Is the Fed finally beginning to see the problems with IT?

For years I’ve been arguing that the public doesn’t understand inflation targeting, and that the Fed needs a target that the public does understand, such as NGDP targeting.  In 2010 when core inflation was running below 1%, Bernanke said the Fed would seek to raise the rate of inflation closer to 2%. Talk radio told its listeners that the Fed wanted to raise their cost of living when average Americans were already struggling, and of course there was an uproar.

Now Mike Bryan of the Atlanta Fed has a post that discusses many of these problems.  He starts off with a survey done by Robert Shiller that shows the public and economists have a radically different view of what the word ‘inflation’ means. To average people inflation is something that reduces living standards, by raising the cost of living.  Economists would call that scenario a supply shock, or a fall in real GDP.  Economists think of inflation as something that raises both wages and prices, with no first order effect on real income.  And if the economy is depressed (as in 2010) the second order effect on real incomes is positive.

Here’s Bryan:

Seventy-seven percent of the households in Shiller’s poll picked number 2″””Inflation hurts my real buying power”””as their biggest gripe about inflation. This is a cost-of-living description. It isn’t the same concept that most economists are thinking about when they consider inflation. Only 12 percent of the economists Shiller polled indicated that inflation hurt real buying power.

I wonder if, in the minds of most people, the Federal Reserve’s price-stability mandate is heard as a promise to prevent things from becoming more expensive, and especially the staples of life like, well, food and gasoline. This is not what the central bank is promising to do.

What is the Federal Reserve promising to do? To the best of my knowledge, the first “workable” definition of price stability by the Federal Reserve was Paul Volcker’s 1983 description that it was a condition where “decision-making should be able to proceed on the basis that ‘real’ and ‘nominal’ values are substantially the same over the planning horizon””and that planning horizons should be suitably long.”

Thirty years later, the Fed gave price stability a more explicit definition when it laid down a numerical target. The FOMC describes that target thusly:

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate.

Whether one goes back to the qualitative description of Volcker or the quantitative description in the FOMC’s recent statement of principles, the thrust of the price-stability objective is broadly the same. The central bank is intent on managing the persistent, nominal trend in the price level that is determined by monetary policy. It is not intent on managing the short-run, real fluctuations that reflect changes in the cost of living.

Effectively achieving price stability in the sense of the FOMC’s declaration requires that the central bank hears what it needs to from the public, and that the public in turn hears what they need to know from the central bank. And this isn’t likely unless the central bank and the public engage in a dialog in a language that both can understand.

This is what I’ve been saying for years.  And you do that with NGDP targeting. You tell people the Fed is trying to keep the total income of Americans, in aggregate, rising at say 4.5% per year, or whatever the target is.  My only quibble is that the phrase “cost of living” at the end of the second to last paragraph is strange. “Cost of living” means price level, which is a nominal variable. I think he means “standard of living,” i.e. real GDP. Or maybe he means “that are reflected in changes in the cost of living.”

HT:  Ed Dolan


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68 Responses to “Is the Fed finally beginning to see the problems with IT?”

  1. Gravatar of Tom Brown Tom Brown
    27. July 2014 at 17:24

    Scott, I’m emailing Glenn Beck and Limbaugh right now and telling them that some pointed headed ivory tower academic economist from Massachusetts is trying to fool honest heartland Americans by calling “inflation” a new name: “NGDP” (which everyone knows stands for “No Good Deed Goes (unpunished))” … just one step closer to FEMA camps!!

  2. Gravatar of Tom Brown Tom Brown
    27. July 2014 at 17:26

    … sorry that should be “No Good Deed (goes) unPunished”

  3. Gravatar of Ben Ben
    27. July 2014 at 17:28

    “especially the staples of life like, well, food and gasoline.”

    How can housing, the inflation of which was the cause of the last crisis, not be in this list?! All economists never ever lay a glove on the cost of land. Rent/mortgage is far more of a % of income vs food/gas for most families. It’s also a huge financial commitment in a world of insecure jobs. Why the failure to tackle land costs in your profession? It baffles me.

  4. Gravatar of Jerry Brown Jerry Brown
    27. July 2014 at 17:41

    As far as a sales pitch, saying that you are targeting rising incomes is way,way better than saying you want to raise inflation.

  5. Gravatar of Jerry Brown Jerry Brown
    27. July 2014 at 17:41

    As far as a sales pitch, saying that you are targeting rising incomes is way,way better than saying you want to raise inflation.

  6. Gravatar of Jim Glass Jim Glass
    27. July 2014 at 17:54

    A while b

  7. Gravatar of Jim Glass Jim Glass
    27. July 2014 at 18:09

    What the heck happened there?? Anyhow…

    A while back I went to FRED and got the correlation between CPI and wage rate increases over the last 50 years, it was 99+%

    Noah Smith (IIRC) pointed out why this must me so: the purchaser’s cost of living is the seller’s income, so in the aggregate the two must rise at the same rate (in a closed economy, or lacking some sort of shock extracting income to elsewhere.)

    IOW, inflation is the overall increase in the *general* price level, and wages are prices, in fact the single biggest price item of all, so they aren’t excluded from it have to rise with everything else.

    But everybody sees the prices they pay going up, they don’t see their income going up — or they see their income going up and figure their prices shouldn’t go up, so not pocketing that gain is their loss, they figure, not realizing how their income gain is what’s causing their price costs to go up.

  8. Gravatar of Benjamin Cole Benjamin Cole
    27. July 2014 at 19:02

    I think Australia’s central bank is doing okay with a 2-3 percent inflation band target.
    Yes, I prefer NGDPLT, but maybe a 2-3 percnr inflation band mimics the same actual policies. Getting an independent public agency–the Fed—to change regime may be impossible…getting it to modify a regime may be…well, impossible too, but less impossible….

  9. Gravatar of Jamie Jamie
    28. July 2014 at 02:15

    As a non-economist who has been reading economics blogs for four or five years, much of economic debate can be summarised in the following conversation:

    Economist: The sky is green

    Non-economist: No, the sky is blue

    Economist: No, you don’t understand how I use the word ‘green’

    Note that, in this conversation, BOTH parties conclude that the other is an idiot.

    When normal people watch the news, they are told that ‘inflation’ is running at a particular level. Economists comment on this and normal people listen. Everyone knows that the conversation is about the change in the price of goods and services and not, say, the change in wages.

    Hence, when economists say that they want to push up the rate of inflation, normal people hear that as a desire to push up the price of goods and services.

    When you say “in 2010 when core inflation was running below 1%, Bernanke said .. ” my assumption is that you mean the price of goods and services. However, if that is not what you mean then you need to be explicit.

    When you say:

    “the public and economists have a radically different view of what the word ‘inflation’ means. To average people inflation is something that reduces living standards, by raising the cost of living. Economists would call that scenario a supply shock, or a fall in real GDP. Economists think of inflation as something that raises both wages and prices, with no first order effect on real income”

    you are telling me something different from the economist on the news on how I should think of ‘inflation’.

    Last week I read an absurd set of posts between two PhD economists one of whom thinks that ‘inflation’ means inflation of the money supply and the other who thinks that ‘inflation’ means inflation of the price of goods and services. Neither of them is using ‘inflation’ in the sense that ‘economists think of inflation as something that raises both wages and prices, with no first order effect on real income’.

    So who, if anyone, is right?

    The problem is that ‘inflation’ is a generic term which can be applied to pretty much anything. Economists could easily solve this problem by agreeing a convention where the term ‘inflation’ on its own is used only as a generic. Otherwise, economists should be specific about what they are discussing. ‘Asset price inflation’, ‘retail price inflation’, ‘wage inflation’, ‘money supply inflation’, ‘NGDP inflation’ and ‘sports attendance inflation’ are all different things.

    The problem here is that this is so obvious that it is easy for normal people to believe that they are dealing with a bunch of idiots. Rather than adopting common conventions on the use of important words, economists prefer to use different conventions, even within a single post by a single author, and then to conduct surveys that show that normal people are idiots.

    ‘Inflation’ is not the only term subjected to ‘word abuse’ by economists. You pointed out last week that there is no common definition of ‘aggregate demand’. I also read another post taking Paul Krugman to task for using the term ‘liquidity trap’ wrongly. In the course of comments on this last post, there was a debate BETWEEN economists on what the term ‘cash’ means? ‘Investment’ and ‘saving’ are also regularly abused. Sometimes economists talk about investment as in ‘I invested in a new factory’ while at other times they talk as though investment is an amount of money. Sometimes ‘saving’ and ‘savings’ are seen as the same thing while at other times they are different.

    Economics is currently at the same state that chemistry would be in if different chemists used different words for different elements and even for the concept ‘element’.

    Why should the rest of us take economists seriously when you can’t even agree on basic vocabulary or even understand the problems that this causes WITHIN the profession as well as with regard to communications with policy makers and the public?

  10. Gravatar of Saturos Saturos
    28. July 2014 at 02:21

    I’m pretty sure Scott is the only economist who uses “cost of living” to mean the economywide price level, much to the bewilderment of his students. He’s certainly the only one who then goes on to say that there is no such thing as the price level.

  11. Gravatar of dtoh dtoh
    28. July 2014 at 03:31

    Don’t see how you IT independent of N/RGDP growth rate target.

  12. Gravatar of Steven Kopits Steven Kopits
    28. July 2014 at 03:32

    Shilling says Q2 closer to 1% than 3%.

    Sadowski back from vacation yet?

  13. Gravatar of Dave Metelerkamp Dave Metelerkamp
    28. July 2014 at 04:22

    NGDP targeting = inflation + real growth, it has the word nominal in it! The public have to now understand inflation AND real growth. I really just don’t get your logic

  14. Gravatar of Dan W. Dan W.
    28. July 2014 at 04:44

    As I read this blog I envision a used car lot. The prospective customer is complaining that the prices on the stickers s are unrealistically high. The salesman invites the customer to calm down, explaining: Don’t you understand? The more you pay for the car the greater our national income!

  15. Gravatar of Benny Lava Benny Lava
    28. July 2014 at 04:55

    I have long said that the public was confusing inflation with prices and purchasing power. If you don’t get a raise at work but gas, rent, and groceries go up then purchasing power is reduced. Which is why I though the ban on the word “inflation” on this blog was good.

    Also, I do think that for years the media has been reducing the Fed activity to be “low interest rates = high inflation” so many you need to start with educating the press about demand and supply of money.

  16. Gravatar of TravisV TravisV
    28. July 2014 at 05:02

    Kevin Erdmann might find this interesting:

    “Corporate Profit Margins Are Getting Ever Fatter”

    http://www.businessinsider.com/profit-margins-are-getting-ever-fatter-2014-7

  17. Gravatar of Vasja Vasja
    28. July 2014 at 05:04

    Dear Scott,

    This is a bit off topic, but I couldn’t find a better place to ask you this…

    Over time I’ve come to understand your arguments for MMism (I think). You’ve laid out arguments on why IR is not a good proxy for the MP stance and pointed toward nominal GDP (or expectations..) as a better proxy. Now I wonder in terms of empirics, more precisely VARs. How would you disentangle the monetary policy shock from a non monetary policy demand shock, since they have very similar effect on the economy?

    With best wishes…

  18. Gravatar of Daniel Daniel
    28. July 2014 at 05:19

    As I read Dan W’s idiotic rambling I think “here’s a man who wants to have his cake and eat it too”.

  19. Gravatar of ssumner ssumner
    28. July 2014 at 05:20

    Jamie, I’m 10 times more frustrated than you are.

    Saturos, As far as I know all economists use “cost of living” to refer to the price level. It’s standard terminology.

    http://en.wikipedia.org/wiki/Cost_of_living

    Steven, Who is Shilling?

    Dave, Then just call it “GDP” or “national income” Neither of those have the term ‘nominal’. Surely it’s not hard to understand the concept of national income?

    Dan, As I read your comments over the years I think to myself that there are some commenters who are so far behind in the discussion that they don’t even realize that they are clueless.

    Benny gets it.

    Travis, That can’t be right! The BEA GDP data says there was a catastrophic fall in corporate profits in Q1.

    Vasja, I view all demand shocks as monetary shocks. A more useful separation might be to separate shocks to the supply of money and the demand for money. The supply of money is what most people mean by “monetary shock.” But I think that definition is problematic.

  20. Gravatar of Dan W. Dan W.
    28. July 2014 at 05:22

    Daniel,

    Clearly you lack a sense of humor. I suggest you buy one now. I hear the Monetarists will be raising prices.

  21. Gravatar of Brian Donohue Brian Donohue
    28. July 2014 at 07:52

    Can I echo Steven Kopits in wondering what happened to Sadowski? Another ‘nowcasting’ opporunity is before us, but dat boy done gone and flew the coop.

  22. Gravatar of Doug M Doug M
    28. July 2014 at 08:09

    “Economists think of inflation as something that raises both wages and prices, with no first order effect on real income.”

    But…sticky wages. Inflation allows the real wage to fall in environments when the real wage won’t fall on its own. With NDGP targeting real wages fall faster in recessions than under other monetary regimes. This is one of the selling points.

    In Mike Bryan’s penultimate paragraph, cost of living is clearly the correct phrase. The Fed does not manage short-term fluctuations in the cost of living… let the nominal variables go where they will…

    “Inflation” in the popular mind shaped by the experience of the 1970’s. OPEC, high gas prices … no gas at any price .. rationing, high food prices. Rising prices and rising unemployment. “Malaise” and “misery.”

  23. Gravatar of Major.Freedom Major.Freedom
    28. July 2014 at 08:48

    “Economists think of inflation as something that raises both wages and prices, with no first order effect on real income.”

    That is false. Economists do not all believe the fallacy that inflation of the money supply raises all wages and incomes equally at the same time such that the only possible reduction in standard of living occurs on the real side of the economy.

    The average person on the street who knows that their costs of living are going up more than their wages, is not necessarily talking about any “supply shock”, because even during times of real economic growth, there are individuals whose costs of living rise faster than their incomes. There are many millions of these individuals whose standard of living is reduced in this way.

    This confusion of is a direct consequence of hypostatization. Aggregates mentality. The public is one giant lump whose total wage rises more or less with inflation (but with a time lag which is of course ignored). Thus any reduction in standard of living MUST be supply shocks independent of inflation.

    Many millions of individual wage earners cannot keep up with inflation. Their wages rise with a significant time lag, and by the time their wages rise, inflation will have already sapped their purchasing power.

    When this was brought up on this blog years ago, the response was pure vitriolic contempt and hatred of that portion of the working class who could not increase their wage rates in time. That is how people who are wrong in theory tend to react when the light of truth is shined on them. The victims become deserved. The exploited become collateral damage. Then the same public are told they are so stupid that they are deluded into believing inflation is reducing their standard of living. That they should look somewhere else and to not pay any attention to the man behind the curtain.

    It seems “the public” understands inflation more than some economists.

    This blogpost is downright disgusting. Just awful. It is no wonder the bulk of the public don’t trust some economists. These economists are kowtowing to and advising their ideological overlords on how to maintain their exploitative control.

  24. Gravatar of TallDave TallDave
    28. July 2014 at 11:26

    Unfortunately the public’s misunderstanding seems to influence CBs across the world. From BOJ to Fed to ECB, CBs pat themselves on the back and say “job well done!” if inflation stays in check, irrespective of the effect on the economy.

  25. Gravatar of Major.Freedom Major.Freedom
    28. July 2014 at 13:10

    Doug M:

    “The Fed does not manage short-term fluctuations in the cost of living… let the nominal variables go where they will…”

    I understand the argument you are making, and from a certain perspective it is true. But from another perspective, the Fed does manage it.

    Imagine someone printed up $X dollars and purchased financial securities owned by a group of people.

    While from the perspective you are coming from would lead us to believe that because I am not directly controlling what happens after my particular set of purchases, it is nevertheless true that my actions have affected the standards of living of people in the short run by way of whatever the particular expenditures are afterwords. The greater my spending, the greater the “receding wave” of expenditures that occur after. This wave of expenditures that brings about relative changes in incomes and purchasing powers is not under my direct control, but I am still responsible for it existing at all.

    I may not be able to predict exactly whose purchasing powers are reduced and whose are increased, or when, but I can still know that the relative changes are because of what I did. It is from this perspective that the Fed “manages short term fluctuations in cost of living.” It is a blind management, but a management to be sure.

  26. Gravatar of Jim Glass Jim Glass
    28. July 2014 at 13:52

    When normal people watch the news, they are told that ‘inflation’ is running at a particular level … Everyone knows that the conversation is about the change in the price of goods and services and not, say, the change in wages.

    Normal people don’t know that “the price of goods and services” *is* their wages? (Thus the 99+% correlation between the two?)

    Only if they don’t bother to think about it.

  27. Gravatar of Doug M Doug M
    28. July 2014 at 15:20

    Jim Glass,
    People are aware of the changing prices of things they buy regularly… food, gas, and rent.

    I don’t think that many have memories for or keep records of too much other stuff they may of bought.

    And, do the degree that people to have some mental picture of food, gas and rent inflation, I don’t think that most do the calculus to say that food prices are up 4% but I received a 6% raise this year, so my real income is increasing 2%…. no, they deserved that raise, and they lock onto those prices that are up the most. People feel like they are always losing.

  28. Gravatar of Jamie Jamie
    28. July 2014 at 16:22

    Jim Glass: “Normal people don’t know that “the price of goods and services” *is* their wages? (Thus the 99+% correlation between the two?) Only if they don’t bother to think about it.”

    Only someone who doesn’t understand the difference between a list of numbers and an average of those numbers could make this statement.

    If economists don’t understand that an average does not apply to everyone in the population then there really is no hope for the profession.

  29. Gravatar of Major.Freedom Major.Freedom
    28. July 2014 at 16:40

    Jim Glass:

    The prices of goods and services is NOT their wages. John Stuart Mill knew this more than 150 years ago:

    “We now pass to a fourth fundamental theorem respecting Capital, which is, perhaps, oftener overlooked or misconceived than even any of the foregoing. What supports and employs productive labour, is the capital expended in setting it to work, and not the demand of purchasers for the produce of the labour when completed. Demand for commodities is not demand for labour. The demand for commodities determines in what particular branch of production the labour and capital shall be employed; it determines the direction of the labour; but not the more or less of the labour itself, or of the maintenance or payment of the labour. These depend on the amount of the capital, or other funds directly devoted to the sustenance and remuneration of labour.”

    One of the great confusions in economic thinking is to percieve economic events and concepts from a Hericlitean philosophical lens, where reality is not percieved as a collection of separate and distinct entities and events, but rather as a kaleidoscope, where one event is also another event. It results in exactly the confusion you have in percieving expenditures on and prices of output, as the same thing as expenditures on and prices of labor.

    Wage prices are not output prices. They are separate expenditures, made at separate times. When you purchase a good, you are not purchasing labor. Labor was already purchased by someone else by the time you purchase what that labor helped produce.

    The prices of goods and services can and does move separate from prices of labor. In fact, if we consider ceteris paribus, spending on labor is actually in competition with spending on goods and services. This is because any given sum of money can only be spent on either goods or labor, but not both at the same time. You are not purchasing labor when you buy food or clothing. You are only purchasing labor when you hire labor yourself.

    A rise in spending on final goods, ceteris paribus implies a reduction in spending on everything else, including labor. Ceteris paribus, the only way that a rise in spending on goods can be matched by a rise in spending on labor, is only if total spending rises. If total spending does not rise sufficiently, then a rise in spending on final output can exceed the rise in spending on labor. Spending on final goods is a function of both prior labor income and prior profit/interest income.

    It is a total falsehood to not only claim that wage expenditures are final output expenditures, but to also claim that within the matrix of wage payments, all individual wage payments keep up with the percent rise in prices on final goods.

    When an individual wage earner observes that the prices of food, gasoline, tuition, healthcare, rent, clothing, and energy all rise faster than his own wages, then no he isn’t “confused” by thinking that inflation is lowering his standard of living. Yiu are living in a dangerous self-imposed bubble if you have no awareness of how many millions of people are forced to have a lower standard of living because of this NOMINAL “shock”.

    Real wages have not risen anywhere near the rate of total production growth, for the last few decades. Inflation is persistently outpacing nominal wage growth.

  30. Gravatar of Major.Freedom Major.Freedom
    28. July 2014 at 16:47

    Doug M and Jamie have thankfully avoided the monetarist koolaid.

  31. Gravatar of Jim Glass Jim Glass
    28. July 2014 at 17:26

    The prices of goods and services is NOT their wages.

    Right, it is their income. And CPI and wage rate increases over the last 50 years correlate by 99+% … why?

  32. Gravatar of ssumner ssumner
    28. July 2014 at 18:22

    Doug, But cost of living is a nominal variable, so he should have worded it differently if he did mean cost of living.

  33. Gravatar of Major.Freedom Major.Freedom
    28. July 2014 at 18:42

    Jim Glass:

    “Right, it is their income.”

    It isn’t their “income” either. Money spent on goods and services is the revenue income of the wage PAYERS. If their money costs, which includes wages, is less than their revenue incomes, then they earned a profit.

    You are not paying wages when you buy goods. Workers are paid wages when their employer paid them prior to the expenditures on final goods. This spending comes out of capital.

    Profit is the original and primary income. Prior to capitalism, prior to the existence of capitalists, there was only spending on goods and services produced by those who did not pay for any labor. The money they earned were product sales revenues. The money they earned were not wages, because they weren’t selling their labor. They were selling goods.

    If they incurred any money costs, in this “early and rude” state of society, then those money costs would be deducted from their revenues and the left over would be profit. If no money costs are incurred, then the entirety of sales revenues is all profit. Note that 100% rate of profit does not imply absolute high prosperity or high real growth. It is just an accounting relation.

    It was not until the first people started to pay for labor, did wages arise, and those wages represented an increase in money costs to deduct from what would otherwise be profit. Real incomes rose even though nominal profits fell.

    “And CPI and wage rate increases over the last 50 years correlate by 99+% … why?”

    The CPI if calculated using the same non-hedonic adjustment methods as used prior to 1990, would show the CPI to be higher than reported. I thought that was common knowledge. When we look at the goods wage earners actually buy, the prices are increasing more than the CPI. More importantly however, is that not every individual’s wages are capable of rising as fast as the goods they buy. This is because inflation cannot physically raise everyone’s incomes equally or at the same time. While a round of inflation may be used for additional nominal net investment, a portion of which goes to additional wage payments, the resulting spending on consumer goods is in competition with the not yet risen spending from other wage earners who are still earning the prevailing wages. The totality of all wages may have gone up, but within that rise there is both increases and no increases. One group of wage earners getting paid ten times as much because of inflation might make total wages rise, but that doesn’t mean every wage earner has experienced that percentage rise in wages. This is a main source of impoverishment within the working class.

    As for why there would be such a tight correlation between average wage increases in percent, and consumer price inflation in percent, is rather trivial: Most inflation takes the form of bank credit expansion used to fund net investment, and it is from net investment that wages are financed. But again, average does not mean everyone.

    Note that this is not NGDP. NGDP is the result of expenditures financed in part by prior wage payments. NGDP can go up more than prior wages, if prior profits rise more than prior wages.

  34. Gravatar of Doug M Doug M
    29. July 2014 at 08:30

    Jim Glass,

    And CPI and wage rate increases over the last 50 years correlate by 99+% …

    http://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=1965-06-16%2C1965-06-16&coed=2014-06-01%2C2014-06-01&width=670&height=445&stacking=&range=Custom&mode=fred&id=CPIAUCSL%2CAHETPI&transformation=pc1%2Cpc1&nd=%2C&ost=-99999%2C-99999&oet=99999%2C99999&scale=left%2Cleft&line_color=%234572a7%2C%2389a54e&line_style=solid%2Csolid&lw=2%2C2&mark_type=none%2C&mw=1%2C1&mma=0%2C0&fml=a%2Ca&fgst=lin%2Clin&fq=Monthly%2CMonthly&fam=avg%2Cavg&vintage_date=%2C&revision_date=%2C

    closer to 75% correlation…

  35. Gravatar of Major.Freedom Major.Freedom
    29. July 2014 at 09:14

    I often hear the argument that recessions cause people to take on more debt, and other variations such as sluggish wage growth causes workers to take on more debt.

    What I never see in these arguments is any attempt at an explanation of where all this additional debt money comes from. There seems to he an implicit belief that debt increases are potentially infinite, and the only thing that limits it is the demand for it. So the belief is that recessions and sluggish wage growth leads to an increased demand for debt, and that is supposed to be sufficient to explaining the increase in supply of debt.

    Nowhere is there any analysis of bank credit expansion or inflation making it possible for people to live beyond their means. With a sound money, a market driven money, it would be much more difficult for people to take on more debt to finance a lifestyle that is beyond their means. But because of too much debt financed by inflation, to keep prices up and to keep spending up from where market forces would have put them, lent to those who are living beyond their means, has led to what is now 77 million Americans having outstanding debt that has been sent to collections agencies. That is not a misprint. The Federal Reserve System has papered over the real structural problems of the country to such a degree that almost half the workforce is on debt inflation life support that they are unable to pay back.

    Debt is the primary form that additional inflation takes. Those of you who want more money and spending, are whether you realize it or not, calling for more debt and more living beyond one’s means.

    As I have mentioned previously, I strongly suspect there is a debt bubble, and when this bubble bursts, no MM can claim they couldn’t know about it, that their theory told them to pay no attention to bubbles, to believe the non-existent free market can “sort it all out.”

  36. Gravatar of Major.Freedom Major.Freedom
    29. July 2014 at 10:32

    According to Wells-Fargo, the after-tax income of the bottom 20% of wage earners has fallen over the last 5 years.

    The poorest are always the worst hit with government intervention. These are the forgotten voices in the marches of aggregate flag waving and “social welfare” socialist programs.

    It is jaw droppingly awe inspiring how despite the psychopaths in Washington, and the self-righteous and arrogant police forces all around the country, the economy is still alive.

  37. Gravatar of vincecate vincecate
    30. July 2014 at 03:04

    “Economists think of inflation as something that raises both wages and prices, with no first order effect on real income.”

    From page 9 of “The General Theory” we read, “Now ordinary experience tells us, beyond doubt, that a situation where labour stipulates (within limits) for a money-wage rather than a real wage, so far from being a mere possibility, is the normal case. Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the price of wage-goods.” In effect he is saying that when the demand for labor shifts lower it is easier to trick labor by reducing the value of money than to lower peoples wages.

    Krugman agrees that, “downward nominal rigidity of wages is simply a fact, attested to by overwhelming evidence.”. So Krugmran’s fix for “the sticky wage problem” is inflation.

    http://krugman.blogs.nytimes.com/2013/10/12/sticky-wages-and-the-macro-wars/?_php=true&_type=blogs&_r=0

    So really economists want to print money to make people poorer on their existing wages (in real terms), so companies can afford to hire more people and reduce unemployment.

    The plan of printing money is to reduce the real income of the average guy and it works every time.

  38. Gravatar of TravisV TravisV
    30. July 2014 at 07:57

    Vince,

    You’re correct, but why is it such an outrage?

    After all, full employment with real wages a bit lower is preferable to high unemployment with higher real wages, right?

    You should sign up for our plan!

  39. Gravatar of ssumner ssumner
    30. July 2014 at 07:58

    Vincecate, Meet Major Freeman.

    The goal of monetary stimulus is to raise real incomes.

  40. Gravatar of TravisV TravisV
    30. July 2014 at 08:12

    Prof. Sumner,

    I think your answer isn’t quite clear enough.

    Vincent’s logic is perverse. He’s saying that we should root for lower NGDP and lower employment because a fall in employment will increase the average real wage. That’s correct but obviously undesirable.

    A surprise acceleration in NGDP increases real growth (output) and employment. Yes, the average real wage falls, but only because lots more people are working!

    Vincent, abandon the dark side and sign up for our plan!

  41. Gravatar of Daniel Daniel
    30. July 2014 at 08:54

    Thing is – what Major_Moron and that Vincent Cate nutbag are babbling about is their method of rent-seeking.

    Of course that in a recession real wages go up – for those that are still lucky to have a job.

    Also, cash also brings a positive return under deflation.

    And deflation means a transfer of wealth from debtors to creditors.

    And that’s why those nutbags root for deflation and unemployment. So they can have it better at the expense of the rest of society.

    Classical rent-seeking.

  42. Gravatar of Tom Brown Tom Brown
    30. July 2014 at 11:29

    “Major Freeman?”

    Major_Freedom/Major-Freedom/Major.Freedom/geoff,
    any relation?

  43. Gravatar of vincecate vincecate
    30. July 2014 at 11:32

    ssumner, “The goal of monetary stimulus is to raise real incomes.”

    What Keynes and Krugman are saying is that they can reduce unemployment by printing money and lowering the real wages for those who have jobs. This does raise the real income for some of those who used to be unemployed. And it may raise the average real income if enough switch from unemployed to employed.

  44. Gravatar of vincecate vincecate
    30. July 2014 at 11:44

    Travisv: “Vince,

    You’re correct, but why is it such an outrage?

    After all, full employment with real wages a bit lower is preferable to high unemployment with higher real wages, right?”

    I would not say outrage. I think it is not correct to say:

    “To average people inflation is something that reduces living standards, by raising the cost of living. Economists would call that scenario a supply shock, or a fall in real GDP. Economists think of inflation as something that raises both wages and prices, with no first order effect on real income. ”

    Also, I don’t think Keynes or Krugman says it clearly enough that most people realize the plan is to drop the real wages of those who still have jobs. You have to really understand what they are saying and think it through. If working people really understood the plan I am not sure they would support it.

  45. Gravatar of vincecate vincecate
    30. July 2014 at 11:51

    Daniel, “And that’s why those nutbags root for deflation and unemployment. So they can have it better at the expense of the rest of society.”

    I don’t think namecalling helps the debate at all. Nor does trying to claim what someone else’s motives are. Try to find an error in my logic or argument.

    In practice printing money over the last 6 years has really helped the rich and hurt the poor. The poor people have to pay more for stuff and their incomes don’t go up as much. The rich people own most of the assets and asset prices go up first when there is lots of new money.

    I am just trying to understand what is going on.

  46. Gravatar of Daniel Daniel
    30. July 2014 at 14:03

    In practice printing money over the last 6 years has really helped the rich and hurt the poor.

    Provide evidence, nutbag.

  47. Gravatar of Major.Freedom Major.Freedom
    30. July 2014 at 21:10

    Daniel:

    You are only revealing your own ideology. Everything you have just said about libertarianism applies to you.

    “their method of rent-seeking.”

    It is not rent seeking for someone to refuse to have others benefit at that someone’s expense.

    If I have a job, but you don’t, and I do not initiate force against your person or property, then I am not gaining at your expense if I am not victimized by coercion in money such that the government can’t print money ex nihilo and enable you to benefit at my expense.

    For A to gain at the expense of B, it is necessary that B be subjected to threats of or uses of force such that wealth is transfered from B to A.

    “Of course that in a recession real wages go up – for those that are still lucky to have a job.”

    It isn’t just luck. It may be difficult for your sensitive ego to handle, but it is possible for A to have a job while B does not because A is smarter, more productive, and offers a better value to others than B, such that B’s unrealistically high wage demands lands him in the unemployment line.

    There is room for everyone in the division of labor, provided they agree and are willing to accept a much lower payment than they might otherwise feel they deserve because they poop and piss just like higher income earners.

    “Also, cash also brings a positive return under deflation.”

    Great! That means even people with little cash earnings can earn a real return. What a great way to help the poor!

    “And deflation means a transfer of wealth from debtors to creditors.”

    In a free market with productivity based price deflation, no, there is no wealth transfer. Wealth transfer occurs when there is coercion in money. With a free market money, the individual decides for himself what commodity offers of payment he is willing to accept, and thus there would not be any wealth “transfer”, for both inflation and deflation.

    “And that’s why those nutbags root for deflation and unemployment. So they can have it better at the expense of the rest of society.”

    And that is exactly why you want violence in money and inflation. So you and the class you identify yourself as “belonging to” can have it better at the expense of everyone else.

    “Classical rent-seeking.”

    Glad you admit that your own advocacy is one of rent seeking.

    Your ideas so messed up and warped, that you can imagine only two choices, one coercive against “the poor”, the other coercive against “the rich”.

    You can’t even comprehend a non-coercive, mutually beneficial choice! Do you see how you are communicating to the world that your upbringing is one of abuse and torment that it’s all you know? Even with the internet, free books on philosophy, ethics, economics, all the opportunity to improve yourself, and you would rather waste your life away calling people names and making extremely superficial an long ago refuted claims. Truly, I mean this sincerely, I feel so sorry for you. Whoever abused you ought to be ashamed of themselves.

  48. Gravatar of Major.Freedom Major.Freedom
    30. July 2014 at 21:14

    Daniel:

    “Provide evidence, nutbag.”

    Over the last 6 years the richest have gotten richer and the poor have gotten poorer. Wealth inequality has risen over the last 6 years.

    The biggest 5 banks now own a larger relative chunk in terms of percent of GDP post crisis than they did pre crisis. Inflation benefits the banks.

    That is the evidence. You just can’t understand it because your flawed theory is twisting amd distorting your interpretation of the evidence.

  49. Gravatar of Major.Freedom Major.Freedom
    30. July 2014 at 21:35

    ssumner:

    “The goal of monetary stimulus is to raise real incomes.”

    That is the goal invented by court intellectuals and welcomed by the court to encourage democratic support for the actual goal, which is and has always been, to protect the bank’s and the government’s money and wealth acquisition from “outside”, “hostile” forces, including market forces.

    The bankers and politicians who coalesced on Jekyll Island to draft up what woild become the Federal Reserve Act were not doing so for the benefit of the “little guy”. They did so for themselves, secretly and away from the public’s eye (at the time).

    After the increased coercion became entrenched, the government needed ongoing intellectual justification. Out of all the competing theories on money, they of course welcomed, financed, and promoted those court intellectual economists who, much like the sleazy power hungry lawyers who are promoted to justify illegal wars and torture, provided an intellectual pretext, a cover, for inflation as somehow beneficial to the “little guy”, by removing his dependency on the sovereign customer for income, to becoming dependent on the government for income. The coercion and destruction are either ignored, or ridiculed when they are brought up. Never any solid arguments or reasoning. It is all this fake intellectual, pandering to political powers.

    MMs have put their faith in legalized counterfeiting cartels controlled behind the scenes by the state and bankers, but presented to the public as managed by PhD technocrats who have little to no experience in running a business, and have thus far no understanding of economic calculation, no understanding of the business cycle, and no moral courage but plenty of ambition and a dangerous sense of eliteness and self-imagined social engineers.

    Anyone who wants to be in charge of a government backed monopoly, are exactly the people who should not be in charge of said monopoly.

  50. Gravatar of Major.Freedom Major.Freedom
    30. July 2014 at 21:40

    I agree with Milton Friedman when he said that money is much too important to be left to central bankers, and when he said he is in favor of abolishing the Fed:

    http://www.youtube.com/watch?v=m6fkdagNrjI

    Myself and all other “End the Fed” econo types are the true heirs to Friedman.

    Market monetarists are the true heirs to Keynes.

    And yet MMs present Friedman as their intellectual figurehead, and chastise Keynesians all the time.

    Interesting turn of events.

  51. Gravatar of ssumner ssumner
    31. July 2014 at 06:50

    vincecate, If output rises then real incomes rise. If output doesn’t rise then real incomes are unaffected.

  52. Gravatar of TravisV TravisV
    31. July 2014 at 07:21

    Vincent Cate,

    I discussed your argument more in the comments section of this post:

    https://www.themoneyillusion.com/?p=27193

  53. Gravatar of Vincent Cate Vincent Cate
    31. July 2014 at 08:34

    TravisV, I think I agree with you and Brian in that other thread.

  54. Gravatar of Vincent Cate Vincent Cate
    31. July 2014 at 08:37

    ssumner: “vincecate, If output rises then real incomes rise. If output doesn’t rise then real incomes are unaffected.”

    What Keynes and Krugman are saying is that printing money makes the money worth less so that real incomes go down, for those employed, so that more people get jobs. Where are Keynes and Krugman wrong?

    There is also the issue of short term and long term. Long term incomes will go up with inflation. But short term they probably don’t go up as fast, at least when there is high unemployment.

  55. Gravatar of TravisV TravisV
    31. July 2014 at 09:17

    Vincent,

    Your view doesn’t make sense.

    Why on Earth would you prefer high unemployment + high average real wage to low unemployment + slightly lower average real wage?

  56. Gravatar of Vincent Cate Vincent Cate
    31. July 2014 at 09:40

    Where did I say that was my view?

  57. Gravatar of Vincent Cate Vincent Cate
    31. July 2014 at 09:41

    I really have been trying to explain Keynes and Krugman and leave my view out of it.

  58. Gravatar of TravisV TravisV
    31. July 2014 at 09:54

    Vincent,

    No hiding your cards, please. What is your position?

    You think the Federal Reserve’s monetary policy is too expansionary, right?

    In other words, you prefer high unemployment + high average real wage to low unemployment + slightly lower average real wage.

    Right?

  59. Gravatar of Tom Brown Tom Brown
    31. July 2014 at 10:45

    Travis & Vincent: Probably few people here will care, but Jason Smith’s (creator of the Information Transfer Model (ITM) of economics) view is as follows (which dovetails with what you two are saying I think):

    http://informationtransfereconomics.blogspot.com/2014/07/is-monetary-policy-best.html

    “When it does work, monetary policy works by kind of a dirty trick

    Although not the entirety of the argument in favor of monetary macroeconomic stabilization, the mechanism by which it operates is to use inflation to make workers accept a real wage cut while not taking a nominal wage cut (also could be applied to firms or households). Because of money illusion, humans focus on the nominal values so don’t notice their real income is falling.

    In the information transfer model, there is significant RGDP growth that is caused by expansion of the medium of exchange when the monetary base is small [3], so this is not necessarily true of the information transfer model. However, monetary policy advocates aren’t advocating the information transfer model.”

    If you’re scratching your head over that last paragraph, first take a look at his footnote [3]:

    “[3] I actually think this is a major issue for monetary economics. How do economies get started? Well, if you create a monetary system you get an economy — that is RGDP growth. At some point a doubling of the monetary base may just lead to inflation (according to long run neutrality), but when the base is small, a doubling of the base should have some real effect by allowing more transactions to occur.”

    OK, so I still probably can’t answer your questions about that, but I do know that one of the conclusions of Jason’s ITM is that when cash in circulation (call it “M0”) is small compared to NGDP, then the ITM predicts the QTM applies more so than it does when M0 / NGDP is large. Specifically when log(M0/c)/log(NGDP/c) = 1/2 the QTM applies exactly. When this ratio is 1, then dP/dM0 = 0 and the QTM fails (assuming in both cases the CB has a market based target like inflation rate or NGDPLT). “c” is one of the 1 to 3 parameters (depending on which specific ITM model is being used), needed in his model (i.e. it’s fit to the empirical data for each separate economy: e.g. here’s a 1-parameter model fit over several economies).

    So, overall, his answer is best summed up by “it depends.” … But at least he tells you how to calculate what it depends on! (and he’s willing to make specific testable predictions over the next six years: i.e. he lays out a means to falsify his hypotheses based on future empirical data: something I never see anyone else discuss much… it seems like most econ bloggers never spell out under what precise conditions they’ll abandon their hypotheses).

    The bit about the unemployment rate probably comes from this post:

    http://informationtransfereconomics.blogspot.com/2014/07/remarkable-recovery-regularity-and.html

  60. Gravatar of Tom Brown Tom Brown
    31. July 2014 at 11:09

    … I suspect that Jason can afford to put his core hypotheses on the line wrt to his predictions for the future since economics is not his day job and thus his livelihood doesn’t depend on “protecting” them. Plus he has a higher burden of “proof,” being that they are unconventional.

  61. Gravatar of TravisV TravisV
    31. July 2014 at 13:27

    Tom Brown,

    This Jason Smith stuff is a little bit all over the place. I’m very skeptical of the validity of his model. From what I can tell, Smith disagrees with Prof. Sumner about monetary offset. But he hasn’t disproven Sumner by any means.

    I also don’t agree with his framing that expansionary monetary policy is some kind of “dirty trick”……

  62. Gravatar of ssumner ssumner
    1. August 2014 at 06:16

    Vincent, You said:

    “What Keynes and Krugman are saying is that printing money makes the money worth less so that real incomes go down, for those employed, so that more people get jobs. Where are Keynes and Krugman wrong?”

    No, they say real hourly wages fall (which is not necessarily true, it’s W/NGDP that falls.) They did not say real incomes fall. Indeed their theory implies real incomes rise on average. Incomes reflect overtime hours, capital income and lots of other factors.

  63. Gravatar of Tom Brown Tom Brown
    1. August 2014 at 08:43

    TravisV, you may be correct. But I don’t think he’s trying to prove anybody wrong… except maybe himself!: at least he’s put his theory up for some specific tests. If it passes these tests, that doesn’t prove he’s correct, and the only thing to do is put it up for more tests, and if it passes them, even more, etc. But I wonder why other people don’t discuss a similar process of falsification for their own theories? I don’t see how the science advances without routinely exposing core hypotheses to falsification. Maybe that happens in journals, but I don’t see it happen on blogs, do you?

    If your theory is “the formula works but it requires X, and the only way to know if X is present is if the formula works” then that’s not disprovable, but it’s also circular. The theory of X is logically consistent and consistent with all known data, but it also provides no explanation whatsoever. It’s no use trying to prove such a theory wrong. I see this kind of thing done all the time on blogs: X is always chosen so that there’s no way to independently test for it’s presence. No way to falsify the X hypothesis.

    The refreshing thing about Jason is he’s tried to avoid that circularity (and I think largely succeeded). The chances that his theory is correct is small… but I think this aspect of his approach is good.

    Vincent Cate has done this to some extent too: he’s predicting multiple consecutive months of hyperinflation for Japan for the beginning of 2016. Again if it happens, it doesn’t prove him right… his theory will have to stand the test of time… i.e. 100’s of thousands more correct hyperinflation predictions (with zero false alarms) over the following millennia… Lol… Sorry Vincent, that’s a bit high of a bar maybe. 😀 … but Jason’s numerical results can be replicated by anybody. I suspect that Vincent’s Japan prediction involves some key measures, but it boils down in the end to his own gut feeling. I doubt there’s a specific numerical calculation he’s done that can be applied to any country by anybody. Am I wrong Vincent?

  64. Gravatar of TravisV TravisV
    1. August 2014 at 09:35

    I did not realize Vincent made that prediction. Good for him. He’s not a coward like Major_Freedom.

    That said, Vincent is wrong to prefer high unemployment + high average real wage to low unemployment + slightly lower average real wage.

  65. Gravatar of vincecate vincecate
    1. August 2014 at 16:45

    I would say the Keynesian dirty trick worked when they went off the gold standard in 1933. But now there are so many benefits and salaries that are indexed to inflation that it does not work nearly so well. People did not know about inflation before 1933 and so Keynes was right. But they have done the trick for so many years that it does not work so well any more.

    What Tom said about me is right. I think Japan will get hyperinflation and then the Pound and Dollar will follow (probably Euro too). Then paper money all over the world.

    My two most popular blog posts which also sum up my views are:

    http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html

    http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.html

  66. Gravatar of Major.Freedom Major.Freedom
    1. August 2014 at 19:37

    TravisV:

    “I did not realize Vincent made that prediction. Good for him. He’s not a coward like Major_Freedom.”

    Since when did refraining from claiming or presuming to have knowledge that I do not in fact have, constitute “cowardice”?

    Since when did courageousness mean arrogance combined with ignorance?

    I think you’re just mad that the only way you can refute my ideas are by presenting or knowing better ideas, which maybe you’ve been having trouble with?

    It is not courageouw to beliege in what one knows to be wrong. Trying to predict the future knowledge, choices and actions of people, most of whom I have never met and never will meet, just seems way off to me.

  67. Gravatar of Major.Freedom Major.Freedom
    1. August 2014 at 19:48

    TravisV:

    “That said, Vincent is wrong to prefer high unemployment + high average real wage to low unemployment + slightly lower average real wage.”

    Based on what? The unexplained and not to be questioned moral claim that the individual must be sacrificed for the sake of society? OK Herr Goebbels.

    You are absolutely without a shadow of a doubt wrong to prefer initiations of force and coercion to sacrifice some individuals for the sake of other individuals. How do I know? Not just because your morality is diseased, but more importantly because it doesn’t actually succeed in getting what you want by using innocent individuals as mere means to the ends of others. Inflation reduces everyone’s standard of living in the long run, not just those who have jobs.

    Your doctrine of hate leads to hate in action.

  68. Gravatar of Daniel Daniel
    2. August 2014 at 03:13

    Your doctrine of hate leads to hate in action.

    http://1.bp.blogspot.com/-1Ql7_Gp04gs/TYVGFxDauZI/AAAAAAAAETw/I8Orp9PScoU/s1600/Camel%2Bfoaming%2Br.jpg

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