We’re in safe hands with the next generation

One of the most aggravating defenses of the current monetary policy insanity is that we “can’t let the inflation genie out of the bottle.”  Or the argument that “the 1970s shows it’s easy to let inflation get out of control, but hard to get it back under control.”  What a bunch of nonsense!

I just checked on St Louis Fred, and the Fed cut rates no less than 19 times between 1967 and 1980, which is the core of the Great Inflation.  Not a single one of those rates cuts was justified, not even close.  The Fed knew very well that NGDP growth was running about 8% in the late 1960s, which is way too high, and closer to 11% in the 1971 to 1981 period, which is completely insane.  And despite those outrageous rates of NGDP growth, it cut rates again and again and again and again and again.  Nineteen times.  You think that was some sort of mistake?  Seriously?  What sort of inflation would you expect with 11% NGDP growth?

And don’t tell me that some academic showed that the rate cuts were justified according to some model due to data lags.  If that’s what the model says, then the model is worthless.  I was there, there was nothing “accidental” about the Great Inflation.

I understand why younger bloggers like Matt Yglesias lash out at the conservatism of central bankers.  But the sort of people who run the Fed today are no different from those who engineered the Great Inflation.  Back in the late 1960 and 1970s they were doing exactly what the consensus of economists wanted done.  The problem was the consensus was misguided (“Money is too easy?  What do you mean?  Rates are high.  In any case, unions are causing the inflation.”)  And the Fed today is doing exactly what the consensus of economists wants them to do (“Tight money?  What are you talking about?  Rates are ultra low.  In any case deleveraging is causing the slow growth.”)

One thing I like about the younger generation is that they see right through phony self-serving justifications for failure.  My daughter sees me as I am, not as I wish I were.  She sees when I’m being a self-serving phony. Evan Soltas found this old Keynes quotation from 1932:

“In the United States it is almost inconceivable what rubbish a public man has to utter to-day if he is to keep respectable. Serious and sensible bankers, who as men of common sense are trying to do what they can to stem the tide of liquidation and to stimulate the forces of expansion, have to go about assuring the world of their conviction that there is no serious risk of inflation, when what they really mean is that they cannot yet see good enough grounds for daring to hope for it.”

.   .   .

The extent to which this quote feels contemporary both amazes and disturbs me.

Younger people who are paying attention recognize the insanity of what’s going on right now.  Yichuan Wang, another high school blogger is also producing great stuff:

These notes about interest rates really only work in a futures targeting regime, in which we are allowed volatility in interest rates so they can show market expectations. This is just another reason why interest rate targeting is not optimal; it suppresses a key source of information for both public and private agents. High interest rates won’t be confused for “tight money” if the interest rate is determined by the market.
This post should remind us that Market Monetarism is a world of non-linear causality and counter-intuitive movements in both expectations and interest rates. Except they wouldn’t be counter-intuitive and these arguments would be self evident if policy actually targeted the level of nominal GDP.  Alas, the Fed does not. A great shame, for both our learning of intuition and suffering in this nation.

I’m greatly heartened by the fact that the smartest high school bloggers seem sympathetic to market monetarist ideas.  The next generation will do fine; it’s my fellow baby boomers that worry me.

PS.  I’m beginning to think I made a mistake converting to Apple.  I don’t doubt the product is fine, but I’m not good at learning new languages.  I’ve found myself “petting” my mouse at work (where I still have a PC) foolishly expecting it to scroll.  At an age where I’m losing several IQ points a decade, can I really afford to devote so many brain neurons to knowing two different computer languages?  I’ll continue to read all the comments, but won’t have time to answer them all.

Update:  Evan got his Keynes quote from a link in this excellent Bruce Bartlett column.


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30 Responses to “We’re in safe hands with the next generation”

  1. Gravatar of John hall John hall
    13. July 2012 at 06:07

    Two different computer operating systems. Language would be like python vs. java. I’m young and I still frequently mix up the syntax for R vs. Matlab.

  2. Gravatar of marcus nunes marcus nunes
    13. July 2012 at 06:16

    The “old guys” should take a look at Australia. Growth there has just reached ‘drinking age’. It´s been a record(?)21 years of continuous growth!
    http://thefaintofheart.wordpress.com/2012/07/13/australian-growth-has-just-reached-drinking-age/

  3. Gravatar of Jonathan M.F. Catalán Jonathan M.F. Catalán
    13. July 2012 at 07:38

    Scott,

    There are academic arguments against NGDP targeting, but has there really been dialogue between market monetarists and those opposed to NGDP targeting (specifically, someone like the Austrians)? It seems to me like there has. Is it because opponents haven’t advanced the debate or is it because market monetarists generally aren’t interested in debating (given that there is a wider body of economists out there than one small segment of the heterodox community)?

  4. Gravatar of ssumner ssumner
    13. July 2012 at 08:07

    Thanks Marcus, It’s good to hear one country gets it.

    Jonathan, Obviously we focus on mainstream economists, as they have the most influence. But I’m happy to debate anyone. I’ve occasionally responded to Robert Murphy, for instance. It’s not clear to me that Austrians oppose NGDP targeting. Hayek supported it, and I think people like Larry White are sympathetic. A new Reason magazine article has a long discussion of Hayek’s support.

  5. Gravatar of Saturos Saturos
    13. July 2012 at 08:09

    Scott Sumner Is Holden Caulfield.

  6. Gravatar of Morgan Warstler Morgan Warstler
    13. July 2012 at 08:42

    Matty will never support NGDLT, but until he goes whole hog into libertarian thinking.

    To him right now it is a good way to get more stimulus for Obama, nothing else. I can’t say this enough, he is, still in his youth, a fair weather friend.

    Evan, whatever else you do… you need to join the Princeton Debate team (APDA), right now a guy I came through APDA with from there (Ted Cruz) is beating Dewherst in the run off for TX Sen.

    Go Ted!

    Note: Austan Goolsbee came through the Yale team with us.

  7. Gravatar of Major_Freedom Major_Freedom
    13. July 2012 at 09:02

    ssumner:

    I just checked on St Louis Fred, and the Fed cut rates no less than 19 times between 1967 and 1980, which is the core of the Great Inflation. Not a single one of those rates cuts was justified, not even close.

    Justified according to what?

    The Fed knew very well that NGDP growth was running about 8% in the late 1960s, which is way too high, and closer to 11% in the 1971 to 1981 period, which is completely insane.

    It’s always amusing to see that it never occurs to NGDP targeting believers that there is a total absence of a scientific foundation and of logical rigor in their worldview.

    ————

    We’re told “We can’t have counterfeiters!” which is to apply to each individual in the country. We’re also told “We can’t have hyperinflation!” which is to apply to society as a whole. But somewhere in the middle, the complete opposite of the small and large statements becomes perfectly true: “We can have 5% NGDP growth controlled by a state!”

    11% is “completely insane”? Why? WHY is 11% “completely insane” (which means 8% or so is only slightly insane), and why is 5% the cat’s meow? Where exactly did inflation go from being “insane”, to being “required”? We’re never told this. We’re just supposed to take Sumner’s word for it. How scientific!

    ———–

    Suppose there are 100 NGDP targeting believers, and for now they each subjectively believe in a different “optimal” rate. What will be the scientific foundation for them to decide who has the right rate and who has the wrong rate, if any of them do have the right rate?

    If you find yourself tending towards something like majority opinion, voting, then that’s not scientific. Physicists don’t decide the fine structure constant by majority voting. They decide by utilizing scientific methods. Majority voting can only result in the more assertive of the 100 intimidating and intellectually brow beating the remaining individuals into “agreement”.

    If you find yourself without an objective foundation from which to decide who is right and who is wrong, and that the optimal rate will be a function of who can say “Your desired rate is insane!” louder than the others, or who has the most political pull among them, i.e. who has the closest access to state guns, then shouldn’t that clue you people in to the obvious fact that what you’re doing is not economic science at all, but rather political strategizing and posturing?

    Where are the economic scientists in NGDP targeting theory? Where are there the economic philosophers of science who can show the objective scientific grounding behind 5%?

    —————-

    I truly am saddened at the utter intellectual superficiality of NGDP targeting theory. There is no objective grounding from which NGDP theorists can find out why 5% is perfect and why 11% is insane. It’s all just subjective shoulder pushing and intellectual intimidation. How else are we to take Sumner’s hysterical “11% NGDP is completely insane” scientific judgment, haha? Using these loaded words is designed solely to intimidate everyone into not thinking 11% is the “correct” rate.

    Sumner can’t use economic science to argue against 11%, because he LACKS such a foundation. He can only run around screaming and kicking until everyone agrees with 5% just to shut him up.

  8. Gravatar of Steve Steve
    13. July 2012 at 09:05

    The Keynes quote was in the Atlantic several years ago, and has been circulating ever since.

    I’m looking forward to your depression manuscript. I started perusing newspapers from 1933 at random and found the below articles. Imagine if I read all the papers, and selected the most salient quotes, rather than just random ones!!!

    ————–

    Berkeley Daily Gazette, October 31, 1933 PAGE 1

    SHOWDOWN ON MONETARY POLICY SEEN

    Another showdown on the nation’s monetary policy was foreseen in official circles today as a result of confusion over President Roosevelt’s gold program.

    One of the nation’s foremost economists told the United Press the gold purchases apparently were the Administration’s final monetary plans before recourse to currency expansion. He described the purchases as “a course over an uncharted sea, the outcome of which cannot be gauged in advance.”

    “If this does not work in raising domestic prices, the only alternative is the printing of money. Even this might not work in raising prices, unless the dollar was suddenly forced down to only a fraction of its present value and people lost confidence in the currency.”

    ——————–

    Berkeley Daily Gazette, October 28, 1933 PAGE 1

    CODES, TAXES DELAY RECOVERY, FEDERAL RESERVE CHARGES

    A spirited defense was made today by Administration spokesmen against a charge by the Federal Reserve Board that the application of codes and processing taxes had retarded industrial activity.

    Secretary of Agriculture Wallace countered the Board’s charge by blaming the recession on the industries themselves.

    Officials of the Reserve Board stood firm. They pointed out their statement was based on research and statistics.

    ——————————

  9. Gravatar of Doug M Doug M
    13. July 2012 at 09:19

    “”Tight money? What are you talking about? Rates are ultra low. In any case deleveraging is causing the slow growth.””

    Deleveraging IS tight money.

  10. Gravatar of SG SG
    13. July 2012 at 09:19

    Scott,

    Think about juggling mac and PC as a brain-enhancing logic puzzle. Some people do sudoku to stay sharp. You use a mac. 😀

  11. Gravatar of Doug M Doug M
    13. July 2012 at 09:20

    St. Louis Fred? You know him, too? Good guy, big Cardinals fan.

  12. Gravatar of Major_Freedom Major_Freedom
    13. July 2012 at 09:25

    Doug M:

    “”Tight money? What are you talking about? Rates are ultra low. In any case deleveraging is causing the slow growth.””

    Deleveraging IS tight money.

    Really? Individual borrowers and lenders are in the monetary policy game now too?

    Tight money typically refers to what the Fed is doing. I don’t think it makes sense to start calling me a money tightener for paying back or defaulting on a loan.

    If you do want to start calling me a money tightener, then I will say “You shall obey my Mount Olympus command because I have decided that money is too loose right now.”

    Scientifically prove me wrong without using the same foundation of personal subjective preference to show your work.

    Or, you know, you could realize “tight money” is subjective to begin with.

  13. Gravatar of Doug M Doug M
    13. July 2012 at 10:51

    Yes, deleveraging is tight money.

    Under the principles of fractional reserve banking, banks create money when they lend.

    People evaluate the return on investment of various potential projects vs. the cost of money to fund them. If opportunities are greater than the cost of money they lever-up. Contrariwise, If the cost of money is relatively high they de-lever.

    In targeting an interest rate, the Fed manipulates the cost of money.

  14. Gravatar of Jason Odegaard Jason Odegaard
    13. July 2012 at 11:01

    Major_Freedom,

    Hello again, I’m catching up with some of Scott’s posts. What I suspect Scott is doing by saying 5% is to set a stable nominal GDP growth rate. In the 1960’s and 1970’s it was becoming less stable.

    Why 5%? Perhaps that’s the average rate since the disinflation of the early 80’s after which we enjoyed greater price stability but still had stable nominal growth, which is all that monetary policy can influence. Since that 5% rate seemed to work well, return to that trend.

  15. Gravatar of TravisA TravisA
    13. July 2012 at 11:28

    Scott, regarding your computer issues: if you can’t return the computer, I suggest looking into Bootcamp, which allows you to run windows on your computer (Bootcamp should already be installed on your apple): http://support.apple.com/kb/HT4818#1

    You can buy Windows 7 and install it on the Apple. Windows 7 is a very nice operating system.

  16. Gravatar of JSeydl JSeydl
    13. July 2012 at 13:24

    Not everyone in your generation is a waste; Krugman and Dean Baker have done just fine. Younger bloggers (including me) have a lot to learn from the old Keynesians, as well as from the market monetarists.

  17. Gravatar of Benny Lava Benny Lava
    13. July 2012 at 17:10

    Scott,

    I wish I were so optimistic as you. I see you knaves occupying Wall Street and I lose faith.

    Also I am amused at your frustration with Mac OS. I had the same experience myself a few years ago. Where is the right click? And scroll wheel? How does anyone use this contraption?

  18. Gravatar of Greg Ransom Greg Ransom
    13. July 2012 at 17:14

    Unions can cause unemployment — that’s econ 101.

    And gov sector unions have done just that — with massive & unsustainable compensation increases given to the gov unions by the politicians which they elected & control in cities, counties and states across the country.

    And what do we see.

    We see gov unions securing continued compensation increases — made possible by firing newly hired gov workers, and by raising taxes, and by borrowing massive amounts of money.

    And we see the gov worker sector as one of the hardest hit sectors of employment.

    Gov sector worker compensation expectations in much of the country have hardly been touch even now much of the country, leading to masses of red ink, to hiring freezes, and to bankruptcies, etc.

    Macroeconomists need to look more than at toy math constructs and one or two aggregate variables to understand the expectations discoordination across time in the economic, eg in the compensation expectations of gov workers, and in the budgets of government entities.

    Long term unemployment is about 40% construction sector — and the rest gov sector & housing, transportation & finance related industries, ie all of them ’00 distorted economic sectors.

  19. Gravatar of Major_Freedom Major_Freedom
    13. July 2012 at 23:06

    I’m greatly heartened by the fact that the smartest high school bloggers seem sympathetic to market monetarist ideas.

    We’re doomed.

    —————

    Jason:

    Hello again, I’m catching up with some of Scott’s posts. What I suspect Scott is doing by saying 5% is to set a stable nominal GDP growth rate. In the 1960″²s and 1970″²s it was becoming less stable.

    Actually I think he was making a value judgment on the height of the NGDP growth, not that it was volatile.

    Why 5%? Perhaps that’s the average rate since the disinflation of the early 80″²s after which we enjoyed greater price stability but still had stable nominal growth, which is all that monetary policy can influence. Since that 5% rate seemed to work well, return to that trend.

    Humans aren’t robots. They learn. You can’t assume that X in the past will work in the future. See Lucas Critique.

  20. Gravatar of ssumner ssumner
    14. July 2012 at 06:38

    Saturos, After 40 years I hardly even remember that book.

    Morgan, I thought Yglesias already supported NGDPLT.

    Steve, The Fed was right about the NIRA, but wrong about monetary policy.

    SG, I hope so.

    Doug, Google St Louis Fred, you might be surprised.

    Thanks Travis.

    JSeydl, I suggest reading the new Keynesians, and ignoring the old ones.

    Greg, Did I claim unions don’t cause unemployment?

  21. Gravatar of Greg Ransom Greg Ransom
    14. July 2012 at 09:51

    No, but I notice that you, George, David & the rest have ignored the explosion in gov worker compensation paired with the decline in government worker employment, and the massive expectations mismatch in the whole government sector — expected compensation & outlays mismatched with possible revenue, at the city, county and state level. The numbers are massive. A equally huge and massive hole in the vision horizon of economists, who were horse blinders which don’t allow them to even conceive of the existence of this source of expectations discoordination, unemployment, compensation increase vs money increase mismatch.

    “Greg, Did I claim unions don’t cause unemployment?”

  22. Gravatar of Mike Sax Mike Sax
    14. July 2012 at 10:20

    Morgan! I’ve had an epiphany! You were right about Romney being the better man to end the deficit. All he has to do is repatriate all that money in the Cayman Islands and we’ll pay down the deficit 9 times over till Sunday

  23. Gravatar of Greg Ransom Greg Ransom
    14. July 2012 at 10:26

    Unions cause unemployment, then macroeconomists like yourself demand inflation to cure unemployment.

    “Greg, Did I claim unions don’t cause unemployment?”

  24. Gravatar of ssumner ssumner
    15. July 2012 at 09:29

    Greg, You said;

    “Unions cause unemployment, then macroeconomists like yourself demand inflation to cure unemployment.”

    I see you are still having problems understanding my policy views. I don’t favor targeting unemployment.

  25. Gravatar of Jason Odegaard Jason Odegaard
    16. July 2012 at 06:34

    Greg,

    Unions increase unemployment among union members, as long as union membership is optional.

  26. Gravatar of Jason Odegaard Jason Odegaard
    16. July 2012 at 06:47

    Major_Freedom: “Humans aren’t robots. They learn. You can’t assume that X in the past will work in the future. See Lucas Critique.”

    Humans also are not random state generators. Humans are more similar than not, and do share quite a lot in common in terms of genetics, nervous systems, and chemicals in our bodies that influence most people’s cognitive processes. Don’t get me wrong – people have differences. But they share enough similarities that common policies can be created that promote benefit to all humans involved.

  27. Gravatar of Major_Freedom Major_Freedom
    16. July 2012 at 07:49

    Jason Odegaard:

    Humans also are not random state generators.

    Yes, it is true, from a formal-logical standpoint, for every human action, a corresponding collective can be defined. For example, if I intend to watch the baseball game tomorrow at 6 pm, then it can be considered as an element of the class “People who watch baseball tomorrow at 6 pm”. However, ontologically, my intended action cannot be grouped into a real collective, but must be conceived as a unique event. Why? Because unlike random treatments, the assumption that one knows nothing about the event except its membership in a known class is a false assumption in the case of my actions!

    We know actions are occurrences determined individually, at specific times and places held and effective value judgments. You don’t have to view my actions as random.

    So should someone say that humans are not robots, it does not follow that this person has to treat human actions as random. They are not random, but this fact does not mean that I can calculate class based probabilities for YOUR unique actions.

    Humans are more similar than not, and do share quite a lot in common in terms of genetics, nervous systems, and chemicals in our bodies that influence most people’s cognitive processes. Don’t get me wrong – people have differences. But they share enough similarities that common policies can be created that promote benefit to all humans involved.

    There is no such thing as “common” governmental “policies”. Governmental policies are heterogeneous behaviors of those who rule and those who are ruled. The state taxes, those not the state are taxed. The state forces its laws, those not in the state are enforced by those laws. The state and those they grant permission, print money, those not in the state and not privileged have to use that money (due to taxation laws). Those in the state cannot enact policies common to all. They can only enact unique “policies” applicable to themselves, and another set of unique “policies” applicable to everyone else.

    So even if you did identify a universal similarity among all men, you cannot possibly consider a governmental policy to be justified on that basis.

    —————–

    Even if you one day realized that common characteristics can never be addressed through government “policies”, and you learned of other non-governmental “policies” that can be used consistent with those common characteristics, you will only ever address the attributes of people, and not they themselves as unique persons. I won’t go further into the implications of this, because it’s a different topic.

  28. Gravatar of Major_Freedom Major_Freedom
    16. July 2012 at 08:01

    ssumner:

    “Unions cause unemployment, then macroeconomists like yourself demand inflation to cure unemployment.”

    I see you are still having problems understanding my policy views. I don’t favor targeting unemployment.

    He didn’t say you favored unemployment targeting.

    I see you’re still using the same bait and switch tactic of misleading people.

    You keep advertising NGDP targeting as something that would have prevented the spike in unemployment post-2008. You are obviously trying to convince the yokels to get on board by pointing to NGDP’s alleged affects on unemployment. Then, when someone points to supply side causes for unemployment, you then bait and switch them and declare “I don’t favor NGDP targeting for employment reasons”, so as to prevent NGDP targeting from being criticized by Hayekians.

    ————

    If NGDP targeting is NOT for the sake of unemployment, then why do you care that unemployment rose post-2008, and why do you keep saying “If only the Fed listened to me! Then unemployment would not have fallen!”

    If you don’t care about unemployment, then why do you keep advertising NGDP as what should exist on the basis of unemployment reasons?

  29. Gravatar of Greg Ransom Greg Ransom
    16. July 2012 at 17:31

    You have advocated steadily increasing the stock of money in order to cure the “sticky wages” problem, Scott.

    Government worker unions have caused much of the “sticky wages” problem & much of the unemployment caused by ever increasing compensation for government workers — LOOK AT THE REAL WORLD in California, if you are interested in the real world.

    It’s clear what you are advocating, whether you want to own that, or allow what you’ve advocated to be capture under an accurate description capturing the same phenomena you’ve put in other language may be another thing.

    —–

    Greg, You said;

    “Unions cause unemployment, then macroeconomists like yourself demand inflation to cure unemployment.”

    I see you are still having problems understanding my policy views. I don’t favor targeting unemployment.

    —–

  30. Gravatar of Jason Odegaard Jason Odegaard
    17. July 2012 at 05:13

    Major_Freedom – Scott mentions that in this particular recession, NGDPLT would have prevented the large rise in unemployment and drop in output. But the Fed would not target unemployment, they target NGDP trend growth. Those are two different things.

    So even if you did identify a universal similarity among all men, you cannot possibly consider a governmental policy to be justified on that basis.

    Here’s a governmental policy I could justify – the vast majority of humans desire to live. Thus, we will bestow upon individuals within the society the permission to use violence against other members of society who desire to murder. Let’s call them police. Is this a justifiable policy? Yes. Is it perfect? No. If you wait for perfection, you will wait forever.

    Your standard for freedom seems a bit high. What you seem to be suggesting is that a world in which any other human exists would be one in which they impinge upon the other’s existence. Why breath the air that another humans has breathed? It would seem the only true source of freedom would be a world inhabited by only one human.

    Yes, it is true, from a formal-logical standpoint, for every human action, a corresponding collective can be defined. For example, if I intend to watch the baseball game tomorrow at 6 pm, then it can be considered as an element of the class “People who watch baseball tomorrow at 6 pm”. However, ontologically, my intended action cannot be grouped into a real collective, but must be conceived as a unique event. Why? Because unlike random treatments, the assumption that one knows nothing about the event except its membership in a known class is a false assumption in the case of my actions!

    We know actions are occurrences determined individually, at specific times and places held and effective value judgments. You don’t have to view my actions as random.

    I was not quite suggesting the grouping, but rather that humans do have some predictability. Using your example, if you are at the baseball stadium tomorrow, I can reasonably estimate the path you will take to enter this stadium. There are perhaps one or two entrances, and the proximity to the paths will be different based upon where you are driving in from. Plus, I know about what types of food and beverages you will consume, especially if I have prior knowledge of your past choices in food and beverages. Combine that prior knowledge with a listing of the available food and beverage choices, I can reasonably predict what you will consume.

    And looking more broadly, I can predict that the design of the stadium will promote a common trend of movement of people through the structure. Perhaps each person would desire the stadium to be designed slightly differently, but in the end a large amount of material needs to be devoted to creation of the stadium, so it ends up being built in a way to service the majority of people.

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