Scott Sumner Proves That the Pen Is Mightier Than the Teaching Post
Seeking to bolster my self-esteem, I re-read my prescient warning back in April that the stock market was overvalued and people should sell. Here’s what I wrote about Scott Sumner (the guy who has made a name for himself by declaring that our problems are due to Bernanke’s tight-money policies):
Well Scott Sumner has hung up the keyboard. In his “I’m not really serious but actually I am” kind of way, he takes credit for quantitative easing and several trillion dollars in new wealth. It’s too long to reproduce the argument here, but he’s basically saying that bloggers forced Bernanke / gave him the support to inflate more, and that has resuscitated global stock markets.
Don’t worry Scott, you are not being arrogant. I too hold you fully responsible for what happens to the world economy.
I was being somewhat tongue in cheek, but it really is true that Scott has done more than any other person in getting mainstream economists to flip on this issue. Check out Tyler Cowen’s remarks today about the possible S&P downgrade:
3. I don’t expect anyone to change their mind at this point, but the “we should have had a much bigger stimulus” argument is unlikely to go down in intellectual history as the correct view. Instead, Ken Rogoff and Scott Sumner are likely to go down as the prophets of our times. We needed a big dose of inflation, promptly, right after the downturn. Repeat and rinse as necessary. But voters hate inflation and, collectively, we proved to be cowards. Too bad.
Really, let’s not have target practice with “beltway libertarians” blah blah blah. That’s not my point here. My point is, how in the world has the economics profession gotten to this point, where it is “cowardice” to not think that multiple bursts of inflation are the key to prosperity? (And where doubling the monetary base in a single year is not enough inflation the first time?)
Murphy on the Judge’s Show Tonight
Tonight I will be on FreedomWatch, but if it affects your plans it is a guest host. (Her name was Liz-something, sorry I can’t remember exactly.)
I’m talking about the stock market, the Fed, and other sexy topics.
L-L-Let’s See That Again!
I know, I know, you were restless last night. Sure, you got your bi-weekly fix of a post on cash balances, but yet something was missing. Eventually, at 3am, you realized what it was: You really wished you could have seen my Neil Diamond performance from a better angle. And, you were dying to see the delivery of my initial joke.
Sleep easy, friend:
Defender of Efficient Markets Hypothesis Gives Away the Game
For a while now, I have been a lone voice crying in the wilderness, claiming that the Efficient Markets Hypothesis (EMH) had no empirical content. It was not a falsifiable theory, but rather a way of looking out at the world and organizing it. Note that this isn’t a criticism–it’s what Misesians think about pure economic theory in general! However, the reason I stress the point is that a lot of EMH proponents think they are being really “scientific” in the same way that quantum physicists are. Here’s what I wrote a while ago in response to hilarious defenses some economists gave for the EMH in the wake of the financial crisis:
The efficient-markets hypothesis comes in various forms. There is, indeed, a large empirical literature, in which Fama and others conducted falsifiable tests. However, as I hope I’ve demonstrated with the quotations above, in practice the efficient-markets hypothesis is actually a tautology, or a way of viewing the world.
There’s nothing wrong with using a priori mental frameworks to parse economic reality; indeed that is one of the defining characteristics of Misesian praxeology . However, as the quotes show, many of the EMH apologists think they’re independently confirming the EMH, when, in fact, their goggles simply force all evidence into conformity with their presuppositions.
So it was refreshing to see (HT2 Krugman) Stephen Williamson–in his attempted takedown of Zombie Economics‘ John Quiggin–say the following:
The Efficient Markets Hypothesis: For Quiggin this is “the idea that prices generated by financial markets represent the best possible estimate of the value of any investment.” Here, Quiggin is badly confused, but maybe the finance practitioners are not helping him out much. Market efficiency is simply an assumption of rationality. As such it has no implications. If it has no implications, it can’t be wrong.
Exactly, Prof. Williamson. I’m glad you agree with me.
Incidentally, this young lad Noah Smith is pretty clever. Too bad he seems to think Chancellor Palpatine is the best leader the Galactic Senate has ever had.
Debt Deal Bask
I’m probably going to be on Judge Napolitano’s show tomorrow (Friday), discussing the stock market drop and possibly the debt deal. Do you folks have any good summaries of the debt deal? E.g. people showing how much the debt still increases, how the tough spending cuts are pushed into the future, etc.? I know there must be a ton of stuff, but I don’t have time to wade through it all, so I’m hoping you can point me to some good summaries.
Examples for the Great Cash Balance Debate of 2011
Let’s try a new approach. The reason I’m persisting in this argument is that I get the sense there are plenty of people lurking who can’t decide who is right. (I.e. if it were just Major Freedom and a few others arguing with me, I would have dropped it long ago because we’re moving in circles.) So let me try the following to get people to see why I am so sure that a good, subjectivist, individualist Austrian economist has to agree that diverting income into the accumulation of cash balances can be a form of saving.
Without further ado, ask yourself which of the following actions should be classified as saving:
(1) A person earns $10,000 during the course of a month, spends $9,000 on rent, food, gasoline, and other items that are consumed during the month, and devotes the remaining $1,000 to buying a 30-day bond that yields 1%. After the bond matures (one month in the future), the person plans on spending the principal and interest on consuming.
(2) A person earns $10,000 during the course of a month, spends $9,000 on rent, food, gasoline, and other items that are consumed during the month, and devotes the remaining $1,000 to buying a 30-day bond that yields 0.5%. After the bond matures (one month in the future), the person plans on spending the principal and interest on consuming.
(3) A person earns $10,000 during the course of a month, spends $9,000 on rent, food, gasoline, and other items that are consumed during the month, and devotes the remaining $1,000 to buying a 30-day bond that yields 0%. After the bond matures (one month in the future), the person plans on spending the principal on consuming.
(4) A person earns $10,000 during the course of a month, spends $9,000 on rent, food, gasoline, and other items that are consumed during the month, and holds the remaining $1,000 in the form of cash that earns a 0% nominal return. The person plans on spending the $1,000 one month in the future on consuming.
(5) A person lives in a Rothbardian world where the money is gold coins and banks are 100% reserve. Consumer prices gently fall about 2% per year on average. Even though the banks are solid, nonetheless the person is very suspicious and stockpiles gold coins over the course of his working career, spending less on consumption year after year than his income would have permitted. At age 70, he retires and starts spending down some of his stockpile on vacation cruises. When he dies, his estate still has 100 pounds of gold coins that his heirs acquire. (So did this man save at any point during his life?)
(6) A business owner in 1999 is worried that Y2K will screw up the financial system, and so every month instead of contributing to his Roth IRA as he normally would have, instead he lets his checking account balance start growing. Then in December 1999 he withdraws $300,000 in currency, out of which he will pay his employees and other expenses during the first quarter of 2000 if the electronic systems are all down. (So how do we classify the $300,000 in physical currency he holds? Is that not a business asset? Did he not save in order to acquire it?)
(7) There is a small island called Rothbardia where the people use gold as money. In 2008 they recognize that the rest of the world is about to start printing fiat money like crazy, and that this will push up the price of gold relative to most other goods. So the people in Rothbardia triple their normal cash holdings (which consist of gold coins and bullion, the money of their land). They are speculating that they will be able to unload some of these cash balances in a few years at a tremendous gain. (So did they stock up on present goods? Did they engage in a massive bout of consumption? Or did they “invest” in cash balances?)
Rothbard Sides With Wenzel on Cash Balances
Such is my devotion to truth, integrity, and the scientific status of Austrian economics, that I am unilaterally reporting the following footnote that I discovered while preparing tomorrow’s lecture for my online tour of Man, Economy, and State.
The context is Rothbard explaining how individuals’ rankings of present versus future units of money give rise to the equilibrium pure interest rate. He points out that because of time preference, nobody would ever give up more than 10 units of present money for 10 units of future money. Then he says in footnote 11 of page 386:
It is not valid to object that some might prefer to use the money in the future rather than in the present. That is not the issue here, which is one of availability for use. If a man wants to “save” money for some future use, he may “hoard” it rather than spend it on a future good, and thus have it always available. We have abstracted from hoarding, which will be dealt with in the chapter on money; it would have no place, anyway, in the evenly rotating world of certainty.
The fact that Rothbard is putting “save” in quotation marks, in conjunction with Wenzel’s other quotes that he dug up from Rothbard the last time we had this argument, makes me think that Rothbard probably would largely side with Wenzel in our spat, especially if he heard that I had said nice things about Keynes’ views on interest and money.
Two things:
(1) I still believe that Rothbard endorses the formula that “Savings = Income – Consumption.”
(2) I still believe that because of (1), Rothbard’s position is untenable if he sides with Wenzel and thinks that adding to your cash balances isn’t really a form of saving.
Bob “Diamond” Murphy
[UPDATE: I swapped in a video from a better angle and that included my opening joke.]
What a way to cap off Mises U last week… Seriously, this band–Fly By Radio–is awesome. Here’s their official promo. The lead singer and guitar are Austro-libertarians and were at Mises U all week. They saw me on Monday doing karaoke, one thing led to another…and here ya go:
If you’re curious, I’d say there were easily 500 people in the crowd, only about 200 of whom were Mises groupies. I was getting fist-bumps from Auburn students who had no clue why I said, “Let’s hear it for Ben Bernanke!” when I first took the stage (before the above clip begins).
(Note: I’m tagging this post “karaoke” but we have now entered uncharted waters for this humble economist.)
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