NGDP research bleg

There are basically three general arguments for NGDP targeting:

1.  It will reduce labor market instability.

2.  It will reduce credit market instability.

3.  It will lead to more pro-market public policies.

I am looking for links to previous empirical research in any of these three areas, but especially the last two.  The first is obviously important, perhaps the most important argument, but it’s also been researched fairly extensively.

Here I’ll sketch out what interests me about the second and third topic:

Financial instability:  It seems like financial crises are often associated with declines in NGDP.  Think about the US and Europe in 1931, Argentina in 2001, the US and Europe in the period after mid-2008.  But that’s just casual empiricism.  I’d like to see rigorous academic studies that look at many different financial crises.  How often are they associated with falling NGDP?  Does this correlation only show up in certain countries?  What about a slowdown in NGDP growth where it still remains positive?  (For instance, did the slowdown in NGDP growth during the 1980s and early 1990s contribute to the S&L crisis?)

Statist policies:  It seems like free market policies do fairly well when NGDP growth is fairly stable (1922-29, 1953-64, 1985-2007) and statist policies do better when NGDP growth is unstable (1913-21, 1930-52, 1965-81, 2008-10).  Obviously there are lots of issues here.  In the case of WWI and WWII, you may have reverse causality—government spending causes the NGDP instability.  But there’s also lots of plausible examples going the other way—the Great Depression leading to the NIRA, the Great Inflation leading to wage and price controls, the Great Recession leading to bailouts, etc.)

It would also be interesting to look at this question from an international perspective.  Out of curiosity, I took a look at the Heritage Economic Freedom scores for the US and Australia, before and after the crisis:

Country    Score(rank)2007     2015

Australia           82.7 (3)           81.4 (4)

USA                  82.0 (4)          76.2 (12)

Australia had much less NGDP instability, at least in a “level targeting” sense (this may not be easy to quantify.)  Is that why the economic freedom score for the US slipped much more than for Australia?  Perhaps, but Australia does slide behind New Zealand, which moved up to number 3, and which nonetheless had a worse recession than Australia.  Another problem is that smaller economies (and commodity exporters) “naturally” have a more unstable NGDP, indeed this is probably desirable.  So you’d need to control for a number of factors.

I seem to recall that the average Heritage Economic Freedom score was rising during the Great Moderation, and began falling after somewhere around 2008.  Is that correct?  I also wonder whether it depends on which regime (statist or market-oriented) is viewed as the plausible alternative.  In the US in 1930 the alternative was statism.  Today in Greece the alternative may be market-friendly policies.  That underlies the conservative fear that NGDP targeting might allow Greece to avoid the needed “tough choices.”

In any case, these are obvious three big issues that need looking at.  I’d guess there’s already some research on these topics, but mostly for labor market instability.  Again, I’d greatly appreciate links to any research on how NGDP instability is correlated with problems like unemployment, financial crises, and statist policies.

Update:  E. Harding sent me a graph showing the average Heritage ranking.  It rose to a peak at 60.2 in 2008, then fell to a trough of 59.4 in 2010, then rose again to an even higher peak of 60.4 in 2015.  Thus the US decline is not typical.



43 Responses to “NGDP research bleg”

  1. Gravatar of E. Harding E. Harding
    6. April 2015 at 12:06

    There are certainly numerous examples of inflationary financial crises (e.g., the 1997-1998 crises in Russia and Asia, numerous Latin American crises).
    As for the Heritage index, see

  2. Gravatar of ssumner ssumner
    6. April 2015 at 12:14

    Thanks E. Harding, I added a update with a link to that graph, which supports my argument. You are right about the inflation crises (typically in low or middle income countries), which do not support my hypothesis.

  3. Gravatar of Morgan Warstler Morgan Warstler
    6. April 2015 at 13:19

    My 5+ years of commenting at this blog counts as economic research, right?

  4. Gravatar of flow5 flow5
    6. April 2015 at 13:27

    I gave you a sledge hammer. I discovered the Gospel. You were too busy. It is worth trillions of economic dollars. No brag just fact.

    ZeroBrains always talks that trash.


    “Diminishing market depth and a surge in volatility were both on display Oct. 15, when Treasuries experienced the biggest yield fluctuations in a quarter century in the absence of any concrete news. The swings were so unusual that officials from the New York Fed met the next day to TRY AND FIGURE OUT WHAT ACTUALLY HAPPENED”

    No “black swan”. “high frequency and other algorithmic traders” – not.

    I.e., absolutely no mystery. I predicted it. I sent the BOG 3 e-mails telling them it would happen.

    The money stock and money flows can never be managed by any attempt to control the cost of credit. The policy rate cannot be adjusted quick enough, or by the necessary increment, so that it offsets the sudden and wide swings in aggregate monetary purchasing power.

  5. Gravatar of Vaidas Urba Vaidas Urba
    6. April 2015 at 13:53

    Regarding the second topic, take a look at the work of David Eagle:

    Lars’ blog has more posts on the topic, all are tagged with Eagle’s name.

  6. Gravatar of Benoit Essiambre Benoit Essiambre
    6. April 2015 at 14:14

    It would also be interesting to see what it does to inequality.

    In theory, under stable NGDP, when the economy does better than expected, workers get an automatic real wage increase instead of the extra wealth flowing to whoever happen to be in the best positions to capture the windfall (I would guess those that hold capital in monopolistic industries).

    When the economy does worse than expected, labor gets a real pay cut, but it is at a time when capital also gets less. Plus workers are more likely to keep their jobs and thus get stabler income than when there is high risk of sudden unemployment.

    In both cases, it seems to me that stable NGDP would reduce inequality caused by unexpected random fluctuations in the economy. Are there significant effects going in the opposite direction? Is there data on this?

  7. Gravatar of ssumner ssumner
    6. April 2015 at 14:32

    Morgan, What do you think?

    Lars, Thanks, but I’m actually looking for empirical studies–there are lots of theory papers out there.

    Benoit, I kind of doubt it has much impact on inequality

  8. Gravatar of CMA CMA
    6. April 2015 at 14:52

    “Do you mean a higher i-rate or a tighter monetary policy? Those are two different things.”

    MP just as stimulative, so achieving the same NGDP growth but at the same time the i-rate is higher. If the central bank expands money to people directly through heli drops without purchasing bonds the demand for bonds is lower, so rate is higher.

    ” After 2000 the Fed cut rates sharply and stock prices FELL””the opposite of the bubble prediction.”

    If the fed didnt cut rates stock prices would of fallen even more. We need to compare the same environment with a different level of interest rate, not just pick any time the interest rate is low.

  9. Gravatar of Morgan Warstler Morgan Warstler
    6. April 2015 at 15:27

    I’m pretty sure it does.

    It’s gotta be like 10 theory papers. What’s the trade value of theory papers to empirical research? 🙂

    BTW, I have always been the Selginist here – arguing lower NGDPLT and stronger focus on stopping 2008 from ever happening… like back in 2005.

    And how exactly are you going to measure statist policies? Apart from 2008 = Obama and 1929 = FDR, etc.

  10. Gravatar of Matt Waters Matt Waters
    6. April 2015 at 15:37

    There is some empirical evidence out there, unintentionally, for NGDP instability leading to more statist policies, at least in the US. I have often heard it trumpeted that economic growth does much better under Democratic presidents. The Economist looked at it and said basically “we have no idea why this happens.”

    Actually it’s fairly simple. NGDP growth is cyclical for whatever reason. Maybe the cyclicality is due to the Fed targeting previous inflation figures rather than future inflation. Therefore an undershoot/overshoot later on will be cyclically corrected. In any case, voters respond with voting for Democrats in the troughs.

    Meanwhile, for pure theory it would be interesting to see how NGDP feeds into RGDP rather than the obvious unemployment and the loss of skills for when the unemployed return to work. There are two purely theoretical and speculative effects which come to mind:

    1. Some sort of “efficiency wage” theory explaining low labor force participation the last few years. In a post a few months ago, I thought the market for the long-term unemployed may be irrational similar to the irrationality of downward nominal wage rigidity. Some of an NGDP increase could go through to higher inflation rather than employing the long-term unemployed. Employers should be able to undercut each other through hiring a less desirable candidate when revenues (i.e. NGDP) increase, but they may pay more instead for the more desirable candidate (i.e. inflation instead of RGDP).

    2. In my own experience, a company paying above-market wages in low NGDP growth has a lot of sub-optimal outcomes for the currently employed. This is even tougher to quantify and show, but in low NGDP extremely few are hiring in most industries. There is less possible specialization of skills and less creative destruction, as more efficient competitors can’t fully capitalize on their higher efficiency.

    I know I’m just saying nonsense at this point. For financial stability, the NGDP variance starting in the 70’s significantly increased activity on Wall Street. It’s not just deregulation that increased Wall Street revenues, but the 70’s and 80’s made many Main Street banks, insurance companies and investors want to hedge risks they didn’t hedge before, especially interest rate/inflation risk. Such a hedge is basically unnecessary with stable NGDP and stable NGDP no longer has that drag on bank loans and insurance. I suppose this also shows up in RGDP indirectly and not “financial stability” per se.

  11. Gravatar of Morgan Warstler Morgan Warstler
    6. April 2015 at 16:03

    I’m going to say this is Larry SUmmers walking back Secular Stagnation and moving towards the Warstler hypo: Digital Deflation means there is nowhere to put money.

    “we may be headed into a world where capital is abundant, deflationary pressures are substantial and demand could be in short supply for quite some time.”

    Yep way to put the meat in the window Larry! Then he middles it with this:

    “In no big industrialized country do markets expect real interest rates to be much above zero in 2020 or for inflation targets to be achieved.”

    And THEN he puts turd in punchbowl (keep pushing his same old noise:

    “In the future, the priority must be promoting investment, not imposing austerity. The”

    See the ANSWER is only this, ONLY MY TAKE:

    “we may be headed into a world where capital is abundant, deflationary pressures are substantial and demand could be in short supply for quite some time.”


    What is CAPITAL in public policy?


    Now let’s ask ourselves why:

    “Third, we may be headed into a world where capital is abundant, deflationary pressures are substantial and demand could be in short supply for quite some time.”

    WHY isn’t this true of govt? Larry? Anyone? Anyone?

    bc dear lads it is TRUE OF GOVT.

    We need less taxes! We can EASILY engineer a LOWER DEMAND for govt!


    What would we do?

    Ah yes, the same thing that has happened in the private sector!!!

    Reducing public employee compensation spend to 1998 levels + inflations yields us A BALANCED BUDGET!

    Holy moly!

    Anyhoo, boys, Larry just put my argument first, said it outloud:

    And I don’t think he’d say it without it meaning something – he’s a sneaky one.

  12. Gravatar of Peter K. Peter K.
    6. April 2015 at 17:41

    I would suggest “pro-market” policies enabled the epic housing bubble and financial crisis. How many financial institutions were wiped out or forced to merge with larger companies?

    You need smart regulations and regulators to prevent the market from going haywire. We had that throughout the post war years until Reagan and Clinton deregulated. Greenspan saw no need to regulate the shadow banking system because markets are awesome.

  13. Gravatar of Ray Lopez Ray Lopez
    6. April 2015 at 21:46

    I see Morgan Wartsler is back, about the only mildly critical voice of Sumner besides MF and myself. The rest of the posters are echo chambers.

    Sumner asks for non-existent links, to prove phantom points. In fact, statist policies come about because of *real* not nominal GDP changes, due to the prevalence in the last four generations of Keynesian and monetarist policies.

    As for international surveys, the best one I found was this (HT to a poster from here, months ago):


    “In the United States, voters replaced Republicans with Democrats in 1932 and the economy improved. In Britain and Australia, voters replaced Labor governments with conservatives and the economy improved. In Sweden, voters replaced Conservatives with Liberals, then with Social Democrats, and the economy improved. In the Canadian agricultural province of Saskatchewan, voters replaced Conservatives with Socialists and the economy improved. In the adjacent agricultural province of Alberta, voters replaced a socialist party with a right-leaning party created from scratch by a charismatic radio preacher peddling a flighty share-the-wealth scheme, and the economy improved. In Weimar Germany, where economic distress was deeper and longer lasting, voters rejected all of the mainstream parties, the Nazis seized power, and the economy improved. In every case, the party that happened to be in power when the Depression eased went on to dominate politics for a decade or more thereafter. It seems far-fetched to imagine that all these contradictory shifts represented well-considered ideological conversions. A more parsimonious interpretation is that voters simply””and simple-mindedly””rewarded whoever happened to be in power when things got better.”

  14. Gravatar of Ray Lopez Ray Lopez
    6. April 2015 at 21:47

    @myself – and the corollary to the above is that the economy improved by itself, exactly what you would expect of a non-linear system where money is neutral and super-neutral.

  15. Gravatar of Ben J Ben J
    6. April 2015 at 22:40


    “the economy improved by itself, exactly what you would expect of a non-linear system where money is neutral and super-neutral.”

    Self-parody, Poe’s law, or just good old fashioned schizophrenia?

  16. Gravatar of Major.Freedom Major.Freedom
    7. April 2015 at 03:20

    “Statist policies: It seems like free market policies do fairly well when NGDP growth is fairly stable (1922-29, 1953-64, 1985-2007) and statist policies do better when NGDP growth is unstable (1913-21, 1930-52, 1965-81, 2008-10).”

    It seems like financial bubbles (which are ALSO periods of “instability”) have taken place 1922-1929, 1953-1964, 1985-2001 and 2002-2007 are periods of rising NGDP, and the aftermaths are when statist policies “do better”.

  17. Gravatar of Major.Freedom Major.Freedom
    7. April 2015 at 03:41

    Just consider the massive stock and debt market bubble cost that has been imposed on society by the Fed’s “stable”, I.e. rising, NGDP.

    Inflation from a central bank that leads to rising NGDP does not cause or imply unchanged relative prices or spending.

    This is because inflation (which leads to rising NGDP) affects interest rates. Interest rates that are hampered by inflation itself, which by the way Bernanke recently explained in his blog takes place even if the Fed should not target them), PREVENTS the relative prices and spending from adjusting to ” equilibrium”.

    Periods of “stable”, I.e. rising, NGDP under central banking are in fact periods of gradually increasing economic stress due in large part to an absence of free market interest rates.

    Interest rates, contrary to AMM, actually mean something. They are not mere nuisances or barriers or reflections of arbitrary tastes that have no relationship to economic coordination. Interest rates actually serve the crucial, vital, paramount role of regulating capital investment vis a vis what economic goods and services are made physically available in the world due to consumption and saving preferences.

    Humans must live and breathe in a physical world of economic scarcity. We cannot just consume everything and hope to be able to grow in prosperity. What hampered interest rates do is prevent us from experiencing the effects of our own consumption and saving behaviors that would encourage coordination. Artificially lower interest rates delay the timing in us experiencing the results of what are actually higher time preferences that are using up more capital than what is and will be available.

    This is what builds up errors to be larger than they otherwise would have been had profit and loss signals represented actual time preferences with free market interest rates.

    Interest rates are not low right now because “money is tight”. That belief is really just a communication that the person saying that believes the Fed is omnipotent and can and should print whatever is necessary to bring about whatever non-market rule they want to have as a plan for everyone else.

    Every socialist rule of money printing, including NGDPLT, is the seed of its own destruction. If the Fed had instead inflated more during those periods of declining NGDP, then the distortions they generated in real terms would have been even more pronounced, because the distortions to interest rates would have been even more pronounced, again just like Bernanke explained in his blog.

  18. Gravatar of Major.Freedom Major.Freedom
    7. April 2015 at 03:47

    The aftermath of exacerbating errors due to flippent Fed rule targeting, might very well have led already to a predominantly socialist economy in general, but as it turns out some corrections were had, so what was instead imposed was a concrete steppe like ratcheting up of statism.

  19. Gravatar of Major.Freedom Major.Freedom
    7. April 2015 at 03:50

    Sumner’s claims on this blog would make more sense if he were a political operative hired to wreck the economy and make statism more pronounced.

    The errors that have built up since 2009, and the errors that were not corrected from prior, are going to require another correction, which more NGDP cannot cure.

    If more statism results from the next correction

  20. Gravatar of Major.Freedom Major.Freedom
    7. April 2015 at 03:52

    AMMs cannot claim to not be intellectually responsible, since they encouraged the instability that has occurred and is occurring right now.

  21. Gravatar of Anthony McNease Anthony McNease
    7. April 2015 at 06:21


    I do think that Summers and Bernanke are right when they postulate that today’s environment shows an abundance of capital chasing too few investments yielding very low real returns. The question before us is how to get capital to invest in NEW investments yielding shifts in AS, higher returns and shifting AD from higher incomes and new products and services. I think the bull market is partially the result of buybacks and increased dividends and not from huge returns in new ventures. Maybe a combination of the two options Scott lists would work, free market and statist. Reduce regulations and taxes to increase potential returns in new ventures, lower future transfer payments and entitlements coupled with a big fiscal jobs plan for useful stuff like infrastructure. I bet a few big desalinization plants in Calf look good right about now.

  22. Gravatar of ssumner ssumner
    7. April 2015 at 06:43

    Peter, I’m not sure I’d call the GSEs, FDIC, FHA, TBTF, mortgage interest deductions, etc., etc., “pro-market policies.”

    Ray, I’m interested in how the Depression affected economic policies, not politics.

  23. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    7. April 2015 at 08:07

    ‘You need smart regulations and regulators to prevent the market from going haywire. We had that throughout the post war years until Reagan and Clinton deregulated.’

    AKA, the economic bliss that lasted for a quarter century?

  24. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    7. April 2015 at 08:12

    Off topic, but any econ profs who are loosing for a good real-life example of price elasticity of demand;

    Read about the Pho soup nazi in chief, Mayor Ed Murray, and his campaign to cleanse Seattle of ethnic restaurants;

    “Pho is not categorized as fine dining. People who eat this type of food have a certain expectation in their mind, so they are very price sensitive,” she warns. ” If they have to pay more than $10 plus gratuity and tax, it’s no longer an affordable luxury for customers who are used to eating with us a few times a week.”

    To reduce expenses, Hoang is considering making their meatballs in-house using machinery rather than the handcrafted meatballs they commission from a local producer. Same goes for the tofu and hand-sliced rare steak.

    “There are different ways we can cut our costs. At the same time, that’s going to trickle down to supporting businesses,” she says.

    [Mayor] Murray says it will take some time to understand the effects of the city’s new floor wage, which remains far below the estimated living wage of $21 an hour in Seattle.

    Funny how the refugees from Communism already understand it.

  25. Gravatar of Ray Lopez Ray Lopez
    7. April 2015 at 09:22

    Sumner: “Ray, I’m interested in how the Depression affected economic policies, not politics.” – surely you must see how politics affects what economic policies will be practiced? The point being under various and diverse politics, yielding a myriad of policies, some of them autarky (like Nazi Germany’s due to a lack of a floating exchange rate and closed economy), some of them off the Gold Standard early (Argentina, UK), and some off late (France, Italy), spontaneously ‘healed themselves’–regardless of fiscal or monetary policy. Ergo, it follows that fiscal and monetary economic policies had nothing to do with recovery from the Great Depression–the economies just came back, possibly due to WWII. You do see this, as a ruddy-cheeked economist, no?

  26. Gravatar of Cliff Cliff
    7. April 2015 at 11:51

    Ray, your position is “all’s well that ends well” and all the suffering between the start and end of the depression, however long, does not matter?

  27. Gravatar of Edward Edward
    7. April 2015 at 17:14

    Don’t even listen to Ray Lopez, he’s incoherent as usual.

  28. Gravatar of Ray Lopez Ray Lopez
    7. April 2015 at 21:45

    @Cliff- my position, backed by evidence, is that monetarism does not matter even in the short run (in the long run MM concede it doesn’t matter), and, as you suggest, letting nature take its course is best since things work out, as they did in the 19thC, by doing nothing. Economies are nonlinear and often, like a nonlinear pendulum (Google this, all pendulums are nonlinear) they ‘come back’ if you let them, it just takes time.

    @Edward- don’t listen? You are like those medieval Catholic priests who preached ignorance is bliss. Faith-based economics is what you preach.

  29. Gravatar of Ben J Ben J
    8. April 2015 at 01:59

    The Ray Lopez theory of the business cycle everyone:

    “Economies come back if you let them”

    Probably the dumbest thing I have ever seen written about economics.

  30. Gravatar of Dan Dan
    8. April 2015 at 05:10

    Regarding your first point, I have a recent working paper looking at three persistent deflationary episodes over the last 200 years in Switzerland.

    These episodes were associated with falling NGDP and retreating employment, but, hardly falling wages.

    The paper can be downloaded here:

  31. Gravatar of Don Geddis Don Geddis
    8. April 2015 at 14:48

    @Ray Lopez: “monetarism does not matter

    Do you realize that the term “monetarism” already has a very specific meaning in economics? You seem to be using it as a synonym of “monetary policy”, which it isn’t. (Or else perhaps your writing is simply incoherent … I was trying to give you the benefit of the doubt, that you merely made a mistake.)

    by doing nothing

    Do tell. Let’s say we put you in charge of the Fed. What does “doing nothing” mean, specifically? A fiat money supply with a constant monetary base? A gold standard? Targeting some nominal aggregate? Not targeting any nominal aggregate?

    If we just fired everyone at the Fed and shut down the whole department, then the money supply would have a fixed monetary base from now on (regardless of changes in the economy). Is that what you’re recommending?

  32. Gravatar of Major.Freedom Major.Freedom
    8. April 2015 at 18:20

    Ben J:

    “Economies come back if you let them”

    “Probably the dumbest thing I have ever seen written about economics.”

    What is dumb to a socialist is about as worthless as his self-professed arrogance in believing he can help others by doing something to them other than “letting” them have their liberty.

    Trust me, you “letting” me improve myself is the best thing you could ever do for me.

    Seriously, where did you people come from? The school of “I can’t stand it when other people have economic freedom”?

  33. Gravatar of Major.Freedom Major.Freedom
    8. April 2015 at 18:31

    Don Geddis:

    Monetarism is a theory of socialist money, in the way of its impact. It can also refer to the activity of socialism in money, from a praxeological perspective. When Ray says monetarism does not matter, he means the activity of monetary socialism does not matter. If you demand others to understand your use of a term, you have to at least try to understand theirs, even if it repulses you.

    “If we just fired everyone at the Fed and shut down the whole department, then the money supply would have a fixed monetary base from now on (regardless of changes in the economy). Is that what you’re recommending?”

    What a foolish comment. As if millions of people everywhere will have no idea what to do about producing and issuing a commodity that is most marketable out of all other commodities. As if there was no money prior to central banks. As if people will continue to use Weimar Deutschmarks forever should the Weimar Deutschmark counterfeiting operation cease to exist.

    Where is your creativity? Is it embarrassing to think of free market alternatives to your socialist plan? Are you sworn or duty bound to never publish comments about alternatives to your professed religion? It is simply either an active Fed, or no Fed and Fed notes in fixed supply?

    How about no Fed, and no Fed notes? How about something other than Fed notes? They managed to do that in other countries I hear.

  34. Gravatar of Don Geddis Don Geddis
    8. April 2015 at 18:52

    @MF: Hey, moron, I was asking questions of Ray, and what he thought, not what you thought. (You keep telling me that you two aren’t the same person.)

    Ray misused the term “monetarism”. You don’t get to make up your own definition of what you want the term to mean. It already has a well-established, very clear, definition. (Especially in the context of a blog like this.) In any case, the bizarre redefinition you’re trying to propose is irrelevant; Ray is the one who used the term, and I was asking Ray what he meant by it. Not you.

    Similarly, I already know all about your fantasy anarchic dream world. You’ve repeated it here ad nauseum for years. Again, irrelevant. Ray wrote that he disagreed with Fed policy, and instead wanted them to “do nothing.” I’m asking Ray what he meant by that, to be more concrete. I’m not interested in yet another spew from your unchanging tape recorder.

  35. Gravatar of ssumner ssumner
    9. April 2015 at 05:18

    Ray, You said:

    “surely you must see how politics affects what economic policies will be practiced?”

    No I don’t, you’ll need to explain that to me. I thought all governments moved in a statist direction in the 1930s, and all except North Korea moved in a market direction in the 1980s and 1990s.

    Dan, Thanks, that looks like a good paper. So you think the Swiss case supports the Musical Chairs model?

    Don, Whenever someone says they want the Fed to “do nothing,” one immediately knows that they are too dumb to know that that isn’t even an option.

  36. Gravatar of Morgan Warstler Morgan Warstler
    9. April 2015 at 14:55

    I’m not critical of Sumner.


    “I do think that Summers and Bernanke are right when they postulate that today’s environment shows an abundance of capital chasing too few investments yielding very low real returns.”

    I’m saying something wildly different. And that my grand theory weighs Summers mind, and that over time he is going to shift to mine.

    The VERY BEST investments today all move atomic things to digital, making capital even less needed in the next cycle.

    I’m saying eventually there is nowhere for most of the capital to go and get returns – bc people who CAN borrow money are only borrowing it to go end another atomic economic sector.

    Until EVENTUALLY nobody wants to borrow, bc there’s simply not much worth borrowing for….

    All that’s left is homes.

    No offices, no college, no cars.

    I’m not saying there is no new place to invest – I’m just saying if space mining and exploration doesn’t REALLY pay off, then there is no other.

    Imagine the Matrix, everybody in a battery pod – WHAT DOES DEBT LOOK LIKE THERE?

    Now, do you or Scott want to live in that world?

    Who cares.

    The point is, if the path from today leads to your matrix battery pod and VR -AND IT DOES – then the path from here to there is every year there being LESS stuff to put capital into and get a return.

  37. Gravatar of James in London James in London
    10. April 2015 at 22:00

    Scott. Latin America should provide a good test bed for this work. Lots of culturally similar but politically and monetarily independent countries with long records. Googling around “inflation and freedom in Latin america” is a good starting point.

  38. Gravatar of James in London James in London
    10. April 2015 at 22:42

    This one looks best for you, if a little back to front on causality.

    Here, the IMF with good data, get causality wrong, too. (It’s never their fault.)


  39. Gravatar of James in London James in London
    10. April 2015 at 23:08

    This looks a very interesting article referred to in the IMF paper, but not available on the web as far as I can see:
    Martin Paldam, 1987, “Inflation and Political Instability in Eight Latin American Countries 1946-83,” Public Choice Vol. 52, pp. 143-68.

    Also this:

  40. Gravatar of ssumner ssumner
    11. April 2015 at 06:26

    Thanks James, That’s very helpful. One issue that must be addressed is causality. Unusually high levels of inflation/NGDP growth may be associated with bad governance, and causality could go either way. However unusually low NGDP growth is much less likely to be associated with bad government, because it doesn’t paper over debts–it makes them worse. Thus I’d expect falling NGDP to be associated with monetary policy errors. In that case the causation would go from bad monetary policy to falling NGDP to bad governance. Does that make sense?

  41. Gravatar of James in London James in London
    11. April 2015 at 22:16

    There are so few post-WW2 examples of excessively low-NGDP growth to test the theory. Except, of course, many countries are in that spot right now, and it’s too early to say how things will turn out. The 1930s experience ended badly, of course.

    If anything, the lesson of the Twentieth Century taken as a whole is that hyperinflation seems to lead to political reform. Whereas hyper-deflation seems to lead to political repression and war.

    However, reading the particular history of one country, like Argentina say, doesn’t help. If anything, it just makes you just want to cry.

    The “war” against the UK to take the Falklands in 1982 was during a period of high’ish inflation and because they perceived the UK as relatively weaker than Argentina at that moment in time. Yet the losses from the Falkland War were nothing compared to the losses from Argentina’s “Dirty War” on itself during the previous decade.

  42. Gravatar of ssumner ssumner
    12. April 2015 at 07:30

    James, I agree.

  43. Gravatar of Dan Dan
    17. April 2015 at 03:53

    Scott, I indeed think that the Swiss case supports the Musical Chairs model. Often, people argue that wages have been pretty flexible under metal currency regimes and therefore deflation was not a problem before WW1. In Switzerland, at least based on the data that I was able to gather, wages did not decline much even under metal currency regimes. However, nominal GDP and employment did decline. Of course, these are only raw correlations based on a small number of persistent deflationary episodes for Switzerland. In my view, persistent deflation is thus pretty costly in terms of reducing employment.

    Interestingly, Bordo, Erdem, Filardo and Hofmann ( asseess the cost of deflation quite differently, and, I would love to hear your opinion on their argument. Based on a panel of countries they essentially show that most consumer price deflations were accompagnied by relatively robust real per capita GDP growth.

    In my view, real per capita GDP growth is not the optimal metric to assess the cost of deflation. People might leave the country because they cannot find work, leading to a smaller denominator. I would argue that this is a sign of economic weakness rather than strength. Moreover, GDP deflators are not availble for the historical data at least for Switzerland (usually, the CPI is used to obtain a proxy for real GDP). Finally, if deflation is due to productivity gains, real GDP should actually grow more strongly than what is observed on average. In this sense deflation would be costly because real GDP growth might have been even higher without deflation. In other words, during a period of high productivity growth, e.g. the industrial revolution, 2% real GDP growth observed during a deflationary episode might have been far below potential GDP growth, while this would be a respectable growth rate for Switzerland today.

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