A Vision From Krugman Column Future
Last night I heard some chains rattling and was visited by a spooky economist who spake thusly:
So a lot of the austerians are pointing with glee at the latest BLS figures, showing year/year CPI is up 9.4 percent. Does this mean the deficit hawks have been right all along? Was Dick Armey on the money when he said crowding out would wreck the recovery?
Umm, no. Everyone serious who has looked at the data agrees that this is a one-shot surge in various staples due to the panic over Japan’s reactor meltdown. Apparently the folks at the Heritage Foundation don’t understand psychology.
But as the chart below indicates, core inflation had been behaving just as we evil Keynesians had been predicting, until last April. So unless John Boehner wants to argue that Big Government leads to Big Tsunamis, there’s truly nothing here. It’s demand, stupid.
core inflation……
Sure prices of food, energy, health care, services etc. are all rising….but our overlords tell us the CPI is low…… all these rising prices must be figments of our imagination…..
I was amused, but not surprised, to see this story:
Fed official points to iPad 2 performance as evidence against inflation; but working-class crowd “can’t eat an iPad” (my headline)
Ya, but what percent of that person’s income is spent on food?
It was probably dumb of him to point out the iPad simply from a rhetorical angle, but the point still holds.
I was watching South Park last night – the World of Warcraft episode. Something caught my attention: Kenny was playing the game on a computer at his home. Kenny’s the poor kid. The market economy is pretty incredible – my dad is a computer guy so we always had a PC as long as I can remember, but I remember a lot of middle class friends who didn’t. And I definitely remember when we first got internet access – a little while after other friends of ours. And no one really had cell phones.
Anyway – none of these points are new to anyone that knows anything about economics, it’s only to say that in this story Dudley made a tactical/rhetorical error, not a bad point. Higher food prices are frustrating because they cut more substantially into the discretionary income that we have left after we’ve allocated a large portion of our paychecks. It’s very visible in that sense, and we shop around for food and we do it on a regular basis so we see changes in it. But that doesn’t mean analytically it should hold the same sway that it does psychologically.
There’s more to it than that, though. Don’t you remember how every time someone mocks deflation as benign, pointing to the historical deflation in computer prices, a Fed shill will roll his eyes and say, “no, we’re not talking about *that* kind of deflation, that’s a completely different phenomenon.”
And yet without catching a breath, a Fed official uses higher price performance (not even lower unit price) as evidence against the kind of inflation they *are* worried about.
What is this? Heads I win, tails you lose? Heads “computer deflation is irrelevant”, tails “computer deflation counts against food prices”?
Furthermore, any reasonable definition of inflation is going to factor in how it does *not* compensate for higher food prices simply that I have the opportunity to smash my iCrap and buy a new gadget at the same price … with more memory OMG!
And not that it matters, but it’s more expensive to port food into NYC, so it’s a bigger part of people’s budgets there, “even though” they can counterbalance it with the “cheaper replacement for purposely scrapped iPad” subsidy.
It also doesn’t matter that an episode from 2008 shows rockin’ tech when we’re talking about inflation SINCE 2008.
“There’s more to it than that, though”
Yup – there always is 🙂
As for your other point… Dudley here is making the point that the prices the audience member was refering to represent a very small portion of what people pay for. That speaks to the relevance of volatile food prices. What’s wrong with that? When “good deflation” of computers, growth in the 1870s, etc. is mentioned again the counter is “but how relevant is that?”. I’m not sure what your point is. Nobody is saying falling computer prices are bad. Nobody is saying rising food prices are good. The question is – are these relevant to the monetary policy decisions we face now? The answer for both seems to me to be “no – we are tackling a different problem. It is not an inflation problem. It is not a deflation-caused-by-progress problem.”
re:“What is this? Heads I win, tails you lose? Heads “computer deflation is irrelevant”, tails “computer deflation counts against food prices”?”
You seem to be missing my point. I’m saying there’s a lot of things we pay for besides food these days. To focus the volatile price of something that makes up an increasingly small part of our budgets is misleading.
re: “It also doesn’t matter that an episode from 2008 shows rockin’ tech when we’re talking about inflation SINCE 2008.”
Again, I think you’re missing my point. All I had noted was that the “poor kid” has a computer and an internet hook-up. In this world, of course it’s frustrating to see the price of milk go up, but you have to ask yourself how much analytic significance to put on it.
I suppose it depends on who we’re talking about. Someone living around the poverty line in the U.S. and billions of people outside our borders spend a much larger % of their disposable income on food and energy. When those prices double in a short period of time bad things can and will happen.
I dont have a problem looking at the core in the short-term, on a month-to-month basis, since it helps give a better idea of the underlying trend w/o the volatile components. I have a problem when people use the core over longer periods of time. If we can cherry pick like that lets take out OER and see what inflation looks like.
I also have a problem when people say “it’s not spilling over to the core” or “its not in wages”. So what? Inflation/deflation is a complicated process and can manifest for different reasons in different ways. If food/energy prices go up people have to pay more regardless of whether it spills over; if wages dont inflate as much it’s even worse for consumers. Without the spillover of raw goods prices to finished goods prices/consumer prices/wages firms’ margins come under pressure which hurts profits, incomes, employment etc.
So for looking at price inflation in the short-term look at the core CPI, long-term look at everything else(raw goods, intermediate goods, finished goods, consumer goods, PCE deflator, wages, imports, financial assets etc.).
Jon –
Ya, definitely on the short run point.
I think outside the blogosphere this isn’t all that controversial. People know these things. They know at what frequency you can use what measures. Unemployment claims are another one that you see jump around a lot, and you just can’t use them like the way some people try to use them.
Daniel, the Fed’s reply was not “food prices are not relevant for monetary policy” (which, in its more nuanced form, is a defensible point). It certainly was not that “computer deflation is not relevant for monetary policy”. I *can’t* have been, when he’s using higher iPad performance (not lower unit price, mind you!) as evidence that inflation is tame!
So whatever you may be thinking, the Fed isn’t. They’re really trying to have it both ways: that computer deflation’s goodness is relevant *only* when it supports their pro-inflation position. Either admit your agreement with this one-sided reasoning, or recognize that your position is not Dudley’s
As for computers vs. food as % of budget: yes, when I buy a new computer (at the same price and using more cycles for more bloated softare) it works faster. But the reason people’s food budgets are staying a low % (if they in fact are) is because they’re to buying lower quality stuff or less of it … not exactly encouraging.
Silas, I’m confused – when has computer price deflation’s goodness not been acknowledged? A similar case where I hear people talking like you is the deflation of the 1870s (not the immediate monetary shock deflation in 1873 – the decade-long deflation).
Usually my response to statements like “but the deflation in the 1870s was good not bad!” is “yes, we’ve known that since about the 1870s”.
What is your point on these sorts of things, exactly? You say people are trying to have it both ways, but I’m not aware of when Dudley or me or anyone seriously engaged in the discussion ever said these were bad deflationary trends. Is there some Dudley citation of falling computer prices as a bad thing that I’m not aware of?
You guys have invented this world where you think our standard line is “deflation is always bad no matter what”. Nobody is trying to have it both ways because despite what you seem to think nobody has ever argued that supply-driven deflation is something to worry about.
And I feel immediately driven to qualify… sure debtors don’t like deflation no matter where it comes from, etc. etc. – specific groups aren’t gonna like it. But no economist of any stripe looking at the broad macroeconomic picture ever gets concerned about supply drive deflation. Ever. I am being declarative but I am also open to being wrong – it’s on you to show me if I’m wrong, though. Show me someone that has fretted over falling computer prices before I even consider agreeing that we are trying to have it both ways.
Daniel, I don’t think you are getting Silas’s point. When ever deflation is being talked about as a concern, like Krugman just a couple months ago, we point out the deflation that is seen in computers, calculators, etc. and the Krugmans out there will explain how deflation in those products is irrelevant to the discussion. Then when we start seeing inflation Krugmans will say inflation is not bad look at the falling prices of computers.
If we have deflation, computers don’t bolster their argument so they drop it from the conversation and if we have inflation they use computers to bolster their argument. heads you win, tails we lose.
If computers are going down because of supply driven deflation then it should be irrelevant to both a deflation and inflation argument from Dudley.
The problem comes in when we try to differentiate supply driven deflation from monetary/credit driven deflation. In theory they are two different things but in the real world its not very clear cut.
Like right now if we look at food prices we see supply constraints, increased global demand, higher money supply, less desire to save, more speculation etc. How much of each is causing the rise in prices?
Part of the problem is just looking at “price level” as some gigantic agreggate rather than a complex system of specific price relationships that are driven by monetary, fiscal, economic, and psychological factors.
Dan –
You are reading Dudley as saying computers go down ten percent, food goes up ten percent, so it all cancels out? I read him as saying “lots of prices go in all sorts of directions – the iPad, for example, is going down in price – and what you need to do is look at the general trend of prices not one specific price”
And I was simply pointing out that Dudley was right to say “you need to look at more than one small part of your budget when you talk about these things”.
Regardless, the point is nobody disagrees on the meaning of things like the decline of computer prices, no matter what Silas thinks we say about deflation.
Daniel, I don’t know where you’re getting my argument from, but it’s not my posts. Let me try to say it again:
The Fed deems computer price deflation “irrelevant” when it would be evidence *against* inflationary policies.
The Fed then (as shown by Dudley recently) deems computer price deflation *relevant” when it would be evidence *for* inflationary policies.
It’s not about whether they regard computer price deflation as good or bad. It’s that they determine its relevance based on whether it supports pro-inflation policy! The Fed is perfectly content to write off computer price deflation as “not the kind of deflation that’s relevant to monetary”. But then, the moment they need to prove people don’t have higher living costs, suddently, computer price deflation is the most important thing the world, and conclusive evidence that you’re just imagining a general increase in prices.
Do I need to say it a different way?
Also, Daniel:
I read him as saying “lots of prices go in all sorts of directions – the iPad, for example, is going down in price – and what you need to do is look at the general trend of prices not one specific price”
And I was simply pointing out that Dudley was right to say “you need to look at more than one small part of your budget when you talk about these things”.
And that’s not responsive to my point that the very example of price deflation was really just technological improvement — the very kind of price deflation they consider irrelevant in conducting monetary policy … until the riffraff gets upset that prices are going up. Then, computer technology magically transforms into the yardstick for inflation.
What’s more, the only prices that aren’t going up are the prices that are very infrequent an optional. A measure of living cost that thinks that an easily avoidable purchase (say, by not smashing your current iPad through a window) can somehow count directly against everyday, unavoidable expenses like food, energy, medical care, and rent — is not living in this world.
Let them eat iPad cake.
“And that’s not responsive to my point that the very example of price deflation was really just technological improvement — the very kind of price deflation they consider irrelevant in conducting monetary policy”
Right. And oil is geopolitical. And food is harvest dependent and also geopolitical insofar as we now stupidly put corn in our cars to make Iowans happy.
It’s precisely because any given price has lots of things going on with it that you DON’T focus on one, because there’s another that goes a different direction for a different reason. You look at broad price trends.
And that’s not responsive to my point that the very example of price deflation was really just technological improvement — the very kind of price deflation they consider irrelevant in conducting monetary policy … until the riffraff gets upset that prices are going up. Then, computer technology magically transforms into the yardstick for inflation.
If Dudley had said that computer technology was the yard stick for inflation then you would have a point. But he didn’t. He clearly says that you have to look at all prices rather than just a couple.
Sure, Daniel. So it would kind of be stupid to narrowly look at prices that you formerly decided aren’t relevant for monetary policy, and then deem them relevant because they support your pro-inflation ideology.
So … why would you be agreeing with Dudley, who did exactly that?
And I’m not sure what the rest of your point was, but if you’re prepared to take huge sectors of the economy, and write off any price increases that happen there, whatever the real reason, because of something special about them, then you’ve desensitized your model to the data. (That’s Bayesian for “out to lunch”.)
Et tu, Blackadder? Yes, you have to look at a broad array of prices. Like, average out a good sample of household budgets — no, no, *not* the ones that pointlessly smashed their current iPads through a window so they would have to buy a new one — and count up all their prices.
You wouldn’t take technologically-based deflation — the very kind that you historically wrote off as not relevant to monetary policy — and then revive its relevance just when you need to get your inflation numbers down.
That would be kinda dishonest, you know?
Silas,
re: “So it would kind of be stupid to narrowly look at prices that you formerly decided aren’t relevant for monetary policy”
Maybe this would be easier if you just give me an example of someone saying “this price isn’t relevant for monetary policy” that you consider inappropriate.
Any SINGLE price is probably inappropriate to talk about w.r.t. monetary policy. Even GENERAL prices (like in the 1870s) might not be relevant, depending on the circumstances. But the point is, Dudley didn’t point to computers and say “computer prices are falling THUS inflation is not a problem”. He pointed to computers and said “other things like computers are falling so you’ve gotta look at the bigger picture”
Silas,
If you can find me an example of someone saying that computer products shouldn’t be considered at all when calculating inflation/deflation then I would love to see it. The claim that looking at computer products alone isn’t a good measure of inflation is not inconsistent with saying that looking at food prices alone isn’t a good measure of it. In fact it is the same point.
@Daniel:
Okay: everywhere. Do a simple search of deflation bad computer, which will return numerous instances of people saying that deflation isn’t bad, because look at the computer industry. The reason given by everyone who disputes this comparison is my substantiation.
@Blackadder: People who dismiss the example of the “good deflation” in computers say it doesn’t count as “bad deflation” because it’s not a velocity-induced deflation and thus isn’t relevant to monetary policy. (See the google search I linked.) That’s fine, but then you don’t get to use it as a counterexaple to inflation. So Fed apologists are trapped into arguing either:
1) Deflation isn’t bad — in which case they shouldn’t be aiming for inflation to “stay safe”.
2) Deflation is bad, but not when it’s technology-induced — in which case they shouldn’t bring up iPad prices as a reason for saying that we’re too close to bad deflation.
Silas,
I looked at your google search. It is almost all Austrians and Austrian fellow travelers arguing that deflation isn’t a problem as using computers as an example. I found no examples of people saying we should consider computer prices when calculated inflation.
Unless Dudley is an Austrian, I don’t see the contradiction.
Blackadder, I was posting that so you could look at the arguments *against* those who deem deflation benign by reference to computers. (That was what I said I was linking it for, remember?) Such arguments (again, AGAINST the “computer prices show deflation is good” position) reflect the Fed’s position and are dismissive of the inflation-relevance of technology prices.
Every time you bring up computers, the Fed shills insist that that deflation is “good deflation”, not the money-supply-relevant kind.
Therefore, it is absurd and contradictory to turn right around and start using tech-related price drops the *moment* you need a counterexample to rising prices.
This isn’t difficult, Blackadder. If you disagree, fine, but please disagree with something I’m arguing.
Here’s the quote again, Blackadder:
Do a simple search of deflation bad computer, which will return numerous instances of people saying that deflation isn’t bad, because look at the computer industry. The reason given by everyone who disputes this comparison is my substantiation.
See that? I wasn’t citing my buddies. I wasn’t citing Austrian “fellow travelers”. I was linking that so you can get a good look at the heads-I-win _dismissal_ of the relevance of tech deflation. Of how tech-driven implicit price drops for computer parts are “not deflation in the sense we care about” right up until the very moment a Fed official needs a hard-to-find example of a price that isn’t rising.
Blackadder, I was posting that so you could look at the arguments *against* those who deem deflation benign by reference to computers.
Right, but the links don’t contain any such arguments. Rather, they contain arguments that deflation is benign.
Hint: look in the comments and trackbacks section.
*facepalm*
This is perfect.
I wonder if they’ll let us visit him in the hospital in a few years?
I’d love to peek through the small thick glass window in the door while he’s pulling his hair out still screaming “it’s demand, I told them it’s the demand and they won’t listen! I have a degree from Princeton…I have a degree from PRINCETON!”
You actually posted core+food and energy? lol Don’t you claim to have an econ degree?
We Austrians knew that massive government debt, the QE’s and super low interest rates we going to cause years and years of recession and we were right. Precisely predicting future price inflation and when in a period of collapsing asset values and a population hesitant to borrow new diluted funny money loans is a bit more tricky. Big deal. Predicting the future is hard because humans act (to coin a phrase).
Murphy, why do you suppose Japan is able to keep their inflation in control despite their excess reserves, but not the US? What exit strategies has the Japanese employed for 15 years that the US can’t? What makes Japan different? You make it sound like the US will lose control and won’t be able to stop the inflation tsunami. Is your argument that Bernanke will want to stop the inflation, but won’t be able to? Or that Bernanke will want the high inflation (like a madman because unemployment would still be high if your stagflation theory is right) and will let it rise without trying to stop it?
He wrote an article a few weeks ago about why Bernanke’s exit strategy would fail. Check out his Mises.org archive.
I read it. His article is why I’m asking about Japan. As far as I can tell, they both have had the same available exit strategies, yet Japan has avoided inflation for years now.
The article in question is billed as explaining why Bernanke’s exit strategy will fail, but actually it only explains how it *might* fail (even there I don’t find it terribly persuasive).
@ desolation Jones
In a Fiat credit based economy, you have to combine money supply plus credit to understand the general price level. If there is massive deleveraging, a central bank can expand its balance sheet and not cause a rise in the general price level. There will be many other negative consequences: Misallocation of resources, bubbles, etc. It is going on now, food and energy up while housing is still going down. Watch out however when banks start to lend. That may start tomorrow or in 10 years. I have no idea.
I had not had any calls from headhunters since early 2007 until January of this year. In ’05 and ’06 the calls were practically incessant.
Since that first call in January I’ve had three more. All my colleagues are experiencing similar courtings.
It sure feels like a bubble has taken shape.
Note: I’m an engineer in the auto industry
I almost deleted this as spam, RG. Then I saw your name and realized you were real. 🙂
The japanese aren’t using exit strategies because they haven’t had an inflation threat in 20 years, despite their huge public debt and monetary accomodation.
My view of why japan is different 1)Monetary/Fiscal policy was late and not as agressive early on as the U.S. 2)Japan became the premiere carry currency so funds could be borrowed and exported rather than spent domestically 3) Japan is a nation of savers. 4)Japan has serious demographic shifts working against it. 5) Japan’s current/capital account is opposite that of the U.S. 6) Japan’s financial industry was kept on life support whereas the western banks were bailed-out, re-capitalized, and allowed to mark assets to whatever right away while reflationary efforts continue to help their balance sheets..
I think it comes down to agressiveness of policy. They got to a point where the psychology of deflation/delevering became almost cemented and now with their structural/cultural issues they are stuck in that cycle. Of course having low growth and stable prices is far from being in a depression.
“Of course having low growth and stable prices is far from being in a depression.”
One of Keynes’s writings that even Keynesians are usually skeptical of is his Economic Possibilities for Our Grandchildren, which presents just such a picture. I’d have to reread it again, but I’ve never thought of Japan as a potential example of this.
Like a good American, I’ve always found Economic Possibilities to be an interesting read, but fundamentally problematic. The idea that we might just get tired of consuming is possible but has always been entirely implausible to me. Our leisure is substantially consumption-based even if we were to be more leisurely.
But maybe we’re all converging on Japan in the limit. Who knows. As you say, that’s far from the worst thing we could imagine.
Like you said I don’t think its possible to get tired consuming.
I’ve always worried more about the effects of debt saturation in developed nations; as it becomes harder to continually grow consumption when more and more seems to get pulled foward. Low rates, lax lending standards, high collateral values, nominal income growth, safety nets etc. tend to push people towards consumption in the short-term. Does counter-cyclical policy exacerbate this if our underlying problems are predominantly structural?
Japan has always been an interesting economic case study for its demographics, capital flows, counter-cyclical policy responses etc. The JPY is a fascinating currency for traders.
It also seems like people have a tendency to judge the state of the Japanese economy more on what the economic numbers say vis-a-vis the perception of how industrialized economies “should” behave rather than what is actually going on in Japan. I’ve heard people say things like: “this recession could have been a depression, or worse, we could be like japan!”.
It’s not possible to get tired ‘consuming’, but it sure is possible to get tired working. And you need to work to earn money in order to consume. Being able to work less = more leisure. Less consumption + more savings + frugal living = more leisure. Money-printing inflation is indirectly a taxation on savings and destroys savings, keeping people on the great big hamster wheel, preventing them from more easily attaining a state of wealth that allows them more idle leisure. I am very happy to live more frugally if it means I don’t have to work as much. This is why I don’t like the Keynesian obsession with ‘full employment’: What it’s basically saying is that if I have the cheek to work and save and earn enough to start having deliberate long idle periods, they call this a “bad thing”, inflate and tax away my savings, and force me back on the treadmill. Then they tell me it’s a “good thing” because I’m now “employed again” and we’re closer to “full employment”. Uhrm nope, we have the technology and means to create a society now that includes large amounts of idle leisure.