When they can spell my name, I’ll know I’ve arrived

Ramesh Ponnuru sent me this article from Time:

Indeed, Ponnuru and Beckworth aren’t the only conservative proponents of this policy. The most vocal supporter of NGDP targeting, Scot Sumner, is also a conservative, and Mitt Romney economic advisor Greg Mankiw wrote a paper in the 1990s extolling the virtues of targeting nominal GDP.

Not everybody in on the right would be keen on this kind of regime, however. In the past couple of years some factions within the Republican Party, led by Ron Paul, have veered increasingly towards the Austrian school of economics, which is highly skeptical of central bank meddling in the economy and of governmental stimulus of any kind. This cycle’s Republican presidential primary was rife with tough words for Ben Bernanke’s unconventional policies, and Mitt Romney himself has opposed further quantitative easing from the Fed.

Of course, if Ben Bernanke and the rest of the Fed aren’t on board, it doesn’t matter what politicians think. And up to this point, Bernanke has resisted expanding the Fed’s balance sheet further – which would be the whole point, in the short run, to switching to NGDP targeting.

A couple quibbles. 

1.  I don’t really consider myself a conservative, as I’m more libertarian on non-economic issues.  But if I was a reporter I might use the term anyway, as it’s more recognizable to most readers. 

2.  The whole point of NGDP targeting, level targeting, is to reduce the demand for base money so that the Fed doesn’t have to increase the base (or at least as much as otherwise.)  But that’s also a minor quibble, as readers of Time aren’t going to understand all the bizarre counter-intuitive aspects of monetary theory at the zero bound. 

3.  It would be more accurate to say “Romney supports QE, but says he opposes it so that he can win the Ron Paul supporters in the general election.”  Market monetarist policies would help tens of millions of Americans (including me), but unlike the Austrians, market monetarist can’t deliver any votes in November.
 
The article also quotes Ezra Klein:

A scary interpretation of Bernanke’s position is that he doesn’t believe the Fed could do much more to help the economy, but he doesn’t want the market to know that, and so he keeps not doing more but telling the markets he could do more if he wanted to.

I get frustrated with this view although I understand it’s widespread.  I’ve followed Bernanke’s research for decades, and I know exactly how he thinks about this issue.  And I’m telling you there is ZERO chance that Bernanke believes the Fed is out of ammo.  I don’t even think he believes they are out of “semi-conventional” ammo, like QE.  And he certainly believes less conventional options like a higher inflation target would work, albeit too well in his view.
 
Steve Chapman of the Chicago Tribune has an excellent article.

Inflation hawks have been predicting a severe outbreak for years. But David Henderson, an economist at Stanford University’s Hoover Institution and the Naval Postgraduate School, has been skeptical enough to put his money where his mouth is.

In December 2009, he publicly bet economist Robert Murphy of the Pacific Research Institute $500 that by January 2013, there would not be a single point at which the CPI would be up 10 percent or more from a year before. So far, it hasn’t been, and it shows no sign it will.

Another economist who thinks inflation is the least of our worries is Scott Sumner of Bentley University in Massachusetts. He says the increase in the money supply has not unleashed inflation because the demand for dollars has risen as well.

When banks or individuals hold on to cash, he notes, the effect is the same as if the Fed were shrinking the money supply. By refusing to spend or invest, they stifle economic activity.

That effect is apparent in the slowing of the economy, which was not exactly galloping to start with. Job growth is on a glacial pace. Three years after the recession officially ended, we have 5 million fewer jobs than we had before it began.

The Fed’s past quantitative easing programs have helped, but they haven’t been big enough or lasted long enough. Sumner argues that the central bank should commit to sticking with the tactic as long as it takes to get growth back to a healthy pace “” backing off only if there are signs that inflation is likely to rise significantly.

Of course I’d prefer my argument be stated in terms of NGDP, but in this case I won’t quibble at all, for two reasons:

1.  Chapman was nice enough to send me the quote for comment, and I realized it would be more understandable to the general newspaper reader if I stayed away from NGDP.

2.  He titled his article:  “Strangled by tight money: Inflation is the least of our worries”

Tight money!!!  That’s a breakthrough.  I had completely given up on the idea of ever convincing my fellow economists that money has been tight over the last 4 years, although it is even using Ben Bernanke’s own criteria.  I had even less hope for convincing the press.  I can just see some conservative Austrian-type who works in the financial industry spitting out his coffee when he reads that headline in the morning.  Thank you Steve Chapman.

And here’s Catherine Hollander writing in National Journal:

The Federal Reserve has a two-pronged mandate to promote price stability and maximum employment. “Part of having a dual mandate is, you can be criticized on both sides for losing the inflation goal or falling short of the employment objective,” said Vincent Reinhart, Morgan Stanley’s chief U.S. economist and a former head of the Fed’s monetary division. “We’re hearing it on the one side even though we don’t have a lot of evidence of inflation taking off. But we’re not hearing on the other side, even though the unemployment is well above the Fed’s estimate of the natural rate.”

So, why are the inflation hawks the loudest? There are a few theories.

One is a difference in economic thought. Scott Sumner, an economist at Bentley University who has urged the Fed to be more aggressive, says if you consider monetary policy through the lens of interest rates, as he believes Democrats tend to do, then you probably don’t think the central bank can do much more; interest rates are already at rock-bottom levels.

If you focus on the money supply side of monetary policy, however, as Republicans do, you will be concerned that future easing will cause inflation to soar. The reality, of course, is between the two: The Federal Reserve’s actions affect interest rates as well as the money supply.

Reinhart’s right that the Dems have been silent on the need for monetary stimulus.  In early 2009 I wrote an open letter to Paul Krugman practically begging the left to get on board the crusade for monetary stimulus, but he brushed me away.  Now I fear it’s too late. 

The National Journal article is behind the paywall.  It’s entitled “Silence From the Left as Fed Mulls Choices.”


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68 Responses to “When they can spell my name, I’ll know I’ve arrived”

  1. Gravatar of Eric G Eric G
    21. June 2012 at 11:54

    A ocuple of things here.

    1) You said Australia had a small government, how do you measure a government? They have a single-payer health care system alongside a smaller private insurance market and that’s not “small government” if you measure it by the scope of the Government. If you are measuring the size of government by it’s debt or deficit, well according to Dean Baker if we paid what other countries paid in health care costs per person we would have budget surpluses too. Maybe this odd smorgasbord of insurance systems is the big government and big corporate model. It doesn’t matter since it’s not working and hasn’t worked that well for years for many many people.

    2) Above this was said, “When banks or individuals hold on to cash, he notes, the effect is the same as if the Fed were shrinking the money supply.” I started to wonder: is the concentration of wealth and income in the hands of the few causing this? What do you think?

    3) You know Paul Krugman has, on occasion, called on the Fed to do more and he’s at least supported QE1 & 2 just because they were trying.

    4) It’s the Left, like Krugman, and only you on the right, that has predicted what was going to happen after QE1 and 2, so why is there an article called “Silence from the Left as Fed Mulls Choices”? I think there should be a lot more scrutiny against nearly every single Republican who have loudly and actively been critical of the Fed in public, the media, etc. Not only is that party keeping Congress from helping out in any way they don’t want the Fed to do anything either (unless Romney is elected, then it’s asset bubbles galore). What do you think?

  2. Gravatar of Cedric Cedric
    21. June 2012 at 12:14

    A mention in Time! You’ve arrived, Scot.

    (And if you want to see if the public is on its way to understanding NGDPLT, just read the comments to the Time article and weep.)

  3. Gravatar of StatsGuy StatsGuy
    21. June 2012 at 12:24

    “I can just see some conservative Austrian-type who works in the financial industry spitting out his coffee when he reads that headline in the morning.”

    Hmm, the benefits of positive visualization.

    Anyway, oil is now sub 80. We’ll get QE in August – Bernanke could not justify it, even though he knows what’s coming. It’s not about theory, it’s about the “optics”.

    However, if Ben is smart – really smart – he’ll use the next month’s weakness to move for a long term action-driving-target rather than yet another one off. Again. This would be Goldman’s “flow based” program. A flow based program with an NGDP target, even one that is soft and not “market based” like a futures contract, would be enough.

    BTW, I want to severely challenge the notion that restraining fuel prices via demand contraction is good for the economy. Consider this:

    http://www.wired.com/autopia/2011/07/fuel-efficiency-drives-american-airlines-record-airplane-order/

    What does this mean? It means the private sector was adjusting to high fuel prices by investing in long term capital that improves efficiency – a net/net gain on many dimensions in an economy with spare capacity.

  4. Gravatar of Major_Freedom Major_Freedom
    21. June 2012 at 12:32

    When banks or individuals hold on to cash, he notes, the effect is the same as if the Fed were shrinking the money supply. By refusing to spend or invest, they stifle economic activity.

    This is a common Keynesian myth. Holding on to cash IS an economic activity. It is people producing goods and services, and earning money, over time.

    The fact that a person would choose to change the time that elapses between the time they earn the money and the time they spend or invest the money, from one day to the next, doesn’t mean economic activity is “stifled.” There is nothing special about what a person did in the past when it comes to waiting times. People should not be chained to their past selves, where if they earned and spent with a velocity of 3, last year, say, that the Fed has to at least maintain that velocity by printing more money today to coax people into maintaining that old velocity.

    Velocity and money supply, and hence MV, and hence aggregate spending, and hence NGDP, SHOULD fluctuate according to individual preferences. If that means production fluctuates, then let it. If that means employment is reallocated, let it.

    There is no justification in giving the primary dealers newly created money, in order to “replace” any temporal decline in “spending” elsewhere, such that “aggregate spending” does not fall from one moment in time to the next.

    Cash holding is a vital attribute of the usefulness of money itself, and is hence a vital aspect of the market process. Money is not a public good. It is a private good. One money owner does not a priori owe that money to “society”, such that if he takes an arbitrary “too long” a time “spending” it according to the whims of wannabe central planning yahoos like market monetarists, that the Fed should create new dollars for the banks’ benefit, so that the banks can send that money to “society” where the magical NGDP fairy lives and breathes.

    Do we advocate that if someone takes “too long” buying oil, that a counterfeiter should print and spend money on oil? That if someone takes “too long” buying books, that a counterfeiter should print and spend money on books? That if someone takes “too long” buying t-bills, that a counterfeiter should print and spend money on t-bills? If you don’t agree, then congrats, you just showed you don’t agree with NGDP targeting. If you do agree, then congrats again, you just showed your insanity.

    If an individual chooses not to earn and spend 5% more each and every year, then neither should an arbitrary population of individuals be expected to do so.

    If you don’t want people holding money according to how much time they think is justified for themselves, then you shouldn’t even be advocating for a monetary system at all.

    When an individual chooses to hold on to their earnings longer than they did so in a recent arbitrary past habit, this is not a choice of that individual to increase the quantity of money. Only if he invests in money production itself would he be choosing to increase the quantity of money. Simply holding onto his earnings is not a justification for a counterfeiter to step in and ensure that last year’s spending equals this year’s spending, despite the individual money holder.

    It takes an especially vicious mentality in a person for them to believe that an individual holding on to their earnings a little longer than they did before in some arbitrary length of time in the past, somehow means counterfeiters have to pounce, print money and take away his purchasing power, and then feel happy that he got what was coming to him, he who greedily like a capitalist fat cat, sits on his pile of money instead of donating it to feed starving children. If he refuses to play the role of steward of “society’s” money supply, and spend it like a good little sheep, then his pile of money is to be destroyed, indirectly through devaluing his money, so that others can replace him as “benevolent spender and giver of the holy money.”

    Monetarism is just a vestige of communism, and its supporters have communist beliefs concerning money. They refuse to see money as private property, and instead see money as property of “society”, where money and spending become “public” property.

    Now, let me be clear. All the above does not mean that money printing is justified after all, on the basis that the only people who end up being exploited are greedy money hoarding fat cat capitalists who smoke cigars, and wear monocles, while cackling in their oak office at a sweatshop, swimming in their pile of money. If that’s all it was, then you’d probably have a case. But there is another, incredibly important problem with inflation that goes far beyond merely exploiting greedy cash hoarders. The problem of inflation has to do with economic calculation.

    Those who counterfeit, have no economic basis for determining whether or not their money printing is creating economic gains, or economic losses. They only have completely arbitrary idealistic models that lead to them recommending insane “perfect” numbers like “5% NGDP hallelujah”. It’s like ancient tribes killing exactly 5 virgins on the basis of some arbitrary subjective star gazing or weather pattern.

    All you central planning, mentally deranged monetarists have to understand is that the only way YOU can know how much money and spending should exist in the market, is by subjecting money production itself to the profit and loss test. That means money production has to be integrated into the system of private property once again. That means individual cash earners and holders, in a world where money production is carried out by capitalists who risk their prior earnings, are subjected to the system of profit and loss, where profits are earned when investments are justified, and losses are incurred when investments are not justified.

    If there is too little money, then the profitability of money production will rise, and THAT is when it is justified to create more money, NOT when people hold money for a little longer than they did in the past such that some silly spending statistic for an arbitrary selection of central planner tracked goods falls from one period to the next.

    Without recourse to the system of profit and loss, based on private property, then money printers cannot know when they are printing too much, or too little. ANY targeting of an arbitrary constant “spending” growth path will invariably lead to money production that is not economically viable, to whatever extent credit and new money creation deviate from what it otherwise would have been had money production been run in private industry.

    Therefore, with veritable blinders on Fed economists, market distortions are almost guaranteed with inflation. And more importantly, any attempt to overrule the market reasserting itself (e.g. collapse in NGDP), requires increasing rates of monetary inflation in order to coax enough spending out of existing cash balances to prevent corrections from being made on the basis of bankruptcies and losses. Yeah, remember when bankrupcties and losses were a part of capitalism?

    The inevitable result of NGDP targeting is therefore currency collapse. And if a new currency is introduced, and the same 5% NGDP is imposed once again, then there will just be yet another currency collapse, this time even quicker than before because the errors will still persist, plus new ones besides. Thus currency collapse events, i.e. redenominations, will tend to accelerate as well, until the division of labor is destroyed, and civilization along with it.

    When you START with an attack on the holding attribute of money, because you ignorantly believe money is something other than a private good that belongs to “society”, and you end up winning that battle, then the only result that can occur is a collapse of money itself.

    Only if you WELCOME the holding attribute of money, and act peacefully towards it, can money, and hence a modern division of labor, persist.

    It’s your choice. You’re not choosing wisely. You’re choosing poorly.

  5. Gravatar of Neal Neal
    21. June 2012 at 12:41

    Scott, have you written about the Austrian disaggregation of capital and conclusion that the amplitude of the business cycle is zero only if the interest rate the Fed sets is equal to the Wicksellian rate? I would be glad to hear your thoughts on it, especially since you once indicated that the Fed caused the 2008 recession by not keeping pace with the plunging Wicksellian interest rate.

  6. Gravatar of Justin Irving Justin Irving
    21. June 2012 at 12:43

    It is funny how tight money leads to crazy political outcomes. Statism bloomed under the tight money of 2008/09, but the other big winner were the Ron Paul Austrians, who at first had me convinced. Thanks Professor Sumner for saving me from that view.

  7. Gravatar of John John
    21. June 2012 at 12:49

    Scott,

    Your argument about money being “tight” is still goofy. What would you say if instead of cutting rates the Fed had kept them around 5%, wouldn’t that be a better definition of tight? I understand that you view tightness of looseness relative to nominal growth but surely you can see why the argument that monetary policy is tight right now is off-putting. I’m writing this because I sympathize with the guy who is spitting up his coffee. That was me a while back.

  8. Gravatar of Becky Hargrove Becky Hargrove
    21. June 2012 at 12:51

    Going through old index card notes from a few years back, I threw out a bunch last night that sounded reeeeeeeally Austrian. The times they are a changin.

  9. Gravatar of Major_Freedom Major_Freedom
    21. June 2012 at 13:18

    Going through old index card notes from a few years back, I threw out a bunch last night that sounded reeeeeeeally Austrian. The times they are a changin.

    Kind of the like the reverse of what happened to Friedman and Keynes.

    Friedman in his later life wanted the Fed abolished, and Keynes on his deathbed said he found himself depending more and more of the invisible hand, laissez-faire arguments he initially dismissed.

  10. Gravatar of Don Geddis Don Geddis
    21. June 2012 at 13:46

    John: “if instead of cutting rates the Fed had kept them around 5%, wouldn’t that be a better definition of tight?

    Your suggestion is a terrible definition of tight money, but you’re right that a 5% Fed funds rate would make money even tighter than it is right now.

    The problem is that the looseness or tightness of monetary policy, depends on the rate relative to current economic conditions. Hence the idea that a Taylor Rule would suggest the “neutral” Fed Funds rate, neither too tight nor too loose.

    Unfortunately, for the past few years, the Taylor Rule rate computes to something like negative 5-7%. Hence the effects of the current 0% rate are exactly the same as setting interest rates 5% too high in any economic conditions: it causes a crash in production, and widespread unemployment.

  11. Gravatar of johnleemk johnleemk
    21. June 2012 at 13:46

    John:

    “What would you say if instead of cutting rates the Fed had kept them around 5%, wouldn’t that be a better definition of tight?”

    That’s like telling a 200lb man wearing an M-size shirt “It’s not too tight, and if you think otherwise, just trying wearing an S instead!”

    In a sense it’s understandable that laypeople confusingly think interest rates are the best indicator of the stance of monetary policy. But it’s inexcusable for policymakers and even economists to be arguing that the money supply has been too loose, or even just right, when even as measured by headline CPI, the Fed has fallen below its inflation target of 2%.

  12. Gravatar of Mike Sax Mike Sax
    21. June 2012 at 13:51

    “If that means employment is reallocated, let it. ”

    Reallocate is such a pretty word-so much nice than saying ‘if that means employment drops sharply, let it’

  13. Gravatar of Major_Freedom Major_Freedom
    21. June 2012 at 13:52

    David Ranson has a piece on how ZIRP hurts economies:

    http://www.forbes.com/forbes/2012/0409/capital-flows-zirp-economic-bank-reserves-batting-zero-david-ranson.html

  14. Gravatar of Major_Freedom Major_Freedom
    21. June 2012 at 13:55

    Reallocate is such a pretty word-so much nice than saying ‘if that means employment drops sharply, let it’

    Drops sharply is such pessimistic words-so much worse than saying “if that means employment is reallocated, let it.”

    So I guess the government should have shoveled money to the horse and carriage industry to prevent temporary reallocation due to the invention of the car?

    Candlestick makers with the invention of the lightbulb?

    Typewriter makers with computers?

    Yes, let’s stay in the stone age so that nobody ever has to lose their job toiling in the fields.

    Good grief.

  15. Gravatar of Mike Sax Mike Sax
    21. June 2012 at 14:01

    “Drops sharply is such pessimistic words-so much worse than saying “if that means employment is reallocated, let it.”

    Nope Major you’ve missed the point it’s not optimism or pessimism-the employment rate has already dropped by a sharp margin. It’s not about optimism or pessimism this is the rearview mirror-that the “reallocation” has been to much less employment is what has happened not what anyone pessimistically thinks might happen.

  16. Gravatar of Bill Woolsey Bill Woolsey
    21. June 2012 at 15:16

    Scott:

    Don’t use the acronym NGDP.

    Nominal Gross Domestic Product is better than NGDP.

    However, spending on output is probably the best way to describe it.

    The Fed needs to commit to expand the quantity of money until spending on output gets back to the trend we were on before the recession.

    How hard is that?

    It is much better than “growth.”

  17. Gravatar of Brito Brito
    21. June 2012 at 15:17

    I’m pretty sure Major_Freedom has never read a single article or book on economics that isn’t austrian, literally every single thing he said was just recycling of talking points popular in the eighteen hundreds; and every single one of them has been countered and rebutted. What he describes is the default base case that everybody is already aware about when they are teenagers before understanding how nuanced things can get. It’s pure verbiage, what he is saying is just pointing out the obvious but obfuscating it; completely oblivious to the fact that reality is a lot more complex than these platitudes; complete oblivious to the fact that there are millions of pages written offering counter-arguments every paragraph in his post that he doesn’t even begin to consider. People (like MF) who think they know everything in social science don’t know anything, I don’t and will never ever trust anyone who shows such an insane lack of humility. It’s my rule of thumb for choosing which analysts to trust.

  18. Gravatar of Benny Lava Benny Lava
    21. June 2012 at 15:20

    Congrats! Admitting you are not a conservative is a good first step. I kid, I keeeed!

    Hmmm, 6 months until Bob Murphy drops 500 bucks? Unless we get some massive inflation spike in a hurry. And I bet a shiny drachma that old Bob won’t change his view on ABC economics. Despite, you know, falsification and empirical evidence and all. Hey I remember when Rob Paul predicted 8 dollars a gallon gas by 2010. But who cares about right or wrong when you are talking about the madness of crowds.

  19. Gravatar of Mike Sax Mike Sax
    21. June 2012 at 15:24

    The key to understanding Major is here:

    “Do we advocate that if someone takes “too long” buying oil, that a counterfeiter should print and spend money on oil? That if someone takes “too long” buying books, that a counterfeiter should print and spend money on books? That if someone takes “too long” buying t-bills, that a counterfeiter should print and spend money on t-bills? If you don’t agree, then congrats, you just showed you don’t agree with NGDP targeting. If you do agree, then congrats again, you just showed your insanity.”

    This silly idea that if we try to effect demand of money it’s the same thing as trying to effect the demand for oil is because Austrians think that money is just another coommodity like any other.

    This is why Austrians are so taken with the gold standard-it was always easy to confuse gold as a commodity and gold as unit of exchange.

  20. Gravatar of Mike Sax Mike Sax
    21. June 2012 at 15:47

    Scott you’re for ending the war on drugs right? For this all libertarians should check out the Democrats

    The Dems: party of pot legalization http://diaryofarepublicanhater.blogspot.com/2012/06/democrats-party-of-pot-legalization.html

  21. Gravatar of Greg Ransom Greg Ransom
    21. June 2012 at 15:51

    Both Lawrence White & Steven Horwitz are on record saying that we had tight money in the 2008-2010 period.

    These are two of the top Austrian monetary economists in the world.

    Stop ripping “Austrian economists” on false grounds.

  22. Gravatar of Becky Hargrove Becky Hargrove
    21. June 2012 at 16:08

    Greg you’re right. Sometimes the term gets used vaguely, because those were not the voices a majority of the public actually heard.

  23. Gravatar of Major_Freedom Major_Freedom
    21. June 2012 at 16:17

    Mike Sax:

    “Drops sharply is such pessimistic words-so much worse than saying “if that means employment is reallocated, let it.”

    Nope Major you’ve missed the point it’s not optimism or pessimism-the employment rate has already dropped by a sharp margin. It’s not about optimism or pessimism this is the rearview mirror-that the “reallocation” has been to much less employment is what has happened not what anyone pessimistically thinks might happen.

    Nope Mike you’ve missed the point it’s not optimism or pessimism-the reallocation rate has already increased by a sharp margin. It’s not about optimism or pessimism this is the rearview mirror-that the “unemployment” has been to much less reallocation is what has happened not what anyone pessimistically thinks might happen.

    Brito:

    I’m pretty sure Major_Freedom has never read a single article or book on economics that isn’t austrian, literally every single thing he said was just recycling of talking points popular in the eighteen hundreds;

    I’m pretty sure I’ve read far more economics than one single school. I just hold the Austrians to be the most correct when it comes to the concept of economic calculation.

    As for recycled talking points, should I listen to yours that are from 300 AD Rome? They devalued the currency as well.

    and every single one of them has been countered and rebutted.

    You have obviously never read any Austrian theory, because it is not even close that “every single one of them has been rebutted.” Action has never been refuted. The core Austrian concepts have never been refuted.

    Empty claims that they have been refuted only shows the emptiness of your talking point worldview.

    What he describes is the default base case that everybody is already aware about when they are teenagers before understanding how nuanced things can get.

    It is precisely nuance that is lost on you central planning types.

    It’s pure verbiage, what he is saying is just pointing out the obvious but obfuscating it; completely oblivious to the fact that reality is a lot more complex than these platitudes;

    The fact that reality is a lot more complex is precisely why your state control platitudes are incorrect.

    complete oblivious to the fact that there are millions of pages written offering counter-arguments every paragraph in his post that he doesn’t even begin to consider.

    I’ve read the majority of all critiques, and the same pattern persists in each one: They don’t understand Austrian concepts.

    People (like MF) who think they know everything in social science don’t know anything, I don’t and will never ever trust anyone who shows such an insane lack of humility.

    I don’t believe I know everything. Quite the opposite. I just know a few things with certainty. It’s precisely central planning types that think they know everything.

    It’s my rule of thumb for choosing which analysts to trust.

    That’s why you’ll remain ignorant. It’s not about trust. Trust is for the ignorant.

    Mike Sax:

    The key to understanding Major is here:

    “Do we advocate that if someone takes “too long” buying oil, that a counterfeiter should print and spend money on oil? That if someone takes “too long” buying books, that a counterfeiter should print and spend money on books? That if someone takes “too long” buying t-bills, that a counterfeiter should print and spend money on t-bills? If you don’t agree, then congrats, you just showed you don’t agree with NGDP targeting. If you do agree, then congrats again, you just showed your insanity.”

    This silly idea that if we try to effect demand of money it’s the same thing as trying to effect the demand for oil is because Austrians think that money is just another coommodity like any other.

    Wrong on both counts. NGDP theory is not trying to effect the demand for money. It’s trying to effect the money demand for goods.

    And money is a commodity.

    This is why Austrians are so taken with the gold standard-it was always easy to confuse gold as a commodity and gold as unit of exchange.

    Gold as a unit of exchange follows from gold as a commodity, the same way fiat money as a unit of exchange follows from fiat money as a commodity.

    The key to understanding Mike is that money is supposedly outside the sphere of economic science, where mysticism in the abstract world of universals takes over, where money is a tool of “society”, rather than of individual economic actors.

    Money has always been a commodity. To deny this is to deny the very foundation of it.

  24. Gravatar of Mike Sax Mike Sax
    21. June 2012 at 16:40

    “Nope Mike you’ve missed the point it’s not optimism or pessimism-the reallocation rate has already increased by a sharp margin. It’s not about optimism or pessimism this is the rearview mirror-that the “unemployment” has been to much less reallocation is what has happened not what anyone pessimistically thinks might happen”

    In this way you’ve refuted that unemployment has spiked and stayed at an elevated level? You’re trying to rephrase it but that’s the bottom line.

  25. Gravatar of Dirk Dirk
    21. June 2012 at 16:44

    I believe you used to consider yourself a “pragmatic libertarian”. I wonder if you’re steering further from the libertarian label these days thanks to Ron Paul and the now unfortunately strong (stronger?) association of “Libertarian” with Austrian economics.

  26. Gravatar of Major_Freedom Major_Freedom
    21. June 2012 at 16:47

    Mike:

    In this way you’ve refuted that unemployment has spiked and stayed at an elevated level? You’re trying to rephrase it but that’s the bottom line.

    It has stayed at an elevated level because the government is paying people to stay unemployed. It’s not because reallocation is ineffective.

    It’s not the fault of the non-existent free market that labor reallocation is prolonged by government intervention.

  27. Gravatar of Major_Freedom Major_Freedom
    21. June 2012 at 16:48

    Dirk:

    I believe you used to consider yourself a “pragmatic libertarian”. I wonder if you’re steering further from the libertarian label these days thanks to Ron Paul and the now unfortunately strong (stronger?) association of “Libertarian” with Austrian economics.

    Fortunately.

  28. Gravatar of Bill Ellis Bill Ellis
    21. June 2012 at 16:57

    Eric G says…and I totally agree…

    ‘It’s the Left, like Krugman, and only you on the right, that has predicted what was going to happen after QE1 and 2, so why is there an article called “Silence from the Left as Fed Mulls Choices”? I think there should be a lot more scrutiny against nearly every single Republican who have loudly and actively been critical of the Fed in public, the media, etc. Not only is that party keeping Congress from helping out in any way they don’t want the Fed to do anything either (unless Romney is elected, then it’s asset bubbles galore). What do you think?

    From Krugman’s latest post…while on vacation.

    (

    …The intimidated Fed: The minimal action “” extending Operation Twist “” wasn’t just inadequate, it was shameful. The Fed has a dual mandate, employment and price stability. Its own projections show high unemployment persisting for years and years, inflation running below its target “” and realistically its inflation projections are too high while its unemployment projections are too low. There is no rational argument I can see for not going all out with monetary stimulus. (…)
    I’m sorry, but this looks like pure concession to political intimidation “” a Fed refusing to do anything that would let Republicans accuse it of helping Obama. And for the sake of its own political comfort, the Fed is essentially betraying the unemployed.

    http://krugman.blogs.nytimes.com/2012/06/21/brief-notes-from-hiding/

    Just last week PK called Fed policy… “sado-monetarism.” http://www.nytimes.com/2012/06/11/opinion/krugman-another-bank-bailout.html

  29. Gravatar of Coldstream Coldstream
    21. June 2012 at 17:07

    How would the “average voter/American” (ie the non-economist) see Market Monetarism in action if it were actually applied?

    I’d venture most people pay little/no attention to what the Federal Reserve does, but they can at least see all the Keynesian-inspired fiscal efforts at stimulus (through road signs if anything else), so it’s easier to at least see and debate its effects, which allows politicians to fight for/against any particular fiscal plan, which certainly helps explain the popularity of fiscal stimulus.

    Would Market Monetarism be relatively unnoticeable, outside of a generally better economic recovery?

    If so, how do we convince politicians and the public of its effectiveness? Is it politically possible?

  30. Gravatar of D.Gibson D.Gibson
    21. June 2012 at 17:08

    Good for you Scott. I like your economics, but disagree with your psychology. I think the hardest people for you to convince will be (academic) economists. They are set in their ways. For them, all the -isms are a religion and not a choice.

    You will have more luck with common folks and the non-partisan media. They know something is wrong, they just need to be told what it is. Heck they already suspect the Fed and banks. They listen to Ron Paul, because he is only one talking about what they suspect. He has the exact wrong prescription, but most folks can “feel” that too. Keep speaking and we’ll all help with posting. This war will not end with Q.E.D. on a blackboard, but with little old ladies posting NGDPLT on their Facebook pages.

  31. Gravatar of Bill Ellis Bill Ellis
    21. June 2012 at 17:43

    Professor Scott Sumner,

    I don’t know how to say this with out sounding disrespectful but here it goes…

    You said…

    In early 2009 I wrote an open letter to Paul Krugman practically begging the left to get on board the crusade for monetary stimulus, but he brushed me away. Now I fear it’s too late.

    I remember back then Krugman being very dismissive and even insulting toward your Ideas. And I thought you were nuts. Maybe by real world standards he owes you some sort of formal apology. But considering the standards of the blogosphere, I would not expect one if I were you. (those kinds of niceties are normally extended only between members of the same political tribe.

    No one has had more disrespect heaped on him than PK. It has, In my opinion, made him quite combative and I applaud him for it. You, coming out of no where, and being of the right, got you caught in the cross fire. But it has been quite awhile since he has gone after you or your ideas.

    And OK so he was late to the monetary expansion game, but now he has become very consistently for it. He no longer dismisses your specific approach. ( Sure he is not sold on it, he questions it, but he does not oppose it. )
    Arguably he is the most powerful voice on economics today…for sure he is the most powerful voice on economics in the popular press today. So what are you doing ? Why keep going after him ?

    May I submit the reason you keep going after him…while soft peddling the “crimes” of folks on the right who are far more dismissive of your Ideas… is the same reason he disrespected you… Political tribalism.

    Let it go. We need a united front on this.

    I am just some clown who does not know you, who took 8 years to get a fine arts degree. I got no place saying this crap…but there it is…I said it.

    Oh and Krugman has been trying to get the folks in power to listen to his policy recommendations since 2007… and has made almost zero progress. I kinda doubt even if he had been on board in 2009 ..that your Ideas would have any more sway among the elite than they do now.

  32. Gravatar of Rick Schaut Rick Schaut
    21. June 2012 at 18:01

    “[Unemployment] has stayed at an elevated level because the government is paying people to stay unemployed.”

    Since we’re talking about elevate unemployment, the only relevant benefit to this claim is unemployment insurance. Unemployment Insurance pays out at approximately 50% of the average weekly wage a person was earning before they became unemployed. At the time they became unemployed, the vast majority of them had expenses that well exceeded 50% of their average weekly wage. UI leaves most people in the red, yet, apparently, this income differential isn’t enough of an incentive for these lazy people to go out and find a job in a market where the ratio of unemployed persons to job openings is on the order of 3 to 1.

    This notion that people are unemployed because the government is paying them to stay unemployed wouldn’t be half as amusing an argument were it not often voiced by the same people who would claim that raising the marginal income tax on the wealthiest Americans back to the level it was a decade ago will cause these folks to go John Gault.

    But, such is the world in which the purveyors of idiotic bromides live. Income differentials have no incentive effects at the bottom of the income ladder, but they, apparently, have huge incentive effects at the top of the income ladder.

  33. Gravatar of Edward Edward
    21. June 2012 at 18:26

    Major,

    “Reallocate is such a pretty word-so much nice than saying ‘if that means employment drops sharply, let it’

    Drops sharply is such pessimistic words-so much worse than saying “if that means employment is reallocated, let it.”

    So I guess the government should have shoveled money to the horse and carriage industry to prevent temporary reallocation due to the invention of the car?

    Candlestick makers with the invention of the lightbulb?

    Typewriter makers with computers?

    Yes, let’s stay in the stone age so that nobody ever has to lose their job toiling in the fields.

    Good grief.”

    (Thumps my head on the table) Arguing with you is like going around in circles. Nobody is saying that we have to prevent technological progress and destruction of jobs that way. Re allocation (real reallocation, not the mythical one imagined by Austrians) doesn’t require that the entire economy explodes. A while back we had a discussion on the effects of capital over expansion in one sector versus other sectors. I implied that an expansion of capital goods sector that produces houses is different than an expansion of the C. goods sector that handles building computers. If the Austrian story were true, we would have seen a housing or car boom, but NOT a boom in other sectors, because you’ve implied that the story is again and again a real story of physical resources (the false bricklayers analogy) There is no transmission mechanism other than money and aggregate demand to transmit a boom in interest rate sensitive industries like cars or housing to the rest of the economy. It doesn’t matter that housing rises more in percentage terms during the boom, nor if if it falls by more during the bust. Other sectors shouldn’t have risen or fallen AT ALL. Nor does your rebuttal that “production takes time” (wtf??!!? does that even mean, you’re stating a tautology!) make any sense at all because a universal boom and a universal bust is not possible under ORTHODOX rothbardian and misiean theory. And thats what we see. What the monetarists and Keynesians kept hammering for a while that finally rescued me from the Austrian intellectual cesspool was the transmission mechanism Maybe you’re creating your own theory . thats fine, but you should at least be clear. Maybe you’re using Robert Murphys theory of “universal re-allocation” (He once conducted a thought experiment about magical gnomes re-arranging the entire economy during the night putting airline pilots in computer centers, doctors as cab drivers and vice versa). My own personal rebuttal to this is that we would see a lot of evidence that this is happening. Yet we don’t .

    Nor does accelerating money supply growth mean anything of the money don’t run around. BFD that Australia needs accelerating money supply growth. if the money doesn’t circulate, it won’t cause price inflation, and if it does, than the level targeting rule will call for the central bank to tighten. to stop printing money and end the inflation.

    What I also find incredible amusing is your support of free market money production. Its amusing not because its a bad policy, but I don’t think you understand the implications of your own worldview. See, I define a gold standard as a situation where the government, not the people, mandates that gold is legal tender for all debts , public and private. thereby crowding out all other choice, and all other currencies EVEN SILVER. See the crime of 1873 if you don’t believe me and how bi-metallism was destroyed. Most Austrians are incredibly coy about whether they support gold, or free market money, because they think theres the same thing, but you see, THEY”RE NOT. Most likely we’d have gold with free market money, along with silver, platinum, copper, diamonds, maybe even iron or aluminum. Who are you to say that people can’t use copper or diamond coins or e-jewels as currency.? In fact because of the money illusion, the way the free market would handle a money shortage would not be for prices in gold terms, to fall,, but A SUBSTITUTION of the cheaper, more abundant precious metals. Don’t believe me, loot at the free silver movement.

  34. Gravatar of dwb dwb
    21. June 2012 at 18:26

    @rick,

    just ignore major freedom. hes the internet austrian, theres no hope of changing his mind. worry if you start agreeing with him.

  35. Gravatar of Edward Edward
    21. June 2012 at 18:30

    cont,

    Therefore, The natural tendency of the free market is inflation, because thats why substantial number of people wanted silver, so it would raise prices

  36. Gravatar of Edward Edward
    21. June 2012 at 18:31

    The “peaceful” free market wants monetary expansion and inflation, and the statists in Europe want Austerity

  37. Gravatar of Edward Edward
    21. June 2012 at 18:37

    Major_Freedom at Bob Murphy’s
    As for the slope of the AD curve, I hold the LONG RUN AS curve to be vertical. All sellers I view as price takers, because I assume they do not gain direct utility from their own supplies.
    I do not hold that inflation can boost production. It can only redistribute existing production.

    If that were true we would see evidence of this, the boom/bust would not be universal, exactly the point I was making above.

    Your worldview is blatantly contradicted by the evidence

  38. Gravatar of Philo Philo
    21. June 2012 at 19:16

    You wrote: “It would be more accurate to say ‘Romney supports QE, but says he opposes it so that he can win the Ron Paul supporters in the general election’.” I hope you’re right. Do you have inside information””from inside the Romney camp, I mean?

    Even if you’re just guessing, market monetarists had better hope Romney wins, because it is crystal clear that Obama does not support QE.

  39. Gravatar of Benjamin Cole Benjamin Cole
    21. June 2012 at 19:26

    Scott Sumner and the band of Market Monetarists are the hope of the world (economically speaking).

    I hope more people start to listen.

  40. Gravatar of Peter N Peter N
    21. June 2012 at 20:30

    I think you must be reading the wrong publications.

    “”Tight money!!! That’s a breakthrough. I had completely given up on the idea of ever convincing my fellow economists that money has been tight over the last 4 years, although it is even using Ben Bernanke’s own criteria. I had even less hope for convincing the press. I can just see some conservative Austrian-type who works in the financial industry spitting out his coffee when he reads that headline in the morning.”

    From FT Alphaville last December:

    http://ftalphaville.ft.com/blog/2011/12/05/778301/the-decline-of-safe-assets/

    This is detailed chart of the declined of safe assets for use as collateral.

    Since this is the broadest kind of money, the loss of $8 trillion or so of it creates a demand that spills over into more liquid forms of money. That is it forces people to use money with a higher opportunity cost than they would prefer, in order to stay in business.

    So internationally, anyway, money is tight, and at least part of the financial press has been saying so for a while now.

  41. Gravatar of johnleemk johnleemk
    21. June 2012 at 20:41

    Bill Ellis,

    He no longer dismisses your specific approach. ( Sure he is not sold on it, he questions it, but he does not oppose it. )

    Arguably he is the most powerful voice on economics today…for sure he is the most powerful voice on economics in the popular press today. So what are you doing ? Why keep going after him ?

    (emphasis mine)

    I think you’ve answered your own question. Krugman has unquestionably improved since 2008, since he no longer explicitly says monetary policy is useless. Now he mainly gives out half-hearted endorsements of monetary policy instead, and continues to stress the primacy of fiscal policy. Saying this makes him a useful proponent of monetary policy is like saying “The Fed has slashed interest rates to 0% instead of keeping them at 5%, so money is now loose!” No, money remains tight, and Krugman remains at best a weak supporter of better monetary policy.

    Another key distinction to keep in mind is that Krugman’s dismissal of Sumner essentially amounts to Krugman criticising the pro-stimulus camp for its support of stimulus. Sumner’s reminder of Krugman’s missteps on the other hand amounts to Sumner criticising the pro-stimulus camp for not supporting enough stimulus.

    Oh and Krugman has been trying to get the folks in power to listen to his policy recommendations since 2007… and has made almost zero progress. I kinda doubt even if he had been on board in 2009 ..that your Ideas would have any more sway among the elite than they do now.

    I would say the opinions of the Democratic political and policy establishment tend to mirror Krugman’s. He hasn’t succeeded at persuading Republican policymakers, but that doesn’t matter! One of the key advantages of monetary policy is that the president has a bully pulpit he can use, the power of making FOMC appointments (which he has totally squandered, not even bothering to use recess appointments to avoid GOP stalling, the way he used a recess appointment for less important posts like CFPB head), and the Democrats continue to hold control of the Senate.

    There are no obstacles to monetary policy if the Democratic Party wants to use it. And if you are suggesting that the Democratic Party completely ignores what Krugman has to say…I don’t think that suggestion passes the sniff test.

  42. Gravatar of Bill Ellis Bill Ellis
    21. June 2012 at 20:51

    MF says…

    “It has stayed at an elevated level because the government is paying people to stay unemployed. It’s not because reallocation is ineffective.”

    Why does any one talk to this guy ? You are never gonna get him to see reality.

    He is faith based. Getting him to budge an inch even in the face of refutations that are clear to anyone with an open mind is like asking a Christian Minster to be mushy on the divinity of Christ.

    The only reason I can see to feed this troll is for the spectacle.

  43. Gravatar of Rick Schaut Rick Schaut
    21. June 2012 at 21:33

    @dwb

    I agree, there’s no hope of changing MF’s mind. There are, unfortunately, those for whom facts and data aren’t even speed bumps on the road to their foregone conclusions.

    Their intractability, however, should not dissuade us from pointing out the incoherence of their arguments. Nor, for that matter, should we merely label them as intractable. Rather, we should demonstrate their intractability by virtue of the flaws in their arguments.

    So, yes, I will point out that his conclusion requires us to turn the concept of marginal utility on its head–that the marginal utility of an additional dollar of income is directly proportional to one’s income rather than inversely proportional to one’s income.

  44. Gravatar of Bill Ellis Bill Ellis
    21. June 2012 at 21:55

    johnleemk says…

    I think you’ve answered your own question. Krugman has unquestionably improved since 2008, since he no longer explicitly says monetary policy is useless. Now he mainly gives out half-hearted endorsements of monetary policy instead, and continues to stress the primacy of fiscal policy. Saying this makes him a useful proponent of monetary policy is like saying “The Fed has slashed interest rates to 0% instead of keeping them at 5%, so money is now loose!” No, money remains tight, and Krugman remains at best a weak supporter of better monetary policy.

    I disagree with you here.
    Krugman does not give “half-hearted” endorsements of monetary policy. I gave two recent examples in an earlier post on this thread…but there are plenty more. How much more harsh can you get then calling the FED’s stubborn policy ” Sado Monerteism ” ? He has been savaging Ben Bernanke…(Who is an old Friend of his). Sure, he does favor fiscal stim. As do I. Are you against it ?

    Another key distinction to keep in mind is that Krugman’s dismissal of Sumner essentially amounts to Krugman criticising the pro-stimulus camp for its support of stimulus. Sumner’s reminder of Krugman’s missteps on the other hand amounts to Sumner criticising the pro-stimulus camp for not supporting enough stimulus.

    I am not sure what you meant here, But as I said Krugman has stopped dismissing the pro monetary expansion guys, (He has never dismissed the pro stim guys) Are you saying that Monetary and Fiscal expansion are the same thing ?
    And Sumner is only supportive of fiscal stim in a very reluctant, limited way. He has often expressed a preference for a combination of monetary policy and Austerity.

    And last…

    I would say the opinions of the Democratic political and policy establishment tend to mirror Krugman’s. He hasn’t succeeded at persuading Republican policymakers, but that doesn’t matter! One of the key advantages of monetary policy is that the president has a bully pulpit he can use, the power of making FOMC appointments (which he has totally squandered, not even bothering to use recess appointments to avoid GOP stalling, the way he used a recess appointment for less important posts like CFPB head), and the Democrats continue to hold control of the Senate.

    There are no obstacles to monetary policy if the Democratic Party wants to use it. And if you are suggesting that the Democratic Party completely ignores what Krugman has to say…I don’t think that suggestion passes the sniff test.

    I agree that If Obama had the guts and the faith to push an expansive monetary policy he could get something done. He does not. But it is a long stretch to blame Krugman for it. If Krugman had sway over Obama , Timothy Geithner, would be gone not Elizabeth Warren. Obama has been listening to the most conservative/establishment members of his cabinet on economic matter from the start, nothing has changed.
    If Krugman has sway over Obama he would have made recess appointments.
    If Krugman had sway over Obama, Obama would be arguing for a Massive new stimulus far, far over the timid spending he is proposing.

    I only wish your assessment of Krugman’s power over Obama was on target.

    And I would say that over all the opinions of the Democratic political and policy establishment on economics are just not that deep. ( The Repubs get into it a lot deeper, but IMHO they get it very wrong.)

  45. Gravatar of Saturos Saturos
    21. June 2012 at 23:06

    Funny, I never knew Ryan Avent was a liberal (in the American sense)…

    See what we’ve done – TIME now thinks that the single best mandate shift for the Fed would be NGDP targeting, as opposed to (explicit) level targeting.

    Scott, I can only imagine what it feels like to make it into TIME magazine, only to find that they’ve spelt your name wrong. It would be like shaking hands with Obama, and then he leans over and asks “I’m sorry, what do you do again?”. (But there’s actually a link to this blog beneath the article.)

    Eric G, we Australians have a sort-of Danish style government, lean yet efficient on welfare measures (relatively speaking, of course). Although that’s probably about to change, with Gillard’s new Carbon Tax (on top of the mining profits expropriation of a couple of years ago).

    About inequality, the problem with nominal GDP is due to hoarding, not saving. The poor are probably even more likely to do that than the rich. OK yes, even existing savings become hoardings at the zero lower bound – but the high level of saving is one of the benefits of inequality, we shouldn’t oppose that just because the central bank sometimes screws up the economy, crushing investment and turning saving into hoarding. Note also that most hoarding is by banks who are being paid by the Fed to hoard (interest on reserves).

    Which reminds me – how absurd is it to argue about the effectiveness of monetary expansion when the Fed is paying interest on reserves. Utterly ridiculous.

  46. Gravatar of John Becker John Becker
    22. June 2012 at 02:54

    johnleemk,

    I like the shirt metaphor but I’d change what you said a little bit. It’s more like a really really fat man in a XXXXXXL shirt. If you just looked at the shirt and not the man, no one would say that the shirt was “tight” by the standards of normal sized people. So as Scott would say, if the Fed had done what its doing now in an ordinary economy, money would be extremely loose.

  47. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 06:17

    Edward

    “Reallocate is such a pretty word-so much nice than saying ‘if that means employment drops sharply, let it’

    “Drops sharply is such pessimistic words-so much worse than saying “if that means employment is reallocated, let it.”

    “So I guess the government should have shoveled money to the horse and carriage industry to prevent temporary reallocation due to the invention of the car?”

    “Candlestick makers with the invention of the lightbulb?”

    “Typewriter makers with computers?”

    “Yes, let’s stay in the stone age so that nobody ever has to lose their job toiling in the fields.”

    (Thumps my head on the table) Arguing with you is like going around in circles. Nobody is saying that we have to prevent technological progress and destruction of jobs that way.

    No wonder you don’t understand economics. You’re hitting your head on the table.

    I didn’t claim that you or anyone else is purposefully trying to prevent technological progress and destruction of jobs that way.

    What I am arguing is that inflation used to prevent job losses has that effect. Technological progress in an inflationary economy comes at the expense of technological progress that could not occur without inflation.

    Re allocation (real reallocation, not the mythical one imagined by Austrians) doesn’t require that the entire economy explodes.

    Austrian re-allocation is real. It is based on the system of profit and loss, and economic calculation, contrary to the mythical one imagined by inflationists.

    Nobody is saying, implying, or calling for the entire economy to explode. It didn’t explode in 1920-1921. You’re fear mongering because you have no rational explanation.

    A while back we had a discussion on the effects of capital over expansion in one sector versus other sectors. I implied that an expansion of capital goods sector that produces houses is different than an expansion of the C. goods sector that handles building computers. If the Austrian story were true, we would have seen a housing or car boom, but NOT a boom in other sectors, because you’ve implied that the story is again and again a real story of physical resources (the false bricklayers analogy)

    This is false. I suggest you educate yourself in the Austrian theory so that you stop making the same errors made by its critics over and over and over again. You can read Murphy’s “Sushi model” of ABCT to understand why these “then you would have seen” claims are wrong.

    There is no transmission mechanism other than money and aggregate demand to transmit a boom in interest rate sensitive industries like cars or housing to the rest of the economy.

    That is false. Nobody sells into and nobody invests into “aggregate demand.”

    And there is a transmission mechanism, and that is an UNHAMPERED price system, UNHAMPERED interest rates, and UNHAMPERED relative demands.

    Monetary policy distorts all of these transmission mechanisms.

    You’re invoking a Keynesian fallacy when you claim it’s aggregate demand that serves as a foundation for economic growth. No, it’s saving and investment at the local scale. Aggregate demand is a PRODUCT of saving and investment spending (and consumer spending). It does not act as an independent, reified “cover” for saving and investment spending.

    It doesn’t matter that housing rises more in percentage terms during the boom, nor if if it falls by more during the bust.

    Oh yes it does. If an expansion in housing requires more resources than are actually available for housing, due to the fact that consumers are NOT, by their relative spending, releasing sufficient resources from other industries, then the expansion in housing is uneconomic. It is unsustainable. It matters.

    Other sectors shouldn’t have risen or fallen AT ALL.

    FALSE. You are still not getting it. This is a phenomenon of scarce resources being redirected. You cannot observe a counter-factual economy where this doesn’t take place, such that you can see a particular “other” sector being larger in the one, and smaller in the other. You can only see what we have, which is the one with redirection. That means you could observe a temporal rise, fall, or no change in “other” sectors.

    Austrian theory does not claim that there will be a temporal decline in ANY sector during the inflationary boom that contains redirection of resources and labor. Austrian theory isn’t claiming that “we should have seen a temporal fall in the car industry if there was such an expansion in housing.” No, Austrian theory isn’t making TEMPORAL claims at all. It is talking about how the market process WOULD HAVE worked had the monetary system NOT been manipulated by central banks and fractional reserve commercial banks.

    Again, you clearly have no clue about Austrian theory, and yet you choose to criticize it. I am convinced that in order to be a critic of Austrian theory, it is a prerequisite that you must not understand it.

    All your silly and uninformed criticisms have been answered NUMEROUS times, but you don’t read them because you believe you have it all figured out, the same way it took you a day to figure out the crude Monetarist and Keynesian models. Austrian theory requires more effort than what you have obviously put into it.

    Nor does your rebuttal that “production takes time” (wtf??!!? does that even mean, you’re stating a tautology!)

    WTF does production take time even mean? Are you for real? The fact that production takes time is in response to the false accusation that there should be an immediate boom in the consumer goods industry after a traditional credit expansion and inflation bust distorted the structure of the capital goods industry. Every time a critic says “B-b-b-but there should have been a boom in the consumer goods industry after the bust!” they are IGNORING the fact that production takes time. They are making a claim that presupposes instantaneous production. THAT’S why I say production takes time. Yes, the concept of production itself IMPLIES time, but that doesn’t seem to stop critics of Austrian theory presupposing it doesn’t.

    make any sense at all because a universal boom and a universal bust is not possible under ORTHODOX rothbardian and misiean theory.

    Yes it is possible, and yes, it has happened.

    And thats what we see.

    What we see is an economy continually distorted by inflation, what we see is economic calculation continually hampered with, what we see is an economy without market determined interest rates, what we see are critics of Austrian theory who have not the first clue what it is even about, because they don’t READ the source material, and they only read third party pundit garbage from ideological partisans who only want to refute Austrian theory for political reasons.

    What the monetarists and Keynesians kept hammering for a while that finally rescued me from the Austrian intellectual cesspool was the transmission mechanism

    In other words, you never understood Austrian theory, and because Monetarism and Keynesianism are “simpler” on your mind, you felt like a moron reading Austrians, but you feel smart reading Monetarism and Keynesianism. Because you felt smart reading the intellectual cesspool that is Monetarism and Keynesianism, you made the incorrect inference that they are correct, whereas the “incomprehensible” Austrian theory is wrong.

    Maybe you’re creating your own theory . thats fine, but you should at least be clear.

    Why? So that you have a talking point to throw at me? Get over it. I don’t have to be clear on who I am agreeing with and who I am not agreeing with. My arguments stand on their own merit or lack thereof. If you need a straw man to attack, I’m not that person. If you can’t address what I am saying, then ask.

    Maybe you’re using Robert Murphys theory of “universal re-allocation” (He once conducted a thought experiment about magical gnomes re-arranging the entire economy during the night putting airline pilots in computer centers, doctors as cab drivers and vice versa). My own personal rebuttal to this is that we would see a lot of evidence that this is happening. Yet we don’t .

    Your mind is thinking backwards. That’s your problem. Your problem is that you don’t understand the fact that you are starting with an a priori theory and then you try to understand historical data. You believe you can just observe data, and then believe the data reveals a theory. That is not what you are doing.

    What you are ACTUALLY doing is comparing two a priori theories against each other, your theory and Austrian theory, and you’re insisting that your theory is correct on the basis of the data, despite the fact that Austrian theory is also entirely consistent with the data. But because you believe “a” theory is consistent with the data, namely your own a priori theory, you then infer that this is the only correct theory, not realizing of course that this is a false methodology of settling on a theory.

    You have to compare theories based on a third standard, and settle the dispute. You can’t settle mutually exclusive theories that are consistent with the data, by observing the data alone. The settling requires economic logic, which you are very weak.

    The gnome thought experiment was to show that problems can arise on the side of supply that are independent from aggregate demand. That’s all it was meant to do. Of course you won’t see evidence of garden gnomes. But we do see evidence that supply side problems exist apart from demand. No economist in the world believes all economic problems are demand side only. The fact that you say there is no evidence for supply side problems, shows that you are not aware of a theory that would enable you to see them. You have to have a correct theory before you look at data correctly.

    Nor does accelerating money supply growth mean anything of the money don’t run around.

    That statement makes no sense to me.

    BFD that Australia needs accelerating money supply growth.

    This is why you’re not considered credible in my view. You actually believe there is nothing problematic with accelerating money supply growth.

    if the money doesn’t circulate, it won’t cause price inflation, and if it does, than the level targeting rule will call for the central bank to tighten. to stop printing money and end the inflation.

    Historically currency collapses have happened very quickly.

    What happens when there is so much money, that it is indeed spent, and the central bank cannot destroy money as fast as it is spent, such that aggregate demand and hence aggregate prices rise so fast that it cannot be used for calculation purposes anymore?

    What I also find incredible amusing is your support of free market money production. Its amusing not because its a bad policy, but I don’t think you understand the implications of your own worldview.

    I understand quite well the implications of my worldview. Your claim to the contrary is irrelevant.

    See, I define a gold standard as a situation where the government, not the people, mandates that gold is legal tender for all debts , public and private. thereby crowding out all other choice, and all other currencies EVEN SILVER.

    I define a free market money standard as one that is manifested by private property rights and voluntary exchange. That is what I advocate. I also typically say along side this, to fill in the blanks so to speak, that a free market in money would almost certainly, but not guaranteed of course, result in a precious metals based money. Chemists can explain why gold and silver have been the most popular money of choice. Austrians can explain why gold and silver have been the most popular money of choice.

    Monetarists can only start with “This is what the state enforces, deal with it”, which is what I would expect from a fascist or communist.

    See the crime of 1873 if you don’t believe me and how bi-metallism was destroyed. Most Austrians are incredibly coy about whether they support gold, or free market money, because they think theres the same thing, but you see, THEY”RE NOT.

    You’re just making that up. They’re not coy. Ask any one of them point black: Do you support a free market in money production, or a state enforced gold standard? 99% of the time you’ll hear “free market in money production.” For those who say “state enforced gold standard”, you’re almost certainly talking to a rare non-anarchist Austrian.

    Most likely we’d have gold with free market money, along with silver, platinum, copper, diamonds, maybe even iron or aluminum.

    You might be right, but we can still argue that aluminum and copper are relatively too abundant and low value per unit volume to be as good a money as gold and silver, which is more valuable per unit volume. Diamonds are not as easily separable, nor are they as homogeneous, as gold and silver. Iron is more easily corroded than gold and silver. Platinum is MORE, perhaps TOO, rare compared to gold and silver.

    I am just saying MY personal preferences for money. In a free market, my personal preferences will be integrated into the preferences of every other market participant, and may the best money win.

    Who are you to say that people can’t use copper or diamond coins or e-jewels as currency.?

    I didn’t say they can’t. Who are you to tell me I am in favor of coercion, when I am the only non-coercion advocate on this blog?

    Who are Monetarists and Keynesians to say that people should be forced to pay taxes in US dollars, and should be forced under the umbrella of US dollar legal tender courts?

    You’re reversing the who’s who of coercion. It’s not the Austrians who want to impose a money on others. It’s you Monetarist/Keynesian, i.e. STATIST types. You have it exactly backwards.

    In fact because of the money illusion, the way the free market would handle a money shortage would not be for prices in gold terms, to fall,, but A SUBSTITUTION of the cheaper, more abundant precious metals.

    That might be the case, but if this does happen, then it will have to true that an expansion in other metals is profitable, which means the market process of voluntary exchange will determine whether or not there is not enough gold and silver money such that the gold and silver price of mined copper and iron say, are high enough to earn profits for the cooper and iron miners, who can sell their iron and copper for real goods since iron and copper are now accompanying gold and silver as medium of exchanges.

    dwb

    @rick,

    just ignore major freedom. hes the internet austrian, theres no hope of changing his mind. worry if you start agreeing with him.

    Yawn.

    Edward

    Therefore, The natural tendency of the free market is inflation, because thats why substantial number of people wanted silver, so it would raise prices.

    Increase in the supply of fiat paper controlled by central bankers who have no access to the price system, of profit and loss, for fiat money production, is not the same thing as increase in the supply of free market money where gold producers are subject to profit and loss.

    The “peaceful” free market wants monetary expansion and inflation, and the statists in Europe want Austerity

    Austerity is not monetary deflation. Get a grip. You’re losing it.

    Major_Freedom at Bob Murphy’s

    “As for the slope of the AD curve, I hold the LONG RUN AS curve to be vertical. All sellers I view as price takers, because I assume they do not gain direct utility from their own supplies.

    I do not hold that inflation can boost production. It can only redistribute existing production.

    If that were true we would see evidence of this

    We do see evidence of this.

    the boom/bust would not be universal, exactly the point I was making above.

    The boom bust is indeed not universal. Not everyone suffers losses during busts, and not everyone makes gains during booms.

    Your worldview is blatantly contradicted by the evidence

    As shown, no, it isn’t. It is completely consistent with it.

  48. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 06:31

    Rick

    Since we’re talking about elevate unemployment, the only relevant benefit to this claim is unemployment insurance. Unemployment Insurance pays out at approximately 50% of the average weekly wage a person was earning before they became unemployed. At the time they became unemployed, the vast majority of them had expenses that well exceeded 50% of their average weekly wage. UI leaves most people in the red, yet, apparently, this income differential isn’t enough of an incentive for these lazy people to go out and find a job in a market where the ratio of unemployed persons to job openings is on the order of 3 to 1.

    A vast majority of jobs would open up if the minimum wage were abolished, and if all labor regulations, including licensing, and the oodles of red tape required to hire someone, were abolished. Inflation has enabled these supply side problems to persist because the costs of them are, as always, offloaded to the consumers, whose standard of living is reduced from where it otherwise would have been, and because nobody can observe such counter-factual worlds, it is typically ignored.

    If there is a reduction in the demand for labor, then the solution is for labor prices to fall. Since that is politically unpopular, the solution is to reduce real wages through inflation, and reduce unemployment that way. Of course inflation itself causes problems, which is why throughout the decades, American workers are put into lines that do not match the global consumers preferences. After decades of inflation, it is going to take a long time to fix, but unfortunately we’re right back into inflation mode, which is halting the correction process.

    This notion that people are unemployed because the government is paying them to stay unemployed wouldn’t be half as amusing an argument were it not often voiced by the same people who would claim that raising the marginal income tax on the wealthiest Americans back to the level it was a decade ago will cause these folks to go John Gault.

    I don’t care about these unnamed “voices” that you are invoking in order to spoil the well when if comes to what I am saying.

    If it pisses you off to hear me say that unemployment persists because the government is financing unemployment, and preventing employers from financing employment, then I don’t care.

    But, such is the world in which the purveyors of idiotic bromides live.

    Your bromide is idiotic.

    Income differentials have no incentive effects at the bottom of the income ladder, but they, apparently, have huge incentive effects at the top of the income ladder.

    Yeah straw man.

    Here’s hint: When you pay people to stay unemployed, and when you point a gun at people preventing them from hiring people at a wage rate that makes you less likely to be voted as a power hungry parasite, then you shouldn’t act all surprised that the “free market” isn’t seeing a reduction in unemployment.

  49. Gravatar of 123 123
    22. June 2012 at 09:15

    Another victory, another german for NGDP targeting:
    http://researchahead.blogspot.com/2012/06/four-weddings-and-funeral.html

  50. Gravatar of ssumner ssumner
    22. June 2012 at 09:35

    Eric G, Australian government spending is low as a share of GDP.

    2. No.

    3. In 2008 and 2009 he did lots of posts saying monetary policy is ineffective at zero rates. That’s why the left is silent. Lots of conservatives support me, including journalists like Chapman, and Ponnuru for the National Review.

    4. I’ve done numerous posts bashing the GOP on this issue.

    Statsguy, Good point about fuel efficiency,

    Neal, I have little interest in Austrian macro, and I get too many commenters when I post on Austrianism.

    John, Interest rates were very high during the German hyperinflation. I presuume you think money was tight?

    Bill, I used nominal GDP a lot in the interview, it’s up to reporters as to how to write it up. Obviously I wouldn’t use “growth” w/o indicating nominal growth.

    Mike Sax, You are so wrong on pot it’s ridiculous. Obama is racheting up the war on drugs. In Massachusetts the statehouse is 90% Dems and most run unopposed. They still refused to legalize pot even though most voters favor it. Pat Robertson does! The National Review does!

    Greg, I don’t think they felt that way in 2008.

    Dirk, No, I’m still a pragmatic libertarian.

    Coldstream, They would only notice the effects, not the policy.

    Thanks D. Gibson.

    Bill Ellis, Hmmm, You like Krugman for being ‘combative’ and don’t like me for being combative. Is that logical?

    Philo, I don’t need to guess, just look at how he flip-flopped on the Fed after Perry enter the race. Before that he was the only Republican who favored the Fed’s monetary stimulus.

    Peter N, First of all Alphaville isn’t the press, it’s a blog. Second, “safe assets” are very different from monetary policy.

    Saturos, Fortunately I’m different from most people. I don’t care about names spelt correctly, how people dress, and appearances in general. I care about ideas, about aggregate utility, about sports, nature, art, and close friends and family. That’s all. Otherwise I don’t give a s***. I hope I never become famous.

  51. Gravatar of ssumner ssumner
    22. June 2012 at 09:42

    123, Thanks, I did a post.

  52. Gravatar of Major_Freedom Major_Freedom
    22. June 2012 at 09:47

    Bill Ellis:

    “It has stayed at an elevated level because the government is paying people to stay unemployed. It’s not because reallocation is ineffective.”

    Why does any one talk to this guy ? You are never gonna get him to see reality.

    Aww, did that make you angry? That I am not praying to the labor God?

    He is faith based.

    No, it’s the opposite. I am reality based. You are faith based. You have faith in the sacredness of labor, where if force is used against non-labor, that it will help labor. Except in a division of labor society, hurting non-labor will hurt labor.

    Getting him to budge an inch even in the face of refutations that are clear to anyone with an open mind is like asking a Christian Minster to be mushy on the divinity of Christ.

    What refutations?

    I am pleading for them, searching for them, but all I see are worthless platitudes from those who think they are arguing with a corporatist who hates the poor.

    The only reason I can see to feed this troll is for the spectacle.

    You obviously don’t know what a troll is. It’s not someone who disagrees with you, nor is it someone who refuses to accept nonsense drivel.

    If you want an echo chamber, sit in one.

  53. Gravatar of MikeM MikeM
    22. June 2012 at 10:26

    I think smart commentators on the left realize that if monetary policy is tried in earnest and fixes this mess, we’ll have no need for massive fiscal stimulus like 2009 stimulus package from the Obama administration and a realization that market infusions of stimulus are better than government backed ones (win the battle, lose the war). High speed rail was a favorite civic project of the left in 2009 and now has turned into a colossal waste of money, whereas monetary stimulus of the same amount would’ve been allocated by individuals in pursuit of their own separate interests.

  54. Gravatar of Bill Ellis Bill Ellis
    22. June 2012 at 14:14

    S Sumner.

    Oh No, I do you like being combative. But not with someone who is pushing in the same direction as you are.

    When it comes to the tug-of war over monetary expansion you two are pulling on the same side of the rope… now.

    You are fighting a battle you have won.

    But hey, you are a lot smarter than I. If you think it works to keep going after Krugman by name while never calling out anyone on the right.

  55. Gravatar of Bill Woolsey Bill Woolsey
    22. June 2012 at 15:40

    “Bill, I used nominal GDP a lot in the interview, it’s up to reporters as to how to write it up. Obviously I wouldn’t use “growth” w/o indicating nominal growth.”

    I should have figured it was the reporter. Oh well, better luck next time.

    Still, it is really cool to see you and David (and Ponnuru)in Time.

    The Chapman piece was on the Reason blog. The comments were pretty frightening.

  56. Gravatar of ssumner ssumner
    22. June 2012 at 17:08

    MikeM, Good point.

    Bill Ellis, You said;

    “But hey, you are a lot smarter than I. If you think it works to keep going after Krugman by name while never calling out anyone on the right.”

    I criticize people on the right more often than I criticize Krugman. I often praise Krugman. Krugman is harder on me than I am on him. You might want to give him some advice, if you feel we are on the same team. Have you written to him suggesting that he not insult me?

  57. Gravatar of ssumner ssumner
    22. June 2012 at 17:09

    Bill, I subscribe to Reason, so I’m gald it appeared over there.

  58. Gravatar of William Bruce William Bruce
    22. June 2012 at 18:39

    “I don’t care…I don’t give a s***.”

    Professor Sumner, are you, in reality, the money badger?

  59. Gravatar of RebelEconomist RebelEconomist
    23. June 2012 at 03:42

    Scott, a question for you, admittedly based on the journalists’ characterisations of your views.

    Assuming that the Fed did expand the monetary base to meet, and be seen to meet, the presently elevated demand for base money and raise NGDP expectations without generating inflation in the process, do you see a danger of inflation later, when demand for base money falls back as the financial crisis recedes? Do you think that the Fed could easily mop up any excess of base money by selling the assets it had bought to supply the extra base money?

    I ask this question because I think that there is too much emphasis from Krugman etc on getting out of the present crisis, and not enough thought given as to whether the proposed escape routes lead to other problems that might be just as serious. I will admit to being surprised at how easily the BoJ were able to start constracting their QE, but unfortunately, the process did not progress very far before they were hit by the foreign financial crisis and forced to renew their easing, so I am not sure that this provided an adequate test.

  60. Gravatar of ssumner ssumner
    23. June 2012 at 07:55

    William, I value time more than money.

    Rebeleconomist. Yes, it’s very easy to stop inflation. Just tighten up on monetary policy.

    I agree that the focus should be on a sustainable policy trajectory, not getting out of this crisis. I view NGDPLT as that sustainable policy trajectory.

  61. Gravatar of RebelEconomist RebelEconomist
    23. June 2012 at 08:30

    Scott, as I am sure you know, “just tighten up on monetary policy” is not an answer. In practical terms, how would you tighten it? Would you sell assets to contract the stock of base money, or raise the interest paid on reserves to replace the waning precautionary demand for base money with an increased demand to hold reserves as a store of value? And do you acknowledge potential problems with these methods, like the losses the central bank might sustain on its asset transactions or the collateral damage caused to other holders of these assets?

    If I may say, I think you ought to pay more attention to your sceptical commenters (unless they write multiple post-length comments on every post like you know who) rather than fobbing them off with glib and unsatisfactory answers. That should help you refine your answers to the common objections to your proposals and who knows, you might even convert some of the sceptics in which case “….joy shall be in heaven over one sinner that repenteth, more than over ninety and nine just persons which need no repentence.”

  62. Gravatar of Mike Sax Mike Sax
    23. June 2012 at 08:40

    “You are so wrong on pot it’s ridiculous. Obama is racheting up the war on drugs.”

    To say it’s ridiculous is certainly overstating your case. Right now Andrew Cuomo and Rahm Immanuel are introducing measures to decriminalize pot. Cuomo has already instructed the NY police not to arrest people for having small amounts of pot on them.

    The Texas Democrats have it in this year’s platform to decriminalize pot as to Colorado Dems. The Congressional Democrats now also have a measure.

    If fact name me the one Republican policy maker pushing anything in this direction-the NR is just editorials. No GOPers are listening to them on this one.

    In NY the Repgus are trying to prevent him. They can’t stop his executive order but they aren’t playing ball on additonal legislaton just like they’re fighting him on ligtening up on opposition to immmigrants.

    Hope you’re not going to tell me that the GOP is the party that wants to give immigrants a chance now too. Romney is Mr. Self Deport.

  63. Gravatar of Mike Sax Mike Sax
    23. June 2012 at 09:23

    Edwward does make a good point that gold itself was the result of Major’s “state violence” in the Crime of 1873. Historically then the gold standard wasn’t the result of pure market forces but was imposed by government mandate

    Edward appreciate your insights as a recovering Austrian. As you know Austrains claim there can be no general glut. This goes back to their illusionary idea that money is just another commmodity

  64. Gravatar of Major_Freedom Major_Freedom
    23. June 2012 at 14:08

    Mike Sax:

    Edwward does make a good point that gold itself was the result of Major’s “state violence” in the Crime of 1873. Historically then the gold standard wasn’t the result of pure market forces but was imposed by government mandate

    Edward appreciate your insights as a recovering Austrian. As you know Austrains claim there can be no general glut. This goes back to their illusionary idea that money is just another commmodity

    It’s not an illusion. Money is in fact a commodity. It is a scarce resource. It is an object of economic action. That makes it a commodity. It just so happens to be the most universally accepted commodity.

    It’s not “just like” oil and broccoli, but then neither is oil “just like” broccoli either. Commodities are heterogeneous, and serve different purposes. Some are for direct utility (consumption). Others are for indirect utility (capital). Some are for mediums of exchange (money). They’re all commodities.

    General gluts are in fact not possible, but not because of money or not money, but because there is no inherent limit to the amount of wealth that humans desire.

    No matter how much wealth is produced, the fact that humans have reason creates a need and desire for more wealth than what exists. You take all the wealth in the world right now, and it is a guarantee that there is a desire for more. THIS is ultimately why general gluts are impossible. It has nothing to do with how many goods are produced compared to the supply of the money commodity.

    The belief that general gluts are possible actually derives from a depraved view of humanity, where it is believed that humans have a limited desire for wealth, such that it is possible where humans can produce “too much” relative to this limit. The limit is believed to exist because of people conceiving humans as nothing but just another lower animal like apes or chimps. This also is why people have the view that the problem of economic life is how to maximize consumption, so that the ability to produce never outstrips the ability to consume.

    It’s the philosophical corruption that has made Keynesianism, and the illusion of general gluts possible.

    It is an illusion to believe that the universally accepted commodity, what we call “money”, ceases to be a commodity simply because of its general acceptance. No, it’s still a commodity. It’s still scarce. It’s still an object of economic action. That doesn’t change.

    The illusion you are suffering from is similar to your illusion regarding initiations of force. To you, when initiations of force become “generally accepted”, by the majority, they cease being initiations of force. In your mind, if there is a group of people calling themselves “government”, who initiate force, then you believe that the initiations of force become something else other than initiations of force. Thus, you insist we use a different name for it, either “law”, or “social contract”, or some other Orwellian terminology, such that if anyone calls it for what it is, initiations of force, THEFT, you then believe you’re being victimized by rhetorical tricks, semantics, and name games. Except it is precisely you who is doing that by calling initiations of force “the social contract”, or “law”, or “democracy”, if the force becomes “generally accepted”.

    Money is a commodity. You can deny this until you’re blue in the face. But money is a commodity. It is an illusion to believe otherwise.

  65. Gravatar of Neal Neal
    24. June 2012 at 14:21

    Scott, you might (in some hypothetical future) find Roger Garrison’s book Time and Money interesting, if you haven’t read it already. I am finding that his description of Austrian theory seems to complement market monetarism.

  66. Gravatar of ssumner ssumner
    24. June 2012 at 16:37

    Rebeleconomist, You decrease the supply of base money or increase the demand for base money (via higher IOR.)

    Mike Sax, You said;

    “name me the one Republican policy maker”

    Ron Paul. And there are others as well.

    Neal, Thanks for the tip.

  67. Gravatar of Eric G Eric G
    27. June 2012 at 17:33

    Oh so, you define “big government” by spending as a share of GDP? That’s odd, the current US spending levels have spiked because of the Republican housing bubble and bust created the recession, more unemployment and poverty thus more spending. So is it “big” now but small in 2008?

  68. Gravatar of Eric G Eric G
    27. June 2012 at 17:38

    Yeah, I have to back up Mike Sax a little bit. In Massachusetts as you know marijuana under an ounce is decriminalized and I’m hearing from a lot of lawyers that cops don’t even bother with the citations. Massachusetts rocks!

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