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.
Core inflation canceled out food and energy from the CPI, and now supercore inflation cancels out everything except wages.
The deeper these folks go, the closer they will get to the ultimate core of all cores: Super-singularity inflation. This inflation is the rate of increase in the price of money printing presses.
Bob, it seems so obviously mealy-mouthed of PK to explicate in this manner. But you really should make it explicit, Hazlitt-on-General-Theory-style!
And yet, Krugman’s predictions have been pretty much on and yours are often exactly wrong.
Why even bother? Maybe it’s time for you to leave the economics profession, to the degree you were ever in it, and just become a pastor or something.
And yet, Krugman’s predictions have been pretty much on and yours are often exactly wrong.
It’s easy to be “right” when you constantly contradict yourself.
You make a very good point, David. Aside from minor stuff like predicting the 2008 Receccion, what has The Murph done to prove himself?
You make a very good point, David. Aside from minor stuff like predicting the 2008 Receccion, what has The Murph done to prove himself?
That would be a good point, except that Bob didn’t predict the 2008 recession. In fact he predicted it wouldn’t happen (see the Conclusion of this article, for example).
Bob, I took your Fed Class, and I remember you discussing your two stances on the recession. However, it was a bit over my head at the time — do you mind posting a clarification as to what was going on between you and Schiff?
Show me his “prediction.”
Certainly.
“[Greenspan’s] artificial monetary stimulus…has sown the seeds of a contraction that will hit by 2Q 2008. The concerns of an asset bubble in real estate and (to a lesser extent) the stock market are entirely justified.”
The Murph, July 2007
Dig it.
“That would be a good point, except that Bob didn’t predict the 2008 recession. In fact he predicted it wouldn’t happen (see the Conclusion of this article, for example).”
Hmmm. You are exactly wrong. Surprising. This is why we don’t talk.
FTA:
“So let me offer some predictions of my own. In 2007, there won’t be a US recession as defined by the NBER. The dollar will be stronger against the euro on December 31 than it was at the beginning of the year. Finally, the spot price of a barrel of oil will be $50 or less.”
This is why you can’t talk. You can’t read English.
So our friend David has decided to, once again, disappear when we start busting what he says.
“When the going gets tough, the tough get going (and David S. hides under a rock)”
He’s probably going on the class field trip to Six Flags. Leave the kid alone.
😀 😀 😀
I seem to remember that Krugman predicted that Obama’s big stimulus spending would result in growth in employment.
In February 2009, Bob Murphy explained why artificially low Krugmanite interest rates would be a disaster:
http://mises.org/daily/3327
You cement-headed Keynesians insist upon keeping your heads in the sand and meticulously maintaining your ignorance. General price inflation is “merely” a secondary effect of funny money dilution which may not appear at first or at all. The primary and most insidious effect is the distortion of price signals and artificially induced relative price changes in specific sectors of the economy. Nothing is more insidiously harmful to an economy (except war?) than artificially low interest rates. Further, the only reason for the Krugmanite obsession with current general price inflation is so they can insist upon more harmful “stimulus” in the form of more money dilution and government debt.
It’s clear that the only way to critique the Austrian School is to purposefully refuse to understand it.
LOL! The Phillips Curve? Last I checked, that only has any relevance during the boom part of the cycle, when the results of capital investments are being reinvested in labor and land, thus reducing unemployment.
What exactly is this newfangled “supercore” inflation, exactly? Are we making up words just to support our arguments? Further, his quotation of Adam Posen further shows his support of the “sticky wages” theory (that he denies subscribing to), thus that gives him further fuel to recommend further inflation of the money supply. Then, he pulls this shite, “mainly, you don’t want to base policy on the notion that wage gains are always a bad thing”. This tells me that wage gains being a bad thing are a normal conclusion to guys like him. God forbid that people’s wages actually increase as compared to goods/services, that is just Keynesian blasphemy.
In either case, he has shown that he only thinks about the economy from the State’s point of view. He sees society as a problem to be dealt with, and that in order to fix it inflation of the money supply is the prescription (after all, wages are still sticky). Sure, QE2 is going to end, and most equities and commodities will see declines from their past year highs, but that is the real correction to the problem. Instead, QE3 will be ready to go.
I swear, this man just does not understand how prices actually work. He’s like a farmer whose crops have been infested by parasites. But, rather than learn what the parasites are, how to get rid of them, and salvage the healthy portion of his crop, he instead decides to plow the whole field down and re-harvest.
Sorry Paul, but the world is not a video game where past actions can be erased by simply pushing a restart button. Real people, and real lives must deal with the consequences.
But, rather than learn what the parasites are, how to get rid of them, and salvage the healthy portion of his crop, he instead decides to plow the whole field down and re-harvest.
I disagree, plowing the whole field might actually kill those parasites, but Krugman’s strategy is just keep planting more and more seed over the top — thus consuming all available grain stores.
Yes, that actually works much better due to the fact that I was speaking of the parasites as a metaphor for distorted prices.
“just keep planting more and more seed over the top”
So that the parasites will never go hungry, no doubt?
When it comes to inflation, Krugman’s predictions over the last couple of years have generally been right, and Bob’s have generally been wrong. It pains me to say this, as I like Bob, while Krugman comes across as an insufferable jerk most of the time (it also doesn’t help that my politics are a lot closer to Bob’s than to Krugman’s).
BA, right, and I’ve acknowledged that on this blog before. There are things like the quality adjustments that Silas brings up etc., and I think those are all valid, but yeah I definitely thought (2 years ago) that it would be more obvious by this point that Bernanke had caused prices across the board to go up.
That’s partly though why I made this post. My good friend David S. and some of the MMT guys are acting like Krugman has been bang-on and not missing a beat, but he has been slowly backtracking. Wenzel pointed out that as late as December 2010, Krugman said, “The danger is still deflation.” Then a couple months later, Krugman was saying, “This is a one-time blip in CPI.” And now he’s saying, “Maybe core CPI isn’t really a great measurement after all.”
So Krugman is moving the goalposts. I am not moving them; I have said that I was wrong in my predictions about CPI made back in 2008 and early 2009.
Krugman has written about how Core CPI as a core inflation measure isn’t the best way to measure it since his famous”Core Logic” post in early 2010.
“The standard measure tries to do this by excluding the obviously non-inertial prices: food and energy. But are they the whole story? Of course not — and standard core measures have been behaving a bit erratically lately. Hence the growing preference among many economists for measures like medians and trimmed means, which exclude prices that move by a lot in any given month, presumably therefore isolating the prices that move sluggishly, which is what we want.”
http://krugman.blogs.nytimes.com/2010/02/26/core-logic/
So he’s not changing his mind and backtracking like you suggest.
And Krugman saying that wage growth is his favorite core inflation measure isn’t something new from him.
“By the way, one could argue that the quintessential sticky prices are actually wages. And they tell the same story. ”
http://krugman.blogs.nytimes.com/2011/01/31/screw-your-coreage-to-the-sticking-place/#
“The question, however, is whether changes in the flexible-price goods feed into persistent inflation in the core. Phelps thought not: he believed that wages were set mainly in reference to other wages, implying that swings in oil or wheat prices were largely irrelevant to the story. I’d agree: if we think of wages as the ultimate core price, I don’t see any mechanism in today’s America whereby rising commodity prices translate into higher wage contracts.”
http://krugman.blogs.nytimes.com/2011/02/01/the-un-cola-era/#
Although you admitted you were wrong about your specific 2009 predictions, you’re still claiming that high inflation is just around the corner (or least you’re suggesting it), but are just moving the prediction to a later unspecified date. I remember just as soon as you admitted being wrong, right in next post you switched your focus off consumer prices and screaming about the recent commodity surge. (Look! High inflation is still coming!)
Bob,
I always feel like a bit of a jerk myself when I bring the issue up, as you have always been honest about the whole thing (something you can’t say about a lot of people). But it does make it harder for me to credit similar warnings now.
Joseph Fetz,
You need to distinguish between real and nominal wages. If the Fed decided to target average wage growth instead of changes in the overall price level, this certainly would not mean that wages couldn’t increase as compared to the price of other goods or services.
For further details, see this old paper by Scott Sumner (which, I might add, refutes Daniel Kuehn’s post on temporal autarky, since clearly the 2011 Sumner must be able to communicate somehow with the 1995 Sumner and get him to write papers responding to 2011 blog posts, even though the 2011 Sumner is on a blogging hiatus).
I was dealing with the quote as stated, so I had assumed real wages and real prices. However, why would I want the Fed to target any prices (wages, or otherwise)? To what benefit does this action serve?
“However, why would I want the Fed to target any prices (wages, or otherwise)? To what benefit does this action serve?”
Matt Rognlie wrote a great series of posts on that subject recently.
http://mattrognlie.com/2011/05/01/why-target-the-cpi/
http://mattrognlie.com/2011/05/09/what-do-people-want-when-they-sign-a-nominal-contract/
http://mattrognlie.com/2011/05/19/is-there-any-reason-to-target-headline-inflation/
I was more or less questioning the moral implications of why they would be targeting prices in the first place, that the primary reason they are targeting prices is because they are engaging in actions that effect such prices.
Joseph Fetz,
I’m not sure I understand your question. Are you asking about the goals of monetary policy generally or do you have in mind some specific alternative to targeting prices or wages (e.g. targeting monetary aggregates)?
Blackadder,
I know this isn’t the appropriate place to ask, but I figured that I would toss out the question at any rate; do you have a blog?
crossofcrimson,
I had a blog, Blackadder’s Lair, which is now defunct. I also blog occasionally at The American Catholic.
Thanks, Blackadder. I don’t always agree with your conclusions but you have an uncanny ability to clearly detail inconsistencies – and you even do it without being a jerk half the time (**cough cough** Gene Callahan **cough cough**).
Looks like my response got stuck in moderation for including too many links.
I had a blog, Blackadder’s Lair, which is now defunct. If you google “Blackadder’s Lair” it should be the first hit. I also blog occasionally at The American Catholic (my posts can be found here).
Yes, I was focusing more on the monetary policy. The only reason to target prices is because you are engaging in actions that will necessarily affect those prices. I don’t see the overall benefit of manipulating prices, whether they be interest rates, wages, PPM, etc.
I don’t get Keynesians:
a) they frequently contend that sticky prices result in quantity adjustments under monetary disequilibrium;
b) if the contention in a) true, movements in sticky prices cannot be good leading or coincident indicators of the full extent of monetary disequilibrium;
c) monetary policy is a process of achieving either monetary equilibrium or a target level of monetary disequilibrium (e.g., a slight excess supply);
d) therefore, an index of sticky prices cannot be a good indicator for purposes of monetary policy;
e) core inflation has “inertia”;
f) core inflation is an index of sticky prices; and
g) therefore core inflation is not a good indicator for purposes of monetary policy.
What part of the above is wrong?
Put another way, if the central bank targets the stickest price, and hits its target, how will the central bank know whether it hit its target a) because they’re really smart and got their policy right, or b) because the sticky price is out of equilibrium but hasn’t moved yet because it’s sticky?
Either sticky prices are sticky enough to create quantity adjustments, and therefore necessarily distort price-based signals of monetary disequilibrium, or they’re not.
Predictions are hard to make. Credibility often times is based on whether or not your predictions have been accurate. However, with economics not being a physical science like physics is then predictions are even harder to make. This is because the variable time is not precisely defined. The Austrian Theory can be perfectly sound, but false predictions by Austrian economists do not undermine the theory. This is because predicting a sharp increase in CPI, for example, in 2012 is much different than predicting a sharp increase in CPI eventually. The fact is we don’t really know when things are going to fall apart, but if we know that current policy will eventually lead to a bust based on sound economic theory then we can either shy away from the demand to provide hard predictions or we can be not provide hard predictions and be ignored.
I will say generally that Krugman has obviously been right about inflation since the financial crisis began, after apparently correctly spotting a housing bubble in ’06. Anyone who disagrees doesn’t understand even basic numbers, much less critical thinking, and hence isn’t worth interacting with.
Bob actually understands that he’s been wrong and Krugman’s been right for years, even though he seems to sometimes think he sees “kontradictions” that mostly don’t exist. I might be able to accept that Krugman’s contradicted himself on QE3 at times, but then there are often subtleties in his posts that are easy to miss. It’s impossible for most Austrians to understand his posts, because they lack even the beginnings of sophistication or even critical thinking skills, and can’t overcome even the most fundamental knee-jerk cognitive biases.
The fact is, even the MMT people have been far closer to right in their predictions, and their “theory” is just a liberal fantasy.
“…and can’t overcome even the most fundamental knee-jerk cognitive biases.”
If you had followed that with a sentence admonishing readers not to respond to your post unless they agreed with Popper’s views on the scientific method, that would have been pretty funny.
It’s impossible for you to understand Austrian economics, because you lack a functioning pre-frontal cortex, which causes your amygdala to override your reason and thus prevents you from forming coherent arguments, such that you are only able to utter primitive grunting sounds reminiscent of quarrelling baboons.
This is why you, and the acolytes of MMT, could not predict the economic collapse, whereas a cornucopia of Austrian economists did predict the housing bubble and collapse: http://www.lewrockwell.com/block/block168.html
“There’s really nothing here to shake my view that deflation, not inflation, is the threat.”
Krugman Nov. 6th 2010
Spot on Krugman.
http://krugman.blogs.nytimes.com/2010/11/06/are-rising-commodity-prices-an-inflationary-signal/
I think some people with Austrian views are ignoring countervailing pressures that are somewhat countering the effect of Bernanke exploding the monetary base. A weak, bailed out banking system has been reluctant to make the loans which would multiply out through the fractional reserve system and really bid up prices.
No, they are ignoring reality, that banks are not reserve constrained to issue new loans, that loans create deposits so investment creates savings and not the other way round, and that QE is a monetary non event which just consists in swapping assets.
Mam, give me a break. If temporal contiguity means anything, both Fed QE programs were successful, from the moment serious talk began about each. We saw rising GDP, asset prices, and unemployment improved somewhat. We just needed far more of it.
That your religion tells you otherwise is irrelevant.
QE1 might have been helpful in improving banks’ balance sheets, but QE2 was a non event. The low GDP growth is sustained by the budget deficit, which is still not large enough.
I get why you’re saying that QE is an asset swap although it seems like a strange way of looking at things. I don’t get how banks aren’t constrained when they have to keep reserves and even the central bank can only create as much money as the US Treasury issues in debt.
Banks aren’t lending, because there’s insufficient aggregate demand.
That answer doesn’t answer anything. Why is there insufficient aggregate demand (if such a thing exists)? All the government gave banks were low interest loans which only exacerbates the problem of too much debt.
And another unqualified to discuss with me…
It’s very Krugman-like to substitute ad homonym attacks for actual debate but the fact remains that in sufficient aggregate demand is a terrible answer. First, just because people aren’t buying the same things in the same quantities as 4 years ago doesn’t mean there isn’t enough demand; that arrangement proved unsustainable in any case. It is just as easy to argue that producers aren’t supplying people with items they want at costs they can afford and that makes it look like a lack of aggregate demand.
There’s insufficient aggregate demand because the capital structure of the economy was distorted by previous excessive bank lending (fractional reserve banking).
There is insufficient aggregate demand because people are not borrowing.
There’s “insufficient aggregate demand” because people are broke due to pre-existing waste of resources resulting from the price and investment distortions of prior rounds of funny money dilution. Because the interest rate is being artificially held down to near zero for savers, it is virtually impossible to make intelligent long term lending, borrowing or investment decisions. Krugmanite policies have us all by the throat while the Krugmanite boot kicks us in the groin.
For the umpteenth time. investment creates savings and not the other way round. We are no longer under a gold standard. Get over it and face reality.
For the umpteenth plus one time, investment can only come from savings, not the other way around. We are not in a magical fantasyland where the tail wags the dog.
Stop thinking that fiat money turns economic laws upside down.
Wrong again, no wonder you don’t understand economics.
Investment come from bank loans. Loans create deposits.
So investment create savings.
printing coconuts again?
Paul,
You say: The Austrian Theory can be perfectly sound, but false predictions by Austrian economists do not undermine the theory.
The problem is that when Austrian economists make a prediction that turns out to be correct Austrians want to take that as vindicating the theory.
If you press a committed Austrian to tell you what would have to happen for his theory to be proved false, he will tell you that there are no such circumstances. Austrian economics is supposed to be a purely deductive theory, meaning that it is consistent with any future course of events. If Bernanke doubled the money supply month after month and there was not only no inflation but no recession for the next 100 years, this would not serve to refute the theory. If country after country enacted Rothbard’s proposed banking reforms, only to be reduced to the standard of living of North Korea, this would not serve to refute the theory.
Granted, Austrians don’t really act as if this was true. Most of the time they act as if the theory did make predictions about what will happen based on was the Fed does (and indeed the theory does appear to make these sorts of predictions). It’s only when these predictions turn out wrong or an Austrian is confronted with contrary evidence that he retreats to saying that of course the theory doesn’t really make any specific predictions.
What kind of a standard is that? I guess any day now socialists will admit to the failure of their theory. Keynesians will admit all their errors of the past 70 years. Name me an economic group that admits it’s failures other than Austrians. Austrians have no problems admitting they were wrong if they called for massive price inflation in 09 or 10. That doesn’t mean the theory is wrong. The big difference is we haven’t adjusted on where we think the economy is headed and only on the time frame. Krugman goes from deflation to minimal inflation to change the way we calculate inflation. If the economy recovers and unemployment returns to normal doing what we’ve been doing then we’re flat out wrong. But if we get massive inflation down the line and the economy tanks do you think Krugman will admit he’s wrong?
What kind of a standard is that? I guess any day now socialists will admit to the failure of their theory. Keynesians will admit all their errors of the past 70 years.
Are you kidding? There are literally millions of people who stopped being socialists because of the failure of socialist societies. Likewise, lots of people stopped being Keynesians due to the failures of the 1970s, and even many of those who continued to call themselves Keynesians altered their theories to take account of these failures.
So yes, it would be good if Austrians could hold themselves to the same standard as these socialists and Keynesians.
The big difference is people got to live under their economic models and suffered the consequences. Who has been able to live in an Austrian economic type society?
That’s nonsense, I’ve seen Dr. Murphy say on this blog many times that if the economy recovers and unemployment gets back to normal by doing what we are doing then he is flat out wrong (something along those lines). Now if we get double digit inflation with rising interest rates and the economy tanks will Krugman admit he’s wrong?
That’s nonsense, I’ve seen Dr. Murphy say on this blog many times that if the economy recovers and unemployment gets back to normal by doing what we are doing then he is flat out wrong (something along those lines).
I’m not familiar with Bob making such a statement (maybe he has and I’ve just not seen it). He did say, however, that “[i]f the non-seasonally adjusted CPI rises at less than a 5% annualized rate in 4q 2009, I will admit I have been a fool for my warnings, and that I clearly don’t know what I am talking about.”
What economic group is claiming victory right now with this economy? Yes, Austrians who called for high inflation in the past two years were wrong. They were not wrong about the collapse in ’08 or that the economy would not recover with the policies we’ve went with so far. You keep coming back to dr murphys past calls for high inflation as if that proves Austrian economics wrong but if we get high inflation before the economy recovers he will be wrong only on the timing and he was right so far that we wouldn’t recover under these policies.
Yes, Austrians who called for high inflation in the past two years were wrong. They were not wrong about the collapse in ’08 or that the economy would not recover with the policies we’ve went with so far.
Keynesians like Nouriel Roubini and Paul Krugman did about as good a job predicting the financial crisis as any Austrian, while prominent Austrians (like Bob Murphy himself) said that there wasn’t going to be a recession, and Peter Schiff, who did predict a crisis, still managed to lose more of his investors’ money than they would have lost if they’d watched CNBC.
The idea that Austrians were somehow unique in predicting the crisis (or that they were uniform in doing so) is just inaccurate.
Yeah and Austrians like Jim Rogers and Marc faber made a bunch of money during the crisis. I made money based on my investments during the crisis based on the Austrian insights. Now is there a list like Walter block put out of all the Austrians who predicted the collapse of keynesians or other schools of thought? Do you think we will return to full employment and a healthy economy based on what we’ve been doing? Will we be able to unwind 1.5 trillion in excess reserves without high inflation? This is far from over and we will see who is right before the end.
I made money based on my investments during the crisis based on the Austrian insights.
I also made money during the crisis, though it didn’t have much to do with Austrian insights (if I’d followed Peter Shiff’s Austrian inspired advice I would have gotten burned very badly).
Now is there a list like Walter block put out of all the Austrians who predicted the collapse of keynesians or other schools of thought?
I don’t know if any Keynesian has bothered putting together such a list. I randomly looked at one of the articles on Block’s list. It was by a guy writing in 2003 who said there had been a housing bubble since the 1980s. If that is representative of Austrians who “predicted the collapse” then color me unimpressed.
Do you think we will return to full employment and a healthy economy based on what we’ve been doing?
If we continue on the current track then we will slowly return to full employment and a healthy economy, though this will take longer than it could or should. That could change though if there is a change in policy or some intervening event like the collapse of the Euro.
Good, got it. You see a slow steady recovery and no to minimal inflation based on what we are doing. Now we wait and see who is right.
One other thing if we see double digit inflation, continued high unemployment, and rising interest rates you will concede you are wrong, right? I have no problem admitting I’m wrong if Bernanke can unwind the excess reserves and return us to full employment.
You see a slow steady recovery and no to minimal inflation based on what we are doing. Now we wait and see who is right.
How long do we have to wait? I only ask because Austrians have been saying that inflation is right around the corner for the past two years (actually I’ve been saying it for decades). And IIRC, back around Thanksgiving we had a similar conversation where you said high inflation would be kicking in sometime in January, and we could just wait and see who was proved right (if I have confused you with someone else then I apologize).
Here is what I said in december.
“I am not predicting double digit inflation within the next few weeks but I think everyone will have a good idea of what to expect in the next few weeks. I believe by January we will know how bad this is going to get. I would expect the deflation camp to be totally discredited next year.”
I’ve been basing my thoughts on the work of Robert Wenzel and I thought we would see inflation pick up in the first half of the year and continue to get worse by the end of the year. Possibly as bad as double digit inflation by the end of the year. Now we might see a pull back at the end of QE2 unless the excess reserves come into the system but there is enough money in already to keep prices rising throughout the rest of the year.
I think we will know who is right based on unemployment, inflation, and interest rates. If inflation doesn’t continue to rise, unemployment trends downward, and interest rates stay low then you are right and I am wrong. I don’t know how to put a timetable on it. You are calling for full employment in what 2, 3, 5, 10 years? You do the same thing with unemployment that you say we do with inflation. So you tell me, when do you see us returning to full employment and a full recovery?
Dan,
The difference is that I don’t claim to be able to deduce logically what is going to happen in the economy the way Austrians do.
As an analogy, that Reverend in California claimed that the world was going to end on May 21st, and when that didn’t happen he said he miscalculated and that it will actually end on October 21st. For me to conclude that he doesn’t know what he’s talking about, it isn’t necessary for me to say exactly when I think the world is going to end (nor would it matter if instead of October 21st he had said the end of the world was “just around the corner”).
First you say,
“If we continue on the current track then we will slowly return to full employment and a healthy economy, though this will take longer than it could or should. That could change though if there is a change in policy or some intervening event like the collapse of the Euro.”
Then you say this,
“The difference is that I don’t claim to be able to deduce logically what is going to happen in the economy the way Austrians do.”
So how do you deduce that we will return to full employment and have low inflation under the current policies? It seems like a cop out to me that you won’t put any time frame on your predictions and you criticize us for calling inflation too soon. We are giving a falsifiable prediction when we say that the economy will not return to full employment and a healthy economy under current policies. If it does we are clearly wrong. What will prove you, keynesians, MMTers, etc. wrong?
Even if we see double digit inflation, high unemployment, high interest rates, and a weak economy nobody from any other school will be conceding victory to the Austrians. They will just move the goal posts like Dr. Murphy was showing Krugman do.
So what will prove you wrong? Nothing? If it takes 2, 3, 5 years before the dollar breaks down does that prove us wrong?
So how do you deduce that we will return to full employment and have low inflation under the current policies?
I don’t deduce it. You asked what I thought would happen and I told you. I don’t claim that things have to happen that way just as a matter of economic logic.
If you asked me who I think will win the Republican presidential nomination next year I can tell you what I think, but I won’t pretend that what I think will happen must happen.
If it takes 2, 3, 5 years before the dollar breaks down does that prove us wrong?
If the dollar breaks down in 2, 3, or 5 years then Austrians will be all over the place claiming their views are vindicated. On the other hand, if five years go by and the dollar is still around they can say they are still right but the collapse is just a little further in the future.
I spelled out what would make us wrong. If the economy recovers and we return to full employment and Bernanke unwinds the $1.5 trillion without causing high inflation under current policies then we are wrong. Apparently you can’t be proven wrong, which is funny considering you were saying that about Austrians. So there is nothing that will prove us right and nothing that will prove you wrong, is that about it?
If the MMTers can show they can spin cotton into gold and bring us a century of prosperity, I’m all for it.
I have nothing per se against Rumpelstiltskin economics other than I live in the real world.
BTW, we do have inflation and we don’t have a recovery.
A theory isn’t about predictions. The causal links in economics are too complex for empirical analysis. That’s why models and theories are of foremost importance. However, there is vindication for the Austrian free market philosophy in the spectacular failures of socialism and the welfare state.
What spectacular failure of welfare states? Most northern european countries are welfare states and have not failed at all, quite the opposite actually.
There is only mixed economies, Austrian free market has never been implemented. Some might argue that Somalia is the closest example and hardly anyone will call it a success. Also the attempts at free market introduced in Latin american countries in the 70s failed to improve people’s lives.
However there are successful mixed economies, like Denmark that is considered one of the most free market oriented economies with a strong welfare state.
The northern European countries been moving swiftly away from the stereotypical scandanavian welfare state model. Right now half of Europe as well as the US and Japan are in bad fiscal conditions; collapsing under the weight of entitlement programs. Then there was the collapse of the USSR. There’s also the example of Chile were Capitalism increased wealth and political freedom. Capitalism doesn’t work in a lot of places because leaders, like the ones in Latin America in the 70s, don’t really try to implement it or run incredibly corrupt governments or don’t want to relax their hold on the nation in the way that capitalism requires.
The northern european welfare states are alive and kicking. That they’ve changed over time is only normal. And the quality of life in those countries is far superior to that in the US.
No country is collapsing under the weight of entitlement programs. Half of Europe is in bad fiscal shape because of the crisis. However that is a problem for some Euro countries because they have relinquished their monetary sovereignty in the same way a gold standard does.
That is not the case of the US or Japan which have their own free floating currencies.
And I hope you are joking about capitalism in Chile having increased their political freedom. Do you know how many people Pinochet killed in his crusade against marxism in order to implement Milton Friedman’s free-market experiment?
Pinochet murdered a lot, but most Austrians would agree that capitalism can come about naturally without government having to impose it.
Oh, and our CIA helped put Pinochet in power, not a very capitalist maneuver in my opinion.
Hong Kong and Singapore’s economy are probably as close as you are going to get to a free market. They seem to be doing OK. Granted, as far as political freedom they are not the best examples. One interesting thing about Singapore’s Gov’t is they basically have one political party. They claim it allows them to focus more on the long term. Politicians feet are probably held to the fire more since blind devotion to a certain party doesn’t factor in to voting habits.
Both are interesting cases. However I don’t think Singapore can be considered an example of free market in the way libertarians consider free markets. The government have been heavily involved in directing the economy, even if it lets the free market determine how.
In Cuba they also have one political party and pretty much for the very same reasons than in Singapore, but not with the same results.
Are you joking about the crisis thing? The lost tax revenues simply don’t correspond to the amounts of debt these countries are in. The debt problems of the developed world are a direct result of expansive government.
Since the mid 90s, scandanavia has wisely pursued balanced budgets, deregulation, and eliminated or cut many state programs. Their socialistic policies led them straight into massive debt and stagnating living standards during the 70s and 80s as it has done here.
It is also beyond doubt that post-Pinochet Chile is more prosperous and free than pre-Pinochet Chile under the Socialist Allende.
I’m not joking of course. The Euro countries crisis was caused by private sector debt not public sector debt, except for Greece maybe. The rising public sector debt is a consequence of the crisis in all the other countries. And this is only a problem because they have abandoned their monetary sovereignty to the ECB.
Scandinavian countries can run balanced or surplus budgets because they are net exporters. When are you going to understand the sectoral balances?
And I would never call freedom what followed Allende’s democratically elected government.
The rising public sector debt is simply the result of the thinking which says that socializing private sector debt in a crisis is good for the economy. Bank bailouts in Ireland put the country under, Greece was run by socialists, and the rest of the countries with debt problems “fought” the crisis with stimulus packages. It was these attemts to prop up aggregate demand that led to high debt. If these countries had let failures fail in the private sector and spent in line with revenues, there would have been no debt crisis. I don’t think it can be any more clear.
Second, balanced budgets are about government spending compared to receipts. Trade deficits have nothing to do with it. Some of the theories your stating make less sense from a causal sense than astrology.
Third, Chile is a relatively peaceful and free country now especially compared to it’s neighbors. Sure Pinochet used political violence which is always wrong but Chile democratized after he left office and his violence paled in comparison to what happened in Argentina during the same period under a socialist government.
Austrian economics makes no predictions.
Austrian economists make predictions.
When a prediction turns out true or false, it reflects the Austrian economist, not Austrian economics.
I’ve heard Dr. Murphy say many times that if the economy recovers and unemployment returns to normal under these policies we are flat out wrong. Do you think Krugman will say this if we get high inflation, rising interest rates, and a tanking economy? The future will show who is right. We still have an awful economy right now and it’s too early to say we are wrong about inflation. Let’s see how this all plays out.
Woha! I can’t believe there are people taking this “supercore” inflation seriously. I took it for a joke at first glance, I mean I really started laughing when I got to the bit about “supercore”, expecting it to be parody or something.
Think about this for a minute: you have wages, and you have savings. At some stage these wages and savings bought you this much real gear, a few years later you have the same wages and the same savings but it buys you less. That is the very quintessential definition of “tax by stealth”. Once upon a time you had something, and now you have less. Why is this difficult? Now Krugman is trying to claim that despite people being unable to buy the things they used to buy, nothing has changed ?!? The “supercore” metric serves no other purpose than to convince complete schmucks to continue banging their head against the wall and ignore the blatant loss of their buying power. The “core inflation” metric stupid enough… so what about volatility? The simple fact is that food and energy are what people need for survival.
I do agree that the fundamentals of supply and demand are going to require that wages fall in real terms (especially relative to commodities) but to go and expect people to believe that everything is normal and nothing has changed, is staggering audacity. I can’t be the only one laughing at this.
Perhaps we are all missing the biggest picture: without the printing of vast sums of new money, there would have been a huge deflation. A lot of resources were squandered/gone/expected-but-not-delivered. The new money just filled the vacuum (deficit). So, there really is inflation but it is being masked by deflation. Or conversely, there really is deflation but it is being masked (counterbalanced?) by inflation.
Okay, this is a serious question for the MMT’ers. Please point out which modern monetary theorists predicted the 2008 financial crisis. This is not a tongue-in-cheek wannbe gotcha question, it is serious. I would genuinely like to know. Here is the infamous list by Walter Block of Austrians-minded individuals who predicted it (http://www.lewrockwell.com/block/block168.html) and from my knowledge there were a few Keynesians who got it too (mainly Nouriel Roubini).
First, there is only a handful of MMTers around. I guess some claim they’ve predicted the crisis because the budget deficits were not large enough which they’ve been doing since the late 90s US budget surpluses which were followed by the dotcom bubble burst and the same pattern applies to the 2000s. Warren Mosler has also explained how the tight US fiscal policy triggered the Asian crisis in 1997. Keep in mind MMTers are heavily influenced by Minsky financial instability theory, which is not that different from the AEBC.
Having said that, plenty of people who predicted this latest crisis have been predicting crisis since forever…
I could spill a glass of apple juice, see it as a sign that another financial collapse is coming and go around various media outlets proclaiming so. And if the collapse happens to come tomorrow, I guess I would be vindicated then.
The point I am trying to make is that, yes, people are always calling for economic collapse but at least Austrians can logically deduce why they occurred.
MMTers saying the dot-com bust was caused by budget surpluses just doesn’t seem to make sense in my mind. Correct me if I am wrong, but the argument is is that because a deficit wasn’t being run with the increased productivity, there wasn’t enough spending and thus a collapse? I am just trying to wrap my mind around it.
And that theory certainly doesn’t explain the 2008 crisis which followed a literal doubling of the size of the deficit.
Well, both Austrians and MMTers who are Minskyans blame the asset bubbles on excessive credit that eventually stops and the bubbles burst.
MMTers however see the size of the deficit as responsible for the over-indebtedness of the private sector in a growing economy, something that results from looking at the sectoral balances.
And yes it applies to the years prior to the crisis because the deficit was not large enough to compensate for the deficit with the external sector, so the domestic sector was still getting itself into more debt for the economy to grow.
Now by external sector, are you referring to foreign economies?
And it seems that Austrians and MMTers do agree on what causes asset bubbles, but prescribe different solutions. MMTers, from what I have read, suggest large scale stimulus which increases the deficit, but it seems contradictory because it results in more borrowing. Just excessive credit again, unless that stimulus is spent by the government immediately.
Again, please correct me if I am wrong and I am still trying to figure out what sets MMTers apart from Keynesians.
In my opinion they do agree that excessive credit is what causes instability.
I think they differ in where to put the blame. Austrians blame the government’s low interest rates, MMTers the bad lending practices and lack of supervision. (I might be oversimplifying it).
And, oversimplifying again, they also differ in what to do when recession hits. Austrians prefer to let the system crash so it is reset and MMTers consider that unnecessary for a monetarily sovereign country that can let the budget deficit be whatever the private sector wants in order to have a soft landing.
In particular Warren Mosler has been advocating tax reductions since the beginning of the crisis.
Again, I fail to see a difference between keynesians and mmters. You already know the Austrian critiques to your argument. I just don’t see what can be a better regulator than failure, I mean you can regulate the crap out of an industry but it seems like a waste of resources when regulators can be corrupted and the market can do it itself eventually. I am also unsure what you mean by the private sector dictates the budget deficit. Is it because we have a representative government? If so, why does it vote for clearly unpopular measures like Obamacare?
Well, one difference is that Keynesians like Krugman think the level of debt is a problem, whilst MMTers think it’s not for a monetarily sovereign country.
And MMTers were against the bailing out of private banks. They should have let to fail or nationalized and dealt with later. But their share holders should have lost their capital.
Yes, I think we can agree that the banks should have been handled differently and should have taken the losses, though I would be opposed to nationalization.
I still see a law of scarcity fallacy in thinking the debt is irrelevant though. I mean sure, the Fed can monetize money the government needs to borrow if lenders refuse to lend, but it just seems like it will destroy a currency to do so in the end. I mean people trade goods and engage in transactions for things they deem as valuable. Without scarcity, how does a currency maintain value? Even if we are all forced to use one currency, black markets would surely pop up.
I would oppose a permanent nationalization of the banks too, but not a temporary one in case of a systemic crisis.
And MMTers agree that the real limit to government spending IS inflation, not the debt level per se.
They actually consider debt issuance as an interest bearing savings account of the private sector whose only function is as an interest rate maintenance operation.
And yes, the external sector refers to the rest of the world.
Net Savings = Government Deficit + Net Exports
If Net Exports = -5% of GDP, and the Government deficit is only 3% of GDP, then Net Savings = -2% of GDP, that is, the domestic private sector is dis-saving or getting indebted by 2% of GDP.
It seems that you are implying that savings are only possible by government running a deficit. I believe I have seen you claim this before. Could you perhaps elaborate because it seems like you are claiming there is only a set amount of economic activity that can be done and that government should dictate our spending and saving through tax and monetary policy. Again, I appreciate the responses, I am just trying to understand the full implications.
That’s savings in terms of US dollars, Income – Expenditure.
I am not saying that government should dictate anything. Just that government spending is part of the private sector’s income, and that taxes are part of private sector’s expenditures.
The key difference between us lies in that, yes, government expenditure is a part of the private sector’s income and spending. While the majority of the population are okay with this current set-up, Austrians aren’t. We think resources and money can be better spent by the private sector and regard taxation and government expenditures as distortions on economic growth. Government does end up dictating how money is spent by regulating in the end. Thank you for explaining though.
I know there are differences, but I think they are mostly ideological, political, philosophical, whatever…
MMT per se is consistent with any size of government, small or big. It argues that the right size, that is how many real resources the goverment should hire and to which end, must be determined by the citizens not by how it is funded because the government has no such problem.
Unless you are a hardcore Austrian who opposes any type of government and a free floating fiat currency, there is more in common between MMT and Austrian economics than people think, in my opinion.
Edward Harrison seems to think that as well.
http://www.creditwritedowns.com/2011/05/on-ideology-economics-and-the-compatibility-of-chartalists-and-austrians.html
Out of curiosity I took a look at Walter Block’s list and at random clinked on one of the links he provides of Austrians who “predicted” the housing bubble.
The link was to a Mises article from March 2003 by someone named Frank Shostak who claimed that a housing bubble had started in the 1980s and was about to pop.
In fact it was only in 2003 that the bubble got started (the Case-Shiller index was 130.48 for q1 2003, and was 129.2 as the nadir of the crisis in q1 2009).
If this is what Austrians consider “predicting the crisis” then I can’t say I’m terribly impressed.
Shostak’s exact words were “there are already signs that the housing market may not be far from its peak.” He was just sighting a slight downturn and thought it perhaps what he saw as a bubble was coming to an end.
If what you are saying is true about the bubble starting in 2003 (From what I have read, I agree that was probably the starting point) then I would love to see data to confirm maybe Shostak was right about the downturn and perhaps the Fed, Fannie and Freddie intervened to keep the party going. I am not asking you to find data, I can do that myself, but it seems like a decent conclusion to make.
The first two articles on the list written by William Anderson don’t even have any housing bubble predictions.
February 2001
http://mises.org/daily/617
“It seems almost certain now that higher inflation will be the norm – at least until the Greenspan Fed realizes that it cannot pump new money into an economy that cannot absorb it. The stock market boom and various real estate booms have either ended or are nearing their end and the next stage of money growth will now affect consumer prices. ”
I guess is this the relevant part. Here he says “real estate booms have either ended or are nearing their ended” and then goes on to say than high inflation in consumer goods would be next. Of course, he ended up being wrong.
July 07, 2003
http://mises.org/daily/1265
Zero housing bubble predictions. All he talks about is a vague boom, but according Austrians we’re always in an artificial “boom”, so I’m not sure how this constitutes as a bonafide housing bubble prediction.
His third article finally identifies the housing bubble, but that was when the crash had already started.
http://mises.org/daily/1533
Take a look at Mark Thorton in 2005. There is a long list of Austrian economists warning of the same bubble. The only come back seems to be that they didn’t predict the date of the collapse. No other school of thought has that many people all predicting it well in advance. Now a lot of Austrians are predicting a dollar bubble. If the economy recovers and unemployment returns to normal then they will be wrong. If we do see the dollar bubble burst I’m sure everyone will say that they were wrong because they didn’t guess the date right.
Is there any school of thought that predicted we would have near 10% unemployment, rising inflation, weak economy because of the policies that have been used? That sure seems to fit the Austrian line other than inflation isnt as high as most expected by this point but nobody predicted we would see $1.5 trillion get stacked up in excess reserves. Do you believe that these reserves will get unwound without causing massive inflation? Anybody can cherry pick quotes and make an economist look bad. The question remains that if the Austrians are wrong who is right and why should we listen to the people who gave us this economy?
Is there any school of thought that predicted we would have near 10% unemployment, rising inflation, weak economy because of the policies that have been used?
MMT
“Is there any school of thought that predicted we would have near 10% unemployment, rising inflation, weak economy because of the policies that have been used? That sure seems to fit the Austrian line”
Bob Wenzel and a ton of other Austrian economists predicted a manipulated recovery fueled by the Fed’s funny money. Bob Wenzel was actually making fun of Krugman last year because he had the audacity to think unemployment would remain high in 2011 and for not seeing the “manipulated recoery” coming.
http://www.economicpolicyjournal.com/2011/03/paul-krugman-fish-floating-in-jello.html
I personally do not see any recovery.
Note: gonna post a couple more times because posting multiple links apparently gets you caught in the spam filter.
And he did it again last month!
http://www.economicpolicyjournal.com/2011/03/paul-krugman-fish-floating-in-jello.html
Of course, the unemployment rate ended up going back up the very next month.
At least Robert Murphy is half right with his stagflation prediction.
“but nobody predicted we would see $1.5 trillion get stacked up in excess reserves”
Not true. Krugman and many other Keynesians (and Chicago guys like Scott Sumner) predicted a japan style liquidity trap where most of the increase in the monetary base would not be lent out, hence an increase in excess reserves and very little inflation.
“When short-term interest rates are close to zero, open-market operations in which the central bank prints money and buys government debt don’t do anything, because you’re just swapping one more or less zero-interest rate asset for another. Alternatively, you can say that there’s no incentive to lend out any increase in the monetary base, because the interest rate you get isn’t enough to make it worth bothering..”
http://krugman.blogs.nytimes.com/2008/03/17/how-close-are-we-to-a-liquidity-trap/
So you’re claiming Krugman and Sumner thought excess reserves would increase from $2 billion to $1.5 trillion since 08/2008? Nobody predicted a massive increase in excess reserves like this back in ’08. Nobody could have predicted the fed would start paying interest on excess reserves for the first time in history. Krugman didn’t even bring up IOER in that qoute.
What about recovery in the stock market?
There’s no doubt markets have responded. U.S. stocks are up 28 percent since August 26, 2010, the day before Fed Chairman Ben Bernanke hinted the U.S. central bank would fire up its money-printing press for a second round of economic aid, known as “QE2.”
The gain amounts to $3.6 trillion in market capitalization, and for a program that consisted of $600 billion in Treasury purchases, that’s quite a multiplier — and it doesn’t even count big gains in commodities and world stocks.
http://www.reuters.com/article/2011/05/18/us-markets-fed-qe-idUSTRE74H6GW20110518
Wenzel’s main focus in that post was the unemployment rate so I’m going to hold him up to that metric. From December to now, unemployment has only gone down .4%. And if you use shadowstats unemployment rate (Wenzel’s favorite site), it’s not even that much because of people leaving the labor force. And civilian employment to population ratio has pretty much remained stagnant.
First off, Wenzel hardly cites ShadowStats (or he hasn’t really done so too much over the past year, I started following him consistency since last August), he usually goes for the MIT Billion Prices Project.
There is indeed a recovery going on, it just isn’t affecting the employment rate so much. Any progress made on the rate was mainly due to people dropping out of the workforce, yet many 99 weekers have now lost their benefits and have reentered the job market. I don’t have the data, but it would seem like if there was a large influx of people going back into the labor force, we would be seeing a higher unemployment rate rather than a stagnant one.
Oops posted the wrong link in my first post.
http://www.economicpolicyjournal.com/2010/12/paul-krugman-on-record.html
The first two articles on the list written by William Anderson don’t even have any housing bubble predictions.
February 2001
http://mises.org/daily/617
“It seems almost certain now that higher inflation will be the norm – at least until the Greenspan Fed realizes that it cannot pump new money into an economy that cannot absorb it. The stock market boom and various real estate booms have either ended or are nearing their end and the next stage of money growth will now affect consumer prices. ”
I guess is this the relevant part. Here he says “real estate booms have either ended or are nearing their ended” and then goes on to say than high inflation in consumer goods would be next. Wrong on both accounts.
Note: R posting something that got in the spam filter for multiple links. Hopefully it works.
July 07, 2003
http://mises.org/daily/1265
Zero housing bubble predictions. All he talks about is a vague boom, but according Austrians we’re always in an artificial “boom”, so I’m not sure how this constitutes as a bonafide housing bubble prediction.
His third article finally identifies the housing bubble in 2007, but that was when the crash had already started.
Blackadder mentions this: http://mises.org/daily/2448
Wow Bob, you were exactly wrong about ’07 too, and not just about whether there’d be a recession. Your oil prediction was wrong too, and weren’t you supposedly analyzing these markets for a living at the time? lmao
How can you possibly ever, ever, ever try to claim anyone else is wrong about anything? People making predictions at random would do significantly better.
Wow David, another insult directed Dr. Murphy. You are just full of surprises. Oh wait, that isnt a surprise because it is the full extent of what you do here. You are the same guy who paid money to heckle classes for one of his courses for the Mises Academy, right?
I think Dr. Murphy has his first stalker.
I figure everyone would like to read this (http://www.bloomberg.com/news/2011-05-25/belarus-headed-for-economic-meltdown-51-ruble-plunge-vtb-capital-says.html)
Belarus is headed for an economic “meltdown” and the ruble will need to depreciate another 51 percent, VTB Capital said, as locals lay siege to shops and protest price increases after the central bank devalued the currency.
The Belarusian central bank let the managed ruble weaken by 36 percent versus the dollar on May 24 as demand for dollars and euros from importers and households threatened to derail an economy already laboring under a current-account deficit equal to 16 percent of gross domestic product.
The devaluation lifted the local price of automobile fuels as much as 24 percent, according to Belneftekhim, an industry group for the country’s oil sector. Last night, about 50 people protested the price increase in the car park of a Minsk hypermarket.
“I can’t describe how I feel without using obscenities, this is all our government’s fault,” said Sergey, a 32-year old attending the protest who works for a computer importer. “The whole world tells them, guys, you have economic problems, you should do something, and all they did was live off getting more and more loans.”
The price of children’s diapers has “gone completely insane” in Minsk, said Natalia, a 24-year-old mother also queuing outside the refrigerator store. “I used to buy a pack for 69,000 rubles, now they cost 140,000,” or almost half the 343,260-ruble monthly child benefit paid by the government, she said.
“We have become paupers,” said Tatiana, a 70-year-old woman in the line who also declined to give her last name. “We have been squeezed into a corner by this devaluation.”
But those diapers could have higher quality that justifies the higher price! And in the end, it’s all offset by how the new iPads hold more memory…
You can’t eat ipads dude. But seriously, even if you are an MMTer or Keynesian, citing ipads increase in power and productivity but not price as a sign of deflation totally misinterprets the definition of deflation. And you wonder why we don’t trust Fed officials….
Look at wages.
Looking at ’em
http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=WASCUR
So if wages tend to fall slower in economic downturns relative to prices, wouldn’t that mean they would also rise slower relative to prices during a recovery?