Saturday, November 7, 2009
Pete Boettke Fulfills My Prophecy
UPDATE: Be sure to read the Sumner/Murphy exchange in the comments. Folks, I may have to put the Google ads back up. This is easily a $19.95 value, yours free if you act now. --RPM
Sometimes I feel like the Barack Obama of econoblogging. I understand all sides in a dispute; I am the aloof Olympian overseer.
Case in point: Paul Krugman was upset at economists who use MV=PY not simply as a tautology, but as a causal economic theory. (I've criticized Keynesians who do the same with Y=C+I+G+NX.) Krugman is at his best when he goes off on economists who think that exchange rates don't affect the trade deficit, because "it's determined by capital flows." Anyway, in our current case, Krugman says:
OK so even though in general I loved Scott's post, I chastised him for saying Krugman was speaking nonsense, when Krugman made a perfectly good point. Here's what I said:
Then Scott in the comments to my above said:
Whoa! Danger danger Will Robinson! Not only did Boettke utter the exact theory that Krugman was attacking--Pete attributed it to Sumner!! And then in the comments to Pete's post, Scott says:
==========
OK the above smarty pants version was written for the 100 or so die-hard econogeeks who spend at least 10% of their lives reading MarginalRevolution et al. Shame on you.
Now for the casual reader, a summary:
(1) I am making fun of Scott Sumner, not Pete Boettke. Krugman's post was perfectly comprehensible, and moreover he wasn't attacking a strawman--many economists would boil down Sumner's own view into the very one that Krugman was attacking.
(2) Krugman's argument is that it is wrong to view V ("velocity of circulation" or the speed with which an average dollar turns over and thus pushes up prices) as independently determined, so that if prices are falling the Fed can just pump up the money supply to keep the total value of output (measured in dollars) from falling. Krugman's point is that in a liquidity trap, if the Fed doubles the money supply, then velocity will simply get cut in half. So the Fed can push and push and push, and it won't prop up aggregate demand (measured in nominal dollars).
(3) I'm not saying I agree with Krugman, I'm just saying it is an interesting thing to consider. The standard explanation for what happened in the early 1930s--an explanation shared by Scott Sumner, Ben Bernanke, (the later) Friedrich Hayek, and many modern Austrians--is that the Fed stupidly allowed the money stock to collapse, which pulled down "MV" and thus pulled down "PY." Since prices couldn't fall quickly enough (for various reasons some of which were the fault of Herbert Hoover and unions), that meant real output (Y) had to fall. Now if in, say, 2005 we wanted to test this idea, we might say, "Shucks it's too bad we couldn't re-run history. If the Friedman explanation were right, a massive spike in the monetary base would've nipped things in the bud. But too bad we'll never be able to really test it; I bet the Fed would never have the courage to really put the pedal to the medal and increase the monetary base a ludicrous amount and keep M1 from falling in the midst of a huge financial panic. But if the Fed did do that--and then the economy quickly bounced back--that would be proof that Friedman was right. Of course, if the economy continued to flounder, and we ended up with the second Great Depression, then propping up M clearly wasn't the solution..."
(4) To drive home the point: Scott Sumner can appreciate how annoying it is that Krugman will continue to cling to his doctrine that big fiscal deficits are the way to fix depressions, even as unemployment breaks 10% while the government runs a $1.4 trillion deficit. Yet Scott has no problem looking at what Bernanke has done with the monetary base and saying, "Obviously it's not enough, because we're still stuck in a recession." Again, this doesn't prove Scott is wrong, but surely he can see the eerie similarity.
Sometimes I feel like the Barack Obama of econoblogging. I understand all sides in a dispute; I am the aloof Olympian overseer.
Case in point: Paul Krugman was upset at economists who use MV=PY not simply as a tautology, but as a causal economic theory. (I've criticized Keynesians who do the same with Y=C+I+G+NX.) Krugman is at his best when he goes off on economists who think that exchange rates don't affect the trade deficit, because "it's determined by capital flows." Anyway, in our current case, Krugman says:
Here’s my problem. Underlying the focus on nominal demand or GDP is some notion that there’s a quantity equation:Referring to the above, our good friend Scott Sumner said:
MV = PY
where M is the money supply, V the velocity of money, P the price level, Y real GDP. And of course this always holds true, by definition. But the temptation is to take it as a causal relationship — to say that real GDP fell because nominal GDP fell, and that this in turn was caused by either a fall in M or a fall in V; and furthermore that any such decline is a failure of monetary policy, because the central bank should have either prevented the fall in M or increased M enough to offset the fall in V.
The second sentence has to be one of the weirdest things I have ever read by a famous economist. I have no idea the point he is trying to make. It is essentially saying that underlying the statement that A*B is important is the implication that A*B = M*(A*B/M). Okay . . .OK hang in there folks. I know you want to know when Boettke enters the fray. Patience my friends.
OK so even though in general I loved Scott's post, I chastised him for saying Krugman was speaking nonsense, when Krugman made a perfectly good point. Here's what I said:
Scott says that he doesn't even understand what Krugman is talking about in the beginning, when I for one certainly "got" Krugman's take on people using MV=PY inappropriately. Not only did I get it, I was nodding my head in agreement.
Then Scott in the comments to my above said:
Thanks Bob, BTW, Krugman seems to have a problem with David using MV=PY inappropriately, but if you read David's post he never even mention's MV=PY once. It's all a figment of Krugman's imagination. I understand that Krugman doesn't like MV=PY, but how does that relate to talking about nominal GDP?OK so then I said in response to that:
Well right, but Krugman is saying that a lot of people go from "We need to boost real GDP!" to "We need to boost NGDP!" to "We need to boost M to offset the fall in V!"OK enter Boettke. In commenting on Krugman vs. Sumner, Pete says:
He's not attacking a straw man, since I think a bunch of Austrians say exactly this.
Paul Krugman provides his take on the Beckworth graph showing the collapse of nominal spending and relates it to his 1998 work on Japan. The upshot, monetary policy will not produce the desired effect in our current situation. Scott Sumner responds and continues to push his position that monetary policy has been too restrictive.
I have discussed this issue with Steve and Larry and I keep getting hung up on this idea that monetary policy has been too restrictive. I get the point about if V collapses faster than money supply is expanded, you get Sumner's position. On the other hand, I don't get it at a very basic level.
Whoa! Danger danger Will Robinson! Not only did Boettke utter the exact theory that Krugman was attacking--Pete attributed it to Sumner!! And then in the comments to Pete's post, Scott says:
Peter, Thanks for the link. If we take a public choice view then blah blah blah.(Note I have slightly edited the above.) Scott didn't devote even a single sentence to saying, "Actually Pete, I'm not sure that you've correctly interpreted my theory, since when Krugman said what you just said, I told my readers I didn't even understand the words comin' outta his mouth. So please rephrase it in a way that a famous economist would talk, because what you've typed above is just plain weird."
1. Blah.
2. Or blah.
In other words blah blah blah.
OK the above smarty pants version was written for the 100 or so die-hard econogeeks who spend at least 10% of their lives reading MarginalRevolution et al. Shame on you.
Now for the casual reader, a summary:
(1) I am making fun of Scott Sumner, not Pete Boettke. Krugman's post was perfectly comprehensible, and moreover he wasn't attacking a strawman--many economists would boil down Sumner's own view into the very one that Krugman was attacking.
(2) Krugman's argument is that it is wrong to view V ("velocity of circulation" or the speed with which an average dollar turns over and thus pushes up prices) as independently determined, so that if prices are falling the Fed can just pump up the money supply to keep the total value of output (measured in dollars) from falling. Krugman's point is that in a liquidity trap, if the Fed doubles the money supply, then velocity will simply get cut in half. So the Fed can push and push and push, and it won't prop up aggregate demand (measured in nominal dollars).
(3) I'm not saying I agree with Krugman, I'm just saying it is an interesting thing to consider. The standard explanation for what happened in the early 1930s--an explanation shared by Scott Sumner, Ben Bernanke, (the later) Friedrich Hayek, and many modern Austrians--is that the Fed stupidly allowed the money stock to collapse, which pulled down "MV" and thus pulled down "PY." Since prices couldn't fall quickly enough (for various reasons some of which were the fault of Herbert Hoover and unions), that meant real output (Y) had to fall. Now if in, say, 2005 we wanted to test this idea, we might say, "Shucks it's too bad we couldn't re-run history. If the Friedman explanation were right, a massive spike in the monetary base would've nipped things in the bud. But too bad we'll never be able to really test it; I bet the Fed would never have the courage to really put the pedal to the medal and increase the monetary base a ludicrous amount and keep M1 from falling in the midst of a huge financial panic. But if the Fed did do that--and then the economy quickly bounced back--that would be proof that Friedman was right. Of course, if the economy continued to flounder, and we ended up with the second Great Depression, then propping up M clearly wasn't the solution..."
(4) To drive home the point: Scott Sumner can appreciate how annoying it is that Krugman will continue to cling to his doctrine that big fiscal deficits are the way to fix depressions, even as unemployment breaks 10% while the government runs a $1.4 trillion deficit. Yet Scott has no problem looking at what Bernanke has done with the monetary base and saying, "Obviously it's not enough, because we're still stuck in a recession." Again, this doesn't prove Scott is wrong, but surely he can see the eerie similarity.
Comments:
Bob, A couple comments. I have no problem with Krugman criticizing the QT of Money. I have a problem with his claiming that falling NGDP is not the cause of the recession. He's been arguing against real theories of the recession for months, and now it's suddenly not due to a shortfall in nominal spending? I don't get it.
The comparison between fiscal and monetary stimulus is meaningless. Fiscal stimulus imposes a huge burden on taxpayers, monetary stimulus imposes no burden, in fact lightens the burden. A good effort by Bernanke is meaningless, all that matters is if there is enough money to create the desire expected NGDP growth. You can't say that about fiscal policy, deficits really are a burden on the economy.
The comparison between fiscal and monetary stimulus is meaningless. Fiscal stimulus imposes a huge burden on taxpayers, monetary stimulus imposes no burden, in fact lightens the burden. A good effort by Bernanke is meaningless, all that matters is if there is enough money to create the desire expected NGDP growth. You can't say that about fiscal policy, deficits really are a burden on the economy.
Scott,
Perhaps I'm wasting too much time on a minor quibble. I have no problem with what you just said here, and (as you know) I'm totally on board with your claim that Krugman is contradicting himself when his own academic work shows the superiority of monetary stimulus (perhaps "unconventional" monetary stimulus).
All I'm saying in this post is that you were apparently baffled by Krugman's opening paragraphs, when (in my mind) they were quite sensible, and in fact described exactly the view that Boettke attributed to you.
Let me put it this way: Krugman is saying that it's wrong to think of "falling NGDP" as "MV." You are using the terms interchangeably, and Krugman is saying that can be very dangerous. Why? Because when you think of "nominal spending" not as the sum of government spending, private consumption, investment spending, etc., but instead think of it as "M times V," then that leads you into the trap of thinking, "Dang, nominal spending is falling because people are scared or whatever, so we'd better jack up M."
To repeat, Krugman is contradicting his other views. But in isolation, this particular point is quite profound. You are choosing to decompose "nominal spending" into "M times V"--or you in effect are doing that because your recommendation relies on boosting M in order to boost nominal spending--and Krugman thinks that's the wrong way to decompose it. Instead, Krugman wants to break it down into C+I+G+NX (expressed in nominal terms) and then the way to boost it is to prop up G.
One last point: The way I would criticize Krugman's reliance on Y=C+I+G+NX is to say, "When you raise G, that won't necessarily 'close the output gap.' What if private consumption and investment fall to perfectly or partially offset the rise in G?"
But Krugman is saying the same thing to you: Even if Bernanke boosted M, that wouldn't raise nominal spending, because V would fall and offset it.
You see? Krugman is NOT DENYING that "nominal spending" needs to be higher. He is saying that boosting M won't do the trick.
Perhaps I'm wasting too much time on a minor quibble. I have no problem with what you just said here, and (as you know) I'm totally on board with your claim that Krugman is contradicting himself when his own academic work shows the superiority of monetary stimulus (perhaps "unconventional" monetary stimulus).
All I'm saying in this post is that you were apparently baffled by Krugman's opening paragraphs, when (in my mind) they were quite sensible, and in fact described exactly the view that Boettke attributed to you.
Let me put it this way: Krugman is saying that it's wrong to think of "falling NGDP" as "MV." You are using the terms interchangeably, and Krugman is saying that can be very dangerous. Why? Because when you think of "nominal spending" not as the sum of government spending, private consumption, investment spending, etc., but instead think of it as "M times V," then that leads you into the trap of thinking, "Dang, nominal spending is falling because people are scared or whatever, so we'd better jack up M."
To repeat, Krugman is contradicting his other views. But in isolation, this particular point is quite profound. You are choosing to decompose "nominal spending" into "M times V"--or you in effect are doing that because your recommendation relies on boosting M in order to boost nominal spending--and Krugman thinks that's the wrong way to decompose it. Instead, Krugman wants to break it down into C+I+G+NX (expressed in nominal terms) and then the way to boost it is to prop up G.
One last point: The way I would criticize Krugman's reliance on Y=C+I+G+NX is to say, "When you raise G, that won't necessarily 'close the output gap.' What if private consumption and investment fall to perfectly or partially offset the rise in G?"
But Krugman is saying the same thing to you: Even if Bernanke boosted M, that wouldn't raise nominal spending, because V would fall and offset it.
You see? Krugman is NOT DENYING that "nominal spending" needs to be higher. He is saying that boosting M won't do the trick.
I don't have a PhD in economics, but I find Bob to be very agreeable here.
Also, on the Krugman's point "to say that real GDP fell because nominal GDP fell, and that this in turn was caused by either a fall in M or a fall in V"
How could this MV=PY explanation apply to a period of deflation? Is it not possible to have a rise in the real GDP and real income, with a simultaneous fall in NGDP, nominal income, price levels, and money supply? Would V in this case always rise in exact proportion to everything else? Or have I misunderstood the problem here?
Also, on the Krugman's point "to say that real GDP fell because nominal GDP fell, and that this in turn was caused by either a fall in M or a fall in V"
How could this MV=PY explanation apply to a period of deflation? Is it not possible to have a rise in the real GDP and real income, with a simultaneous fall in NGDP, nominal income, price levels, and money supply? Would V in this case always rise in exact proportion to everything else? Or have I misunderstood the problem here?
# posted by 
: November 7, 2009 10:01 PM
: November 7, 2009 10:01 PM
Bob, Again, I have no problem with Krugman saying MV is misleading. But that's not why he is criticizing David. David never mentioned MV. Krugman says it's misleading to focus on the fall in NGDP. And the fall in NGDP is the cause of all our problems according to Krugman's own model. I'll take another look in the morning, but Krugman's comments seemed a complete non-sequitor. I mean it's also true that NGDP equals the number of Austrian economists in the world times Z, where Z is defined as NGDP divided by the number of Austrian economists in the world. That's equally relevant to David's post, i.e. of no relevance whatsoever. Krugman may have something else in mind that he didn't like, but he picked on the wrong guy, as David wasn't guilty of misusing MV, or even mentioning MV.
Scott,
If you're still checking, here's why Krugman thinks that guy supports a monetary solution. At the very end (after his famous charts) he wrote:
I think it also speaks to the influence of U.S. monetary policy on global liquidity conditions and, thus, it influence on global nominal spending.
Also, Krugman linked to Bruce Bartlett apparently explicitly talking about M and V (though I didn't follow the link so maybe Krugman mischaracterized it--I would have suspected Bartlett would blame the recession on Ron Paul, not the Fed).
And then also note that the very first commenter at David's blog said he wanted to introduce him to...Scott Sumner!!
So if Krugman is crazy for seeing the connection between that guy's charts and people calling for more M, then:
(a) Boettke is crazy too, and
(b) the first commenter at David's blog is crazy too.
You're right in your analogy with Z, but the difference is that increasing the number of Austrian economists would help the economy. This is a case for the tautology coincides with causality.
If you're still checking, here's why Krugman thinks that guy supports a monetary solution. At the very end (after his famous charts) he wrote:
I think it also speaks to the influence of U.S. monetary policy on global liquidity conditions and, thus, it influence on global nominal spending.
Also, Krugman linked to Bruce Bartlett apparently explicitly talking about M and V (though I didn't follow the link so maybe Krugman mischaracterized it--I would have suspected Bartlett would blame the recession on Ron Paul, not the Fed).
And then also note that the very first commenter at David's blog said he wanted to introduce him to...Scott Sumner!!
So if Krugman is crazy for seeing the connection between that guy's charts and people calling for more M, then:
(a) Boettke is crazy too, and
(b) the first commenter at David's blog is crazy too.
You're right in your analogy with Z, but the difference is that increasing the number of Austrian economists would help the economy. This is a case for the tautology coincides with causality.
Scott Sumner wrote:
Fiscal stimulus imposes a huge burden on taxpayers, monetary stimulus imposes no burden, in fact lightens the burden.
I submit that the latter statement is preposterous. Fiat money creation amounts to monetary dilution. Purchasing power is stolen from those holding the existing money and transfered to those receiving the new money. That’s your “monetary stimulus” (“Whoopie! I got some new money!!”). Only the thieves have a lightened burden. The victims are victims of theft through stealth and fraud. Just like “fiscal stimulus” which is another form of theft through stealth and fraud.
Further, money dilution distorts the market pricing system, especially the pricing of interest rates and distorts long term capital investment leading to the boom and bust cycle.
Imposes no burden? I don't think so. Fiat money creation is the cause of our economic catastrophe.
Fiscal stimulus imposes a huge burden on taxpayers, monetary stimulus imposes no burden, in fact lightens the burden.
I submit that the latter statement is preposterous. Fiat money creation amounts to monetary dilution. Purchasing power is stolen from those holding the existing money and transfered to those receiving the new money. That’s your “monetary stimulus” (“Whoopie! I got some new money!!”). Only the thieves have a lightened burden. The victims are victims of theft through stealth and fraud. Just like “fiscal stimulus” which is another form of theft through stealth and fraud.
Further, money dilution distorts the market pricing system, especially the pricing of interest rates and distorts long term capital investment leading to the boom and bust cycle.
Imposes no burden? I don't think so. Fiat money creation is the cause of our economic catastrophe.
# posted by : November 8, 2009 1:46 PM
: November 8, 2009 1:46 PM
Nike all star shoes
NBA all star shoes
Adidas basketball shoes
NBA basketball shoes
Nike Basketball shoes
Nike Outlet
Adidas Outlet
LeBron James Shoes
Kobe Bryant Shoes
Allen Iverson Shoes
Kevin Garnett shoes
Paul Pierce Shoes
Penny Hardaway Shoes
Nike Flightposite
Nike Basketball shoes
Nike Outlet
LeBron James Shoes
Post a Comment
NBA all star shoes
Adidas basketball shoes
NBA basketball shoes
Nike Basketball shoes
Nike Outlet
Adidas Outlet
LeBron James Shoes
Kobe Bryant Shoes
Allen Iverson Shoes
Kevin Garnett shoes
Paul Pierce Shoes
Penny Hardaway Shoes
Nike Flightposite
Nike Basketball shoes
Nike Outlet
LeBron James Shoes
<< Home
Subscribe to Posts [Atom]