God as Author
I may have blogged about this idea before, but repetition never hurt anybody… At first glance, it seems that if people have free will, then God must not have a plan after all. In other words, you can believe that people choose to do bad things, or you can believe that God willed that they do bad things, but you can’t believe both.
And yet, the Bible seems to indicate that both propositions are true. For the former, it makes little sense for God and the prophets to tell people to repent and turn away from their sinful ways, if you don’t think they have free will.
On the other hand, you have passages like this (Ex 9: 8-12):
8 So the LORD said to Moses and Aaron, “Take for yourselves handfuls of ashes from a furnace, and let Moses scatter it toward the heavens in the sight of Pharaoh. 9 And it will become fine dust in all the land of Egypt, and it will cause boils that break out in sores on man and beast throughout all the land of Egypt.” 10 Then they took ashes from the furnace and stood before Pharaoh, and Moses scattered them toward heaven. And they caused boils that break out in sores on man and beast. 11 And the magicians could not stand before Moses because of the boils, for the boils were on the magicians and on all the Egyptians. 12 But the LORD hardened the heart of Pharaoh; and he did not heed them, just as the LORD had spoken to Moses.
In case the context isn’t clear, Moses and Aaron are demanding that Pharaoh release the Israelites from their bondage in Egypt. You would think God would want Pharaoh to do the right thing. Yet sometimes (as the passage above makes clear) we are told that God hardens Pharaoh’s heart; we’re not told that this Pharaoh was just a mean guy.
An atheist can of course just chalk it up to another contradiction in the Bible and move on. But I don’t think it’s a contradiction, and in fact I think anyone who has ever written fiction can understand why.
Suppose I ask you if Professor Moriarty has free will. Your answer will be yes. In contrast, if somebody had been drugged or hypnotized into attacking Sherlock Holmes, then we might say, “That guy wasn’t committing a crime; he was under someone else’s control.”
Those are perfectly sensible things to say, even though Arthur Conan Doyle ultimately planned out everything that Moriarty does. We can say, “Well, within the world of the Sherlock Holmes stories, Moriarty has free will.” Right, just as within our world we have free will. The really interesting thing about God’s story–history–is that the Author is Himself one of the characters in the story and communicates with other characters. (As smart as Holmes was, if you were living in one of those stories, and Arthur Conan Doyle wrote in a pamphlet containing a message, wouldn’t you heed Doyle’s remarks even more than Holmes’?)
Again, this won’t really resonate with people who have never written fiction, but if you create characters and “get to know them” as the story develops, there really is a sense in which they take on a life of their own. If you have thought out the details beforehand, then you know what “has to happen,” but you also can’t “force” it by making characters do things that are, well, out of character–at least if you want to write good fiction.
When it comes to God’s story, He has invented the most interesting characters ever. And He painstakingly develops the backstory for each one of them, even minor characters that don’t seem to be that important for the major themes. Finally, God’s story is incredibly realistic, obeying an internal consistency that is so astonishing that many of the characters think there is no evidence of an Author.
Scott Sumner Sees Sumnerites Everywhere
Wow. Scott Sumner’s success has gone to his head so much that he thinks we’re all market monetarists now. In this post, Sumner first quotes from a news article about Bernanke:
The Fed, he said, believes inflation will remain near the central bank’s target of 2% or a little less. The economy can support an unemployment rate around 5% to 6% without fueling inflation, he added.
“I do believe we will return to a healthier growth rate. I don’t see any reason why we couldn’t,” he said.
Now kids, I want you to truly see Scott the way I do. To do that, you have to read the entire commentary he gave on the above news excerpt. Here’s Scott’s reaction to the above:
It’s good to hear that Bernanke thinks the problem is demand side, not structural. Oddly, I actually think it’s more structural than he does. If we stay at 99 week maximum UI benefits, I’d expected the natural rate to be in the 6% to 7% range, especially if the minimum wage rate stays this high.
So Bernanke thinks easier money would help the economy even more than I think easier money would help the economy. But he fails to see one very obvious potential problem. There is something that could prevent a return to “healthier growth.”
Let’s assume inflation stays near at 2%. And let’s also assume that they allow NGDP to grow at a bit over 4%. Then we won’t get a “healthier” recovery.
But why would I make such a pessimistic forecast about NGDP growth? Why expect it to be so low?
Umm, maybe because it’s been low for the past several years.
Maybe because private forecasters expect it to remain low.
And maybe because the bond market seems to expect low NGDP growth (as far as we can tell.)
Other than those three reasons, there’s no reason at all that the economy can’t have a healthier recovery with 2% inflation.
And who determines the rate of NGDP growth? There’s probably an answer somewhere in Bernanke’s intermediate macro textbook.
This is really astounding. Let me walk you through this.
First, when Scott says right off the top, “It’s good to hear that Bernanke thinks the problem is demand side…” he has no justification for this. Watch:
Suppose you asked me what I thought was wrong with the economy. I would say that there are a lot of misallocated resources from the mistakes of the housing boom years. If we had laissez-faire, they’d get moved around right-quick. But we have unemployment benefits, blah blah blah, that are making this thing drag out. If the government just locked its policies in place, it might take a few years to slowly grow out of this mess, but we’d eventually return to a regular growth rate (though we’d be permanently lower than we otherwise would have been). I’m disregarding the ticking time bomb of the Fed’s injection of reserves, for the sake of argument.
Now if you said, “OK Bob, why doesn’t the Fed just print up another trillion dollars right now, to speed that process up?” I would say, “Aren’t you listening? I just told you the problem was structural. This isn’t a demand problem. Why would we print up money to deal with a structural problem?”
I’m not saying Bernanke thinks like I do, I’m just saying someone who did subscribe to (at least a certain class of) structural theories of the recession, might say exactly what came out of Bernanke’s mouth.
In contrast, if you thought the problem were demand-side, then what Bernanke said makes absolutely no sense. Don’t take my word for it, Scott Sumner himself goes through and explains why Bernanke’s comments make no sense, if Bernanke in fact thinks we are suffering from a demand problem, not a structural supply side problem.
So to sum up, here’s what Sumner has done in this blog post: He takes a Bernanke quote that is consistent with someone who thinks we are suffering from a structural problem (which can’t be fixed by easier money), and erroneously concludes that Bernanke is saying we have a demand problem–even though Bernanke says no such thing, either explicitly or implicitly. Then, Scott proceeds to ridicule Bernanke for not being consistent with his (alleged) belief that we are suffering from a demand side problem.
I really hope Scott tunes up his rhetoric before our debate. I want the bookies to at least keep the line within two touchdowns.
Follow-Up on Krugman and Italy
Not surprisingly, Daniel Kuehn (and others) was not impressed by my highlighting of an apparent Krugman Kontradiction regarding Italy. To refresh your memory, in November 2009 (to take just one example) Krugman was (typically) making fun of people who were warning that the US had better get its deficit under control, lest interest rates quickly spiral up out of control and bring us to our knees.
To prove how misguided this fear was, Krugman had constructed a chart showing that the US debt-to-GDP ratio had recently risen higher than Belgium’s, but was still below Italy’s. Some people balked, and Krugman clarified:
Why, people ask, would I want to compare us to Belgium and Italy? Both countries are a mess!
Um, guys, that’s the point. Belgium is politically weak because of the linguistic divide; Italy is politically weak because it’s Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.
So now in the comments of my post, Daniel says:
The guy that basically launched the currency crisis literature thirty years ago introduced the fact that he was concerned about the role of currencies during crises in November, 2011?
I don’t buy it Bob.
Then Daniel goes on to provide some quotations where Krugman is talking about the problems with the euro, well before 2011.
OK that’s fine, but it doesn’t change the fact that this is a Krugman Kontradiction. Let me put it to you like this:
==> If Italy had continued to be fine, Krugman would (presumably) have continued to cite Italy as proof that he is right, and the WSJ is wrong, about the dangers of high debt.
==> When it turned out Italy wasn’t fine, Krugman cited Italy as proof that he was right, and the euro-optimists had been wrong.
Isn’t that convenient? No matter how Italy turns out–whether it’s humming along nicely, or on the verge of defaulting because it’s being attacked by bond vigilantes–Krugman’s models “called it” in both cases? Reality really does have a Keynesian bias.
Let me drive home the point. Just today, Krugman wrote:
Brad DeLong sends us to a piece by Nouriel Roubini from almost six years ago, describing how Giulio Tremonti, Italy’s economy minister, threw a hissy fit when Roubini suggested that Italy might have problems with its euro membership. And no, I’m not being unfair — read Roubini’s piece. It was quite something.
What I would say is that this incident exemplified something that was going on all along the march to the eurodebacle. Serious discussion of the risks and possible downsides was simply not allowed. If you were an independent economist expressing even mild concerns about the project, you were labeled as an enemy and shut out of the discussion.
In a way, the remarkable thing is that it took until now for disaster to strike.
Does everyone see what a I-don’t-know-what Krugman is being here? If the above quote is right, that means that Paul Krugman in, say, November 2009 was sitting around thinking, “Man, I can’t believe Italy has hung on for this long, without being attacked by bond vigilantes. This is really surprising to me, but I’m so confident in my understanding of optimal currency areas that I really think disaster will strike any day now.”
And yet, when some Republicans that month said the US needs to cut spending to get our fiscal house in order, Krugman wrote, “If [Italy] can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.”
Nobody sees a problem with that?
Well, I do. Either Krugman was flat-out wrong in November 2009, and didn’t realize Italy was on the verge of disaster. Then now, he is making up stuff when he pretends that he did realize it in November 2009.
Or, Krugman knew full well Italy was on the brink of disaster in November 2009, but went ahead and used it as a quick zinger to make fun of the austerians, because he knew nobody cares about the validity of arguments, the blogosphere is a team sport, and he’d have his useful smart guys (not useful idiots) defending him in comments across the globe.
Either way, that’s not cool.
Last complaint: Just like I don’t like the current situation in Europe being blamed on the gold standard, I also don’t like it being described as Italians wanting German central bankers, when right now the head of the ECB is Italian. I don’t care about the ethnicities, it’s just that I can only process so much Orwellianism per day.
(For the record, I get what both claims mean, and I’m just pointing out how they have a problem in that they don’t accord with the actual reality. It is truthiness as Stephen Colbert would use the term, to say Europe is suffering right now because it has a gold standard as the Italians are being dominated by German central bankers.)
Krugman Promises to Reconcile Himself at a Date TBD
Ah, I’m glad to see some people are apparently busting Krugman in the comments of his blog about an apparent inconsistent (dare I say Kontradiction?). For a while Krugman has been ripping on the people worrying about deficits, by pointing to other countries that have higher debt-to-GDP ratios than the US does. Here’s a good one from November 2009. Krugman posts a chart showing US debt surpassing that of Belgium but still well below Italy and Japan. Krugman then says:
Why, people ask, would I want to compare us to Belgium and Italy? Both countries are a mess!
Um, guys, that’s the point. Belgium is politically weak because of the linguistic divide; Italy is politically weak because it’s Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.
So you see the problem now, with Krugman having made arguments like that for more than a year. (I’d love it if he used Greece as an example, but I don’t think he did, since it’s a pretty dinky country and I doubt they would have even been on people’s radars until, well, the bond vigilantes decided to attack. You know, the invisible ones.)
Today Krugman acknowledged this apparent problem and handled it this way:
A quick note right now, maybe more later.
One question that keeps coming up is, how can I reconcile my scorn for warnings about bond vigilantes with what is happening to Italy? This seems especially pointed because I have in the past used Italy’s ability to carry debt exceeding its GDP as an illustration that debt concerns were overblown.
The answer lies in the concept of original sin. Not the Pope’s kind, but the economics kind — the long-standing notion that developing countries were especially vulnerable to financial crises because they borrowed in foreign currency. (Yes, the linked paper actually raises some distinctions between currency mismatch and original sin; never mind for now).
The key point is that by joining the euro, Italy took a bite of the apple — it converted its advanced-country status, as a nation issuing debt in its own currency, into original sin, with debts in someone else’s currency (Europe’s in principle, Germany’s in practice). That is the root of its new vulnerability.
More on all this later, I hope.
Yes, I hope so too.
The problem is, this wasn’t “the key point” when Krugman was ripping on the austerians back in 2009, and he routinely cited Italy as an example of a country with a high debt-to-GDP ratio.
The US government will be the last domino to fall in (what I perceive to be) a global bubble in sovereign debt. So as these dominoes keep toppling, of course Krugman and my MMT friends in the comments will always come up with some reason that the latest victim of the bond vigilantes is the last one–it could never happen here.
And then, when it does happen here, the fault won’t be with the massive run-up in debt championed by Krugman et al. in the interim. No, it will be because the Fed doesn’t have the courage to inflate enough, or because investors get spooked by fiscal conservatives in Congress, or because of some yet-to-be-determined difference that excuses the humongous deficits that made the government vulnerable to the bond vigilantes.
(Remember, Iceland didn’t adopt the euro. As I recall, the bond vigilantes had a few words with them. I know, I know, they had debts denominated in other currencies. There’s always a way to explain it away. Fiat money and massive deficit spending aren’t the problem; we haven’t really given them a chance yet.)
Murphy in Michigan
I am going to hook up with the Energy for America bus tour, as it hits the cities of Midland, Mt. Pleasant, Traverse, and Portage. (Consult the schedule for more specific times.)
BY NO MEANS am I suggesting that people drive a long ways to this thing. My understanding is that a few of us are just going to give quick (like 5 minutes each) pep talks on conventional energy production (we’re for it) and let people sign the bus. But if you’re a huge groupie and you live down the street, come on down. I’ll flex and you can feel my bicep.
(After I do the Saturday events I’ll blog that night from the hotel and give more specifics about how cool or uncool the events are for potential attendees. I think they serve food and drinks but no alcohol.)
A Minor Quibble With the Whole NGDP Discussion
I generally like what Noahpinion says on the GDP debate, but even he is conceding too much to Sumner et al. Before I was letting it go, because I figured it was a harmless simplification, but thus far I’ve only seen one random guy in the comments mention the problem. (Firefox ate my tabs when it upgraded, so I lost the link to that guy.)
Anyway, here is Matt Yglesias telling us why NGDP is “the real thing” as opposed to that artificial construction of BLS economists, “inflation”:
Something worth flagging for the NGDP conversation is that because both real GDP and inflation are familiar subjects of discourse, it seems natural to many people to take them as “given” and understanding NGDP (= GDP + inflation) as somehow constructed and exotic. But actually NGDP is, relatively speaking, the simple quantity here. It measures total spending in the economy. You count everything, add it all up, and you’ve got your NGDP. It’s actually just like the GDP you may have learned about in your intro textbook: Household consumption plus exports plus government purchases plus investment minus imports. Social construction enters the picture when we try to move from this nominal quantity to the allegedly “real” one.
No, Mr. Yglesias, notwithstanding your clever title reference to The Matrix and/or a book I never read, you are simply mistaken. NGDP is not “total spending” in the economy, and it is wrong when people write that it is equal to MxV, if V truly means “the average number of times a dollar changes hands in the economy during the time period in question.”
For example, if I spend $1000 buying shares of stock from somebody, that is “spending” and those $1000 change hands. But it doesn’t raise NGDP by $1000.
Even more serious, when the farmer sells wheat to the miller, who in turn sells flour to the baker, who in turn sells whole loaves of bread to the retailer, etc. etc., NGDP doesn’t capture the “total spending” in that stream of transactions. No, it only counts the “value added” at each stage.
So there are two things here:
(A) At the very least, there is a measurement issue. It is actually a lot more complicated to calculate “nominal GDP” than to simply add up “total spending.” You have to be a trained economist to even know how to begin doing it.
(B) There are actually conceptual issues too. For example, it is my understanding that if the baker spends $1 million on flour that he uses up that period making bread, that doesn’t count in NGDP. However, if he spends $1 million on buying a new oven that will last for ten years, then it does count in NGDP as “investment.” So, what happens if we switch our time period from one year to ten years? Does NGDP over the ten-year span suddenly drop by $1 million, because the oven went from fixed capital to circulating capital? (I have never gotten a good answer to this one, because everybody I asked said, “I don’t know Bob, I hate GDP accounting.”)
Last thing: For those of you think “this is the best Bob’s got,” I am working out some of these tangential issues as I prepare my most devastating assaults on Scott Sumner’s worldview. I have not yet begun to argue.
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”?
Fractional Reserve Banking and Casinos
Long story, but my six-year-old son was asking me to explain gambling. I told him about how you go into a casino and give them money for chips. Then I was explaining Blackjack, and told him about betting $10 etc. on a hand.
He stopped me and asked me to clarify. Was the person betting chips or betting money? I had been using the terms interchangeably.
“Oh,” I explained, “you give the casino your money, and they give you chips that represent the money. So it’s like you are gambling with your money, it’s just more convenient.”
Then, as I’m continuing with the tutorial in Blackjack, of course my mind is building all kinds of parallels with fractional reserve banking. For example, would it be illegal for the casino to give players a loan of chips, that wasn’t 100% backed by the casino’s own funds? I.e. at any given time, could there be a run on the house? I would tend to think every chip in play is backed 100% by cash, but maybe I’m wrong?
If I’m right, isn’t it funny that commercial banks are allowed to do things that would be illegal for a casino to do?
And if I’m wrong, well then, uh, isn’t it funny that commercial banks operate just like casinos??!! (See what I did there?)
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