Did any of you grow up with a family tradition of telling scary ghost stories around Christmas?
Despite the theoretical connection between printing money and rising prices, and the empirical evidence staring him in the face, Matt Yglesias continues to raise doubts in the minds of the public over the threat of purchasing-power change. Here’s Yglesias telling us up is down:
Inflation continues to be very low. But here’s how Daniel Costello reported it from Planet Money:
The core PPI – which excludes food and energy prices – rose 0.5% in November, more than expected. Leading the advance: truck and cigarette prices. Core prices are up 1.2% over the past year.
The news is unlikely to change the Fed’s decision on whether or not to keep interest rates at a record low Tuesday. But it does add to concerns the central bank’s loose monetary policy could lead to greater inflation and new asset bubbles down the road.
In 2008, the CPI increased 0.1 percent, way below the Fed’s 2 percent implicit target. In 2009 thus far, the CPI is set to increase by a number that’s higher than that, but still below the implicit target of 2 percent. So why, logically, would an increase from “way below target” to “somewhat below target” spark a concern about inflation? It would take a year or two of inclation above the target rate for the price level to return to its long-run trajectory. I doubt that if we had a year of 3.9 percent inflation followed by a year of 2.6 percent inflation that you’d hear people saying the Fed was worried about deflation. They’d say the Fed was glad things were getting closer to the target.
OK so Yglesias is making two separate claims here:
(1) Inflation continues to be very low.
(2) Using core inflation as an index, we are below the long-run target of 2% per year.
Both claims are wrong, unless we very carefully choose our time frame. In terms of reaction to the PPI report, inflation is very HIGH–after all, the actual PPI went up 1.8 percent in one month (seasonally adjusted), which works out to annual inflation of about 24%; hardly tame. The core PPI went up 0.5% in one month–an annualized rate of 6.2%, triple the target.
Now of course, you can’t judge a trend just by looking at a single month’s reading, but again this drives me nuts when the news hook for a blog post is a very high reading, which is then reported as “evidence” for the low inflation. (!)
Anyway, let’s look at Yglesias’ second point, that we are still digging our way out of the actual price deflation of late 2008. Or rather, his point is even subtler–it has to be, because we already are above last year’s price levels. What Yglesias is now arguing is that the current level of prices is below where it would have been, had we experienced “target” core inflation last year.
OK but what’s so special about a two-year window? If we start in October 1971, when we were off the gold standard, and look at the 38-year change in core CPI through October 2009, then there is an annualized increase of core CPI of about 4.4%, assuming I did my Excel formula correctly. I think 4.4% is way way above the Fed’s target of 2%, and since it’s done that on average for 38 years straight, I think we are in line for some serious under-inflating.
Maybe Yglesias thinks I’m cherry picking by selecting 1971. OK if we go back to the start of FRED’s core CPI series, in the 52-year span from October 1957 through October 2009, annualized core inflation has been just shy of 4.0% (again, subject to my quick Excel calculation in which I have 70% confidence). So the long-run trend is DOUBLE the official target, and it’s been that way for 52 years. I’m too tired right now to think carefully through the compound growth issues, but I think that means we should have stable prices for 26 years straight in order to get back to where Yglesias wants us to be.
But I don’t think Yglesias will agree with my assessment. He has done the equivalent of pointing out that since 1998, we have had no appreciable warming. Except, in Yglesias’ case he is doing something more like saying, “Purchasing-power change halted in October 2008! Whence this ‘consensus’ on money and inflation?”
DISCLAIMER: I actually like Yglesias’ posts, because he strikes me as sincere. I just think he is horribly wrong on this issue, being misled by people like Krugman whose sincerity I am not sure about.
Jeff Tucker reminded me that the PPI came out today (CPI tomorrow!). From the BLS’ news release:
The Producer Price Index for Finished Goods rose 1.8 percent in November, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This increase followed a 0.3-percent advance in October and a 0.6-percent decrease in September. In November, at the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 1.4 percent, and the crude goods index rose 5.7 percent. On an unadjusted basis, prices for finished goods moved up 2.4 percent for the 12 months ended November 2009, their first 12-month increase since November 2008.
So yes, producer prices are up 2.4% over the past year–doesn’t sound like we’re stuck in a liquidity trap to me–but that doesn’t really mean much, since it was the first such 12-month increase in a year!
I guess now we see one framing trick that the government and media can use, to keep the public thinking that inflation is nowhere on the horizon.
UPDATE: In fairness, I should relay I just checked and the headline and blurb from the main page at CNBC (which has now switched to something else) said something like, “WHOLESALE INFLATION HEATS UP: The BLS reported that producer prices recorded their first year-over-year gain since November 2008…”
This Wednesday at about 1:30pm EST I’m doing a phone interview with Judge Napolitano on my recent article about the fate of the USD. (I am leaving right after for a business road trip so that’s why I’m phoning it in, as they say.) I don’t know if it will be live; I don’t have a TV so I have no idea when his show is actually on FOX.
UPDATE: Tom Woods reminds me that Judge Napolitano’s show is broadcast on the Internet. I was thinking of seeing him host Glenn Beck’s show and got confused.
Others can list the numerous contributions Samuelson made to just about every field in mathematical economics; his output was really incredible. In just about every major topic, one of the early “seminal” papers was a Samuelson article.
Not only was Samuelson a workhorse, he was also a clever writer and could be a real wise*ss. For example, when arguing with people who kept insisting that a certain strategy was optimal in the face of uncertainty (it’s not), Samuelson grew so exasperated that he published a paper [.pdf] that ended like this:
No doubt some will say: ‘I’m not sure of my taste for risk. I lack a rule to act on. So I grasp at one that at least ends doubt: better to act to make the odds big that I win than to be left in doubt?’ Not so. There is more than one rule to end doubt. Why pick on one odd one? Why not try to come a bit more close to that which is not clear but which you ought to try to make more clear?
No need to say more. I’ve made my point. And, save for the last word, have done so in prose of but one syllable.
Two of my prized possessions are the referee reports for my publications (here and here) in the Journal of the History of Economic Thought. (If you’re curious to see the type of paper I’m talking about, the appendix of my dissertation [.pdf] gives you a flavor of the analysis in both JHET papers.) On both papers Samuelson disclosed his identity, and he wrote tons of comments all over the them, in pen.
The first paper he basically signed off on, though he had some reservations. The second paper though–which the title announced was a critique of Samuelson–his report said something like (paraphrasing), “The author has selected just four of my many papers on these topics; he has somehow managed to neglect my paper with Solow  which gives the general framework and can handle each of these special cases which so fascinates the author. Yet let a dueler choose his weapon, and die by it: I recommend publication to be followed by a comment from me, explaining the errors even within the narrow scope he had burrowed for himself.”
I should emphasize the above is probably only 50% related to what Samuelson wrote; I haven’t read the report in years. But it was something like that, and it was simply hilarious. It was the cockiest referee report you could imagine; the idea that Paul Samuelson needed to make sure the editor of JHET realized this punk kid from Hillsdale College was an idiot.
I know how narcissistic this sounds, but when I saw that report I really really hoped Samuelson would write his response before he died. Well too late. The editor of the paper told me Samuelson hadn’t written a reply after a few months, and then when my paper actually came out, I mailed a hard copy to Samuelson’s secretary, hoping to goad him into firing off a reply. Ah well. Note that I’m not saying he chickened out, but I’d like to think he decided, “Argh, this kid’s mistakes are so subtle that it would take too long to straighten them out. Let me rip Hayek’s legacy instead.”
Now the reason Samuelson was called on to referee my first paper (dealing with Bohm-Bawerk’s critique of the “naive productivity theory of interest” and the Solow growth model) is that he was probably one of the three people on the planet who really could have refereed it. There are a lot of people who know Bohm-Bawerk’s work, and there are a lot of people who understand neoclassical models where the real interest rate equals the partial derivative of the production function with respect to K, but there aren’t too many people who are expert enough in both to be able to tell if I’m a genius or an idiot. (The verdict is still out, btw.) Samuelson was one of those people.
In fact, Samuelson’s reswitching paper has a beautiful numerical illustration of the Austrian approach to capital. Obviously Samuelson thinks he’s blowing up Menger and Bohm-Bawerk with the paper, but if you really take the time to understand his model, it’s really cool. I don’t know how the heck he came up with such nice round numbers for the example; it’s beautiful.
Last point: Samuelson bluffed a lot, or at the very least, he was really sloppy. He would “casually” drop allusions to mathematical theorems or things from physics that weren’t quite right. My two favorite examples:
(1) In one paper he was lauding some earlier thinker, and said something like, “His contributions were countably finite.” I don’t know what the heck that is supposed to mean. If a set is infinite then it can be either countable or uncountable; e.g. the real numbers in the interval (0, 1) are uncountable, whereas the positive integers 0, 1, 2, … are infinite but countable. So I think Samuelson was trying to make a geek math joke and just botched it.
(2) In another paper (I think it was a different paper) Samuelson started off with a completely unnecessary tangent recapitulating the proof that there are an infinite number of primes. Problem was, his proof was wrong! I was in grad school reading the paper, and showed it to the Turkish guy next to me. “That’s not a proof, right?” He laughed and agreed with me. I wonder if the journal editor realized it and didn’t want to challenge the prima donna, or if he didn’t even notice.
UPDATE: In the comments Taylor confirmed my claim that Samuelson bluffed in mathematics: He can’t even count! Look more closely at the excerpt from above, regarding the allegedly monosyllabic journal article.
That makes me wonder how many polysyllabic words are actually in that thing. But I’m not checking, as the editor(s) didn’t either.
All year, Paul Krugman has been pooh-poohing the ability of the Federal Reserve to do anything to get us out of recession. Because we’re in a “liquidity trap,” monetary policy is either ineffective or politically impossible, and the only cure is massive deficit spending. Krugman has been so vocal on this point–even though it violates Krugman’s own published analyses–that Scott Sumner wrote Krugman an open letter asking him to explain the contradiction.
So it was with great surprise that I read this Krugman NYT column in which he does (almost) a complete 180–he says that Obama doesn’t have the support to push through the required deficits, and so it’s up to Bernanke to save the day through buying $2 trillion in assets.
The turnaround was incredible; Sumner patted himself on the back for being vindicated. (Really, check out Sumner’s post to see just how blatantly Krugman’s recent column violates what he’s been saying all year.)
So this intrigued me. I figured that Krugman sees the inflation coming just as I do, and so he wants to get on the right side of things–it would be really embarrassing if we got double-digit inflation when Krugman’s last “call” was that the Fed is pushing on a string in times like these. As for the timing, I thought it very coincidental that Krugman changed his call 6 days before the first BLS report will come out showing year/year CPI inflation. Since (to my knowledge) I am the only person harping on this point, I actually entertained the notion that Krugman checks my blog as sort of a recon operation behind enemy lines.
Yet as I was reading Wall-E to my son tonight, the obvious answer hit me: Krugman’s pro-inflation column was the first one he could have written (unless they allow him really tight submission deadlines) after the “G30″ meetings! Here’s Krugman blowing off the meetings as incredibly boring, but the WSJ blog’s description is a bit more sinister:
If you want to encourage the kind of conspiracy theories that have prospered in the wake of last year’s financial crisis — those that describe a secret cabal of elites running the world — try doing the following:
1. Have a group of 30 high-powered economists, government officials and bankers meet under the auspices of an international group that shares ideas on how to run the global financial architecture.
2. Make sure the group’s name can be reduced to a “G” and a number. (In mimicking the G7 or the G20, this keeps outsiders guessing: Are these guys from the government, or the private sector? Is there a difference?)
3. Have your Board of Trustees led by an influential former Federal Reserve chairman who’s now working as a senior advisor to the president of the United States.
4. Name the former vice chairman of bailout behemoth AIG as the group’s Chairman and CEO. (Also, if you want to reach the Zionist conspiracy theorists, it helps that he and another prominent member of the Group have very close ties to Israel.)
5. Ensure that membership includes the likes of these: A former Treasury Secretary and president of Harvard who also now works as a top presidential economic advisor; an outspoken liberal economist-cum New York Times columnist; Citigroup’s senior vice chairman; and top representatives of the world’s four most important central banks.
6. Hold two days of closed-door meetings at the New York Fed, scene of many a desperate deal to rescue the financial sector in 2008, conveniently located a few blocks from Goldman Sachs.
7. Do not publicize a list of attendees and leave everyone guessing about the agenda.
These were the circumstances surrounding Friday’s start to the 62nd plenary meetings of the Group of 30, whose formal name is “The Consultative Group on International Economic and Monetary Affairs, Inc.”
So to summarize: All year Krugman has been saying that the Fed is impotent, and only fiscal policy (i.e. huge deficits) can save the day. Starting on December 4, Krugman meets with a mixture of government and private financial elites. Six days later (seven in the print edition), in his NYT column Krugman calls for Bernanke to start buying $2 trillion in financial assets as a way to stimulate the economy. Very interesting.
Of course, not to throw cold water on the great conspiracy theory, but I should mention that after Paul Samuelson’s death, Krugman is back to explaining matter-of-factly that the Fed can’t do anything in a liquidity trap. Either way, his bases are covered. Whatever occurs, Krugman called it.
Bryan Caplan bet me $100 that we wouldn’t see 10% CPI inflation in any 12-month period over the next five years. What Bryan doesn’t realize is that I would have paid $100 just for him to link to my article on the dollar. Heh heh, all too easy.
Do you think Jesus’ relatives would double-up and give him one present for both Christmas and his birthday?