Invasion of the Purchasing Power Snatchers
Scott Sumner is a tragic hero. Check out his awesome FAQ (which he confusingly calls “FAQs”); so much brilliance and yet it goes awry because of his obsession with NGDP (nominal gross domestic product) growth.
Let me give you a good example. In a recent (and characteristically awesome) post, Scott goes through and documents just how nuts some economists were before Milton Friedman learned us all that inflation is always and everywhere a monetary phenomenon. Seriously, check out this insane quote from Joan Robinson:
“An increase in the quantity of money no doubt has a tendency to raise prices, for it leads to a reduction in the rate of interest, which stimulates investment and discourages saving, and so leads to an increase in activity. But there is no evidence whatever that events in Germany followed this sequence.”–Joan Robinson, circa 1938
Now this is important for our story, look at Scott’s (perfectly correct) reaction to this insanity:
So easy money couldn’t possibly have caused the German hyperinflation because German interest rates were not very low. And everyone knows that easy money is associated with low interest rates. I won’t insult the intelligence of my readers by explaining what is wrong with her reasoning.
But perhaps we shouldn’t be too hard on poor Joan Robinson. Unlike some of the more wimpy Keynesians, she at least had the courage of her convictions. If interest rates are the right indicator of monetary policy; then doggone it money must have been really tight in Germany during the early 1920s. Let’s not be distracted by a few wheelbarrows full of cash.
Great stuff, Scott, but of course it seals your doom. Note, everyone, that Scott did not say, “Let’s not be distracted by million-percent nominal GDP growth.” No, in order to slap Robinson upside the head and prove to her that the German central bank was engaging in very loose policy, he pointed to the (possibly apocryphal) wheelbarrows of cash.
Later on in the post, Scott says:
This morning I noticed that I was linked to by a blogger way over in England. It seems he wanted to find an economist who was crazy enough to think that Fed policy has recently been tight, despite the low interest rates, and I was the only one he could think of. You’ll have to admit that it would be odd to cite an authority as obscure as me, if there were more famous economists making the same point.
Yes Scott, you are indeed crazy for thinking it was tight monetary policy in the fall of 2008 (!!) that caused all of our recent problems.
But perhaps we shouldn’t be too hard on poor Scott Sumner. Unlike some of the more wimpy Friedmanites, he at least has the courage of his convictions. If nominal GDP growth is the right indicator of monetary policy, then doggone it money must have been really tight in America the last 10 months. Let’s not be distracted by two FRED graphs.
