Reality Has a Well-Known Market Monetarist Bias
I am of course studying Scott Sumner’s every eye-twitch in this video. Kelly Evans catches him pretty well in the beginning, asking at one point if his policies would have prevented the housing boom. He admits that no, NGDP growth hadn’t been too high, but says that every time there is a crisis like this, regulators need to study the episode and do a better job next time. (I really do think I will just let Scott keep talking when we debate in front of a largely Misesian crowd next year.)
But what really interests me starts around 13:00. Evans says that according to Scott, it’s OK if people are “spooked” by the threat of rising (price) inflation. He agrees, and in part of his explanation says “we actually had deflation in 2009.”
That didn’t sound right to me, so I cooked up the following chart:
I have graphed the levels of headline CPI, core CPI seasonally adjusted, and core CPI non-seasonally adjusted. I don’t see any conceivable sense in which we had deflation in 2009. By “deflation” does Scott mean “lower inflation than usual”?
He’s referring to this graph .
Unless my eyes are failing me that chart sure looks like the blue line is a lot higher at the end of 2009 than it was at the begging of 2009.
DJ, okay, but I’d love to see Scott try to talk his way out of a speeding ticket using that approach.
Aha, you fell into my trap! You did the same thing just last month.
http://consultingbyrpm.com/blog/2011/10/friendly-monthly-price-inflation-update.html
See my comment. You tried using the still rising rising 12 month change as proof that Krugman was wrong about inflation slowing down.
kavram, actually tried to use the speeding ticket analogy on me, but misapplied it.
Actually, you also mentioned Sumner in that post, so this is even more of a Murphy Kontradiction.
Anyway, whether you think it’s more appropriate to say we had deflation in 2008 or 2009 has no bearing in Sumner’s argument. A level target would still require more inflation to make up for some of the deflation that happened in 2008 or 2009.
But Sumner SAID we had deflation in 2009.
Since when did a smaller rate of inflation mean there is “deflation”?
What does the “old” definition of “deflation” then become? Or are we going to to pretend that it’s no longer even meaningful?
Strange inflationary times we live in. It’s like slavery is the new freedom.
Would it make you feel better if he said “We had a negative 12 month change” in several months in 2009?
Anyway, if you read my post, I actually kind of agree with you. But it’s still completely irrelevant to what Summers is saying. Nothing hinges on deflation happening in 2009. If it happened in 2008, fine. The point is that we had deflation at some arbitrary time and a level target would require extra inflation to make up for it. That’s it.
Would it make you feel better if he said “We had a negative 12 month change” in several months in 2009?
Wait, are we talking about whether Sumner was right in his assessment that there was deflation in 2009, or what I feel like when he says various things?
To answer your question, it would be better if he said “We had inflation in 2009.”
Anyway, if you read my post, I actually kind of agree with you. But it’s still completely irrelevant to what Summers is saying.
Sumner said a lot of things. There isn’t just one thing. One of things he said was that we had deflation in 2009, which is, if we define inflation as rising prices, an incorrect claim.
Nothing hinges on deflation happening in 2009. If it happened in 2008, fine.
We had deflation in 2008, not 2009, at least according to the St. Louis Fed’s data. I think this is the only point Murphy wanted to make.
The point is that we had deflation at some arbitrary time and a level target would require extra inflation to make up for it. That’s it.
We all get the NGDP logic, but that wasn’t in play here.
And to add something to this point, with an NGDP target, it’s not just deflation that would require additional inflation to make up for it. Even insufficient inflation would require additional inflation to make up for it.
Imagine inflation decreasing to 0.1% per year, for 100 years. Imagine the economy going along with some ups and some downs, but in general a gradual upswing in standards of living.
Now imagine some NGDP guy coming along and saying “ZOMG! This is not right! We now have to inflate by $1000 trillion bajillion this year to make up for all that lost inflation! Look at the target! THE TARGET!!”
Desolation Jones wrote:
Aha, you fell into my trap! You did the same thing just last month.
Well, I’m sure you won’t be surprised to hear that I don’t think I did any such thing. Sumner said we had (price) deflation over a certain period, and he is demonstrably wrong. As Woolsey said, I think he just made a mistake.
What I was doing in the post you link, is try to show that various categories of prices are definitely rising at very decent clips, and I used 12-month to show it wasn’t a little blip. When I referred to Krugman and Sumner saying that there had been just a one-shot spike in commodity prices that was working its way through the system, I was talking about them saying that back in 2009 (I think). I didn’t have in mind Krugman saying price inflation was slowing down in the last month or two.
(Maybe Krugman has brought the point up twice, since 2008. But what motivated my remarks in the original post, was that we have clearly had general prices inflation at rather high levels [in some indexes] for a while. This isn’t a misleading blip to a spike in commodity prices from a long long time ago.)
Perhaps Bob is savings his strongest argument for the actual debate but the issues he is currently bringing up against Sumner (a probable mistake made in a one-take TV interview, some quibbles around how meaningful the term “inflation” is ) seem to be missing the heart of the matter – why does Bob consider NGDP-targetting to be a bad thing?
Rob, keep this under your hat.
“What I was doing in the post you link, is try to show that various categories of prices are definitely rising at very decent clips, and I used 12-month to show it wasn’t a little blip”
When Krugman uses the word blip, he’s referring to a small period of time , not a small amount of inflation.
So for the same reason it doesn’t make sense to use the 12 month change to demonstrate we had deflation in some months of 2009, using the the 12 month change to demonstrate there was no blip makes no sense either. It’s too long of a time period
You said, “Exactly how long will it take us to get over that “hump”?” so I could only assume you were talking about time when you asked that question. The hump of high inflation in consumer prices last for about five months and ended a few months ago. Now the inflation rate is back to normal levels.
“When I referred to Krugman and Sumner saying that there had been just a one-shot spike in commodity prices that was working its way through the system, I was talking about them saying that back in 2009 (I think). I didn’t have in mind Krugman saying price inflation was slowing down in the last month or two.”
I’m confused about this. When did Kruman and Sumner blame the recent spike in consumer prices in 2011 on something that happened back in 2009?
Was there even a significant oil spike in 2009?
DJ, I believe that the graph you linked to includes food and fuel, which is fine but if food and fuel define deflation in 2008 / 2009 then they define inflation in 2011 just the same.
http://tinyurl.com/bop2lzr
We had deflation in 2009.
Deal with it, Murphy. And stop acting like such an idiot.
How does a lower rate of increase in inflation compared to past years translate to deflation?
This is like saying “cuts to government spending” by lowering the rate of increase in spending.
DT, are you serious? You are linking to 12-month changes. What happened is that prices fell sharply in late 2008, then they bottomed and and rose steadily through 2009. So (a) a chart of levels shows, correctly, that there wasn’t price deflation in 2009, and (b) a chart of 12-month changes would show negative numbers through much of 2009, but would eventually become positive by the end of it.
DT,
I’m not sure if you’re being sarcastic, but if you’re serious, that graph does not constitute evidence of “deflation in 2009”.
As the plot is of a twelve-month difference function, the only statistical relevance it has is to changes in the rate of inflation sometime in the twelve months preceding T.
Even granting (far too generously, IMO) that “Deflation” is constituted by any decrease in the rate of inflation, the function you plotted gives no evidence that the “deflation (your definition)” shown by the plot in 2009 occurred in 2009.
it only shows that sometime in the twelve months previous to those dates in 2009, there was a “deflation (your definition)”.
In order to prove a “deflation (your definition)” inside of 2009, there would have to be a negative value at New Year 2010. (Which, I note, there is not.)
And even then, your implied definition of deflation is rubbish.
Always slow on the trigger.
DT, did you seriously post that chart as proof? HAHA.
I swear, I must be living in an alternate reality where up is down, right is left, and charts on 12 month changes are being used to refute charts on observed data.
I swear, I must be living in an alternate reality where up is down, right is left
Indeed!! But awareness being the first step, there is hope.
Sumner does complain a good bit about CPI meaures not using the current prices of homes (which dropped alot) and instead showing a rising “rent equivalent.”
Personally, I don’t understand why anyone would use the CPI. I use GDP price indexes. Why do only consumer goods count?
But I think the most likely explanation of Sumner’s remark is that he made a mistake. The deflation in headline inflation was pretty much over by 2009. It was in the second half of 2008.
But perhaps he will explain.
P.S. I can’t get the video to work.
Scott_Sumner logic: “Deflation is bad. The economy was bad in ’09. Therefore, it was in deflation.”
And don’t laugh, Bob, you’ve used similar logic before: “Markets are good. A carbon permit trading system is bad. Therefore, a carbon permit trading system is not a market.”
How about this: In the Sumnerian worldview, changes in NGDP are the proper measure of monetary disequilibrium. A fall in NGDP implies excess money demand. Deflation is excess money demand. Therefore, a fall in NGDP implies deflation.
David, sure, we can use that definition, in which case we clearly had inflation during 2009. (At least using your criterion, we could say there was “deflation” in the first quarter of 2009, which was then swamped by the inflation in the last 3 quarters. In contrast, save for maybe a one-month blip, there was no actual fall in CPI during 2009.)
Hi Bob.
It’s not my criterion – it’s Sumner’s (and I believe Hayek’s and Selgin’s, perhaps amongst others). With a flow, obviously the intervals over which one compares it matters. I am not sure if these are the right numbers to be using (http://www.data360.org/dsg.aspx?Data_Set_Group_Id=230) but while the quarterly NGDP may have returned to its Q4 2008 levels by Q4 2009, I believe it’s the case that the 2009 annual number was below the 2008 annual number. Also, quarterly NGDP didn’t clear the pre-recession peak (of Q2 2008) until Q2 2010. I am not defending Sumner but perhaps that was what he was referring to.
Bob,
I think to nitpick over when and where deflation started and ended takes the focus on the bigger points. Still, it is understandable why Sumner would say there was deflation in 2009. It is common for observers to talk about year-over-year inflation rates which as you acknowledge does show deflation. He may have been referring to that common usage.
Let me also return to a point Bill Woosley raised. Sumner has consistently argued that the CPI understated the level of price level decline because of how poorly the measure housing. Because of this post I decided to take a look at the CPI less shelter. It is striking, almost a -30% decline on a monthly annualized growth rate.. See here: http://research.stlouisfed.org/fred2/graph/?g=3gl
David, can you explain why CPI less shelter would show that huge drop in 2008 like that? I would have thought that CPI less shelter would show a smaller decline than CPI on account of the fact that housing collapsed so much during that time.
Is housing calculated so poorly that a housing collapse is calculated as something way more optimistic, thus pulling up the CPI so much that it dominates the fall in other consumer prices?
In the CPI, they use imputed rents. House prices don’t matter, except to the extent it shows up in rents. CPI didn’t capture the large increase in house price to rent ratio, and also didn’t capture the fall in that ratio.
Bob,
If the best criticism you can offer of Sumner is that he should have said we had deflation from summer 2008 to summer 2009 rather than just saying 2009, then I think he wins the day.
Major Freedom,
I haven’t looked close enough to know enough, but my understanding is they use rental equivalent for housing costs and that apparently is much slower to change or is not measured properly. I believe if you look at the CPI housing component it shows a much milder decline and even some increase.
When I heard it, I just thought he meant deflation actually occurred in 2009, not that we experienced deflation over the course of all of 2009.
We did, from February to March, have a drop from 212.879 to 212.572. I use the seasonally adjusted data, though, maybe Bob’s isn’t SA.
In the CPI less food and energy, the same occurred in December. The level fell from 220.783 to 220.494. Again seasonally adjusted.
Anyway, why let seasonality affect the view of the price level?
I don’t know if this is was Sumner meant or not. It’s just how I interpreted it when I listened to the interview. I guess I thought he was emphasizing the actually, as in, isn’t that surprising, when the WSJ was writing all those op-eds and when Bob Murphy was making inflation bets with David Henderson that some deflation actually occurred.