroves were vorpalsmacked.

  44. Gravatar of Geoff Geoff
    18. January 2014 at 11:32

    Dustin:

    “Geoff, Assuming there is such thing a malinvestment (and I think it is a self-evident truth) you really claim the 20% decrease in production index was entirely due to ‘correction’, getting back to good??”

    Yes, and I would even go further. I would argue that even more corrections were in the pipeline, if the Fed didn’t reinflate beyond what a free market would have generated, once again.

    This may shock you, but a free market economy can grow if it just so happens that there is a constant money supply for a period of time. As long as the Fed or the government or other thugs are not physically destroying other people’s money, there is all the opportunity in the world for the economy to be rebuilt and grow for the foreseeable future on the basis of a fixed money supply.

    I can’t break down history into “caused by corrections” and “caused by other factors”, because there is only one set of data.

    “The point is that cyclical behaviors evolve into depressions unnecessarily. Monetary policy won’t prevent cyclical behavior, it will prevent unnecessary depressions.”

    I hold they are necessary, if we want to have sustainable economic growth in line with consumer preferences without the need for the relatively more painful corrections we call recessions later on.

    You don’t believe it is necessary for economic activity to be directed towards actual consumer ends. You believe in work for works’ sake, and output for output’s sake, so that we can delude ourselves into not having to think about working towards individual ends, but rather, the ends of overlords in government, such as aggregate output and aggregate employment.

    Those ends are not individual ends. Increasing aggregate output and increasing aggregate employment by political force is not compatible with increasing individual ends through the market.

    “Why not both…?”

    Monetary policy causes the very depressions you claim they are tasked with stopping. But not in the way you might suspect. You believe they cause depressions by not inflating enough. That is true empirically, meaning as we observe historical data, but it is not true theoretically, meaning what is necessarily taking place. What I mean is, it just so happens that for the last 100 years of history, the central bank in this country has refused to accelerate inflation so as to postpone corrections so long and so stressed that eventually no amount of additional inflation can stop the corrections, i.e. hyperinflationary depression. What they have actually done is refuse to accelerate inflation, which has brought about the corrections sooner than the ultimate end point. So that’s exactly why we have empirically minded economists, such as Sumner, Friedman, and many others claiming that “depressions are caused by insufficient inflation.” Yes in a way that is true, but it’s a half truth. The full truth is that the reason depressions occur at all from that “insufficient inflation” is because the “insufficient inflation” is revealing errors made on the basis of previous “oversufficient inflation.”

    If every depression caused by previous inflation were prevented from correcting, and postponed with even more inflation, such that aggregate spending kept chugging along at whatever rate, at the cost of an accelerating growth in the money supply, then this, like all other previous inflation rules, can only be temporary. Aggregate spending can keep growing at a particular rate in an environment of an accelerating money supply, for only so long. At some point, people will realize there is far too much money, and the central bank will lose control due to the fact that it cannot “absorb” as much money as the public wants to spend. Aggregate spending and prices will then spiral out of control.

    We saw this happen in Australia. Look at the statistics.

    http://research.stlouisfed.org/fredgraph.png?g=r5p

    The aggregate money supply in Australia from 1992-2007 grew at an accelerating rate, and reached over 23% growth per year just prior to deflation. This acceleration was not capable of being permanent without hyperinflation, so the RBA, like the Fed, chose to reduce its inflation.

    Another acceleration, this time more pronounced, will be necessary to hold unemployment down the way it was pushed down before.

  45. Gravatar of Greg Ransom Greg Ransom
    18. January 2014 at 11:33

    systemstivally = systematically

    If Scott needs a dictionary for the “big words” he doesn’t know I’ll happily send him a dictionary,

  46. Gravatar of Greg Ransom Greg Ransom
    18. January 2014 at 11:36

    Scott writes, “Gee, there’s a lot of big words in that sentence, wish I knew what they meant.”

    I believe that was the argument William Jennings Bryan made against Darwinian biology at Dayton, if I recall correctly,

  47. Gravatar of Greg Ransom Greg Ransom
    18. January 2014 at 11:38

    So your argument, Scott, is that you are too stupid to conceive Hayek’s demand-side rival to your picture — and ‘thus’ it doesn’t exist?

    Brilliant and completely ethical — exactly the model of scholarly integrity and the scientific ethos.

  48. Gravatar of kebko kebko
    18. January 2014 at 11:41

    Patrick, thanks for the shout out. But I don’t really see the structural issues as being opposed to the demand-side problem. It just means that if the fed is happy with 1.5% inflation, then they are pushing NGDP even further below the path that Scott would prefer, relative to where we would be without the supply side issues.

  49. Gravatar of Kevin Erdmann Kevin Erdmann
    18. January 2014 at 11:43

    Oops. Kebko is me, in case anyone is confused and cares.

  50. Gravatar of Peter N Peter N
    18. January 2014 at 11:53

    Daniel,

    In practice, the Fed has constraints on what it can do.

    For one thing, it can’t take radical action before it can convincingly demonstrate necessity. That is, exigent circumstance have to be exigent, not potentially exigent. It also has to maintain its long-term credibility. It can damage this by being perceived as overreacting. In the past the Fed has failed to act when it knew it was economically best because it would damage credibility.

    There is also the counter-factual problem. If you take drastic action early and prevent a catastrophe, you can’t justify your action except by citing the catastrophe that didn’t happen. This often doesn’t convince.

    Then there is the use it and lose it problem. The Fed took successful extraordinary action, and as a consequence, congress changed the law so they couldn’t do it again! Imagine if they had done the same things and nothing bad had happened. If they had bailed out Lehman, for instance, there would have been hell to pay. Bernanke certainly foresaw this possibility. He would have been reluctant to damage the Fed this way.

    Finally, suppose they had managed to maintain 5% NGDP. Would that have solved anything? Lehman, AIG, Fannie, Freddie and GM would have still been accidents waiting to happen. When Europe crashed, it would have taken down AIG for sure. Could the Fed have intervened without the precedent of the Lehman catastrophe to show the effects of not acting?

    So, in theory the Fed probably could have maintained 5% NGDP if it had acted strongly early enough, but in practice, I’m not so sure. I definitely think that if they had acted faster to support asset backed commercial paper, set up TALF earlier and bailed out Lehman, the crash would have been a lot less painful, but could they have justified this, and would Paulson have supported it? They certainly couldn’t act without the support of Treasury.

    The Fed isn’t alone in having political constraints. The other central banks have even worse ones.

  51. Gravatar of Dustin Dustin
    18. January 2014 at 11:54

    Geoff, a lot of ideas there. Please forgive my commitment to the basic line of reasoning:

    If folks can behave irrationally optimistically en masse (prolonged malinvestment), can they not also behave irrationally pessimistically en masse (+ demand for $, – demand for credit, – appetite for risk, etc…) such that a cyclical correction becomes a depression? It must be so.

    What to do? Remain idle while fear runs it’s course?

  52. Gravatar of Daniel Daniel
    18. January 2014 at 11:58

    So the economics profession has declared that conducting monetary policy via instruments other than the interest rate is “radical and unconventional”.

    And since it’s “radical and unconventional”, it shouldn’t be used. Because it’s “radical and unconventional”.

    Circular logic at its best.

    This isn’t a case of political constraints. it’s a case of economists being idiots.

  53. Gravatar of Geoff Geoff
    18. January 2014 at 12:46

    Dustin:

    “If folks can behave irrationally optimistically en masse (prolonged malinvestment), can they not also behave irrationally pessimistically en masse (+ demand for $, – demand for credit, – appetite for risk, etc…) such that a cyclical correction becomes a depression? It must be so.”

    I don’t distinguish behaving “irrationally pessimistic” from behaving “irrationally optimistic”, nor do I connect malinvestment to optimism. Malinvestment is not psychologically one dimensional. It is caused by prices that are influenced by more than market forces, which prevents those market forces from being observed unhampered in prices.

    Profits can be made with deflation, no deflation/inflation, and inflation. Investors seek profits. If the prices they work with don’t reflect true consumer preferences, then their searching for profits, instead of coordinating economic activity, instead does not, because errors are not punished sooner by what should be losses.

    What you call “irrationally pessimistic”, I simply call corrective behavior. I don’t view people as “irrational.” If people are irrational, then it undercuts every theory of economics, for the actor who proposes it, must also be irrational. Thus, the theory of irrational people, must also be irrational.

    I hold that ALL action is “rational” in the sense of being purpose-driven. Individuals seek their own ends. They may err, but errors are not signals of irrationality, but of action as such. The Kahneman and Tversky theory of rational behavior I consider to be artificial and arbitrary.

    This is worth repeating: In the absence of hampered prices, prices serve to coordinate the real activity of individuals who are mostly ignorant of each other’s preferences and behavior.

    “What to do? Remain idle while fear runs it’s course?”

    Fear? Fear is always present to some degree. It’s not like during booms people are fearless 100%. If an individual is more afraid in the market, such that they produce and earn and income, but accumulate those earnings instead of buying goods from others, then contrary to this bringing about “depressed business activity”, it actually brings about a shifted, but still coordinating, activity. It does so either by way of altering the ratio between investment spending and consumer spending, which makes the capital structure somewhat more present goods driven or somewhat more future goods driven, or, it does so by altering prices as such. More goods and less money to buy goods, puts downward pressure on prices. Of course, it’s not instantaneous price adjustment, but the pressure is on prices to fall, and in a free market, where there is no coercive “minimum income” guarantee, or minimum wage laws, prices do eventually fall in a context of lowered spending.

    What MM doesn’t touch with a ten foot pole, is the question of why is it that so many people all at the same time, would suddenly reduce their spending compared to the recent past, which is the same thing as saying why would so many people at the same time hold onto their earnings for a longer period of time, or at least longer than what investors expected.

    MM just claims the Fed didn’t inflate enough to reverse the effects of changed money holding times. It doesn’t address why the Fed had to inflate more in the first place to reverse those effects. And I believe I know why. It’s almost certainly because doing so would compel the MM to consider the possibility that previous non-market inflation and non-market interest rates had something to do with it. This of course would undercut the MM “solution”, because the solution would be more of the disease. The unconscious hope is that with the right amount of disease, the symptoms can be controlled permanently.

  54. Gravatar of Greg Ransom Greg Ransom
    18. January 2014 at 13:03

    Geoff — there certainly isn’t any reason to believe there are not systematic waves of optimism systematically effecting capital production structures, liquidity, securitization, interes rates, shadow money supplies and endogenous money.

  55. Gravatar of Daniel Daniel
    18. January 2014 at 13:14

    Malinvestment […] is caused by prices that are influenced by more than market forces

    Circular logic #1

    It doesn’t address why the Fed had to inflate more in the first place to reverse those effects.

    Remember kids – a deflationary death-spiral is the wrath of Mises for not being a good Austrian.

  56. Gravatar of Geoff Geoff
    18. January 2014 at 13:37

    “Malinvestment […] is caused by prices that are influenced by more than market forces”

    “Circular logic #1”

    No it isn’t.

    “It doesn’t address why the Fed had to inflate more in the first place to reverse those effects.”

    “Remember kids – a deflationary death-spiral is the wrath of Mises for not being a good Austrian.”

    There is no such thing as a “deflationary death spiral.”

  57. Gravatar of Geoff Geoff
    18. January 2014 at 13:38

    “Geoff “” there certainly isn’t any reason to believe there are not systematic waves of optimism systematically effecting capital production structures, liquidity, securitization, interes rates, shadow money supplies and endogenous money.”

    I agree with that, but malinvestment is not monopolized by “optimism” only. That is the important point.

  58. Gravatar of ssumner ssumner
    18. January 2014 at 13:38

    tesc, I believe they think it matters a little bit, but not much.

    Peter, I’d recommend you look at my paper “The Real Problem was Nominal” The Fed certainly could have stopped NGDP from falling, and that almost certainly would have made the financial crisis and recession far milder. Ditto for the eurozone.

    Greg, You said;

    “So your argument, Scott, is that you are too stupid to conceive Hayek’s demand-side rival to your picture”

    I thought Hayek agreed with my view that unstable NGDP was the problem.

  59. Gravatar of Geoff Geoff
    18. January 2014 at 13:48

    “I thought Hayek agreed with my view that unstable NGDP was the problem.”

    The problem with Hayek is that he contradicted himself in his writings.

    He also wrote:

    Even now our difficulties are not at an end. For, in order to eliminate all monetary influences on the formation of prices and the structure of production, it would not be sufficient merely quantitatively to adapt the supply of money to these changes in demand, it would be necessary also to see that it came into the hands of those who actually require it, i.e., to that part of the system where that change in business organisation or the habits of payment had taken place. It is conceivable that this could be managed in the case of an increase of demand. It is clear that it would be still more difficult in the case of a reduction. But quite apart from this particular difficulty which, from the point of view of pure theory, may not prove insuperable, it should be clear that only to satisfy the legitimate demand for money in this sense, and otherwise to leave the amount of the circulation unchanged, can never be a practical maxim of currency policy. No doubt the statement as it stands only provides another, and probably clearer, formulation of the old distinction between the demand for additional money as money which is justifiable, and the demand for additional money as capital which is not justifiable. But the difficulty of translating it into the language of practice still remains. The ‘natural’ or equilibrium rate of interest which would exclude all demands for capital which exceed the real supply capital, is incapable of ascertainment, and, even if it were not, it would not be possible, in times of optimism, to prevent the growth of circulatory credit outside the banks.

    Hence the only practical maxim for monetary policy to be derived from our considerations is probably the negative one that the simple fact of an increase of production and trade forms no justification for an expansion of credit, and that””save in an acute crisis””bankers need not be afraid to harm production by overcaution. Under existing conditions, to go beyond this is out of the question. In any case, it could be attempted only by a central monetary authority for the whole world: action on the part of a single country would be doomed to disaster. It is probably an illusion to suppose that we shall ever be able entirely to eliminate industrial fluctuations by means of monetary policy. The most we may hope for is that the growing information of the public may make it easier for central banks both to follow a cautious policy during the upward swing of the cycle, and so to mitigate the following depression, and to resist the well-meaning but dangerous proposals to fight depression by ‘a little inflation’.

  60. Gravatar of tesc tesc
    18. January 2014 at 14:26

    Sumner,

    Thanks, they are odd.

  61. Gravatar of Mike Sax Mike Sax
    18. January 2014 at 14:39

    “The main difference between 2007-2009 and now is that a large portion of distortions 2007-2009 were able to be revealed, precisely because the central bank (wisely) did not continue to accelerate inflation, whereas the distortions now are not, precisely because the central bank lost its wisdom and reinflated. So the boosts to output and employment since 2009 are again only temporary. It is unsustainable growth. It’s the same class of unsustainable growth that preceded 2007-2009.”

    Major your monetary policy preference seems to be for recession or you only approve of the job the Fed is doing during recession. You see the Fed as doing a poor job during booms and a great job during recessions.

    So Tom Brown this might make his nomination process a heavy lift. Turns out no one really likes recessions-except Major.

  62. Gravatar of Daniel Daniel
    18. January 2014 at 15:00

    There is no such thing as a “deflationary death spiral.”

    So the whole world must have imagined the great depression and the rise of fascism.

    Are there any limits to your idiocy ?

  63. Gravatar of tesc tesc
    18. January 2014 at 15:20

    Daniel,

    I think the problem with Geoff and the austrian like him is that they confuse higher inflation with higher ngdp.

    “dangerous proposals to fight depression by ‘a little inflation’. ”

    This quote from Hayek is irrelevant to MM theory. MM wants higher NGDP, not higher inflation. The inflation rate has to do with AS, which is not control by the FED.

    That is why Hayek supported stable NGPD during slumps, because you can have NGDP growth and deflation at the same time. Inflation is not a explanatory variable in MM framework, just a response variable.

    The Obscurantist-Austrian uses inflation and interest rates as explanatory variables, just like Keynesians. I see them as different sides of the same coin. The Interest Rates/Inflation coin or framework.

    MM wisely lets interest rates and inflation to market realities. NGDP growth is the issue under State fiat currency.

  64. Gravatar of TravisV TravisV
    18. January 2014 at 15:59

    Prof. Sumner,

    If the Fed really did target 4.5% or 5.0% NGDP growth using an NGDP futures market, do you believe that the business cycle would be overwhelmingly driven by supply-side factors? (oil shortage –> 4% inflation / 1% real growth, technology boom –> 1% inflation / 4% real growth, etc. etc.)?

  65. Gravatar of Jeff Jeff
    18. January 2014 at 17:02

    Many moons ago, when I was a young econ grad student, I read a bunch of Austrian stuff. Some of it is pretty good, like the ideas that we’re never really in equilibrium, that prices are part of an ongoing discovery process, and the demolishment of the socialists’ conceit that they could ever know enough to centrally plan everything.

    But some of their ideas just don’t work. The idea that a low cost of capital causes people to overinvest in more roundabout means of production during booms sounds appealing, but there is no empirical support for it. I remember looking high and low for several weeks in a good research library for any papers that could actually measure the roundaboutness of production, and how and if it changed over the business cycle. You would think, that since that is essentially the Austrian theory of the business cycle, that somebody, somewhere would have found some empirical evidence of it. But I couldn’t find any papers to that effect, and I really did try.

    Now that was a good twenty five years ago, and maybe something has changed since then. But still, it was enough to make me discount Austrian business cycle theory. Where is the Austrian Wesley Mitchell?

    Then I made the horrible mistake of trying to understand capital theory. Bohm-Bawerk, Marx, and the others. What I learned from that is that not only does no one know how to measure capital, no one even has a very good definition of what it is. It doesn’t even rise to the status of theory without measurement.

    Now of course, the Austrians here are going to say I just wasn’t smart enough or didn’t try hard enough to understand what they’re saying. I even had a boss once who dropped Human Action on my desk once and said I should read it. When I asked him a few weeks later if he’d actually read all of it, of course he hadn’t. I’m not convinced anyone ever has. Certainly no editor did.

    If you can’t explain your theory and tell me what testable implications it has in less than twenty pages, you’re either a bad writer or your theory is overly complicated. My experience led me to think that both of these apply to the Austrians.

    And nothing I’ve seen in the comments here on Scott’s blog has caused me to reconsider.

  66. Gravatar of Mike Sax Mike Sax
    18. January 2014 at 18:36

    I’m guessing you also admire the job the Fed did between 1929 and 1932. Was that also a period of Fed wisdom Major?

  67. Gravatar of JohnB JohnB
    18. January 2014 at 19:30

    Scott,

    The Austrian Business Cycle Theory is absolutely a story of monetary disequilibrium or shock as you like to put it. It is based on the British Currency School theory of banks making more and more loans and lowering their reserves until a panic struck and many banks went insolvent. That’s part 1 of the story.

    Part 2 of the story is Knut Wicksell’s theory of interest rates. When market rates get lower than the natural rate (the rate that balances saving and investment) it causes entrepreneurs to invest in projects that are of a longer duration than the existing stock of savings justifies. Long term projects are most sensitive to interest rate changes.

    Mises combined these two theories-the British Currency School and the Wicksellian equilibrium rate-to create the theory of the business cycle.

    The bust has 3 parts. Part 1 is when consumers reassert their preferred savings to consumption ratios. Part 2 is when banks can no longer keep the boom going by extending credit because reserves are running low. The central bank must hike interest rates as well because inflation starts picking up as the money created by credit expansion starts driving up prices. These 3 factors create a credit crunch that reveals a huge cluster of errors in the economy.

    This theory explains the two key features of the business cycle: the cluster of errors and the disproportionate damage to capital goods companies relative to consumer goods. The longer periods of production encouraged by credit expansion proved to be misguided.

    The best argument against this is rational expectations. My response to this is that there is no true way to know what interest rates “should be” and also that businesses are in a dilemma where other people are making lots of money and sitting on the sidelines could cost you your job no matter how right you may prove to be later.

    I’d add to this theory Eric Falkenstein’s idea that the long-term industries most likely to experience a boom are industries that proved recession proof in the last recession.

    I’ll be happy to take on any other objections to this theory from all comers. Just keep things civil. Throwing a bunch of data without a theory behind it is a useless form of argument.

  68. Gravatar of JohnB JohnB
    18. January 2014 at 19:43

    Jeff,

    You seem to be under the impression that economic science works in the same way as physics or chemistry. Economic theories do not create testable predictions and cannot be proven or disproven by empirical results. This is unfortunate because the whole endeavor would be a whole lot easier if they were.

    I think that the Austrians are very correct in the regard that the best economic reasoning consists of rigorous logical deduction and careful reflection. It follows that the only way to disprove theories is to show why their logic is flawed. For instance, I think Mises did a good job showing why theories of how a socialist economy would be able to run were off base.

    The best way to argue against true socialists is still to show the flaws in their logic rather than to point to historical examples like the USSR, China, Cuba, or North Korea. They’ll just say that those weren’t real socialism.

    P.S. I’ve read all of Human Action and loved it. I haven’t read Man, Economy, and State all the way through. The expansion in roundaboutness during a boom shows up in how capital goods (companies farther away from consumer goods) companies expand the most during the boom are hardest hit during the bust.

    Capital goods industries and the cluster of business errors are the closest things to testable elements of ABCT. Although, like anything else in economics, empirical data won’t be able to account for all the moving parts and convince people.

  69. Gravatar of JohnB JohnB
    18. January 2014 at 19:45

    Jeff,

    I’d seriously have to reconsider the Austrian theory if consumer goods companies like Coca-Cola got hit the hardest during a recession or if there was no evidence of cyclical changes in bank lending.

  70. Gravatar of JohnB JohnB
    18. January 2014 at 21:26

    Scott,

    I remember you describing GDP as Grossly Deceptive Partitioning. It’s a great line but now I’m going to accuse you and the other macroeconomists of something similar.

    Do you view supply and demand side factors as hermetically sealed? For instance, if banking policy hadn’t been completely screwed up and banks were making loans, would it have been necessary for Bernanke to make so many asset purchases? If there weren’t extended UI and minimum wage laws, would the Fed Funds Rate still be at 0.25%?

    Just how you believe that inflation isn’t a useful term, I believe that supply side and demand side are not terms that macroeconomists should use. The economy is a complex web of interlocking factors that cannot be isolated. Since there is no supply side or demand side of a macroeconomy, these are usually only used as pejorative labels.

    Supply and demand are the best tools for microeconomic reasoning but don’t apply to entire economic systems where aggregate demand simply equals aggregate supply defined by the common denominator of money.

  71. Gravatar of Daniel Daniel
    19. January 2014 at 01:53

    Part 2 is when banks can no longer keep the boom going by extending credit because reserves are running low. The central bank must hike interest rates as well because inflation starts picking up as the money created by credit expansion starts driving up prices.

    First of all, we are no longer on a gold standard. So there is no limit to the expansion of money supply. So that’s one idiocy.

    Another thing is – are you actually claiming there was a threat of massive inflation in 1929 and 2008 ? I know “praxeology” is all about ignoring reality, but this is just retarded.

    a credit crunch that reveals a huge cluster of errors in the economy.

    You say “huge cluster of errors”, I say “sticky wages”.

    Economic theories do not create testable predictions and cannot be proven or disproven by empirical results.

    So,by definition, the Austrian School engages in unfalsifiable pseudo-science. We already knew that.

    the only way to disprove theories is to show why their logic is flawed.

    http://uneasymoney.com/2012/10/03/two-problems-with-austrian-business-cycle-theory/

    http://econfaculty.gmu.edu/bcaplan/whyaust.htm

    http://www.the-human-predicament.com/2012/03/is-austrian-view-of-great-recession.html

    Huh. I guess that criterion doesn’t apply to your pet theory.

    I believe that supply side and demand side are not terms that macroeconomists should use

    The fact that you cannot see their usefulness speaks only of your limitations.

  72. Gravatar of Jeff Jeff
    19. January 2014 at 04:16

    JohnB,

    If the only way to criticize a theory is to criticize it’s logic then macroeconomics should have stopped with Lucas or Kydland and Prescott. The great selling point of the first rational expectations models was that they were internally consistent. Critics pointed out that (i) they didn’t fit the data very well, or that (ii) they left out important features of the real economy. By your standard, these criticisms were invalid.

    I could go on about this for several paragraphs, but in doing so I would merely be cribbing from Milton Friedman’s The Methodology of Positive Economics”. I know that the Austrians don’t like Friedman’s approach, but to most of the rest of us it makes a great deal of sense.

    If you don’t think the comparisons of North Korea vs South Korea or East Germany vs West Germany are valid ways of judging how effective a social system is, I can only shrug and ignore you. But I think what you’re saying is not that, but rather that committed idealogues will ignore or rationalize away such evidence and continue their argument as if it didn’t matter. That’s certainly true, but I don’t care what they think. They’re beyond hope.

  73. Gravatar of Jeff Jeff
    19. January 2014 at 04:19

    Arghh! Messed up the link. Here it is again, hopefully without any typos this time:
    The Methodoly of Positive Economics.

    Scott, can you get a preview feature on our posts?

  74. Gravatar of Jeff Jeff
    19. January 2014 at 04:27

    JohnB,

    Also, with respect to roundaboutness of production: The key thing to measure is not how many steps there are from production of thing A until it’s ultimate consumption in the form of thing D which was made using thing C which used thing B which in turn was made from A. No, for roundaboutness in the sense in which Austrian theory uses it, what matters is how much wall clock time elapses between A and D. I am unaware that anyone has ever even made an effort to measure this kind of roundaboutness.

    Also, you say that capital investment goes up in booms and down in busts. True enough with respect to physical capital, but the opposite is true for human capital. Why should it be true for one but not the other?
    I can think of reasons, but I wonder what the Austrian story is.

  75. Gravatar of Jeff Jeff
    19. January 2014 at 04:33

    JohnB,

    Finally, with respect to your point about how consumer goods don’t get hit as hard during recessions as capital goods do. That’s certainly true. But that’s also consistent with Keynesian theory, New Keynesian theory, Monetarist theory, and just about every other kind of macroeconomic theory. Every theorist is acquainted with the basic stylized facts documented by Wesley Mitchell (but pretty well known even before that) and so every reasonably well developed macro theory tries to account for them.

  76. Gravatar of ssumner ssumner
    19. January 2014 at 06:48

    travisV, Yes.

    Jeff, They have lots of great ideas too. One of my favorites is Hayek’s proposal for NGDP targeting.

    JohnB, I think the Austrians (and Keynesians) made a mistake in focusing on interest rates. They are a sideshow. The key issues is NGDP instability and sticky wages. As for capital goods industries, all business cycle models that I have ever seen predict that capital goods output will be much more cyclical than consumer goods output. At times Austrianism almost seems like a mirror image of Keynesianism. Except that Austrians see excessive booms as driving the cycle and recessions as the result, and Keynesians see recessions as driving the cycle.

    I’ve argued dozens of times that AS and AD shocks are “entangled” due to the way we do monetary policy. But I still think it’s useful to do a counterfactual of what would RGDP have looked like if NGDP had been kept stable. That counterfactual is what I mean by supply-side component of recessions.

    AD is a bad term as it has nothing to do with demand in a micro sense, economists should call it nominal spending. Nominal shocks and real shocks are what AD and AS actually mean.

    Jeff, I’ll look into a preview feature.

  77. Gravatar of Vivian Darkbloom Vivian Darkbloom
    19. January 2014 at 06:59

    Cochrane has a response of sorts to this post that he wrote in response to a off topic comment to his (Cochrane’s) recent post about “inequality”;

    “”aggregate demand” is a pretty slippery concept. You demand less of one good if you demand more of another. But how do we demand less of everything? Most “aggregate demand” models are missing a budget constraint. When they do put in a budget constraint, we demand less of everything by demanding more money. That, at least makes sense.

    Anyway, Surely something like “aggregate demand” is at stake in turnining a financial crisis into a sharp downturn. The puzzle is why it goes on and on. Sumner’s graph is very misleading — compare his IP to the previous trend or “potential.” Perennial slow growth sounds a lot more like “supply.” And Mulligan type problems, though slow moving, do suggest an economy that recovers much more slowly from shocks. More later -J”

    http://johnhcochrane.blogspot.fr/2014/01/two-points-on-inequality.html#comment-form

  78. Gravatar of Wc Wc
    19. January 2014 at 07:06

    The financial crisis happened. Doesn’t this instability of institutions reflect a supply shock? It’s not that the potential productivity of the supply side of the economy had a shock, it’s that the potential couldn’t be fully realized because of liquidity constraints and mass risk-aversion. Or am I missing something?

    In general I agree with you that a supply shock can’t totally explain the dip. But all these models have the assumption of stable financial markets and minimal rigidities/imperfections.

  79. Gravatar of Geoff Geoff
    19. January 2014 at 11:53

    Daniel:

    “There is no such thing as a “deflationary death spiral.””

    So the whole world must have imagined the great depression and the rise of fascism. Are there any limits to your idiocy ?

    Thank you Sumner, for brainwashing Daniel into believing in your lies. I guess it doesn’t take much for your followers to believe in idiocy.

    First, it was not deflation that caused the rise of fascism. To claim so is to display ignorance of political movements. Fascism requires many components for it to arise.

    1. There has to be a pre-existing philosophical movement in favor of fascism. Without philosophy, a society won’t turn fascist due to war, depression, or natural disaster. Far worse events took place in many countries all throughout history, and yet fascism did not arise in these locations. This fact is perhaps the most important one. There must be a philosophy of fascism already in academic and political circles. In Germany’s case, well actually in Prussia and Weimar’s case during the 19th century, fascist philosophical literature was predominant. From Fichte to Carlyle to Nietzsche (the latter of whom Hitler took most of his philosophical outlook), the philosophical movement in Germany showed quite clearly that fascism was already on the intellectual horizon, before deflation took place. Contrast that with the deflation in the US during the early 1930s, which did not see fascism take over, and this should clue you in to the fact that the argument that “deflation causes fascism” is a gross misstatement of the facts. It’s what to expect from a crude pedant who wants to advance his agenda that black people are evil by pointing to some spurious correlation between a rise in black population in location X, with a rise in violence in location X. I can see through your garbage, so you don’t have to pretend it is working on me.

    Two, there has to be a nationalistic, militant political force, coupled with some social antagonism that introduces a rift between those representing fascism, and those the fascists wanted to annihilate. In Germany’s case, this was “Aryan” pitted against Jews, gays, Christians, non-Aryans, and communists. All those who would “corrupt” the homogeneity inherent in the radical worldview of “us versus them.”

    Three, and this is less “necessary” and more circumstantial, which of course is not to diminish or lessen it, since after all many fortuitous events took place in Germany that led to fascism, the German people were “insulted” by being branded as the cause for the “Great War”. The Treaty of Versailles put draconian war reparations on the country, which was an important impetus for why the German central bank hyperinflated, and wreaked havoc on the country. This to a large degree agitated the German people and encouraged the very radical thinking that the environment of fascism in intellectual circles, as mentioned above, had already presented as a source for “progress”.

    Fourth, and perhaps the most relevant to your superficial claim, is that the massive deflation in Germany would not have been perceived as necessary had it not been the previous hyperinflation. Massive deflation took place in Germany because it must have been so due to comparison to the past inflationary period. The same deflation that took place in the US in the early 1930s would not have been perceived as necessary had it not been for the previous high inflation during the 1920s (which by the way Sumner admits took place, if we define inflation as aggregate money supply). Sumner admits that the 1920s saw a very large rise in the quantity of money, but his excuse, which I still chuckle at to this day, for why it doesn’t count, is that the Fed wasn’t tracking the aggregate money supply at the time. Think about that. It would be like arguing the Black Death doesn’t count as a cause for why so many people died in Europe, is that they didn’t know about viruses or bacteria at the time. And you’re following Sumner as an intellectual role model? You should rethink your position, and take your blinders off.

    There are many other factors, necessary ones, that would take volumes to describe (I recommend “Rise and Fall of the Third Reich”).

  80. Gravatar of Geoff Geoff
    19. January 2014 at 12:14

    tesc:

    “I think the problem with Geoff and the austrian like him is that they confuse higher inflation with higher ngdp.”

    No, I don’t. I define inflation as aggregate money supply growth. I do not “confuse” this with aggregate SPENDING.

    “”dangerous proposals to fight depression by ‘a little inflation’. “

    “This quote from Hayek is irrelevant to MM theory.”

    No it isn’t, because Hayek’s conception of inflation, is a call that matches the call of MMs during recessions. More money so that there is more aggregate spending than there otherwise would have been.

    “MM wants higher NGDP, not higher inflation. The inflation rate has to do with AS, which is not control by the FED.”

    Hayek wasn’t calling for higher prices and lower supply. He was calling for more money and spending, higher prices, whatever nominal increase metric you want to use, GIVEN that supply does not fall which would make prices rise for supply, and not nominal reasons. He was pointing a finger at the central bank and warning against more inflation from them in response to a depression. This is entirely “applicable” to MM theory.

    “That is why Hayek supported stable NGPD during slumps, because you can have NGDP growth and deflation at the same time. Inflation is not a explanatory variable in MM framework, just a response variable.”

    Hayek was inconsistent. He wasn’t calling for higher price inflation caused by lower supply. He was calling for higher prices due to monetary inflation, which is higher NGDP ceteris paribus.

    “The Obscurantist-Austrian uses inflation and interest rates as explanatory variables, just like Keynesians.”

    Haha, “Obscurantist”. Oh now I’m doubting my entire worldview. You need more pejorative adjectives there. Try “FringeFauxObscurantist”. That has a better ring to it.

    The ABCT uses interest rates as an explanatory variable yes, because in Austrian theory, contrary to MM theory, interest rates regulate intertemporal investment, i.e. productive stages, WITHIN a given aggregate. If interest rates are changed by the central bank to be lower AS IF individuals in the market are saving more resources due to a lower time preference, then what happens according to ABCT is that there is a redirection of capital away from where individual saving and consumption patterns actually would make them sustainably allocated, to where they are not sustainably allocated.

    When a recession hits, as it did in 2007, which MM admits took place BEFORE “plunging NGDP made things worse than they were” (which leads to the question of what CAUSED that initial bad situation that subsequent falling NGDP allegedly exacerbated…MM theory silent on that), it is a revelation of capital investment errors, one of the consequences of which is rising cash holding times, and falling spending. Since in ABCT production takes time, there is no reason to expect an instant spending reconfiguration, such that NGDP does not fall. There should indeed be a fall in spending (provided the central bank does not reinflate, trying to delay recovery). Once the falling spending reveals the capital investments as losers, THEN a reallocation of resources can take place, to be more sustainable. NGDP is not telling you the story of what is happening within the capital structure and the labor markets.

    “I see them as different sides of the same coin. The Interest Rates/Inflation coin or framework.”

    Haphazardly lump in theories you disagree with together all you want, you’re not actually succeeding in showing they are of the same cloth. Austrian theory is radically different from Keynesian theory. In fact, this is NOT haphazard, it is Keynesianism and Monetarism that are in the same umbrella from the Austrian perspective, because both look only at aggregates, they both ignore individual time preference, they both ignore capital structure, they both ignore the regulative aspect of interest rates as well as relative prices and spending, and most importantly, they both ignore, nay, they both infringe upon, unhampered economic calculation, which is THE most important stimulus there is to healthy economic growth.

    “MM wisely lets interest rates and inflation to market realities. NGDP growth is the issue under State fiat currency.”

    Impossible to have markets determine the interest rates when there is a central bank inflating and deflation to target NGDP. In order for markets to determine interest rates, there MUST be a market in money production, not a socialist monetary system.

    When a central bank inflates to target NGDP, it is, by way of inflation entering the credit markets first, affecting interest rates. Just because the Fed isn’t purposefully targeting interest rates in NGDPLT, it doesn’t mean the Fed isn’t actually affecting interest rates by purely nominal causes. You and Sumner have the same ostrich like, head in the sand approach to reality. It is almost as if you believe that if you don’t purposefully control something, then by definition you are not affecting it no matter what you do. Clearly that is absurd. It is absurd because the effect of one’s actions are not limited to the direct thing you’re affecting. The one factor you are purposefully affecting can have subsequent, unintended (or intended) consequences on other factors, that would not have taken place if you had not affected the initial factor in question.

    To make this simple: Even if you want to target NGDP, it doesn’t mean that you won’t be having any affect on relative prices, relative spending, indeed even aggregate prices. The baseline is what would have taken place had you not acted in that way. Targeting NGDP via inflation WILL have a purely nominal effect on interest rates.

  81. Gravatar of Geoff Geoff
    19. January 2014 at 12:37

    Jeff:

    “Many moons ago, when I was a young econ grad student, I read a bunch of Austrian stuff. Some of it is pretty good, like the ideas that we’re never really in equilibrium, that prices are part of an ongoing discovery process, and the demolishment of the socialists’ conceit that they could ever know enough to centrally plan everything.”

    Take that conceit of central planning and apply it to banking specifically. The same principle behind why 100% socialism is disruptive is the same principle behind why socialist banking is disruptive.

    The key is that in socialist banking, there is no profit and loss mechanism regulating the investment in, and production of, money. We can’t know via market preferences whether there are too many or too little resources being put into the production of money, because we can’t see market driven profit and loss in the production of money itself. The production of money in our society is constrained to political force of government, not sovereign individual consumers and investors whose choices would bring about profits or losses to the central bank. If the central bank inflates too much, then F U they don’t incur market losses. If they produce too little, then F U they are not subject to competitors stepping in to fill the void. They have a politically enforced monopoly.

    “But some of their ideas just don’t work. The idea that a low cost of capital causes people to overinvest in more roundabout means of production during booms sounds appealing, but there is no empirical support for it.”

    Sure there is.

    http://research.stlouisfed.org/fredgraph.png?g=r8d

    The more heavy, more roundabout industries (construction, durable goods) suffered more after the initial crises relative to the less heavy, less roundabout industries (retail and service sectors).

    This is empirical evidence that too many resources were devoted to the more roundabout industries PRIOR, and not enough resources to the less roundabout industries PRIOR.

    There is other evidence. To claim there isn’t any empirical data consistent with ABCT, is really just to display your lack of knowing such evidence.

    “I remember looking high and low for several weeks in a good research library for any papers that could actually measure the roundaboutness of production, and how and if it changed over the business cycle. You would think, that since that is essentially the Austrian theory of the business cycle, that somebody, somewhere would have found some empirical evidence of it. But I couldn’t find any papers to that effect, and I really did try.”

    You didn’t try hard enough, because there are papers. You likely won’t find them in your research library, because the peer review process is dominated by non-Austrians.

    “Now that was a good twenty five years ago, and maybe something has changed since then.”

    Yes, the internet happened. Now there is no excuse. No more “there are no papers.” No more “If it’s true, where is the evidence?”

    “But still, it was enough to make me discount Austrian business cycle theory. Where is the Austrian Wesley Mitchell?”

    You mean if I looked for MM papers during the 1930s, and didn’t find any, or found only a few, it means MM theory has no significant evidence? Please. This is not how to think like an intellectual. It is not how to think like a researcher. It is how to think like a lazy person who wants the comfort of not having his views challenged by believing no such challenges exist.

    “Then I made the horrible mistake of trying to understand capital theory. Bohm-Bawerk, Marx, and the others. What I learned from that is that not only does no one know how to measure capital, no one even has a very good definition of what it is.”

    False. A good definition of capital is goods reproductively employed. In a monetary economy, this can be understood as those economic goods purchased when the purpose of those purchases is to make subsequent sales.

    A car purchased by a car rental company is a capital good, because it is purchased for the purpose of making subsequent sales. That same car purchased by a homeowner to get to and from work, the grocery store, and friends’ houses, is a consumer good, because it is not purchased for the purpose of making subsequent sales.

    You have to try harder. You’re not giving enough effort. You can do it, you just have to stop allowing the crap you’ve picked up from Sumner (and your formal coursework) to cloud your thinking.

    “It doesn’t even rise to the status of theory without measurement.”

    It is a scientistic fallacy to assert that only directly measurable quantities are economically significant quantities. I can’t effectively measure the total physical output of an economy in terms of physical concepts, but that doesn’t mean total output isn’t an economic concept that can’t be integrated into one’s economic thinking. I can’t “measure” your subjective preferences for goods and money and every other scarce good taken all together, but that doesn’t mean your subjective preferences don’t exist, or have no impact on economic life.

    Stop thinking like a physicist, such principles do not apply in economics. Economics is akin to mathematics, and formal logic. It is not a historical data driven science.

    “Now of course, the Austrians here are going to say I just wasn’t smart enough or didn’t try hard enough to understand what they’re saying.”

    BINGO. The fact that you suspect this is the answer you will get means you know yourself that you’re not giving enough effort. To merely anticipate what the likely response will be, doesn’t diminish or discount that response, I hope you understand.

    “I even had a boss once who dropped Human Action on my desk once and said I should read it. When I asked him a few weeks later if he’d actually read all of it, of course he hadn’t. I’m not convinced anyone ever has. Certainly no editor did.”

    I believe economist Robert Murphy did. He wrote a Study Guide to it. You can check it out for free online. Google it.

    “If you can’t explain your theory and tell me what testable implications it has in less than twenty pages, you’re either a bad writer or your theory is overly complicated.”

    Economics isn’t a “testable” science!

    Overly complicated? Complicated yes, but not overly so. You can understand it if you really wanted. You have to read philosophy, particularly but not solely idealism, and the history of economic thought, as well.

    “And nothing I’ve seen in the comments here on Scott’s blog has caused me to reconsider.”

    Your loss.

  82. Gravatar of Geoff Geoff
    19. January 2014 at 12:44

    Daniel:

    “Another thing is – are you actually claiming there was a threat of massive inflation in 1929 and 2008 ? I know “praxeology” is all about ignoring reality, but this is just retarded.”

    Praxeology doesn’t make empirical predictions. It only constrains explanations to economic ones.

    “a credit crunch that reveals a huge cluster of errors in the economy.”

    “You say “huge cluster of errors”, I say “sticky wages”.”

    You say “sticky wages”, and I say “You’re not even addressing the causes, which include, but are not limited to, inflation itself.”

    “Economic theories do not create testable predictions and cannot be proven or disproven by empirical results.”

    “So,by definition, the Austrian School engages in unfalsifiable pseudo-science. We already knew that.”

    Mathematics and formal logic are not pseudo-science. They are science. It’s why we see mathematics in science departments in universities and colleges, instead of in the social science departments. Your conception of science is inherently flawed.

    By definition, economics is about human action, which is by nature, not scientifically predictable, because humans learn and change over time in unpredictable ways. Yes, I know that frightens the bejesus out of you. Yes, I know that you feel much safer if you knew what the future will bring using some formulae or constant. I get it. You believe that lack of knowledge is ipso facto a flaw in the universe. Why? Because your standard is not human consciousness, but the consciousness of a God. You’re a religious minded thinker, masquerading as a scientifically minded rational person.

    “the only way to disprove theories is to show why their logic is flawed.”

    “http://uneasymoney.com/2012/10/03/two-problems-with-austrian-business-cycle-theory/”

    “http://econfaculty.gmu.edu/bcaplan/whyaust.htm”

    “http://www.the-human-predicament.com/2012/03/is-austrian-view-of-great-recession.html”

    Not an argument. Not worth addressing.

    “Huh. I guess that criterion doesn’t apply to your pet theory.”

    What criterion? You have not displayed any understanding or knowledge of any criterion.

    “I believe that supply side and demand side are not terms that macroeconomists should use”

    “The fact that you cannot see their usefulness speaks only of your limitations.”

    God is a “useful” explanatory factor for creationists. Doesn’t mean it is correct.

    Pragmatism is a flawed epistemology. No wonder you’re always so confused about the world. Full of paradoxes and whatnot.

  83. Gravatar of Daniel Daniel
    19. January 2014 at 12:48

    Geoff,

    I’m impressed by your ability to write walls of text that don’t contain a single intelligent thought.

  84. Gravatar of Geoff Geoff
    19. January 2014 at 13:12

    Daniel:

    I am not impressed by your inability to back up your blustering and insults with displays of actual knowledge. I’ve noticed that your intellectual repertoire is shallow.

    Just to advise you of my thought on this: The more you insult me, the more confident I am in my ideas, because it is telling me I am face to face with the assumptions and premises of your outward arguments, and your response is to defend because you feel threatened. That feeling of being threatened tells me that I am hitting a weak spot in your walls of texts of insults.

    Keep trying. I guess the only way you can progress is to learn while insulting me. As I do with many others, if that is the case, so be it. I’d rather you learn and understand ideas, than to be nice to me whilst remaining ignorant.

  85. Gravatar of Daniel Daniel
    19. January 2014 at 13:17

    the massive deflation in Germany would not have been perceived as necessary had it not been the previous hyperinflation.

    “Perceived as necessary” by whom, you imbecile ?

    BTW – This is the only sentence I can reply to, since the rest of your ramblings is just circular logic (predictably).

  86. Gravatar of Geoff Geoff
    19. January 2014 at 13:19

    “”Perceived as necessary” by whom, you imbecile ?”

    Well, obviously the central bank for one. Misguided intellectuals and economists for another. I don’t really get your question. Do you want specific names?

    “BTW – This is the only sentence I can reply to, since the rest of your ramblings is just circular logic (predictably).”

    You have not shown how it is circular logic.

  87. Gravatar of Daniel Daniel
    19. January 2014 at 13:26

    So because economists were stupid enough in 1929 (and 2008) to allow a monetary contraction, it proves what exactly ?

    Other than the fact that a single point of failure (namely, a central bank) is a very dangerous thing, obviously.

    You have not shown how it is circular logic.

    Because you’re too stupid to recognize it (one name it goes by is “austrian business cycle theory” – among many others).

  88. Gravatar of Geoff Geoff
    19. January 2014 at 13:37

    Daniel:

    “So because economists were stupid enough in 1929 (and 2008) to allow a monetary contraction, it proves what exactly ?”

    Those particular series of events only proves what individuals knew and preferred at the time.

    My argument is different. It is that there would not have been a perceived need to deflate, if there was not a prior inflation.

    “Other than the fact that a single point of failure (namely, a central bank) is a very dangerous thing, obviously.”

    Yes, that’s also true. Milton Friedman agreed. Quoting Clemenceau, Friedman wrote in “Capitalism and Freedom” that “money is much too serious a matter to be left to the Central Bankers.”

    “You have not shown how it is circular logic.”

    “Because you’re too stupid to recognize it (one name it goes by is “austrian business cycle theory” – among many others).”

    Oh, the ol’ catty girlfriend tactic. “If you can’t guess, then I’m not telling!”.

    Actually the reason is obvious. It’s because you’re incapable of showing it. Come on, you don’t like me. Why not put me into my place by showing everyone here? Do it for their benefit. Pretend I would understand.

    I mean, you’re not posting here only for my benefit are you? If nothing else, do it for yourself.

  89. Gravatar of Daniel Daniel
    19. January 2014 at 13:44

    there would not have been a perceived need to deflate, if there was not a prior inflation.

    One example (among many) of circular logic. Predictably, you’re unable to recognize it as such. On account of being dropped on the head as a child (probably).

  90. Gravatar of Geoff Geoff
    19. January 2014 at 13:48

    “there would not have been a perceived need to deflate, if there was not a prior inflation.”

    “One example (among many) of circular logic. Predictably, you’re unable to recognize it as such. On account of being dropped on the head as a child (probably).”

    Merely quoting what I wrote does not constitute an argument against it.

    Please tell me that you are at least able to understand that.

  91. Gravatar of Geoff Geoff
    19. January 2014 at 13:50

    Daniel:

    “BTW – This is the only sentence I can reply to, since the rest of your ramblings is just circular logic (predictably).”

    Actually, that is the only sentence you responded to because it is the only one that touches your monistic, inflationist/nominalist worldview. You obviously don’t read history or philosophy, you only read NGDP all day long. So the only point you feel comfortable addressing, is the one inflationist/nominalist concept I happened to have mentioned.

    You’re really only displaying your own limitations when you do that.

  92. Gravatar of Daniel Daniel
    19. January 2014 at 14:31

    Oh look, an autistic retard is trying to guess someone else’s motivations.

  93. Gravatar of Geoff Geoff
    19. January 2014 at 15:18

    Daniel:

    “Oh look, an autistic retard is trying to guess someone else’s motivations.”

    Yes, because motivations don’t affect one’s behavior. /s

    You’re not motivated by truth seeking. You’re motivated by feeling less pain, truth be damned.

  94. Gravatar of Daniel Daniel
    19. January 2014 at 15:24

    Economics isn’t a “testable” science!

    Overly complicated? Complicated yes, but not overly so. You can understand it if you really wanted. You have to read philosophy, particularly but not solely idealism, and the history of economic thought, as well.

    So it’s all bullsh*t. Might as well be invisible underwear gnomes at work.

    a revelation of capital investment errors

    Do you wear a tinfoil hat ? How peculiar and convenient, the mistakes happen to be revealed all at the same time – and everybody goes bankrupt and unemployed.

    But it’s not “testable” anyway, so how do you know it’s not alien brainwaves at work ?

    So we have a self-contradictory jumble on nonsense – which doesn’t make any sort of testable predictions whatsoever – and that happens to be A FEATURE, NOT A BUG !

    And then the likes of Geoff and JohnB decide to enlighten everyone else on the virtues of “praxeology” – also known as “how to come to conclusions without looking at facts”.

    Here’s my un-falsifiable statement – you’re a bunch of brain-washed ideologues.

    How do I know ? The ghost of Mises whispered in my ear. Disprove that.

  95. Gravatar of Greg Ransom Greg Ransom
    19. January 2014 at 15:27

    Scott writes, “I thought Hayek agreed with my view that unstable NGDP was the problem.”

    The crucial thing is the causal mechanism which makes NGDP unstable and why an unstable NGDP is a problem, given that causal mechanism.

    Hayek has a causal mechanism taking place at the margin among all margins across the time interconnections between all production and consumption plans — eg it’s like Darwin in having a non-magical causal mechanism acting over individuals or indicidual plans — and not the magical creationist sort of causation that somehow acts magically on whole aggregates of supposed univocal natural kinds.

    Where Hayek has a causal mechanism involving market actors and change at the margin involving individual production and consumption plans across time, you, Scott have magic — the magical and economically impossible different change of univocal natural kind aggregates directly interacting with one on other, as no economic process could causally possibly work.

    Sorry for the many words with more than one syllable.

  96. Gravatar of Geoff Geoff
    19. January 2014 at 15:39

    Daniel:

    “Economics isn’t a “testable” science!”

    “Overly complicated? Complicated yes, but not overly so. You can understand it if you really wanted. You have to read philosophy, particularly but not solely idealism, and the history of economic thought, as well.”

    “So it’s all bullsh*t. Might as well be invisible underwear gnomes at work.”

    How do the comments you have quoted stand as an argument that they are “BS”? Again, merely quoting comments is not an argument against them.

    “a revelation of capital investment errors”

    “Do you wear a tinfoil hat ?”

    Not recently.

    “How peculiar and convenient, the mistakes happen to be revealed all at the same time – and everybody goes bankrupt and unemployed.”

    History shows it. I don’t know what you mean by “convenient.”

    “But it’s not “testable” anyway, so how do you know it’s not alien brainwaves at work ?”

    To not be testable does not mean any and every argument is permissible. There are constraints. The constraints are derived from self-reflective analysis and deduction. Economics is the science of human action. Alien brainwaves do not fall under the rubric of human action.

    “So we have a self-contradictory jumble on nonsense”

    You haven’t shown how it is “self-contradictory”, nor have you shown how it is a “jumbled mess.”

    Methinks you might be referring to your own mindset when you are faced with a challenging theory.

    “which doesn’t make any sort of testable predictions whatsoever – and that happens to be A FEATURE, NOT A BUG !”

    Mathematics and formal logic do not make any predictions, but no serious scientist would claim that they are how you are describing Austrian economics.

    “And then the likes of Geoff and JohnB decide to enlighten everyone else on the virtues of “praxeology” – also known as “how to come to conclusions without looking at facts”.”

    History are past facts. Praxeology deals with what MUST be true in economic life by virtue of the fact that humans act.

    Looking at facts is another way of saying observing past events. But from whence does the validity of observation of history arise? The concept of observation cannot be observed. It is a concept that is understood. This “understanding”, or “verstehen”, is the foundation for how we come to know the propositions that we call economic propositions.

    “Here’s my un-falsifiable statement – you’re a bunch of brain-washed ideologues.”

    You’re still angry.

    “How do I know ? The ghost of Mises whispered in my ear. Disprove that.”

    Economics does not deal with the voices you hear in your head. Economics deals with your actions. Your purposeful behavior.

    Action is irrefutable, because any attempt to refute it would have to be understood as an action. The argument that economics is not a prediction science isn’t an argument that we can make up anything under the Sun and claim it to be true. Praxeologists do not advance just any old propositions and claim them to be true. They are advancing a particular, relatively small, group of propositions that are necessarily true because they are grounded on the irrefutable axiom of action. That’s all economics is.

  97. Gravatar of Geoff Geoff
    19. January 2014 at 15:42

    Daniel:

    “”How peculiar and convenient, the mistakes happen to be revealed all at the same time – and everybody goes bankrupt and unemployed.””

    Actually, to be more precise, that is exactly what the Austrians are saying. They are not saying that “everybody goes bankrupt and unemployed.” They are saying that history shows there are periods where there are significantly larger numbers of errors.

    Not every investor loses in a recession. Some make out very well because they went contrarian.

  98. Gravatar of Geoff Geoff
    19. January 2014 at 15:44

    Sorry, meant to say “that isn’t exactly what the Austrians are saying.”

  99. Gravatar of John Becker John Becker
    19. January 2014 at 15:47

    I used to post as John or JohnB but I’m using my full name because I’ve seen both of those used by other commenters. I am the guy who is usually espousing Austrian economic views although I am a big fan of the EMH as well.

    Daniel,

    Even though we aren’t on a gold standard, reserve requirements limit the ability of banks to expand the money supply.

    Central banks were raising rates in 1928-1929 and 2004-2007. In 28-29, the Fed was responding to the stock market boom and was trying keep inflation at 0%. Inflation was a concern for them in 1929 since they were trying to keep it so low and the massive productivity increases in that decade suppressed price inflation. You seem to have a short memory because in early/mid 2008 inflation was well above their target of 2%. As late as August and October 2008, voices in the economic community were against rate cuts because inflation in the United States and England was around 5%.

    http://www.nakedcapitalism.com/2008/08/buiter-provokes-wrath-at-jackson-hole.html

    http://www.theguardian.com/business/2008/oct/14/record-inflation

    All economic theories by your standards are unscientific pseudo-science. When was the last time you saw a Keynesian change their viewpoints because fiscal stimulus didn’t work as effectively as promised. Look at the fight Scott Sumner and Paul Krugman have been having over the “test” of market monetarism versus Keynesianism in 2013. Name an economic result that would discredit your worldview. Economics is a study of nearly infinitely complex systems. You can always find data in any situation to fit your theory. In fact, you need to have a theory in order to even decide which data is relevant or worth looking at.

    A cluster of errors describes events that happen at the start of a recession where a bunch of businesses fail or take big losses. Sticky wages refers to a situation where wages do not fall fast enough to clear the labor market. They refer to entirely different things and stick wages becomes a problem only after the business downturn. Did Lehman Brothers fail because of sticky wages? That seems like a bit of a stretch.

    I’d be happy to respond to your links but my post is getting long. If you want to continue this discussion I’d be happy to give you my email and we can correspond that way. I will say that despite Bryan Caplan’s disagreements with Austrian School methodology (I have read his article repeatedly), he reaches nearly the exact same policy recommendations as the Austrians and is every bit as much of a free market economist as Murray Rothbard. I am a big fan of Bryan Caplan.

    It’s funny that you said that my failure to see the usefulness of AD and AS only speaks to my limitations when Scott Sumner agreed with me that AD lacks microfoundations and is something he avoids as well. Let’s keep these discussions civil please. I don’t know you and don’t feel the need to insult you because we don’t see eye to eye on everything.

    Jeff,

    I’ll respond to all of your points. If you want to continue this discussion, I’ll be happy to give you my email address and we can correspond.

    You said that according to my methodology there is no way to argue against rational expectations because it is internally consistent. My counter to that is that rational expectations theory is based on bad assumptions and I attack the theory on those grounds. The assumption that people have perfect information or some form of perfect ability to predict the future is contradicts our basic knowledge about the human condition and eliminates any role for entrepreneurship. I think the Austrian economists are correct in emphasizing uncertainty in economics and the importance of the entrepreneur in the economic system.

    About positivist methodology. The basic tenants of microeconomics such as supply and demand or comparative advantage are results of pure reasoning. You wouldn’t say that you discredited supply and demand because a price fell when supply decreased anymore than you’d say that you discredit the Pythagorean theorem by measuring right triangles.

    I agree completely that North Korea compared to South Korea or East and West Germany are as close to natural experiments as you can get in economics. However, I had a Communist professor at UCLA who denied that North Korea and East Germany were examples of socialism. What I’m trying to say is that empirical evidence in social sciences can be denied in a way that a physical phenomenon like gravity cannot. I think we’re on the same page here.

    I think of roundaboutness as the complexity involved in making goods from complete scratch. “I, Pencil” by Leonard Read is an illustration of roundaboutness. It includes technology and the research that goes into the technology used to transform natural resources into consumer goods. That’s just the way I look at it and I completely agree that it is not an easily measured concept if it can be measured at all. I’d just say that the way we produce a loaf of bread today is significantly more complex than the way a loaf of bread was made 2000 years ago. It involves more genetic modification, transportation, etc.

    I think what you are saying about human capital is that human capital is not pro-cyclical and may even be counter-cyclical if more people go back to school during busts. I personally don’t think that human capital is a useful term in economics. To paraphrase an author, the Soviets had physicists on every corner playing chess but they were eating stones in their soup. Austrians don’t really have a position on human capital and make the point that a lack of physical capital goods and savings is what determines how well you can produce things. Poor countries are not poor because the people lack knowledge, they could always hire outside experts, they are poor because they have not accumulated the capital goods to make enough stuff to enjoy high standards of living.

    Mises talks about capital this way: Income equals the amount that you can consume without reducing capital. Human capital is a different concept from this entirely.

    I don’t think Keynesian theory does a good job at explaining why capital goods industry are hit so much harder than consumer goods industries. It still requires constant business investment to produce consumer goods and a deficiency of animal spirits or a lack of aggregate demand seems to imply that consumer staples companies should suffer as much or almost as much as industrials.

    If you have any more critiques or questions, just email me at jbecker313@gmail.com.

    Scott,

    Thank you for responding to my posts in a way that made me think.

    Aren’t nominal shocks entangled with real effects as well? Can’t you argue that real supply problems in the economy have nominal effects? For instance, Smoot-Hawley in the early 1930s hurt American farm exports which hurt the ability of farmers to repay loans to local banks leading to bank runs that spread across the country and collapsed the money supply.

    The focus of Austrians is really more on bank credit expansion increasing the amount of money in circulation relative to money in reserves. In this sense, Austrians and market monetarists could agree that interest rates are a sideshow.

    The Keynesian story of animal spirits depressing investment and creating a lack of aggregate demand seems less specific to explaining the damage to capital goods industries. After all, consumer staples businesses require a great deal of capital investment as well. Coca-Cola doesn’t magically bubble out of the ground.

    About your counterfactual, stabilizing NGDP might have slowed structural adjustments and RGDP might have been slower to recover compared to a situation like 1921 where the government and Fed let NGDP collapse. As Milton Friedman pointed out, inflation distorts business decisions and keeps some businesses in operation that would go bust otherwise. At some point as well, the central bank might have had to bring inflation down (ignoring NGDP due to popular pressure which is a fact of life for any institution) which would have caused another bust. As I’ve pointed out, the historical relationship between stable NGDP and stable RGDP is a historical relationship and might break down if the Fed started targeting NGDP.

  100. Gravatar of Geoff Geoff
    19. January 2014 at 15:51

    John Becker:

    “In fact, you need to have a theory in order to even decide which data is relevant or worth looking at.”

    Bingo.

  101. Gravatar of ssumner ssumner
    19. January 2014 at 16:21

    John Becker, Real shocks only affect NGDP if the central bank allows them to. Monetary policy after the 1921 recession was more expansionary than after this recession. Of course the supply-side of the economy was also more flexible back then.

  102. Gravatar of Daniel Daniel
    19. January 2014 at 17:12

    reserve requirements limit the ability of banks to expand the money supply.

    So even though we’re on 100% fiat money … the money supply cannot be expanded ?

    in early/mid 2008 inflation was well above their target of 2%

    Yes, headline inflation was somewhat higher – mainly because of high oil prices. Core inflation was in the 2-3% range.

    But what do I know, maybe world demand for oil was exacerbated by inflationist central banks.

    Name an economic result that would discredit your worldview.

    A monetary contraction that wouldn’t result in unemployment. That would falsify the sticky wages model. And a subsequent reflation that wouldn’t result in a drop in unemployment and increase in output.

    Now back to you, what exactly would falsify your theories ?
    Oh, that’s right – NOTHING. Because it’s pseudo-science.

    A cluster of errors

    Must be a special brand of human stupidity, since it tends to happen all at once and only at special times – that just so happen to coincide with drops in aggregate demand.

    Did Lehman Brothers fail because of sticky wages?

    Debts (among other things) also happen to be sticky.

    Scott Sumner agreed with me that AD lacks microfoundations

    What Scott Sumner was saying was that the name itself is somewhat inappropriate, not that the concept lacks usefulness.

    To quote Forrest Gump – “stupid is as stupid does”. It’s hard to have respect for people who espouse pseudo-scientific and reality-defying theories.

  103. Gravatar of Daniel Daniel
    19. January 2014 at 17:34

    Shorter Geoff – if the austrian business cycle theory seems like nonsense, it’s because you haven’t performed the appropriate thought experiments.

    Facts be damned, who needs them when “individuals act” ?

    Here’s my thought experiment – what would it look like if an autistic moron read the preface to one of Mises’s books ?

    I predict the outcome would be Geoff.

  104. Gravatar of tesc tesc
    19. January 2014 at 18:13

    Dr. Sumner,

    Where can I get info about the 1921 recession? How do you know that the 1921 monetary policy was more expansionary policy? NGDP growth greater or so?

  105. Gravatar of Geoff Geoff
    19. January 2014 at 18:47

    Daniel:

    “Shorter Geoff – if the austrian business cycle theory seems like nonsense, it’s because you haven’t performed the appropriate thought experiments.”

    Correct.

    “Facts be damned, who needs them when “individuals act””

    Human action is a fact.

    “Here’s my thought experiment – what would it look like if an autistic moron read the preface to one of Mises’s books ?”

    Someone who has read more Mises than you?

  106. Gravatar of Geoff Geoff
    19. January 2014 at 18:49

    Daniel:

    “A cluster of errors”

    “Must be a special brand of human stupidity, since it tends to happen all at once and only at special times – that just so happen to coincide with drops in aggregate demand.”

    The cluster of errors, and the consequences of it, are what cause the increase in money holding times, and drop in spending, from what it was in the recent past.

  107. Gravatar of Geoff Geoff
    19. January 2014 at 18:56

    Daniel:

    “Now back to you, what exactly would falsify your theories ?
    Oh, that’s right – NOTHING. Because it’s pseudo-science.”

    Falsificationism is a self-contradictory methodology, for it rests on an unfalsifiable premise, namely, that the truths of reality do not change over the course of time.

    In other words, the theory that “the only legitimate statements that say something true about reality are falsifiable statements” is itself a non-falsifiable statement, and hence by its own account, not a valid statement about the truth of reality.

  108. Gravatar of Daniel Daniel
    20. January 2014 at 00:55

    There’s regular stupidity – and there’s austro-obscurantist stupidity, which is in a league of it’s own.

    “If you can’t dazzle them with brilliance, baffle them with bullsh*t”

  109. Gravatar of John Becker John Becker
    20. January 2014 at 13:03

    Daniel,

    You took things to a new level of intelligence with this one.

    “reserve requirements limit the ability of banks to expand the money supply (me).

    So even though we’re on 100% fiat money … the money supply cannot be expanded?” (your response)

    If you don’t understand why reserve requirements put a limit on how much money and credit banks can extend then you should go do some basic textbook reading before coming back here. Yes, the central bank can theoretically print unlimited amounts but individual banks do not have the authority to print money. They can only make loans based on the amount of deposits they have. They must keep at least 10% of their deposits as reserves, amounts in excess of this are called excess reserves. Anyone who has taken an econ class or been to a bank knows this.

    When Lehman Brothers failed in September 2008, headline inflation was over 5% and you’re then telling me that they failed because their debts and wages couldn’t adjust down to match deflation?

    I said in an earlier post in this thread that if bank credit didn’t expand and contract in a pro-cyclical way or a recession didn’t hit capital goods industries much harder than consumer goods industries, I’d have to change my mind. However, neither of what we have said would change our minds is likely to happen. That shows that we both practice pseudo-science by your standards.

    By the way the 1921 recession showed a huge drop in prices and the labor market recovered very quickly. That would seem to contradict your theory. You won’t see it that way because you’re dogmatically committed to your pseudo-science.

    What gives you the right to go around calling anyone who disagrees with you stupid? You’ve made some the dumbest arguments I’ve seen thrown around on this site and have been the least civil about it and I mean that sincerely. What you said about individual commercial banks being able to create unlimited money because it isn’t backed by gold is especially classic. I’m gonna keep reminding you of that one every time you get nasty.

  110. Gravatar of John Becker John Becker
    20. January 2014 at 13:05

    Scott,

    That is exactly why the Fed could do more with much less back in the early 20s. The supply side was much much more flexible. Monetary policy and the real economy entangle both ways.

  111. Gravatar of Daniel Daniel
    20. January 2014 at 13:59

    JohnB,

    For some odd psychological reason, austro-obscurantists have some hang-up with banks.

    the central bank can theoretically print unlimited amounts

    Not just theoretically. It is the central bank which controls the money supply. Absolutely. Period.

    So what exactly does Lehman Brothers or reserve requirements have to do with a monetary contraction ? Other than provide a convenient excuse for incompetent central bankers.

    Fiat money means that monetary expansion can continue indefinitely – contrary to what the theory of phlogistion austrian business cycle theory says. So there’s at least one internal inconsistency. Which, by your own standards, would invalidate it.

    By the way the 1921 recession showed a huge drop in prices and the labor market recovered very quickly.

    In typical ideologue fashion, you rewrite history to fit your story.

    http://measuringworth.com/usgdp/

    So the money supply contracted in 1920, stabilized in 1921 and by the end of 1922 was growing again.

    What does it say about your theory when it relies on half-truths ?

    I said in an earlier post in this thread that if bank credit didn’t expand and contract in a pro-cyclical way or a recession didn’t hit capital goods industries much harder than consumer goods industries, I’d have to change my mind.

    Other theories explain this phenomen, so what makes the Misesian nonsense special ?

    What gives you the right to go around calling anyone who disagrees with you stupid?

    Stupid is as stupid does. Economic theology is on the same intellectual level with creationism.

    What you said about individual commercial banks being able to create unlimited money

    What I actually said was “the money supply cannot be expanded ?”. Notice I did not say BY WHOM. Guess I should have been more careful. Theologues are pretty good at sophistry.

    But anyway, to repeat myself – who cares how the money enters the economy ? I don’t care about some obscurantist fixation with banking, as if somehow it has a significant bearing on macro-economic issues.

    What matters is that on a fiat standard, the money supply can keep growing as much as the monetary authorities want it to – so the initial premise of the ABCT is false.

    What does it say about you when you decide to cling on to a demonstrated falsehood ?

    Also – since we’re on the topic of “headline inflation”. What is the proper monetary response to a negative supply shock ?

    The way I see it, it’s better to keep nominal spending on track and accept a bit on inflation than tighten and run into stickiness.

    But even so, the fact that inflation targeting requires tight money in response to a supply shock only proves it is sub-optimal policy.

    Also, I thought austrians define inflation as the growth in money supply, not prices. So what gives ? What’s with the changing of the goal posts ?

    http://www.tradingeconomics.com/united-states/money-supply-m1

    By austrian standards, there was little inflation in 2008. So, by using your own standards, there was no reason at all to tighten in 2008 – the Fed should not concern itself with changes in relative prices, even austro-obscurantists would agree with that.

    So another strike agains ABCT. Yet, I have a feeling you won’t change your mind.

  112. Gravatar of Tom Brown Tom Brown
    20. January 2014 at 14:11

    For anybody here that likes to mix it up with Austrians, I thought this was kinda funny:

    http://rationalwiki.org/wiki/Fun:Austrian_school

    Let me know if that helps!

  113. Gravatar of Tom Brown Tom Brown
    20. January 2014 at 14:57

    … I wonder how hard it would be to code up an Austrian rant-bot? It can’t be that difficult, right? I think that rationalwiki article could give a talented programmer a good place to start. A rant-bot could be used in a version of the Turing test: are you in a thread with a living breathing human Austrian, or just an Austrian rant-bot? The rant-bot that fools the most people wins! (Likewise the human Austrian that makes people think he’s a rant-bot also gets a prize).

    To be fair, it’s probably possible to add a page to rationalwiki for arguing with MMists, NKers, PKers, MMTers, or just about any of the schools out there that are convinced that they alone are right. In fact MMists might be particularly easy: you just need one bullet point:

    o NGDPLT, NGDPLT, NGDPLT, … ad nauseam

    http://1.bp.blogspot.com/-nwYvhyMpC_o/UhIT9dwFkSI/AAAAAAAAAdY/nvnoKBTivXo/s320/sumnerNGDP.GIF

    Lol, … I got that pic from JP Koning’s site.

    No disrespect. [said in a NJ accent]

  114. Gravatar of Scott Sumner Scott Sumner
    20. January 2014 at 16:45

    tesc, NGDP growth during the recovery from 1921 was faster than during this recovery. Also wages were more flexible.

  115. Gravatar of Geoff Geoff
    20. January 2014 at 18:27

    Daniel:

    “There’s regular stupidity – and there’s austro-obscurantist stupidity, which is in a league of it’s own.”

    Penetratingly profound insight.

    “If you can’t dazzle them with brilliance, baffle them with bullsh*t”

    You still sound mad.

    “For some odd psychological reason, austro-obscurantists have some hang-up with banks.”

    Not banks, but rather central banks. Yes, Austrians have a “hang up” with socialist institutions.

    “By the way the 1921 recession showed a huge drop in prices and the labor market recovered very quickly.”

    “In typical ideologue fashion, you rewrite history to fit your story.”

    “http://measuringworth.com/usgdp/”

    “So the money supply contracted in 1920, stabilized in 1921 and by the end of 1922 was growing again.”

    “What does it say about your theory when it relies on half-truths ?”

    It isn’t a half truth, and you didn’t post anything that would contradict it.

    “I said in an earlier post in this thread that if bank credit didn’t expand and contract in a pro-cyclical way or a recession didn’t hit capital goods industries much harder than consumer goods industries, I’d have to change my mind.”

    “Other theories explain this phenomen, so what makes the Misesian nonsense special ?”

    Which theories?

    “But anyway, to repeat myself – who cares how the money enters the economy ?”

    Every economist, except maybe MMTers.

    “I don’t care about some obscurantist fixation with banking, as if somehow it has a significant bearing on macro-economic issues.”

    Your lack of caring is not based on understanding of sound economics.

    “What matters is that on a fiat standard, the money supply can keep growing as much as the monetary authorities want it to – so the initial premise of the ABCT is false.”

    That doesn’t refute the initial premise of ABCT. It is actually a component of it. You don’t understand ABCT.

    “What does it say about you when you decide to cling on to a demonstrated falsehood ?”

    You haven’t shown how it is false.

    “Also – since we’re on the topic of “headline inflation”. What is the proper monetary response to a negative supply shock ?”

    Abolish the central bank so that such negative shocks are reduced.

    “The way I see it, it’s better to keep nominal spending on track and accept a bit on inflation than tighten and run into stickiness.”

    The way you see things is fundamentally flawed.

    “But even so, the fact that inflation targeting requires tight money in response to a supply shock only proves it is sub-optimal policy.”

    Depends on how you define “tight”. Tight to you is typically loose relative to a free market standard.

    “Also, I thought austrians define inflation as the growth in money supply, not prices. So what gives ? What’s with the changing of the goal posts ?”

    He didn’t.

    “By austrian standards, there was little inflation in 2008.”

    First, the money supply is not just M1. M1 is a component of the money supply. Second, by Austrians standards, you’re not supposed to only look at 2008. You’re supposed to also look at the time period preceding it, whereby the aggregate money supply grow much more.

    “So, by using your own standards, there was no reason at all to tighten in 2008 – the Fed should not concern itself with changes in relative prices, even austro-obscurantists would agree with that.”

    False. There was a reason to tighten. The reason is previous loosening, which you continue to ignore.

    “So another strike agains ABCT. Yet, I have a feeling you won’t change your mind.”

    That isn’t a strike against ABCT.

  116. Gravatar of Daniel Daniel
    21. January 2014 at 01:53

    Your stupidity is very predictable, Geoff.

  117. Gravatar of John Becker John Becker
    21. January 2014 at 13:03

    Daniel,

    You are like a less knowledgeable and far more shrill version of Geoff on the other side of the ideological spectrum. You two are made for each other.

    I’m gonna cut off my debate with you here. Your arguments are neither intelligent nor presented in a civil way. At least learn how the federal reserve operates before you go around picking fights with people on a blog about monetary policy. You’re making a fool of yourself.

    Get familiar with this type of stuff before you go around calling people idiots.

    http://www.federalreserve.gov/monetarypolicy/

    The central bank’s ability to create money is NOT unlimited because the Fed must purchase financials assets (usually treasury securities) of which there are limited qualities. In addition, the Fed is limited in the types of financial assets which they can purchase. In practice, they may be able to circumvent these restrictions. But as of today, they are LEGALLY LIMITED in how much they can purchase. Plus, in practice, central banks have run out of ink and paper (Zimbabwe). This is another example where you simply don’t know what you are talking about. This isn’t Austrian stuff, this is stuff I learned as a freshman in college before I had heard of Mises or Hayek.

    You said that Lehman Brothers failed because of sticky wages and debts (at 5% inflation!!!). I said it was because the business made mistakes along with a lot of other businesses around the same time. You tell me which is more likely.

    You’re right, monetary expansion can continue indefinitely on a fiat money system; but only if the central bank is willing to tolerate ever-increasing inflation. They don’t do this because most central banks have some form of an inflation target.

    Learn the basics.

  118. Gravatar of Daniel Daniel
    21. January 2014 at 14:56

    Part 2 is when banks can no longer keep the boom going by extending credit because reserves are running low. The central bank must hike interest rates as well because inflation starts picking up as the money created by credit expansion starts driving up prices.

    This is what you wrote. And I pointed out that fiat money means monetary expansion can continue indefinitely, nor was there any threat of runaway inflation in 2008 – unless you’re willing to blame the Fed for oil shocks (at this point, I wouldn’t be surprised).

    It follows that the only way to disprove theories is to show why their logic is flawed

    To quote from you again. So, by your own criteria, ABCT has been shown as false.

    The fact that you continue to obfuscate only proves you’re a brain-washed ideologue with zero intellectual honesty. Typically austrian.

Leave a Reply