Just a Reminder: You Can Have High Unemployment and Price Inflation Simultaneously
I am working on a C4L rebuttal to this Greg Ip article. But I thought I’d give you guys a sneak peek on one of my points.
Ip apparently subscribes to the “we’re all Keynesians now” view when he writes:
People and businesses spend when their incomes are growing and they’re confident about the future…If…spending outstrips the economy’s productive capacity, inflation could result. But that’s years away: The economy today is awash in idle factories and unemployed workers.
OK, so then how is it possible that in late 2008, Zimbabwe had price inflation so ridiculous, that prices doubled every 25 hours, while in January 2009, the official unemployment rate was 94 percent? That seems like a lot of idle factories and unemployed workers. And, just to be clear, I’m saying that in my humble opinion, the (price) inflation rate of 79.6 billion percent could be construed as “high.”
http://en.wikipedia.org/wiki/NAIRU
While I agree with your general point, I also think that hyperinflation is a special case. Hyperinflation means that money is no longer a store of value even for very short periods. Thus, it ceases to be a reliable medium of exchange, i.e., a reliable alternative to barter even for the length of time necessary to arrange the exchange. Economic activity shrinks.
Bob, I’ve long seen the relationship between inflation and employment as being something like an inverted u-shaped curve. Economic efficiency suffers at both capacity under- and over-utilization.
Over-utilization would involve consumption rates literally above the capacity of the economy to meet them, increasingly destroying savings and capital investment in real terms. As deferred consumption grinds down, unemployment eventually increases. This can happen via expectations, which of course can move effects forward.
On Zimbabwe in particular, comparisons between it and the US are silly for a number of reasons. For one, Zimbabwe essentially has no treasury department or open market operations, literally printing money to pay its bills. This is due to the extreme lack of demand for its debt.
Here in the US, we have an actual treasury and OMOs; very low debt/GDP ratio in terms of default risk; the world’s reserve currency, which is independent; and a huge tax base.
I often hear Austrians and others compare our debt and deficit situation to that of households with similar levels of debt. This comparison is ridiculous in many ways, but it actually serves to illustrate the opposite of the intended point.
For at least many decades, typical American homeowners have carried mortgages at 3 times or greater income, along with auto loans and credit cards. The vast majority have always done so sustainably.
This is on of the reasons I’ve presumed Japan can remain extremely solvent even with a far higher debt/GDP ratio, which last I checked was around double our current one.
Bob, would you mind clarifying where he says that inflation and unemployment can’t come together. He doesn’t Bob, he simply doesn’t. You and he may have a disagreement about the prospects of inflation under current conditions, but I don’t think you need to so smugly reminded him that inflation and unemployment can come together. I’m not aware of anywhere where he said that unemployment can’t come with inflation, and I’m not aware of what an erroneous view like that has to do with Keynesianism either.
Daniel, he says:
If…spending outstrips the economy’s productive capacity, inflation could result. But that’s years away: The economy today is awash in idle factories and unemployed workers.
I am reading that to mean, “We can’t have high inflation while there are idle factories and unemployed workers.” Is that not what he is saying?
As far as Keynesian theory, this is literally textbook (at least at the undergrad level). You have a short-run Aggregate Supply curve that is horizontal and then shoots upward. So if Aggregate Demand starts out low, as you increase it, you get increases in real output with no upward pressure on prices. But once you hit full employment (i.e. once AD starts intersecting the SRAS curve where it swings upward), then further increases in AD don’t give much more real output, they just lead to rising prices.
Right I read that Bob. My understanding of that was “one cause of inflation is demand push inflation, and there’s no risk of that right now”. I didn’t read anywhere where he said “unemployment and inflation can’t come together”.
You really have to assume a shocking degree of ignorance or idiocy to interpret it the way you did. Did Greg Ip just forget the 1970s or any of the other incidents you mentioned? There is absolutely no suggestion in here that he thought demand-pull mechanisms were the only cause of inflation – you do a nice job describing it for everyone in your second paragraph, but that’s not my question – my question was what Keynesian out there can you name that thinks that’s the only way for inflation to happen? We do think it is a way for it to happen, but you’ll have to provide some more evidence for why you think this comment was exhaustive.
That would be like me taking a couple sentences of yours when you’re concerned about inflation because of monetary policy and taunting “I just want to remind you that large secular productivity increases can cause deflation even without a falling money supply”. Of course you know that – noting your concerns for the current episode doesn’t mean you’re ignorant of other causes. You just personally think those causes aren’t quite as big of possibility right now – which as I read it is essentially all Ip is saying.
Daniel,
Are you saying that Ip (and Keynesians) believe there are other causes of (price) inflation besides the supply-demand for money relative to the supply of goods? What are they? Maybe I missed it, but I didn’t see Ip mention these in his article.
Also, I know its not germane to your point, but as an ‘Austrian’, I would be concerned about the Fed increasing the money supply even if prices are falling because more goods are being produced. Inflating the money supply is not only a problem because it increases prices overall. I can’t speak for Dr. Murphy, but I think he would be to.
I’m not sure what you mean – what other causes are there besides the relative supply and demand of money and goods? I think everything that Bob adds here (that as far as I know Keynesians agree with him on) is also subsumed in the relative supply and demand for money and goods, isn’t it?
I’m a little unsure of what to expect with the Fed too – but more because I’m not sure how effective it would be than because I expect it to be hyperinflationary.
It’s just like with the 1920-21 paper, Bob. You gave me a series of Krugman posts that quite clearly said we need fiscal policy. Fair enough, but in my response, I gave you other posts of Krugman’s where he said that in the 1980s the circumstances did not call for fiscal policy, to demonstrate that you were presenting a vastly and really an irresponsibly oversimplified view of the way Krugman and other Keynesians think about things. Did you ever read the posts I sent back to you?
It’s precisely the same case here. You talk as if Keynesians don’t know what monetary inflation is! Did you read any of these by any chance:
– http://krugman.blogs.nytimes.com/2009/06/03/the-stagflation-myth/
– http://krugman.blogs.nytimes.com/2010/03/18/stagflation-versus-hyperinflation/
– http://krugman.blogs.nytimes.com/2010/03/23/moderate-inflation-versus-hyperinflation/
I know they’re not Greg Ip, but all of you inevitably tie modern Keynesianism back to Krugman anyway so I figured I might as well get right down to it. There is ample evidence that Keynesians understand these things, Bob. Knowing that, I would have thought that you would need to highlight something more than a few sentences on demand-pull inflation to conclude that he was saying that inflation had no other possible causes.
You’re not nearly as bad as your Mises colleague William Anderson about this (I have enjoyed keeping up with your blog recently), but I’ve noticed a surprising tendancy, shared by Anderson, to argue by assuming extremely levels of ignorance or simple-mindedness on the part of your opponents. “Keynesianism=without fiscal policy you can never get out of a downturn”, “Keynesianism=inflation is always caused by demand-pull forces”, etc. Half the time responding to you has to be spent addressing these straw men.
‘Supply shocks’ and COLA’s (‘cost push’) do not cause general price inflation.
All right DK, I’ll grant you that I should have mentioned that Ip discussed Zimbabwe. I don’t think that saves him, but I understand why a neutral umpire could cry foul that I didn’t mention it. (In all honesty, I had forgotten that he did, when I made this post. I only focused on “myths” #1 and #2 I think in my article.)
So if Ip meant to say, “There is no danger of inflation right now, because (a) people are still buying Treasuries and (b) we have idle capacity,” I still think that’s not a coherent position. The US stagflation still works against it, though it neuters Weimar Germany and Zimbabwe.
I have read those Krugman things before. The one on stagflation seems amusing to me. Look at what Krugman is arguing: The problem in the 1970s was that we had a jump in oil prices, and excessive money printing.
OK, what do we have today…?
(And yes I know he is saying it was a “real shock,” as opposed to a purely nominal shock.)
Anyway, DK, suppose that Day the Dollar Died video occurs. Krugman could then say, “Oh well, there was a shock coming from the Chinese suddenly refusing to buy Treasuries. At that point, in order to maintain the crucial deficit spending needed to maintain AD, the Fed had to start monetizing the debt. So we were out of the liquidity trap, and the dollar crashed. We had 15% unemployment and core inflation, just like my Keynesian model predicted. Man I will never forgive Sarah Palin for bringing the return of stagflation.”
Do you get what I’m saying, DK? I don’t deny that after the fact, you could reconcile whatever happens with some Keynesian model. I am saying right NOW Keynesians are dismissing these warnings as “years away” etc. because of idle capacity. I think that is a bad way of looking at it.
Do you get what I’m saying, DK? I don’t deny that after the fact, you could reconcile whatever happens with some Keynesian model.
Bob, Excellent point, followed by another related gem…
I am saying right NOW Keynesians are dismissing these warnings as “years away” etc. because of idle capacity.
Both preceded by excellent example of Keynesian selective memory…
Anyway, DK, suppose that Day the Dollar Died video occurs. Krugman could then say, “Oh well, there was a shock coming from the Chinese suddenly refusing to buy Treasuries. At that point, in order to maintain the crucial deficit spending needed to maintain AD, the Fed had to start monetizing the debt. So we were out of the liquidity trap, and the dollar crashed. We had 15% unemployment and core inflation, just like my Keynesian model predicted. Man I will never forgive Sarah Palin for bringing the return of stagflation.”
That nails it. The place where I have to part company is on the scenario presented in the inflation association video. I still think it is far fetched, but not impossible.
Maybe you could clarify why “stagflation still works against it”? I think this case is clearer in your head than it is to some readers (or at least me). Maybe I have some cognitive dissonance, but I (1.) certainly understand stagflation as a possible phenomenon consistent with my understanding of the economy, and (2.) am not worried about inflation right now.
I also don’t see how debt monetization gets us out of a liquidity trap.
re: “I am saying right NOW Keynesians are dismissing these warnings as “years away” etc. because of idle capacity. I think that is a bad way of looking at it.”
Well, again – you’re only telling half of the story. We have idle capacity AND no inflationary expectations which are so essential to the emergence of stagflation. Expectations can, of course, change. And when the facts change the assessment will. But it’s more than just idle capacity. We have slack that can be picked up, yes – and we have excessive demand for money, and we have no expectations of inflation. What do we have in support of inflation? An increase in the money supply? Is that all? OK, but the impact that that has on inflation is contingent on lots of other factors that are pointing in exactly the opposite direction. You don’t have to invoke stagflation in responding to this view – you have to demonstrate why an increase in the money supply poses any substantial risk under current circumstances. We are all agreed on the theoretical viability of stagflation.
I should note – if you are ONLY saying that you wish Ip said presented a more thorough analysis than just idle capacity, and you’re NOT saying Ip is claiming that unemployment and inflation can’t occur together, then you and I are in agreement (although I would add that Ip adds more later on).
My concern from the beginning is that you seemed to taket he mere citation of idle capacity as evidence that we don’t think unemployment and inflation can come together. That claim would be logically incoherent and absurd for anyone familiar with Keynesianism to make.
And don’t get me wrong – Krugman straw-mans Austrians too. I follow him – I like him – I think he’s one of the most insightful guys around. But he certainly hasn’t taken the time to learn what he needs to learn to fairly engage you guys.
Oh wow – and now I actually read Ip’s article which I should have started with…
…were you planning, at all, to address the points where Ip DOES discuss monetary inflation, the transmission mechanism, and even your Zimbabwe example? Doesn’t it seem relevant to maybe cite the points where he actually talks about those things and their relationship to this point, rather than just citing this point and pretending that full capacity utilization is the only talking point on inflation that he has?
DK, I don’t know what to say. Ip says we don’t need to worry about inflation, because currently factories are idle. That is not a valid argument.
Instead of me guessing what he meant to say, you can propose what he was actually saying, and then I’ll respond to it.
If you disagree with him on that point, then disagree with him by all means. What’s a little odd is that you try to make the case that he doesn’t think unemployment and inflation can come together when he said nothing of the sort. It’s especially odd because you never even mention where he cites Zimbabwe in his own article and highlights why he thinks the case of Zimbabwe is different from our current situation, AND when he thinks we should start worrying about Zimbabwe-type situations. Those conditional claims he makes about Zimbabwe have nothing to do with any idle resources assumption.
I would have thought that if you wanted to counter him with a Zimbabwe example you would have at least talked about his own discussion of Zimbabwe!
And please – it’s not a matter of guessing what he meant to say. You’ve circled back to that when I’ve discusses stuff with you at Think Markets as well. It’s not a matter of divining something in someone’s mind – it’s all there in black and white that I can read as plainly as you can.
Did he say inflation can’t come when there’s idle resources? No, he didn’t. He did suggest demand beyond full capacity “could” [his words] cause inflation, not that it was the only cause. That was in response to his #1. He discusses other monetary causes (like yours) in response to his question #3 and then gives further reasons there why he’s not worried now. But nowhere does he say that the only cause of inflation is spending beyond full capacity – the claim you attribute to him – and he mentions other causes of inflation that you conveniently neglect to mention.
So it’s not a matter of “guessing”. It’s all written there Bob.
And aside from Ip, you should know that Keynesians don’t think spending beyond full capacity is the only cause of inflation. If you actually believe they think that, I have to ask what rock you’ve been living under.
Daniel,
Why can’t you ask Dr. Murphy for a simple clarification? Something like this;
“Dr. Murphy, are you saying Ip believes that, no matter what, you can never have inflation with unemployment, or are you saying that Ip believes that, ceteris paribus (no supply shocks, no COLAs, a monetary policy based on an accurate NAIRU, etc.) you can’t have inflation with unemployment?”
I think Ip is clearly claiming (at least) the latter, and that Dr. Muphy is attacking that proposition.
Richard –
I am simply commenting that Bob’s “reminder” is unnecessary, and inferring from the introduction to his final paragraph that he seems to think the insights he raises about monetary inflation are new to Keynesians (which I’m arguing they’re not).
If Bob (1.) wants to clarify that the title is meant to be facetious, (2.) wants to clarify that he knows this is all understood by and consistent with Keynesianism, or (3.) wants to challenge Ip on his views on the specific circumstance we find ourselves in rather than infer from that circumstance things that Ip thinks about inflation more broadly, then I would welcome any of those things.
And since Murphy mentions Zimbabwe as a counter-argument, I would also welcome him noting the fact that Ip discussed Zimbabwe in the initial article.
I hate the gov they dont no sh** and cant even say they have walked in the unemployed shoes so they should not be the ones passing or not passing the extention
But if workers had expected 80 billion percent inflation and negotiated nominal wage contracts on that expectation, then real wages would have risen 80 billion percent minus 79.4 billion percent, which is roughly 400 million percent, although I’m actually way off because I’m not good with precentages.
This shocking real wage increase explains the 94% unemployment. If only they’d had a bit more inflation—-it’s all about expectations.
Now to create a Phillips curve big enough to plot those points. 🙂
Scott, just to be clear, you’re saying that if you had been advising the Zimbabwe government in January 2009, you would have told them to print money at a faster rate?