26 Sep 2012

Clarification on Sumner, Congress, and NGDP

Inflation, Market Monetarism 60 Comments

It is clear from the comments of my last post that, as usual, people are not fully appreciating the cogency of my analysis. Before diving in, let me make sure the casual reader understands why I’m spending so much time on this guy Scott Sumner, of whom most may never have heard. It’s not that Scott cheated me in a card game last summer or something like that. No, Scott is arguably the world’s leading advocate of “market monetarism,” which (in the present environment) leads to calls for bolder action by the Fed. Since I think this would be awful policy, I am trying to dismantle the Sumnerian worldview–some days, singlehandedly. It is an awesome responsibility. The fate of the dollar and Western civilization itself hangs in the balance.

Now in my last post, I criticized something Scott had said about Congress raising the minimum wage, and people were jumping up and down on me in the comments. I believe they have no leg to stand on. So let’s go through it more slowly. Here’s the relevant quote from Scott, to refresh our memories:

If [the natural rate of unemployment in the US] did rise to 8.1%, the most likely explanation is that the policies I mentioned above (minimum wage increase, extended UI [unemployment insurance], etc) caused the increase. But monetary stimulus would help on both fronts; reducing the real minimum wage (which never would have been passed had Congress know[n] how little NGDP growth we were going to get) and also causing Congress to reduce the maximum UI benefit more quickly, as they do after every previous recovery from a recession. [Emphasis changed.]

So let’s walk through my problems with this, and along the way I will answer my critics (i.e. Scott’s defenders).

(1) My fundamental problem with Scott’s entire approach is that he diagnoses economic problems in terms of NGDP. I don’t think that’s a helpful way to view the world. OK, we have that disagreement. But, if it’s bad enough that Scott himself walks around, thinking about economic problems in terms of NGDP, then it’s even worse if he starts attributing that perspective to everybody else. It is simply not true to say that Congress wouldn’t have done such-and-such if they known about NGDP growth. And to repeat, it’s not merely a harmless slip; Scott does this kind of thing a lot. To be clear: I don’t mind if Scott had said, “Congress had no idea how bad their move to raise the minimum wage would be, since NGDP was about to collapse.” But that’s not what he said, and he does this thing a lot–saying for example that firms enter into long-term contracts with certain expectations of NGDP growth, which they clearly do not.

(2) What’s even weirder about this whole thing is that Scott once argued that the Fed couldn’t have been responsible for a boom in the 1920s as the Austrians claim, because the monetary aggregates M1 and M2 hadn’t been defined at that point. (You think I’m putting words in his mouth? No, he said that.)

(3) I don’t think that when Congress passes a minimum wage increase, considerations of the economy come into play. I think it is a backroom deal to get votes from labor unions who benefit from making lower-skilled competition more expensive.

(4) Gene Callahan and others in the comments were arguing that all Sumner meant was, Congress wouldn’t have taken this measure had they realized how devastating it would be. Well hang on. An equivalent term for “NGDP” is “nominal income”. So let’s suppose it’s not purely a cynical, political move, and that some concern for economics is involved. You’re telling me that Barney Frank is thinking, “If I thought nominal income in this country would rise like it normally does, then I’d support a law forcing employers to pay poor people more. But, if I thought nominal income growth would stall, then I wouldn’t want to force employers to pay poor people more.” On the contrary, to the extent that they actually worried about the economy and impact on poor people, I think if anything they would do the opposite of what Scott says: They would jack up the minimum wage if they thought the market, left to its own devices, wouldn’t give rising incomes.

During the New Deal, the federal government implemented all sorts of policies that were explicitly designed to raise nominal incomes. Was this because nobody in the government realized the economy was bad in the mid-1930s? They erroneously thought NGDP growth had been brisk? No, I would argue (a) they didn’t care about the economy, these were political moves and/or (b) to the extent they cared, they thought raising incomes was a way to help people in an awful economy.

Question: If Gene (and Scott) are right, there should be examples of Congress cutting the minimum wage in response to a recession, right? Just like Congress might extend unemployment benefits and so on to help the laid-off workers, they should also cut the minimum wage once they see with their own eyes that NGDP growth has been too low. Has that ever happened? (Maybe it has; I’m genuinely asking.)

(5) Some people are trying to defend Scott by saying something like, “Look, Barney Frank knows you can’t raise the minimum wage to $1000/hour. That would be too high in comparison to the general price level. That’s all Scott was getting at.” Well, if that’s what Scott meant, then he’s in trouble. He has spent lots of posts arguing that what most people think of as problems with price inflation is actually due to NGDP. So I might be extremely generous and agree that in some vague sense, Congress agreed to hike the minimum wage because they were just trying to catch up with general price inflation, and maybe they wouldn’t have been so aggressive had they realized CPI growth would slow down for a few years. But, in that case, they would be directly contradicting several posts that Scott has written, saying why this perspective is totally wrong. Remember kids, on certain days of the week Scott bans the use of the word “inflation” on his blog because the very term leads to all sorts of nonsense.

60 Responses to “Clarification on Sumner, Congress, and NGDP”

  1. Blackadder says:

    First, Scott is wrong about whether Congress would have increased the minimum wage if they’d known the crash was coming. Congress is stupid.

    Second, the average person has never heard of NGDP, but when you have a stable NGDP growth trend over a long period, this will tend to get built into people’s wage demands, contract terms, etc. After the crisis I’ve had people tell me how upset they were that they weren’t getting their “standard” raise to cover “increased cost of living” even though we were experiencing deflation. Some of my wife’s student loans are at the “low” fixed rate of 6.8%. And so on.

    • Matt Tanous says:

      “After the crisis I’ve had people tell me how upset they were that they weren’t getting their “standard” raise to cover “increased cost of living” even though we were experiencing deflation.”

      What deflation? Did you go to the grocery store any time during the crisis and its aftermath? According to the CPI, we had deflation – but the CPI was explicitly reconfigured twice in the last few decades (and “tweaked” quite a bit more) specifically to HIDE the inflation of the early 80s and 90s.

      Regardless, the people were upset they weren’t getting a raise. Because people ALWAYS WANT MORE. Duh. They are used to getting it to – at least nominally. Without an understanding of economics on a basic level, they expect that the thing that has been true their entire lives is the standard thing, and when it doesn’t happen they get upset.

      It really has nothing to do with factoring in NGDP growth. NGDP on its own takes the horrible GDP metric and just makes it worse.

      • Blackadder says:

        What deflation?

        There was deflation from mid 2008 to mid 2009.

        Did you go to the grocery store any time during the crisis and its aftermath?

        I haven’t been to any grocery stores since June of 2008 on account of my hunger strike.

        According to the CPI, we had deflation – but the CPI was explicitly reconfigured twice in the last few decades (and “tweaked” quite a bit more) specifically to HIDE the inflation of the early 80s and 90s.

        Let me guess: you’ve been snookered by ShadowStats?

        Without an understanding of economics on a basic level, they expect that the thing that has been true their entire lives is the standard thing, and when it doesn’t happen they get upset.

        Yeah, that’s precisely my point.

        • Matt Tanous says:

          “There was deflation from mid 2008 to mid 2009. ”

          According to aggregate metrics that are specifically set up by governments to pretend away any price rises their policies cause.

          You assume the government statistics are somehow more accurate than people looking at their budgets and recognizing that they can buy less of the stuff they used to buy with the same salaries. Why?

          “Let me guess: you’ve been snookered by ShadowStats? ”

          No. ShadowStats provides alternative metrics, but the fundamental problem is that the metrics are all arbitrary and ineffective. The CPI does not include housing prices, or healthcare, or education, or practically anything else that causes people to go “why is this beating inflation by so much?” The weightings of what is input is determined by guessing. Changing standard quantities of goods are ignored. There can be no “price level” in the first place – no sum of the array of prices based in different units – but only an array of different prices.

          “Yeah, that’s precisely my point.”

          The assumption is that NGDP is tied to nominal wages. It isn’t – a drastic increase in population at the same time could cause nominal wages to fall while NGDP rose, for instance. Rising nominal wages could cause NGDP to rise, but it is not the only thing that can do this.

          • Blackadder says:

            You assume the government statistics are somehow more accurate than people looking at their budgets

            Actually you can look at privately run price indexes like the Billion Prices Project, they show the same thing.

            There can be no “price level” in the first place

            So when you said: “CPI was explicitly reconfigured twice in the last few decades (and “tweaked” quite a bit more) specifically to HIDE the inflation of the early 80s and 90s” what you mean was that there is no such thing as a price level and that inflation and deflation are meaningless concepts?

            The assumption is that NGDP is tied to nominal wages. It isn’t – a drastic increase in population at the same time could cause nominal wages to fall while NGDP rose, for instance.

            Well okay, but we haven’t had such a drastic increase over the last several decades (or do you think that the bogus government-manufactured Census numbers are hiding a big population explosion?)

            • Matt Tanous says:

              “what you mean was that there is no such thing as a price level and that inflation and deflation are meaningless concepts? ”

              I mean that if you have any metric, and it is adjusted to give more acceptable numbers, that should be a red flag.

              Inflation and deflation of prices are meaningless concepts. Inflation and deflation of the money supply is the problem anyway.

              “Well okay, but we haven’t had such a drastic increase over the last several decades”

              That was just one example. Nominal wages could also rise without NGDP rising (or rather remain in similar trends while NGDP drops or stagnates) if, as we currently have, people are leaving the workforce in droves to the point where they aren’t even counted in unemployment statistics (which – surprise! – are manipulated to ignore a large chunk of unemployment).

      • Gene Callahan says:

        “According to the CPI, we had deflation – but the CPI was explicitly reconfigured twice in the last few decades (and “tweaked” quite a bit more) specifically to HIDE the inflation of the early 80s and 90s.”

        Oh, and also to help HIDE the alien spacecraft being held in New Mexico.

    • Yancey Ward says:

      but when you have a stable NGDP growth trend over a long period, this will tend to get built into people’s wage demands, contract terms, etc.

      What is meant by “a long period”? Sumner is arguing we have been under trend for close to 5 years now. Isn’t it possible the present growth trend is now the expectation, and that jumping it upwards will now cause problems itself?

      This is part of my problem with Sumner and his supporters- they seem to be arguing that it is the change in expectations that are bad, not the expectations themselves, but they are increasingly, in my view, arguing for a large change in expectations today.

      • Blackadder says:

        Yancey,

        Good point. Scott has said that he only thinks you should try to make up about a third of the lost NGDPTL because of this expectations adjustment.

    • Silas Barta says:

      After the crisis I’ve had people tell me how upset they were that they weren’t getting their “standard” raise to cover “increased cost of living” even though we were experiencing deflation.

      So do you see the contradiction there? If your inflation measure isn’t capturing people’s increased cost of living, that means the measure is *wrong*. You should generally never find yourself saying, “inflation is under control, except when it comes to any observable consequences for how you should plan for the future”. (And that principle generalizes far beyond inflation!)

      Or are you saying that this cost of living is made-up, and that people expect a cost of living adjustment, even without the cost of living … adjusting? That people aren’t paying more for regular necessities? Or that maybe even if they are, it’s completely canceled out by how the new iPad would have the functionality of two iPads and thus its effective price was halved? (And of course, product debasements *never* make you adjust inflation upward…)

      • Blackadder says:

        Or are you saying that this cost of living is made-up, and that people expect a cost of living adjustment, even without the cost of living … adjusting?

        Yep.

        • Silas Barta says:

          So you’ve replied to the people saying, “Oh, but your cost of living hasn’t actually increased”? Did they believe you?

          • Blackadder says:

            So you’ve replied to the people saying, “Oh, but your cost of living hasn’t actually increased”?

            No, I didn’t want to come across as being a dick about the whole thing, so I let the issue slide.

            • Gene Callahan says:

              Silas wouldn’t have let that opportunity pass him by, Blackadder!

              • Silas Barta says:

                You would have avoided alerting your friends that they were overestimating the cost of goods and therefore were being too conservative with their spending?

              • Major_Freedom says:

                Of course not Silas, he would only attack anyone who questioned or critiqued someone doing that.

              • Silas Barta says:

                … while whining about the need to be charitable to one’s opponents, no less!

          • Tel says:

            Easy enough to put it more sympathetically, “Oh! Tell me how the cost of living has increased for you.”

            Every answer you get will include food and fuel of course. Some of them will include rent, bus tickets, train tickets, electricity. Quite a few might mention health care, and medicine.

            • Silas Barta says:

              Reminds of a video from that “The Ben Bernank” guy.

              “Is the food cheaper than a year ago?” No

              “Is the health care cheaper than a year ago?” No

              “Is the transportation cheaper than a year ago?” No

              “So how is there deflation?” (I guess because two people can use one iPad now or something…)

  2. Blackadder says:

    One other point. Sumner is wrong about what motivates Congress. But he’s right that more monetary stimulus would reduce the real value of the minimum wage, and hence blunt its contribution to unemployment. That’s more important.

  3. Blackadder says:

    Bob,

    It’s true. For example, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota has suggested that the Fed temporarily raise it’s inflation target from 2% to 2.25% until unemployment comes down.

    Panic.

    • Matt Tanous says:

      Given the height of excess reserves, and the growth of the monetary base behind it, I’d be pretty afraid for unemployment to come down. It’s pretty much guaranteed that any economic growth that is created by all this QE nonsense will be the start of a bubble, and this bubble will be quite a big one – with high inflation at the same time, no less.

      Uncle Ben’s Crazy Housing Sale is proceeding according to plan. New inflationary bubble is the next step, right?

      • Blackadder says:

        I’d be pretty afraid for unemployment to come down.

        See, Bob. Unemployment Is The Plan.

        • Matt Tanous says:

          Funny. A claim that improving employment numbers would be correlated with a new bubble due to the Fed’s policies does not make unemployment The Plan.

        • Matt Tanous says:

          Also, this is not an Austrian view alone. Philadelphia Fed President Charles Plosser has repeatedly warned that “inflation is going to occur when excess reserves of this huge balance sheet begin to flow outside into the real economy.” I’m just saying that this is likely when banks start lending again and employment numbers start to pick up significantly.

    • Bob Murphy says:

      ??? I know it’s true; that’s why I made the video. And I’m saying, now you are identifying yourself as part of the group that thinks what this economy could really use what now is some bigger price spikes. You are going to get strung up with the rest of them when the checks from DC get interrupted.

      • Blackadder says:

        Bob,

        What the economy could really use right now is more NGDP growth. Hopefully that would come in the form of more real growth. But if it also results in slightly higher inflation, then I’m fine with that; it might even have some favorable effects (e.g. reducing the real value of the minimum wage).

        Bwahahaha.

        • Bob Murphy says:

          Hey Blackadder, this is my response to your latest comment.

        • skylien says:

          Hey BA,

          After your hoarding apple comment you didn’t respond to my answer, which I think countered your apple argument.

          Now I don’t know if you just didn’t bother to look for an answer from me anymore, or you silently agree, or what I rather think you think I am still wrong but just don’t care to tell me why.

          You are a sharp thinker and I quite often agree with what you write and therefore I am quite eager to get an answer there or even finish this discussion if possible. Yet I am already happy if you can give me at least a:” Come on, you don’t know what you are talking about, you are just wrong, and your spelling and grammar mistakes make me sick. So you are not worth my time..” You can copy and paste that if you like.

  4. Matt Tanous says:

    I like how Sumner thinks the inflationary aspect of the Fed’s policy during the 20’s, and the crash it caused, is “internet Austrianism”. I’d be interested in knowing how Rothbard had access to the modern Internet in 1963.

    Oddly, I expected an attempted refutation of Rothbard’s highly detailed empirical explanation of economic history. Instead I got a bunch of useless metrics used to claim inflation didn’t exist. At least now I understand why Murphy is so set against this nonsense. Because it is nonsense.

  5. Jon Steele says:

    Thanks for the clarification Bob. It was helpful to me, and I’m not an economist myself as you surely realize, so thanks for your patience.

    I agree with your points (1) and (2).

    I partly agree with (3). It’s a backroom deal with unions, but it’s not impossible that economic considerations could play a role. I can’t be bothered to look up the numbers, but I think even with the increases to minimum wage, typical union scale is still about double or so. If your story only includes union appeasement, then you have to account for that gap. I’m not saying that economic factors are the only explanation, but I’m saying they could be. And even if I’m skeptical about it myself, that could include not just CPI but nominal income, which includes supply side factors like productivity (or doesn’t it?).

    On (4), I don’t know about Gene and Scott, but my position is that the political calculus assumes gains in votes from raising minimum wage both from unions and from the segment of the broader political left that equates higher minimum wage with concern for poor people. That is large number of votes to have to overcome.

    On (5), you may be right that Barney Frank only accounts for price level, in which case Sumner would indeed be wrong to speak of them doing an implicit NGDP forecast. But again, it doesn’t seem impossible to me that Frank could have nominal income in mind when setting the target. I do think Sumner should present evidence if he thinks that Barney Frank has nominal income in mind (which I’m saying is possible), and that Frank’s model of how nominal income is determined is the same as his. (Does Sumner think real wages are determined by a worker’s marginal product? Does Frank?)

    • Matt Tanous says:

      “Does Sumner think real wages are determined by a worker’s marginal product? Does Frank?”

      I can’t speak for Sumner, but I’d bet that Frank is one of those types that believes wages are set unilaterally by “exploitative” employers who hate the poor and blah, blah, blah “wage slavery”.

    • Bob Murphy says:

      Jon wrote:

      I can’t be bothered to look up the numbers, but I think even with the increases to minimum wage, typical union scale is still about double or so. If your story only includes union appeasement, then you have to account for that gap.

      I don’t follow you here, Jon. Union workers have higher skills than really cheap non-union workers. So if you’re a contractor building a house, and you have to hire some workers, you can hire the expensive union guys who do a good job or the cheap teenagers who have never been on a roof. By making it more expensive to hire the teenager, Congress pushes contractors to favor the union guys more.

      • Jon Steele says:

        I agree with that part Bob. But my understanding is that typical union scale is more like $15-18/hour, maybe higher. So we agree the unions are happy if Congress raises minimum wage to $9/hour, because it cuts out some of the competition without inducing any additional unemployment among union members. But I’m saying the unions would be even happier if the minimum went even higher, say to $13 an hour. That would cut out even more competition from non-union labor while still not harming unionized labor.

        The fact that a significant gap still exists between the minimum wage and the union wage means, to me, that backroom deals between politicians and union bosses can account for some but not all of the new minimum wage rate that gets passed. If the unions were pulling the strings entirely, minimum wage would have gone even higher, that is to say closer to the lower bound of union scale.

        So, I think there’s more to the story there.

        • Matt Tanous says:

          ” If the unions were pulling the strings entirely, minimum wage would have gone even higher,”

          The politicians still have to appease the public, a significant part of which knows better. As Rothbard, la Boetie, and others pointed out, even a dictator is upheld, in the long run, by public opinion (people have to be willing to do what they say), and thus is constrained by that. Too large of an increase would lead to the compulsory unemployment becoming obvious, and that would bring the roof down on the minimum wage scam.

          • Jon Steele says:

            Indeed, that does seem like an awfully strong contender to explain the gap. But it means the politicians are taking into account economic effects, contra Bob in his point (3). I take it you’d agree with what I said in the comments to Bob’s previous post, that “Implicitly this could be an acknowledgement of the potential for unemployment.” (By “this” I was referring to the fact that the politicians did not raise minimum wage even higher than they did.)

            • Matt Tanous says:

              They could be, but it is also possible that they are taking into account only political effects – that it could cost them more votes with businesses that would have to pay the higher wages than they would gain from workers that would get them, for instance.

    • Bharat says:

      “I’m an economist myself as you surely realize, so thanks for your patience.”

      Haha, I’m surprised economists don’t speak like this ^ when they talk to the public (yes, I made a small change).

  6. Blackadder says:

    Skylien,

    This is in response to the comment you linked to above about hoarding. As I understand it, you are making a distinction between hoarding an item so that you can use it in the future vs. hoarding an item so that you can resell it in the future. You say that responding to hoarding by increasing the supply of the item is good in the former case but bad in the latter.

    That won’t do. Take oil as an example. A person might stockpile oil because he thinks the price is going to go up and he’s afraid he won’t be able to get oil at a reasonable price in the future, or he might stockpile oil because he thinks the price is going to go up and he wants to resell it at a profit later. In either case the price signal sent by the stockpiling is the same: it pushes the price of oil up, which encourages increased production. We surely do not want to say that producers should not respond to this price signal if it is as the result of people stockpiling oil for resale; for one thing, there is no clear way for producers to know whether the price increase is due to hoarding from one motivation rather than another. In addition, the value of speculation comes precisely from the fact that it sends this price signal and encourages increased production when the market expects a shortage in the future.

    • skylien says:

      If you say that stockpiling a commodities should signal to producers that they should increase production (I say yes except for money), then let’s see what really finally causes this reaction by the producers.

      If speculators guess that a commodity will be relatively scarce in the future and they drive its price up by stockpiling it, then this translates into relatively greater profits by the producers, which allow them to increase production. So it doesn’t depend on the stockpiling it depends on profits if production is increased or decreased. Yet you seem to argue the same should be true for money. If this is true then the final signal, which is a relatively high profit rate for the producer of money, should mean the producer of money needs to increase supply. Yet profits for the FED to produce fiat dollar notes is nearly infinite at all times!

      Hence if this really is your metric on how to decide if the FED should expand the money supply then the FED needs to print as fast as possible at all times!

      Since I am sure you are not for the above stated policy, your argument that hoarding cash signals the FED should print more fails. You don’t want it in normal times (as fast as possible), and you even do not want it now.

      So why do you want the FED to print only an arbitrary amount now?

      Don’t you think that hoarding cash instead of investing and consuming it, shows risk averseness? Would (in the absence of CB/government intervention) cause interest rates to rise or/and company earnings to decrease, therefore forcing the most unsound investments to liquidate first, generally deleverage bad debt (and I agree maybe even some otherwise good debt) until earnings to risk ratio reaches a safe area again that people could gain real confidence?

      • Blackadder says:

        Skylien,

        It’s true that the Fed isn’t trying to maximize its own profitability. That’s why I brought up the example of gold-money. In that case the gold-miner is trying to maximize his profitability, and this is what leads him to increase production, same as with any other commodity. If you think that this is bad (and you’ve said repeatedly that it is), then it can’t be the case that what distinguishes the two cases is the pursuit of profit. If increasing the money supply in response to increased money demand is bad, it has to be for some other reason. So what is it?

        • Anonymous says:

          BA,

          It is not bad if it is due to higher consumption demand (stockpiling due to speculation on higher future consumption demand or falling supply included). I think this is only bad in case it is in response to higher money demand also for gold (No gold isn’t perfect as well).

          That this is bad can be concluded from the fact that markets tend to use money with high stock to flow ratios which are very hard to produce and increase the supply. Else why wouldn’t have markets settled with something like butter as money?

          The degree to which it happens with gold is very small, in fact smallest to any alternative I know. Look at the development of the gold price in the last 12 years and the mining per year. Do you know something else that beats it that has quite the same qualities that are necessary for money?

          So while this signal we talked about so much of course is there however small it might be for gold or technically big for Fiat, this doesn’t exclude other signals it might also send, as showing that there is too much bad debt. And only money could send this signal, no other commodity can do this at the same time. By withdrawing funds from investments people are scared of and by consuming less, it becomes harder for companies to refinance and keep the production level.

          How else do you think a structural problem can be signaled if not this way? Only bankruptcy and loss can do that. By falling for the misconception hoarding of money only can mean we need to supply more, you are overriding this important signal, especially if the money is handed out to the firms in trouble anyway. The market process is broken at this point.

          So to sum up: The signal you speak of is there and in my point of view bad in case of money (which can be supported by the fact that markets tend to use things as money with the least degree this actually can happen), yet this doesn’t mean it couldn’t send also the signal that there is bad debt.

          Do you agree it might therefore send more than one signal?

          Given your premises were true when would you actually know that a business is not sustainable? It could always be just higher money demand that made the firm illiquid?

          • skylien says:

            sorry that was me forgetting to enter any name and e-mail. I didn’t know it will take the comment anyway…

            Bob you may delete the upper double post of me.

        • skylien says:

          BA,

          It is not bad if it is due to higher consumption demand (stockpiling due to speculation on higher future consumption demand or falling supply included). I think this is only bad in case it is in response to higher money demand also for gold (No gold isn’t perfect as well).

          That this is bad can be concluded from the fact that markets tend to use money with high stock to flow ratios which are very hard to produce and increase the supply. Else why wouldn’t have markets settled with something like butter as money?

          The degree to which it happens with gold is very small, in fact smallest to any alternative I know. Look at the development of the gold price in the last 12 years and the mining per year. Do you know something else that beats it that has quite the same qualities that are necessary for money?

          So while this signal we talked about so much of course is there however small it might be for gold or technically big for Fiat, this doesn’t exclude other signals it might also send, as showing that there is too much bad debt. And only money could send this signal, no other commodity can do this. By withdrawing funds from investments people are scared of and by consuming less, it becomes harder for certain companies to refinance and keep the production level.

          How else do you think a structural problem can be signaled if not this way? Only bankruptcy and loss can do that. By falling for the misconception hoarding of money only can mean we need to supply more, you are overriding this important signal, especially if the money is handed out to the firms in trouble anyway. The market process is broken at this point.

          So to sum up: The signal you speak of is there and in my point of view bad in case of money (which can be supported by the fact that markets tend to use things as money with the least degree this actually can happen), yet this doesn’t mean it couldn’t send also the signal that there is bad debt.

          Do you agree it might therefore send more than one signal?

          Given your premises were true when would you actually know that a business is not sustainable? It could always be just higher money demand that made the firm illiquid?

      • Tel says:

        If speculators guess that a commodity will be relatively scarce in the future and they drive its price up by stockpiling it, then this translates into relatively greater profits by the producers, which allow them to increase production.

        Relatively greater short term profits by the producers, who would know (if they have any brains) that those stockpiles will get out onto the market at some stage (either as direct sales into the market, or as reduced purchases with people consuming their stockpiles). That’s what happens with physical commodities anyhow.

        If this is true then the final signal, which is a relatively high profit rate for the producer of money, should mean the producer of money needs to increase supply. Yet profits for the FED to produce fiat dollar notes is nearly infinite at all times!

        It makes sense if you consider that the profit signal for the Fed is interest payments on the debt. Thus, a ZIRP implies no profits, so they should produce enough money to stimulate production, but not enough to completely squelch interest rates. If people stockpile actual cash then interest rates will go up as no one is buying bonds, (and the Fed would be encouraged to produce more money by the profit signal). If people want to buy bonds and stockpile those, then interest rates go down and the Fed would be encouraged to tighten money supply.

        That all presumes that the Fed puts some “effort” into producing money and then “lends” the money. Of course, we know it’s a make-believe story, and the fact remains that if the government runs a deficit, then the Fed must buy that deficit, no matter what. Which is why the whole thing is such a joke.

        • skylien says:

          Agree with your first point, which would act just as an additional constraint on gold miners to increase gold mining in case the stockpiling due to a recession is not due to present or expected future consumtion.

          Don’t agree with your second point. The FEDs actions are limited by law and are outside of a market process. A private business that couldn’t rent its product for profit, but could sell it into the market for near infinite profit would do so. Also no private business would borrow to customers, and pay them for taking it. The FED does in general not respond to usual market signals as the market does, that’s why I think it is superficial to argue that a higher money demand means we need more dollar notes. If this were true then it is easier to privatize the FED and take away its monopoly, instead of having a bunch of people sitting in a room guessing what the market wants from them.

    • skylien says:

      Thanks for your answer!

  7. Martin says:

    Bob,

    I am thinking billiard players and physics here: congress, businesses etc, they don’t think in terms of NGDP but they can be understood as if they do. Scott got his PhD from Chicago, there are or were a lot of people walking around there with that sort of view. It’s what Friedman meant instead of said when he wrote Friedman (1953); I believe that’s McCloskey’s interpretation of it anyway. Though I have my doubts about congress, businesses and long term contracts do make sense to me.

    • Matt Tanous says:

      I don’t see how any business contract can be assumed to accommodate NGDP. It might consider a change (fall) in the purchasing power of money (although businesses often do not do so in their planning and accounting), but NGDP can increase due to real growth as well – and I don’t think any business would refuse a contract or change its terms because the economy as a whole is expected to grow in real terms a certain amount.

      This is the problem with considering the economy as an aggregate, especially in terms of NGDP. The number of factors involved is enormous, and they are all variable. The only way a business could be considered as if it considers NGDP is if it considered every possible variable, which it does not.

  8. Gene Callahan says:

    “If Gene (and Scott) are right, there should be examples of Congress cutting the minimum wage in response to a recession, right?”

    1) I didn’t adopt Sumner’s theory here, I explained it to you, since you obviously had gotten what he was claiming wrong, as confirmed via email since.

    2) Come on, Bob, you’re familiar with ratchet effects. Whether or not Sumner’s theory is correct, I would NEVER expect to see minimum wage cuts, recession or no. “Taking money out of the mouths of the poor” is never going to be a popular position!

    • Robert Fellner says:

      Whether or not Sumner’s theory is correct, I would NEVER expect to see minimum wage cuts, recession or no. “Taking money out of the mouths of the poor” is never going to be a popular position!

      I don’t see how a theory that Congress acts on macroeconomic concerns can be correct considering the rationale for why they never act in the opposite direction is based, entirely, on political concerns.

      • Gene Callahan says:

        Well, Robert, someone who isn’t quick enough to realize that people often have several motives working simultaneously would miss a lot, now, wouldn’t he?

        • Dan says:

          I can’t believe you have the nerve to criticize Silas for being a jerk.

          • Major_Freedom says:

            That’s Callahan’s M.O.

            He is like Mrs. George Selgin in this respect.

            It’s OK to use caustic barbs, invective pejoratives, and churlish condescension, but only if they use them.

  9. Rob says:

    “and people were jumping up and down on me in the comments. I believe they have no leg to stand on”

    Does this mean that they were in fact hopping on you ?

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