My slow response to Tyler Cowen’s quick response

Tyler Cowen reacted to the recent Fed decision.  I don’t understand several of his cultural references, but I’ll respond to at least some of his points:

I would put it thus: the Fed probably decided to do the best it could within political constraints and a framework of more or less stable prices.  Which won’t do much good at all.

They are certainly operating under political constraints, and what they’ve done last week certainly won’t help.  But I also think they’ve shown a lack of creativity.  In some ways their actions (QE and Twist) seem more radical that 2% inflation targeting, level targeting.  But the latter policy would actually be far more expansionary.  Both NGDP and RGDP would have to grow considerably faster than currently expected to get inflation up to 2% over the next 5 years (especially using the Cleveland Fed measure of expectations.)   Admittedly, even that policy would result in a sub-par recovery.  But how radical is it?  It would essentially mean the Fed is reneging on the employment mandate, and targeting prices only.  And we now live in a world where even that sort of conservative dream policy is viewed as being too stimulative.

1. The median voter hates price inflation.  Don’t blame Bernanke.

The median voter doesn’t understand inflation.  They don’t know the difference between supply-side inflation and inflation.  So it’s no surprise that “inflation” is unpopular.  Bernanke would be creating demand-side inflation, which raises the real incomes of Americans.  It’s an open question as to how unpopular that would be.  There’s no question that QE2 wasn’t all that popular.  But I’d make two points.  Obama was significantly more popular when QE2 was creating 200,000 jobs a month and reducing the unemployment rate, than he is now, with oil prices falling fast.  Second, part of the oil price increase under QE2 was Libya, which isn’t demand-side at all.

2. Today price inflation will accelerate real wage erosion, or at least is perceived so, who wants to take credit for that?

Demand-side inflation reduces real hourly wages (sometimes) but raises real annual incomes.  People care much more about real annual incomes than real hourly wages.  They want to work.  A president would much prefer real hourly wages falling and real incomes rising, rather than the reverse.

3. Core CPI is already going up at a rate of two percent and 3.8 percent for the broader bundle, at least for the time being.  Voters don’t know or care what is embedded in the TIPS spread, etc.

Lots of presidents have been highly popular with 2% core and 3.8% headline inflation.  Those are very typical inflation rates.  Not many have been popular with 9% unemployment for as far as the eye can see.  Voters do care about headline inflation, but it’s only averaged 1% over the past three years, and is expected to average about 1.4% over the next 5 years.  Headline inflation isn’t the biggest economic problem in America, unemployment is.  That’s why Obama is highly unpopular.  Plummeting house prices mean lower “inflation.”  Do a poll and find out how many voters see “inflation” that way; see how many actually welcome lower housing “inflation.”  For most voters inflation is the price of gas, period.

4. Some of the “inflationists” ignored supply-side factors and bottlenecks and didn’t see this price pressure coming.  That has thrown their entire analysis into doubt, unjustly probably but nonetheless.  In any case it is no longer the simple story where Q goes up first and only later does P rise.

I strongly agree here.  I’ve always argued that AD raises prices—there is no such thing as a flat SRAS.   And it does so right away, due to commodity prices.  The peak oil problem makes this even worse, as Tyler indicates.  The rising inflation is an embarrassment to demand-siders who have focused their analysis on the need for higher inflation and who buy into Keynes’s “bottleneck” theory of inflation, or NAIRU models.  FDR disproved those models when he generated rapid inflation in 1933.  On the other hand NGDP growth has been slowing from an already low level, so us market monetarists are seeing our predictions vindicated.  If you don’t generate robust NGDP growth, you CANNOT get a robust recovery.

Every now and then, you ought to conclude that what you see is what you get and that is because of the rules of the game.  When it comes to further monetary stimulus, I’m not sure there’s so much more to say.

Maybe not right now, but this policy will eventually fail.  And when it does we’ll be right back here debating the need for more monetary stimulus.  Eventually the Fed will do what it should have done in 2008-09, but after much needless suffering.  Just as eventually (in 1981) the Fed did the tight money policy it should have done in 1966.  And eventually (in 1933) it did the easy money policy it should have done in 1930.  That’s why pundits need to keep up the pressure, no matter how much it looks like we are losing.

PS.  At the request of some commenters, I added a link to my new NGDP paper on the right side of this blog, in the category “Quick intro to my views.”  I think it is the best place to see my policy views in one place.



45 Responses to “My slow response to Tyler Cowen’s quick response”

  1. Gravatar of bill woolsey bill woolsey
    24. September 2011 at 10:57

    I don’t think “demand side” inflation leads to increases in real income necessarily. Only in special situations.

    I will grant that “supply side” inflation decreases real incomes for most people.

    As for the argument about higher inflation lowering real wages, and how that is a bad thing, the response that real incomes will rise misses the point.

    If inflation rises today, my real wage will probably fall. It is those unlucky formerly unemployed people whose real incomes will rise because they begin to work.

    The goal is more rapid growth in expenditure on output. That this might well lead to higher inflation is unfortunate.

  2. Gravatar of Lars Christensen Lars Christensen
    24. September 2011 at 11:55

    Bill, I strongly agree – it is predictability and stabilty og NGDP we need – arguing for inflation is not on its own warranted.

  3. Gravatar of Scott Sumner Scott Sumner
    24. September 2011 at 13:23

    Bill, I meant if at less that full employment. In that case the SRAS is upward sloping, and more AD leads to more RGDP, and hence more real income.

    Bill and Lars, I agree we should stop talking about inflation and instead talk about NGDP.

  4. Gravatar of Bob Murphy Bob Murphy
    24. September 2011 at 13:47

    Scott can you please explain this more clearly:

    Demand-side inflation reduces real hourly wages (sometimes) but raises real annual incomes.

    The only sense I can make of that, is if you are looking at a per-worker figure for the former, but a per-workforce figure for the latter. Is that right?

  5. Gravatar of Matt Waters Matt Waters
    24. September 2011 at 16:15


    “Annual Income” can be raised with demand-side inflation per-worker as well.

    For example, Germany has supposedly handled the crisis well without unemployment going up very much, but instead of unemployment German firms have cut worker hours. It helps moral well than pure lay-offs, but functionally it has the same effect on demand. Lower hours leads to demand-side deflationary cycle as much as higher unemployment.

    There’s less of that in the US, but most government workers do now have furloughs and many companies have either cut hours or forced managers to take unpaid vacation. For them, their real hourly wages may go down with more demand-side inflation but their real incomes could go up as well.

    And in the long run, the demand-deflation cycle will produce far worse outcomes for everyone. The architects lucky enough to be working aren’t rejoicing about low inflation. They are very scared of losing their jobs and have zero bargaining power or flexibility. As a way to increase real wages, there could not be a worse way to do it than demand-side deflation.

  6. Gravatar of Matt Waters Matt Waters
    24. September 2011 at 16:19

    Uh, I should have said that cutting hours keeps morale higher than pure lay-offs. I should really proofread my comments before they go out.

    Also, work-sharing is easier in Europe because most American workers have a number of fixed benefits. For an American worker with employer health insurance, companies would have to cut more than 50% of base pay to cut total compensation by 50%. Due to health insurance, it’s much easier functionally to cut 50% of workers than try to cut all worker’s hours by 50%. Another reason to get employers out of the health insurance business, one way or another.

  7. Gravatar of David Pearson David Pearson
    24. September 2011 at 16:31


    Lost Lybian oil has been replenished by the SPR release; China real growth is unexpectedly slowing. Two “real shocks” have been reversed, yet Brent Crude is still up 40%+ since Jackson Hole 2010.

    The Fed has little control over the relative price distortions created by its policy actions. In this particular instance, real wages fell as commodity and import prices rose. There was nothing particularly surprising in this sequence. What is surprising is that people keep comparing 1932, when real wages were at peak relative to profits and the economy was dominated by the tradeables sector; with 2011, when real wages were at trough relative to profits, and most jobs have been lost in the non-traded service sector. FDR then recognized the benefits of raising tradeables prices; today, the benefits are much less clear, as the evidence shows.

  8. Gravatar of Bryan Willman Bryan Willman
    24. September 2011 at 17:19

    A very real problem is that the US has a nasty kind of have/have-not split, where the “haves” are actually a majority.

    So the sorts of people who write and read and comment on these blogs go “9% unemployment, those poor people!” And people like me go “and that’s not the real number, the real number is much higher especially in some ethnic groups, that’s horrible.”

    But there’s another dynamic which is “Hey, I have a job, and want to keep it, and not become poor even though I’m working. So don’t you government clowns who allowed this disaster in the first place make me poorer or endanger my existing job.”

    Put another way, the 90% of the nominal workforce or majority of the real workforce don’t care so much about the unemployed. They care about what they fear happening to *them*. Losing *their* job. Being unable to pay *their* bills even though they have a job.

    So they (a probable majority) will be opposed to anything that makes *them* poorer (lower real wages is a big nono) and anything that makes *them* fear for *their* jobs.

    To add to the fun, a part of the unemployed are retired people on fixed incomes, who take a very dim view of inflation as well, and vote.

    A related phenomenon is things like the King County Police Union, who basically argued that it was better to lay off officers but keep the same pay, than to reduce pay but have fewer layoffs. (I am of course glossing over various issues in that description.)

    The practical effect of this is that a majority of voters may well be very opposed to inflation of any sort, even if some kinds of inflation would inevitably be associated with reducing unemployment.

  9. Gravatar of Becky Hargrove Becky Hargrove
    24. September 2011 at 17:30

    Bryan Willman,
    Just wanted to let you know I’m one of those have-nots who has been studying economics on my own since losing self-employment/employment almost eight years ago.

  10. Gravatar of Matt Waters Matt Waters
    24. September 2011 at 18:06


    It seems like you are blaming QE2 for the rise of Brent “since Jackson Hole 2010.” But how does QE2 explain the rise of Brent in Euro terms? The only way QE2 increased Euro prices for crude is if American oil demand went up in real terms. And it would only go up in real terms if the economy improved. Real demand is a feature, not a bug.

    Also, the fact that more nominal income goes to corporate profits than before is not an issue for monetary policy. But with 9.1% unemployment, real hourly wages are clearly above their market levels and demand-side inflation would (and has) reduced unemployment. No matter if real wages are higher or lower than a few years, they are still clearly too high for the market and the only way to fix cyclical unemployment is demand-side inflation.

    I also honestly do not have a good answer for why more income has gone to profits the past few decades. Smarter investors? More compensation in the form of stock options which are still not fully expensed? More corporate cronyism? In any case, the answer has little to do with monetary policy while unemployment has everything to do with monetary policy.

  11. Gravatar of Matt Waters Matt Waters
    24. September 2011 at 18:21


    When I was in Chicago on business some time ago, I remember a story about a Cook County public union making the same exact choice. They chose to lay off a few less senior employees rather than cutting wages through higher benefit/pension contributions. This is also at the core of the Verizon strike and the issues with Wisconsin unions. Unions are fine with laying off a small percentage of employees or even hours, but go crazy when you start talking any sort of wage or benefit cuts.

    Managers will also have huge issues with morale with trying to cut wages for non-union workers. People tend to think that managers have much more power than they actually do. They do have some power, but many times they are actually at the mercy of their employees to keep customers happy. It makes sense for managers then to keep wages and prices at above-market levels and instead cut employees or hours.

    I would compare this situation to the free-rider issues with private provision of defense, police forces, fire fighters, etc. If we had the option to pay for defense, then everybody would decide to not pay since they do not benefit individually from paying. But since everybody does not pay, everybody ends up without defense.

    In this case, people act rationally for themselves to accept layoffs instead of lower wages. But when everybody does that, it is a disaster. Unabated, you get what we got 1929-33.

    Such people who still have a job and don’t feel for the “have-not’s” don’t realize that demand-side inflation is the only reason they themselves still have a job. They also should realize that, in the end, they will also be far worse off for not having full employment since they have zero bargaining power or flexibility.

    From personal experience, it is harder to distinguish yourself as a worker when your company must put a blanket salary freeze to make ends meet. I was lucky enough to get and keep an entry-level job a few years ago and I quickly progressed, but my salary stayed at levels far below everyone else even as I took on more responsibilities than most others. I was thus one of the “lucky” ones to keep my job, but I would have been better off if my field was at full employment and I didn’t have to work in a field where everybody had salary and hiring freezes.

  12. Gravatar of dwb dwb
    24. September 2011 at 19:06

    The median voter hates price inflation.

    its amazing what people can state without being challenged on the evidence. hates price inflation. really? Wheres the proof? people were miserable in the late 80s, 90s, when inflation was higher? really? my observation is that people love it when the economy is booming. period. Internet stocks, housing, nobody complains about an asset bubble until after it pops.

  13. Gravatar of Bryan Willman Bryan Willman
    24. September 2011 at 19:53

    Becky – my point was not to suggest that “have-nots” don’t read blogs, but rather, a large group of “haves” are more interested in hanging on to what they have than in general economic improvement. (Which is a natural human thing.)

    And so, the union thing described in two posts above really applies to a large part of the electorate. (Who can blame anybody for this, it’s normal self interest.)

    Which means schemes that reduce real individual wages while increasing total real wages will not be popular, at least not with unemployment at a “mere” 9%.

    I intend this as an explanation of political behavoir, not any sort of moral comment.

  14. Gravatar of Benjamin Cole Benjamin Cole
    24. September 2011 at 20:22

    Why the sacred status of inflation under 2 percent?

    Sheesh, I would embrace 6 percent inflation if it meant boomtimes, baby.

    A fetish for stable prices (whatever that means, and however you measure stability) should never trump real economic growth, innovation, prosperity.

  15. Gravatar of John John
    24. September 2011 at 20:57

    I think maybe people think too much about money and wages when they think about economics and too little about actual goods production. Full employment is just a means to the end of producing the most goods possible in a sustainable, which means profitable, manner. If you ask yourself, what are the barriers to maximum production of goods and services, I don’t think the first thing that should come to mind is producing more pieces of paper with pictures of presidents on them.

    How about letting oil companies drill for oil wherever it lays in the ground and the owners of that land are willing to sell it to them?

    How about dropping all of our tariffs and subsidies to stimulate economically sensible production in our nation and bring cheaper goods from abroad to American citizens?

    How about letting teenagers, new job hunters, and low skilled laborers learn job skills and gain the benefits of employment by abolishing the minimum wage?

    How about ending the pointless war on vices such as gambling, prostitution, and drug use so that labor power and taxpayer money isn’t wasted sticking people into cells?

    To the people who don’t think economies can grow without inflation, just look around the world and at history. China experienced deflation during their most rapid periods of growth. Countries with higher inflation regularly have higher unemployment and lower real GDP growth. Inflation is simply bad policy. If you want a good economy, create it through the free market, not the printing press.

  16. Gravatar of grcridlan grcridlan
    25. September 2011 at 00:00

    I think there is a meaningful cadre of Democrats more concerned with stagnant real wages than economic growth, and unable or unwilling to understand that real wages don’t fall because of Evil, but rather due to price competition.

    Likewise Republicans and the strong dollar; it’s a macho thing.

    Politics aside, though, Scott, a real question:

    In your view, should NGDP targeting consider external price shocks? For instance, if oil prices result in an extra 2% inflation, should we target 2% higher NGDP growth? Seems to me we should, but I’m pretty sure that the analysis that led me there isn’t considering some correlation problems.

  17. Gravatar of Morgan Warstler Morgan Warstler
    25. September 2011 at 02:10


    8 years without a job???

    I’d love to get your real feedback on my Guaranteed Income proposal:

    John is of course right. And John, we needn’t just be asking – demand it.

  18. Gravatar of John John
    25. September 2011 at 03:01


    Thanks for the of course when you said I was right. I should have also added dramatically simplifying the tax structure so that spending, saving, and production decisions aren’t grossly distorted by tax incentives and dropping regulation so that such a vast amount of resources (~10% of GDP!!!) don’t go towards compliance; shuffling paper around that does nothing but pointlessly kill trees. The only way I know how to demand this stuff is by voting for Ron Paul.

  19. Gravatar of Nevorp Nevorp
    25. September 2011 at 03:30

    “The median voter doesn’t understand inflation. They don’t know the difference between supply-side inflation and inflation. ”

    As a median voter could you expand on this difference. Thanks.

  20. Gravatar of Peter Peter
    25. September 2011 at 04:11

    Nevorp, I’ll give it a shot. I hope Scott will correct me if I get it wrong. This is actually just a guess since I haven’t been able to find a definition anywhere.

    Supply-side inflation is due to changes in productivity. If we are only producing wheat and get a bad harvest yielding only 50% of normal output, we will get 100% inflation (unless a stupid central bank would slam the brakes). But it’s all supply-side inflation.

    The other part is demand-side inflation. It’s due to changes in NGDP (aggregate demand). This is the only type of inflation that should be of interest to central banks.

  21. Gravatar of Becky Hargrove Becky Hargrove
    25. September 2011 at 05:09

    My brain is still foggy from three days of unpacking my library (and trying to find a place for it) but I do want to respond to your link. Yes I agree with income level of all kinds but people still need to be able to create the economic environments they can work in, i.e. one does not have to serve one dollar tacos out of a $200,000 building, or sleep in a 1500 square foot house. Small structures for living and working can be created that are even more enticing that the large ones we inhabit now. But more importantly, we need to tap into a frontier of wealth creation with our own skills that works independently of money, so that monetary economies can be stabilized. This is why the Tea Party has gone about things in a dangerous way, trying to take away what government has provided before people can create an alternative for themselves.

  22. Gravatar of StatsGuy StatsGuy
    25. September 2011 at 05:10

    Dear everyone,

    How, exactly, do we separate out how much inflation is “demand side” and how much is “supply side”.

    Should we even bother?

    Regardless of whether inflation is demand side or supply side, isn’t it rather easy to defend an NGDP target in most real world circumstances?

    I would hazard that we’ve been seeing “supply side” inflation since 2005ish, largely having less to do with the US and everything to do with demand in the developing world. The monetary response has, effectively, been to constrict AD in order to preserve (or actually, INCREASE) the purchasing power of debt (if you had invested in 30 year bonds back in 2000, you’d have done quite well) – that is to say, to extract wealth from the productive economy in order to make sure that existing debt instruments are capable of purchasing more quantities of the raw materials that we’re supposed to be economizing (reducing consumption). The _levered_ economy, by comparison, is seeing losses in purchasing power as the value of debt increases and the cost of supplies increase.

    It comes down to this – the bond market is eating the productive sector alive in order to keep the purchasing power of debt and dollar vs. commodities intact even though we should be moving our economy structurally away from resource intensive systems. Meanwhile, we’re incurring more debt (at the private and federal level) to preserve consumption as incomes (private and government) decline and the poverty rate skyrockets.

    IMHO, one of the greatest advantages of an NGDP target is that it forces/allows the national debate to focus on structural issues. Right now, the structural debate is conflated by all sorts of madness. We should be having a serious conversation right now about what “infrastructure investment” means, about the real value of education, about our tax system(s), food security, 50 year energy plans, and so forth. Instead, the national economy is living hand to mouth. Both at the private level (food stamps causing surge in walmart sales on a monthly basis), the state level (budgets cut to pay out retirement obligations even as class sizes in lower grades exceeding 30 per teacher), and the federal level (federal government now funded by rounds of 2 month spending bills with no annual budget).

    Oh well. I no longer let myself get too excited about this anymore.

  23. Gravatar of Morgan Warstler Morgan Warstler
    25. September 2011 at 06:56


    You missed the main point.

    Guaranteed Income means ALL recipients are auctioned off to profit seeking private interest ventures.

    Bidding starts at $40 per week ($1 per hour).

    And I’m here to tell you, that means NEXT WEEK, you will have a job.

    SOMEONE will put the $ in the machine and bid high enough on your time and win.

    And you will do during that week, whatever they want you to do. You will have a job. LATER, you can figure out what you want to do. And when you figure that out, there will be lots of low cost labor for you to make use of.

    The cost of childcare will fall, poor neighborhoods (where there are lots of unemployed) will be fixed up, prices of local services will fall.

  24. Gravatar of Morgan Warstler Morgan Warstler
    25. September 2011 at 07:06


    You are going to get a level NGDP target, but it will be closer to 3% than 5%.

    That # is basically HARD MONEY.

    Because we routinely hit 3% in RGDP, and so we’re going to RAISE rates more frequently, which will over time mean a higher cost of borrowing (and capita formation).

    And that WILL lead to the US gvt. having to make REAL CUTS in spending, because the cost of our debt interest payments will skyrocket…. it might very well be more than Medicare o SS.


    I’m trying to manage your expectations, because what you said makes perfect sense if it is done through a smaller gvt. frame of mind.

  25. Gravatar of Becky Hargrove Becky Hargrove
    25. September 2011 at 07:39

    Here are some of the places where we agree: 1)Everyone remains economically linked in some fashion, if only for the reason we are all responsible for our own survival. 2) Find ways for local people to get over their supposed aversion to one another and get out of their ruts. 3)Do so in ways that may topple a few individuals ideas as to how people live their economic lives with one another, so that greater overall wealth is possible.

    Even so, I believe human skill needs to be reevaluated wherever monetary economies are not capable of creating production efficiencies that allow pricing without taxation, government redistribution or insurance schemes.

  26. Gravatar of flow5 flow5
    25. September 2011 at 07:54

    1961’s Operation Twist was introduced during a fixed (Bretton Woods), exchange rate regime. Bernanke’s QE2 was introduced during floating exchange rates (permitting hot money flows). QE2 ignited the carry trade (new forward/futures positions). QE2 collapsed the Trade Weighted Exchange Index. Some prices have proved “transitory”, while others haven’t.

    “I’ve always argued that AD raises prices…And IT DOES SO RIGHT AWAY, due to commodity prices.”

    Speculative price distortions will weaken and depress the economy, increasing unemployment & ultimately create a DEFLATIONARY effect.

    Bernanke’s Operation Twist caused the dollar to rally, & put pressure on dollar-denominated prices. Inflation cannot occur unless fueled by a chronic increase in the volume and/or transactions velocity of money (excessive in terms of rates-of-change in real-output). Exchange rate changes seem to be an exception to this rule.

  27. Gravatar of Scott Sumner Scott Sumner
    25. September 2011 at 08:00

    Bob, No, the first point isn’t “per worker” it’s “per worker hour.” During booms workers work longer hours.

    David, I don’t agree with your Libya argument, I’d like to see data.

    Developing country demand has been quite strong over the past twelve months.

    But the biggest problem with your QE2 argument is that you haven’t produced any mechanism by which it could have sharply raised oil prices. I do think it had some effect prior to the QE2 announcement, but a negative effect after. That’s because the argument you use about China applies much more strongly to the US. Our growth has been much more disappointing than China’s growth. So how did QE2 raise oil prices? Dollar depreciation was far too small to have a big effect.

    Real wages are not a useful variable because the CPI is not a useful variable. If the CPI were accurate the housing construction sector would be booming as workers rushed to build houses and sell them for 7.7% higher prices than in mid-2006.

    Bryan, You said;

    “But there’s another dynamic which is “Hey, I have a job, and want to keep it, and not become poor even though I’m working. So don’t you government clowns who allowed this disaster in the first place make me poorer or endanger my existing job.””

    Do these people pay no attention to the effect of tight money on their 401k?

    Matt Waters, Good point about Europe.

    dwb, Great point.

    Ben, I agree.

    John, Try explaining 1929-33 with a real theory of output. Can’t be done, you need those “pieces of paper.”

    grcridlan. That’s a complicated question:

    1. A oil shock that raises the CPI by 2% raises the GDP deflator by much less than 2%. Much of our oil is imported.

    2. The ideal target is actually hourly nominal wage rates, but I favor NGDP for political and practical reasons. Your example highlights one of the cases where wages are better.

    Nevorp. Inflation raises both wages and prices. But when people think of inflation, they mentally hold their nominal wage fixed, and think about how they’d feel about higher prices. That’s implicitly equating “inflation” with “supply-shock inflation” such as higher oil prices, which do leave your nominal income fixed. Demand side inflation cause incomes to rise faster than prices, if the SRAS isn’t vertical.

    Statsguy, Yes, I’ve argued NGDP targeting frees us to focus on the real issues, without worrying about if failing to rescue GM will “hurt the economy.”

  28. Gravatar of John Thacker John Thacker
    25. September 2011 at 08:06

    Wheres the proof?


    There are plenty of polls showing that the median voter hates the idea of inflation. One poll, then another poll, and a third poll.

    Yes, it’s easy to argue that voters will like the result of a little bit more inflation because it will lead to higher GDP and so forth, but that’s like expecting voters to like the idea of free trade or free immigration in a downturn as well.

    The opposition to these policies gets less intense when all is well, but when times are bad voters have instinctual dislikes for some policies that economics tells us will help us all overall. (But, importantly, there will still be some losers, it’s not Pareto optimal.) Anyone who thinks that “oh, it’s easy to get voters to like inflation based on the eventual results” should wonder why we can’t do the same with minimum wage, immigration, free trade, Davis-Bacon, rent control, restrictive zoning and land use policies, etc. There are plenty of policies that seem to help the “haves” at the extent of the “have nots” that are supported by the “have nots” because the economic explanation is counter-intuitive.

    As noted by Bryan and others above, one problem is that people with jobs (especially those with secure jobs, whether tenured or union or government) don’t necessarily see unemployment as “their problem” quite so much as they do inflation. And people really do think that money is loose right now and that QE and such “hasn’t worked.”

  29. Gravatar of John Thacker John Thacker
    25. September 2011 at 08:11

    Do these people pay no attention to the effect of tight money on their 401k?

    They do so as much as they pay attention to the effect of tight immigration, tight trade requirements, licensing requirements, rent control, Davis-Bacon, restrictive zoning, or anything else I listed in the previous post where the argument of economists seems counter-intuitive to non-economists (like the President).

    You’re saying: “They say they hate A. But A leads to B, and they like B! The benefits of B way overwhelm the downsides of A!” But they don’t see or agree that A leads to B. They see the immediate and obvious downsides of A, and since they don’t think that B follows from A, they hate it.

    It’s Bastiat’s What Is Seen and What Is Not Seen.

  30. Gravatar of John Thacker John Thacker
    25. September 2011 at 08:15

    NGDP targeting is still considered controversial in the economics profession. How can you possibly expect the median voter to agree that A leads to B, when the economics profession has failed to convince on rent control or zoning– where Paul Krugman himself has written several NY Times op-eds talking about how they’re bad? Avowed “socialist” economists have talked about rent control is a bad solution, but it persists.

    Krugman explained away (correctly, IMO) much of Texas’s success by saying it was due to their smarter (weaker) zoning and land-use restrictions, which predate Perry. Did that cause any significant number of voters who love him on other issues to change their minds on that issue? I’m afraid not.

  31. Gravatar of John John
    25. September 2011 at 08:33


    It’s quite easy to explain those years without blaming deflation. Deflation is a secondary effect not a cause. The biggest cause was the Fed’s creation of a stock market bubble in the first place. The second biggest cause was Hoover’s efforts to keep wage rates at 1928-9 levels during the deflationary rebalancing period which follows every boom. Keeping wages high led to mass unemployment and a collapse in output. Hoover’s second big mistake was massively raising taxes on all income brackets and creating new income brackets in 1932. His third biggest mistake was Smoot-Hawley which crippled international trade.

    Here you go for a summary
    1. Forcing wages above their market rates led to a collapse in unemployment and output
    2. Raising taxes did the same
    3. Higher tariffs crippled domestic industry by raising costs on crude and intermediate goods and killing export markets due to retaliatory tariffs.

    If Hoover had avoided doing these three things, I think it’s very likely that the Great Depression would’ve been no worse than the depression of 1920-21.

  32. Gravatar of David Pearson David Pearson
    25. September 2011 at 11:04


    From James Hamilton:

    “The Libyan conflict has been estimated to have taken about 1.5 mb/d of light, sweet crude off the market.”

    “The two million barrels per day released from the IEA program would represent 2.3% of the 87 million barrels per day currently being produced globally.”


    Remember that Saudi is the swing producer in the global oil markets. A loss of 1.5m b/d is something they can theoretically handle, notwithstanding issues of crude quality (light vs. heavy). The fact that they did not handle it might be because of supply limitations, or because the prefer to leave oil in the ground due to inflationary expectations. There is no way of knowing how much supply is limited due to this dynamic.

    “Market” Monetarists focus on market responses to Fed actions. Here is a predictable market response to QE2-induced increases in future inflation expectations: If commodity prices are expected to be higher tomorrow, I’d rather pull forward purchases and delay sales. This is particularly true if negative real rates depress the carrying cost of inventory/reduce the return on cash receipts. Why assume that market actors did not respond in this way? This truly baffles me.

  33. Gravatar of Bryan Willman Bryan Willman
    25. September 2011 at 12:28


    “Do these people pay no attention to the effect of tight money on their 401k?”

    If they know any economics at all, they know textbook 101 that says Low Interest Rates are the defining property of Loose Money. You (Scott) and the facts on the ground strongly argue that this is not at all the case, but that doesn’t count in this political circumstance.

    It’s important to remember that there are lots of people on what amount to “fixed” incomes, and another pool of people on incomes that have very low upside in nominal let alone real terms. So they don’t see inflation as “the general price level rises and wages rise with it” they see it as “the cost of gas rose relative to my income, and I maybe paid more taxes to boot.”

    Whether this is personally or globally factually true is not the deciding factor. How people vote in elections is the deciding factor.

  34. Gravatar of John John
    25. September 2011 at 13:07

    People need to keep in mind that gasoline is the basic, life-sustaining liquid of the economy; just like water is to the human body. You can’t maximize production and economic growth without maximizing the supply of oil.

  35. Gravatar of Morgan Warstler Morgan Warstler
    25. September 2011 at 16:05

    the only time I ever blogged daily was about Peak Oil, just to cover all the material and get it all through my head.

    We’re pushing the boundaries of production, provable reserves, new tech or not.

    The good thing is that we’re close enough to Oil Sands and Shale (Natural gas) being profitable that as long as we keep a presence in the Middle East, we “should” have our gas station attendants over there pumping at full production without regard to their own interests.

    I redid an edit of Syriana to explain the political reality back in 2006:

    It stands up.

    The reality of situation is that energy prices are going to damp wet blanket any growth we have, so our own energy policy CANNOT afford a single green luxury.

    Each of us must go down to the local city hall and stab a dolphin to death.

    We must all drink a cup of Polar bear blood.

    We are all in this together, its FINE to say what we are going to do is disappointing, but we ARE going to do it.

    Long after oil runs out of the Middle East, we will have plenty of backup… including a nuclear navy.

    All of this is a round about way of say: Peak Oil as a problem TRUMPS a Fed that doesn’t target NGDP, it hs a far more real impact.

    These problems here, our problems here, are small.

  36. Gravatar of Doc Merlin Doc Merlin
    25. September 2011 at 18:22

    “That’s why Obama is highly unpopular. Plummeting house prices mean lower “inflation.” Do a poll and find out how many voters see “inflation” that way; see how many actually welcome lower housing “inflation.” For most voters inflation is the price of gas, period.”

    You mean, “price of gas, energy and food.” So, all the stuff left out of core inflation? 😉

    Also, housing deflation doesn’t affect people positively because it doesn’t affect the price that people pay for their current housing, only the price they would pay for /different/ housing.

  37. Gravatar of Doc Merlin Doc Merlin
    25. September 2011 at 18:25

    I should say doesn’t affect /most people/ positively.

  38. Gravatar of Scott Sumner Scott Sumner
    25. September 2011 at 18:50

    John Thacker, I still say Obama’s way more popular with 5% inflation and 5% unemployment than 1% inflation and 9% unemployment.

    In the first case he’s re-elected in the second he loses.

    I have several posts explaining why Krugman is wrong about Texas.

    John, You are completely wrong about the Depression as I’ve explained in many posts. The Fed did not “create” the stock market boom of 1929, that accusation is absurd.

    David, If QE2 reduced world oil output, I presume you have data to support that. And which part of the price increase are you attributing to QE2, before or after the announcement?

    And why would investors expect inflation, given that bond yields are 2%. If they really expected inflation, why not just buy CPI futures as a hedge?

    I read in the NYT that only 60 million barrels were released, are you saying that number is wrong?

    Bryan, See my reply to John Thacker.

    Doc Merlin, That proves my point.

  39. Gravatar of Jon Jon
    25. September 2011 at 20:25

    Scott writes:

    1. A oil shock that raises the CPI by 2% raises the GDP deflator by much less than 2%. Much of our oil is imported.

    About sixty percent is imported. I wonder though whether that matters: energy is in everything including labor. To what extent can we be reductionist and make the following kind of claim:

    If an alternative fuel costs more to make than it’s worth, then it is also true that it consumed more energy to make than is now stored. (assuming all markets are efficient and all transactions are time consistent).

  40. Gravatar of John Thacker John Thacker
    25. September 2011 at 21:09

    I still say Obama’s way more popular with 5% inflation and 5% unemployment than 1% inflation and 9% unemployment.

    In the first case he’s re-elected in the second he loses.

    Scott, agreed. But that’s an argument you’re making for “why Obama should spend/have spent his political capital on monetary policy (instead of other things)?” The answer to that question is because, apparently, he doesn’t understand monetary policy nor trust his right advisors that do.

    I was addressing the separate question of “why is it so difficult to go for higher inflation, and why does it cost (short-term) political capital to do so?” Voters don’t like it, and it’s unpopular for the same reason as other economist-approved polices are unpopular– but it’s even worse because the economist profession is far less unanimous than it is on other topics.

    That’s why the “the opposition is just being evil” argument doesn’t really work for me. (Just as I don’t believe it as an answer when those other economist-approved policies are opposed by politicians, mostly but not exclusively Democratic Party ones.)

  41. Gravatar of Scott Sumner Scott Sumner
    26. September 2011 at 04:49

    Jon, Your point about oil being in things like labor is misleading in two ways. Oil shocks don’t drive up wages if NGDP growth is slow. And second the fact that oil is used in domestically made products does not mean it shows up in the GDP deflator. The addition of inflation to the product price (from oil) is offset by the negative from imported goods inflation.

    John, I simply don’t agree with your view about easy money being unpopular. I have many posts explaining that public opinion is a meaningless term. If the policy succeeds, it will be popular. The public cares about results, they don’t even understand monetary policy. The public isn’t even well enough informed about money to have an opinion.

  42. Gravatar of John Thacker John Thacker
    26. September 2011 at 09:25

    If the policy succeeds, it will be popular. The public cares about results, they don’t even understand monetary policy.

    Your first sentence here is not quite correct, as the second sentence demonstrates. If the policy succeeds, the results (and largely the President) will be popular. However, that doesn’t mean that the policy will be popular. The public cares about results, they don’t even understand monetary policy– therefore, they won’t grasp that the monetary policy led to the results, and the monetary policy will remain unpopular.

    The public isn’t even well enough informed about money to have an opinion.

    Yet despite that, they have an opinion. Just as President Obama has his own opinion, despite refusing to listen to his advisors.

    It’s certainly true that a politician can take the majority popular view on a bunch of issues, and yet find his popularity declining because of the results, just as a politician can buck the popular view on issues and then find his popularity rising because of the results. In both cases that’s when the results of a view don’t match the popular expectation. (A similar phenomenon is when all the individual parts of some large policy poll well, but the total package does not, like with the “jobs package” or PPACA/Obamacare.)

    You’re arguing that the President should overcoming any short-term worries and just do it, and he will reap long-term rewards. Absolutely! But it’s difficult for any politician to overcome short-term concerns, particularly when that politicians doesn’t understand the policy he’s supposed to be pushing and refuses to listen to his advisors on it.

  43. Gravatar of stan stan
    26. September 2011 at 10:02

    A lot of hammers here looking for nails to hit. Sometimes the problem isn’t a nail. Perhaps someone will give economists a clue.

    Unemployment today is not a monetary problem. Ask employers why they are not hiring. No, really, someone should go ask employers why they are not hiring. They aren’t stupid. They know why they aren’t hiring. ASK them.

    Government regulatory and legislative changes and proposed changes have scared the crap out of them. Obamacare, financial regs, proposed climate change legislation, EPA regs, threatened tax increases, government strong arm measures in the auto industry and the Gulf — government has not only made it much more difficult to justify investing in new employees, it has made it much harder to predict how much worse the government impact will be in the future. Rational people are sitting out new moves until the dust settles.

    The economy is made up of real people who make decisions for all kinds of reasons and some of those reasons are beyond the ability of the Fed to control. The Fed cannot bring calm to a marketplace that is extremely jittery over reasons that have nothing to do with the Fed. The Fed has added to the sum total of fears because of the specter of inflation at some point in the near future. But the Fed has no tool to calm an employer who is petrified by what the executive and legislative branches are doing in DC.

  44. Gravatar of Morgan Warstler Morgan Warstler
    26. September 2011 at 13:46

    I have read that generally rents correlate incredibly well with income. How much people have to spend = what they pay in rent / mortgage.

    So people aren’t likely to notice inflation there liek they do with gas food etc.

    It ALSO annoys the bejesus out of me that we continue to worry about housing prices – is the TWIST basically an effort to target home prices like a “laser” with monetary?

    NO ONE who bought during the bubble has equity, so they really have nothing to lose but a credit ding – which we can forgive once they lose the house.

    No one is hurt by ripping the band-aid off housing prices, finding a real floor, EXCEPT for the bankers.

    Those who bought before 2001, not hurt.
    Those who own outright, not hurt.
    Those who bought after 2001, no equity anyway, so not hurt.

    Bankers hurt. That’s it.

  45. Gravatar of Scott Sumner Scott Sumner
    28. September 2011 at 14:54

    John, Well if things are that bad then there is no hope, as neither party has a clue.

    Stan, I’m afraid that’s wrong on two levels. Asking business people why they do something is a lousy way to understand what’s going on (the fallacy of composition.)

    But as a matter of fact they have been asked, and they say the problem is lack of demand, not regulations.

    Morgan, Yes, it’s silly to focus on housing; we have an NGDP shortfall, housing is a symptom.

Leave a Reply