Yet Another Krugman Kontradiction?
Help me out here, Krugman sympathizers: For a while now he has been making two different arguments that seem in conflict.
On the one hand, he has been savaging that “austerians” for pointing to historical examples of an expansionary episode of government budget cutting, by saying that all of these cases are inapplicable to our times. For example just today he wrote:
Early last year, many people on both sides of the Atlantic seized on the idea that less is more — that cutting spending would actually help, not hinder, recovery. There was a paper by Alesina and Ardagna that seemed to provide evidence to that effect, and nothing succeeds like telling people what they want to hear.
Since then, the whole intellectual edifice has collapsed. The Alesina et al methodology turns out to be deeply flawed, which should have been obvious from the start (and was, to some of us.) The alleged cases of expansionary austerity have, without exception, turned out to be bad examples, either involving cuts when the economy was booming or situations in which sharp interest rate declines and/or currency depreciations were the actual sources of expansion.
Note that I put the important point in bold above. In a post yesterday, he said something very similar:
I have, in the past, used Sweden’s experience in the 1990s to illustrate the difficulties we face in recovering from a global financial crisis: Sweden recovered from crisis, but it did so only by devaluing its currency and moving from trade deficit to trade surplus, a route that’s not available to the world as a whole (unless we can find another planet to trade with).
OK so the point is clear: The Republicans who say the U.S. should cut its budget right now–and point to historical examples of countries doing just that and expanding their economies–are sleazy, because the world as a whole can’t depreciate its currency and boost exports to Mars.
Fine, fair enough.
But wait a second. When it comes to Krugman’s discussions of the euro, suddenly the rules change. Here’s Krugman from March 27 explaining why some countries are suffering under the euro:
I think Dean Baker and I are converging on deficits and independent currencies. He asserts that having your own currency makes a big difference — you can still end up like Zimbabwe, but not like Greece right now. I’m fine with that.
Specifically, the reason Greece (and Ireland, and Portugal, and to some extent Spain) are in so much trouble is that by adopting the euro they’ve left themselves with no good way out of the aftereffects of the pre-2008 bubble. To regain competitiveness, they need massive deflation; but that deflation, in addition to involving an extended period of very high unemployment, worsens the real burden of their outstanding debt. Countries that still have their own currencies don’t face the same problems.
So correct me if I’m wrong here, but it sounds like Krugman is saying to the PIGS (not PIIGS mind you) that if they just had their own currencies that they could depreciate, they’d be better off. But how? Are Martians only willing to import Guinness but not Michelob? (I don’t blame them if so.)
This is another great example of a Krugman Kontradiction. It’s not a literal contradiction. Rather, it’s that Krugman uses one set of rules to call his opponents awful names, and then changes the rules when he’s pushing his own policies. Scott Sumner has nailed Krugman on this type of thing several times (though I’m not going to dig up the links).
When he says we can’t all depreciate our way out, that doesn’t seem to me to be saying that depreciation doesn’t work. The situation with the PIGS is that they are held to German and French standards on monetary policy. Presumably, with their own currencies, they could still improve their relative situation even if this is not a viable solution for everyone at once.
Note that he says “it’s not available to the world as a whole”, not that it’s not available, period. What is contradictory about that? I’m not even sure he’s right that it’s not available to the world as a whole. It seems to me that increasing the money supply – even if everyone does it – is a good thing that’s not somehow negated because everyone does it. You may not have the net exports boost a country would have if it were alone in depreciating, but it would still be a good thing. So I’m not entirely sure Krugman is right here… but he doesn’t seem to be contradicting himself.
When he says we can’t all depreciate our way out, that doesn’t seem to me to be saying that depreciation doesn’t work. The situation with the PIGS is that they are held to German and French standards on monetary policy. Presumably, with their own currencies, they could still improve their relative situation even if this is not a viable solution for everyone at once.
I am not sure that you even noticed the logical implications of this argument here, but it logically implies that every single individual in the world could “improve their relative situation” if they had the ability to print their own currency. After all, you, me, and most others in this country are held to other people’s, namely the Fed’s, “standards on monetary policy,” not our own individually, and so we all could “improve our relative situation” as well if we each had monetary sovereignty.
Ironically, the argument logically implies a system of commodity money, because if every individual had the legal authority to print their own money, then call that paper money whatever they want, and then attempt to use it in trade, legally, then of course nobody will accept paper money anymore, and a system of hard money, probably precious metals, will naturally arise in a spontaneous fashion.
That’s funny.
Note that he says “it’s not available to the world as a whole”, not that it’s not available, period. What is contradictory about that? I’m not even sure he’s right that it’s not available to the world as a whole. It seems to me that increasing the money supply – even if everyone does it – is a good thing that’s not somehow negated because everyone does it. You may not have the net exports boost a country would have if it were alone in depreciating, but it would still be a good thing. So I’m not entirely sure Krugman is right here… but he doesn’t seem to be contradicting himself.
He is not literally contradicting himself, but rather he is using the same facts in an attempt to “prove” contradictory arguments. On the one hand he uses the same facts (not printing money) to attack the argument that austerity (which is a proxy for governments being economically forced to cut spending due to not having monetary sovereignty) benefits economies, and he attacks that argument on the basis that because the examples of austerity proposed by austerity proponents also had currency devaluation due to those countries’ governments having monetary sovereignty, it means the alleged negative effects of spending cuts were offset by the allegedly positive effects of inflation. On the other hand Krugman used the same facts (not printing money) to support the totally opposite argument that having monetary sovereignty won’t help economies because not all countries can export to Mars.
In other words, Krugman argued that monetary sovereignty state by state both benefits country economies and harms them, depending on whether the argument is used against anti-Keynesian austerity advocates, or for his own argument.
One the one hand Krugman says that not every country can depreciate its currency as an offsetting measure to spending cuts (and thus stimulate exports), but only when he attacks austerity (spending cuts) advocates. Here, monetary policy (depreciation) can help economies by stimulating (exports). Here, as long as countries have monetary sovereignty, they can stimulate (exports) and thus avoid a deepening recession.
On the other hand Krugman also argues that Europe would be better off if each country could appreciate its currency (and thus stimulate imports), when he advances his own nationalistic monetary sovereignty position, which presumably means Europe can import more from Mars. Here, all of a sudden central banks stimulating imports by depreciating the currency is possible, and not stupid as was the austerity advocates arguing that economies can be helped by depending on currency depreciation to boost exports, regardless of spending cuts.
Before, it was stupid to depend on monetary policy and stimulate exports because not all countries can do this. This was stupid of course because it is supposedly stupid to ever argue for spending cuts. When spending cuts are defended on the basis of currency depreciation, then currency depreciation is stupid because not all countries can do this.
Then after, it is suddenly a good idea to depend on monetary policy, this time to stimulate imports, and thus, presumably, all countries can do this. It is now no longer stupid because spending cuts were not brought up alongside monetary policy (since it is Krugman’s argument after all). Now, countries can depend on monetary policy to get them out of recession, as long as each country has monetary sovereignty of course. Now, it presumably follows that all countries can import from Mars.
Before, depreciation was stupid because the advocates called for spending cuts. Before, depreciation was stupid because “not all countries can stimulate exports.”
Later, he argued that Europe can benefit from appreciation, because its his own argument. Now, appreciation is not stupid and a good idea, but he never said that not all countries can appreciate and stimulate imports, and call it a stupid idea, the way he did with depreciation and stimulating exports when the argument came from austerity advocates.
It’s as if he is against any monetary policy policies when they come from austerity advocates, using the reason that not all countries can use monetary policy to stimulate exports or imports at the same time, but when it comes to his own position of national monetary sovereignty, all of a sudden monetary policy is effective, because cuts to spending is not being advanced alongside it. Here, it seems that every country can appreciate its currency and import more because the actual goal of national monetary sovereignty is being advanced and advocated, and spending cuts are not being advanced and advocated, so who cares about being logically consistent about monetary policy.
The whole argument for why it’s not available to the world as a whole is that you have no export advantage (ie – no foreign demand advantage) if everyone is depreciating at once.
If everyone is not depreciating at once (they’re not) presumably individual countries like the PIGS will still benefit from it.
Right I get that, DK. So why is the Republican budget plan sleazy? Why does Krugman get to hold everything else equal when implementing his own policy solution, but Boehner doesn’t get to hold other countries’ monetary policies equal when he cuts government spending?
Could it be that Krugman doesn’t have a problem with currency depreciation, but he doesn’t want to see G cut?
The JEC report thing?
Because they put up Swedish budget numbers and completely ignore what economists cite as the source of growth in Sweden. Ignoring counterfactuals and disregarding important omitted variables is bad economics. Boehner wasn’t guilty of not being able to control Swedish monetary policy – he was guilty of concealing what was happening with Swedish monetary policy and inappropriately making inferences about fiscal policy.
Because they put up Swedish budget numbers and completely ignore what economists cite as the source of growth in Sweden. Ignoring counterfactuals and disregarding important omitted variables is bad economics. Boehner wasn’t guilty of not being able to control Swedish monetary policy – he was guilty of concealing what was happening with Swedish monetary policy and inappropriately making inferences about fiscal policy.
How it is inappropriate to point out that mere spending cuts is not the end of the world as Krugman et al constantly advance, because monetary policy can in theory offset it? If the US government cuts spending, then why can’t it also depreciate its currency the way Krugman defended the Swedish experiment by referencing Swedish depreciation?
Why is spending cuts in the US out of bounds, when the US has the very monetary power that Krugman says is needed alongside spending cuts if spending cuts are not to plunge the economy deeper into recession?
Attacking Boehner for allegedly not citing Swedish monetary policy while referencing its spending cuts is NOT a refutation of the argument that spending cuts does not necessarily plunge economies deeper into recession! After all, if Sweden cut spending and yet allegedly recovered on the basis of currency depreciation offsetting spending cuts, then why can’t the US government do the same thing?
Boehner can be labeled misinformed for not referencing monetary policy in Sweden, but he cannot be used as the target for attacking the argument that spending cuts allegedly does not necessarily lead to deeper recession if the government has monetary sovereignty like Sweden did when it cut spending. That is textbook straw man you have going on there.
Krugman attacked the sleazy Republicans for advocating for spending cuts, period. End of story. He only attacked their implicit dependency on monetary policy as a desperation move in order to refute their argument that spending cuts do not necessarily lead to deepening recession. But when it comes to Europe, for example Sweden, where spending cuts have been shown to not be followed by deepening recession, he claims the only reason it didn’t was because they depreciated their currency.
Well, why can’t the US do the same thing? Why it is “sleazy” to advocate for cuts in spending and implicitly label monetary policy as an effective offsetting measure in the US, whereas overseas, where spending cuts are ACTUALLY taking place, that all of a sudden monetary policy can be used to offset the allegedly negative effects of spending cuts?
He’s making a contradictory argument. It’s only wrong to (implicitly) depend on monetary policy when the call is for lower government spending. When government spending does take place in the world, and a deepening recession is not followed, we are to shut up about it, because monetary policy can suddenly offset spending cuts and prevent a deepening recession. This completely kontradicts Krugman’s earlier position when he attacked those sleazy Republicans for (implicitly) depending on monetary policy when advocating for spending cuts. Sure, he may have attacked them for not bringing up monetary policy when they reference Sweden, but that actually implies that Krugman believes monetary policy can be used to boost economies despite spending cuts.
Why couldn’t Krugman say that the sleazy Republican proposal to cut spending is fine, as long as the Fed depreciates the currency more to allegedly offset the cut in spending? Why the outright hostility to US spending cuts in toto? Why are all calls to cut spending in the US a stupid idea, even though the US has the monetary power to depreciate the currency as an offset, the very monetary power Krugman says would benefit some of the European countries if only they had it?
It’s plain as day that Krugman attacks all calls for spending cuts no matter how large the spending gets, and wherever spending cuts do take place in the world, if the economy there goes deeper into recession, its because of those spending cuts, despite monetary policy, and if the economy does not go deeper into recession, its because of some other government power that allegedly offset those spending cuts, in Sweden’s case it was monetary policy. He will argue like this even if it means he has to kontradict himself.
Depending on monetary policy when advancing spending cut proposals? BAD.
Depending on monetary policy when spending cuts actually take place in the world and the economies there do not go deeper into recession? GOOD.
Never does he consider the argument that spending cuts, tax cuts, and no inflation helps economies. It’s always the same tune. Never cut spending. Attack those who ever advance cutting spending even if monetary policy can allegedly offset it. When the world refutes the theory that spending cuts necessarily plunge economies deeper into recession, desperately refer to monetary policy and now depend on it.
Imagine a country that cut government spending AND did not completely offset the drop in Aggregate Demand by inflating its currency. Imagine that country not going deeper into recession. Oh my God, that country and time exists. 1946 America. Economy grew by roughly 30% that year. Spending was cut by around 50%, and inflation of the money supply was nowhere near that level. Consumer prices rose just 8 percent in 1946, 14 percent in 1947 and 8 percent in 1948, and actually declined in 1949 — and this was after the removal of extensive price controls that had limited increases for 5 years.
There are case examples like this all over the place. It simply does not follow empirically or theoretically that government spending cuts ipso facto lead to deepening recession.
I think Daniel Kuehn has it. The individual countries are not the world.
So the Republic budget plan is talking about world GDP? No, it’s saying this is how the US can expand its economy through austerity. And Krugman says, “No you sleaze buckets, the only way that can work is if you depreciate your currency. But if the whole world tries that, it won’t work. So you are liars.”
Let me clarify:
Krugman says, “The way for Ireland to grow is to depreciate its currency. There are many historical precedents for this.”
John Boehner says, “The way for the US to grow is to cut government spending. There are many historical precedents for this.”
Krugman says, “John you sleazebucket, the only way those ‘precedents’ worked is through currency depreciation and/or interest rate cuts. Shame on you.”
Do you see what I’m saying, David? Keep in mind I am lightheaded from food deprivation because of the Fed.
http://krugman.blogs.nytimes.com/2010/10/05/the-imf-on-fiscal-austerity/
That’s not what Krugman says, Bob. He has good reasons he’s put forward for critiquing the few studies that tout contractionary fiscal policy as beneficial. Indeed, the only reason why those studies were notable in the first place was because of how few and far between they are.
If you want to engage Krugman’s skepticism of these claims it’s probably worth reviewing why he’s skeptical, rather than thinking it’s simply him arguing by historical example where he gets the right to pick which historical factors are relevant and which aren’t.
Daniel, I know what Krugman’s position is. I was hip deep in this stuff when it was hot. (Here’s an example, but there are other ones where I went through Finland etc. that I can’t find right now.)
Your answers don’t even begin to address my point. You keep telling me what Krugman’s objection to the austerity examples is. OK fair enough; that’s actually what I said in my blog post: “Fine, fair enough.”
You need to explain why it’s not legit to cite Ireland as a successful austerity program–since they only did it by devaluing, according to Krugman–but it IS legit to say the Euro is straitjacket on Ireland, since they could devalue right now if they weren’t on the euro. Look, it’s the same freaking country. Click on my link above to see Krugman discussing Ireland when it devalued.
So to repeat once again: If Krugman just had his responses to the austerity examples, OK fine. But he can’t then drop those criteria for what makes for a valid policy prescription, when it comes to his thoughts on the PIGS.
As I noted to you in my email, the Irish devaluation Krugman cites in your link happened in the 1980s – long before the euro. All his postings on Ireland lately that I’ve seen have been bemoaning the inability to carry out a policy they once could.
Who cares if “it’s the same freaking country”? What matters is that “it’s not the same freaking monetary regime”. Where’s the contradiction?
The contradiction is, as mentioned countless times, when Krugman attacks the argument that austerity works, because monetary policy is an effective offset against spending cuts, but only when sleazy Republicans advance that argument.
On the other hand, monetary policy is also an effective offset that explains why for example Ireland did not go into recession after it cut spending, and that more European countries could also recover if they too could change the value of their currency as monetary sovereign nations.
But luckily of course they can’t, which enables Krugman to depend on an imaginary Europe that does not exist in order to advance his “if only they did this, then…” argument, which kontradicts his argument against the sleazy spending cuts advocates back in the US.
Why are you so blind to this? It’s so plain and easy to see.
I think it’s simply mahvelous that the Krugmanites and Keynesians are being so explicit about the nature of money dilution and their explicit goal of money depreciation. Most citizens still have no clue regarding the source and cause of inflation.
I think that the major impediment to a general understanding of the ABCT is the general disbelief that inflation is caused by the intentional dilution of the money supply and/or that the answer is that simple or that the monetary authorities are so diabolical and depraved. If that truth could ever sink in with “the masses”, I think we’d finally have the inflationists on the run. Permanently.
All of this talk of “austerity” is just a smokescreen from the statists. Whatever happens will just be a crappy-ass statist version of “austerity” in any event.
We’re not going to abolish the Fed and public schools and the drug war and the empire in the next 18 months. What will happen is that the states and Feds will try to get by with doing the same old same old on slightly less cash, the Fed will maintain its super low interest rates thereby continuing our gruesome depression, things will get worse and worse and it will all be blamed on “Austerians” by the statists and the media (not to be redundant).
A disaster caused by Keynesian money dilution and unlimited spending and debt will be blamed on us. Bet on it.
This little debate is the reason why Austrians are always going to be at a disadvantage with the Keynesians. The purpose of both money dilution and deficit spending and debt is to make everyone think that they are richer than they really are. Both are unsustainable and when reality sinks in, it’s going to be painful. Austrians will always be blamed for the pain especially when the Krugmanites and MMTers are around to claim that the government has an unlimited stash of stuff readily available to painlessly satisfy every conceivable human desire but for those evil Austrians and Austerians.
Wrong, not evil.
I think you’re misdiagnosing the purpose.
The purpose of what? The purpose of post-bust money dilution is to artifically lower debt obligations, wages and prices that only got out of whack in the first place due to the original spurt of money dilution which caused the boom.
The purpose of deficit spending and government is to buy votes without having to pay them in the short run.
The purpose is irrelevant if the means used is initiating violence and if the actual effects is economic destruction. Initiating violence is not justified and it is economically destructive.
Violence is what enforces our monetary system of central banking, and violence is what enforces deficit spending. Both are destructive in their own ways, the former generates the business cycle in today’s society and the latter retards economic growth and prosperity.
Austrians and Austerians are right. You’re wrong.
The last sentence should have read:
“The purpose of deficit spending and government DEBT is to buy votes without having to pay them in the short run.”
I also do not think there is much difference of opinion in certain aspects of this debate between the Austrians on the one hand and the Keynenians or MMTers.
Is there really a dispute here that the purpose of the post-bust money dilution is to lower the real terms of debt obligations and wages and prices while artificially raising the nominal value of certain assets?
Is there really a dispute here that the US government under its fiat money regime is essentially off the leash when it comes to constitutional restrains and considerations of basic property rights and due process?
The disputes are about the impact of those policies. The statists always ignore the basic Austrian concerns of Cantillon effects and the distortion of the price, investment and capital structure that result from them.
Lower real debt obligations insofar as you’re correcting an increase in real debt obligations, I suppose.
Even that, though, is very different from your initial diagnosis which was to “to make everyone think that they are richer than they really are”, which I don’t think is the purpose at all.
I think of the purpose of monetary expansion as bringing the interest rate back out of disequilibrium. The real difference between Austrians and Keynesians is this: Austrians think that the price distortion comes in the boom and the real prices are revealed in the bust. Keynesians think that the price distortions come in the bust and (with the exception of bubbling assets that may or may not be present in any given case) real prices occur in the boom.
You look at us and think that somehow we’ve forgotten the price mechanism.
We look at you and laugh at the fact that you moralize about the price mechanism at the same time that you embrace a massive price distortion – namely, an interest rate that is too high.
Yep, sounds about right: I look at you, the one who views the absurdly high home prices with people levering up beyond reason as “the real price”, and think you’re f’in nuts. And then this gets reaffirmed when you refer to risk-free 10-year interest rates barely above inflation as “rates too high” and think we need to revert back to the excessive leverage and consumer debt of 2005 and reclaim our inalienable right to yet-lower rates.
I don’t even know what that’s considered a reasonable position these days. You simply shouldn’t see people going into debt up to their eyeballs and saving nothing right alongside sub-4% (risk free) interest rates. That’s no longer reflecting the opportunity cost of feeding the nation’s debt addiction.
I am surprised to read Krugman using the term “regain competitiveness”. In his book Pop Internationalism, he says anyone who uses the word competitive in the context of international trade doesn’t know what he is talking about.
Keynesians think that the price distortions come in the bust and (with the exception of bubbling assets that may or may not be present in any given case) real prices occur in the boom.
I’m going to change my statement slightly. The purpose of the initial money dilution episode is to cause a boom. The effect is to cause most everyone to think they and everyone else is richer than they really are. The creation of a funny money loan steals purchasing power from those holding the existing money which distorts prices. Further, the interest rate is articifially lower than it would be and is probably the most important price that is distorted. People start buying houses with new funny money bidding up their price. Workers and other businesses are drawn into the building of these new houses. When a $100,000 house is sold for $700,000 and then for $800,000, people tend to think that there is someone out there ready to buy it for $800,000+ worth of goods and services. Everyone thought that they and everyone else was richer than they really were. But that was a false signal. The boom will end either when interest rates are raised OR the boom might just run out of steam, as happened with our housing bubble.
Ultimately it was discovered that there really was no one out there with approximately $800,000+ worth of goods and services to trade for these price-inflated homes and that prices had simply been bid-up by new funny money creation. Further, all of those lines of production supporting the bubble were similarly exposed. All of those wages and prices were FALSE because people were deceived by the false prices induced by the funny money. The reality is that most of those resources were wasted and malinvested. The reality is that your former $800,000 house might only be worth $135,000 now (the REAL price) but you owe $650,000 on it. No doubt that’s a problem.
(Is there really a moral, as opposed to legal, obligation to repay a loan created ex nihilo?)
The person with the $135,000 house and the $650,000 mortgage needs to file for bankruptcy and get a fresh start. A new round of funny money dilution who’s purpose is to dilute the debt obligation and increase the nominal value of the home will only start a fresh round of Cantillon Effects and malinvestments. Further, the mortgage debtor made the deal, not the rest of us. Live and learn.
The bust prices are real. The boom prices are a deception. Keynesianism is based upon deception.
When you say “the purpose” what exactly do you mean by that?
You call it a “purpose” but it sounds like you’re just providing your understanding of the effect of it. Your post hear sounds nothing like the purpose of monetary and fiscal policy, but it sounds a lot like your view of its effects.
You would probably be confused if I said “the purpose of Austrian economic policy is to artificially raise interest rates and prevent the economy from efficiently allocating resources”, wouldn’t you?
You would probably be confused if I said “the purpose of Austrian economic policy is to artificially raise interest rates and prevent the economy from efficiently allocating resources”, wouldn’t you?
He would probably disagree, but not because those are the actual effects and not necessarily the purpose. It would be because those are not only not the purpose, but they are not even the actual effects either. Austrian economic policy results in NATURAL interest rates, natural because they would be set by individual’s voluntary trading patterns. It is NOT “artificial” when individuals set interest rates using only the free market process of free trade of private property. It is artificial when the banking system violates traditional property rights framework and initiates threats of violence against the population into coercing them into using paper money, which in our society the banking system inflates into the loan market beyond what voluntary savings and transfers of property rights generate.
The Austrian solution will allow interest rates to be naturally set, not artificially set, and that will enable investors to efficiently allocate capital resources in a time structure that is in line with actual voluntary saving and consuming patterns of the consumer. By artificially depressing interest rates, the government through the central bank prevents efficient allocation of resources, which is why the economy booms and then busts all the time. Investors and consumers do not know what the natural rate of interest is because it does not exist, as the Fed system sets an artificial rate that is not a result of voluntary trading patterns as would exist in a free market, Austrian economy.
The purpose of central banking is to enable the government and the banks free, unearned purchasing power at the expense of all those who receive the new money at later times. Since the Fed always inflates, pretty much continuously, the “long term neutral effect” of inflation typically preached by quasi-monetarists and monetarists is never reached. When a new dollar finds its way into a late receiver’s pocket, increasing their nominal income, by that time the Fed System will have already increased the money supply even further in the meantime, which means that late receiver is already, and in fact hasn’t stopped, paying higher prices for the goods and services he buys. He can never catch up unless he finds himself in a job that is near the initial stages of inflation, like government work, federal reserve work, and those sellers who sell goods to the government or their labor to the Fed. The further back in line a person is, like fixed income wage earners, pensioners, and the like, they are exploited the most.
Government is exploited the least, since the Fed typically buys government bonds when it inflates.
Can’t we agree that the generic stated purpose of money dilution by its advocates is to “stimulate” the economy in one form or the other? I would agree that the purpose is irrelevant to the actual results which stand or fall on their own merits.
Keynesians always seem to make an amorphous fuss when I insist that money dilution must be theft. As John Maynard Keynes insightfully observed in 1919:
By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.
And I guess the latest WordPress comment problem has been solved.
Well what are you talking about – expansionary monetary policy or continuing to push high inflation?
They’re two different things, Bob.
Keynes was different from most modern Keynesians in that he wanted actual price stability (not low inflation), but preferred to err on the side of inflation rather than deflation. This is a legitimate difference between him and virtually every modern Keynesian.
But modern Keynesians do not embrace a continuous process of high inflation that he describes here. They embrace consistent, low inflation that can be expected and factored into debt contracts and therefore is not confiscatory. Monetary policy is tight right now. A short review of Scott Sumner’s points on this would be more convincing than I ever could be. You are quoting Keynes criticizing a “continuous process of inflation” and trying to tie it to modern Keynesian concerns about tight money. That doesn’t compute, Bob.
You call what we have now consistent low inflation?
Of course, because the iPad has dropped in price.
Focusing on things that have risen in price is misguided, because the iPad has decreased in price.
You’re not looking at the correct goods. You’re only focusing on energy, housing, rice, corn, salt, sugar, oil, wheat, cars, clothes, gasoline, stocks, bonds, wood, paper, tuition, food, flowers, healthcare, and books.
Stop focusing on what doesn’t matter and start focusing on iCrap that matters.
They embrace consistent, low inflation that can be expected and factored into debt contracts and therefore is not confiscatory.
Daniel, it seems you really don’t understand how inflation works. Even if inflation was low, and even if every last person on Earth had perfect foresight on what the rate will be, and contracted in the present accordingly, then it is NOT the case that inflation no longer becomes confiscatory. Inflation is ALWAYS confiscatory, no matter how perfect the foresight of people happens to be.
You have to understand that inflation enters the economy always at distinct points. It does not enter everyone’s bank accounts equally at the same time. Because of that fact, some people in the economy receive money that they did not “earn” in the traditional sense of providing goods and services to others. They gain at the expense of others just because they are the first receivers of the new money. They gain increased purchasing power for no other reason than that they are first (or close to first) in the line.
Perhaps a basic analogy will help. Suppose there is a three person economy. Suppose they each have $1000. Thus, each person has the same purchasing power at first. They each can purchase 1/3 of the economy’s output in dollar terms.
Since inflation in the real world always enters the economy at distinct points, we can mimic this fact by assuming that should inflation of say $100 enter this three person economy, only the first person, person A, receives the $100 from the printing press.
So at time = 0, persons A, B and C each have $1000. At time = 1, person A will receive $100. Suppose we’re at time = 0. Suppose also that all three people, A, B, and C have perfect foresight about future inflation at time = 1. Everyone correctly expects that inflation will be 10%.
At time = 1, A will receive $100, and that will result in A having $1100, B having $1000, and C having $1000. Percentage-wise, A will be able to purchase 1.1/3.1 of the economy’s output in dollars, B will be able to purchase 1/3.1, and C will be able to purchase 1/3.1.
This is the case even if A does not trade at all or provide any goods or services to anyone else and simply keeps his money as cash until time = 1. After 1 period, A will be able to purchase [1.1/3.1 – 1/3] = 2.15% *more* of the economy’s output in dollars simply by being first in line to the printing press. This of course will come at the expense of both B and C, and so each of B and C would only be able to purchase [1/3 – 1/3.1] = -1.075%, or 1.075% less of the output of the economy.
Now, question for you. Is there ANYTHING that B and/or C can do at time = 0 in order to avoid having their purchasing power confiscated, given the fact that A will get $100 of new money at time = 1?
If you can solve this, then I’ll give you a cookie.