Recent links
1. Tim Duy has some perceptive comments on how Fed-think is ruining our economy:
Bullard divulges that the FOMC still doesn’t understand its job:
“Bullard said that ‘Treasury yields have gone to extraordinarily low levels. That took some of the pressure off the FOMC since a lot of our policy actions would be trying to get exactly that result.'”
The FOMC just cannot see that low interest rates are a sign of tight money, an expectation that the economy is facing headwinds and the Fed is not going to sufficiently offset the subsequent drag on growth. They need policy such that interest rates start to rise on the back of economic gains. That falling yields are a bad, not good sign, completely eludes them.
2. James Hamilton provides a public service. This post allows you to win 100% of cocktail party debates over gasoline prices. Just remember “84 cents plus 2.5% of Brent.” That’s not so hard.
3. Matt Yglesias shows that although GOP voters are opposed to big government, they are also opposed to any significant steps to rein in government spending (at least if you believe polls, which I don’t unless I agree with them, which in this case I do.) There are interesting hints that independent voters might actually be more libertarian than GOP voters (on spending, not taxes.) As the core of the GOP moves south, it becomes more like a European-style conservative party—pro-big government, pro-cartels and regs that favor affluent people, and culturally conservative. Unfortunately our political system has no place for pro-free market and socially liberal people. The kind that read The Economist magazine. So they end up as independents.
4. Alen Mattich of the WSJ has an article discussing my euro-crisis post. It’s pretty good, but the last paragraph somewhat mischaracterizes my views:
Short of such a union, the only alternative is for the euro zone to inflate its way out of trouble, Mr. Sumner argued. The European Central Bank would need to be allowed to print money and buy sovereign debt from across the periphery until those countries rediscover competitiveness. Otherwise, the euro’s days are numbered.
I believe that even a “union” would fail to solve their problems. I don’t view my monetary policy proposal as inflationary. I don’t think they’d need to buy up lots of sovereign debt. I’m no expert on the ECB, but whatever assets they normally buy, or loans they normally make, would be sufficient. There is no need for any change in technique. The euro may survive even if they don’t follow my advice, but some countries may exit.
5. Last, and definitely not least, Ryan Avent has a magnificent post demolishing the recent report by the BIS. Ironically, when the BIS was first created around 1930 they were seen as a progressive organization that would work for central bank coordination to arrest global depression. Now they’ve morphed into a club that represents all the worst aspects of 1930s conservatism:
At the heart of the BIS’ flawed thinking are a number of key misconceptions:
Low interest rates represent accommodative monetary policy. This is a venerable error, also popular during the 1930s. Central banks change the cost of money””the interest rate””in order to clear labour markets. Policy is accommodative not when interest rates are low in absolute terms, but when they are low relative to the market-clearing rate. Economist estimates (including some by Federal Reserve economists using Taylor rules) indicate that for much or all of the period from late 2008 to now the market-clearing interest rate in advanced economies has been negative, substantially so in some cases. Near-zero nominal interest rates (and even moderately negative real interest rates) may therefore represent too-tight monetary policy: money too costly to encourage the spending and investment necessary to achieve full employment.
. . .
Secondly, the BIS takes the distressingly Hayekian (or Mellonist) view that “malinvestment” during the boom must somehow be paid for in slower growth now:
“Because labour and capital do not easily shift across industries, the misallocation of resources during the boom tends to work against recovery in the aftermath of a crisis. Hence, countries where the sectoral imbalances were most apparent are facing higher and more protracted unemployment as their industrial structure only slowly adjusts.”
Exhibits A and B for this argument””Spain and Ireland””are fairly lousy examples given the absence in those countries of an independent monetary policy (the BIS might as well argue that countries with no central bank can’t rely on a competent central bank to stabilise the macroeconomy). America, the BIS’ Exhibit C, reveals the weakness of the argument. America’s housing crash began in earnest in 2006, at which point sales, construction, and real-estate employment all commenced plummeting. GDP growth continued, however, and unemployment remained at normal levels until mid-2008, two years later, at which point nominal output began to fall well short of trend and falling employment affected nearly every major industry. Labour and capital shift easily enough when demand follows expectations””when central banks do their job.
Central banks can’t do more without confronting unacceptable risks. The BIS cites imbalances as obstacles to effective monetary policy while acknowledging that by pushing unconventional monetary policy further central banks can impact aggregate demand. A host of accompanying risks to such policy suggests they should not, however. What sort of risks?
“First, prolonged unusually accommodative monetary conditions mask underlying balance sheet problems and reduce incentives to address them head-on. Necessary fiscal consolidation and structural reform to restore fiscal sustainability could be delayed.”
If the central bank does its job, in other words, politicians may not do the things central bankers think they ought to do. Implied in this assessment is that it is the central banker’s job to hold elected governments accountable for public finances and supply-side policies rather than the electorate’s. This represents both a dereliction of the central bank’s duty and an astounding policy overreach. In a similar vein:
“[L]arge-scale asset purchases and unconditional liquidity support together with very low interest rates can undermine the perceived need to deal with banks’ impaired assets.”
In other words, neglect of the central bank’s primary duty may be appropriate in order to focus the minds of bank executives and politicians on potential asset losses. Translated, this is effectively the liquidationist view of recovery; if interest rates were higher, advanced economies would be forced into wholesale default, the end result of which would be (assuming society survives the ensuing depression) clean balance sheets.
There’s much more—read it all.
I get depressed reading many of the comments in my blog. People ranting about the Rothchilds. Complaining that I’m getting my hands dirty trying to make central bank policy a bit less bad, trying to help the millions of unemployed. They stand on the sidelines without a spot on mud on their clothing, insisting we need to destroy the central banks. Bring on mass liquiditation. Destroy everything and a new and more pure and more beautiful economy will rise from the ashes. Some are the very same people who suggest 9/11 was a CIA plot. It smells of the 1930s. God I hate ideologues.
I plan to take a short break from blogging to finish up some projects.
HT: Tyler Cowen, Saturos
Update: 6. On second thought, maybe we do need a 20-year recession to really cleanse the economy of its excesses.
7. Exactly my view.
8. Peter Tasker in the FT:
If the big cause of the debt problem is declining nominal GDP, then it follows that the solution must be rising nominal GDP. Indeed, if Japan had managed to grow at 3 per cent in nominal terms over the past 15 years, the economy would be two-thirds bigger than it is now, asset prices would be higher and government finances in better shape.
Tags:
27. June 2012 at 09:05
This from Ryan Avent;
‘Central banks change the cost of money””the interest rate….’
made me grind my teeth. Especially since the rest of the article shows he understands it isn’t true.
27. June 2012 at 09:07
Scott says…
I say… Applause…Lots and lots of it.
27. June 2012 at 09:31
Please keep it up, Scott. I see market monetarist ideas cropping up all over the place, both in the internet and the mainstream media. You’re making a real difference, notwithstanding the cranks that flood your comment section.
27. June 2012 at 09:32
well, i hope you are enjoying the summer at least. honestly i dont get depressed at the comments, thats par for the course. what gets me irritated is Fisher who makes – what probably over 200k, does not understand his job, and cant even get a decent haircut?
http://www.reuters.com/article/2012/06/26/usa-fed-fisher-idUSL2E8HQEDQ20120626
WHY CANT WE HAVE ACCOUNTABILITY AND INCENTIVE BASED COMPENSATION ON THE FOMC.
ok sorry to yell.
my favorite part: “I would argue against it unless something comes up that I don’t understand,” Fisher said, according to the transcript.
which is like… everything!!!
but seriously, when can we nominate you for the FOMC??
27. June 2012 at 09:38
“Tim Duy has some perceptive comments on how Fed-think is ruining our economy:”
The scary thing is it’s not just Bullard who thinks Euromaggedon and falling rates is stimulative. Lacker added himself to the mix this week, joining Fisher and Plosser from several weeks ago.
27. June 2012 at 09:40
There’s really never been a place for socially liberal fiscal conservatives. There simply aren’t that many, neither among voters or politicians. It isn’t a winning strategy. Northeastern Republicans, for every bit that they are more socially liberal, are more profligate spenders and regulators.
If people like us could win elections, we would, but we don’t.
The old Republican party was protectionist; it has also become more free trade as it has shifted South, just as the Democrats have become more protectionist.
27. June 2012 at 09:47
America’s housing crash began in earnest in 2006, at which point sales, construction, and real-estate employment all commenced plummeting. GDP growth continued, however, and unemployment remained at normal levels until mid-2008, two years later, at which point nominal output began to fall well short of trend
The unemployment of illegals, not counted well in the statistics, shot WAY WAY up.
There were actually 2 housing crashes:
2006: crash in construction, lots of construction companies bankrupted or ceasing operations, some legal construction unemployment and huge unemployment among illegals.
House prices stopped going up and started drifting down.
2008: House price crash, with the financial crisis that ended cheap no-documentation loans (liar loans), no money down … “house prices always go up”.
2008-2012+ huge loss in median (& average) Net Worth of the 65% (+) American homeowners (mortgage holders), most whom had house equity as their biggest “savings”.
I agree the money is tight, and NGDP targeting, or the Taylor rule, would be better than what is on offer by Central Banks now.
However, the 2-year difference between construction/price peak in 2006, and total output drop in 2008, does not invalidate the “higher and more protracted unemployment as their industrial structure only slowly adjusts” to those malinvestments.
Responsible Companies and responsible homeowners got unexpected losses to their net worth, to “the money they have”. Aggregate Demand is NOT just a function on current income, cash in pocket.
The prior 20 year trend was a bubble trend. There is NO sustainable gov’t nor central bank policy that gets back to that over-employment trend.
On the other hand, even if NGDP targeting would only have reduced the pain and depth of the Recession, the low AD / low growth might mean that CBs start trying it “as a last resort”. (Like Churchill’s quote about America)
27. June 2012 at 09:50
First, watch this: http://www.southparkstudios.com/clips/386590/pissed-off-and-angry-party. It might cheer you up.
Second, consider this: Krugman bans trolls and deletes offensive comments. I know that you want this to be a free speech zone, and that’s fantastic, so maybe you could start small: say, a 50 comment limit per post?
And finally, cheer up about politics. A classical liberal coalition is the new majority coalition in the US! A conservative base strategy like that of GWB could barely produce 50% in the war time setting of 2004. The coalition that elected Obama–one that combined independents concerned about economic efficiency with traditional big-L Liberals concerned about the rightwing big government state of Bush/Cheney–is not only more or less socially liberal and economically free-market, but it can produce 53%, a clear majority.
Obama was the first president to win a clear majority since George H.W. Bush. I’m not saying this is good news because Obama is the cat’s pajamas. But it is good news for what it says about the future of politics in the US. Since the ’88 election, the Republicans have consolidated the remaining cultural conservatives left in the Democratic Party while alienating a lot of the classical liberals that were once part of their coalition. Just as conservative thought in the 50s aimed at bringing in illiberal and religious elements of the Democratic party, books like Dean Baker’s “Taking Economics Seriously” and “The End of Loser Liberalism” are a sign of similar moves toward coalition building. Although Baker may not have intended it, they read as if they were designed to convert the traditional left-liberals to a more free market mentality, a good sign that there are intellectual moves toward consolidating a classical liberal coalition. I think it is fair to say that the future of small-l liberalism looks brighter than ever.
27. June 2012 at 09:58
Oh, and if you think the Democratic party hasn’t changed that much since ’88, recall that Rick Perry chaired the Texas branch of Al Gore’s Democratic primary campaign that year.
http://abcnews.go.com/blogs/politics/2011/08/rick-perrys-defense-of-1988-al-gore-endorsement-runs-into-reality/
27. June 2012 at 09:59
‘Obama was the first president to win a clear majority since George H.W. Bush.’
W won with 51% of the popular vote in 2004.
27. June 2012 at 10:09
Scott,
Well the trolls and cranks are indeed exhausting and irritating there are those of us out there who typically refrain from commenting, but nevertheless find your posts engaging, educational, and have given good cause to rethink out political and economic beliefs. So well it may not seem obvious you are having an impact. So keep up the good fight and don’t let the b*stards bring you down!
27. June 2012 at 10:19
Patrick: 50.7, to be exact. A majority, but barely, in war time, with a weak opponent.
27. June 2012 at 10:37
Thanks again for your efforts, which have made a big difference in the way I approach economic issues in general.
27. June 2012 at 10:39
On the first point, I don’t read the minutes, but are Bullard’s comments consistent with the thinking of others? If so, that is indeed depressing.
As for the comments, you’re facing the dilemma of open comments. Some people are only here as trolls for their own agenda, and other’s can’t resist that bate (I’m often in the latter camp, but seem to be doing okay around here).
27. June 2012 at 10:53
[…] Sumner, “Recent links“, The Money Illusion, 27 June […]
27. June 2012 at 11:24
Scott, don’t judge yourself based on a couple of trolls. That says more about the internet than about you.
You have been a significant contributor to getting NGDP into the mainstream economic debate.
And (perhaps less important) you’ve helped some individuals (like me) finally understand what the f*** is going on with this whole “macroeconomics” thing.
Influencing the academics and politics, and educating laypeople: what more could a teacher ask for? 🙂
27. June 2012 at 11:38
Scott,
Your approach has been more successful than I would’ve ever guessed, so ignoring me might be a good idea. But, is it possible that too many have been too kind to the fringe elements which have grown since the financial crisis? Might the right response be ignoring them or dismissing them outright? Or to put it another way, do so many experts need to be so kind to them?
I’m not suggesting everyone be Krugman, or especially DeLong, but at the same time, to give some ideas so much attention in a polite, sober, rational way may lend them credibility in the eyes of some. Can you imagine many physicists giving the same sort of attention to members of the Flat Earth Society?
I guess my real question is, why aren’t flat-earthers being treated like flat-earthers?
27. June 2012 at 11:43
I’ve been supportive of MM ideas because they would stabilize what we currently have so we can figure out a way to reform it; and given the situation, it sorely needs it. The longer this problem continues, however, the less supportive I am of having a government money monopoly as I imagine what would be happening to people all over the country if there were no social support programs. And the more it is pointed out how expensive this is as compared to the alternatives, the more I am disgusted with the whole thing.
A government institution that creates this kind of destruction and continues to do so no matter how loud and long the error is pointed out is one that shouldn’t exist. I could add more to this statement, but it would be nothing but an epic anti-Fed rant so I’ll stop here.
27. June 2012 at 12:38
Professor Sumner…
I tried making My face book page a place where anyone could say anything.
Ugg. My experiment in anarchy failed miserably. People I really like ended up at each others necks. I got sucked into it too. No one was happy.
Now I have a strict “make nice” policy and everyone is happier. And we still manage to have some good convos.
It think Anarchy on the internet is a great thing…In its Place.
I used to hang out in unmoderated cesspools like the threads of Politico. I had long relationships with, an actual White supremacist, with a person that advocated killing abortion providers, with a Militia guy who advocated (thinly veiled) the violent overthrow of the government…and other assorted crazies.
There was NO way we could discuss anything without being very ugly and disrespectful of each other…yet I found these relationships illuminating.
I don’t think we changed each others minds one small bit, but we did, I like to think, humanize each other.
When ever I hear of efforts to “clean up the dialogue” the internet I get vexed.
But that does not mean that everyplace has to be a No Rules zone…and a Blog like this certainly does not have to be, and could, just maybe, be improved by a few rules.
I respect that you will take a lot of crap form people who have genuine disagreements with you…But there is NO reason that you have to tolerate certain MFers constancy being on the attack saying the same basic thing over and over and taking up the vast bulk of many threads…
This is your Blog…you are the King. So do what you want. It is good to be the King.
27. June 2012 at 12:47
Last year you wondered whether you might have influenced Lucas as a student, and this quote reminded me of that. Lucas said (in 1988 I believe):
“Most of what we know we learn from other people. We pay tuition to a few of those teachers…but most of it we get for free and often in ways that are mutual – without a distinction between student and teacher.”
27. June 2012 at 13:53
Scott,
Just wanted to send some positive thoughts your way. Reading your blog has taught me a lot about macro and monetary policy. I really appreciate your effort here, and I am sure many others do as well.
Best wishes to you going forward.
27. June 2012 at 14:16
2. I have to fill up today 🙁
27. June 2012 at 14:32
One of the problems is that those of us who agree with 95-100% of what you say tend not to say much. Always interpret my apparent absence as meaning “Yes; it is great that someone is actually blogging these things”.
27. June 2012 at 14:49
I second W. Peden (although, I don’t know enough to agree or disagree; I lurk to keep up.)
27. June 2012 at 14:52
W. Peden,
Yes, Scott writes very little that I don’t agree, that is what of it I understand. That’s why I also rarely comment.
27. June 2012 at 14:54
Professor,
Sorry. I should have been clearer. By union, I meant a union akin to the one in the U.S., a fully integrated political, and economic unit. Which is how I understood you to have contrasted the U.S.’s acceptance of permanent transfers from richer to less affluent parts of the country with European half heartedness. And yes, I agree, such a union is not possible in Europe.
As for inflation, I meant as a counter to the deep deflationary pressure being felt across the periphery, where, as you mentioned, Germany would have to accept something higher than 2% CPI growth.
Mea culpa. When I revisit the subject I’ll ensure not to repeat the fuzziness.
As for the liquidationists, Steve Keen has some interesting arguments. He figures until the deleveraging process finishes, economies aren’t going anywhere, and offers some suggestions as to how to achieve this (including debt jubilees).
27. June 2012 at 15:58
Third W. Peden. Most of my comments tend to be exasperated echoings of what’s already been said before, complaining that policymakers still aren’t learning.
27. June 2012 at 16:28
Hey now! Checkout the economic thinker Miles Kimball is featuring over at Supply Side Liberal tonight!
http://blog.supplysideliberal.com/post/26033839073/mike-sax-review-of-some-economics-blogs
27. June 2012 at 17:03
“Complaining that I’m getting my hands dirty trying to make central bank policy a bit less bad, trying to help the millions of unemployed.”
A lot of the hard line right ideologues are willing and eager to sacrifice working people on the alter of the false god of laissez faire. As long as they have theirs, working people can starve for all they care.
27. June 2012 at 17:14
“God I hate ideologues.”
I am a strong progressive on most issues, but support whatever I think actually works, even if it is inconsistent with progressive dogma.
I think you are right on about monetary policy and encourage you to continue your good work in this area, explaining why monetary policy is perfectly capable of increasing output and reducing unemployment when the economy is in a depression.
I think that market monetarist ideas are beginning to catch on. One thing some of the market monetarists should do is to publish a market monetarist alternative of Krugman’s END THIS DEPRESSION NOW!
27. June 2012 at 17:21
“Oh, and if you think the Democratic party hasn’t changed that much since ’88, recall that Rick Perry chaired the Texas branch of Al Gore’s Democratic primary campaign that year.”
That tells us much about Rick Perry and very little about the Democrats.
27. June 2012 at 17:38
The FOMC just cannot see that low interest rates are a sign of tight money, an expectation that the economy is facing headwinds and the Fed is not going to sufficiently offset the subsequent drag on growth.
As one of your shoe polishers Yichuan pointed out, low interest rates do not necessarily mean tight money. Interest rates were low throughout the very loose money 2000s. Indeed, interest rates have been declining since 1980.
We’re in the mother of all bull-runs in bonds.
I get depressed reading many of the comments in my blog. People ranting about the Rothchilds. Complaining that I’m getting my hands dirty trying to make central bank policy a bit less bad, trying to help the millions of unemployed. They stand on the sidelines without a spot on mud on their clothing, insisting we need to destroy the central banks. Bring on mass liquiditation. Destroy everything and a new and more pure and more beautiful economy will rise from the ashes. Some are the very same people who suggest 9/11 was a CIA plot. It smells of the 1930s. God I hate ideologues.
Well, this is obviously directed at me, so…
You get depressed? Is it your emotions that guide you or your intellect?
I don’t get depressed reading your comments. Your ranting about the gold standard, complaining that you’re not getting your hands dirty by not only ridiculing those who want to abolish central banks, but insisting that NGDP targeting is superior, totally ignorant of the fact that it is precisely central banks, inflation, and its intellectual advisers such as monetarists, who have CAUSED the millions of people to be put into projects that were not physically sustainable and thus caused their unemployment.
You stand on the sidelines without a spot of mud on your clothing, claiming that the problems are always caused by not enough money printing. You’re just like the Keynesians. Simply unable, or unwilling, to accept a free market. What is with the antagonism towards the market?
I don’t claim to have no mud on my clothing, but at least I am not dropping truckloads of dirt on innocent people, claiming that I’m only trying to help them. The road to hell is paved with good intentions. I don’t question your motivation. I question your method. It’s your method that wreaks havoc on people’s lives, because your method hampers their ability to economically calculate and coordinate their actions in a division of labor.
Yes, bring on mass liquidations. It would be better to have mass liquidations now, then even greater mass liquidations later on. While you’re pleading to help the economy via printing oilet paper money deluding investors into behaving as if the errors don’t exist, you are only making things worse by preventing needed corrections from taking place. It is people who thought like you during the 1930s that caused the great depression. Back then, just like now, people like you did not want the market to function. You wanted government tinkering. You wanted central bank intervention.
There were mass liquidations and massive unemployment in 1920-1921. Did the US collapse? No. We’re strong. We can recover for the transgressions of the state. Let the market work for the love of humanity. Just. Let. It. Go. Stop trying to control the world. Stop believing you’re responsible for it. Let individuals solve their own problems, and let money be produced by the people in the market. What is so incredibly frightening about that? Are you afraid that the market process that is responsible for your food, clothes, and shelter, is unable to manage something as simple as a medium of exchange? These goods are even more important than money, and yet you’re not saying the state should control the production of these things. Why? What is the hangup when it comes to money?
Bankruptcies are a HEALTHY aspect of capitalism. Capitalism without bankruptcies is like driving without a steering wheel. Destroy everything? Who said wealth is to be destroyed? I didn’t. Mass bankruptcies and liquidations will lead to existing resources being redeployed to their most efficient use. It won’t vaporize them into thin air. Stop believing the hysteria from those who stand to lose the most with a free market. You can’t be so afraid of bankruptcies. No matter what, the pain will be less than it would be if we continue on with this central banking nonsense, misleading investors into prolonging and introducing new malinvestments, which will lead to something a lot worse than liquidations.
——-
About 9/11: I trust independent engineers and physicists. Those not paid by the state, and there are thousands of them, they overwhelmingly have concluded that the twin towers, and building 7 which was not even hit by a plane, were brought down by controlled demolition techniques. Who is responsible is anyone’s guess. But the SCIENCE is clear. If you can’t psychologically accept this, then my guess is that it is the same reason you can’t psychologically accept a free market in money production. You just need to feel like you’re being taken care of and that those in charge of the country and of money, have your best interests at heart. They don’t. They have their own interests at heart. Maybe only methodological individualists can grasp this.
——–
Do you believe that monetarists who wanted price targeting didn’t have “the unemployed” in their minds? Look what happened. You simply must understand the difference between intentions and results. Your intentions are nobody’s business. It’s the results that are so problematic.
———
Like I proposed before, if you start to champion free market in money production, I promise never to post on this blog again. Your readers and you have a great incentive, no?
27. June 2012 at 17:40
And Sumner, YOU’RE an ideologue too. You are uncompromising. You will not support anything other than NGDP targeting. That makes you an ideologue.
Do you hate yourself?
27. June 2012 at 17:44
I plan to take a short break from blogging to finish up some projects.
This is the tide turning.
27. June 2012 at 17:51
In my first lesson in Econ 101, we where asked, “Who is the most powerful person in the world?”. We all answered, “Reagan.” The correct answer was “Volcker”. I am not sure the Fed Chairman is the most powerful person, but Chairman Bernanke’s followed the advice of Prof. Bernanke we’d be better off. This blog is only the only place on the internet to consistently call him on it. Keep it up!
Also, a little Southern History. After Lincoln, no Southerner could be a Democrat. Perry was a Democrat, because everyone was a Democrat. That changed about 1990. Now Texas has no zero Democrats (state-wide office). Same ideals, just different labels.
27. June 2012 at 18:34
“I get depressed reading many of the comments in my blog”
Your blog is great. I’ve learned lots about economics and market monetarism from you. Plus your enthusiasm and intellectual honesty is admirable.
I never comment, because I’m not an economist and don’t know what to add. Well, one time I was upset by what you said and wrote to defend the Supreme Court, and now this.
Anyway, thank you so much for teaching and sharing your ideas.
27. June 2012 at 18:35
Major_Freedom,
Your comments indicate you don’t even understand Scott’s ideas, and you’ve been commenting on this blog for sometime now. That tells me you’re incapable of understanding the discussion. Close-minded people offer little or nothing to any discussion.
To refer to you as an ideologue is much too kind. You’re a religious fundamentalist. I don’t know what/who your god is, be it gold, Mises, or what have you, but this is a blog by a professional economist who takes a scientific approach. I don’t imagine your anti-scientific droning on convinces anyone with a scientific orientation. You’re wasting your time here if your goal is to convince anyone else.
People with your religious doctrine are shown to be wrong daily, yet there’s no sense of embarrassment or self-reflection. You just know you’re right, because you read your bible and whatever the bible says must be true, even if it’s merely informed by some long abandoned, anti-scientific philosophy.
Radical libertarians are every bit as out of touch as full-on communists. Neither understand human nature well-enough to develop practical models for civilization.
27. June 2012 at 18:48
Wow! MF is a 9/11 nut too? I wouldn’t have believed that my opinion of him could drop even lower. (Although I guess that personality trait does help explain his behavior here.)
And Sumner called it. Is there no limit to the genius of our fearless NGDPLT leader?
27. June 2012 at 18:57
Patrick, the interest rate is the cost of holding money, that’s clearly what he meant.
27. June 2012 at 19:07
Major Freedom says…
Seriously MF, You write like a bulldozer…An unceasing roll of dead weight with zero subtlety, totally uncomprehending of anything out side of your bulldozer reality…you seem to live not to learn but to smash.
And Now I see you read with the same denseness.
Any one who has read this blog for any amount of time can see that Sumner is a pragmatist. I know you have not missed his posts on his recommendations of what can be practically done politically … so you must not have been able to process them.
MF you are not just an ideologue you are a Zealot, a totalitarian, a pie in the sky dreamer who thinks he knows THE answer…if only everyone would listen to him.
I thank the gods you are a “nothing” with no actual power… it is when people like you get power that tragedy follows.
27. June 2012 at 19:39
J. Bradford DeLong has an interesting read…if you find one more lament on how nobody is listening to the people that got it right interesting I guess…But this part sticks out for me…
It seems to me that no one in economics other than the far right thinks that a more aggressive monetary policy should not at least be tried. Bernanke seems to think it would help, but for some reason he express reluctance to help, preferring that Politicians do more…as if an aggressive Fed policy would be rude.
The reason seems like it has to be political. And if it is political then the repubs spring to mind as the beneficiaries. But it is hard to believe that the repubs could have this much sway. ( Could another faction of elites be benefiting ? )
Very befuddling.
27. June 2012 at 19:44
Steve Horwitz (a serious Austrian economist) has a nice term for the MF’s of this world: “consumer Austrians”. He makes it clear they often do not even understand the tradition they are claiming to speak for.
I am having a very enlightening back and forth with him; you can find the links here
http://marketmonetarist.com/2012/06/27/lorenzo-and-horwitz-debate-austrian-economics/
Scott, my understanding of monetary economics have vastly improved from reading this blog. I look forward to reading your book.
27. June 2012 at 23:22
MF reveals the rest of his spots…
As we used to say on usenet, *plonk*, into the killfile you do go.
Of course on usenet there are killfiles. Put the cranks and loons and ideologues in your killfile, they disappear, “poof”, and all that remains is rewarding conversation.
Sadly in blog comments there are no killfiles. I’m kind of surprised that nobody’s implemented them. Here it is a matter of a little will and mild effort. But it’s worth it.
Before you respond to MF again, remember that he is a “9/11 conspiracy” nut. He’s here to proselytize his own peculiar religion, not to discuss anything reasonably. You can’t ever win a point with him, or even get him to consider an alternative point of view, and as Mark Twain said about a similar circumstance, he enjoys it when you try. It only encourages him to give you 2,000 words more. Then if you make the mistake of answering that…
So *don’t* answer him. When people like this don’t get arguing responses all the fun goes out of it for them and they take their proselytizing to greener fields. An outcome devoutly to be desired, IMHO.
People, I suggest, put this 9/11 conspiracy crank in your mental killfiles. Like he’s not there.
Unless you agree with him. Then by all means, fair is fair, speak up and be counted.
28. June 2012 at 00:17
I get depressed reading many of the comments in my blog.
Oh, no. The blog is doing great, you know that!
And the commenters here by general standards are first rate — even those who might bother you the most are basically polite, which is not all true on the web generally or at many other high-profile economics blogs in particular (or even true of many other high-profile economist bloggers). I’ve always been impressed by how much they are so with no moderation at all. I’m sure it results from your example and the personal responses you make to so many comments.
In sci.econ on usenet, back in pre-blogging days when numerous real economists could be found there, prior to logging on one had to don an asbestos suit to deal with the flame attacks. The conversation here is an exercise in Victorian gentility by comparison.
You could kill all comments of course, to be rid of the depressing ones. But remember that many of your non-depressing commenters — who’ve been highly impressed by and appreciate the effort you put into personally responding to them — are spreading your message abroad to distant blogs and elsewhere. I dare say you’ve won a lot of converts to NGDP analysis by discussing it in your comments.
Your blog is doing great, comments and all, and the whole package is highly appreciated by a good many of us.
If you want to be depressed about something, be depressed about the people who will vote on election day — look at the surveys of their knowledge of the ABCs of politics and economics … or don’t, maybe best not.
As Churchill said, democracy only looks so bad when one doesn’t consider the alternatives. That applies to the democracy of your blog comments too.
28. June 2012 at 02:46
Jim: exactly my thoughts, nothing to add there. Scott and other Market Monetarists are doing great. They started a conversation that I no longer thought possible on the web and they have a large impact that can be seen in real world. If anything Market Monetarists should be proud of the work they have done and of the effort they put to explaining their ideas to broader audience.
28. June 2012 at 05:42
I can’t keep up. The only thing I know is this ends in hyperinflation, the question being ‘what does our brush with deflation first look like?
28. June 2012 at 05:43
Dear Scott,
Will you sign the manifesto?
http://www.manifestoforeconomicsense.org/
After all, the main message of the manifesto is that we have a demand-side crisis and that we need demand-side policies to solve it.
I would see it as just another occasion to call for NGDP level targeting.
28. June 2012 at 05:47
“I’ll tell you what happened, son! See, there’s a bunch o’ idiots out there who weren’t happy with what they had! They wanted a bigger house and materialistic things that they didn’t even need. People with no money who got loans to buy frivolous things they had no business buying. And these assholes just blindly started buying any stupid thing that looked appealing, ’cause they thought money was endless! It goes back to when the government had the idea that everyone in America deserves to own a house. So we have people having a hard time paying their loans, meaning less money coming in. And the idiots couldn’t see that by doing all this frivolous spending they were mocking the Economy. And they made the Economy very angry. We’re all feeling the Economy’s vengeance because of materialistic heathens who did stupid things with their money! Do you understand, son?”
28. June 2012 at 06:33
I suspected the acolytes would come out in full force after that last paragraph, because they sense a threat to the hive…
Mike Sandifier:
Your comments indicate you don’t even understand Scott’s ideas, and you’ve been commenting on this blog for sometime now. That tells me you’re incapable of understanding the discussion. Close-minded people offer little or nothing to any discussion.
Which comments are you referring to, and why do they show I don’t understand? I’ve been told this repeatedly and yet nobody has actually explained themselves. I can’t possibly take your claim on faith.
To refer to you as an ideologue is much too kind. You’re a religious fundamentalist. I don’t know what/who your god is, be it gold, Mises, or what have you, but this is a blog by a professional economist who takes a scientific approach. I don’t imagine your anti-scientific droning on convinces anyone with a scientific orientation. You’re wasting your time here if your goal is to convince anyone else.
I am an atheist, so I can’t be a “religious fundamentalist.” You obviously feel a strong need to call me that, to serve as a pejorative, as if mere name-calling refutes a single argument I have made.
I should remind you that some of the greatest scientific minds in the history of mankind were “religious fundamentalists.” Copernicus, Kepler, Descartes, Newton, Euler, Faraday, Maxwell, Pasteur, Planck, Heisenberg, Galileo, Ampere, Avogadro, Foucault, Gutenberg, Laplace, Marconi, von Neumann, Pascal, and many more, were all people you would have thumbed your nose at for being “religious.”
The scientific approach being taken on this blog rather sloppily wavers between a priorism, and a posteriorism, depending on when it suits the blog owner’s particular argument at the time, whether he is attacking another’s views or defending his own.
You say I take an anti-scientific approach. What do you mean exactly? That I am convinced economic science is not a positivist science? That I am convinced economics is more akin to logic and mathematics, than it is to physics and chemistry?
Here’s some advice: Your method is all wrong. See the Nobel Prize winning speech of FA Hayek to get a sense of this. Then actually read on the epistemological foundations of economics. Have you ever done that? Or did you just swallow what you were taught in university without question?
People with your religious doctrine are shown to be wrong daily, yet there’s no sense of embarrassment or self-reflection. You just know you’re right, because you read your bible and whatever the bible says must be true, even if it’s merely informed by some long abandoned, anti-scientific philosophy.
Again, I am an atheist, so I do not adhere to a religious doctrine. How does unnamed attacking others who are not me, in any way negatively reflect on me? I am not them, and they are not me. I know you view humans as mere members of groups, where the “real” reality resides, so talking about one group or another is supposed to entitle you to infer what you believe for the group, is somehow true about an individual in that group.
Radical libertarians are every bit as out of touch as full-on communists. Neither understand human nature well-enough to develop practical models for civilization.
And what is human nature then? Merely saying someone is out of touch on “human nature” is not an argument against their ideas, unless you can show where their ideas on human nature are indeed out of touch.
My conviction on human nature is that humans act. It’s the only axiom I hold on human nature. What’s your conviction on human nature?
Don Geddis:
Wow! MF is a 9/11 nut too? I wouldn’t have believed that my opinion of him could drop even lower. (Although I guess that personality trait does help explain his behavior here.)
Wow! Don Geddis is an “official” 9/11 conspiracy theory nut too? I wouldn’t have believed that my opinion of you could drop even lower.
And Sumner called it. Is there no limit to the genius of our fearless NGDPLT leader?
Sorry to burst your cult of personality prayer session, but I was the one who told Sumner that. He didn’t guess it. I said it. This blog post is just him mentioning it so as to spoil the well. By mentioning 9/11, he hopes to belittle the economics arguments I have made. And you know what? His unintellectual tactic worked just beautifully on you. You don’t care about ideas. You too only care about appearances.
Bill Ellis:
And Sumner, YOU’RE an ideologue too. You are uncompromising. You will not support anything other than NGDP targeting. That makes you an ideologue.
Do you hate yourself?
Seriously MF, You write like a bulldozer…An unceasing roll of dead weight with zero subtlety, totally uncomprehending of anything out side of your bulldozer reality…you seem to live not to learn but to smash.
You’re right. I don’t live to learn. I live to be happy, to enjoy myself, and a part of that contains a strong desire to learn.
For me, to learn is to have an ACTIVE, THINKING mind, not a passive, empty mind. I reject the tabula rasa philosophy of Locke and Hume, and I accept the rationalist philosophy of Leibniz and Mises.
Leibniz once paraphrased Locke as having famously said “Nothing is in the mind that has not first been in the senses”, to which Liebniz replied “…except the mind itself.” This is what characterizes my philosophy.
You don’t seem to like it that I called Sumner an ideologue, after he called me one. Yet I did not actually you see you say I am wrong, that Sumner is not an ideologue, despite his unwavering, uncompromising stance regarding central banks and NGDP targeting and the capitulation of “Central banks exist, deal with it.”
As for “smashing”, yes, I do smash. I smash bad ideas. Just like you’re trying to smash my ideas in this latest post.
I can’t “learn” from someone espousing a theory I have already learned is wrong.
And Now I see you read with the same denseness.
In what way? You’re just antagonizing without saying anything substantive.
Any one who has read this blog for any amount of time can see that Sumner is a pragmatist.
Do you honestly believe that merely identifying something is sufficient?
Sumner once told me he adheres to Richard Rorty’s philosophy. This was significant, because it is precisely philosophy that guides a person’s entire view of their existence, of life, and of course of economics.
Have you ever read Rorty? I have. Do you know what his philosophy consists of? I do. Rorty attempted to resurrect the ancient epistemologies of subjectivism and relativism, under a new guise of what’s called hermeneuticism. Rorty held that rationalism:
“is a desire for constraint””a desire to find “foundations” to which one might cling, frameworks beyond which one must not stray, objects which impose themselves, representations, which cannot be gainsaid.
“The dominating notion of epistemology is that to be rational, to be fully human, to do what we ought, we need to be able to find agreement with other human beings. To construct an epistemology is to find the maximum amount of common ground with others. The assumption that an epistemology can be constructed is the assumption that such common ground exists.”
Rorty believes no such common ground exists. Hence, rationalism must fall, and a new old “relativist” philosophy call hermeneutics must rise:
“Hermeneutics sees the relations between various discourses as those of strands in a possible conversation, a conversation which presupposes no disciplinary matrix which unites the speakers, but where the hope of agreement is never lost so long as the conversation lasts. This hope is not a hope for the discovery of antecedently existing common ground, but simply hope for agreement, or, at least, exciting and fruitful disagreement. Epistemology sees the hope of agreement as a token of the existence of common ground which, perhaps unbeknown to the speakers, unites them in common rationality. For hermeneutics, to be rational is to be willing to refrain from epistemology””from thinking that there is a special set of terms in which all contributions to the conversation should be put””and to be willing to pick up the jargon of the interlocutor rather than translating it into one’s own. For epistemology, to be rational is to find the proper set of terms into which all contributions should be translated if agreement is to become possible. For epistemology, conversation is implicit inquiry. For hermeneutics, inquiry is routine conversation.”
If we take his philosophy as valid, as meaning what he ostensibly means to say, then his philosophy contradicts itself.
This can be seen by asking the fair, honest question: “OK, if there is no common ground under which each individual’s pronouncements are to be judged, then what of Rorty’s own pronouncements themselves?” If Rorty is right, that there is no such thing as true theories based on common, objective ground, then logically I must conclude that Rorty’s own pronouncements cannot say anything true either. It would be self-contradictory to do what Rorty did, which is to deny that an objective case can be made for any proposition, while at the same time claiming this to in fact be the case for his own propositions.
Rorty’s philosophy is a self-refuting, misguided attack on the foundation of economic science.
——
I know you have not missed his posts on his recommendations of what can be practically done politically … so you must not have been able to process them.
So you’re saying Sumner is a political strategist, rather than an economist? Glad someone else agrees with me.
I disagree on what can be “practically done.” There is an implicit absolutism, a determinism, inherent in the capitulatory, yet belligerent claim “We have a central bank, it’s not going away, so deal with it.”
If we were living in a totalitarian society, and every “citizen” thought like that, then there would be no philosophical foundation for ending totalitarianism. If everyone thought like Sumner, and Sumner admit he’s just trying to minimize the damage the Fed does, then WHO will lead the way to actually ending that which is doing the damage? Should we all just capitulate, and hope that Providence, or perhaps some materialist force inherent in nature, will do all the work for us? Human society is a function of human action. That seemingly banal statement seems to go over the heads of everyone on this blog, with the exception of a few who get it. Individuals shape society. Individual ideas and individual action are the path to progress. Not sitting back and hoping some non-praxeological force does it, while in the meantime we devote our entire intellectual lives to merely tame the beast and hope it plays nice, rather than destroying it.
I don’t expect you to want to be friends with me, or to be popular with your fellow head nodders. I know in the deepest part of my entire existence that I am right. And I don’t care if that makes you feel like less of a man, or powerless, or ineffectual, or exasperated. If I only did what others wanted me to do, or expected of me, I’d be ignorant just like you.
MF you are not just an ideologue you are a Zealot, a totalitarian, a pie in the sky dreamer who thinks he knows THE answer…if only everyone would listen to him.
You forgot a pejorative in there. I only see one, two, three in one sentence. Maybe a few more commas and a few more pejoratives, and I’ll feel so low of myself that I’ll come running into your arms desperately pleading to be saved from this incomprehensible existence.
Tell me, what is so wrong about thinking I have “the answer”, and wanting others to learn what I have learned? I am anonymous. I don’t want to control you. I don’t want to rule you. Can’t you see I only care about ideas? I learned years ago that it is ideas that shape human society. So, I have chosen the path of ideas.
Calling me a totalitarian is like calling Stalin a libertarian.
You attack me for having convictions? What does that say about you?
I thank the gods you are a “nothing” with no actual power… it is when people like you get power that tragedy follows.
In what way? Please be specific. Remember, I advocate for absolute private property rights at the individual level, based on original appropriation, production and exchange. No initiations of violence are permitted. I do not WANT “power.” I want prosperity and a long, happy life. I recognize that humans are an incredible, indispensable source for this.
Contrary to your hysterical yammering, it is precisely when people like YOU gain power, that “tragedy” follows.
Just look at who is in power now who cause tragedy now. Do any of them think like me? No, they do not. They think almost the exact opposite. Those who have power have been given such power by uninformed statist zealots like you who have been brainwashed since childhood to believe to obey your masters, to accept the violence they initiate, because they are doing God’s work, or Humanity’s work, that we should not question them, or the majority that “votes” the lesser of two evils without ever destroying the evil, indeed, by harnessing it for their own ends.
You thanks the gods I don’t have power? As opposed to whom? The amazing “somethings” who are not like me, who do have power? Do you think I would bomb villages like Obama and Bush, killing families? You are so clueless about the world around you that you have not the slightest conception that you are a part of the problem. You bring forth and spread an intellectual plague. You need to do some serious self-reflection.
Lorenzo from Downunder:
Steve Horwitz (a serious Austrian economist) has a nice term for the MF’s of this world: “consumer Austrians”. He makes it clear they often do not even understand the tradition they are claiming to speak for.
Prove it that I don’t understand the tradition I am claiming to speak for.
I am having a very enlightening back and forth with him; you can find the links here
Too bad you’re still clueless on the causes and cures of depressions.
Jim Glass:
Of course on usenet there are killfiles. Put the cranks and loons and ideologues in your killfile, they disappear, “poof”, and all that remains is rewarding conversation.
You mean echo chamber orgies of reach arounds.
Before you respond to MF again, remember that he is a “9/11 conspiracy” nut.
You mean a “I accept what independent architects and engineers have studied and concluded, regardless of politics, emotions, and prejudices” nut.
He’s here to proselytize his own peculiar religion, not to discuss anything reasonably.
I am an atheist.
You can’t ever win a point with him, or even get him to consider an alternative point of view, and as Mark Twain said about a similar circumstance, he enjoys it when you try.
I consider alternative points of view all the time. When have you ever conceded a point to me? And you’re complaining I don’t concede a point to you? Look in the mirror.
If you feel like a failure, then try harder.
It only encourages him to give you 2,000 words more. Then if you make the mistake of answering that…
Then I respond again! Yay.
So *don’t* answer him. When people like this don’t get arguing responses all the fun goes out of it for them and they take their proselytizing to greener fields. An outcome devoutly to be desired, IMHO.
I type more when the responses decline.
People, I suggest, put this 9/11 conspiracy crank in your mental killfiles. Like he’s not there.
You’re a 9/11 conspiracy crank. You actually believe, without science or reason, the government’s story. That fires on two or three floors on a steel reinforced skyscraper that was not even hit by a plane, can bring it down from its under-infrastructure, exactly like a controlled demolition. You can even see the tell-tale squibs coming out the sides as it went down. Thousands of architects and engineers have concluded the science shows controlled demolition. The families of the 9/11 victims have sued the state because they don’t believe the official story either. And you call ME a conspiracy crank? YOU’RE a conspiracy crank. You believe in the crank conspiracy that men living in caves in the middle east want to kill American civilians. You’re a loon.
Unless you agree with him. Then by all means, fair is fair, speak up and be counted.
Who do you think you are? Some bureaucrat who believes himself an authority to socially stigmatize others? No wonder Horwitz pointed out so many of your errors concerning economics.
28. June 2012 at 06:39
Holy Christ! Where is Morgan Warstler? Morgan old buddy guess what? The mandate is constitutional-it’s a tax. Read it and weep!
Hey don’t feel so bad I’ll take you to dinner I’m in such a great mood!
Between this and Miles Kimball linking and posting me last night!
28. June 2012 at 06:43
Jim Glass:
If you want to be depressed about something, be depressed about the people who will vote on election day “” look at the surveys of their knowledge of the ABCs of politics and economics … or don’t, maybe best not.
You’re one of those people.
28. June 2012 at 06:46
John Thacker, Whenever I meet a middle-aged professional male, and start talking politics, 90% of the time they tell me they are socially liberal and fiscally conservative.
Alen, Don’t worry, I understand that it’s often hard to figure out what I am saying, because my writing style can be loose and conversational. Most reporters might have made the same assumptions.
Regardng Keen, I don’t think delevereaging is the key, I see a lack of NGDP growth as being the key problem. I see deleveraging as a symptom.
Don Geddis, I keep telling people he is wrong about everything. Once and a great while we each come across a person that has almost perfectly bad judgement, thinks about everything in the wrong way. He’s not the first example I’ve met, but might be the best.
Lorenzo, Yes, he fails to understand that Hayek favored NGDP targeting.
Everyone, I’ll skip most comments because of a lack of time. if I missed an important question ask it again, and I’ll respond tomorrow.
I hope to be back very soon, as I just need to finish up a couple projects.
28. June 2012 at 06:53
Simon, I could never sign a petition that says monetary policy can’t work because rates are zero. I regard that attitude as one of the basic causes of the crisis.
They should have kept it simple, a petition for more demand stimulus, without mentioning monetary and fiscal policy. Why such a long petition?
Mike, I hadn’t heard that. If so, it’s the right decision as I argued earlier. But it’s still a very bad policy.
28. June 2012 at 06:53
Mike Sax:
Holy Christ! Where is Morgan Warstler? Morgan old buddy guess what? The mandate is constitutional-it’s a tax. Read it and weep!
Hey don’t feel so bad I’ll take you to dinner I’m in such a great mood!
Between this and Miles Kimball linking and posting me last night!
You are….happy that an institution has just granted itself the authority to initiate more violence against innocent people, in this case coercing them into paying private companies?
Yay fascism.
28. June 2012 at 06:56
“The FOMC just cannot see that low interest rates are a sign of tight money, an expectation that the economy is facing headwinds and the Fed is not going to sufficiently offset the subsequent drag on growth. ”
The pathology exhibited by this statement is hard to understand. I understand that low interest rates allt he way downt he yield curve are a sign that the current monetary policies(if unchanged) show we are heading for a another “crisis”…Sumner understands it. Everyone here understands it…the millions on zerohedge understand it …the millions who follow krugman understand it. Quite a diverse coalition. Yet the FOMC is just a bunch of idiots who can’t understand it? really?
I applaud Sumner for finding a big intellectual flaw in the current monetary regime…good job on publicizing it with this blog. I hope you are successful in getting it implemented.
Still if you don’t acknowledge that “the Economist” is in favor of centralization of government power and are shocked, SHOCKED to see them engage in propaganda on it’s behalf then you are being as willfuly ignorant as the FOMC seems to be. Just hoping you watch for the bias in the future…you made a note of it the other day and that shows you are partially awake.
28. June 2012 at 07:04
“God I hate ideologues.”
Not much to add to that, but because of my chosen name on this blog I wanted to applaud that statement.
“I get depressed reading many of the comments in my blog.”
Me too, but you have some of the best regular commenters I’ve seen on a blog. Bill Woolsey, Benjamin Cole – both brilliant. And many others are great – I learn from them every time I visit. Most of the crazy comments are from the same few nutjobs. One of them just happens to be extremely long winded.
28. June 2012 at 07:15
ssumner:
Don Geddis, I keep telling people he is wrong about everything. Once and a great while we each come across a person that has almost perfectly bad judgement, thinks about everything in the wrong way. He’s not the first example I’ve met, but might be the best.
You haven’t SHOWN I am “wrong about everything.” You only just keep repeating that empty talking point hoping that your readers take you on faith, just like they have to take NGDP theory on faith.
You perceive me to have almost perfectly bad judgment? That presupposed you to have almost perfectly good judgment. Nice self-pat on the back.
Yet it is precisely you that has almost perfectly bad judgment, as I have repeatedly shown over and over again. You only NEED me to have almost perfectly bad judgment. It’s like a drunk thinking those who are sober are the ones who are saying incomprehensible things.
Lorenzo, Yes, he fails to understand that Hayek favored NGDP targeting.
You fail to understand that Hayek was inconsistent on this point, for he also stated:
“The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.”
The words “maintaining” and “appropriate level” are words that convey a rigidity, a constancy, an NGDP rate or level targeting, not, contrary to your claim, a micromanaging of NGDP up and down according to stabilizing employment. MAINTAINING spending AT A LEVEL is NGDP targeting. It doesn’t matter how many times you deny this.
——-
“The chief root of our present monetary troubles is, of course, the sanction of scientific authority which Lord Keynes and his disciples have given to the age-old superstition that by increasing the aggregate of money expenditure we can lastingly ensure prosperity and full employment.”
“It was John Maynard Keynes, a man of great intellect but limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathized. He had attempted by a succession of new theories to justify the same intuitive belief: just as there cannot be a uniform price for all kinds of labour, an equality of demand and supply for labour in general cannot be secured by managing aggregate demand.”
“The claim of an eminent public figure and brilliant polemicist to provide a cheap and easy means of permanently preventing serious unemployment conquered public opinion.”
The words “increasing the aggregate of money expenditure we can LASTINGLY ensure prosperity and full employment” are words that convey an NGDP targeting political strategy.
An NGDP targeting political strategist would never say the above two passages.
But again, like I said many times, Hayek was often inconsistent, which is precisely why both socialist and free market economists consider Hayek to be “on their side.”
28. June 2012 at 07:21
Propagation of Ideology:
“God I hate ideologues.”
Not much to add to that, but because of my chosen name on this blog I wanted to applaud that statement.
Too bad you’re an ideologue as well. You are an especially easy to point out ideologue. You are uncompromising in your conviction that individualist anarchism, a free market money standard, the gold standard, are all bad ideas, or at least inferior to your positions as against these. You are unwilling to concede that my arguments are right. That makes you an ideologue.
Ergo my chosen name for you on this blog.
It’s not a bad thing, really. I don’t understand why ideas are so evil.
On this blog, sometimes I feel like I am in a room full of closeted homosexual Republicans all talking about how homosexuals are deviant.
28. June 2012 at 07:45
S Sumner says…
HA ! That is the best argument for liquidationism I have ever seen.
28. June 2012 at 07:47
Gabe:
“The FOMC just cannot see that low interest rates are a sign of tight money, an expectation that the economy is facing headwinds and the Fed is not going to sufficiently offset the subsequent drag on growth. “
The pathology exhibited by this statement is hard to understand. I understand that low interest rates all the way down the yield curve are a sign that the current monetary policies (if unchanged) show we are heading for another “crisis”…Sumner understands it. Everyone here understands it…the millions on zerohedge understand it …the millions who follow krugman understand it. Quite a diverse coalition. Yet the FOMC is just a bunch of idiots who can’t understand it? really?
Declining interest rates do not necessarily signal that monetary policy is or has been “tightening.”
There has been declining interest rates since 1980.
If you were right, then there should have been declining money inflation since 1980. But there hasn’t.
Interest rates should have started to go back up starting 1995.
When Milton Friedman pointed out the empirical data of the 1970s and the 1980s, it was 1998, before the data from the mid-1990s to today were borne out. A positivist economist makes the mistake of reasoning from past history. The rationalist economist can infer different possibilities to explain empirical phenomena.
——
It is actually a pathology to believe declining interest rates can only mean tightening money.
——
Now, you may be asking, what happened starting mid 1990s that led to interest rates falling despite monetary inflation starting to increase again? The answer to this is the explosion of “shadow banking”, of “modern finance.” What happened is that interest rates kept falling because the increase in money supply didn’t traditionally increase the prices of consumer goods as much as that amount of inflation would have in the past. The loose money from the Federal Reserve System ended up lowering interest rates, but because a substantial quantity of that money expanded a gigantic modern financial sector, price inflation of consumer goods was not as high as it would have been had the money went directly into “traditional” channels of capital goods -> consumer goods.
So during the 1990s, the “loosening money” was able to put downward pressure on interest rates (liquidity effect), and keep them low because of the explosion of a new “productive stage” in the economy called shadow banking, modern finance, etc, which tied up the money and prevented them from doing what rear view thinking economists expected it to do, which is raise the prices of consumer goods, and thus raise price inflation, and thus add a corresponding inflation premium to interest rates.
As it happened, interest rates kept falling because of CHEAP money that has expanded the financial sector, but (so far) kept a lid on runaway consumer prices.
——-
This is, incidentally, why many of us free market economists consider the financial system to be the mother of all bubbles. It has expended too far relative to other sectors, according to non-market processes, and there is an incredible amount of inflation pent up in that productive stage, so as to keep it alive, and the release of inflation is being capped by the Fed so as to prevent runaway price inflation of consumer goods.
28. June 2012 at 07:58
Major if you have to respond to comments not directed at you try the point that a major economics professor just posted me at his blog.
The other day you were trying to taunt my empirical point that many people read and like Diary of a Republican Hater by claiming that it’s “faith based” and maybe someday it could happen if I keep hoping.
No need to-it already has. I have the analytics to prove it as does Miles Kimball which is how he found out about me. Check the above link you passed over if you want to doubt it.
28. June 2012 at 08:00
Where is Morgan Warstler anyway-is he on vacation? I haven’t seen him in days. Anyway Morgan this one’s for you
Yeah buddy! ACA is supreme law of the land! http://diaryofarepublicanhater.blogspot.com/2012/06/yeah-buddy-obamacare-is-constitutional.html
28. June 2012 at 08:07
6. On second thought, maybe we do need a 20-year recession to really cleanse the economy of its excesses.
Yes, because it will take people two decades to finally figure out what to do with all the capital resources heretofore produced, given that a free market process is used going forward.
People are just that dumb.
Everyone needs mommy and daddy to help them with the responsibility of “spending”, because everyone is so stupid, that they would rather die than set lower prices.
—-
Or, you know, we could have an incredibly deep, painful, yet healthy, but much shorter than 20 year depression, like what more or less happened 1920-1921. The US didn’t blow up then. In fact, the 1920s was one of the most productive decades we’ve ever had. There was so much production, that even the Federal Reserve System’s theretofore record setting inflation couldn’t make prices rise by all that much.
—–
Maybe market monetarism is really just a psychological self-affirmation program designed to prevent market monetarists from being looted by a mob in a deflationary correction? That the “economics” of it is actually just a shell that covers an inner political strategy? One can only wonder…
28. June 2012 at 08:10
Mike Sax:
Major if you have to respond to comments not directed at you try the point that a major economics professor just posted me at his blog.
My sights are set on, how shall I say this, something a little higher, a little more important than that.
The other day you were trying to taunt my empirical point that many people read and like Diary of a Republican Hater by claiming that it’s “faith based” and maybe someday it could happen if I keep hoping.
Yes, there are other faith based partisans in the world other than you. Many are in the halls of academia.
You’re surprised?
No need to-it already has. I have the analytics to prove it as does Miles Kimball which is how he found out about me.
What analytics?
Check the above link you passed over if you want to doubt it.
I already told you I don’t read partisan blogs.
28. June 2012 at 08:19
Morgan don’t know what google analytics is? You really are ignorant. And you don’t have to read “partisan blogs” everyone else does.
“My sights are set on, how shall I say this, something a little higher, a little more important than that.”
So much the worse for you. Maybe that’s why you’re so ignorant. Which you are if you don’t know what google analytics are.
28. June 2012 at 08:20
The above comments are to Major of course not my good but missing buddy Morgan Warstler.
28. June 2012 at 08:25
Mike Sax:
I suspect Obamacare is going to reduce life expectancy. Doctors will invariably respond more to government coercion and rules, and less to individual patient cues and needs.
While you’re feeling empowered, like all socialist minded people do when the state grows, let it not be said that you were not warned.
28. June 2012 at 08:27
Mike,
Secretly, I was hoping Obamacare would be struck down. It was my hope that the mandate, which the court today did affirm as a tax, would be unconstitutional. This would have opened the floodgate for tax reform. We could have attacked the mandate to buy a home via the mortgage interest deduction. We could have gone after the mandate that an individual must work for an employer who offers health insurance on a pre-tax basis.
This tiny perceived victory for the uninsured is a HUGE victory for continuing stupid tax deductions and loopholes.
28. June 2012 at 08:30
Mike Sax:
Morgan don’t know what google analytics is?
I know what google analytics is, I just didn’t know what “analytics” you were talking about. The word has many meanings on its own.
And you don’t have to read “partisan blogs” everyone else does.
Everyone else does not.
So much the worse for you. Maybe that’s why you’re so ignorant.
I am less ignorant for not reading your blog.
The above comments are to Major of course not my good but missing buddy Morgan Warstler.
Oops.
The same Morgan who had the guts to say I am right?
28. June 2012 at 09:12
ChacoKevy,
An interesting and insightful perspective.
28. June 2012 at 09:18
‘I get depressed reading many of the comments in my blog.’
Count your blessings that you aren’t MIT’s Simon Johnson; http://baselinescenario.com/
Your nutjobs are Aristotles compared to his.
28. June 2012 at 09:41
Major Freedom,
I have a question for you. Your answer won’t solve anything, I’m just curious, what you say.
Imagine a pure service economy. Only creative human services get sold and consumed instantly. Everybody is a doctor or a fitness coach, a hairdresser or stage actor, a teacher or… All other things are done by self-assembling, self-repairing solar powered robots at no cost. They have teleportation too, so land value drops to zero. In short, there are no saving vehicles! None!
There is still a need for money, cause there is still the double coincidence of wants problem. But since there are no banks, no investments, no saving vehicles, how should they create money? What’s your recipe?
28. June 2012 at 09:51
http://research.stlouisfed.org/fredgraph.png?g=8jZ
Even using NGDP as a gauge for “tight vs. loose” money, interest rates kept falling even though NGDP did not. Throughout the 1980s, 1990s, and 2000s, interest rates continued to fall, however there was no secular decline in NGDP during the 1990s and 2000s.
This is a bond bubble, everyone. It’s not signalling monetary policy has been declining.
When interest rates rise on all the Treasury’s debt, and all the private debt, both of which have been encouraged by decades of reckless monetary inflation, you’re going to see a correction the likes of which is going to make 2008-2009 look like a picnic.
Now you can’t say you weren’t aware, and weren’t warned, and that there is no way anyone could have predicted this because some loser self-affirmation EMH theory said it can’t be done.
28. June 2012 at 10:16
3. Note that a) GOP is 3x more willing than Dems, b) the Ryan plan exists, and c) the question is misleading, no one wants “major cuts” SS/Medi but no one is proposing that, either, the solutions on the table generally envision merely slowing the rate of growth, most people do not naturally think in baseline terms
28. June 2012 at 10:43
Mike Sax:
Rewind to September 20th, 2009. ABC News Interview between George Stephanopolous and President Obama:
——-
GEORGE STEPHANOPOULOS: …during the campaign. Under this mandate, the government is forcing people to spend money, fining you if you don’t. How is that not a tax?
OBAMA: Well, hold on a second, George. Here – here’s what’s happening. You and I are both paying $900, on average – our families – in higher premiums because of uncompensated care. Now what I’ve said is that if you can’t afford health insurance, you certainly shouldn’t be punished for that.
That’s just piling on. If, on the other hand, we’re giving tax credits, we’ve set up an exchange, you are now part of a big pool, we’ve driven down the costs, we’ve done everything we can and you actually can afford health insurance, but you’ve just decided, you know what, I want to take my chances. And then you get hit by a bus and you and I have to pay for the emergency room care, that’s …
STEPHANOPOULOS: That may be, but it’s still a tax increase.
OBAMA: No. That’s not true, George. The – for us to say that you’ve got to take a responsibility to get health insurance is absolutely not a tax increase. What it’s saying is, is that we’re not going to have other people carrying your burdens for you anymore than the fact that right now everybody in America, just about, has to get auto insurance. Nobody considers that a tax increase. People say to themselves, that is a fair way to make sure that if you hit my car, that I’m not covering all the costs.
STEPHANOPOULOS: But it may be fair, it may be good public policy …
OBAMA: No, but – but, George, you – you can’t just make up that language and decide that that’s called a tax increase. Any …
STEPHANOPOULOS: Here’s the …
OBAMA: What – what – if I – if I say that right now your premiums are going to be going up by 5 or 8 or 10 percent next year and you say well, that’s not a tax increase; but, on the other hand, if I say that I don’t want to have to pay for you not carrying coverage even after I give you tax credits that make it affordable, then …
STEPHANOPOULOS: I – I don’t think I’m making it up. Merriam Webster’s Dictionary: Tax – “a charge, usually of money, imposed by authority on persons or property for public purposes.”
OBAMA: George, the fact that you looked up Merriam’s Dictionary, the definition of tax increase, indicates to me that you’re stretching a little bit right now. Otherwise, you wouldn’t have gone to the dictionary to check on the definition. I mean what …
STEPHANOPOULOS: Well, no, but …
OBAMA: … what you’re saying is …
STEPHANOPOULOS: I wanted to check for myself. But your critics say it is a tax increase.
OBAMA: My critics say everything is a tax increase. My critics say that I’m taking over every sector of the economy. You know that. Look, we can have a legitimate debate about whether or not we’re going to have an individual mandate or not, but …
STEPHANOPOULOS: But you reject that it’s a tax increase?
OBAMA: I absolutely reject that notion.
——–
Does this mean Obama should reject the Supreme Court’s decision regarding his own program?
28. June 2012 at 10:46
If the Supreme Court has ruled that the executive has a constitutional right to force the people to pay private companies, then does mean they have also constitutional right to force me to buy, oh I don’t know, cigarettes, and call it a “tax” as well?
28. June 2012 at 10:56
If Congress can constitutionally create a mandate for me to purchase healthcare, and call it a tax, then couldn’t Congress create a mandate for me to purchase financial securities, and call it a tax?
Are we going to be forced to buy treasury debt as a “tax” at some point? What’s to stop the maniacs in Washington from doing this now that the courts have granted permission for fascism?
“A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.”
——
As the socialists destroy America, they blame the anti-socialists for their own destructive actions.
28. June 2012 at 11:05
Major the only thing you have to buy is broccoli as far as I’m concerned.
I like how you trotted out that interview from 2009. So Obama had a different legal opinion than Roberts- who cares? You’ve been listening to Rush-he played that interview this afternoon.
I mean I did listen to him today of all days. How sweet it is. Listeing to you carp isn’t half bad either.
28. June 2012 at 11:08
Too my mind it seems like there is a consensus that a more aggressive Fed policy should at least be tried. Even the hold outs on the left won’t argue against it expect to say that it is futile.
So for the the question has tuned from, “Should we do it” to “Why aren’t we doing it ?”
I don’t think the Fed is just too stupid, so the answer must be that inaction is benefiting some group that has corrosive power… political or cultural.
Who ? The repubs seem the obvious choice, yet I can not see the Fed selling out the world just to defeat Obama. ( Am I being naive ? )
So I look to the cultural aspect. The Fed is of the Culture of Bankers, and we all know the banks are not as secure as Jamie Dimon would like us to believe…And that a consequences of the mess in Europe will put even more pressure on them.
Is there any aspect of a more active Fed that will cause the banks discomfort ? It seems to me they should welcome a more activist Fed…But I know, I don’t know enough to know.
Anyone care to venture a guess or opinion as to the mystery of why the Fed won’t act ?
28. June 2012 at 11:13
Mike Sax:
Major the only thing you have to buy is broccoli as far as I’m concerned.
You forgot private healthcare, what with your giddy response to this unprecedented ruling that has effectively sanctioned fascism. Did you know that the Obamacare bill was written by the large pharmaceutical companies?
I like how you trotted out that interview from 2009. So Obama had a different legal opinion than Roberts- who cares?
I know it hurts to hear.
You’ve been listening to Rush-he played that interview this afternoon.
I don’t listen to Rush. This interview is now all over the net.
I mean I did listen to him today of all days. How sweet it is.
You listen to Rush?
Listeing to you carp isn’t half bad either.
Fish don’t speak.
28. June 2012 at 11:16
And it’s not just Roberts. The vote was 5-4. Five supreme court justices have just set a precedent that grants Congress the “constitutional authority” to force people to pay private companies.
You don’t grasp how this sets a precedent for a new state power?
Go back to sleep.
28. June 2012 at 11:19
Believe me Major nothing is hurting me right now. You’re the one that’s hurt you so hate the idea that anyone who should get healthcare if they lack the deep pockets to pay for it.
I listen to Rush sometimes yeah. Just like I sometimes read you-neither is very pleasnt it’s true.
28. June 2012 at 11:23
MF, I agree low interest rates don’t ALWAYS mean contraction or stagnation are on the horizon. I didn’t see the need to point that out because in the current horribaly over-indebted state of our economy I agree with Sumner and others here that stock markets and GDP will decline/stagnate and the economy will get worse unless the monetary authorities change course(and I’m sure they will at some point)…probably after they achieve some big political objective(perhaps a more centralized authoritarian government in Europe).
28. June 2012 at 11:28
Mike Sax asks…
Last post I saw of his, he said we was busy painting for his dad’s construction company. He seems like a good kid. I think I got off on the wrong foot with him. I hope he did not take it personally.
28. June 2012 at 11:29
And of course I know Roberts wasn’t the only one one the bench. He was the only one who said it was a tax. The other four judges that voted for it didn’t say it was a tax but rather that the Commerce Clause allows it.
28. June 2012 at 11:57
Yeah Bill don’t feel bad most get off on the wrong foot with Morgan but he’s not such a bad guy when you get to know him.
It’s just weird with him not being around lately. Scott hasn’t been around much lately, Morgan’s been AWOL-the system is breaking down.
28. June 2012 at 12:08
Scott–
The MF/MS/MW trio really kill this comment section and indeed I read it less and less. The PPACA gloating today is off-topic and massively irritating. I suspect that your ethos precludes from going full Delong on those guys but you should put your pragmatist hat on and reconsider.
Anyway, the Tasker link is interesting, and I know you’ve written about Japan a number of times, but I was curious as to whether you have any sort of “Unified Theory of Japan” because I’d be interested. Seems Tasker is saying that consumption taxes are essentially tight money and that it’s the complete opposite of what Japan ought to do. Which makes sense but what’s the alternative? Massive QE, right? But what problem does that solve? There’s no output gap to speak of, no obviously positive NPV projects lying around unexecuted for want of capital. So what gives?
28. June 2012 at 12:18
Bob sorry you feel that way but don’t lump me in with MF.
I probably shouldn’t waste time responding to him.
People do sometimes make off topic omments-not just me.
MW was gloating when the austerity parties won in Greece. It happens sometimes-I think most people take it for what it is.
No one has really written anything relevant in awhile so there’s kind of the vaccum effect-nature abhors as it were.
However I do apologize if you feel that way.
28. June 2012 at 12:36
Mike Sax:
Believe me Major nothing is hurting me right now. You’re the one that’s hurt you so hate the idea that anyone who should get healthcare if they lack the deep pockets to pay for it.
Straw man.
No, I hate your idea that guns should be used to do it. I am not against people who can’t afford healthcare, be given healthcare voluntarily.
You hate the idea of people abstaining from using violence to acquire wealth from other people. You hate voluntary, peaceful behavior. You don’t understand that increased violence shrinks the total supply of goods and services. You are a myopic, short term pundit who doesn’t understand economics.
I listen to Rush sometimes yeah. Just like I sometimes read you-neither is very pleasnt it’s true.
Peace is always unpleasant to those who want to eliminate it.
gabe:
MF, I agree low interest rates don’t ALWAYS mean contraction or stagnation are on the horizon. I didn’t see the need to point that out
The way some people here talk about it, I think it does need to be pointed out.
Bob Dobalina:
The PPACA gloating today is off-topic and massively irritating.
It is to be expected from the few posters here who have a rather extreme socialist “screw you I want yours” bent to them. I can appreciate your feeling irritated. They feel happy and in need of gloating on the basis of increased violence in society, this time in the form of forcing people to pay private companies.
28. June 2012 at 12:37
Sax– you’ve made 11 of 87 posts on this page and not one of them as far as I can tell has anything to do with what Scott wrote.
Your first post is off-topic naked self-promotion (and don’t fool yourself into believing that being linked by Miles Kimball is a particularly boastworthy accomplishment), and your subsequent post is nothing more that baiting another noisebot– which you continue to do even though he’s (obviously) not present to engage you. Why don’t you and MF continue your little folie à deux of relevancy over email?
When you write that “No one has really written anything relevant in awhile so there’s kind of the vaccum effect-nature abhors as it were,” I’m staggered at your inability to detect even the slightest irony of your remark.
28. June 2012 at 12:41
Yikes, Bob’s mad.
28. June 2012 at 12:46
This post hasn’t been typical if you look at a typical postas all it did was mention a few links I write plenty of things relevant to monetary policy. If you’re upset about the ACA pasing fine. But don’t try to paint me with any false brush.
I often have good monetary convserations here at Money Illusion. Obviosuly many people differ with you about Miles.
28. June 2012 at 12:58
“I write plenty of things relevant to monetary policy.”
I agree, you do provide plenty of reasons for facepalms.
28. June 2012 at 14:33
I won’t spend much time on a comment that may never be reached underneath so much MF verbiage, except to record that I disagree with Ryan Avent’s criticism of the BIS. Where he goes wrong is his assertion that a central bank’s “proper domain” is demand stabilisation. As seemed to be generally accepted until the financial crisis made it inconvenient, a central bank’s primary objective is to provide the amount of currency to facilitate transactions, typically with some tolerance of moderate depreciation. A central bank has some short-term influence on real activity, but it is by no means the only or the best-placed state institution to have such influence, so this should be no more than a central bank’s secondary objective. To give a boxing analogy, a central bank’s job is, as agreed ex ante, to hold the ring within which households, firms and governments operate. The central bank is not to blame if those parties hurt themselves by crashing into the ropes.
28. June 2012 at 14:50
Rebel you said:
“Where he goes wrong is his assertion that a central bank’s “proper domain” is demand stabilisation. As seemed to be generally accepted until the financial crisis made it inconvenient, a central bank’s primary objective is to provide the amount of currency to facilitate transactions, typically with some tolerance of moderate depreciation. A central bank has some short-term influence on real activity, but it is by no means the only or the best-placed state institution to have such influence, so this should be no more than a central bank’s secondary objective.”
So what should be done about demand stabilisation then? What has the most influence on real activity?
28. June 2012 at 15:11
You should just take the time to aknowledge the argument properly, I just can’t figure out how you can think those pikes in debt levels in the 30s and now are coincidences. Do you think debt to GDP ratio can increase forever? If not, the change in debt needs necessarily to decelerate, which will trigger a crisis. From that point, it’s a positive feedback loop on the way down, we’re in a dynamic system and the causality is circular. The solution can’t be asking the banks please lend more. It’s just like your saying the drop in nGDP is coming out of nowhere, it’s not an explanation, it’s a description and it’s not predictive at all.
I know your well intentionned but if you willingly blind yourself in order to avoid challeging a theory you believed all your life, your part of the problem, not the solution.
You’re complaining about ideology but you doesn’t seem to realize the whole idea of equilibrium came out of an ideology in the first place. It has been useful to some extent since it has promoted liberty which is a good thing, but you can’t base science on an ideology. Equilibrium is nowhere to be found in the real world since time never stops, it’s a fundamental property of complex dynamic systems. When such a system breaks down, it will come from uncontrolled positive feedback loops, you don’t need any exogenous factors to find an “explanation”.
The bottom line is that Keen comes up with a model which can explain the crisis and it’s consistent with the datas without having to arbitrarily adjust the parameters and rely on shocks coming from the heavens. Moreover, it did predicted the crisis and can prevent it from happening again in the future. I just hope Max Planck could be proven to be wrong : ” Science evolves one funeral at a time”
http://www.debtdeflation.com/blogs/2012/06/15/submission-to-the-senate-economics-committee-post-gfc-banking-inquiry/
28. June 2012 at 16:52
Mathieu,
You said: “Do you think debt to GDP ratio can increase forever?”
Extremely good question. The heart of the matter.
I presume by “debt” here you are referring to the total net debt of all private and public net debtors?
28. June 2012 at 17:03
Paul Andrews,
I’m refering to private debt in that context.
28. June 2012 at 17:32
Excellent blogging by Sumner, and I hope his break from blogging is brief.
28. June 2012 at 17:56
good lord.
I attend one little qualcomm dev conference and its all babble.
SCOTUS sucks. Roberts threaded the needle… it all comes down to:
My bet is still on with Scott.
IF Obama wins, the the best conservative play is NGDPLT.
IF Obama loses, Scott takes a back seat to me.
On SCOTUS, Roberts really threaded needle, I’d have preferred he stayed in majority, but thats another reason we need Romney, it gets us two more conservative judges.
Pay no attention to anything else on SCOTUS, get two more Scalias and the Dissent becomes the Majority opinion, and wipes away far more then Obamacare.
It all comes down to November.
—–
Also, Dobbs, eat a dick, I’m a frigging pope of slack and this entire discussion falls under Scott’s #3.
But if I wanted to spend my time yammering about Lawn Moisture Manager it would still edify your learning or you aren’t a good enough reader.
DeLong needs to put down the donuts.
28. June 2012 at 21:02
Scott,
I have a theory as to why the Fed wont embrace level targeting. First would you not agree that if Paul Volcker had level targeted during the 80’s, he would have had to roll back the entire NGDP growth and subsequent prive level back to 1973-74. Wouldnt the recession of 1981 have been ten times more brutal? I think the inflation hawks would say: “You want level targeting fine! But you’ll have to take it on the downside as well as the upside! Are you SURE you’re ready for that?” That’s why I think they wont do level targeting.
What are your thoughts?
P.S. If you had a choice between price level targeting and simple ngdp growth RATE taregting, all things being equal which is better?
28. June 2012 at 21:03
taregting should read targeting.
28. June 2012 at 21:33
prive level should read “price level”
29. June 2012 at 01:08
@Mike Sax,
Considering that there is not yet a consensus on how the monetary transmission mechanism works, I could not say what the most powerful influence on real economic activity is, but my preference would be to use them all a bit, while respecting their limitations, plus accept a certain amount of contraction. Keep the inflation target, but aim for the top of the tolerance band. Provided that public debt is not excessive – say less than 90% of GDP – run a moderate fiscal deficit of, say 3%. Use balanced fiscal policy – what Jeffrey Sachs calls “structuralism” – especially taxes targeting wealth that has come through the boom and bust relatively well, to spend on state investment, such as in pre-school education.
The trouble with economists is that they are too dogmatic. There is usually some merit in most of their ideas, but many cannot accept any opposing arguments. Keynesians would deplore the controlled liquidation in my programme, while Austrians would reject structuralism as “big gubbermint”. I came to economics after a scienfic education, so their attitude makes no sense to me.
29. June 2012 at 01:27
@RebelEconomist
If you say that it is risky to run up government debt of more than, say, 90% of GDP
“risky” how exactly? “prudent” based on what? Reinhart Rogoff should get the anti-Nobel prize for perpetuating correlation is causation fallacy and the arbitrary 90%.
fiscal spending (say govex as a % of gdp) is pure unadulterated social policy. thats all, no economics.
29. June 2012 at 04:51
http://www.project-syndicate.org/commentary/the-perils-of-prophecy
Brad DeLong: “The failure of central banks to target nominal GDP growth remains incomprehensible to me, and I will not write about it until I think that I have understood the reasons.”
But he ruins it by with a list of economists that is slightly ‘off’: “That means trusting economists like Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers.”
29. June 2012 at 05:02
Regarding the blog, I would not get discouraged. Cranks are all over the Internet, it is the way of things. If everyone ignored them they would go away. I am not completely sold on market monetarism but I appreciate learning about it through this blog and also having some of my questions answered. I view ABC economics as completely discredited since their predictions were wrong. If your predictions continue to turn out correct I will be more swayed into the MM camp. We must be bold and follow where the data leads us.
29. June 2012 at 05:14
It is so deeply ironic to see DeLong and others suddenly appear shocked that central bankers aren’t “doing the right thing”… after spending three years lending credence to the idea that central bankers are impotent. DeLong is better than most, but it still stinks of historical revisionism. “Well of course they should have been targeting NGDP! I said that all along.”
Another voice here in support of W. Peden’s comment.
29. June 2012 at 05:45
Rebel your approach seems to make some sense. My impression of you-which may be mistaken-was that you’re an Austrian opposed to any kind of stimulus-monetary of fiscal. I don’t know what gave me that impression-there was a lot of noise around you-and I may have misread you.
To me you’re right about dogmatism. That’s why while market monetarism seems to offer some good insight it’s a little too dogmatic IMO about fiscal stimulus.
As for debt with low interest rates like these isn’t this the time you want to be running a deficit?
29. June 2012 at 06:11
Morgan I don’t agree with everthing you said but good to have you back.
I agree with you especially though about Dobbs. 100%
Sumner had actually thanked me for telling him about ACA
29. June 2012 at 06:18
RebelEconomist:
my preference would be to use them all a bit, while respecting their limitations, plus accept a certain amount of contraction. Keep the inflation target, but aim for the top of the tolerance band. Provided that public debt is not excessive – say less than 90% of GDP – run a moderate fiscal deficit of, say 3%. Use balanced fiscal policy – what Jeffrey Sachs calls “structuralism” – especially taxes targeting wealth that has come through the boom and bust relatively well, to spend on state investment, such as in pre-school education.
The trouble with economists is that they are too dogmatic. There is usually some merit in most of their ideas, but many cannot accept any opposing arguments. Keynesians would deplore the controlled liquidation in my programme, while Austrians would reject structuralism as “big gubbermint”.
It is rather amusing that you did not detect the irony in this argument. Economists are dogmatic because they cannot accept opposing arguments, and yet there you are not accepting opposing arguments, but just your own “programme.”
Why should I and everyone else be subject to your “programme” rather than their own “programmes” for themselves?
And you didn’t get the Austrian argument. The “big government” argument is an ethical argument, which economists who consider themselves Austrians might say. The Austrian economics argument however is that Keynesian and Monetarist “programmes” distort economic calculation by manipulating the monetary system, which increases discoordination of individual actors in the division of labor, and thus hampers, not assists in, economic recovery.
——
I came to economics after a scienfic education, so their attitude makes no sense to me.
It is a gross error to believe that every phenomena in the world can only – and here is where that word applies again: dogmatically – be understood and learned via scientific monism, that is, it is a dogmatic belief not to consider any other method of inquiry when approaching economics than through the positivist method that is also used in physics, chemistry and engineering.
You have brought a dogma along with you, and you can’t even see it, and yet you say economists are dogmatists? That’s rich.
Monism is the great destroyer of economic science. The profession has been almost entirely usurped by those who can only be called dogmatists, because they refuse to accept that the method of economics can be any different from physics and chemistry and the other “hard” sciences.
Read Hayek’s Nobel lecture as an introduction.
29. June 2012 at 06:28
@Mike Sax, thanks. Yes, ideally the time to run government deficits is during the bust, when interest rates, especially “risk-free” rates, are low. But the problem I have with the likes of Krugman and Wolf is that they dismiss the constraint imposed by the stock of debt. If you say that it is risky to run up government debt of more than, say, 90% of GDP (I am not saying that this is the right single number, but I think that it is wise to take some view of what a prudent limit might be), then many developed countries are close to running out of fiscal ammunition.
29. June 2012 at 06:58
Morgan,
WE. ARE. DOOMED.
http://www.nationalreview.com/corner/304411/not-so-good-news-victor-davis-hanson
29. June 2012 at 07:02
@RebelEconomist
If you say that it is risky to run up government debt of more than, say, 90% of GDP
“risky” how exactly? “prudent” based on what? Reinhart Rogoff should get the anti-Nobel prize for perpetuating a correlation is causation fallacy and the arbitrary 90%.
fiscal spending (say govex as a % of gdp) is pure social policy. thats all, no economics.
the fact is: inflation is a tax. Like all tax policies, we debate who the tax actually hits and how redistributive it is. The whole “gov debt” debate is really code for “we think the government is too big” which is social policy. I happen to agree but at the same time the reality is when fiscal spending is too high taxes need to go up, whether you call it inflation or taxes is irrelevant.
for some reason another post got eaten, not sure why.
29. June 2012 at 07:14
the fact is: inflation is a tax.
Unless you hold long-term fixed-rate debt, then it’s a subsidy!
29. June 2012 at 07:21
It is so deeply ironic to see DeLong and others suddenly appear shocked that central bankers aren’t “doing the right thing”… after spending three years lending credence to the idea that central bankers are impotent. DeLong is better than most, but it still stinks of historical revisionism.
It’s because DeLong’s a statist first, anything else a distant second. Just try to imagine the howls of outrage if under Romney policy becomes hold gov’t spending constant + NGDPLT = shrinking gov’t.
29. June 2012 at 07:23
@TallDave,
not sure what you mean by a subsidy: if you own long term fixed rate debt as an asset, then unexpected inflation erodes the real value of that debt, reduces your real return. If its a liability, then that erosion reduces the real value, so its a subsidy.
29. June 2012 at 07:26
Sorry, “hold” was confusing, realized that after posting. I should have said “owe” as in people with fixed-rate mortgages, student loans, etc.
29. June 2012 at 07:47
RebelEconomist:
Yes, ideally the time to run government deficits is during the bust, when interest rates, especially “risk-free” rates, are low.
This is a Keynesian myth that needs to die already. Government deficits that are financed by borrowing are especially destructive during busts, because it is precisely during busts that absolute savings for the private sector are most needed. Busts are characterized by a drop in the market value of accumulated savings and capital in the private sector. New private sector savings are needed to replenish what was previously wasted and malinvested during the boom. Real savings do not come from the printing press nor from the Treasury. They come from the private sector saving what is earned through production. Savings that are redirected away from the private sector, and into treasuries and government spending, ends up choking off real economic recovery. Government spending is not the formation of private sector real saving. The economy does not need more money during busts. It needs more real private sector saving.
But the problem I have with the likes of Krugman and Wolf is that they dismiss the constraint imposed by the stock of debt. If you say that it is risky to run up government debt of more than, say, 90% of GDP (I am not saying that this is the right single number, but I think that it is wise to take some view of what a prudent limit might be), then many developed countries are close to running out of fiscal ammunition.
The last thing the economy needs is to be shot. Yes I realize it’s a euphemism, but there is truth to it in my judgment.
BTW, inflation encourages government borrowing and spending, because inflation enters the market primarily through treasury purchases. That artificially boosts the demand for, and thus decreases the yields of, and therefore gives the Treasury more incentive to, issue more government debt.
29. June 2012 at 07:54
TallDave, I see very little evidence that the GOP has any interest in reducing the size of government. For most of my lifetime they complained that they never held all three branches of government at the same time—but when they finally did, they went on an orgy of spending (military and domestic.)
Bob. I don’t have a strong view on the size of the output gap in Japan, what has been the real GDP growth rate since 2008?
I think a higher consumption tax would make a lot of sense if accommpanied by monetary stimulus. But I fear the BOJ will refrain from doing so (as in the late 1990s), and hence it will slow real growth.
Rebeleconomist, I don’t understand your comment about central bank policy. What would you have them adopt as a nominal target?
Mathieu, You said;
“if you willingly blind yourself”
I find that people who start off with personal insults tend to leave the most ill-informed comments, and yours is no exception. Anyone who has studied EC101 knows that correlation tells us nothing about causation. There are a huge number of variables that are highly correlated with business cycles. NGDP is one, and debt is another. I happen to think there are lots of good models explaining why NGDP shocks affect output, whereas that’s not the case for debt.
Edaward, No, when the policy is adopted you choose the trend line that leads to the most stable output at the point of adjustment.
Benny, Of course I merely predict what the markets predict, and hence will be right exactly as often as the markets are right. Currently they predict low inflaiton for many years, and also low interest rates.
29. June 2012 at 08:22
Scott,
Do you think the debt to GDP ratio can increase forever?
29. June 2012 at 08:37
So Rebel if you think that many countries are out of fiscal ammunitiion based on a budget constraint what’s next for them?
They should just right off years of stagnation? I’m not sure why the budget to deficit ratio matters so much.
Again I look at interest rates which are at all time lows even many years out. This is true of all countries that print their own money-US, Britian, Japan, Switzerland,Israel, etc.
Wouldn’t now be the time to do more long term government borrowing and lock in low rates?
29. June 2012 at 08:50
Paul:
Do you think the debt to GDP ratio can increase forever?
It looks as though GDP cannot sustainably grow without accelerating debt.
(Note that this chart is not cumulative total credit market debt outstanding, it is ANNUAL change in total credit market debt outstanding, relative to GDP).
Do we need at least an annual 30% growth in debt relative to GDP in order to bring us back to the wonderful bubble years of the 1990s and 2000s?
29. June 2012 at 08:56
Mike Sax:
Again I look at interest rates which are at all time lows even many years out. This is true of all countries that print their own money-US, Britian, Japan, Switzerland,Israel, etc.
Did you also look at MBS yields prior to 2007 and conclude that the “doomsayers” regarding the mortgage market were wrong?
Low interest rates do NOT signal future market phenomena. Never reason from interest rates.
29. June 2012 at 09:23
@dwb, I just gave 90% as an example that has been suggested, but clearly, at some point, there is a danger of getting into a debt trap. It seems to me that that risk could be evaluated using some kind of monte carlo simulation model, generating paths for various values of interest rates, demographic changes etc and seeing how many of them end up in a debt trap. I don’t know what that risk limit is, but the key point I am making is that it is not sufficient to consider only the cost of government debt in deciding whether or not to borrow to spend.
@Scott, inflation targeting fits my idea of the appropriate role of a central bank, but I would be inclined to change the index a bit, to include assets and wages, and exclude quality adjustment – basically, to produce something like a traded-value-weighted index of transaction prices. If the government wishes to stipulate a formal secondary real activity target, I would have it specified in terms of the rate of change of the real variable rather than its level.
29. June 2012 at 09:33
@RebelEconomist
Define “debt trap” i dunno what that means.
29. June 2012 at 09:48
@Mike Sax, yes, ultimately, if you cannot do enough with the normal monetary and fiscal tools, then you have to accept that your country has a real problem and is collectively going to have to live on less income. And then you need to take emergency measures to get by and hopefully improve the situation.
My suggestion would be wealth taxes like the post-war German lastenausgleich to redistribute wealth from the wealthy to prevent the poor falling below some minimum standard of living. I also like the land tax proposal in today’s Financial Times letters ( http://www.ft.com/cms/s/0/5ebfac84-b3ec-11e1-8fea-00144feabdc0.html ). In my view, such carefully considered wealth taxes are much preferable to inflation, which is easy to slip into, but tends to hit the less wealthy and least sophisticated most.
29. June 2012 at 09:50
Of course you know what it means dwb – in a debt trap your debt explodes because you do not have the income to even cover the interest payments.
29. June 2012 at 10:05
I dont really see that kind of debt trap for a sov that prints its own currency. the end result of what you say for a sov is some combination of inflation, higher taxes or lower spending. If the sov refuses to raise taxes or lower spending, inflation (which is a defacto tax hike) is in the cards. the only trap here is bad social policy to begin with.
29. June 2012 at 10:21
I would rule out inflation – see my comment above at 09.48.
I suspect that, if they were truthful, one reason why Krugman and Wolf cavalierly advocate increased deficit spending is that they would not worry if it did lead to inflation.
29. June 2012 at 10:23
dwb
“fiscal spending (say govex as a % of gdp) is pure unadulterated social policy. thats all, no economics”
I’m not sure what you mean that fiscal spending is not about economics but only social policy.
Is your main objection that 90% of GDP is an arbitraty spending limit?
29. June 2012 at 10:24
Ok Rebel. Why would you rule out inflation? Even if there are costs are they greater than being in a long term Great Stagnation a la Tyler Cowen?
29. June 2012 at 10:26
Paul:
This chart sums up why “conventional monetary policy” that relies on the fed funds rate goosing credit expansion (and thus NGDP), no longer works.
Starting in the early 1980s, and continuing into the 1990s and 2000s, household debt exponentially increased, and I submit it is direct a result of the Fed’s reckless decades long dollar bubble formation and decreasing fed funds rate (which could only be done in a fiat money regime by the way) .
The economy “grew” for decades on the basis of cheap money and debt brought about by the Federal Reserve System.
Even if the Fed didn’t “let NGDP fall” post-2008, there is no way that the status quo could have continued ad infinitum. In other words, 5% NGDP targeting theory contains a seed of its own destruction because it does not distinguish between different forms of inflation and their implications.
If 5% NGDP targeting occurs on the basis of primary dealers expanding debt, then there will arise a debt saturation limit and the economy will go into depression.
If 5% NGDP targeting occurs on the basis of primary dealers expanding equity, then there will arise an equity saturation limit and the economy will go into depression.
The only way the phenomena of 5% NGDP growth can avoid this is if the 5% NGDP growth is borne out of the market process itself, where each expenditure is expanded and contracted in accordance with economic calculation from individuals. An external entity that overrules the market process and inflates via debt and equity nominal expansion in order to bring about its own desired NGDP, then the economy will go into depression at some point after the errors in calculation are revealed and exposed.
The Fed adopting NGDP targeting can only guarantee that correction to errors which would have been made with market determined changes in NGDP, are not made, which will only create more problems in the long run.
——-
It is a great fallacy to believe that a Fed inflation targeting scheme that relies on private market credit and equity nominal expansion can overcome the resulting bubbles. The Fed can’t just promise higher price inflation extraneously to the market if it targets price inflation through government debt purchases. Inflation and spending are borne out of the market process of exchange, the actors of which have to use the money the Fed creates for some of its friends who then spend/invest it. Price inflation or NGDP targeting that relies on financial institutions who lend and/or invest in equity, will invariably create debt or equity bubbles because these expansions are NOT caused by real, voluntary saving.
On the basis of decades long bond bubble since the early 1980s, there have been two major equity bubbles, and we are currently in the formation of a third equity bubble.
Once this massive, decades in the making debt bubble pops, and it will pop at some point, the entire Ponzi fiat/credit economy will experience a great upheaval, and considering how fundamentally anti-capitalist the majority of our deplorable intellectual establishment of our age really is, I sometimes wonder if the mass of people, who have been indoctrinated by these intellectual and moral baboons, will be able to know how to secure their individual liberty.
29. June 2012 at 11:05
“On SCOTUS, Roberts really threaded needle, I’d have preferred he stayed in majority, but thats another reason we need Romney, it gets us two more conservative judges.”
Roberts got it right. The mandate is actually a tax on free riders. People who can afford to buy insurance and do not still expect to be treated if they are in an auto accident, have a heart attack, etc. and cannot afford to pay for the treatment. This is a rational expectation because society will not tell such people, sorry, you chose not to buy insurance, and now, since you cannot pay for the treatment, we are going to let you die.
I am old enough to remember when conservatives were opposed to free riding and would favor imposing a tax on them.
If I were Obama I would announce the money raised from taxes on people who do not buy insurance will be used to reimburse health care providers for the cost of treating people who cannot pay for treatment because they did not buy insurance, and sell it to the public as a tax on free riders.
29. June 2012 at 11:07
@RebelEconomist,
i dont understand why you are ruling out inflation. a sov always has the option of physically printing money.
@mike Sax,
fiscal spending is about provision of public goods (social policy). what else would it be? what if i say we dont need no stinking roads and screw the unemployed (i am not saying that). its a social choice to provide things like unemployment insurance and regulate pollution because we think that the private sector cannot solve those problems on their own.
29. June 2012 at 11:16
“Do you hate yourself?”
Major, Scott is right on in pushing for NGDP targeting. Why should he hate himself for being right?
29. June 2012 at 11:53
Full Unemployment Hawk:
Major, Scott is right on in pushing for NGDP targeting.
Actually FUH, he’s wrong in pushing for NGDP targeting.
Why should he hate himself for being right?
I didn’t say he has to hate himself for being right (which he isn’t). I asked him if he hates himself, on the basis that A. he said he hates ideologues, and B. he is an ideologue. A. and B. together would logically imply he hates himself.
I just wanted to know if what is logically inferred in his statements, is something he actually believes.
——–
The reason why “pushing for NGDP targeting” is wrong, can be summed up in the single sentence (which of course requires far more explanation to be fully grasped): It distorts individual economic calculation, and as a result it requires accelerating money supply growth in order to be maintained, which of course is not sustainable in the long run.
29. June 2012 at 11:56
Mike Sax:
Why would you rule out inflation? Even if there are costs are they greater than being in a long term Great Stagnation
Non-market inflation to prevent corrections (recessions) is the CAUSE of “Great Stagnations.”
The costs of inflation are stagnations. Preventing labor and resource reallocation in line with actual saving/consumption patterns is what prevents economic recovery.
29. June 2012 at 11:57
dwb:
its a social choice to provide things like unemployment insurance and regulate pollution because we think that the private sector cannot solve those problems on their own.
Violence cannot solve those problems. The state makes pollution and the problem of unemployment worse.
29. June 2012 at 11:59
Full Unemployment Hawk:
Roberts got it right. The mandate is actually a tax on free riders.
It is not “free riding” to choose not to pay and not receive a service.
It is however “free riding” to tax.
29. June 2012 at 12:23
“The mandate is actually a tax on free riders. People who can afford to buy insurance and do not still expect to be treated if they are in an auto accident, have a heart attack, etc. and cannot afford to pay for the treatment.”
What about people who do not buy insurance, but are charged multiples of market rates by health providers who aren’t constrained by an insurance price cartel? Who do I send my “free rider tax” bill to?
29. June 2012 at 12:28
I didn’t meant to be insulting, I think you ignore the “if” at the begining of the sentence. A lot of economists are willingly blinding themselves about heterodox theories, with no valid arguments. Here’s for example Bernanke about Minsky in his essay on the Great Depression :
“Hyman Minsky (1977) and Carles Kindleberger (1978) have … argued for the inherent instability of the financial system but in doing so have had to depart from the assumption of rational economic behaviour.” A footnote adds – “I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.”
Putting aside the fact that I think neoclassical economists definition of rationality is totally irrationnal, it is still wilful ignorance. I’m sorry, you can’t dismiss another theory on the basis that it clashes with another theory, you need to test them both against the datas. Neoclassical theory failed to predict the crisis and is still failing to get us out of it. You’re trying to explain why but to an objective observer, there’s no reasons to favor your theory over Keen’s one. Now, I’m not into your head and I don’t know if you intend to adress these issues properly or if you will dismiss it out of hand just like Bernanke, that’s basically why I started with “if”, and it’s not a personal insult, it’s a critic of a methodology who shouldn’t be considered as scientific.
I am well aware about confounding variables and the fact that a correlation doesn’t neccecerily imply a causality. If you look back at what I wrote, you will realize that while I do think debt is the cause of the crisis, I never said that the correlation alone was a proof of causality. Nevertheless, it is totally right to say that such high correlations strongly suggest a causal link, although it doesn’t tell you anything about the direction of the causality.
You say:
“I happen to think there are lots of good models explaining why NGDP shocks affect output, whereas that’s not the case for debt.”
I never denied that nGDP affects output, the question is why nGDP is falling, and you can’t blame contractionnary monetary policy since you define it as falling nGDP. Shocks are irrelevant, it’s the equivalent of saying you ignore why nGDP is falling. This is not surprising at all that no neoclassical model can’t explain the role of debt in the crisis, since you can’t capture any feedbacks using comparative statics and using that methodology, shocks will always be the answer.
Keen comes up with a modeling technique which makes neoclassical models look not so good anymore. It is still at it’s begining, but it’s already superior to anything else in my opinion.
29. June 2012 at 12:40
dwb
“fiscal spending is about provision of public goods (social policy). what else would it be? what if i say we dont need no stinking roads and screw the unemployed (i am not saying that). its a social choice to provide things like unemployment insurance and regulate pollution because we think that the private sector cannot solve those problems on their own.”
Based on what you said to Rebel I think I agree with you-I too don’t see why you would rule out inflation.
Fiscal policy is a social choice I would agree but isn’t the issue also argued with economically-for instance those who oppose stimulus come up with all these reasons and quibbles about why it won’t have the effects you think it will, etc.
So when Obama passed his stimulus it was an economic question in arguing what you think the effects are.
I guess my question is how do you differenitate social and economic policy?
29. June 2012 at 12:48
@Mathieu Dufresne
Yes I too have Keen’s book-there are a few books ahead on my reading list but I plan to get to it ASAP. From what I’ve seen I’m very impressed.
Do you have a blog by any chance? I do. I wrote about some of these issues today
http://diaryofarepublicanhater.blogspot.com/2012/06/fiscal-vs-monetary-policy-scott.html
29. June 2012 at 13:05
@dwb and Mike Sax, read my comment at 09.48. Do you think that inflation represents an appropriately targeted wealth tax?
Inflation hits relatively poor and vulnerable (ie old) savers hardest. Better to explicitly introduce a wealth tax designed to put the burden on those most able to pay and has the minimum of undesirable distortions of economic activity, like a land value tax.
29. June 2012 at 13:07
Mathieu Dufresne:
In his model, Keen completely ignores the vital role of economic calculation, and in so doing rescues us from neoclassical errors, only to impose another fallacious model on us that is built on a fallacious foundation.
Post-Keynesian Minskyites have no theoretical explanation for WHY debt makes economies inherently unstable. The best they have is that historically, depressions are associated with higher debt levels.
The attack on individual rationality (goal seeking behavior) inherent in your approach is what is “totally irrational”, since it requires rationality on the part of individuals to even adopt the theory that people are irrational.
——-
Most importantly, the Financial Instability Hypothesis fails to grasp the incredible difference between credit expansion, that is, credit backed not by real saving but rather by bank promises to pay (which is itself backed by the non-market Federal Reserve), and credit is that backed by real saving.
Minsky fallaciously claimed that credit expansion is an inherent aspect of capitalist economies, even though capitalism and credit expansion are antithetical to each other.
Capitalism is based on ABSOLUTE private property rights. With credit expansion, with or without central bank assistance, absolute property rights is lost. Economically speaking, that is, in terms of human actions, credit expansion brings about the phenomena where two or more parties act as if they each have absolute property rights to a particular property (in this case money), even though there is only one property.
While legally the state can allow these actions to occur, and while socially the direct parties involved in the transactions can allow these actions to occur, it nevertheless brings about a deviation from the requirement of only one property owner, praxeologically speaking, to one property, that is necessary for there to be capitalistic actions in this respect.
If a fractional reserve bank acts as if they have present claim on a sum of money, and if a fractional reserve bank customer acts as if they have present claim on the same sum of money, then this is not an example of capitalism in action. This is an example of a deviation from capitalism. It essentially turns absolute property rights to money into a lottery, where in a bank run only some people can take possession of the money upon which they acted as if they had present control over it the entire time.
In 100% reserve banking, this deviation would not exist. With 100% reserve banking, there is an economic equivalence between money supply, and number of parties who act as if they have present claims to that money supply.
The introduction of central banks make the problem of credit expansion worse, because unlike in a (non-capitalist) free banking scenario, in which case deviations away from absolute property rights to money is reduced, central banks enable fractional reserve banks to expand credit to even greater lengths, thus bringing about more instability.
Minsky’s fundamental error is in starting with the Marxian belief that capitalism is inherently unstable and prone to periodic booms and busts.
——–
If we had 100% reserve, private driven money production, then debt can never become an “aggregate” destabilizing force, because every single nickel of debt would be exactly counter-balanced by an equivalent nickel of real saving. Any debt defaults or repayments that occur would not, contrary to credit expansion economies, result in a reduction of the total quantity of money.
29. June 2012 at 13:16
Mike Sax:
Fiscal policy is a social choice
Social choice? You mean the choice of those in the state, whose choice is mandatory on others by force.
In other words, you’re saying “fiscal policy” is an act of violence.
29. June 2012 at 13:28
@Mike sax
I don’t have any blog, I am not an economist by the way and I already spend enough leisure time to read about the economy so I don’t plan to have a blog. Moreover, I think my English writting is not so hot.
29. June 2012 at 13:30
Mathieu I’m not an economist either, though I don’t let that stop me!
Any partiuclar blogs you really like?
29. June 2012 at 13:34
Major:
“The attack on individual rationality (goal seeking behavior) inherent in your approach is what is “totally irrational”, since it requires rationality on the part of individuals to even adopt the theory that people are irrational”
I thought Austrians deny rational expectations and EMH as well.
I didn’t know you were wildly opposed to credit expansion too. However you’re not opposed to credit just its expansion?
Incidentaloy you have said Hayek supported NGDP as long as on a world wide basis-I know you’ve admitted he wasnt consistent.
Keynes in the forming of Bretton Woods advocated for a world central bank-so the two should have beeen buddies.
29. June 2012 at 13:50
@RebelEconomist,
“Inflation hits relatively poor and vulnerable (ie old) savers hardest. ”
you are making assumptions about inflation that may or may not be true.
says who?? social security and many social welfare programs are indexed. pension funds are mainly invested in equities and corporate bonds, and those assets right now show a *positive* correlation to inflation expectations. Other assets (treasuries) have a negative correlation.
anyone who says they “know” who inflation hits hardest is making stuff up.
29. June 2012 at 14:31
RebelEconomist
you are making assumptions about inflation that may or may not be true.
Thank you.
The only savers/pensioners who get hurt by inflation are one who buy long term fixed rate bonds and then inflation goes up after they bought them, i.e. almost no one given the way most pension funds are managed.
I agree with you and wish people would stop making moronic statements about the effects of inflation on widows and orphans.
29. June 2012 at 14:38
@dtoh.,
actually I don’t even agree with that. it depends on where you are in the business cycle. right now with you assets like equities and corp debt are positively correlated to inflation, because the reduction in deliquency /default risk outweighs inflation.
i frankly not even sure the population of the who is affected stays the same.
29. June 2012 at 14:39
gotta love my phat phingers
29. June 2012 at 14:45
@dwb, it is known ( http://www.census.gov/hhes/www/wealth/wealth.html ) that the relatively poor tend to hold a relatively large proportion of their net wealth in bank accounts, and I am assuming that such assets would suffer relatively large real losses from inflation. Now you tell me why, out of all the possible forms of wealth tax, you think inflation is appropriate.
29. June 2012 at 14:47
FEH
The mandate is actually a tax on free riders. People who can afford to buy insurance and do not still expect to be treated if they are in an auto accident, have a heart attack, etc.
No. The law exempts low-income people who are the ones who end up not paying their medical bills. If you have enough income to be subject to the tax, you have enough income so that medical care providers will generally collect even if you’re not insured. The tax has nothing to do with free riders, it’s pure redistribution…rich to poor, young to the old, self-employed to corporate-employed, etc.
29. June 2012 at 16:23
Mike Sax:
I thought Austrians deny rational expectations and EMH as well.
Rational expectations is different from homo economicus.
I didn’t know you were wildly opposed to credit expansion too. However you’re not opposed to credit just its expansion?
Yes.
Incidentaloy you have said Hayek supported NGDP as long as on a world wide basis-I know you’ve admitted he wasnt consistent.
That is what can be inferred from a portion of his writings, yes.
Keynes in the forming of Bretton Woods advocated for a world central bank-so the two should have beeen buddies.
Hayek didn’t advocate for a central bank like Keynes did.
29. June 2012 at 17:15
MF:
I asked Scott: “Do you think the debt to GDP ratio can increase forever?”
You said: “It looks as though GDP cannot sustainably grow without accelerating debt.”
So what is your answer to the question?
Also, why do you believe that real GDP cannot sustainably grow without accelerating debt? If I invent something today that is of real value to people, that will add to real GDP without having any effect on debt.
29. June 2012 at 17:21
@rebeleconomist,
actually, the really really poor tend to avoid banks altogether. but no i do not agree. bank accounts’ interest income is indexed to a short term rate. if i have 5k in the bank but i make 10k, 2% inflation increases my wages more than the real value of my bank account. plus, the consumption basket of a family at the lower quintiles is different than average (elderly consume more health care, others might consume more gasoline).
i am not saying inflation is better or worse, just different. whether its better or worse very specifically depends on the scenario you lay out. I can lay out some where inflation is worse than wealth taxes, some where its better.
29. June 2012 at 17:46
“Social choice? You mean the choice of those in the state, whose choice is mandatory on others by force. In other words, you’re saying “fiscal policy” is an act of violence.”
Enforcing property rights is also the choice of those in the state, whose choice is mandatory on others by force. In other words, you’re saying “enforcing property rights is an act of violence.”
29. June 2012 at 18:10
Real GDP can grow without having debt to GDP ratio increasing. Keen’s model can easily prove that, altough infinite growth is obviously impossible but that’s another story.
29. June 2012 at 22:04
@dwb
“risky” how exactly? “prudent” based on what? Reinhart Rogoff should get the anti-Nobel prize for perpetuating a correlation is causation fallacy and the arbitrary 90%.
There is a deadweight cost of taxes on the economy. Interest on the national debt is serviced with taxes. When tax rates increase the deadweight cost rises not by the increase in the rate but by the square of the increase — double a tax rate and you quadruple its deadweight cost.
Thus debt of 90% of GDP would impose four times more deadweight cost on an economy than debt of 45% of GDP, ceteris paribus. On its face this would be expected to slow the growth of the higher-debt economy, which is what R&R report finding.
That’s a continuing cost of higher debt. Of course the risk is that when a govt is nearer its carrying limit of debt and an “unhappy surprise” occurs, lenders will require a risk-compensating increase in the interest rate it pays that is much higher than if it were well below its carrying limit. Need one mention the spread in European rates since 2007?
fiscal spending (say govex as a % of gdp) is pure social policy. thats all, no economics.
How does “fiscal spending” become conflated with deficit spending and a 90% of GDP debt ratio? Any amount of fiscal spending can be paid for with taxes without increasing debt at all — if the voting taxpayers think it is worth it.
@ RebelEconomist
My suggestion would be wealth taxes … I also like the land tax proposal in today’s Financial Times letters
Land tax has been a dream since Georgist days. Pittsburgh tried it in reality and it was an immediate disaster, the system collapsed and was abandoned in one year.
Land value tax is a double-appraisal system, first appraising total property value then appraising out the value of improvements. Appraisal systems are the tax collector’s nightmare, by far the most inefficient way to assess taxes — in Massachusetts, a high-tax state with every kind of tax imaginable, 90% of all tax appeals and litigation are over property tax appraisals. That’s with a single appraisal level. Plus, land is uniquely volatile in value (see recent history) as it is so inelastic in supply. That means it has to be reappraised constantly, and with every lot being unique, everybody always has a good reason to appeal. Plus, it is it uniquely prone to corruption — a little money changing hands can make both the assessor and land owner better off.
While the Pittsburgh system collapsed in one year it took several years of mass litigation to clean up the mess.
@ dwb
fiscal spending is about provision of public goods (social policy).
Assuming you mean about politically-driven social spending programs you are correct.
But “public goods” are goods which when consumed are nonexcludable and nonrivalrous — e.g. a radio station signal, nobody in its range is excluded from receiving it and one person receiving it doesn’t block another from doing so, so there is no bidding among consumers for the right to receive it.
OTOH, govt-provided public schools, pensions, and medical care are not public goods, even if they are good for the public.
I hate to be pedantic, but changing the definitions of words is starting down the road to MFdom.
Admittedly economists are terrible at naming things, “public good” does not mean “good for the public”, “Ricardian Equivalence” is something Ricardo *rejected*, etc. As if everything weren’t confusing enough.
what else would it be?
Many would say it is about buying votes. No nation ever got its debt over 90% of GDP by spending on roads and unemployment insurance.
And why couldn’t it pay for its programs with taxes anyhow, if the taxpaying voters deem them worth their cost? Again, how does “fiscal spending” = “debt increase”?
@ RebelEconomist
Inflation hits relatively poor and vulnerable (ie old) savers hardest.
The poor buy a different bundle of goods than the well off, one that is less subject to inflation. More of the goods are manufactured and physical (e.g food), supplied by parts of the economy with rapidly rising productivity, and subject to broad (often international) market competition that keeps prices down. The well off purchase much more in services and unique goods that are much more subject to price inflation.
BTW, accounting for the higher cost-of-living increases incurred by the well off eliminates much of the “welfare gap” that is typically presumed to result from the income gap. See Robert Gordon, no right-winger he!
@ dtoh
The only savers/pensioners who get hurt by inflation are one who buy long term fixed rate bonds and then inflation goes up after they bought them, i.e. almost no one given the way most pension funds are managed.
People may have inflation-indexed pensions these days, but pension plans load up on those fixed-rate bonds which lose value with inflation — and when pension plans become too underfunded, somebody darn sure pays.
@ RebelEconomist
the relatively poor tend to hold a relatively large proportion of their net wealth in bank accounts, and I am assuming that such assets would suffer relatively large real losses from inflation.
Well, savings account interest steadily exceeded the rate of inflation over the 40 years to 2007. Not so much since then, of course.
29. June 2012 at 23:54
@dwb, of course, one would hope that the really poor are not affected by a wealth tax of any kind.
I would not be so sanguine that short-term interest rates will rise with inflation – presumably that would restrain inflation anyway. It has certainly not been the case here in the UK, where deposit rates have generally been well below the rate of inflation even if you keep moving your accounts, which the elderly tend not to do. This is distressing for my eighty-something next-door neighbour, a retired pet shop owner with no corporate pension plan, dependent on bank deposits and life insurance schemes, which have of course also been crushed by QE. And their consumption basket tends to be dominated by healthcare, heating and food, which I dare say have if anything inflated faster than the general price level.
But look, while it is possible to argue about the impact of various forms of wealth tax, the point is that by adopting policies that may generate inflation deliberately or otherwise, we drift into one particular form of wealth tax, with a burden distribution that is unplanned and unlikely to correspond to what we might choose if we thought about it.
30. June 2012 at 01:13
Major Freedom,
I have a question for the Austrians.
Imagine a pure service economy. Only creative human services get sold and consumed instantly. Everybody is a doctor or a fitness coach, a hairdresser or stage actor, a teacher or…
All else is done by self-assembling, self-repairing solar powered robots at no cost. They have teleportation too, so land value drops to zero. People are very virtuous, nobody is taking any consumer credit. They are libertarians, only a minimal state exists, no government bonds! In short, there are no saving vehicles! None!
There is still a need for money, cause there is still the double coincidence of wants problem. A piano teacher wants a hair cut, but the hairdresser hates piano and prefers to watch a stand-up-comedian, but the comedian is bald…
Since there are no banks, no investments because there are no assets, no storable goods, no saving vehicles, how should they create money? What’s your recipe?
30. June 2012 at 02:27
libertaer,
This is not on behalf of any Austrian viewpoint, but in the situation you describe, a free society would invent forms of money, which would compete with one another leading to the best forms being the widely used ones.
Most likely these would be based upon credit. Piano teacher is paid with a hair-cut voucher (a form of credit), which might be swappable at a clearing house service for other kinds of vouchers. Once people start to trust the clearing house, the clearing house would start to issue all-purpose vouchers in exchange for specific vouchers. People start to accept these as payment, because that gives them more customers, and so on.
The clearing house evolves into a bank. There are many of them and the poor ones fail, thereby ensuring that people are careful about which ones they use… And so on.
There will always be credit, and credit is needed for a smoothly functioning economy. Credit is trust. However credit can easily get out of hand and cause problems. Then it becomes misplaced trust. This was known by ancient societies who enforced periodic debt jubilees as a way of short-circuiting credit bubbles.
30. June 2012 at 04:58
Full Employment Hawk-
“Enforcing property rights is also the choice of those in the state”
Good point that’s often forgotten. I’d add that enforcing contracts is a choice of those in the state. Prosecuting fraud and assault is as well.
This is where I see a lot of confusion in these types of discussions. Some people who call themselves advocates of freedom, libertarians, or whatever, really mean anti-governmentism. They start with the assumption that the government can only reduce freedom and never expand it and form all their opinions on that basis.
I think it’s obvious that some government laws reduce my freedom and others increase it. Laws defining and enforcing private property rights and contracts increase total freedom. Also clearly defining the process to follow when one party no longer wants to (or is unable to) be party to the contract (bankruptcy? foreclosure?). But we should be honest about it – my ownership of a house is a government restriction on your freedom to live in that house without my permission.
30. June 2012 at 07:36
@JG
Re: Pension plans:
1) Have relatively low weighting of long duration fixed rate assets.
2) Generally inflation is built into the pricing so pensions only get hurt when inflation expectations rise after the the fixed rate assets have been purchased.
3) Fall in value of the equity portion of the pension portfolio is usually what leads to underfunding. This typically is caused by a drop in NGDP so it tends to happen in low inflation environments.
4) If you look at the value of pension assets, I’ll bet you find a very strong positive correlation with inflation. I’d be willing to speculate that pensioners benefit from inflation.
30. June 2012 at 08:51
“cost of money””the interest rate”
Interest rates are the price of loan-funds, not the price of money. The price of money is represented by the various price (indices) level.
30. June 2012 at 09:41
libertaer the thing to understand is that the Major is not any normal run of the mill Austrian-he’s a Rothbardian which is a horse or a whole differnt color.
It’s Austrianism on steroids.
30. June 2012 at 10:22
The interest rate is the opportunity of withdrawing cash; and the cost of leverage. It affects directly the desirability for more liquidity, there’s nothing wrong with referring to it as the cost of money.
30. June 2012 at 12:28
Dear Austrian Trolls,
Have you ever considered that your ranting constitutes a tax on Sumner’s generosity to engage with commenters? One of the unintended consequences of this tax is to increase the effort he must expend per post, thus reducing supply.
There are so many things far more deserving of the troll tax besides this site. Why not harass Congress people who support the agriculture bill? That has to be, by any reasonable standard, a worse offender against libertarian ideas, no?
Trolls of the world unite! You have nothing to lose but your time!
30. June 2012 at 13:03
Scott, perphaps you need some ideologues of your own. Or, at least some unprincipled opportunist politicians just jumping on a bandwagon. Or some practical men slaves to some long dead economist. Purists rarely like the character of those who finally get the chance to implement their ideas.
However, at the end of the day there are no ideologues, just people you disagree with who can at any time change their minds. It happens all the time. The funny thing is that very often they can’t see they’ve been influenced but believe they have thought of the new idea all by themselves.
30. June 2012 at 13:05
Even Major Freedom. People are funny that way.
30. June 2012 at 14:29
libertaer:
Imagine a pure service economy. Only creative human services get sold and consumed instantly. Everybody is a doctor or a fitness coach, a hairdresser or stage actor, a teacher or…
All else is done by self-assembling, self-repairing solar powered robots at no cost. They have teleportation too, so land value drops to zero. People are very virtuous, nobody is taking any consumer credit. They are libertarians, only a minimal state exists, no government bonds! In short, there are no saving vehicles! None!
There is still a need for money, cause there is still the double coincidence of wants problem. A piano teacher wants a hair cut, but the hairdresser hates piano and prefers to watch a stand-up-comedian, but the comedian is bald…
Since there are no banks, no investments because there are no assets, no storable goods, no saving vehicles, how should they create money? What’s your recipe?
Self-assembling robots designed by mankind would be imperfect. Therefore, there will be a need to maintain the robots. Saving and investment would have to exist. Robots are physical objects. Without conscious human effort to maintain their own imperfect creations, they would break down, wear out, rust, and so on. To replace worn out and fully depreciated robots, to repair existing robots, this requires humans to devote at least a positive portion of their time and resources to ensuring that the robots are operating efficiently. This would be investment activity. I cannot even imagine a world where human created robots need zero attention from humans to continue in operation.
——-
In order to know whether or not a given action that is devoted to investment activity is making gains or losses, investors will require a way to calculate the difference between costs and output. The only way this can be done is if the unit of comparison is the same. This is where the need for money comes in.
——-
I disagree that there would be no assets in your scenario. The robots themselves would be assets. Land value cannot possibly drop to zero because even with teleportation, land would still be finite and scarce. It will be impossible for everyone in the world to use the same land at the same time. There will thus be purchase prices for land.
——-
To answer your question on how they “should” create money, the answer is not predictable. It would depend on the individual property owners. It would depend on their desires. You’re asking me to be a central planner. You’re asking me how I would design this society’s monetary system.
The Austrian recipe however is to depend on respect for individual property rights and economic freedom, and whatever happens from this, is what the Austrian would say “should” happen.
Mike Sax
libertaer the thing to understand is that the Major is not any normal run of the mill Austrian-he’s a Rothbardian which is a horse or a whole differnt color.
It’s Austrianism on steroids.
That is a meaningless statement. “Rothbardianism” is just taking what most people already accept, which is not to steal against your neighbor, and to let individuals produce whatever they want using their own property, using their own land property, and sell to whoever they want, at whatever price the market will bear, and just extending that ethic not only to “citizens”, but to every individual in the world, including those who currently do not act in this way, namely those in the state, and common criminals.
Shane:
Dear Austrian Trolls,
Shane, I don’t think you know what a troll is.
Have you ever considered that your ranting constitutes a tax on Sumner’s generosity to engage with commenters?
No, because nobody is threatening Sumner, forcing Sumner, or coercing Sumner, into him giving up his property, his labor, or anything regarding his body or his physical property.
Sumner is not “generous” in engaging with his commenters. He is doing it out of his self-interest. If you believe he is doing this against his own interests, for the sake of your interests, then I have news for you: The world doesn’t revolve around you.
One of the unintended consequences of this tax is to increase the effort he must expend per post, thus reducing supply.
Doesn’t increased effort increase the supply of Sumner arguments?
There are so many things far more deserving of the troll tax besides this site. Why not harass Congress people who support the agriculture bill? That has to be, by any reasonable standard, a worse offender against libertarian ideas, no?
It is not a valid argument to say that because A is worse than B, that B should be ignored in favor of A. Congress people who support the agriculture bill are too stupid to engage. They only thing they respond to is votes, campaign contributions, and those with more coercive power than they. I do not vote, I do not contribute, and my power is limited, so my interests lie with engaging intellectuals.
Trolls of the world unite! You have nothing to lose but your time!
I don’t think you know what a troll is.
James in London:
Scott, perphaps you need some ideologues of your own. Or, at least some unprincipled opportunist politicians just jumping on a bandwagon. Or some practical men slaves to some long dead economist. Purists rarely like the character of those who finally get the chance to implement their ideas.
Sumner is an ideologue. His followers are all ideologues. Everyone here who refuses to budge from their fundamental ideas, are ideologues.
Even Major Freedom. People are funny that way.
Show me a superior alternative to a free market in money production.
30. June 2012 at 15:31
Still feeding the trolls…
Can’t you guys find some where else to play ?
30. June 2012 at 16:19
Scott,
TallDave, I see very little evidence that the GOP has any interest in reducing the size of government. For most of my lifetime they complained that they never held all three branches of government at the same time””but when they finally did, they went on an orgy of spending (military and domestic.)
Well, it’s certainly been suboptimal for minarchists like myself, but things have changed a bit since then — the Tea Party’s core value is less spending.
Anyways, if the GOP has been bad, the Democrats have been catastrophic — if you look at the last few decades of budget proposals, the GOP’s have virtually always been smaller (that’s how we ended with a surplus in the 1990s; the GOP actually shut down the gov’t over spending cuts). And look at what happened to the U.S. budget after 2006.
http://en.wikipedia.org/wiki/United_States_federal_budget#Total_outlays_in_recent_budget_submissions
We haven’t seen anything like the cuts in Sweden or Canada, but then we started from a better baseline.
30. June 2012 at 17:05
Well according to J. Bradford, the Dems are the real party of small government;
http://delong.typepad.com/sdj/2012/06/glenn-hubbard-behave-yourself.html
————quote————
I worked for the Clinton administration. Throughout the entire 8 years of the Clinton administration–without a single Republican vote to help us when the heavy lifting needed to be done–we reduced the share of federal government spending as a share of potential GDP from 22.2% to 19.3%–by 0.3625%/year.
It was not easy. It was not moderately difficult. It was very difficult. It was brutal.
We did it. We know of what we speak. It is enormously difficult to get federal spending down–and it is much more difficult now, after two additional decades of Republicans blocking almost every single possible sensible cost-saving health-care reform, than it was when we started back in 1993.
——————endquote—————
So difficult even President Clinton wasn’t planning on it, if you remember his 1996 re-election campaign. But, I suspect a little cherry picking there on the years for comparison.
30. June 2012 at 17:41
Paul, You said;
“Do you think the debt to GDP ratio can increase forever?”
Forever’s a long time. I’d have to say no; after 837,455 years something weird would happen.
Seriously, when people ask me questions like this I know they are on the wrong track.
Mathieu, I get crackpot theories sent to me almost every day. Many are emailed directly to me, not via the comment section. I ignore the vast majority of them. I simply don’t have time to read every book and article that is recommended. If someone wants me to read something they need to explain why it’s interesting–to perk my interest. Suggesting that monetary policy is not capable of preventing a fall in NGDP is not a good way to perk my interest—it’s so far-fetched I dismiss it out of hand. Remember Zimbabwe?
James of London. A pragmatist is someone who considers the effects of various policies, to see whether they would help society or not. An ideologue tries to figure out whether something passes the litmus test for libertarianism (or socialism), and makes their decision solely on that basis.
TallDave, Privately the GOP regards the Tea Party as fools. They want their votes, but discard them right after the election. The Dems are not much worse on spending. Spending rose more slowly under Clinton than Bush.
30. June 2012 at 17:56
‘Spending rose more slowly under Clinton than Bush’
The election of 1994 have anything to do with that? I seem to remember Clinton vetoing the Republican’s budget in 1995, because of horrible spending cuts to Medicare and other favored Dem programs.
Also, it called for a balanced budget by 2002!
30. June 2012 at 19:32
ssumner:
A pragmatist is someone who considers the effects of various policies, to see whether they would help society or not. An ideologue tries to figure out whether something passes the litmus test for libertarianism (or socialism), and makes their decision solely on that basis.
A libertarian is someone who considers the effects of various policies, to see whether they would help THE INDIVIDUAL or not. An ideologue tries to figure out whether something passes the litmus test for “pragmatism” (or what helps the state), and makes their decision solely on that basis.
30. June 2012 at 19:36
Bill Ellis:
Still feeding the trolls…
You too don’t know what a troll is.
Can’t you guys find some where else to play ?
Is that what economics discussions appear to you? As playing? Maybe you’re better off with Dr. Seuss?
30. June 2012 at 19:40
A pragmatist is someone who considers the effects of various policies, to see whether they would help society or not.
An ideologue also reifies, that is, personifies, the concept “society”, and pretends to know what benefits and what harms this abstract concept.
——-
Society is composed of individuals. Society does not gain benefits nor does it incur costs. Only individuals gain and lose. Someone who believes a particular government action is “helping society” or “hurting society” is failing to grasp this fact.
30. June 2012 at 20:42
M_F:
I can’t imagine why you would think the phrase “Austrian Troll” was directed at you.
30. June 2012 at 22:16
Scott,
I asked: “Do you think the debt to GDP ratio can increase forever?”
You replied: “Forever’s a long time. I’d have to say no; after 837,455 years something weird would happen.”
I will assume from this that you don’t believe the debt to GDP ratio is useful as a measure of economic health. Is that a fair interpretation?
1. July 2012 at 03:08
Major Freedom,
if you plan any network technology, you are -in a way- a central planner, but since this doesn’t have to involve coercion, you can still be a libertarian.
So, for the sake of the argument, imagine a society without assets. They still need a medium of exchange. If some decide to use money instead of barter, no coercion is involved.
Now, what do you do, if some try to save for a rainy day. Since by assumption there are no assets, no investments, there can’t be no savings. S=I. Aggregate demand equals consumption (let’s assume, there are no taxes and it’s a closed economy). So by “saving for a rainy day” they are just hoarding the medium of exchange, they consume less, creating unemployment, without any reason. In this case it’s rational for the money producing network agency to give out more medium of exchange, pushing AD back up again. Think of money as solar powered electricity, if people want to consume more, just produce more. It’s free!
I agree with you, that what Sumner proposes implies that money is a public good. Here in Germany, conservatives call Milton Friedman a “Geldsozialist”, a money socialist. You called Sumner a communist. But since property rights are a public good too (you don’t own your property rights, you can’t buy or sell them, you can’t sell yourself into slavery…), there is no contradiction between being a libertarian and accepting the concept of public goods, right?
The point of all this: there is no contradiction between a libertarian society and NGDP targeting. Money is a public good, the medium of exchange. If some people, for whatever reason, don’t want to consume and don’t want to invest either, they don’t need a medium of exchange because there are not engaging in any kind of exchange. If they nevertheless just hoard the medium of exchange in their basement, they misuse a public good.
But hey, no problem, people, who actually want to exchange consumption and investment goods, are free to make themselves as much medium of exchange as they need, that’s the beauty of fiat money. To take up my imaginary society without assets, you just announce that you will print money and give it out on a per capita basis and (in the case of accelerating inflation) you announce that you would take money out through a consumption tax, which wouldn’t be a real tax as the money gets destroyed. Since it’s all about expectations, announcing it will already be enough. And if some prefer not to use any money, they can barter instead. No coercion whatsoever.
By the way, I think the main cause for the mess we are in is demographics. Here in Germany (the same in Japan) people are producing less but more high quality human capital. The problem is you can’t own human capital. (This would be a good time to reintroduce slavery 😉 So you get lots of savers, but not enough safe investments. So people are misusing the medium of exchange as a saving vehicle. This is not saving, it’s just hoarding. And it has to be stopped.
1. July 2012 at 05:31
“Economist estimates …..the market-clearing interest rate …..has been negative……represent too-tight monetary policy…..money too costly to encourage the spending”
Anyone pontificating that interest rates represent “policy rates” isn’t worth reading. Keynes’s liquidity preference curve (demand for money) is a false doctrine. And by late 2008 the damage had already been done. Monetary flows work with long, very specific, & unvarying lags (mathematical constants).
Bernanke conducted 2 distinct contractual money policies. The first one was for 29 consecutive months (forcing the decline in housing prices). Then Bernanke delivered the coup de grâce:
POSTED ON: Dec 13 2007 06:55 PM |
10/1/2007 -0.47 -0.22 * temporary bottom
11/1/2007 0.14 -0.18
12/1/2007 0.44 -0.23
1/1/2008 0.59 0.06
2/1/2008 0.45 0.10
3/1/2008 0.06 0.04
4/1/2008 0.04 0.02
5/1/2008 0.09 0.04
6/1/2008 0.20 0.05
7/1/2008 0.32 0.10
8/1/2008 0.15 0.05
9/1/2008 0.00 0.13
10/1/2008 -0.20 0.10 * possible recession
11/1/2008 -0.10 0.00 * possible recession
12/1/2008 0.10 -0.06 * possible recession
Exactly as predicted:
Monetarism has never been tried. The Keynesian economists on the Fed’s research staff have now cooked up IOeR’s (remunerated excess reserve balances) that: absorb both existing bank deposits within the CB system (taking Treasuries-safe assets off the market), as well as attract monetary savings from the non-banks (shadow banks). The runs on the shadow banks stemmed not from their inherently risky financing (e.g., re-hypothecation), but from Bernanke’s self-destructive money policies.
IOeR’s have displaced reserve requirements as the Fed’s credit control device. The introduction of IOeR’s (like a Pyrrhic victory), induce dis-intermediation within the non-banks (where the size of the commercial banking system remains the same), but the size of the shadow banks shrinks.
IOeRs result in a cessation of circuit income, & the transactions velocity of funds. They propagate stagflation. They reduce real-output. They have stifled the economic recovery.
1. July 2012 at 05:43
@rebeleconomist
This is distressing for my eighty-something next-door neighbour, a retired pet shop owner with no corporate pension plan, dependent on bank deposits and life insurance schemes, which have of course also been crushed by QE. And their consumption basket tends to be dominated by healthcare, heating and food, which I dare say have if anything inflated faster than the general price level.
clearly you have a very specific idea of what the costs of inflation are. my point, as you say, is that we should not drift into it. i generally don’t think that the difference between 2% and 2% inflation is material except insofar as it suggests higher growth expectations, which in the US i would welcome right now.
@Jim Glass,
couple of points:
1. yes “public goods” has a dual meaning, and i use it in both ways. i am not confused. What we collectively vote to let the government do is called social policy, whether that involves externalities or is economically optimal is a different issue
2. you said: “Of course the risk is that when a govt is nearer its carrying limit of debt and an “unhappy surprise” occurs, lenders will require a risk-compensating increase in the interest rate it pays that is much higher than if it were well below its carrying limit. Need one mention the spread in European rates since 2007? ”
no that is false, sort of. remember that default and inflation are equivalent. For a sov that prints its own currency those higher rates mean the market is reflecting expectations of incipient inflation. Sov spreads in Europe are completely different, sort of, Spain does not print its own currency (what those spreads do reflect though is that if the currency union broke, Spanish inflation would be much higher than Germany).
3. you said: the deadweight cost of debt increases with the square of taxes. Sure, but see #2. this is a theoretical calculation and i can use it to make up any numbers i want.
We have no idea what the “carrying limit” of debt is (see Japan). In fact, looking at Japan and the UK and historical examples, I tend to think its a lot higher than people imagine.
dont misuderstand me, i like small government. thats because the government is largely corrupt, not for any economic justification.
1. July 2012 at 05:44
^^ “2% and 2% inflation is material ”
2% and 3%. yes, the difference between 2% and 2% is not material!
1. July 2012 at 06:04
Can Scott explain this better than Kling can?
http://econlog.econlib.org/archives/2012/07/eurozone_market.html
Whew! I thought Scott would have called me a dogmatic libertarian, but I’m enough of a consequentialist to pass that test. Although I’m not entirely satisfied with “help society” as an evaluation criterion. Unbelievably, I agree with MF’s comment, where he says, “An ideologue also reifies, that is, personifies, the concept “society”, and pretends to know what benefits and what harms this abstract concept… Society is composed of individuals. Society does not gain benefits nor does it incur costs. Only individuals gain and lose. Someone who believes a particular government action is “helping society” or “hurting society” is failing to grasp this fact.“. But nonetheless I think I would pass Scott’s test where MF would fail.
MF, you’re dodging the question too. Which individuals?
Shane, +1. Actually make that +2.
1. July 2012 at 08:22
‘no that is false, sort of.’
Okay, who are you, John Roberts?
1. July 2012 at 08:29
Getting back to the question of comparative levels of depression-inducing comments sections; my buddy Brad couldn’t tolerate my asking him if his;
‘Throughout the entire 8 years of the Clinton administration–without a single Republican vote to help us….’
included what happened after Nov. 1994. That’s all I said last night, but you can’t read it here;
http://delong.typepad.com/sdj/2012/06/glenn-hubbard-behave-yourself.html
1. July 2012 at 08:51
“I agree with you, that what Sumner proposes implies that money is a public good.”
Money is NOT a public good.
if you start from that premise, you are no different than weirdo Christian dancing around with snakes and speaking in tongues.
The hard brutal facts are that money exists for THOSE WHO ACTUALLY MATTER, and why do they matter? Because they are the kind of people who establish money, government, a nd law.
And why do they establish them?
Because it serves their personal interests.
Imagine you believe in God.
Imagine he is a benevolent god.
Now you understand your relationship with the the hegemony.
God loves you, but you do not blaspheme God, and you are not equal.
The fact that other country more carefully obscure the men behind the curtain, or have to obscure them, is simply because the hegemony in those countries is made up of losers.
OF COURSE you would expect the hegemony of the worlds greatest nation to be better at keeping their fingers on power than the amateurs in Europe etc.
FINALLY, remember the hegemony in the US is almost 33% of the population.
1. July 2012 at 12:00
Ideologues and pragmatists are both human types. Ideologues just change their minds more slowly, often too slowly. Pragmatists change their minds quickly, often too quickly. They can both be right at the same time. Just because someone won’t change their mind quickly enough they get called ideologues.
In the UK Margaret Thatcher was regularly accused of being an idelogue when she was in fact merely holding her nerve, and bringing about much needed supply-side reforms. David Cameronnwas hailed as a pragmatist when he got elected but now merely seems dazed, confused and thoroughly ou of his depth.
1. July 2012 at 12:04
I would say that anyone who believes in God must be fairly obtuse, even an ideologue, but I am patient and believe time, science and Richard Dawkins will help people to the truth in the end.
1. July 2012 at 12:20
And if you want to get really depressed and see why some of us worry about the mechanisms of monetary stimulus via the banks, then read some of this, at least pages 10 and 11:
http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf
1. July 2012 at 12:33
DeLong is of course a massive revisionist on the subject of how “he” and the Clinton people did so much more than 100% of the work to produce the surplus as “we reduced the share of federal government spending as a share of potential GDP from 22.2% to 19.3%.”
First, the Clinton White House’s own budget projections back then showed deficits increasing *forever* even after they enacted their tax increase. That’s what *they thought* they were doing at the time.
Second, what to their surprise shrank govt spending as a share of GDP “to 19.3%” and reduced the deficit was of course the late-Clinton years economic bubble and the resulting explosion of unanticipated tax revenue it produced.
Third, as to what actually constrained spending back then, we might contrast DeLong today to DeLong 2002 discussing the issue with the CBO head back then, Rudy Penner, quoting:
~~~~~~~~~~~~~~~~~
Brad praises how well and honest the budgetary process worked in the early and mid-1990s, and what an important role the Budget Enforcement Act [BEA] and its Pay-As-You-Go restrictions [PAYGO] that made any piece of legislation that increased the deficit out-of-order on the floor of the House and the Senate played in making the 1990s debate both high-quality and effective…
Rudy: …One substantive point: You rightly praised how the BEA worked from 1990 thru 1997. But then it broke down completely…
Brad: The discretionary caps were pierced regularly and with gay abandon. But–and correct me if I am wrong–individual bills that moved outside of appropriations jurisdiction still had to be deficit neutral, didn’t they? But the rapid dissolution of the effectiveness of the process after 1997 puzzles me greatly…
Rudy: Legislation involving mandatory accounts “had to be deficit neutral”, but it wasn’t after 98. PAYGO rules were routinely violated, but legally in the sense that a phrase was often included in the legislation that essentially said that this law is not subject to PAYGO rules.
Brad: Yeah. But up through 1997 (or so) inclusion of such a phrase would automatically lose you ten votes (or so) in the Senate. So what happened at the beginning of 1998 to change things so completely? That’s still not clear to me…
Rudy: I believe it was the surplus. PAYGO was originally designed to stop tax and entitlement policy from increasing the deficit. (Really, to preserve the gains from the 1990 budget agreement.) After 1997, it had the effect of preventing any reduction of the surplus and that didn’t make much sense. Fixing it wasn’t easy tho a number of proposals were made. So they decided to ignore it
~~~~~~~~~~~~~
Hmmm … “Brad praises how well and honest the budgetary process worked in the early and mid-1990s … the House and the Senate 1990s debate both high-quality and effective … thru 1997”.
Is that what Brad is saying now? There’s *not a word* from Penner or that Brad about how awful the Repubs were the whole time with all credit belonging to the Dems. It looks like today’s Brad has put himself down the memory hole. 🙂
BTW, the next time someone tells you that “starve the beast doesn’t work” — that is, the level of govt spending isn’t affected by the amount of govt revenue available to spend — quote the above to them…
The PAYGO constraint that effectively limited new spending and set the stage for the surplus was created and enforced by bi-partisan agreement in response to the 1990-level deficits. Then the surplus arrived. “After 1997, it had the effect of preventing any reduction of the surplus and that didn’t make much sense … so they decided to ignore it.”
1. July 2012 at 13:00
I would say that anyone who believes in God must be fairly obtuse, even an ideologue, but I am patient and believe time, science and Richard Dawkins will help people to the truth in the end.
Which cannot but bring to mind, from one of the greatest of South Park episodes…
1. July 2012 at 14:03
James the Londoner, that Barclays thing could be interesting, if Paul Tucker is (seen as) compromised he won’t get to be next BoE Governor, and if Gus O’Donnell becomes BARC chair, we can count him out too; of the mooted candidates, that would leave only Adair Turner?
1. July 2012 at 14:52
“Someone who believes a particular government action is “helping society” or “hurting society” is failing to grasp this fact.”
Among progressives, “helping society” is a shorthand term for asserting that the benefits to individuals in that society exceed the harm to individuals in that society.
1. July 2012 at 15:05
“Now you understand your relationship with the the hegemony. God loves you, but you do not blaspheme God, and you are not equal.”
DAMN THE HEGEMONY! MAY IT BE ACCURSED BY THE PEOPLE OF ALL NATIONS AND ALL GENERATIONS! (I can blaspheme against it some more if needed.) It does not love us, it is out to exploit us for its selfish gains and is our implacable emenmy that must be defeated if we are to live in a just, free, society with true equality of opportunity.
“We hold these truths to be self-evident, that all men are created equal.”
The hegemony is fundamentally un-American.
Morgan is providing a valuable service on this site in exposing the great evil that freedom loving Americans are up against.
1. July 2012 at 15:06
“Now you understand your relationship with the the hegemony. God loves you, but you do not blaspheme God, and you are not equal.”
DAMN THE HEGEMONY! MAY IT BE ACCURSED BY THE PEOPLE OF ALL NATIONS AND ALL GENERATIONS! (I can blaspheme against it some more if needed.) It does not love us, it is out to exploit us for its selfish gains and is our implacable emenmy that must be defeated if we are to live in a just, free, society with true equality of opportunity.
“We hold these truths to be self-evident, that all men are created equal.”
The hegemony is fundamentally un-American.
Morgan is providing a valuable service on this site in exposing the great evil that freedom loving Americans are up against.
1. July 2012 at 15:06
Full Unemployment Hawk:
Among progressives, “helping society” is a shorthand term for asserting that the benefits to individuals in that society exceed the harm to individuals in that society.
Even to progressives, they mean benefits and costs to a non-individualistic, universal “collective” concept; an aggregate concept. They don’t mean that every individual is better off. They don’t mean that for every individual, they gain more than they lose.
Progressives do not respect Pareto optimality.
1. July 2012 at 15:10
While I’m not a Donald Trump fan, he nails it on Obamacare:
http://i48.tinypic.com/33elwxs.jpg
1. July 2012 at 15:18
“Progressives do not respect Pareto optimality”
Basing economic policy on Pareto optimality accepts the status quo as optimal, so that only changes that make no one worse off are acceptable. There is no reason to accept the assumption that the status quo is optimal. Therefore basing economic policy exlusively on Pareto optimality illegitimately rules out arguments that there are people who aught to be made worse off. Many progressives do hold the position that there are people who are currently getting too much of the pie and AUGHT TO BE made worse off.
While the rule of THE GREATEST GOOD FOR THE GREATEST NUMBER has well-known problems, it is nevertheless on the right track.
Freeing the slaves was not Pareto optimal because the slave holders were not compensated.
In addition, many people on the right support policies that are not Pareto improving, such as, for example, movements toward free trade in which the losers are not compensated.
1. July 2012 at 15:29
“Society is composed of individuals. Society does not gain benefits nor does it incur costs. Only individuals gain and lose.”
I agree with this proposition, but the benefits and costs to different indiduduals can be weighed against each other so that aggregate statements about how it affects society (being the weighted sum of the individuals, rather than some abstract concept) can be made. Yes, to do that requires value judgements to be made and different value judegemants lead to different reslults for society.
1. July 2012 at 15:35
“David Cameronnwas hailed as a pragmatist when he got elected”
Hailing him as a pragmatist never made sense. Imposing austerity when an economy is in a depression and asserting that such austerity would be expansionary is the very essence of an ideologue.
1. July 2012 at 15:46
“Five supreme court justices have just set a precedent that grants Congress the “constitutional authority” to force people to pay private companies. You don’t grasp how this sets a precedent for a new state power?”
The precedent was set by George Washington when he signed a bill requiring everybody to buy a firearm.
1. July 2012 at 17:38
Patrick, At least can we agree that we did better with GOP Congress plus Clinton than a GOP Congress plus Bush?
I certainly agree that DeLong has a blind spot, as Jim Glass shows in his post.
Paul, Yes.
1. July 2012 at 19:05
The precedent was set by George Washington when he signed a bill requiring everybody to buy a firearm.
Didn’t the militia act require people to own a gun (and other things), and not necessarily purchase a gun from a pre-approved list of providers, the way Obamacare does so with insurance?
1. July 2012 at 20:19
“Didn’t the militia act require people to own a gun”
Technicalities. The point is that if you did not own a gun and someone did not give you one, you had to buy one. And if there was a danger that many gun manufacturers produced defective guns, the requirement that guns be purchased from an approved list of manufacturers would have been Constitutional, (although not feasible at that time).
Just as state governments have the right to require people to buy car insurance, the commerce clause gives the Federal government the right to require people to buy car insurance meeting certain minimum standards (for example if some of the state requirenments are viewed as too lax) since cars are driven across state boundaries. It even gives the Federal government the right to require people to buy broccoli because it is sold in interestate commerce. One can argue that that may be a bad idea (I would not favor such a law) but the government has the right.
1. July 2012 at 20:27
“Society is composed of individuals. Society does not gain benefits nor does it incur costs. Only individuals gain and lose.”
I fully agree with this value judgement. This is why the doctrine of states rights is invalid. It implies that societies or governments have rights. Only individuals are sentient and feel pleasure and pain and therefore only individals have rights. If state governments violate the rights of individuals or fail to protect them, it is perfectly legitimate for the Federal government to intervene.
1. July 2012 at 20:43
“it even gives the Federal government the right to require people to buy broccoli”
For example, if Congress concluded that the price of broccoli was too low and did not provide an adequate rate of return for broccoli producers, so that the purpose of requiring people to buy broccoli was to increase the demand and therefore the price of broccoli. Of course this would be an incredibly stupid thing to do, but the point is that the commerce clause gives the Federal Government the right to do this.
1. July 2012 at 20:47
“Society is composed of individuals. Society does not gain benefits nor does it incur costs. Only individuals gain and lose.”
This is why corporations do not have any rights.
2. July 2012 at 00:50
The precedent was set by George Washington when he signed a bill requiring everybody to buy a firearm.
“Didn’t the militia act require people to own a gun”
Technicalities. The point is that if you did not own a gun and someone did not give you one, you had to buy one.
No technicality. The Second Militia Act did not require everybody, or anybody, to buy a firearm.
It required free white able-bodied males, of age for and eligible for military service, to be ready to report for military service bringing with them their own specified weapons and provisions.
This was national defense “war” legislation, justified constitutionally by the war power. The first words of the Act are “An ACT more effectually to provide for the National Defence”. Commerce and economic considerations had nothing to do with it. The commerce clause had absolutely totally nothing to do with it.
If George Washington had tried to convince Congress to order “everybody” to buy *anything* because he thought it was a good idea for commercial-economic reasons everyone would have laughed at him. As he was not the kind of guy to be laughed at, he never did any such thing.
Also, the Court’s majority opinion in a footnote specifically rejects the “militia” argument for the reason given above — it was a war power provision. End of that story.
the commerce clause … even gives the Federal government the right to require people to buy broccoli because it is sold in interestate commerce
Roberts’ opinion explicitly says the commerce clause does *not* give it that right. So do a majority of the Justices. That’s why Roberts had to resort to citing the “tax” power.
This is why the doctrine of states rights is invalid. It implies that societies or governments have rights … only individals have rights. If state governments violate the rights of individuals or fail to protect them, it is perfectly legitimate for the Federal government to intervene.
Hmm, just curious … you say above both that governments have no rights, only individuals have rights, and that the federal government has rights. Ample rights! (Even “the right to require people to buy broccoli”!)
If governments have no rights, so that if state governments violate the rights of individuals it is legitimate for the federal government to intervene, then is it equally true that if the federal government violates the rights of individuals it is legitimate for the state governments to intervene?
Let’s hope Prof. Sumner gets the subject back to NGDP soon.
2. July 2012 at 01:11
I asked: “Do you think the debt to GDP ratio can increase forever?”
You replied: “Forever’s a long time. I’d have to say no; after 837,455 years something weird would happen.”
Me: “I will assume from this that you don’t believe the debt to GDP ratio is useful as a measure of economic health. Is that a fair interpretation?”
You: “Yes”
OK. Then I’ll present a chain of logic that I expect you won’t agree with, but I would be interested to hear where you believe the logic breaks down. I’m referring to public + private net debt.
1. Each year net debtors need to pay interest to net creditors.
2. They need to do this from their earnings, or by increasing their debt.
3. Earnings of net debtors are a portion of GDP. Only a portion of these earnings can go to debt service, because net debtors need also to consume.
4. Therefore if interest payments were to exceed a certain portion of GDP, debt would start to grow unsustainably – i.e. would need to be resolved eventually via default.
5. Therefore if the debt to GDP ratio is continually rising, eventually the only way for that to be sustained is via a continually decreasing average market interest rate.
6. In that case a situation would eventually be reached where the interest rate structure is very flat. In fact if it went on ad infinitum, the average market interest rate across all durations and types would approach zero.
7. This would cause the credit pricing mechanism in the economy to become severely impaired.
8. It would be impossible to maintain economic health in this situation.
2. July 2012 at 06:49
Full Unemployment Hawk:
“Didn’t the militia act require people to own a gun”
Technicalities. The point is that if you did not own a gun and someone did not give you one, you had to buy one. And if there was a danger that many gun manufacturers produced defective guns, the requirement that guns be purchased from an approved list of manufacturers would have been Constitutional, (although not feasible at that time).
Notice how your argument of history deftly changed into a “what if” and “would have been” argument concerning danger of defectiveness and pre-approved list of gun manufacturers. so as to pretend that the precedent of Obamacare’s mandate of actually having to buy health insurance from a pre-approved list of private companies, was already set by Washington.
——-
“Society is composed of individuals. Society does not gain benefits nor does it incur costs. Only individuals gain and lose.”
I fully agree with this value judgement. This is why the doctrine of states rights is invalid. It implies that societies or governments have rights. Only individuals are sentient and feel pleasure and pain and therefore only individals have rights. If state governments violate the rights of individuals or fail to protect them, it is perfectly legitimate for the Federal government to intervene.
You just contradicted yourself. If there is no such thing as state’s rights, because only individuals feel pleasure and pain and so on, then you cannot possibly then claim that the federal state can “legitimately” step in and “intervene”, for you would just be invoking the doctrine of federal government rights.
——–
Jim Glass:
One of the few posts you make that I agree with. Let’s hope the topic of NGDP remains in the background for longer, so that more agreements can be had.
2. July 2012 at 07:03
Scott,
Privately the GOP regards the Tea Party as fools. They want their votes, but discard them right after the election.
True enough… but the Tea Party has also primaried some of those people right out of power and installed people like Rand Paul in their place.
The Dems are not much worse on spending. Spending rose more slowly under Clinton than Bush.
Yes, but that happened mostly despite Clinton, and was partly attributable to a single large exogenous factor, the end of the Cold War, which allowed the military budget to be lower (in nominal terms!) in 2000 than it was in 1989, a period during which the rest of the budget nearly doubled, going from $840B to $1,494B.
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf
Generally forgotten are the 1990s’ bitter fights over domestic budgets, in which we were repeatedly told the GOP’s proposals meant women, children, and the elderly would be left starving in the streets.
2. July 2012 at 07:20
Paul Andrews:
In your syllogism, did you equivocate A. Net debtors and B. “The economy”? It looks like you did, but I cannot be sure.
The more net debtors there are, and the more they owe, then the more net creditors there are as well, and the more they are owed. Is this a problem for “the economy” however? Or is it a problem for the net debtors, who find themselves with less and less money available to consume with?
——-
I agree with your assumption that interest rates would decline as more debt is introduced, ceteris paribus. But I disagree with your assumption that interest rates would approach zero. Interestingly, my disagreement stems from something you positively mentioned: that people have to consume.
The fact that people have to consume, will mean that at some point of increasing debt, the people who are lending will eventually hit a maximum amount of money they would be willing to lend, because they have to keep some of their earnings for themselves in order to consume with.
So there is a minimum spending that lenders will devote to their own consumption. With any given overall finite spending, this means there will be a limit to how much debt can exist. Debt cannot possibly accelerate beyond the constraint imposed by consumption spending from the lenders and total spending.
——-
If interest rates did decline on the basis of a rise in the ratio of voluntary savings and investment to consumption spending, and average interest rates got very “low”, say in the 0.25% – 1% range across the board, then there is no reason to believe the economy cannot properly “function” in this way. The interest rates that exist would be a function of voluntary savings, not monetary manipulation from central bankers, and so the interest rates that exist would be a function of what consumers are actually communicating to be their real time preferences. Investors who engage in more capital intensive projects due to the “cheap money” making what otherwise would have been unprofitable projects, to be profitable, they would actually be doing what consumers are allowing to be made possible by virtue of their extremely low consumption and extremely high savings.
Consumers (who, I cannot emphasize enough, are composed in part by LENDERS) would be communicating to producers: “We only want the bare minimum resources to be devoted to our consumption. For the rest of the scarce resources, we are willing to have them devoted to future production (and consumption). So, to all you producers, please expand more future oriented production instead of more present oriented production, and we will reward you with our future consumption spending when the goods and services are ready.”
2. July 2012 at 08:10
“then is it equally true that if the federal government violates the rights of individuals it is legitimate for the state governments to intervene?”
In principle yes they do. But under our Constitution, the state governments do not have the AUTHORITY to intervene. Under the Articles of Confederation they did.
No government has RIGHTS, only individuals have rights. But governments do have the AUTHORITY to carry out their legitimate government functions.
2. July 2012 at 08:16
“Notice how your argument of history deftly changed into a “what if” and “would have been” argument”
A tactical mistake on my part. I should have stuck to the valid point that the requirement under Washington that everybody own a gun set the precedent that the Federal government has the authority to require people to buy things.
Once that precedent is established, the authority to set rules about the specifics of what you are to buy logically follows.
2. July 2012 at 09:21
‘I certainly agree that DeLong has a blind spot…’
He can see well enough to delete things he doesn’t like.
Btw, one of the (perhaps) unintended consequences of the Budget Act of 1990–which, I agree, did constrain congress–was the housing bubble.
That was the motivation for the legislation that enabled it. The GSE Act of ’92, HUD’s Best Practices Initiative of ’93-94, the amending of the CRA in ’95. None of that shows up in the budget.
Speaking of forcing private actors to do what they otherwise wouldn’t.
2. July 2012 at 09:41
Paul Andrews –
“If something cannot go on forever, it will stop.” – Herbert Stein
The exact mechanism that this will happen can’t be definitively predicted. But I’d say it’s around step 4 in your scenario. Defaults are supposed to happen in the market. If debts become higher than the ability of borrowers to repay, then lenders take a loss as they should for making unproductive loans.
2. July 2012 at 09:48
Evidence for market monetarism: http://marginalrevolution.com/marginalrevolution/2012/07/very-good-sentences-21.html
2. July 2012 at 10:04
Bernanke explained? http://econlog.econlib.org/archives/2012/07/what_john_rober.html
2. July 2012 at 10:31
Mike and/or Kevin Munger thinks it isn’t so easy for monetary policy to fix the recovery, and cites Svensson(!) as evidence: http://mungowitzend.blogspot.com.au/2012/07/promises-promises.html
2. July 2012 at 11:05
I should have stuck to the valid point that the requirement under Washington that everybody own a gun set the precedent that the Federal government has the authority to require people to buy things.
No, it did not. See among others NFIB v Sebelius US Supreme Court, No. 11-393, 6/28/12. And repeating this claim will not make it so.
2. July 2012 at 11:08
Full Unemployment Hawk:
I should have stuck to the valid point that the requirement under Washington that everybody own a gun set the precedent that the Federal government has the authority to require people to buy things.
That initial point was INVALID. The Militia Act did NOT “require people to buy things.”
——
“then is it equally true that if the federal government violates the rights of individuals it is legitimate for the state governments to intervene?”
In principle yes they do. But under our Constitution, the state governments do not have the AUTHORITY to intervene. Under the Articles of Confederation they did.
No government has RIGHTS, only individuals have rights. But governments do have the AUTHORITY to carry out their legitimate government functions.
So in other words, all you’re saying is that the Constitution is a document written by those who decided to enact a “might makes right”.
2. July 2012 at 14:21
Steve Williamson has a new post up:
Some Doubts About NGDP Targeting – Steve Williamson
“….
So, what do we make of this? If achieving a NGDP target is a good thing, then variability about trend in NGDP must be bad. So how have we been doing?
The first chart shows HP-filtered nominal and real GDP for the US. You’re looking at percentage deviations from trend in the two time series. The variability of NGDP about trend has been substantial in the post-1947 period – basically on the order of variability about trend in real GDP. You’ll note that the two HP-filtered time series in the chart follow each other closely. If we were to judge past monetary policy performance by variability in NGDP, that performance would appear to be poor. What’s that tell you? It will be a cold day in hell when the Fed adopts NGDP targeting. Just as the Fed likes the Taylor rule, as it confirms the Fed’s belief in the wisdom of its own actions, the Fed will not buy into a policy rule that makes its previous actions look stupid.
There’s another interesting feature of the first chart. Note that, during the 1970s, variability in NGDP about trend was considerably smaller than for real GDP. But after the 1981-82 recession and before the 2008-09 recession, detrended NGDP hugs detrended real GDP closely. But the first period is typically judged to be a period of bad monetary policy and the latter a period of good monetary policy.
Here’s another problem. There is a substantial source of variability in real and nominal GDP that we rarely think about, as we are always staring at seasonally adjusted data. Indeed, the Bureau of Economic Analysis makes it really hard to stare at unadjusted National Income Accounts data. I couldn’t unearth it, and had to resort to Statistics Canada which, in their well-ordered Canadian fashion, puts all of these numbers where you expect to find them. The next chart shows the natural logs of Canadian nominal GDP, seasonally adjusted and unadjusted.
The seasonal variation in unadjusted NGDP is pretty clear in that picture, but to get an idea of the magnitude, the next two charts show HP-filtered seasonally adjusted and unadjusted Canadian NGDP, respectively.
[Graph]
The first chart looks roughly like what you would see for the same period in the US. Typical deviations from trend at business cycle frequencies range from 2% to 5%. In the unadjusted series, though, the deviations from trend are substantially larger – typically from 5% to 10%.
The second chart is interesting, as you can see both the seasonal variation and the cyclical variation in NGDP. If we want just the percentage deviations of unadjusted NGDP from seasonally adjusted NGDP, we get the next chart.
There’s a substantial amount of variation there – on the order of what we see at business cycle frequencies.
So, if variability about trend in NGDP is a bad thing, why should we not worry about the seasonal variability? I can’t see how any answer that the NGDP targeters would give us to that question could make any sense. But they should have a shot at it.
The monetary models we have to work with tell us principally that monetary policy is about managing price distortions. For example, a ubiquitous implication of monetary models is that a Friedman rule is optimal. The Friedman rule (that’s not the constant money growth rule – this comes from Friedman’s “Optimum Quantity of Money”) dictates that monetary policy be conducted so that the nominal interest rate is always zero. Of course we know that no central bank does that, and we have good reasons to think that there are other frictions in the economy which imply that we should depart from the Friedman rule. However, the lesson from the Friedman rule argument is that the nominal interest rate reflects a distortion and that, once we take account of other frictions, we should arrive at an optimal policy rule that will imply that the nominal interest rate should be smooth. One of the frictions some macroeconomists like to think about is price stickiness. In New Keynesian models, price stickiness leads to relative price distortions that monetary policy can correct.
If monetary policy is about managing price distortions, what does that have to do with targeting some nominal quantity? Any model I know about, if subjected to a NGDP targeting rule, would yield a suboptimal allocation of resources.
The idea that it is important to have the central bank target a NGDP futures price as part of the implementation of NGDP targeting seems both unnecessary and risky. Current central banking practice works well in the United States in part because the Fed (pre-financial crisis at least) is absorbing day-to-day, week-to-week, and month-to-month variation in financial market activity. Some of this variation is predictable – having to do with the day of the week, reserve requirement rules, or the month of the year. Some of it is unpredictable, resulting for example from shocks in the payments system. I think there are benefits to financial market participants in having a predictable overnight interest rate, though I don’t think anyone has written down a rigorous rationale for that view. Who knows what would happen in overnight markets if the Fed attempted to peg the price of NGDP futures rather than the overnight fed funds rate? I don’t have any idea, and neither does Scott Sumner. Sumner seems to think that such a procedure would add extra commitment to the policy regime. But the policy rule already implies commitment – the central bank is judged by how close it comes to the target path. What else should we want?
Finally, there is no guarantee that the central bank could always hit a given NGDP target, even if it wanted to. The reason some prominent Old Keynesians like the NGDP rule is that they think they can’t lose with it. Suppose we are Old Keynesians, and our view is that NGDP is now 10% below where it should be. So, being Old Keyensians, we think monetary policy should be more accommodative. Even if all we accomplish is a 10% increase in prices, that will deflate some private debts, and at worst redistribute wealth toward those who were hurt by the recession. Good deal! The problem is that we are in a more severe liquidity trap than even Paul Krugman wants to think about. The only policy instrument that currently matters is the interest rate on reserves (IROR). If the Fed moves the IROR, or signals how it will move the IROR in the future, that matters. Otherwise, there is no effect on any quantities or prices. Making promises about future NGDP cannot help the Fed do a better job of making promises about the future path for the IROR, so NGDP targeting appears to be of no use in our current predicament.”
http://newmonetarism.blogspot.de/2012/07/some-doubts-about-ngdp-targeting.html
2. July 2012 at 14:25
And Mark Thoma posts approvingly:
“When Steven Williamson isn’t suffering from Krugman Derangement Syndrome, a frequent ailment, he can ask good questions:
Some Doubts About NGDP Targeting
In one part of the post, he says:
If we were to judge past monetary policy performance by variability in NGDP, that performance would appear to be poor. What’s that tell you? It will be a cold day in hell when the Fed adopts NGDP targeting. Just as the Fed likes the Taylor rule, as it confirms the Fed’s belief in the wisdom of its own actions, the Fed will not buy into a policy rule that makes its previous actions look stupid.
I’ll be interested to hear the responses to his questions (assuming he has more luck than David Andolfatto in getting advocates of NGDP targeting to repond). I’m trying to be open minded, but it is not yet clear to me that NGDP targeting is the optimal policy rule in the sticky wage and price models used to evaluate monetary policy. (I have doubts about the models as well, which is why I’d like to better understand the classes of models for which NGDP targeting is optimal, and the classes for which it’s not. I have a pretty good idea of how to answer that question for the Taylor rule, but am less certain for NGDP targeting. It could be that NGDP targeting is relatively robust to model uncertainty, i.e. it does well in many classes of models even though it may not be optimal within any particular class — that would work in its favor — but that is not yet clear either.)”
http://economistsview.typepad.com/economistsview/2012/07/some-doubts-about-ngdp-targeting.html
2. July 2012 at 15:35
Yeah Mark I’ll be interested too-if he does have more luck. Part of it is he thinks NGDP targeting won’t be accepted because of the Fed’s vanity-stable NGDP growth so far from what it’s past performance shows.
It is intersting that NGDP was more stable in the 70s-of all times. I mean if you had to pick the decade since WWII for the most stable for NGDP that would probably be your last choice.
Mind you he seems to think the current inflation targeting regime is optimum which I’m certainly skeptical of.
However it will be interesting to see how many NGDPT advocates take up his challenge. So far Nick Rowe has left a few comments.
Williamson was incredulous to Nick’s second comment:
“Are you telling me you can get the same nominal GDP path with different paths for the nominal interest rate?”
SW says we’re in a worse liquidity trap than even Krugman wants to know about
2. July 2012 at 15:55
My comment didn’t print. I’ll try again:
Yeah Mark I’ll be interested too-if he does have more luck. Part of it is he thinks NGDP targeting won’t be accepted because of the Fed’s vanity-stable NGDP growth so far from what it’s past performance shows.
It is intersting that NGDP was more stable in the 70s-of all times. I mean if you had to pick the decade since WWII for the most stable for NGDP that would probably be your last choice.
Mind you he seems to think the current inflation targeting regime is optimum which I’m certainly skeptical of.
However it will be interesting to see how many NGDPT advocates take up his challenge. So far Nick Rowe has left a few comments.
Williamson was incredulous to Nick’s second comment:
“Are you telling me you can get the same nominal GDP path with different paths for the nominal interest rate?”
SW says we’re in a worse liquidity trap than even Krugman wants to know about
2. July 2012 at 16:18
Scott,
It’s a mistake to consider someone who thinks the FED cannot always control nGDP growth as a crackpot. Zimbabwe is a complete different situation than the one we’re talking about and if anything, it’s another good example that nGDP growth can go totally out of control. If the banks are to make additionnal loans, you need to have borrowers who are willing to take on that debt and the evidences that the FED will always be able to have control on their decisions are far from being watertight. It all comes down on how you treat expectations and Minsky have more than a grain of wisdom on that issue. I regard his analysis as far more realistic and consistent with the datas than anything else I have read. There’s place for doubt. Doubt is the ultimate key to knowledge and if there’s no place for doubt, that’s how you know you’re stuck with an ideology.
2. July 2012 at 17:04
There’s place for doubt. Doubt is the ultimate key to knowledge and if there’s no place for doubt, that’s how you know you’re stuck with an ideology.
Does that mean I should doubt what you say about doubt being the ultimate key to knowledge, and that I should doubt the notion that without doubt one becomes an ideologue?
2. July 2012 at 17:51
@Mark A. Sadowski
thanks for the heads up i don’t frequent SW’s blog.
one thing I definitely agree with is “the Fed will not buy into a policy rule that makes its previous actions look stupid.”
almost definitely not! Not until central bankers are elected, anyway.
you said:
“I have doubts about the models as well, which is why I’d like to better understand the classes of models for which NGDP targeting is optimal, and the classes for which it’s not.”
i am not sure that’s the right question. Clearly, we have models in which PLT is optimal, and we have models where NGDPLT is optimal, it all comes down to whether you believe the assumptions.
The question is not whether you believe the assumptions, the question is what is the actual cost of the suboptimal policy in case you choose ngdplt in error (and vice versa). if one chooses ngdplt in a world where PLT is optimal, the cost (at 2-3% inflation level) is small. conversely, if one chooses PLT in a world where NGDPLT is optimal (say, large supply shocks or nominal debt), the cost is large. in my mind, thats the reason NGDPLT dominates.
and here’s one i found from the wayback machine:
“Understanding nominal gnp targeting”
http://research.stlouisfed.org/publications/review/89/11/Understanding_Nov_Dec1989.pdf
talk about deja vu…
2. July 2012 at 18:52
MF:
“The more net debtors there are, and the more they owe, then the more net creditors there are as well, and the more they are owed. Is this a problem for “the economy” however? Or is it a problem for the net debtors, who find themselves with less and less money available to consume with? ”
It’s a problem for the economy if something systemic encouraged the net debtors to take on more debt than they can handle, and then large numbers default at around the same time. (e.g. systemic loose money leading to credit and asset bubble). Then it’s a problem for net debtors, net creditors, and for the system.
“Debt cannot possibly accelerate beyond the constraint imposed by consumption spending from the lenders and total spending.”
I agree with you, there is a limit to how high the debt to GDP ratio can climb due to constraints such as these. My syllogism is not one that I believe can ever reach its conclusion. I believe it has to break down at one of the steps, which therefore implies that the debt to GDP ratio cannot grow forever. I am hoping Scott will point out where he believes it breaks down.
“The interest rates that exist would be a function of voluntary savings, not monetary manipulation from central bankers”
Not necessarily, if central bankers were continually forcing rates lower and lower to prevent a sudden collapse in credit due to default.
2. July 2012 at 19:41
Mike Sax,
“It is intersting that NGDP was more stable in the 70s-of all times. I mean if you had to pick the decade since WWII for the most stable for NGDP that would probably be your last choice.”
That sounds like what he’s saying but that’s not what he’s saying. Steve is saying that RGDP is more variable than NGDP during the 1970s. What he neglects to mention is NGDP was also more variable during the 1970s, which in turn implies RGDP was *very* variable.
2. July 2012 at 19:45
dwb,
You said:
“you said:
“I have doubts about the models as well, which is why I’d like to better understand the classes of models for which NGDP targeting is optimal, and the classes for which it’s not.””
No, I didn’t say that. Mark Thoma said that. Perhaps I should have italicized instead of putting it in quotes.
“i am not sure that’s the right question. Clearly, we have models in which PLT is optimal, and we have models where NGDPLT is optimal, it all comes down to whether you believe the assumptions.
The question is not whether you believe the assumptions, the question is what is the actual cost of the suboptimal policy in case you choose ngdplt in error (and vice versa). if one chooses ngdplt in a world where PLT is optimal, the cost (at 2-3% inflation level) is small. conversely, if one chooses PLT in a world where NGDPLT is optimal (say, large supply shocks or nominal debt), the cost is large. in my mind, thats the reason NGDPLT dominates.”
I agree.
2. July 2012 at 20:22
“Does that mean I should doubt what you say about doubt being the ultimate key to knowledge, and that I should doubt the notion that without doubt one becomes an ideologue?”
You could start by doubting everything except that you are a doubtul doubter doubting.
2. July 2012 at 20:29
“Full Unemployment Hawk”
I see that I have once more reduced you to resorting to name calling. When you feel you cannot win an argument on the merits of the facts you resort to behaving like a 10 year old.
2. July 2012 at 20:33
James in London: the Barclays Bank LIBOR scandal finally provoked me into a post on global banking that has been brewing for some time.
http://skepticlawyer.com.au/2012/07/03/corrupting-risk-on-top-of-the-surplus-pyramid/
3. July 2012 at 07:08
Paul, You said.
“5. Therefore if the debt to GDP ratio is continually rising, eventually the only way for that to be sustained is via a continually decreasing average market interest rate.”
You lost me here. I’d expect too much borrowing to lead to higher rates, and eventually default.
TallDave, So why did the GOP go on an orgy of domestic and military spending once they took office? And the Rand Pauls of the GOP will never have much influence. Even the party leadership opposed him.
Mattieu, I thought you were saying the central bank might not be able to raise NGDP. Now you are saying they could, but it might get out of control. That’s a very different claim.
I think people are missing the point here. In all of human history there is no case of a central bank trying to inflate with fiat money and failing. Not one. And yet truckloads of ink have been spilled descibing this “problem.” Don’t you think we ought to at least see one case of a “liquidity trap” before we start becoming so concerned? Obviously I might be wrong. If Bernanke does the things he told the BOJ to do, and fails, then so be it. But until that happens I’m going to focus on probable outcomes, not remote possibilities that seem unlikely to ever occur in reality. One only has so much time, I can’t address every far-fetched theory.
Now if NGDP is growing nicely could we still have debt problems? Yes. I don’t think they would cause cyclical problems, while others do. I’d like to see the evidence.
3. July 2012 at 16:28
Scott,
I asked: “Do you think the debt to GDP ratio can increase forever?”
You replied: “Forever’s a long time. I’d have to say no; after 837,455 years something weird would happen.”
Me: “I will assume from this that you don’t believe the debt to GDP ratio is useful as a measure of economic health. Is that a fair interpretation?”
You: “Yes”
Me: “OK. Then I’ll present a chain of logic that I expect you won’t agree with, but I would be interested to hear where you believe the logic breaks down. I’m referring to public + private net debt.
1. Each year net debtors need to pay interest to net creditors.
2. They need to do this from their earnings, or by increasing their debt.
3. Earnings of net debtors are a portion of GDP. Only a portion of these earnings can go to debt service, because net debtors need also to consume.
4. Therefore if interest payments were to exceed a certain portion of GDP, debt would start to grow unsustainably – i.e. would need to be resolved eventually via default.
5. Therefore if the debt to GDP ratio is continually rising, eventually the only way for that to be sustained is via a continually decreasing average market interest rate.
6. In that case a situation would eventually be reached where the interest rate structure is very flat. In fact if it went on ad infinitum, the average market interest rate across all durations and types would approach zero.
7. This would cause the credit pricing mechanism in the economy to become severely impaired.
8. It would be impossible to maintain economic health in this situation.”
You: “”5. Therefore if the debt to GDP ratio is continually rising, eventually the only way for that to be sustained is via a continually decreasing average market interest rate.”
You lost me here. I’d expect too much borrowing to lead to higher rates, and eventually default.”
I agree, a higher debt to GDP ratio (too much borrowing) implies a higher ratio of defaulting debt at some point. My point is that very high ratios of debt to GDP, especially when rates have been kept artificially low (staving off defaults), indicate a danger of upcoming system-side simultaneous defaults.
Given you seem to agree that too much borrowing implies a higher chance of default, why don’t you think that this can apply systemically?
4. July 2012 at 07:09
TallDave, So why did the GOP go on an orgy of domestic and military spending once they took office? And the Rand Pauls of the GOP will never have much influence. Even the party leadership opposed him.
Domestically, as a sop to Democrats and centrists (e.g. Medicare part D, “compassionate” conservativism which meant more welfare), militarily because of another exogenous event — 9/11 — the response to which, let us remember, was broadly bipartisan.
As for influence… yes and no. We haven’t gotten much movement on the drug war and social issues, because the religious right more than counterbalances the libertarians, but the statist wing of the the party has been nearly obliterated, as evidenced by the earmark ban and the fight over the credit limit, in which the GOP went to mat for spending cuts at huge risk to themselves (and the Democrats fairly successfully defended spending by falsely conflating default with reaching the credit limit, even though revenues were FAR more than interest, in fact more than enough to meet SS and Medi as well, and the CRS confirmed Treasury can prioritize debt service). The GOP is even showing traditionally unusual willingness to cut military spending.
I realize a lot of this is inside baseball to non-political-junkies, but I hope this information is useful.
5. July 2012 at 12:17
Full Unemployment Hawk:
“Does that mean I should doubt what you say about doubt being the ultimate key to knowledge, and that I should doubt the notion that without doubt one becomes an ideologue?”
You could start by doubting everything except that you are a doubtul doubter doubting.
Why not start with the fact that your call for doubt means one should doubt what you just said about doubt? Or did you really mean that I and everyone should doubt their convictions, but not your convictions? That everyone does not know truth, except your notion of it?
As for your latest response here, all I can say is that what started out as sophistry and a philosophical con job, has now turned into full blown contradiction. If you want me to doubt everything except my allegedly being a doubtful doubter doubting, then that implies you believe I am not a doubter. Well, if you believe I am not a doubter, then you cannot possibly consider it possible for me to “doubt everything”, because doubting everything is doubting something, and you said I shouldn’t doubt that that I am a doubter.
——-
“Full Unemployment Hawk”
I see that I have once more reduced you to resorting to name calling. When you feel you cannot win an argument on the merits of the facts you resort to behaving like a 10 year old.
You wish.
No, I “feel” fully convinced that I can (easily) win an argument with you about economics. I call you Full Unemployment Hawk because I find your self-given name ironic. You call yourself a full employment hawk, yet I am convinced your ideas if/when practiced actually exacerbate unemployment. Hence my name for you is “name calling” yes, but in no way is it any different from you uttering names for others.
What, did you expect me to call you by the name you give yourself? Sorry, I will call you what I want. You can call yourself Mr Awesome, it won’t matter, because it doesn’t mean you are what you say you are. I give you the name I want to give you.
If that upsets you, then start a revolution where children are no longer named by their parents, where everyone names themselves.
5. July 2012 at 18:47
Paul, I don’t follow. I agree that too much borrowing can make a large bout of defaults more likely. As I’ve indicated many times, I favor numerous public policy changes to discourage debt.
Talldave, I read that the reforms are already starting to unravel—that the GOP wants to go back to special tariff breaks for local industries.
5. July 2012 at 22:53
Scott,
I asked: “Do you think the debt to GDP ratio can increase forever?”
You replied: “Forever’s a long time. I’d have to say no; after 837,455 years something weird would happen.”
Me: “I will assume from this that you don’t believe the debt to GDP ratio is useful as a measure of economic health. Is that a fair interpretation?”
You: “Yes”
Me: “OK. Then I’ll present a chain of logic that I expect you won’t agree with, but I would be interested to hear where you believe the logic breaks down. I’m referring to public + private net debt.
1. Each year net debtors need to pay interest to net creditors.
2. They need to do this from their earnings, or by increasing their debt.
3. Earnings of net debtors are a portion of GDP. Only a portion of these earnings can go to debt service, because net debtors need also to consume.
4. Therefore if interest payments were to exceed a certain portion of GDP, debt would start to grow unsustainably – i.e. would need to be resolved eventually via default.
5. Therefore if the debt to GDP ratio is continually rising, eventually the only way for that to be sustained is via a continually decreasing average market interest rate.
6. In that case a situation would eventually be reached where the interest rate structure is very flat. In fact if it went on ad infinitum, the average market interest rate across all durations and types would approach zero.
7. This would cause the credit pricing mechanism in the economy to become severely impaired.
8. It would be impossible to maintain economic health in this situation.”
You: “”5. Therefore if the debt to GDP ratio is continually rising, eventually the only way for that to be sustained is via a continually decreasing average market interest rate.”
You lost me here. I’d expect too much borrowing to lead to higher rates, and eventually default.”
Me: “I agree, a higher debt to GDP ratio (too much borrowing) implies a higher ratio of defaulting debt at some point. My point is that very high ratios of debt to GDP, especially when rates have been kept artificially low (staving off defaults), indicate a danger of upcoming system-side simultaneous defaults. Given you seem to agree that too much borrowing implies a higher chance of default, why don’t you think that this can apply systemically?”
You: “Paul, I don’t follow. I agree that too much borrowing can make a large bout of defaults more likely. As I’ve indicated many times, I favor numerous public policy changes to discourage debt.”
Then why wouldn’t you look at the debt to GDP ratio as indicator of the need for such policies, and as a measure of how successful such policies were?
6. July 2012 at 11:26
Scott —
That wouldn’t shock me, local corporatism is the hardest kind to root out from either party. OTOH, some of these things go down in flames when the Tea Party gets wind of them — Boehner has been embarassed by them more than once! And they don’t seem to be flagging.
I worry a lot more about persuading the GOP to go along with NGDPLT than about their fiscal policy. Monetary policy is harder to understand and rewarding debtors goes against their moral instincts. But Romney’s very clever and works very hard to understand complex economic issues, and he will want to be re-elected…
7. July 2012 at 08:12
Paul, Because I have no idea what the proper ratio is. I focus on eliminating government policies that bias us toward to much debt, let the market decide what’s appropriate.
TallDave, Today Tyler Cowen has a post showing Romney and Ryan coming out againt Medicare cuts. The evil Dems are trying to reduce spending on entitlements that go to GOP voters!
8. July 2012 at 00:17
Scott,
I asked: “Do you think the debt to GDP ratio can increase forever?”
You replied: “Forever’s a long time. I’d have to say no; after 837,455 years something weird would happen.”
Me: “I will assume from this that you don’t believe the debt to GDP ratio is useful as a measure of economic health. Is that a fair interpretation?”
You: “Yes”
Me: “OK. Then I’ll present a chain of logic that I expect you won’t agree with, but I would be interested to hear where you believe the logic breaks down. I’m referring to public + private net debt.
1. Each year net debtors need to pay interest to net creditors.
2. They need to do this from their earnings, or by increasing their debt.
3. Earnings of net debtors are a portion of GDP. Only a portion of these earnings can go to debt service, because net debtors need also to consume.
4. Therefore if interest payments were to exceed a certain portion of GDP, debt would start to grow unsustainably – i.e. would need to be resolved eventually via default.
5. Therefore if the debt to GDP ratio is continually rising, eventually the only way for that to be sustained is via a continually decreasing average market interest rate.
6. In that case a situation would eventually be reached where the interest rate structure is very flat. In fact if it went on ad infinitum, the average market interest rate across all durations and types would approach zero.
7. This would cause the credit pricing mechanism in the economy to become severely impaired.
8. It would be impossible to maintain economic health in this situation.”
You: “”5. Therefore if the debt to GDP ratio is continually rising, eventually the only way for that to be sustained is via a continually decreasing average market interest rate.”
You lost me here. I’d expect too much borrowing to lead to higher rates, and eventually default.”
Me: “I agree, a higher debt to GDP ratio (too much borrowing) implies a higher ratio of defaulting debt at some point. My point is that very high ratios of debt to GDP, especially when rates have been kept artificially low (staving off defaults), indicate a danger of upcoming system-side simultaneous defaults. Given you seem to agree that too much borrowing implies a higher chance of default, why don’t you think that this can apply systemically?”
You: “Paul, I don’t follow. I agree that too much borrowing can make a large bout of defaults more likely. As I’ve indicated many times, I favor numerous public policy changes to discourage debt.”
Me: “Then why wouldn’t you look at the debt to GDP ratio as indicator of the need for such policies, and as a measure of how successful such policies were?”
You: “Because I have no idea what the proper ratio is. I focus on eliminating government policies that bias us toward to much debt, let the market decide what’s appropriate.”
I agree we should let the market decide, and remove as many government distortions as possible. However we need means by which to tell whether we have been successful in this.
As for many measures there is no proper value of the debt to GDP ratio. However the debt to GDP ratio is far higher than it has ever been. Isn’t this an indication that government policies over the last few decades have biased us toward too much debt?
12. July 2012 at 06:42
To the point about the equivalence of a tax on not having health care and a tax credit for having it. I agree they are equivalent from an economic standpoint which may raises an interesting constitutional question about tax credits.
A case can be made that a $1,000 tax for not having health insurance is a direct tax, a capitation, which is unconstitutional because it is not apportioned. The tax on not having health insurance is clearly a direct tax, it’s not an excise, tariff, or other indirect tax as it’s both unavoidable and collected directly from the citizen based on their existence. But it may not fall under the 16th amendments exception for income taxes because this tax is not triggered by having income. In which case it’s a direct tax which needs to be apportioned, but apportioning the health care tax would negate it’s function to incentive people.
Now the interesting part, if this is an unconstitutional direct tax and it is equivalent to a tax rebate, then aren’t the other tax rebates like the housing interest deduction, school debt interest deduction, etc. also unconstitutional direct taxes due to that equivalence?
Notice, this issue only arises if you are forced to accept the $1,000 payment is only a tax and not a penalty. If they federal government can penalize not having health insurance with a $1,000 fine, on commerce clause grounds, then it can surely penalize not financing a house. But that path has been ruled out by the ACA decision.
This may be one of the unintended consequences of the ACA ruling. I hope smarter people than me can figure this out, but I do wonder about the implications of the economic equivalence on all tax credit if a challenge to the health care tax is brought on the grounds that it is a direct tax.
29. September 2012 at 01:50
[…] Scott Sumner neatly summarizes the American political scene: As the core of the GOP moves south, it becomes more like a European-style conservative party””pro-big government, pro-cartels and regs that favor affluent people, and culturally conservative. Unfortunately our political system has no place for pro-free market and socially liberal people. The kind that read The Economist magazine. So they end up as independents. […]
26. February 2017 at 03:57
[…] “I get depressed reading many of the comments in my blog. People ranting about the Rothchilds. Complaining that I’m getting my hands dirty trying to make central bank policy a bit less bad, trying to help the millions of unemployed. They stand on the sidelines without a spot on mud on their clothing, insisting we need to destroy the central banks. Bring on mass liquiditation. Destroy everything and a new and more pure and more beautiful economy will rise from the ashes. Some are the very same people who suggest 9/11 was a CIA plot. It smells of the 1930s. God I hate ideologues.” http://www.themoneyillusion.com/?p=15116#comment-167080 […]