Potpourri
* Of course political pundits contradict themselves all the time, but Newt Gingrich’s positions on Libya are impressive. (HT2 Gene Callahan)
* “Analysts surprised” by the latest inflation numbers… The producer price index (PPI) for finished goods, up 5.8% over the last 12 months; for intermediate goods, 8.9%; and for crude goods, 16.4%. But don’t worry kids, Nobel laureates and Fed officials keep reassuring us that with high unemployment, there is no chance of a wage-price spiral developing and leading to significant inflation.
* Speaking of inflation, the way ShadowStats’ John Williams calculates it, he says that right now old-school consumer price inflation is running about 10%, if we calculated it the way it was done before 1979. (HT2 LRC)
This is obviously a very significant point in our debates over Fed policy. I sent the above article to Scott Sumner and David Beckworth to see what they had to say, since it was a chink in their armor that they should plug. (At least I think I sent it to Beckworth; the address in my account was db something, hopefully I didn’t just burden David Bowie with a CNBC article.) Here was Scott’s response (with permission): “No chink in my armor, because I care about NGDP growth, not “inflation.” NGDP growth is running around 4% to 5%, so if inflation is 10% then RGDP is falling at 5% to 6% a year. How likely is that? In other words, the 10% inflation argument is too crazy to respond to.”
The funny thing is, I would have thought free-market fans (like Scott) would welcome such evidence. “Oh OK, I couldn’t understand why the biggest interventions since the New Deal were having such little effect on the economy! Now it all makes sense.”
All joking aside, I have been astounded by some free-marketeers who think we should be optimistic about the economy. If you really believe that, then why are you wasting your career on something that obviously doesn’t matter very much?
* Don’t get too mad at Scott; he writes post like this and all is forgiven.
* Here’s a pretty good summary of the bankruptable Fed. The writer makes a good point that hits one of mine from a slightly different angle: Fed officials pooh-pooh worries of asset losses by saying they will hold them to maturity, and yet they pooh-pooh worries of (price) inflation by saying they will sell off assets at a moment’s notice if they need to.
* Another good analysis of possible Fed insolvency.
* Can you guess the closet Austrian who wrote: “[T]he introduction of the euro led to a period of low interest rates in southern Europe, triggering an inflationary boom; when the boom ended, they were left uncompetitive with northern Europe.” ?
* Bryan Caplan complains about his experiences growing up, when religious people just wouldn’t leave him alone. I mean poor Bryan went through this: “My response, from age 15-19 or so, was to wage a one-man intellectual war on religion. I didn’t just object to religious claims that happened to come my way. I was on search-and-destroy mode, vainly trying to argue every crucifix-wearer onto the path of reason.”
* Speaking of religion, Jeff Tucker on its tension with economics.
* Great article by Anthony Gregory on “Why the Left Won’t Stop the Wars.”
* Krugman ups the ante. Originally, I thought the whole deal with Keynesian economics was “sticky wages.” In other words, sure, markets would clear instantly with perfectly flexible prices, and so you’d never have involuntary unemployment. But in the real world, prices (especially wages) are sticky, and so that’s why we need government intervention.
But then Krugman lately has been saying no, the problem isn’t sticky wages. Even if we cut wages across the board, that wouldn’t help things, because it would just magnify our nominal debts.
Yet in this latest post, he seems to up the ante and say even if it weren’t for nominal debts, falling wages still wouldn’t boost employment. So at this point I’m thoroughly confused. Krugman seems to be saying that even with perfectly flexible wages and no nominal debts, the economy can still get stuck in a liquidity trap where we need an outside agency to boost demand. Is that right? If so, how is that possible? Why wouldn’t the naive Chicago School model hold?
* Speaking of Krugman, in this post he implicitly says that anybody who sides with the Confederate states must be in favor of reintroducing slavery. (In fairness he is possibly just being “funny.”)
* I was curious about the Heritage Foundation’s explanation for their alteration of the table showing unemployment numbers for the Ryan budget plan, but this is all I could find for their take on it.
* Some more Point campaigns (here and here) that the organizers said were inspired by my Krugman debate… One of them seems not to have taken off.
* Chaos Theory now in ePub.
* I talk about the case of Bernard von NotHaus, but be sure to read Bill Rounds’ alternate take.
* It’s here! The full infomercial for my upcoming class on Rothbard’s Man, Economy, and State.
Scott again fails to take into account the effect of productivity on output and the price level.
The Shadow Stats numbers don’t seem remotely plausible to me.
For example, according to Shadow Stats inflation from 2003-2007 was also around 10%. Does anyone honestly believe that inflation during that period was as bad as in the 1970s?
Or again, according to Shadow Stats, the median income in the early 1970s was more than $100,000 in today’s dollars. Does that sound likely?
Or again, if you use the Shadow Stats numbers, the housing boom was not so huge. The value of a home still went up, but not nearly as much as if you use the CPI numbers. Is that really the conclusion people here want to be pushing?
For example, according to Shadow Stats inflation from 2003-2007 was also around 10%. Does anyone honestly believe that inflation during that period was as bad as in the 1970s?
Don’t forget to take into account smaller goods, smaller packaging, etc, and constant or marginally increasing prices.
I bet you are only focusing on prices. Are you really looking at the containers going from say 37 oz to 35 oz? Or are you just looking at the prices going from $4.59 to $4.69?
Shadowstats utilizes the same method that the BLS utilized prior to the “improvements” made during the 1980s and 1990s.
Or again, according to Shadow Stats, the median income in the early 1970s was more than $100,000 in today’s dollars. Does that sound likely?
How are you converting that?
Or again, if you use the Shadow Stats numbers, the housing boom was not so huge. The value of a home still went up, but not nearly as much as if you use the CPI numbers. Is that really the conclusion people here want to be pushing?
It should be intuitive that in inflation corrected terms, the value of homes didn’t go up by as much. Nominally, of course they went way up. But then so did a lot of things.
The Austrian perspective to take is to rank real goods and services in terms of relative value. The housing boom would have us believe that the relative value of houses went way up in people’s value scales and passed a whole bunch of things on the way up. In reality of course, people weren’t prepared to place houses up that high in relation to other goods, which is why the housing boom was not sustainable. The only way that the housing boom would have been sustainable is if people actually placed housing further up in their value scales voluntarily, which means they would have willingly placed other things lower in their value scales, which in other words means they were willing to sacrifice those other things and consume less of them in order to consume more housing, which of course means there would have been real savings released from those other goods which would have made the housing boom sustainable.
But the prices were not a function of real consumer preferences, but funny money from the Fed, which is why the true value scales of individuals was not able to be observed through pricing.
I bet you are only focusing on prices. Are you really looking at the containers going from say 37 oz to 35 oz? Or are you just looking at the prices going from $4.59 to $4.69?
My understanding is that the Shadow Stats numbers only look at prices, whereas the CPI tries to make adjustments based on the sorts of factors you mention (as well as others).
Shadowstats utilizes the same method that the BLS utilized prior to the “improvements” made during the 1980s and 1990s.
Yes, but the general view at the time among economists was that the old way of calculating inflation was faulty and that the new way really was an improvement. Maybe they were wrong (although as your previous comments suggest, not considering hedonics is a pretty major flaw), but the changes weren’t simply a matter of government officials wanting to make themselves look better.
How are you converting that?
The National Inflation Association has a large series of charts based on Shadow Stats data. Here is the one for median income.
Yes, but the general view at the time among economists was that the old way of calculating inflation was faulty and that the new way really was an improvement. Maybe they were wrong (although as your previous comments suggest, not considering hedonics is a pretty major flaw), but the changes weren’t simply a matter of government officials wanting to make themselves look better.
So by that reasoning, there really wasn’t double digit inflation during the 1970s because the calculations done at the time were done using the older “faulty” method.
The National Inflation Association has a large series of charts based on Shadow Stats data. Here is the one for median income.
Hmmm, does that include all income, including home price appreciation and equity?
So by that reasoning, there really wasn’t double digit inflation during the 1970s because the calculations done at the time were done using the older “faulty” method.
No. From the fact that the revised method of calculating inflation gives you a lower rate than the old method today, it doesn’t follow that using the revised method would have given a lower inflation rate in the 1970s.
Hmmm, does that include all income, including home price appreciation and equity?
Are home price appreciation and equity income?
We were arguing in December about inflation. I was basing my reasoning on Robert Wenzel’s great work and I said,
“Give it a few months and you’ll start seeing even the governments manipulated cpi figures rising.”
Your response was,
“Folks like Bob have been saying this for years. Inflation is always just over the horizon. At some point you have to look at all the false predictions and start wondering whether there might be a flaw in your reasoning.”
Do you still claim there is no inflation now or any reason to expect it in the future?
Dan,
Yes. The CPI is still below the target rate. The high inflation Wenzel has been predicting has not materialized, and I don’t expect it to any time soon.
No. From the fact that the revised method of calculating inflation gives you a lower rate than the old method today, it doesn’t follow that using the revised method would have given a lower inflation rate in the 1970s.
Why not?
Are home price appreciation and equity income?
They can be, depending on the context, which is why I asked if the graph included things like that. Household income for example doesn’t include them, but total personal income does include them.
Captain Freedom,
Take the difference between the CPI and Core Inflation. Sometimes these numbers diverge significantly from each other, other times they are more or less the same. Therefore, if CPI was higher than Core Inflation for one period, you can’t just assume that the same will be true for another period as well.
In any event, based on the link Desolation Jones provides below, it appears that they Shadow Stat numbers are in fact not created by calculating the CPI using the old methodology. So it’s kind of a moot point.
Take the difference between the CPI and Core Inflation. Sometimes these numbers diverge significantly from each other, other times they are more or less the same. Therefore, if CPI was higher than Core Inflation for one period, you can’t just assume that the same will be true for another period as well.
Why are you focusing on the difference between core inflation and CPI? That’s not what underlies the comparison between calculating inflation post-1970s versus calculating inflation during 1970s. I am talking about CPI using the method during 1970s versus calculating CPI using the method of today.
Core inflation is a separate and new statistic that excludes things like food and energy. It is irrelevant.
I am asking why would CPI during the 1970s not be lower if the same method of today is used, meaning they include hedonics and substitution and things like that.
Maybe I’m not explaining myself properly…
In any event, based on the link Desolation Jones provides below, it appears that they Shadow Stat numbers are in fact not created by calculating the CPI using the old methodology.
Well, that’s separate from what I was talking about, but it’s food for thought. Econbrowser has a quote from Williams saying something about ad factor, but I don’t see that quote anywhere in William’s actual reports or communications.
Why are you focusing on the difference between core inflation and CPI? That’s not what underlies the comparison between calculating inflation post-1970s versus calculating inflation during 1970s.
I was using the CPI vs. Core Inflation example to illustrate a point you seemed to have trouble grasping, i.e. that from the fact that CPI is lower now using the new calculations than using the old calculations, it doesn’t follow that CPI would be lower in the 1970s using the new calculations than using the old calculations.
Are you familiar with the concept of an apples to apples comparison? If we use a different method for calculating CPI now, it follows that to meaningfully compare to the 1970s, we need to use that new method on the old data.
So, for example, you can’t dismiss 5% inflation (calculated under the new method) as “tame” when it turns out that the 1970s would have been 5% inflation by that method too!
I can explain that a different way if you want.
I agree. Shadowstats CPI numbers are worse than the ones coming out of BLS.
Do you ever go grocery shopping? Do you monitor non-tech product debasement? Ever noticed toilet paper rolls getting narrower, product packaging getting flimsier? Ever leave the house?
It seems you won the bet with Caplan about double digit inflation counting food and energy:
http://econlog.econlib.org/archives/2009/12/double-digit_in.html
why are you not claiming victory?
why are you not claiming victory?
Presumably because the bet was for the CPI.
Since Americans are so intellectually and emotionally unengaged that they cannot be shamed or outraged by the horrors of war (“I hate people, but I love animals!”), I’ve decided that we must focus our presentment of war crimes to those as experienced by dogs, cats and other pets. From page 145 of “War Crimes Against Southern Civilians” by Walter Brian Cisco:
One bizarre undercurrent of Sherman’s devastation came to be known as the “war on dogs.” Convincing themselves that Southerners used bloodhounds to track escaped Union prisoners of war, the invaders became obsessed with the notion that all dogs be destroyed. A Federal colonel said that “we were determined that no dogs should escape, be it cur, rat dog or blood hound; we exterminate all.” And he saw no need to waste ammunition on the creatures. “The dogs were easily killed. All we had to do was to bayonet them.”” Some animals, such as cats, “seemed to feel it in the air that something was approaching,” observed one woman in the path of Sherman’s army. “The watchdog had, in fear, crouched under the dining table,” she said, “when a soldier, spying him there, shot him.”12 Another lady living in Barnwell wrote that the first act of the invaders upon breaking into her home was to kill her pet dogs. They barked and growled at the intruders, “but in an instant both were hushed, two sharp pistol reports followed the last growl as the faithful dogs bounded forward only to fall in their tracks, dead.” Her terrified children stood by, “shedding silent tears.”13 Sometimes soldiers used the butts of their rifles to kill beloved pets in the presence of children.14
The world must be alerted to the fact that Krugman is defending the slaughter and butchering of pet doggies by the evil Sherman during his March to the Sea.
Speaking of religion, Jeff Tucker on its tension with economics.
Great article. It reminds me of why so many socialists have problems understanding economic scarcity. They either take the infinite resources in heaven idea and secularize it by claiming that abolishing private property will produce infinite wealth on Earth, or they seek to reduce people’s desires for additional wealth by social engineering and then hoping to remove felt scarcity that way (much like governments remove the effects of inflation by still printing money but enforcing price controls), or a combination of the two.
It seems to me that the socialists and the Keynesians are the ones stuck in an other-worldly religion. They can understand private property, thrift and scarcity in their own lives, homes and financial affairs. However, they have a quasi-religious belief that the state has magic powers which eliminate all of these self-evident worldly restraints. And, of course, it is they who must be in charge of the magical world of the future. This is the fundamental difference we have with these people and which is why they will never respond to facts, logic or evidence. Their magic statist world is not constrained by facts, logic or evidence and they would just as soon kill you as to admit that.
Rothbard explained that Marxism was in truth an “end-time” religious belief.
http://www.lewrockwell.com/rothbard/rothbard206.html
I continue to believe that Keynesianism is simply a fix of Marxism which still mandates control by the “intellectuals” and magic bureaucrats, but allows the masses a longer leash.
The reason they will forever reject the Austrian School is because the real world of acting man is based upon the totally mundane and unimpeded existence and activities of plain ol’ average people. Since we totally reject allowing these “intellectuals” the power to impose their magical Keynesian world devoid of property, thrift and scarcity upon the masses, they get just a little upset with us about that.
That is what and who we face.
Shadowstat numbers are ridiculous. He DOES NOT recalculate the CPI. John Williams just includes an “ad factor” in his own stats. He more or less adds 7% to the official BLs numbers and his job is done without sifting through the individual items.
http://www.econbrowser.com/archives/2008/10/shadowstats_res.html
Despite population growth, GDP today is lower than in 1990 using his method. Nobody finds this far fetched?
I do! Shadow stats has no credibility, and anyone else quotes shadowstats frequently will quickly lose credibility too.
Have you read Garrison’s Time and Money? He discusses why, in the Keynesian framework, flexible wages wouldn’t be enough to ‘stimulate’ an economy out of depression.
Jonathan,
I own Time and Money, but haven’t read much of it. Which chapter and/or pages should I read on this topic?
He covers this specific topic in chapter 7 & 8, but Garrison’s objective is to “unite” Austrian, Keynesian, and Neoclassical macro theory in such a way that he could model all of them in the same way, so you can compare them on ‘level ground’, so to speak. The background for the model is the entire book.
Wow – I must be a closet Austrian too and I didn’t even know it! In addition to problematic inflationary booms driven by low interest rates, I’m also a subjectivist (I’m not sure if I’m a “radical subjectivist” or not), and I think that the important human action to consider is that which occurs in disequilibrium. Where’s my membership card?
If you did a little analysis, you would find, historically, there is very little pass through from producer to consumer prices, especially during consumer balance sheet recessions such as the one we are in currently. I’d pass along some research, but I’m sure you’ll find it more fulfilling to do this on your own.
Also, a 10% inflation rate as you imply is completely nonsensical. This would imply a negative real rate for all fixed income assets, including corporate and high yield debt. And anyone who pays attention to these markets knows there is OVERWHELMING demand for these assets currently. Maybe Mr. Murphy is smarter than the entire fixed income market, and high yield investors oversubscribing to new issues by a magnitude of 3 to 4 times are idiots and don’t realize they are investing at negative real returns. Or maybe Mr. Murphy has little clue to what’s happening in capital markets, and his views on inflation are clouded by his fundamental misunderstanding of the monetary system.
When we are fending off deflation a few years from now, will you raise the white flag and admit your errors?
For once, I’m largely in agreement with AP Lerner.
So you believe we are going to have deflation too? What do you base that on? I know APL has his reasons (I disagree with him) but what do you base your reasons on for expecting deflation?
No, I don’t believe in deflation. Which is why I used the qualifier “largely”. My agreement was, again, largely with his second paragraph.
When we are fending off deflation a few years from now, will you raise the white flag and admit your errors?
Yes, unless they do something like suck a bunch of monetary base out.
Do you think food and energy prices are going to fall over the next few years?
“Do you think food and energy prices are going to fall over the next few years?”
Yes, but regardless of the direction of food and energy prices, a wage-price spiral is still highly unlikely. I would even say impossible.
If food and energy continue to rise, profit margins get squeezed and consumer spending in other areas will fall as an over levered consumer who can barely pay his bills spends more at the pump, but even less at the Gap. This is demand destruction, not inflation that results in wage-price spirals.
Wages remain suppressed as companies cannot pass along higher input costs to consumers, and refuse to hire/raise wages to protect profits margins best they can. Just look at recent unit labor cost trends. Let’s also keep in mind 70% of producer input costs are now labor costs. Obviously a simplified model, but this is the basic story.
How do you fit Zimbabwe into your model of the world? (I’m not asking sarcastically.) They had 90% unemployment with billion-% price inflation at one point. So how did a wage-price spiral develop there, while it’s “impossible” here?
Zimbabwe (and Weimer, and every other hyperinflation) is the result of the inability of the public sector to collect taxes. Once the public sector can no longer collect taxes, the public sector is rendered meaningless, and the currency becomes worthless. Are you anticipating the inability of the US government to no longer collect taxes? Hyperinflation is never a monetary event, it’s a political event. This is what history tells us. Sorry, but if you believe the Fed can create hyperinflation, you very clearly do not understand the monetary system of the US. Here’s some light reading, and would be interested in your response.
http://bilbo.economicoutlook.net/blog/?p=3773
AP, what do you think would happen if Bernanke on Monday announced that he was going to have the Fed buy every publicly traded company in the world?
As a follow-up, what would happen on Tuesday if Bernanke announced that the Fed was going to start stockpiling groceries, and it would pay $100 for a gallon of milk?
I think I’ve put my finger on what aggravates me so much about Krugman (and a fortiori, AP Lerner): I think that the government under both Bush and Obama have been putting in place all kinds of supply-side crunches. So for you to say, “Oh, we can’t have hyperinflation unless the massive money printing is coupled with really stupid policies that restrict output,” doesn’t really reassure me.
If we get through this, and the Fed’s balance sheet goes back to normal, while unemployment gently returns to 5%, without CPI going nuts, then I will admit I was totally wrong.
But if we get hyperinflation–or even double-digit price inflation for 3 years straight, let’s say–I don’t want you guys coming up with excuses. “Well this wasn’t a wage-spiral, so Krugman and we were right. This was due to blah blah blah, which we never denied could happen. It’s the fault of the tax revolts and severe budget cuts of Rand Paul.”
1. Global food prices are 36 percent above their levels a year ago and remain volatile, pushing people deeper into poverty, according to new World Bank Group numbers released today.
http://tinyurl.com/6h5zu8u
2. Since the evil and criminal central bank insists upon keeping interest rates at near zero instead of allowing free people to set their own interest rates (whatever that might be), average returns on everything will remain artificially low and poverty-inducing. Thus, people will clamor for any investment the might allow them to simply tread water. Because we cannot tell what interest rates should be, we are flying blind.
3. When is AP Lerner going to explain where all the goods and services are going to come from to satisfy the government’s unpayable debt? I’ve been asking him this since July.
Global food prices are 36 percent above their levels a year ago and remain volatile, pushing people deeper into poverty, according to new World Bank Group numbers released today.
This is true, and perhaps an opportunity for Bob (Murphy) to answer David Henderson’s question about how Fed policy is supposed to lead to higher food prices elsewhere on the globe.
“Money is created by government spending”
AP Lerner and Warren Mosler
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
“This is true, and perhaps an opportunity for Bob (Murphy) to answer David Henderson’s question about how Fed policy is supposed to lead to higher food prices elsewhere on the
globe.”
Mr. Murphy may have a different theory that includes money printing and other scary terms. But from a capital markets perspective, what’s happening is as the Fed swaps reserves for treasury bills/notes/bonds, they are taking duration, income, and risk free assets from the private sector. This is forcing asset managers and other investors to take on more risk than they would otherwise. By definition, if you remove a massive amount of the risk free asset from the market, you are making the market risker, forcing folks to take on more risk. Basically, the Fed is forcing investors out the risk curve via the portfolio rebalancing channel. The Fed is not adding new financial assets to the private sector, and instead, they are removing duration, income and risk free assets, making the market, by definition, more risky. Bernanke openly admits this. It’s a horrific policy that leads to asset bubbles that ultimately end in deflation.
Simplified version of a complicated story.
Arggggh! This is what aggravates me about Sumner. He feels entitled to dismiss any monetary measure as obviously wrong or irrelevant on the grounds of the “superior” NGDP gauge. Yet everything he’s said about the causal power of NGDP growth is trivially false: business *don’t* make plans based on NGDP numbers (at most, they look at specific demand for products), and even if they did we wouldn’t want them to: they should care about sustainable demand for specific output, not “total dollar hand-changes”.
Furthermore, he doesn’t seem to realize, no matter how many times he’s told, that NGDP targets are trivially achievable with no economic effect, simply by having people repeatedly buy from each other as much as necessary.
And yet he doesn’t even entertain the notion that NGDP has just been a correlate with no causal power. Or consider whether any econometric is still measuring what we want it to. All while being at the top of his profession (or close enough to be frustrating for the rest of us proles that have to actually live in the economy).
Of course there is no inflation. My $210,000 house is now worth $105,000 (even thought the city tax assessor says it’s worth $165,000) and my annual non-stop airplane ticket from Detroit to San Antonio, Texas is still $259 even after Delta bought Northwest.
There’s nothing to worry about.
Austrian Man: This wacky plan you statists have to dilute the fiat money supply and spend like drunken sailors is going to distort the price, investment and capital structure AND will be impossible to track. We won’t know if prices are going up due to money dilution or due to real shortages. It will be a mess.
Statist Man: You Austrians know nothing. You can’t even track price inflation. You’ve been refuted.