Krugman Doubles Down on Inflation
He’s sticking to his guns, I’ll give him that. Krugman has already gone the route of defining the relevant (price) inflation measure as one that strips out energy and food, despite the obvious (and comic) problems with doing that.
Now he’s taken his Phillips Curve mindset to the next level:
US core inflation has ticked up slightly recently. What’s that about?
I’ve suspected that what we’re really seeing is the inadequacy of even core inflation as a way to purge transitory effects of volatile prices: the measure takes out purchases of food and energy, but it doesn’t take out indirect effects of raw material prices on costs. New research from Goldman Sachs (no link) seems to support that view: it finds that core inflation is getting a temporary bump from the prices of imported raw materials, and will probably subside if the commodity surge is in fact over.
This in turn suggests that policy should really be based on some kind of “supercore” inflation. Should this simply be wage growth? Adam Posen at the Bank of England has certainly gone well down this route, arguing that the relatively high rate of even core inflation in the UK reflects one-off factors and that stagnant wages show that there are few risks. And I totally agree with Posen about the UK policy issues.
Yet there are problems with a wage target — mainly, you don’t want to base policy on the notion that wage gains are always a bad thing. Maybe adding a trend productivity adjustment would do the trick. More systematic thoughts when I have time.
Anyway, the bottom line for now is that neither the Fed nor the ECB should be at all concerned about inflation.
Say what you will, that’s impressive.
Sympathy for the True Believers
On Facebook I just made my profile: “Robert Murphy wants to point out that technically, the rapture people haven’t been proven wrong. There could have been a guy in Malaysia who disappeared yesterday but nobody’s noticed yet.”
After doing so, I felt a twinge of regret because I saw a lot of other people were piling on as well.
I don’t have anything too profound to say in the present post except that I don’t feel smug with respect to these folks, I feel sympathy. I had an experience back in September last year where I was really really sure something was going to happen after a lot of prayer. Then it didn’t happen, and it really shook me.
As readers of this blog know, I still believe in God, but I am a lot more humble since that episode. (I don’t want to describe it because it would make little sense out of context. If and when I write my autobiography it will get a just treatment. Suffice it to say, it wasn’t that I heard a voice say something false, but I definitely had my faith shaken.)
On the one hand, I am more humble in my own confidence in the nature of God and His plan for the world. I thought I understood certain things back then, and no I did not.
On the other hand, I am not at all judgmental when I see other people go way out on a limb and then it blows up in their faces. I can sympathize with them thinking they have access to secret knowledge and in a sense it’s admirable that some of them (I’m talking about the rank and file, not the head honchos) made personal sacrifices and braved the insults because of what they believed. It’s just too bad that they fell for something that to the rest of us seemed patently absurd.
Last point: I am fully aware that the regular atheist/agnostic readers can have a field day now in the comments. Merry Christmas.
Deep Thoughts From Mises
I’m working on a study guide for Mises’ The Theory of Money and Credit and came across this neat quote on page 202: “In a social order that is entirely founded on the use of money and in which all accounting is done in terms of money, the destruction of the monetary system means nothing less than the destruction of the basis of all exchange.”
(BTW, I am 200 pages into the book and have yet to hit the bats-it insane part. I can hardly wait to see the transformation, since it’s awesome thus far.)
My Future Self May Agree With Daniel Kuehn…
…but as of right now, his post on “temporal autarky” strikes me as one of the oddest arguments for market failure I’ve ever encountered. (And he’s got stiff competition: Paul Krugman doesn’t like the food that people in England eat, ergo the market doesn’t work.)
Now I feel a responsibility to faithfully reproduce Daniel’s argument, since I think his post may partly be in response to my request in this comment. So let’s let Daniel speak for himself:
You have a better chance of making an economic transaction with someone from North Korea today than you have of making an economic transaction with someone living 100 years from now. We typically think of North Korea as an autarkic regime, so I’ve always felt that it’s reasonable to apply the same term to the future. We are simply not allowed to trade with anyone in the future – even our future selves. This is the problem of temporal autarky.
We have evolved to deal with this. The matter that composes us may extend in all four dimensions of space-time, but our experience of existence has evolved to be an experience of space-time as a three dimensional reality (space) moving along a fourth dimensional track (time). Einstein called this conceptualization of reality a “stubbornly persistent illusion”, but it is an illusion that works decently well for both neoclassical economics and Newtonian physics….
We have one investment to consider as a society that I talk about fairly regularly on here: the exploration, terraformation, and colonization of the planet Mars. That’s a costly endeavor, but also one with important benefits. But benefits to whom? Mostly to people living two hundred, three hundred, four hundred years in the future at least. It would be an adventurous, but not exactly pleasant place to live until at least that time. Now imagine if you lived in 2311, on the Earth. You have the option of living with a single planet civilization or a two planet civilization (with much better access to a resource-rich asteroid belt). You only know Earth now, of course, so you could be tempted to say you’re fine with a one planet civilization, but I think that’s naive. Imagine if half or even less than half of the Earth’s landmass were gone: if there were no North and South America. The world would be much more impoverished place. More places, more people, more opportunities for interaction, trade, and specialization is a good thing. It’s an enriching thing. Go even farther into the future – 2811 – and imagine metropolises on Mars. Imagine two Parises. Two New Yorks. Two Tokyos. Two Rios. Imagine the new cultures that would flourish there. Unambiguously more human civilization is better. Someone from 2311 or 2811 would want to make an investment in the past in this new, expansive human civilization. And in 2311 or 2811 they’re going to be tremendously wealthier than we are, so investing in a Martian colonization effort in 2011 would be a pittance for them.
The problem is, these humans that coexist with us in space-time but exist in 2311 or 2811 rather than 2011 can’t make this transaction with us. We are complex combinations of four-dimensional existence that can only (so far as we know) truck, barter, and exchange in three dimensions. We are living under a regime of temporal autarky, and autarky is impoverishing.
This is why I have substantial doubts about the optimality of a three dimensional market when it comes to four dimensional distributions of costs and benefits. We fake it, of course. We economists are happy to talk about “intertemporal choice”. But that’s not really the right term for what we’re discussing. Intertemporal choice models are actually principal-agent models where our present self is acting both on his own behalf and on behalf of our future self in a transaction, but the future self has no say. Behavioral economists have pointed out that humans generally do hyperbolic discounting (to varying degrees of course). This is discussed as a sort of cognitive bias. Of course what it really is a lack of standing in the transaction for our future selves. Hyperbolic discounting is a major problem for efficiently allocating costs and benefits between future and past versions of ourselves. The problem becomes even worse when we think about allocating costs and benefits between future and past people.
What does temporal autarky imply? Well, let’s think of it in terms of an autarky we’re more familiar with (say, North Korea). What does the autarky of two contemporaries in the United States and North Korea imply? Well for one thing it implies that mutually beneficial exchange can’t occur. So far as we know, we can’t get technology from the future (Sarah Connor probably thinks that’s a good thing). But if we think specifically in terms of direct investment from one trading partner to another, it means that investments that would be beneficial in North Korea and profitable to Americans can’t be made in North Korea.
The same is true of the future. Our faux-intertemporal choice allows us to make a few provisions for the future, but only because we gain some utility from the expectation that some future version of ourself will gain utility. No such transaction can occur between other future humans and ourselves. The conclusion is absolutely unambiguous: the market economy underinvests in the future. Period. The market is by far and away the best institution for allocation decisions we have, but it has certain predictable blindspots and this is one of them. [Bold added.]
OK let’s unpack this in two steps:
(1) The autarky of North Korea is not a “market failure” in the usual sense of the term.
Yes, there are potentially mutually advantageous trades that aren’t occurring between people in North America and North Korea. They aren’t occurring either because of government barriers or because of “real” transactions costs. Either way, that’s not a typical market failure. Either the government is causing the problem, or the problem is due to something “real” that can’t be solved politically. Look, there are farmers who let oranges rot in Florida even though they would be willing to sell them for a penny to people in India, and even though the people in India would be willing to pay 2 pennies for them. But it costs too much to ship them. That’s not a market failure in any conventional sense of the term.
So, if Daniel wants to use the analogy of North Korean autarky to prove that the market fails in intertemporal trade, I’d like him to first spell out exactly how the market is failing us in interspatial trade with respect to North Korea.
(2) The autarky of the future is even less of a market failure than North Korea.
Even if Daniel can get pass hurdle (1), it’s still not clear that he has made his case. It’s at least physically possible for trade flows to occur between North America and North Korea. That is, Americans obviously can send resources into North Korea and build a factory, and the North Koreans can send a stream of goods in exchange as dividend income on the investment. We know that if institutions changed, this type of thing would occur, so in a grand sense I could see Daniel arguing that “the market” isn’t delivering the best of all possible worlds, hence it’s “suboptimal” (even though that’s not the conventional definition of “market failure”).
But with respect to trading with someone from 2081, it’s not only institutionally impossible, it’s literally against the laws of physics (as we currently understand them). Go back and re-read Daniel’s post. He’s not talking about the well-known problems of people today, not properly taking into account their own future utility (which can include their concern for their descendants). No, at least if we take his post at face value, he is lamenting the fact that the market isn’t allowing people from the future to send us stuff in exchange for us investing in ways they would like.
Well, OK, but that is qualitatively less of an objection than even North Korean autarky. By the same token, if people didn’t have to sleep regularly, we could produce a lot more stuff. So clearly there is underutilization of human labor, period. Does anyone like that argument against the market’s allocation of resources?
No one can predict the future, but I find it very unlikely Daniel will sway me on this one.
Highway Robbery in Tennessee
A local liberty activist sent me this a few days ago, and I just got around to watching it. Holy cow, this is worse than I would have thought possible. Trust me, don’t think you’ve seen the worst halfway through it. You need to watch the whole thing, even when the newscasters are talking to each other with 45 seconds to go–keep watching.
Apocalypse Soon: What Would Landsburg Do?
Sam T. sends me this profile of the people who think the world will end quite soon. I haven’t looked into this stuff too carefully, but my inner Steve Landsburg leads me to ask:
For these people who think the world’s end is imminent, and who are Christians (though I don’t know if they are evangelical), have they taken other action that is consistent with their stated belief? For example, have they stopped paying their mortgages and life insurance premiums, and maxed out their credit cards, in order to send as many missionaries to Africa as possible?
Krugman Speculation Bask
I am honestly not looking to criticize him… Paul Krugman wrote a lot back in 2008 about the lack of a speculative signal in the oil markets. (Specifically, inventories weren’t rising and production wasn’t falling, so the record prices in the summer were due to “fundamentals” he thought.)
But I seem to recall that this time around–say within the last 6 – 8 months–he wrote that he thinks speculators might be involved with the rapid increase in oil prices, because now there is evidence of accumulating inventory.
However, I can’t find his more recent post(s) on this. Any help?
More on the Selling Gold Controversy
Mish thinks the idea of the government auctioning off its gold is so self-evidently stupid, that he stated with complete confidence that the Sun must have confused Ron Paul with Heritage’s Ron Utt, or it misquoted Paul. There was no other possibility in his mind (read his Addendum).
In contrast, Gary North not only believed that Ron Paul was in favor of the idea, but he endorsed it. (HT2 LRC)
This issue is tough because the government has put us in such a bad situation. As Wenzel said in his can’t-we-all-just-get-along post, there are multiple fronts in the battle for freedom.
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