Niklas Blanchard agrees we should abolish inflation

Last year I made a rather wacky argument:

I don’t propose to abolish the phenomenon of inflation, but rather the concept of inflation.  And to be more precise, price inflation, which is what almost everyone means by the term.  I want it stripped from our macroeconomic theories, removed from our textbooks, banished into the dustbin of discarded mental constructs.

I thought no one would agree with me.  I was wrong.  Here’s Niklas Blanchard:

Inflation is confusing. The concept makes crazy people crazier. And even worse, it makes otherwise sober people disagree with each other. Reading through the accounts of QE2 on the internet the past few days have solidified my view that inflation is a thorny enough concept that we should rid it from popular vernacular. Is inflation important? Sure…but what measure of inflation is correct? CPI-U? GDP Deflator? Your crazy uncle’s index? Does inflation help or hurt savers in the current landscape?

.   .   .

In order to square this circle, I propose we forget about inflation. And not just forget about talking about it, but forget about its use in the setting of monetary policy. Instead, we should target nominal expenditure at a steady growth rate (3% a la Woolsey, or 5% a la Sumner, Beckworth, etc.) with level targeting.

I love being a contrarian.  What do I do if the whole world ends up agreeing with me?  Life would become unbearable.


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45 Responses to “Niklas Blanchard agrees we should abolish inflation”

  1. Gravatar of Lee Kelly Lee Kelly
    6. November 2010 at 18:01

    I love being a contrarian. What do I do if the whole world ends up agreeing with me? Life would become unbearable.

    As long as there is more than one contrarian like you, have no fear.

  2. Gravatar of Lee Kelly Lee Kelly
    6. November 2010 at 18:05

    Even if we had a perfect measure of inflation (what does that even mean?), then it would still be irrelevant to monetary policy.

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. November 2010 at 18:07

    I would abolish inflation. But then I would also abolish GNP:

    http://www.youtube.com/watch?v=mCH3KvcAf9w&feature=player_embedded

    Let us begin anew…

  4. Gravatar of JTapp JTapp
    6. November 2010 at 18:23

    Scott, is it possible for you to outline the differences between yourself and a “New Monetarist” like Stephen Williamson? His latest post acknowledges that QE is about asset prices, but he raises the question of what Bernanke will do “if the inflation rate is at 6% and the unemployment rate is still close to 10%.”

    I’ve looked at a couple of his papers where he draws the distinction between New Keynesians and monetarists. I’ve not looked at his textbooks, maybe they would hold an answer.

    In some of his posts he seems to not understand Beckworth, and so I wonder in what ways you’re not all on the same page.

  5. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. November 2010 at 18:58

    Nobody at my school(s) uses Williamson’s papers. And for good reason. They’re total crap. He doesn’t know what he’s talking about. Williamson states things freely without sufficient logical support. In fact that’s his motto: “Let me say the most incredulous thing and see if nobody notices. If people let me get away with it I might make a little dough”.

  6. Gravatar of david david
    6. November 2010 at 20:06

    Williamson subscribes to endogenous money; Sumner subscribes to exogenous money.

  7. Gravatar of Shane Shane
    7. November 2010 at 00:11

    Here’s a contrarian proposition–let’s adopt level targeting…of government employment, or at least government expenditures. I’ve heard it said that government never creates a job. Funny, I just signed my papers the other day for a teaching position at a state university, one which, incidentally, was almost canceled because of budget cuts. Luckily, I have the contract signed, although its continuity beyond Spring ’11 is still contingent on future budget.

    It is hypocritical for the single largest employer–the federal government and, a fortiori, the combined public sector, including both federal, state, and local governments–to expect everyone else to create job growth while seeking to cut its own payrolls. So why not level target the public sector as well? The reason is that, just as there is a secret pact for opportunistic disinflation, there is a secret pact for opportunistic contraction of government jobs by public-sector payroll hawks (see Yglesias, http://yglesias.thinkprogress.org/2010/11/the-conservative-recovery/). This is the reason for the Keynesian objection to austerity–we see a hypocrisy in the claim that, sure, there should be level targeting, but not when it comes to the state sector. It seems, Professor Sumner, you are a proponent of opportunistic public sector payroll contraction. Why, sir, do you hate the fact that my children can eat?

    (I keed, I keed–I have no children).

    Here’s a proposal for a truce between monetarists and Keynsians. There should be no more obsessive focus on fiscal stimulus, and no more talk of liquidity traps, zero rate bounds, etc. We all agree to level target–both the price level and/or NGDP, but also government employment, or at least combined government spending. The government sector is large enough that they can have significant direct impact simply by acting in counter-cyclical fashion, continuing to expand their budgets according to trend even in recessions, irrespective of any attempts to “prime the pump.” There is no rationale for cutting needed jobs in an economic downturn. When government employment expands beyond trend, then it is time to tighten. But right now, that is clearly not the case.

  8. Gravatar of marcus nunes marcus nunes
    7. November 2010 at 05:29

    Scott
    What do you make of this?
    http://www.capital-chronicle.com/2010/11/its-still-different-this-time-stable-vs.html

  9. Gravatar of scott sumner scott sumner
    7. November 2010 at 05:44

    Lee, I agree on both points.

    Mark, He’s talking about RGDP, not NGDP. A completely different issue. Obviously if we abolish inflation we also abolish RGDP. So I have no problem with is argument.

    JTapp, First of all that won’t happen. The fact that Williamson thinks it is possible suggests that he doesn’t have good instincts about how monetary policy is conducted in the real world. Right now the markets think inflation will be too low. And if it does the solution is very simple—target NGDP. If NGDP is growing at 5% it doesn’t matter whether inflation is 6% or negative 6%, for the simple reason that inflation doesn’t matter. NGDP growth matters.

    david, If monetary policy were endogenous, then there’d be no point in debating monetary policy.

    Shane, In Britain government certainly expanded beyond trend. I can’t support your proposal because I’d like to see a massive reduction in government employment. For instance, I’d privatize all K-12 schools, fire companies, and the Post Office and Amtrak. That would mean a big reduction in government jobs (and a big increase in private jobs.)

  10. Gravatar of scott sumner scott sumner
    7. November 2010 at 05:46

    Marcus, The paper was published in 1938. I’d ask him “How are those low prices working out for you?”

  11. Gravatar of No Stocks 4me Kramer No Stocks 4me Kramer
    7. November 2010 at 09:22

    I say again,

    what ever it takes to get my CD’s back to at least 5% I’ll go along with!

  12. Gravatar of JimP JimP
    7. November 2010 at 09:37

    This seems rather good. At least these folks are talking about quantities, not prices.

    And they do make clear the abject failure of Fed policy up to now:

    begin quote

    Now, let us examine what happened to combined Federal Reserve and commercial banking
    system during the Fed’s first round of quantitative easing that covered the 16 months ended
    March 2010. Chart 3 shows the net change in total Federal Reserve credit, Federal Reserve
    outright holdings of securities and Federal Reserve credit excluding outright holdings of
    securities in the 16 months ended March 2010 (the shaded area in the chart). Notice that
    although Federal Reserve outright holdings of securities increased a net $1.5 trillion during the
    first round of Fed quantitative easing, total Federal Reserve credit increased by only a net
    $200 billion during this period because other elements of Federal Reserve credit contracted by
    a net $1.3 trillion. Chart 4 shows that commercial banking system credit contracted by a net
    $875 billion in the 16 months of the Fed’s first round of quantitative easing. Thus, when we
    sum the net change in Federal Reserve credit and commercial banking system credit in the 16
    months ended March 2010, the period encompassing the Fed’s first round of quantitative
    easing, we find that the net change in credit was minus $675 billion. Is it any wonder, then,
    why the response of nominal GDP growth was so restrained to QE1? We would argue that
    QE1 was a misnomer in that there was no quantitative easing, but rather a quantitative
    contraction.

    end quote

    Also, they acknowledge the disappointingly small size of the QE2 – and they say that they expect it to have only a modest effect.

    begin quote

    For the sake of argument, let us assume that in the next seven months combined Federal
    Reserve and commercial banking system credit increase a net $600 billion, the amount of the
    Fed’s planned securities purchases over this period. This would represent a 5.2% increase in
    the September level of combined Federal Reserve and commercial banking system credit.
    Chart 7 shows that there has not been a seven-month increase in this credit aggregate of 5.2%
    or greater since March 2009. Now, a 5.2% increase in combined Federal Reserve and
    commercial banking system credit is unlikely to result in a boom in nominal aggregate
    demand, but it will help prevent the economy from slipping back into a recession within the
    next 12 months in the face of substantial economic headwinds emanating from the housing
    and state/local government sectors of the U.S. economy

    end quote

    Its something, but now enough. Its Ben the timid. But still – so long as he keeps on keeping on.

    http://www-ac.northerntrust.com/content//media/attachment/data/econ_research/1011/document/us1110.pdf

  13. Gravatar of JimP JimP
    7. November 2010 at 09:39

    now = not

  14. Gravatar of JimP JimP
    7. November 2010 at 09:50

    And so long as Ben does not actually mean all that stuff he said in the WaPo – which sure did sound like an inflation obsession – and a promise to raise rates pretty soon. Hopefully that was like Bush and WMD in Iraq – for popular consumption only.

  15. Gravatar of JimP JimP
    7. November 2010 at 09:52

    BTW that was a joke – about Bush. Ok?

  16. Gravatar of Ted Ted
    7. November 2010 at 10:27

    I think if we didn’t have the high inflation of the 1970s, inflation probably wouldn’t be a dirty word.

    I have two comments on your NGDP targeting proposal though Scott.

    Firstly,the general policy conclusion from sticky wage and price models is that you need to target the nominal variable that is “most” sticky. I believe wages are far stickier than prices – wouldn’t it make more sense to target the nominal wage directly then?

    Secondly, you claim inflation is irrelevant and that nominal income matters (I actually prefer Gross Domestic Income over Gross Domestic Product, it’s been shown to be more accurate for business cycle fluctuations) – I agree this is probably true for business cycle movements, but it isn’t true from a public finance perspective, which is also important for the economy. The latest estimates I have for U.S. currency outside the United States is about 60% (as of 2006) – that’s quite a lot of currency! That means if our currency is deflating, say at -6%, the U.S. is then transferring real resources to the rest of the world in the form of negative seignorage income. Also, let’s remember we have a system of distortionary taxation. This also means that for a given rate of deflation, taxes have to be higher in order to finance the negative seignorage income. So, there is a trade-off here. Since foreigners hold such large sums of our currency, it may be optimal to impose an inflation tax on them as this relieves the need for higher distortionary taxation here for a given level of government spending. Furthermore, even if we had a system of lump-sum taxes, it would still makes sense to extract revenue from the foreign money holders. Of course, this must be traded off against taxing domestic residents – but Stephanie Schmitt-Grohe and Martin Uribe have found that the trade-off is in favor of taxing foreign residents and the optimal inflation rate is a little over 2% – remarkably close to our current target (probably by chance, since I’ve never heard the Fed claim our target is 2% because of the foreign holdings of money. Of course, they probably wouldn’t say that even if it were true since it might make other nations angry at our Fed). So, I would actually say that it’s important we maintain a 2% inflation rate, otherwise we have the potential to have higher taxes. Although, in practice, targeting 5% NGDP growth would probably imply a rate of inflation of about 2% per year anyway, but I just wanted to make the point having a 5% NGDP target with -6% deflation isn’t costless by any extent.

    Also, if I remember correctly,Williamson largely doesn’t believe in price stickiness, or rather he doesn’t think price stickiness implies monetary policy has real effects – even in the short-run. He wrote about such a theory in his paper “New Monetarist Economics.” If I remember the model correctly, it was something along the lines of a search theory of money so when the money supply increases or decreases there is no real effects at all – but it makes prices look sticky. Say the money supply rises. He would argue that due to search costs, some producers increases prices, which forces sales down. Whereas some producers keep prices constant, but the volume of sales increases. All things equal, producers are indifferent between the two outcomes since profits remain the same in certain search models of money. Clearly, in this world, prices look sticky, but it doesn’t imply monetary policy has real effects. You could probably tell a similar story about wage stickiness with a search-and-matching model of employment. So, my guess is, he doesn’t buy price and wage stickiness are actual things, but endogenous responses in the aggregate data to movements in the money supply and thus monetary policy has no power in this sense.

    The model looked highly stylized and required some assumptions I don’t think hold in the real world, but more importantly, such a search model of money can’t explain why stocks and asset prices respond they way they do. If monetary policy has no real effects, then the markets shouldn’t respond the way they do. Until Williamson confronts such evidence, I’m going to be skeptical of his thinking on the issue.

  17. Gravatar of marcus nunes marcus nunes
    7. November 2010 at 11:41

    And they keep framing the debate in terms of INFLATION: Here is Mark Thoma vs S. Williamson:
    http://economistsview.typepad.com/economistsview/2010/11/i-was-kind-of-grumpy-heres-steven-williamsons-response-to-my-post-grumpy-thoma-by-steven-williamson-apparently-mark-th.html

  18. Gravatar of Joe Joe
    7. November 2010 at 11:42

    How would AS/AD work? I think you once mentioned that you’d replace Y with total hours worked in the economy. I like that, since it seems like that closest thing that human knowledge could come to an objective statistic measuring the nations work/output. And then you would replace Price with NGDP? Correct?

    I say because AS/AD was always useful in helping me get the economy. Whereas IS/LM did not.

    Joe

  19. Gravatar of Full Employment Hawk Full Employment Hawk
    7. November 2010 at 13:15

    You are certainly a very different monetarist than Meltzer. In a recent column in the Wall Street Journal, he writes:

    “Would the late Milton Friedman have endorsed the Federal Reserve’s plan to make large-scale purchases of long-term Treasury bonds? … Some people, including this newspaper’s David Wessel in a column last week, believe the great Nobel laureate would favor this inflationary program. I am certain he would not.”

    Meltzer has been criticising the Fed’s policies as too expansionary and leading to inflation.

  20. Gravatar of Full Employment Hawk Full Employment Hawk
    7. November 2010 at 13:23

    I don’t have access to more than the beginning of the article because to read the rest I would need to have a subscription to the online Journal, and I am not prepared to give Robert Murdoch any of my money. So I will have to rely on Paul Krugman’s comment:

    “Yes, there was brief bulge in the PCE deflator early this year “” which in itself raises questions about how reliable a measure it is. But basically, both show a steady trend toward lower inflation. Which is, by the way, the opposite of what Meltzer told us to expect.

  21. Gravatar of Liberal Roman Liberal Roman
    7. November 2010 at 15:54

    OT: This is getting worse and worse. Sarah Palin has decided to put in her two cents on Bernanke.

    http://www.nationalreview.com/corner/252715/palin-bernanke-cease-and-desist-robert-costa

  22. Gravatar of Benjamin Cole Benjamin Cole
    7. November 2010 at 17:28

    While Scott Sumner may be staking out an extreme position to make a point, there is far too much obsession with inflation currently. It has become a fetish.

    And consider, there is a recent AER peer-reviewed paper to the effect that the CPI measures about one percent too high, and Boskin of Stanford found roughly the same result in the 1990s. Consumers and businesses are constantly migrating to better, lower cost products and services, and any static measures of inflation will get out of date quickly.

    I would rather live with 5 percent inflation and 5 percent growth, than 2 and 2. Have we forgotten the basics? It is real output that counts.

    Another thought perhaps for Scott Sumner to take up: What happens when bondholders and anti-inflationist become too strong? Retirees who own US bonds, for example, would be happy with deflation, even if it meant output sagged. Other people on fixed incomes too. These people have an interest in keeping the monetary noose around the neck of productive enterprises.
    I wonder if this is in the background in Japan. So many people there own Japanese debt, there is a coalition of people happy with mild deflation. It becomes a political force.

    Some US investors have gone long on the dollar, and they are harping on tight money etc,

  23. Gravatar of Benjamin Cole Benjamin Cole
    7. November 2010 at 17:29

    BTW–

    “Full Employment Hawk”–I love your handle.

    We need more of that.

    The Monetary Bulls.

  24. Gravatar of marcus nunes marcus nunes
    7. November 2010 at 18:26

    This Williamson post borders on the “hilarious”:
    http://newmonetarism.blogspot.com/
    “I don’t know what “aggregate demand” is. That’s in a language I can’t make any sense of”.
    “New Monetarism” has not yet reached the stage o swahili (which is spoken/understood by 50 million people worldwide)!

  25. Gravatar of Morgan Warstler Morgan Warstler
    7. November 2010 at 19:39

    when you want to read an article at the journal, just google the title – first link lets you in.

    http://online.wsj.com/article/SB10001424052748704462704575590721000212144.html

  26. Gravatar of Morgan Warstler Morgan Warstler
    7. November 2010 at 19:47

    I actually think the Milton’s real take on QE at this moment would be entirely based on what it bought us politically…

    Meaning, he’d say, “if you are committing to continuous aggressive hammer mallets to un-stick public employee wages… these are righteous deflationary effects – by all means the Fed will provide enough QE to ensure the stock market keeps going up, even though you are applying major AD shocks.”

    thought he’s likely not mention the stock market, the I’m sure he’d agree with the theme, there is nothing the man hated more than government.

  27. Gravatar of malavel malavel
    8. November 2010 at 00:10

    Nominal income sure sounds better than NGDP.

    1. It’s easier to pronounce.

    2. People wont pick up the old “GDP is not a good measure of growth!”.

    3. Increasing peoples incomes is great!

    I’m not saying that nominal income is better from a technical point of view, just that it would be easier to sell to the general public.

  28. Gravatar of Doc Merlin Doc Merlin
    8. November 2010 at 01:49

    And now you see why Austrians defined inflation as increase in the monetary base, as opposed to “price inflation” which really depends on what assets/goods/services you are looking at.

  29. Gravatar of JTapp JTapp
    8. November 2010 at 06:38

    @Ted and Scott,
    Williamson made the point that “Keynesians (new and old)” had not convinced him that an increase in the money supply could increase output w/price levels not rising. I pointed out to him that the very idea was covered in two of Friedman’s “11 tenets of monetarism” from a 1970 speech he gave–the one cited by Bernanke a few years ago. He basically dismissed it as something he doesn’t like about Friedman’s thinking.

    Again, what exactly is this “New Monetarism” and is Williamson its only real practitioner? I’ve not seen any other self-identifying monetarist in the blogosphere agree with him on much.

  30. Gravatar of Full Employment Hawk Full Employment Hawk
    8. November 2010 at 08:22

    “I don’t know what “aggregate demand” is. That’s in a language I can’t make any sense of.”

    Lucas cannot understand what involuntary unemployment is.

    Fama cannot understand what a bubble is.

    WARNING! Ideological blinders at work!

  31. Gravatar of Full Employment Hawk Full Employment Hawk
    8. November 2010 at 08:24

    “what ever it takes to get my CD’s back to at least 5% I’ll go along with!”

    If it takes 4% inflation to get your CD’s back to 5%, will you go along with that.

  32. Gravatar of scott sumner scott sumner
    8. November 2010 at 08:42

    JimP, Well at least it’s better than nothing, which is what we had until now.

    Ted, You said;

    “Firstly,the general policy conclusion from sticky wage and price models is that you need to target the nominal variable that is “most” sticky. I believe wages are far stickier than prices – wouldn’t it make more sense to target the nominal wage directly then?”

    Yes, I published a paper advocating nominal wage targeting in the mid-1990s. I favor NGDP targeting only for political and pragmatic reasons. It’s hard to measure aggregate hourly wages, and it sounds bad to say you are targeting them.

    I like most of your comment. I agree that the evidence against wage and price stickiness is flimsy, and it makes no sense to call such a model “monetarist”. The most important part of monetarism is that monetary shocks have real effects. The great success of monetarism was showing that tight money caused the Great Depression. He must think it didn’t. That’s not monetarism.

    Regarding seignorage, I don’t see why the entire argument can’t be better framed in terms of NGDP growth, rather than inflation. You get seignorage from extra money demand associated with both RGDP growth and inflation. Also recall that inflation has very negative effects on our tax system. I’m fine with 2% inflation, but the gains from seignorage can be offset by the losses from distorting taxes on capital (which aren’t easily indexed) so we need to be careful in pushing the inflation argument too far.

    Marcus, I can’t understand why Williamson is worried about inflation. Isn’t he a free market guy? The markets say inflation is not and will not be a problem.

    Joe, Exactly right. AS/AD is very useful, and I’d go with hours/NGDP.

    Full employment hawk, Yes, I don’t consider myself a monetarist. I’ve been called quasi-monetarist, but unlike Meltzer, I don’t focus on the monetary aggregates, I focus on NGDP growth expectations (or inflation expectations.)

    Liberal Roman, Yes, I saw that too—indeed I already have a post.

    Benjamin, Good points. BTW, In an earlier post I argued that savers might not actually benefit from deflation. It also tends to lower REAL interest rates, as the economy becomes depressed. I do understand the lower prices, and that long term bonds can rise in price. But economics is not a zero sum game–if deflation makes the country poorer, eventually even savers will suffer. Some savers invest in stocks, or short term assets which see lower real rates as the economy slumps.

    Marcus, Yes, that AD comment also made me smile. I suppose the reason I didn’t make fun of it is because I am also a contrarian, and also say some strange things. But that blog seems to be off in another universe. It doesn’t seem very monetarist to me–I think this blog (and Beckworth, Rowe, Woolsey, etc,) are the new monetarism. But he’s obviously a very smart guy, and I’ll keep tuning in occasionally to see his take on things. I’ve seen him do good analysis of technical issues.

    Morgan, I did a number of posts showing Friedman would have favored easier money today. He argued that when interest rates were near zero, monetary policy had been too tight.

    Contrary to Meltzer, the Fed does not target 1.2% inflation, indeed inflation has exceeded 1.2% for roughly 45 years in a row.

    malavel, You are probably right, but NGDP is easier to type.

    Doc Merlin, So we had 100% inflation in late 2008? Or suppose there is a lost of confidence in a currency like Confederate money. That’s not inflation if the supply is fixed but the demand falls close to zero?

    JTapp, Yes, see my answers to several commenters above.

  33. Gravatar of Ryan Ryan
    8. November 2010 at 09:32

    Prof Sumner –

    Although I hardly expect you to agree, if you are interested in this concept at all, you would do well to investigate why Ludwig von Mises thought the term “inflation” was worthless as it pertains to economics.

    First of all, he thought that a little bit of inflatin/deflation must surely be going on constantly as part of the normal dynamic aspects of the market. So he identified that such changes are natural and are only really called “inflation” or “deflatin” when they became sufficiently large phenomena.

    Second of all, he rightly pointed out that it was always politicians who pointed out when inflation was large enough to be called inflation.

    Finally (and this is where you will disagree – perhaps the only point on which you will disagree), he pointed out that inflation that is large enough to become political is always the result of a deliberate inflationary policy.

    More here: http://mises.org/daily/908

    I’d love to hear your thoughts on the Mises view of this issue in sort of a quick, once-off, greatly abridged version.

  34. Gravatar of JTapp JTapp
    8. November 2010 at 11:12

    Speaking of inflation, Jonathan Wright of Johns Hopkins writes an op-ed in the WSJ stating that the negative yield on TIPS means the market is expecting inflation to be too low, not too high.

  35. Gravatar of Doc Merlin Doc Merlin
    8. November 2010 at 11:52

    ‘Doc Merlin, So we had 100% inflation in late 2008? Or suppose there is a lost of confidence in a currency like Confederate money. That’s not inflation if the supply is fixed but the demand falls close to zero?’

    Austrians define inflation as just what is happening on the supply side. You are correct with the Austrian definitions, “its not inflation if the supply is fixed but the demand falls close to zero” because the problem isn’t printing too much money, but rather that the confidence in the money was lost.

    I think Austrians would say we have 100% monetary inflation in 2008, but the fed was subsidizing the banks to not lend money so it didn’t translate into massive price increases outside of certain commodity markets.

  36. Gravatar of Doc Merlin Doc Merlin
    8. November 2010 at 13:04

    ‘david, If monetary policy were endogenous, then there’d be no point in debating monetary policy.’

    I agree. In fact, I suspect that it SHOULD be endogenous and by making it exogenous the fed messes things up.

  37. Gravatar of Doc Merlin Doc Merlin
    8. November 2010 at 15:54

    @Scott:
    “Marcus, The paper was published in 1938. I’d ask him “How are those low prices working out for you?””

    What low prices? The federal and state governments set price floors to prevent the prices from being low. Yes, disaster resulted.

  38. Gravatar of Morgan Warstler Morgan Warstler
    8. November 2010 at 17:11

    “Morgan, I did a number of posts showing Friedman would have favored easier money today. He argued that when interest rates were near zero, monetary policy had been too tight.”

    Yeah, I was here.

    The point is that MF was MUCH MORE concerned about size of government than he was monetary policy.

    And, ye who doesn’t not expound nearly enough on the necessary smallness of government, attracts all kinds of pro-government hipsters who grasp at your ideas because they are JUST SURE there’s a DeKrugman/Obama bigger government solution pony in there somewhere.

    —–

    And aren’t you getting to the point where your ideas are getting enough play, that you have to aggressively defend against other bad actions that could ruin your chance?

  39. Gravatar of Morgan Warstler Morgan Warstler
    8. November 2010 at 17:14

    Don’t let the dirty hippies steal your baby Scott! I won’t be able to stop the Tea Party Mob from getting you, if you aren’t preaching the “make the cuts!” gospel.

  40. Gravatar of JTapp JTapp
    9. November 2010 at 04:33

    Scott, Reihan Salam of Economics21 and the National Review asks you to weigh in on their latest editorial. (see his comment at the bottom of that post). Comparing Italy’s QE of the 1970s to the U.S. today.

  41. Gravatar of scott sumner scott sumner
    9. November 2010 at 08:00

    Ryan, Interestingly, I’ve also argued that inflation is not very useful, and that NGDP is much better (as Hayek also argues.)

    I’m short of time now–are there any specific quotations you want me to respond to?

    JTapp, That sounds right to me.

    Doc Merlin, OK, but if Confederate prices rise 1000% and there is no “inflation,” then I think we need new terminology.

    Wholesale prices fell sharply between 1937-38, which was a huge problem.

    Morgan, I approved of the British Conservatives doing the tight fiscal/easy money policy. Isn’t that something small government types could support? It says let’s have growth, but in the private sector.

    JTapp, Yes, I guess I need to reply on that one.

  42. Gravatar of Lee Kelly Lee Kelly
    9. November 2010 at 08:44

    I found a great quote from Hayek yesterday in Prices and Production claiming the concept of the price level, and changes thereof, is quite irrelevant to monetary economics. He instead stresses the importance of relative prices, their effects on production, and total nominal income (or the ‘money stream”, in Hayek’s words). I’ll need to dig the quote up.

  43. Gravatar of Doc Merlin Doc Merlin
    10. November 2010 at 05:25

    @Scott
    ‘Doc Merlin, OK, but if Confederate prices rise 1000% and there is no “inflation,” then I think we need new terminology.’

    We have had it. For much of economy history it was differentiated by saying “inflation” only referred to supply side increases of money (i.e.: making the money less valuable than it would otherwise have been, by creating more), “price inflation” referred to the price changes. Austrians still use the historical definition, whereas mainstream modern economists all but ignore the difference between the two.

  44. Gravatar of ssumner ssumner
    11. November 2010 at 09:23

    Lee, That would be great. I might include it in a post.

    Doc Merlin, Yes, but times change. Suppose I go around using terms like “spinster” and “gay” with their meanings from 100 years ago? Today inflation means price inflation.

  45. Gravatar of Doc Merlin Doc Merlin
    11. November 2010 at 12:10

    @ssumner:
    In that case I support ignoring the idea of price inflation in macro. Monetary inflation is still an important concept, but price inflation doesn’t really tell you much because it can come from so many different sources.

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