The Evil Empire is still ahead of us, but we’re gaining on ’em.

Here is David Frum from June 30th:

But if Krugman’s direct government expenditure is not a very good policy answer, his dire economic warning remains a haunting policy question. What can we do to accelerate economic growth and job creation? For those of us on the free-market side of the debate, the question is even more haunting: What’s our countervailing idea?

The on July 5th I said this in response:

I’ve recently noticed a lot of columns discussing the issue of economic stimulus.  When the articles are written by journalists, they almost never include any discussion of the pros and cons of additional monetary stimulus.  Here are examples by David Leonhardt, David Frum and Fareed Zakaria, but there are many more out there.

Leonhardt says we need more stimulus, and seems to think fiscal stimulus is the only option.  Zakaria sees the argument for more fiscal stimulus, but also asks how we can get corporations to do more with their cash hoards.  Frum is skeptical of Obama’s fiscal approach, but challenges his fellow conservatives to come up with alternatives:

And then David Frum on July 7th:

My own Republican Party is equally perplexed. It opposes more government spending. It wants the Bush tax cuts extended. But the Bush tax cuts are in place now — and they do not seem to have helped very much through these terrible two years.

I have a suggestion. I think we should overcome our inhibitions and rediscover the positive side of inflation. I know! I know! I’m a child of the 1970s too! I remember when menus came with little stickers affixed in a stack atop the original price. I remember crazed auction rooms where bidders scrambled to buy something, anything with their depreciating currency: paintings, suits of armor, Austro-Hungarian postage stamps.

But as awful as double-digit inflation was, single-digit deflation is worse. As triumphant as the victory over inflation was, we can’t always be re-fighting the last war.

This is a country deeply in debt. Inflation reduces the burden of debt — anonymously, impersonally, and across the board. I hope I don’t sound too nationalistic when I note that a lot of that debt is held by our Chinese friends. They ran huge trade surpluses with the United States when times were good. Time now for them to contribute a little back.

Nobody wants to see wheelbarrows of money at the grocery store. But 3 percent inflation? Four percent? There are worse things.

Three of four percent inflation?  That would be almost as bad as the Paul Volcker “golden age” of 1982-87.  I can’t imagine anything worse than that!  Seriously, I’d like to think that he read my call for 3.4% inflation (expectations) over the next 12 months, but more likely it was John Makin’s paper at the AEI.  That was a shot right into the Death Star of the Evil Empire.  Don’t lose hope, the truth always wins out in the long run.

PS:  Of course as a good post-modernist I must concede that the truth always wins out in the long run precisely because society defines ‘truth’ as that which wins out in the long run.  Can you think of any exceptions?


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26 Responses to “The Evil Empire is still ahead of us, but we’re gaining on ’em.”

  1. Gravatar of coray coray
    10. July 2010 at 09:11

    Then postmodernism is untrue, for in no society has it “won out in the long run.”

  2. Gravatar of TGGP TGGP
    10. July 2010 at 10:47

    We are never in the long run, only the short run. Alternatively, the present is part of the long run of the past. You believe in a truth independent of (and contrary to) the present consensus, so you cannot be a thorough-going post-modernist.

  3. Gravatar of Benjamin Cole Benjamin Cole
    10. July 2010 at 11:44

    The more I read Scott Sumner, the more impressed I am.
    Great stuff–yes, now we are cowering in front of 3 percent inflation, although even 3 percent inflation is about as likely as the Cubs wining the World Series.
    Anyone who suggests that any inflation is okay is the Neville Chamberlain of the financial scene.

  4. Gravatar of Doc Merlin Doc Merlin
    10. July 2010 at 12:04

    I just wish people would stop thinking in terms of inflation and inflation targets. Prices are only a useful signal to market participants in competition to non participants it isn’t useful, its better to think in terms of P*Y or some other flow.

    cue postmodernism:
    We don’t seem to believe Scott is a post modernist, so he isn’t.
    end postmodernism

  5. Gravatar of Jon Jon
    10. July 2010 at 14:21

    “This is a country deeply in debt. Inflation reduces the burden of debt “” anonymously, impersonally, and across the board. I hope I don’t sound too nationalistic when I note that a lot of that debt is held by our Chinese friends.”

    Yes, an unexpected inflation does. So the inflation has to keep ratcheting up surprisingly, but then ceases to be a surprise and expectations become of an accelerating inflation, and at each step it becomes more and more painful to reset expectations.

    No thanks.

  6. Gravatar of Benjamin Cole Benjamin Cole
    10. July 2010 at 16:06

    Jon-
    Well, no one wants escalating inflation, or growing national federal and trade deficits,

    But, if we bring the federal budget roughly into balance, and then run 4 percent inflation a year, we wipe out half of national debt in roughly 10 years.

    Or, we could pay bone-crushing taxes, and pay down debt over the same period,

    Deflation would be death–the debt would grow, and most property owners would eventually default, slaughtering our financial system.

  7. Gravatar of Philo Philo
    10. July 2010 at 17:06

    “Of course as a good post-modernist I must concede that the truth always wins out in the long run precisely because society defines ‘truth’ as that which wins out in the long run. Can you think of any exceptions?”

    You’re tempting me, but I swore I wouldn’t yield. No comment!

  8. Gravatar of Jim Glass Jim Glass
    10. July 2010 at 17:38

    “if we bring the federal budget roughly into balance, and then run 4 percent inflation a year, we wipe out half of national debt in roughly 10 years.”

    Except the average maturity of the existing debt is four years, and when it gets rolled over an inflation premium will be added to it.

    (Plus we will still be running deficits for sure, and the inflation premium will be added to all that new borrowing too.)

    Lenders aren’t entirely stupid. Once the motive for inflation becomes “slash the debt” (“screw lenders”) they hike rates by enough to not only cover the inflation increase to date but also to protect themselves from further possible inflation increases generated along these lines.

    That inflation premium can last for years, see the 1980s.

    Despite how popular the notion is, historical data show that the strategy of “inflating away debt” is
    more myth than reality
    .

  9. Gravatar of Jim Glass Jim Glass
    10. July 2010 at 17:59

    Richmond Fed President concerned about inflation, reports the WSJ.

    ~~~
    The recent spate of weaker economic data doesn’t mean the U.S. recovery is faltering, and the Federal Reserve continues to get closer to the time when it will need to raise interest rates … Federal Reserve Bank of Richmond President Jeffrey Lacker told Dow Jones Newswire…

    Lacker believes, like many other Fed officials, that the economy doesn’t yet need fresh support from the Fed. He put very low odds the Fed will come back into the market to buy mortgages, saying “I don’t think this is the time to shift gears again” and “we are a long way a ways from needing to think about starting up asset purchases again.”

    Rate hikes aren’t imminent, but they are getting closer, the official said. “I have been saying that I am waiting for the time when growth is strong enough and well enough established that it will be clear we need higher rates,” Lacker said. “I don’t think we are there yet,” although he also said “we are getting to a time period where it’s going to be a more and more cogent question” as to when tighter policy will be required.

    Lacker expects the economy to continue to grow around its trend-like pace of 2 3/4% to 3%, and said growth could accelerate in the future…

    The official said the high unemployment rate “” it was 9.5% in June “” is hard to read right now given uncertainties about labor participant rates…

    Lacker said the Fed must be vigilant about inflation, and that he expects the core inflation rate to gradually drift back toward 1.5%, as he noted the relatively stability of inflation expectations.

    He warned “we are capable of causing inflation when the unemployment rate is relatively elevated,” so the Fed must continue to monitor the situation closely…
    ~~~~

    “What is truth?” — anonymous central banker.

  10. Gravatar of johnleemk johnleemk
    10. July 2010 at 20:26

    Jon:

    Which is why the monetary authority should target an inflation rate or NGDP growth level, not interest rates. When expectations seem to be getting out of hand, the monetary authority should ratchet things back. It’s not like we don’t understand how to stop inflation in an age of fiat money — we just stop printing it and start taking some of it out of circulation.

    I can’t remember where I heard this, but the other day someone put it as such: hyperinflation is a fiscal phenomenon. Hyperinflation only happens when the government clearly cannot pay its debts, and issues more money to cover those debts anyway.

    I am skeptical of the potential to inflate a lot of the debt away, but I’m confident at least some debt can be reduced — and it’s still a lot better than *adding* to that debt with fiscal stimulus. The US is not in danger of defaulting on its loans, not now anyway — and since the monetary authority is independent of the government, hyperinflation is exceedingly unlikely.

    (Unrelated tangent: New Zealand and Australia have an interesting approach to the relationship between the government and the monetary authority; they effectively sign an agreement binding the monetary authority to hit a particular target, and this agreement can be revised as necessary. Australia presently targets inflation of 2-3%, and this target has been unchanged since 1993. New Zealand’s last Policy Targets Agreement, concluded in 2008, targets inflation of 1 to 3%. Thought this might be interesting since Scott’s talked up Australia quite a bit in the past.)

    Overall I think the problem is it’s hard to sell the public on the benefits of inflation. How can you tell people that making their stock of money worth less is better for them? That’s why Frum had to explain it in terms of one of the less (IMO) potent benefits of monetary stimulus. The other way to explain it, of course (as he tried also) is to paint it in terms of avoiding deflation’s pain. But intuitively, why would making people’s stock of money worth more be a bad thing? Selling the public on this is hard.

  11. Gravatar of Lorenzo from Oz Lorenzo from Oz
    10. July 2010 at 22:13

    “Winning out” is not independent of the nature of reality.

  12. Gravatar of Mario Rizzo Mario Rizzo
    11. July 2010 at 08:17

    I thought the lesson of the 1970s inflation was that only unexpected inflation “helps” employment in the short-term. So that if you announce credibly 3.4% (or whatever) you are already behind. I also think that whatever is targeted will be a lower bound under today’s political circumstances. In general, I am against trying to cheat bondholders by giving them more inflation than they expected when they bought the bonds.

  13. Gravatar of scott sumner scott sumner
    11. July 2010 at 09:04

    Coray, No, I said it will win out, not that it already has. My economic ideas haven’t won out yet either, but they will.

    TGGP; You said;

    “You believe in a truth independent of (and contrary to) the present consensus, so you cannot be a thorough-going post-modernist.”

    No, no, no. I believe truth is what is considered true. I am simply predicting that in the future something else will be considered true. Today, X is regarded as true, but I predict that in the future Y will be considered true. Read Richard Rorty, he says the same thing.

    Benjamin and Doc Merlin, My first choice is steady 5% NGDP growth, level targeting, but since everyone else talks about inflation, I must talk that language.

    Jon, But it would only be offsetting the undeserved gain they got from disinflation. I don’t know about Frum, but I am not advocating we depart from our long run 2% rate. I just want to catch up to it.

    People failed to notice a odd contradiction in Frum’s two posts. First he says he can’t think of a way to increase AD, which means ipso facto he can’t think of a way to create inflation. Then he says “why don’t we just inflate?” Am I the only one who sees that as being very peculiar?

    Philo, Sorry for tempting you.

    Jim Glass, That’s a good point.

    Jim Glass #2, Those comments seem very bizarre to me. What does he thing the Fed’s goal is? He seems to suggest 1.5% inflation, but if so, why did the Fed cut rates in 2007 when inflation was far above 1.5%, indeed far above 2%? I really have no idea where these guys are coming from.

    johnleemk, Those are good points; it is much easier to sell the public on 5% NGDP growth, because that means people’s incomes will be rising.

    Lorenzo, You said;

    “”Winning out” is not independent of the nature of reality.”

    Yes, but ‘truth’ and ‘reality’ are totally different concepts. Truth is a human construct. A complement we pay to ideas. Reality would still be out there even if no life had ever existed.

  14. Gravatar of Richard H. Serlin Richard H. Serlin
    11. July 2010 at 09:27

    The laws of physics. It doesn’t matter what people think in the long run, gravity and chemicals, etc. will still behave the same even if people think differently.

  15. Gravatar of OGT OGT
    11. July 2010 at 10:48

    Sumner- So if your ideas don’t win out, you will manifestly have been wrong?

    Benjamin Cole, nothing is less likely than the Cubs winning the World Series.

  16. Gravatar of Morgan Warstler Morgan Warstler
    11. July 2010 at 17:24

    Which is of course, the danger here. If we gain a Republican majority, Obama makes like Clinton, and we see the economy begin to recover without the Fed targeting NGDP, what is Scott’s response? That it would be recovering faster with 3.4% inflation?

  17. Gravatar of Bill Woolsey Bill Woolsey
    11. July 2010 at 18:37

    Scott:

    See Rizzo’s comment. You just can’t “talk about inflation.”

    By the way, a return to the 5% growth path for money expenditures on year from now is something like 11% growth money expenditures for the year.

  18. Gravatar of Philo Philo
    11. July 2010 at 20:02

    @ Mario Rizzo

    “In general, I am against trying to cheat bondholders by giving them more inflation than they expected when they bought the bonds.” How do you feel about goosing bondholders by giving them unexpected disinflation?

  19. Gravatar of johnleemk johnleemk
    11. July 2010 at 21:37

    Scott,

    So could one say that the central bank’s job is to ensure people’s nominal incomes grow 5% annually on average over the long run?

  20. Gravatar of More Confirmation That Firing Frum Was the Right Thing to Do More Confirmation That Firing Frum Was the Right Thing to Do
    12. July 2010 at 04:24

    […] was reading Scott Sumner’s blog when I came across this quotation from David Frum: The Obama administration is fretting over […]

  21. Gravatar of scott sumner scott sumner
    12. July 2010 at 09:32

    Mario Rizzo, No, the lesson of the 1970s is that inflation doesn’t matter once it is incorporated into wage contracts. Right now wage contracts don’t incorporated 3.4% inflation expectations, so achieving that inflation would boost growth.

    Richard, “The Laws of Physics” could mean one of two things.

    1. Actual models developed by humans, and then later almost always replaced by better models.

    2. Some sort of underlying reality.

    The term “true” is a human construct, an opinion about the validity of statements.

    OGT, You asked:

    “Sumner- So if your ideas don’t win out, you will manifestly have been wrong?”

    I am not quite sure what you mean by “manifestly.” If my ideas don’t win out, then in the long run they won’t be regarded as true. I accept that as a real possibility, although I hope for the opposite.

    Morgan, You asked:

    “Which is of course, the danger here. If we gain a Republican majority, Obama makes like Clinton, and we see the economy begin to recover without the Fed targeting NGDP, what is Scott’s response? That it would be recovering faster with 3.4% inflation?”

    My response is that the recession itself (after August 2008) was avoidable.

    Bill, See my response to Mario.

    I agree about 11% NGDP growth, but think it is too late to go all the way back. Our economy has already begun adjusting to the lower NGDP growth. I’d be happy with about 8% or 9% growth.

    johnleemk, You asked:

    So could one say that the central bank’s job is to ensure people’s nominal incomes grow 5% annually on average over the long run?”

    No, for two reasons.

    1. Population growth means individual incomes would grow at about 4% on average.

    2. It is just an average, each person would see a different growth rate depending on all sorts of special factors.

  22. Gravatar of Jon Jon
    12. July 2010 at 17:29

    Scott: He seems to be making a general claim that inflation bails-out debtors it does not. If he wants to make the specific claim that everyone should get the inflation they were expecting that’s a different matter.

    Until he can put the point with the necessarily delicacy, he’s a dangerous nutcase, not least because even if he gets the delicacy, his phrasing seems blunt enough to encourage those who don’t get it.

    Witness some of the responses to my remark here. For instance, Ben mentions how convenient it would be have four percent inflation going forward and wipe-out the national debt.

    uh-huh. scary, scary stuff. maybe someone should tell the treasury first that they really want to be selling 30 or 40 year bonds!

  23. Gravatar of scott sumner scott sumner
    13. July 2010 at 08:18

    Jon, Those are good points. I may revisit this quotation later.

  24. Gravatar of TheMoneyIllusion » A world gone mad TheMoneyIllusion » A world gone mad
    14. July 2010 at 08:53

    […] week I did a post on David Frum.  To briefly summarize, he noted that the economy seemed to need stimulus, but he was skeptical of […]

  25. Gravatar of Andy Harless Andy Harless
    5. August 2010 at 09:26

    I will note that I mentioned inflation as a solution in a comment to David Frum’s June 30th post. However, the argument that he gives in the quoted section is different from the one that I made in the comment, so I won’t assume that he got the idea from me either 🙂

  26. Gravatar of ssumner ssumner
    6. August 2010 at 05:57

    Thanks Andy. BTW, I don’t know if you know this, but I did several posts a while back discussing some of your posts.

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