Then and now

Then:  In the 1971-81 period NGDP grew at 11%, causing high inflation.  I favored much lower NGDP growth, and thought easy money was to blame.  The vast majority of economists disagreed with me and the other monetarists.  “Only those crazy Chicago economists think monetary policy determines inflation.”  Inflation is caused by unions, and deficit spending, and low productivity growth in services, and crop failures and oil shocks.  In any case, interest rates are high so it can’t be tight loose money.  That’s what I kept hearing from economists who didn’t have their heads in the clouds like us monetarists, who looked at the “real world.”

Now:  Over the last 4 years NGDP growth has averaged 2%, lowest since the early 1930s.  I favor much faster NGDP growth, and blame tight money.  The vast majority of economists disagree with me.  “Only those crazy market monetarists think monetary policy explains the 2% NGDP growth since 2008.”  It’s the collapse in housing, the tighter lending standards, the hoarding of ERs, the cutbacks in state and local spending, fear of Obamacare tax increases.  In any case interest rates are low so it can’t be tight money.

Today we know exactly who was right about the 1970s, but it remains to be seen who will be shown to be right about the 2008-2012 period. However things are moving our way, bit by bit.

PS.  Didn’t Gloria Swanson say “I’m still big, it’s the movies that have gotten small?”  We market monetarists are still aiming for 5%, it’s the rest of the profession that’s gone from being inflation mongers to inflation nutters.

PPS.  Lots of “sensible” economists thought I was a bit nuts in arguing that unemployment might well be 8.1% right now even if the Obama stimulus had never passed.  What sort of figure do they think is more plausible?  Perhaps the 5.9% figure that Obama’s experts predicted without the stimulus?

Let’s face facts.  We are being told a slow recovery was inevitable for one reason, and one reason only.  Because the actual recovery has been very slow.

PPS.  I got the graph from this Joe Weisenthal post, which is quite good.

HT:  Saturos



19 Responses to “Then and now”

  1. Gravatar of marcus nunes marcus nunes
    2. October 2012 at 14:14

    I think the last two graphs in this post provide a good summary for your argument:

  2. Gravatar of Major_Freedom Major_Freedom
    2. October 2012 at 14:54

    THEN: The vast majority of economists believed that as long as monetary inflation was sufficient, persistent unemployment was impossible. Some economists however, including Hayek, held that there is no causal relationship between the two.

    NOW: NGDP has been growing at above 4% annually since late 2009, and yet unemployment remains persistently high, and the reported statistic is remaining stable instead of rising in part because of many workers no longer even looking for work, which means the statement “employment has not improved” a statement not out of bounds (since the inflation and NGDP growth is preventing sufficient labor reallocation needed for true recovery).

    Today we know who was right about the 1970s. It remains to be seen who will be right about 2008-2012. Bit by bit however, things are moving my way.

  3. Gravatar of Adam Adam
    2. October 2012 at 15:03

    I think you mean “loose” instead of “tight” in the second to last sentence of the first paragraph.

  4. Gravatar of Jake Jake
    2. October 2012 at 15:04

    From the first paragraph…

    “In any case, interest rates are high so it can’t be tight money.”

    Scott, did you mean to say loose or easy money here? I don’t think the statement makes sense the way it is written.

  5. Gravatar of Farid Elwailly Farid Elwailly
    2. October 2012 at 15:05

    “In any case, interest rates are high so it can’t be tight money”

    Don’t you mean:

    “In any case, interest rates are high so it can’t be easy money”

  6. Gravatar of Nick Rowe Nick Rowe
    2. October 2012 at 15:57

    Scott: that is exactly my memory of the (early) 1970’s too. There were dozens of “explanations” of the high inflation. But you forgot the disappearance of anchovies off the coast of Peru (this was before we really understood el nino). The past really was a different world. None of you young (under 50) people would recognise it.

  7. Gravatar of ssumner ssumner
    2. October 2012 at 16:28

    Marcus, Excellent post.

    Adam and Jake and Farid, Thanks, I’m getting increasingly senile.

    Nick, Yes, I just turned 57.

  8. Gravatar of Bob Murphy Bob Murphy
    2. October 2012 at 16:51

    You are a sly dog, Sumner, trying to use the stagflation of the 1970s as a trump card. (I’m not being sarcastic, I love this post in its audacity.)

    I’m being serious: Scott, did the excessive NGDP growth of the 1970s have any real effects? I assume you think the sluggish RGDP growth and above-normal unemployment was because of supply-side shocks. But if the Fed had kept stable NGDP growth, would things have been better than they were in reality?

    (And if you say, “Yes Bob, because Nixon’s price controls would have had less punch with lower price inflation,” that’s fine, but can you clarify if there are any other possibilities? Like, absent explicit government nominal price-fixing, can real shocks be made worse through excessive NGDP growth, the way you think they can be amplified through deficient NGDP growth?)

  9. Gravatar of ssumner ssumner
    2. October 2012 at 16:53

    Bob, Yes, excessive NGDP growth raises the real tax on capital, and slows economic growth (modestly).

  10. Gravatar of ssumner ssumner
    2. October 2012 at 16:54

    And dogs aren’t sly, cats are.

  11. Gravatar of Major_Freedom Major_Freedom
    2. October 2012 at 18:32


    Bob, Yes, excessive NGDP growth raises the real tax on capital, and slows economic growth (modestly).

    This is another “sly” comment. You used the word “excessive.” OK, so if “excessive” NGDP growth raises the real tax on capital, does that mean you believe there is a rate of monetary inflation (or NGDP growth) that doesn’t raise the tax on capital at all? Which is to say, from what baseline is taxes on capital raised from?

    If >5% NGDP growth “raises” real taxes on capital, then doesn’t that imply any NGDP growth generates taxes on real capital? If not, why not?


    Are you aware of any other effect that inflation has on economic growth, besides real tax on capital? For example, the effects that inflation from a non-market institution has on economic calculation by market actors?

    Suppose I wanted to know the time horizons that other market actors have in terms consumption and savings preferences, so that I can know how capital intensive my projects can be and how long I can sustain them to completion. Given that the Fed is purchasing securities from the banking system, which has temporarily lowered interest rates from where they otherwise would be in a free market, and are now at extremely low levels, how am I supposed to find out the answer to my question? If I have to use means other than prevailing interest rates, in effect making a guess, is it not possible that my guess would be wrong? Is it not possible that most investors would guess wrong, because they too are not able to observe the answer to this question in the price system? Suppose most investors today are making wrong guesses. Wouldn’t this require widespread corrections at some point in the future? Or are these decision errors minor? Or not possible because EMH somehow claims market actors can acquire empirical knowledge without observation?

  12. Gravatar of Bob Murphy Bob Murphy
    2. October 2012 at 18:52

    Scott sorry to be a pest: In a totally free market where the government only levies a $10 head tax in order to fund the military to repel Bangladeshi invasion forces, would excessive NGDP growth have real effects, in your opinion? I think I totally get why you don’t like too-low NGDP growth, but I’m trying to understand why you agree with me that the excessive price inflation of the 1970s was bad.

    Let me give you an idea of where I’m coming from. I would say that if people today had very little idea if price inflation would be 10% versus 100% in the year 2020, that that would have “real” consequences. It would be better if there were more predictability in the purchasing power of money.

    Now I understand that your preferred policy would avoid such swings and would in fact deliver such predictability. But I want to know if you agree with me that such unpredictability would be bad, and if so, why?

  13. Gravatar of Bob Murphy Bob Murphy
    2. October 2012 at 18:54

    (And if you don’t want to be a sly dog, OK, you can be a bird dog. As a 57-year-old you appreciate the Everly Brothers reference I hope.)

  14. Gravatar of Saturos Saturos
    3. October 2012 at 04:08

    Bob, I’m sure Scott would admit that an unpredictable price-level destroys calculation even if all debts are indexed. Plus at really high inflation rates shoeleather costs make money worthless as a medium of exchange.

  15. Gravatar of ssumner ssumner
    3. October 2012 at 05:12

    Bob, The real effects (menu costs) would be so tiny as to be not worth worrying about, unless you got extremely high NGDP growth.

    That’s for expected NGDP growth (or inflation), trend rates. Obviously unexpected or volatile growth rates cause additional problems because of sticky wages, as Saturos says.

    I’d be more likely to pick up Bob Dylan references.

  16. Gravatar of Saturos Saturos
    4. October 2012 at 00:39

    Scott, did you like Dylan’s new record? (I haven’t heard it yet, but the pretentious music review blogs I frequent all panned it. So, since you have no “taste”, perhaps you did?)

    I think a volatile price level ruins calculation even when everything is flexible, as Lucas explained. And Mankiw states the stylized fact that, for reasons unknown, high inflation (or rather accelerating inflation) tends to become volatile inflation (I think it has to do with the money multiplier, but I’m not sure). And you can restate that in terms of NGDP, sure, but it’s the price level that matters to me when I go to the supermarket (and I don’t think I have money illusion – though I’m happy to believe that everyone else does. It’s the transmission mechanism from money illusion to wage stickiness that confuses me, but I’m happy to believe the data that wages are sticky anyway.).

  17. Gravatar of Saturos Saturos
    4. October 2012 at 01:35

    Nick, I got a glimpse of the world you old people mentally inhabited by studying under teachers and professors who still think like that. (I still remember trying to convince my high-school economics teacher that Friedman’s dictum “always and everywhere” was obviously true.) Plus; everytime I talk to my parents. (But then they came from a really different world…)

  18. Gravatar of ssumner ssumner
    4. October 2012 at 06:05

    Saturos, There real no material difference in the volatility of grocery store prices under inflation and NGDP targeting. Indeed there are cases were most prices are more stable under NGDP targeting. The biggest difference between the two occurs with big oil shocks. If oil doubles in price would you rather have all other prices unchanged (roughly NGDP targeting), or all other prices fall at differing rates that average 2% or 3% (CPI targeting?)

    I’ve just begun to listen to it. In general I prefer his mid-1960s CDs. The Live at Royal Albert Hall CD is my favorite.

  19. Gravatar of Saturos Saturos
    4. October 2012 at 06:22

    Scott, I absolutely don’t disagree, I just think that in this case it’s more a cost of volatile inflation per se rather than NGDP growth (a rarity, I agree). Though I agree that with a big oil shock it’s clear enough that oil is scarcer in real terms, and it wouldn’t be worth it just to maintain the expected price level to contract spending on other sectors. And yes you’re right that such contraction would further distort relative prices, as Lars Christensen and George Selgin point out.

    I’ll take your recommendation on the live CD, though I have to admit that the only Dylan I really like is Highway 61 Revisited (which has got to be one of the top 10 popular music albums ever.)

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