I told you so?

So let’s review the past year:

1.  Keynesians warned us that it would be a huge mistake to adopt fiscal austerity in America.  It would cut growth sharply.  Mark Sadowski has the details.

2.  The “Laffer wing” of the Keynesian movement predicts the damage to growth will be so great that the deficit might not even decline.

3.  Then we find Congress does the austerity, despite the advice of the Keynesians.

4.  Job growth continues in 2013 at almost exactly the same pace as in 2012.  The tax revenues pour in.

5.  The budget deficit gets much smaller.

And how do the Keynesians react to all this?  They say “I told you so.”  There was never any reason to worry about the big bad deficit.  It’s coming down very fast “on its own.”  Yes, if by “on its own” you mean that the evil GOP forced eurozone-style austerity on the US, and the Fed offset the effects on NGDP (unlike the ECB.)


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62 Responses to “I told you so?”

  1. Gravatar of Don Don
    14. August 2013 at 07:12

    Austerity was a lie anyway–the “emergency” Sandy spending was larger than the sequester. News today is that even Europe is seeing growth and they aren’t doing monetary or fiscal stimulus.

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. August 2013 at 07:19

    Could it be called ‘expansionary austerity’?

  3. Gravatar of Daniel Daniel
    14. August 2013 at 07:34

    Job growth is terrible, the economy is anemic and you are crowing about the virtues of austerity?

    FYI a large portion of the sequester hasn’t even kicked in yet. I know government contractors whose hours start getting cut in Sept.

  4. Gravatar of TravisV TravisV
    14. August 2013 at 07:41

    Prof. Sumner,

    Do you agree with this interpretation of the evidence?

    “Summers or Yellen? Markets Don’t Care”

    http://www.bloomberg.com/news/2013-08-12/markets-unlike-media-aren-t-in-a-lather-over-fed-chair.html

  5. Gravatar of ssumner ssumner
    14. August 2013 at 08:06

    Don, Nope, the austerity was real. The deficit is falling fast.

    Patrick, Well that’s kind of a vague term, as it depends on what the Fed is doing. But yes, given an expansionary enough Fed policy it could be expansionary austerity. In fact we’ve had roughly neutral austerity.

    Daniel, No, I’m not crowing about the virtues of austerity, I opposed the tax increase. I’m pointing out that the Keynesians are saying “I told you so,” even as they were completely wrong.

    Travis, The markets don’t care all that much, but they clearly prefer Yellen.

  6. Gravatar of Doug M Doug M
    14. August 2013 at 08:15

    TravisV,

    I would say that that Wolfers has it about right — the market perception is that neither will change tack in the short-term.

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. August 2013 at 09:24

    Meanwhile in France (on the road not taken);

    http://www.bbc.co.uk/news/business-23688553

    ——–quote——-
    … the employers’ association, Medef, remains cautious. The union’s president for the Paris region, Marie-Christine Oghly, says another rise in taxes would strangle France’s anaemic recovery.

    “Our companies are not competitive because of the high level of social charges and taxes. If we want to export we have to be competitive and right now our labour costs are too high,” she says,

    “Yes we have stopped the recession. It’s not getting worse. Perhaps our export balance also looks a little healthier.

    “But still the deep reforms we need have not been passed, our deficit remains high, and until we cut spending we won’t be on the right path.”

    Mr Hollande has pledged to cut unemployment by the end of the year. Eighty-two per cent of people say they do not believe him. Right now it is not hope he is inspiring but deep cynicism.
    ——–endquote———

  8. Gravatar of Alexander Hudson Alexander Hudson
    14. August 2013 at 09:35

    This post confuses two arguments that have come from the left. One argument is that austerity would be ruinous for the U.S. economy. On that point, I agree that they have been wrong. But the other argument was that the huge deficits that conservatives have been screaming about for years, and that they’ve used as evidence of Big Government, were largely the result of a weak economy, rather than a change in public policy (i.e., Obama’s Big Government takeover of the economy). And the corollary of that argument was that the deficit would shrink rapidly as the economy improved, even without any other changes in policy. On that point, they are completely right. That’s where the “I told you so” is coming from.

    Now, I don’t think that’s a particularly impressive prediction, since any idiot could have made it. But in case you forgot, there were a lot of people on the right who, in their anti-Obama zeal, were saying the opposite.

    It’s also not clear to what extent austerity is responsible for the rapid decline in the deficit, if you define “austerity” as an exogenous change in fiscal policy (something like the sequester or the year-end tax increase). I would imagine most of it is just due to the recovering economy (i.e., the deficit has been coming down “on it’s own”), and a smaller fraction of it due to honest-to-God austerity (a good portion of which is tax increases advocated by the left). So unless you have some evidence that it’s the GOP-advocated spending cuts that have been driving down the deficit, I’m not sure where you get off attributing all the credit for this to a party that has consistently opposed monetary offset.

  9. Gravatar of Morgan Warstler Morgan Warstler
    14. August 2013 at 10:42

    This is the argument PK doesn’t want to hear, and you need to say it all the time:

    “Yes, if by “on its own” you mean that the evil GOP forced eurozone-style austerity on the US, and the Fed offset the effects on NGDP”

  10. Gravatar of TravisV TravisV
    14. August 2013 at 10:50

    Bullard should be Chairman of the Fed!

    http://blogs.barrons.com/stockstowatchtoday/2013/08/14/so-much-for-that-state-of-calm-dow-drops-100-points-as-bullard-speaks

    ” Low U.S. inflation is a concern and it has not begun to head higher, a senior U.S. Federal Reserve official said on Wednesday, adding that inflation was one of the factors under scrutiny as policymakers weigh tapering monthly bond buys.

    “Inflation has been running very low. I have been concerned about low inflation,” St. Louis Fed President James Bullard told a Rotary Club luncheon in Paducah, Kentucky. There has “not been much indication, so far, that it has been ticking back up toward target,” he said.”

  11. Gravatar of marcus nunes marcus nunes
    14. August 2013 at 11:16

    Travis
    More likely the market dindn´t pay attention because Bullard was implying that ‘tapering’ could be postponed…Yesterday, according to the same source stocks went up because Lockhart said the recovery was not strong enough to stop bond buying ALLTOGETHER!

  12. Gravatar of TravisV TravisV
    14. August 2013 at 11:17

    Questions I’m generally curious about:

    Is California’s state budget situation still a disaster?

    What will its budget situation look like two or three years from now when property values will be a lot higher?

    How much more revenues could the state raise if it lifted zoning restrictions on high-density urban development?

  13. Gravatar of Marcelo Marcelo
    14. August 2013 at 11:37

    Scott,

    I think you are neglecting to take into account the counter-factual here. What if, in the non-sequester world, NGDP(and RGDP) would have grown faster than it has in the real world? Isn’t this exactly the argument that Ben Bernanke has been making throughout 2013?

    In other words, why should we use a 2012 baseline, not a “2013 No Austerity Baseline” to judge macro policy in 2013?

  14. Gravatar of Lorenzo from Oz Lorenzo from Oz
    14. August 2013 at 12:46

    TravisV: That depends on how California’s taxes on land (and capital) work. In Australia, raising returns from various property and capital taxes are a major reason why State Governments land-ration so enthusiastically–it increases their revenue.

  15. Gravatar of Lorenzo from Oz Lorenzo from Oz
    14. August 2013 at 12:48

    My previous comment was a response to: How much more revenues could the state raise if it lifted zoning restrictions on high-density urban development?

  16. Gravatar of TravisV TravisV
    14. August 2013 at 13:06

    Lorenzo,

    Interesting. However, I’m not exactly sure what you’re saying. Does Australia have aggressive restrictions against dense development or lax restrictions? And does Australia have high property taxes? Any difference between taxing the land value and the building value?

    At any rate, I’m a big believer that Texas’s willingness to provide building permits, as well as the fact that it has numerous medium-sized cities, are major reasons why it’s growing so much faster than other major states.

    http://www.slate.com/blogs/moneybox/2012/05/14/the_decline_of_california.html

    http://www.bloomberg.com/news/2013-02-12/home-prices-drive-people-out-of-california.html

  17. Gravatar of Bill Ellis Bill Ellis
    14. August 2013 at 13:26

    “Then we find Congress does the austerity, despite the advice of the Keynesians.”

    As I pointed out before, this was offset by increases in state spending.

  18. Gravatar of Geoff Geoff
    14. August 2013 at 14:00

    “And how do the Keynesians react to all this? They say “I told you so.” ”

    Dr. Sumner did exactly this when interest rates rose after the Fed announced it would “taper”.

  19. Gravatar of Cameron Cameron
    14. August 2013 at 14:11

    Geoff,

    Actually he said he’s always been puzzled by rate movements, particularly immediately after fed announcements.

    Unless you have a source to back up your claim…

  20. Gravatar of Aidan Aidan
    14. August 2013 at 16:24

    Scott, do you still consider yourself a supply-sider?

  21. Gravatar of Bill Ellis Bill Ellis
    14. August 2013 at 16:41

    As budgeted total government spending as % of GDP…

    for 2012, 22.55
    for 2013, 22.74 up slightly. Looking at that this no Keynesian would be predicting much of a change at all. Right ?
    The sequester only reduced actual outlays by 42 billion.

    And the economy is just about where Everyone thought it would be…If we had done no QE at all.

    From Jan 2011…”CBO projects that the unemployment rate will gradually fall in the near term, to 9.2 percent in the fourth quarter of 2011, 8.2 percent in the fourth quarter of 2012, and 7.4 percent at the end of 2013″
    http://www.cbo.gov/publication/21999

    ( I can’t recall PK or Delong or Thoma making any specific predictions that would run contrary to what is happening right now…or say that the government’s forecasts for unemployment were horribly out of line. )

    The only growth we have seen is better attributed to cyclical forces, such as, in the words of Keynes ..”use, decay and obsolescence ” than QE.

    So yea…They told you so.

  22. Gravatar of ssumner ssumner
    14. August 2013 at 16:42

    Alexander, That’s partly right, but I was under the impression that a large part of the recent drop in the deficit was austerity, not growth. Growth is continuing, but not very fast. Yet the deficit is suddenly plunging very rapidly. I’d like to see a breakdown of each factor.

    Travis, Good, but I wish he’d talk about NGDP, not inflation.

    Marcelo, But what is the evidence that growth would have been faster w/o austerity? Couldn’t one say the same about Europe? Maybe austerity didn’t slow growth, maybe it was tight money? The Keynesians say the effect of austerity was plain as day in the eurozone.

    Bill, And as I pointed out before, you are completely wrong. There’s been lots of austerity this year—ask Krugman. Any rise in state spending doesn’t even come close to offsetting Federal austerity.

    Cameron, It’s waste of time to even respond to that moron.

    Aidan, All good economists are both demand and supply siders. I consider myself both.

  23. Gravatar of Bill Ellis Bill Ellis
    14. August 2013 at 17:21

    Back in 2011 did you think that the CBO’s forecast was way off ?

    If not, how can you account for the fact that QE got us nowhere past the consensus expectations ? It is as if it did not happen.

  24. Gravatar of Waffles Waffles
    14. August 2013 at 17:43

    ssummner, re: Europe GDP counterfactual, Keynesians can also point to the statistical relationship between growth forecast errors and fiscal consolidation on a country by country basis, ala the IMF’s analysis in more recent years.

  25. Gravatar of Scott Freeland Scott Freeland
    14. August 2013 at 18:49

    It’s amazing at this point that the dogmatists on the right and left are still failing to see what is now obvious.

  26. Gravatar of Marcelo Marcelo
    14. August 2013 at 19:29

    Scott,

    Thanks for the reply. I’m not quite sure how you do it!

    I think it’s important when discussing austerity to keep in context of the central bank policy. We know that the Fed believes that (1) inflation and unemployment are below their targets and (2) they choose not to engage in further QE (and in fact are seriously considering slowing the pace of purchases before years end). If we assume the Fed acts under those conditions, wouldn’t increased deficits (fiscal stimulus) have a net positive effect on growth (in my thinking, changes in QE are only used to offset possible deflation, not used to reach target NGDP growth. And policy makers place a negative weight on the size of the Fed balance sheet, as opposed to only considering changes in NGDP).

    Also, I think it’s important to keep austerity in context of the large positive supply shock (natural gas production shock). It’s hard to separate out these effects, and I don’t think simply saying “austerity–> shrinking deficits and no effect on growth”. Absent that positive supply shock, growth would likely be below where it is now!

    Thanks again! Keep up the impressive writing.

  27. Gravatar of ssumner ssumner
    14. August 2013 at 20:52

    Bill, I never predicted that QE would lead to fast growth. I’ve said from the beginning that the recovery would be very slow due to the Fed’s tight money policy, and I’ve been right. The Keynesians said fiscal austerity would slow the recovery, and they’ve been wrong.

    waffles, I’ve done posts pointing out the flaws in those studies, they are the same flaws as you see in multiplier studies at the state level in the US. You need to examine the entire currency zone, regions within it tell you nothing about the multiplier, nothing about monetary offset.

    Scott, Good question.

    Marcelo, Yes, it’s possible fiscal stimulus would help, and of course I support certain types of fiscal stimulus. But overall I’m very skeptical, and the past 12 months have made me more so. Natural gas is much too small to have a significant effect on the overall economy. If we had a positive supply shock we’d get a better RGDP/P split than we’ve been getting recently. It may have helped a bit, but it’s been offset by negative supply shocks elsewhere, perhaps bad public policies.

  28. Gravatar of Geoff Geoff
    14. August 2013 at 21:18

    “I’ve said from the beginning that the recovery would be very slow due to the Fed’s tight money policy, and I’ve been right.”

    I’ve predicted that that same Fed activity (what you call tight and I call loose) would hamper recovery, not because it was too tight, but because it was too loose. And guess what? Recovery has indeed been slow. So I’m right.

    Can anyone figure out how to reconcile two different theories of the cause for the slow recovery, given that both are consistent with history that has so far transpired?

    I’ll give you a hint: You’ll have to use a non-empirical foundation, just like you do when you assume a priori that the truths of reality don’t change over the course of time, such that you give meaning to the concepts “confirmed theories” and “falsified theories”, where these theories have been advanced in the past, during a different moment in time, and then held as applicable concepts to be “tested” in the present as well.

    Anyone?

  29. Gravatar of Geoff Geoff
    14. August 2013 at 21:30

    Cameron:

    “Actually he said he’s always been puzzled by rate movements, particularly immediately after fed announcements.

    Unless you have a source to back up your claim…”

    https://www.themoneyillusion.com/?p=22017

    “PS. The fact that Krugman, Cowen, Kling, myself and many others were surprised by the surge in rates over the past few weeks actually speaks well of our understanding of macro. It shows that we’ve been paying attention, that rates don’t usually behave this way.”

    In other words, when he sees something he didn’t expect, it shows he understands macro. LOL

    Or how about this gem:

    https://www.themoneyillusion.com/?p=22205

    “I’m still puzzled by the response of long term rates to the tapering talk. But if long rates always moved the same way in response to monetary news, then interest rates would no longer be a lousy indicator of monetary policy.”

    So again, even though he’s puzzled about the response to rates, he’s still right about rates.

    This is hilarious to read.

  30. Gravatar of Aidan Aidan
    14. August 2013 at 21:46

    I never thought I’d see the day where I’d agree with a Geoff post, but here we are. You can use the data to show that monetary policy was too tight and that’s why the recovery is so weak or that monetary policy was too loose and that’s why the recovery is so weak or that monetary policy is the reason why the recovery is doing as well as it’s doing and the same for fiscal policy.

  31. Gravatar of RebelEconomist RebelEconomist
    14. August 2013 at 23:18

    Yes, good observation Geoff – I leave you to hold Scott to account these days, since NGDP targeting ceased to be an immediate threat in the UK (although Scott may be encouraged to hear that I do not think we have heard the last of NGDPLT in the UK, as it is difficult for Carney to be as incontinent as his paymasters want as long as the inflation target is legally mandated).

    As you may recall, I agree with you that excessively loose monetary policy holds back recovery, and would cite the stronger recovery in the US (which closed more banks and allowed more foreclosures) than in the UK. In the same vein, I was interested to see Krugman’s post ( http://krugman.blogs.nytimes.com/2013/08/03/structural-humbug/ ) that noted the tendency for the US states that suffered the worst downturns to have the fastest recoveries – although needless to say, Krugman did not draw the conclusion that this suggests that getting on with liquidation is for the best!

  32. Gravatar of Marcelo Marcelo
    15. August 2013 at 04:57

    Scott,

    I agree with you about the minimal magnitude of the supply shock.

    I am wondering what has made you so skeptical over the last 12 months about fiscal stimulus. In 2012 average NGDP growth was higher than it was in 2013. Doesn’t this imply tighter macroeconomic policy (before the serious talk about the winding down of QE3) in 2013 than in 2012? At the margin, why wouldn’t it be the case that tightening of fiscal policy has slowed NGDP growth?

  33. Gravatar of Brian Donohue Brian Donohue
    15. August 2013 at 05:27

    I’m the only person I know that supported both the tax increases and the sequester, on the view that the Baby Boomers behaved with shocking fiscal indiscipline during the years when we should have been laying up for their retirement tidal wave, which is just starting up. I wanna make sure we get our pound of flesh from the jerkiest generation before they all head off to Del Webb, emerging every two years and heading to the polls to ensure the entitlement gravy train keeps rolling.

    The predictions of doom from both sides this year (Rs on taxes, Ds on sequester) was lame.

  34. Gravatar of jason11 jason11
    15. August 2013 at 06:15

    GDP, GDI and job growth have all slowed. Although by selectively choosing your dates of austerity and sequester you can make make the argument the jobs numbers say different things if you feel so inclined.

    I dont like your ‘lets slow things down a little and pat ourselves on the back’ plan.

    I much prefer the ‘how about we dont slow things down’ plan.

  35. Gravatar of ssumner ssumner
    15. August 2013 at 07:40

    Aidan, Geoff is an idiot. If you are agreeing with him take a deep breath and rethink your position. He is almost always wrong in every dimension a person can be wrong. Facts, logic, theory, you name it. I’ve given up responding to him because nothing I say sinks in. He keeps misstating my views. He just doesn’t understand.

    Rebeleconomist, You said:

    “As you may recall, I agree with you that excessively loose monetary policy holds back recovery”

    If this is a joke I don’t get it. Faster NGDP growth would lead to slower RGDP growth? Okaaaay . . .

    Marcelo, Most economists think GDP growth for 2013 will be almost identical to 2012. We will see.

    6 years ago almost all good macroeconomists thought fiscal stimulus was ineffective. It’s the rest of the profession that has changed their minds, I’ve stuck with the mainstream NK theory.

    Jason11, Your data is wrong, 2013 will be a carbon copy of 2012.

  36. Gravatar of Alexander Hudson Alexander Hudson
    15. August 2013 at 09:14

    Scott, Krugman might contend that what’s changed in the last 6 years is that we hit the lower bound. To me, that raises an interesting question: what did macroeconomists think about monetary policy and fiscal stimulus at the zero bound 6 years ago? Obviously you could point to academics like Bernanke or textbooks like Mishkin’s and argue that the prevailing view was that monetary policy is effective and fiscal stimulus is ineffective, but perhaps those two weren’t representative? Was there a hidden split in the macro community that only surfaced once we hit the zero bound? My guess is that Krugman changed his mind pre-crisis after witnessing Japan’s struggles. (Yes, I agree that he drew the wrong lesson there, but that is nevertheless the lesson he took from it.) But what about other macroeconomists? Did they just never really think about it?

  37. Gravatar of Bill Ellis Bill Ellis
    15. August 2013 at 09:41

    Scott says…”The Keynesians said fiscal austerity would slow the recovery, and they’ve been wrong.”

    No, the recovery sucks. It was slowed. It would be better if there had not been austerity. The Keynesians were right.

    The die has been cast for a while. Our spending has not deviated much from what was EXPECTED years ago… So there is no reason for a Keynesian to expect much deviation from the expected trend.
    Yes there is the tax increase thing. But that is too simplistic. Keynesians–as do almost all economist –recognize that different kinds of taxes have different effects. There has been a lot of work showing that raising taxes on the wealthy has no significant effect. (I think Delong did some recent work on these lines.) looks like they were right…again.

    Sure the Keynesians continually make general statements about how different acts of Austerity are counter productive– like the sequester, but those are not specific predictions. People complain about things going in the wrong direction even when they are not very significant moves.

    The prediction that you keep attributing to the Keynesians– that our economy would be worse now than it is– is prediction that anyone who understands Keynesianism even a little bit would NEVER make given the data.

    (I have yet to find a major proponent of Keynes who predicted that any “new” austerity would have us below the long term trends that everyone was expecting–because they ALREADY had austerity built into their prediction…as the great bulk of austerity had been carved in stone. )

    At best you are bashing Keynesians who were a bit sloppy in their language, not Keynesianism.

  38. Gravatar of Bill Ellis Bill Ellis
    15. August 2013 at 10:16

    Scott says… “Bill, I never predicted that QE would lead to fast growth. I’ve said from the beginning that the recovery would be very slow due to the Fed’s tight money policy, and I’ve been right.”

    You also argued that QE would have us in a BETTER place than we would be if we did not do it. And I think it is fair to assume you meant that there would be an improvement in the expected TREND…(otherwise your prediction would have no meaning. )
    And we have NOT seen an improvement over trend, over what would be expected because of “use, decay and obsolescence “ …

    You made all kinds of noise about the Bad people at the Fed ignoring the full employment half of their mandate by not doing QE’s… So now that QE had NO effect on employment…It is suddenly not about employment ?

  39. Gravatar of Scott Sumner Scott Sumner
    15. August 2013 at 10:44

    Alexander, Good questions. The ones I read alot (Svensson, McCallumn, Bernanke, Mishkin, Friedman, etc) all thought policy could easily overcome the liquidity trap. I thought they were representative.

    I’d guess most economists never gave it much thought. Then when rates hit zero and Fed policy APPEARED ineffective, they remembered what they’d read about Keynes in EC101, and jumped to conclusions prematurely. However I also vaguely recall statements by people like Hamilton and Hall that suggests to me that they may have become more pessimistic in recent years.

    Bill, No, I specificaly said that QE would merely offset the fiscal austerity. Go back and look at my posts from late last year. I’ve been right.

    I think you are simply ignoring what Keynesians said late last year, and before the sequestor. But it’s in the public record, and it will haunt Keynesians for decades to come.

    The funniest thing about Keynesians is that they were claiming the payroll tax was slowing growth, even when the data showed that it wasn’t!!

  40. Gravatar of Bill Ellis Bill Ellis
    15. August 2013 at 10:51

    How much of the total Austerity was a Surprise after QE∞ ? Not much. So why would a Keynesian expect much deviation from trend ?

    All you are claiming is that QE∞ “offset” surprise Austerity, austerity that was not big enough to change expected trend out side of what can be attributed to statical noise in the first place… Not a strong defence.

  41. Gravatar of RebelEconomist RebelEconomist
    15. August 2013 at 13:21

    You don’t get it, Scott? OK, I’ll explain it again.

    I don’t dispute that, if you supply enough money to raise NGDP growth you can get an RGDP recovery. Once. Through an inflationary reset. But I would worry that such drastic action might leave an unstable economy, and that it would take years for the authorities to regain trust, especially if the inflationary reset marks the apotheosis of a series of easy money bailouts, as it would in the US and UK.

  42. Gravatar of W. Peden W. Peden
    15. August 2013 at 13:54

    RebelEconomist,

    Is that symmetric? Does a deflationary shock create an unstable economy?

  43. Gravatar of Negation of Ideology Negation of Ideology
    15. August 2013 at 16:39

    Brian Donohue – “I’m the only person I know that supported both the tax increases and the sequester,”

    I know what you mean – I supported both the tax increases and the sequester, though for different reasons than you. I don’t think I’ve met anyone in person who agrees. Most people don’t understand the monetary offset, much less agree with it. I was hoping for a stalemate that caused all the tax cuts to expire(not just those for the rich), and the sequester at the same time. Does anybody believe the Fed wouldn’t have increased QE to more than $85 Billion a month?

    The best would be if he used the occasion as a reason to turn to NGDPLT.

  44. Gravatar of Two Sumner Posts That I Thoroughly Enjoyed Two Sumner Posts That I Thoroughly Enjoyed
    15. August 2013 at 22:34

    […] this post, Scott hits something that I have been pointing out […]

  45. Gravatar of RebelEconomist RebelEconomist
    16. August 2013 at 00:42

    @W. Peden, “Does a deflationary shock create an unstable economy?”

    Interesting question. Judging by Japan, apparently not. There has been a lot of rhetoric about a “deflationary spiral” in Japan, but in reality the rate of deflation has generally been negligible. Real growth in Japan has not been too bad either.

    I suppose a deflationary spiral is theoretically possible, if people became convinced that the central bank really wanted deflation, but since there is no clear reason for the authorities to seek such an outcome, it is not really an issue.

    I suspect that the downside alternative to inflationary instability is a stubbornly stable state of sub-par economic output. Sub-par because investment is deterred by widespread awareness of unresolved imbalances – in Japan, an unsustainable fiscal situation (now, having largely replaced bad debts and zombie companies), an unsustainable housing distortion in the UK.

  46. Gravatar of W. Peden W. Peden
    16. August 2013 at 02:08

    RebelEconomist,

    People did eventually infer that the Bank of Japan wanted deflation.

    If there can be deflationary/disinflationary shocks as well as inflationary shocks, then one has to consider the starting point of the economy before judging whether or not moving to a higher rate of inflation is justified.

  47. Gravatar of RebelEconomist RebelEconomist
    16. August 2013 at 03:20

    @W. Peden, “People did eventually infer that the Bank of Japan wanted deflation.”

    That is the kind of myth that becomes entrenched when blogs like this one become fanzones rather than places for objective economic discussion. In fact, consumers’ inflation expectations in Japan have generally been positive: http://ftalphaville.ft.com/2013/01/17/1340432/koo-posen-and-other-abenomics-dissenters/

    I have visited provincial Japan several times through the deflationary years, and I have never come across anyone who was worried about deflation. My impression is that most everyday items remain fixed in price, and the deflation is largely confined to cheap manufactured products that come from / compete with China. I never ceased to be amazed by what you can buy in a ¥100 shop!

    PS. And here is a wonderful anecdote for you: When I mentioned this perhaps surprising fact to my (Japanese) wife just now, her comment was “Of course, prices have been going down.” I expressed puzzlement, to which she responded, “It’s obvious. The prices will go back up again. You economists are so stupid.”! That is credible price stability in action!

  48. Gravatar of W. Peden W. Peden
    16. August 2013 at 04:28

    RebelEconomist,

    That link is paywalled, but consumer inflation expectations ≠ inflation expectations.

    Insofar as inflation expectations are downwardly stick, that’s an argument against deflation and low inflation rates, because it implies people would be systematically mistaken about prices and this means that price-signals fail to work properly.

  49. Gravatar of W. Peden W. Peden
    16. August 2013 at 04:29

    * downwardly sticky.

  50. Gravatar of W. Peden W. Peden
    16. August 2013 at 04:31

    Come to think of it, if inflation expectations never turn into deflation expectations, then that implies a long-run downward-sloping Philipps Curve for falling prices, because unemployment would never fall to the natural rate.

  51. Gravatar of Cory Cory
    16. August 2013 at 06:27

    Professor Sumner,

    First of all, well done on Larry Kudlow. The world needs more sober analysis in political and economic commentary to combat the paranoid style that Peter Schiff epitomizes.

    So, in some other possible world where we had, say, Peter Schiff as FED chairman and 1). Congress engaged in “Austerity” (Sequester + Fiscal Cliff Tax Raises) and 2). the FED did not provide any kind of Monetary Offset would we agree that the “austerity” in the form of higher taxes + lower spending would likely cause a contraction of NGDP and raise unemployment/not increase employment???

    Seems to me Keynesians like Krugman simply underestimate the ability of monetary offset. (Part of me thinks that this is partly for political reasons in his blog but that’s just a guess).

  52. Gravatar of ssumner ssumner
    16. August 2013 at 07:24

    Bill, The problem is that you are an army of one. Other Keynesians deserted you in late 2012 when they said austerity was a huge deal. They even blamed the eurozone double dip recession on austerity of similar proportions. So it’s late in the day to claim there wasn’t much austerity after all.

    Rebeleconomist. No it’s you that doesn’t get it; the huge increase in the money supply is not easy money, indeed it’s a reflection that money has been tight. Easy money would be fast NGDP growth, and it would be associated with a smaller money supply, as in Australia.

    Cory, Yes.

  53. Gravatar of RebelEconomist RebelEconomist
    16. August 2013 at 07:53

    @W. Peden, if not consumers’ inflation expectations, then whose? I thought that was the inflationists’ story – consumers hold back from making purchases because they expect to be able to buy at lower prices later?

    The link is not paywalled by the way – FT blogs are free, but you do have to register.

    Inflation expectations from ten year JGBs were above zero until a sharp drop in late 2008 (the same pattern as in other inflation-linked bond markets, believed to reflect the lower liquidity of inflation-linked bonds), dipped to about 3% deflation, and have been recovering ever since, rising back above zero in early 2012 (ie before Abe).

    The BoJ has been declaring an intention to end deflation for years, and introduced a 1% inflation target a long time ago. Why should anyone think that the BoJ wants deflation? Except those who need that to make their theories work of course.

  54. Gravatar of RebelEconomist RebelEconomist
    16. August 2013 at 08:14

    Scott, if you are trying to convince people that slow NGDP growth amounts to tight money, it is no good simply asserting that point over and over. You need some other measure of tightness. I agree with you that you cannot just use the policy interest rate, because what that interest “should be” in some sense also matters, but maybe there is something else that you can offer.

  55. Gravatar of ssumner ssumner
    16. August 2013 at 21:35

    Rebeleconomist, Bernanke claims inflation and NGDP growth are the two ways of measuring the stance of monetary policy. Both are below average.

  56. Gravatar of Geoff Geoff
    17. August 2013 at 03:18

    “Bernanke claims inflation and NGDP growth are the two ways of measuring the stance of monetary policy. Both are below average.”

    The average was and is far too high.

    Never reason from the status quo.

  57. Gravatar of Geoff Geoff
    17. August 2013 at 04:00

    Aidan:

    “I never thought I’d see the day where I’d agree with a Geoff post, but here we are. You can use the data to show that monetary policy was too tight and that’s why the recovery is so weak or that monetary policy was too loose and that’s why the recovery is so weak or that monetary policy is the reason why the recovery is doing as well as it’s doing and the same for fiscal policy.”

    That’s exactly right Aidan. You hit the nail on the head.

    Historical data does not “show” which theory among competing alternative theories is the right one.

    And why is this? It’s because economic theories are actually grounded on, that is, established as valid by, self-reflective ratiocination. Economics is actually a study of individual action, and to a lesser but still significant extent, the study of wealth generation in relation to action.

    While it is totally up to you, I recommend that you ignore the childish and petty name calling protests from Sumner. The fact that he feels compelled to convince you that I am wrong through such behavior is, to me at least, and perhaps to you too, strong evidence that he doesn’t believe his ideas are able to stand up to mine. He doesn’t want others to start thinking I am right and he is wrong.

    Sumner wrote:

    “Geoff is an idiot. If you are agreeing with him take a deep breath and rethink your position. He is almost always wrong in every dimension a person can be wrong. Facts, logic, theory, you name it. I’ve given up responding to him because nothing I say sinks in. He keeps misstating my views. He just doesn’t understand.”

    I’m sorry that you feel that way. I guess all I can say is that the reason “nothing” you say “sinks in”, is simply because “nothing” you say is without flaws, where “nothing” is actually a large percentage of things you say (about money and its relation to real economic activity).

    I mean really, after reading a lot of the posts here, I notice that the only theory you have that connects money to the real economy, and to individual action, are the aggregated RGDP and NGDP concepts. There is no theory of capital structure, no theory of temporal allocations of resources, no theory of markets to stand in contradistinction to market monetarism, no theory for why coercion (in the form of central banking, among other activities) against innocent people makes their lives better off.

    I am very interested in how such an empty theory and collection of floating concepts divorced from each other can possibly show a theory that does take into account the above as incorrect, would work.

    I am wrong with “facts, logic, theory, you name it”? Well, since asking for evidence of this would be a waste of time, as you would likely again view my responses as “nothing I say sinks in”, I think what is happening is that you have come to believe that to be correct, is to agree with Sumner, even though Sumner is incorrect.

    Do you seriously believe you are any less wrong than the incorrect Monetarists and Keynesians that have preceded you? You’re all using epistemological principles that literally prevent you from knowing why you’re wrong. It is also the very reason why your ideas unleash destruction everywhere they are implemented, and tragically you believe such destruction is in the last resort market driven, which is up to you to “fix.”

    This is THE foundation for why social coercion exists and why such social coercion centralizes into destructive, parasitic territorial monopolies that you call states. Intellectuals like yourself provide justification for the destructive behaviors of other individuals in society, who themselves cannot grasp why there is economic destruction around them, and then tragically come to believe that destruction is inherent in economic life, in the market, which leads to a circular cycle of anti-capitalism and anti-rationalism.

    There is only one way for humans to act in the world, without doing so self-destructively and social-destructively. There are many ways to act destructively. It’s difficult to know the right way. But it does exist, and incredibly, you, and likely everyone else on this blog, are choosing the right way in practice, every day. You refrain from initiating violence against other people’s persons and property. You deal with other individuals in your particular social lives, the exact same way that I am positing is the right way for everybody in the country, indeed the world.

    To refrain from initiating violence against other persons and their property is the flip side of the coin of positively using rationalism.

    I am here on this blog to make everyone realize that the content of what they are saying, contradicts what they are themselves doing.

    Everyone here who “supports” or “advocates” central banking, are at the same time people who do not think it justified to impose it themselves on others. Granted, there are likely those who would do so if they had the power, and would be willing to force others against their will. But in terms of who they are, what they are doing, everyone here are practising the ethics I myself espouse for everyone including me, and that includes acting using money, real goods, and trading with others in a context of private property rights.

    I am not wrong, contrary to what Sumner claims. He isn’t wrong either…in terms of how he is acting. He is just wrong in what he is saying. The content of what he is saying contradicts the nature of his (right) actions.

  58. Gravatar of Geoff Geoff
    17. August 2013 at 04:15

    RebelEconomist:

    “Yes, good observation Geoff – I leave you to hold Scott to account these days, since NGDP targeting ceased to be an immediate threat in the UK (although Scott may be encouraged to hear that I do not think we have heard the last of NGDPLT in the UK, as it is difficult for Carney to be as incontinent as his paymasters want as long as the inflation target is legally mandated).”

    I’m not doing what I am doing “to hold Scott to account.” It’s to help others who might be misled or brainwashed.

    “As you may recall, I agree with you that excessively loose monetary policy holds back recovery, and would cite the stronger recovery in the US (which closed more banks and allowed more foreclosures) than in the UK. In the same vein, I was interested to see Krugman’s post ( http://krugman.blogs.nytimes.com/2013/08/03/structural-humbug/ ) that noted the tendency for the US states that suffered the worst downturns to have the fastest recoveries – although needless to say, Krugman did not draw the conclusion that this suggests that getting on with liquidation is for the best!”

    Bingo. Instead, he’ll interpret it as yet more evidence that it is a demand problem, not a structural problem. The reason he does this is because his theory literally prevents him from connecting structural theories to historical data.

    If what you have in your mind is demand problem theory, then you will see the data as “confirming” demand problem theory.

    Of course, this is always communicated by the more sophisticated pundits in terms of alleged disinterestedness and unbiasedness. E.g. “I’ve looked in the data for the structural side theory to be confirmed, but I just don’t see it.” I chuckle whenever I read things like that. I think “Of course you wouldn’t see it!”

  59. Gravatar of Geoff Geoff
    17. August 2013 at 04:24

    Sumner:

    “”As you may recall, I agree with you that excessively loose monetary policy holds back recovery”

    If this is a joke I don’t get it. Faster NGDP growth would lead to slower RGDP growth? Okaaaay . . .”

    Not everyone defines “Recovery” as an unsustainable RGDP boost.

    It is true that the government might be able to bring about an increase in “aggregate” output by printing a bajillion paper notes and coaxing investors into allocating capital into lines that while boosting overall output, doing it unsustainably so, through capital consumption, etc.

    It’s interesting the way you are trying to pigeonhole RebelEconomist’s post into a narrow argument of NGDP and RGDP. I just finished writing that your theory is lacking in this respect, and there you go viewing and understanding what RebelEconomist said in those terms. So that should tell you I’m right about this.

    What RebelEconomist is saying has to do with capital structure sustainability, not whether or not “increasing NGDP causes an increase in RGDP” for a time.

  60. Gravatar of Suvy Suvy
    17. August 2013 at 10:40

    We’ve discussed this many times and I do agree with you on this. However, there is a difference between cutting 5% of GDP in one full swoop versus cutting $100-200 billion/year over an extended period. What the Keynesians don’t realize is that the size of the cuts combined with the size of the monetary stimulus matter and the effects are extremely nonlinear. If we slowly cut the deficit over a matter of years while keeping the monetary stimulus in place, we can reduce the deficit in a sensible manner.

    History shows that countries who run up massive deficits along with massive government debts are taking huge risks and effectively playing with fire. Those who are saying that we need to increase government spending during a time like this are basically saying that it’s a good idea to give a 7 year old kid the opportunity to play with dynamite. Deficits can get out of control very, very quickly and we just shouldn’t be playing around with them.

  61. Gravatar of For Obamacare Opponents Time is Not on Their Sides | Last Men and OverMen For Obamacare Opponents Time is Not on Their Sides | Last Men and OverMen
    19. February 2017 at 08:44

    […] just about-other than the sequester that Scott Sumner is so triumphant about.     https://www.themoneyillusion.com/?p=23017     Yeah, Scott, let’s pop champagne.    […]

  62. Gravatar of On Sequester, Scott Sumner Can Only Gloat | Last Men and OverMen On Sequester, Scott Sumner Can Only Gloat | Last Men and OverMen
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    […]      https://www.themoneyillusion.com/?p=23017 […]

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