03 Nov 2015

Monetary Policy Views Applied to a Thermostat

Austrian School, Economics 36 Comments

If you’re trying to understand why I made this post, all I can say is that Scott Sumner went down this road. You wanna get nuts!? Come on! Let’s get nuts!

* * *

The curtain rises, showing six nerds in a house, all shivering and breath visibly coming out of their nostrils.

BEN: While you clowns were sitting around yapping away, I alone had the courage to push the thermostat all the way up to 80–as high as it would go. Furthermore, our utility bill this month will be higher than all previous utility bills combined. I clearly did as much as could be expected of me, and the house is indeed getting warmer, we just need to give it some more time to heat up.

PAUL: Yes, good job Ben. There’s no one I would have preferred to be manning the thermostat. However, you really were dealt a bad hand, because it is just so darn frigid outside. As you note, the thermostat is only capable of being pushed up to 80. But since my thermometer says it’s 43 degrees in here, ideally what we’d like is to set the thermostat to about 95, to really get that furnace blasting for a few hours and warm this place up. But for now, we just have to grin and bear it, because for technical reasons we simply can’t push the thermostat above 80. I just wish we erroneously thought someone was trying to break into the house–then we’d all run around, checking that the windows and doors were locked. The exercise would warm us up so that the thermostat being set at 80 would actually work out fine.

BOB and SCOTT: Riiiiiight.

JOHN: I’m thinking maybe you guys are making a huge mistake here. Doesn’t it seem weird to you that the one time in the history of this house that we’ve got the thermostat pushed all the way up, we also are shivering like crazy? Maybe there’s some weird mechanism where the furnace is bouncing around so violently that it knocked open a hole outside and all the heat is escaping–?

PAUL and SCOTT: Riiiight.

PAUL: Yeah that’s cute John, but everybody knows that Ben has done what he could. Look at how high he’s pushed up the thermostat. That’s a heating policy if ever there were one–not one that could be responsible for the freezing house.

SCOTT: Whoa whoa whoa, let’s not reason from a thermostat change. As a general rule, a high thermostat setting means that the owner has engaged in a cold policy.

JEFF: Good point Scott. So guys, this policy is clearly not working. We’re running up huge utility bills, and I’m concerned that we’re doing permanent damage to the furnace. So let’s turn the thermostat down a notch–

SCOTT: Whoa! That would be a disaster! Why would we suddenly implement a cooling policy?

BOB: Huh? Didn’t you just tell us to never reason from a thermostat change?

SCOTT: *sigh* Obviously any given turn down of the thermostat makes things cooler than they otherwise would be.

BOB: Right, and every HVAC guy thinks the same thing. So why do you keep lecturing us on committing some type of fallacy?

SCOTT: Because you guys think that the thermostat being set to 80 somehow indicates “a heating policy.” No it doesn’t, if anything it indicates that the thermostat policy has been incredibly cold.

BOB: That’s a really weird way of looking at it. In any event, shouldn’t your lecture then be, “Never reason from the level of the thermostat,” rather than “a thermostat change”?

SCOTT: I can’t continue with this basic stuff. Go brush up on a Lee manual.

BOB: *sputtering* I was studying Lee before it was cool!

PAUL: Hey hotshot, what do *you* think we ought to do with the thermostat? You seem to have all the answers.

BOB: Well I don’t know; nobody can know what single temperature is right for millions of people in the house. I think you should let people go live in their own houses, and set their own thermostats.

PAUL, SCOTT, BEN, JOHN, and JEFF: Riiiiiiight.

36 Responses to “Monetary Policy Views Applied to a Thermostat”

  1. Josiah says:

    If it’s 43 degrees in the house, does setting the thermostat at 80 make the furnace work any harder than if you’d set it at 70?

    • Bob Murphy says:

      I can only work with what Scott gives me.

    • E. Harding says:

      The Fed controls interest rates; it targets inflation.

    • Tel says:

      In a word, “No”.

      A basic deadband furnace controller (which is nearly every electromechanical thermostat) only turns ON when the room is too cold, or OFF when the room is too hot. If it’s already ON, turning it up won’t make it any more ON.

      More advanced controllers might have a few other tricks like changing fan speeds, or with a heat-pump system you have forward/reverse cycle (i.e. cooling or heating) and also some control over pump speed (maybe). At any rate, if it’s falling short by more than 10 degrees basically the heater is doing it’s best and turning up the thermostat achieves nothing.

      A surprisingly large number of people don’t understand this, and will continue turning up the thermostat regardless of the hopeless failure of the system to cope, or even sometimes will turn it way up because they believe it will operate faster that way. This goes some way towards explaining the continued popularity of Keynesian economics.

      • E. Harding says:

        Come on; I think you know raising the Federal funds rate by 50 points will have a greater effect than raising it by 5 points.

        • Tel says:

          Sumner came up with the thermostat example, not me

          I’m just pointing out how a thermostat works, if that bothers you either shout at the bi-metal strip and demand it should operate differently, or scratch your head about why Sumner started off in that direction.

  2. E. Harding says:

    “Because you guys think that the thermostat being set to 80 somehow indicates “a heating policy.” No it doesn’t, if anything it indicates that the thermostat policy has been incredibly cold.”

    -Truth. If Ben set the thermostat to 50 or 60 degrees while the temperature outside was still frigid, you’re allowed to blame him for unnecessarily cooling down the house to dangerous levels.

    “shouldn’t your lecture then be, “Never reason from the level of the thermostat,” rather than “a thermostat change”?”

    -Never reason from a thermostat change, but you’re allowed to reason from a thermostat change relative to counterfactual.

  3. Andrew_FL says:

    I think I can reconcile this all a bit, but not fully:

    It’s absolutely true that if I just turned the thermostat up my house must have been cold. Why else would I turn it up?

    On the other hand, it doesn’t make sense to say that holding the thermostat at 80 degrees is not only not a “heating policy” but a policy of cooling the house.

    If you set your thermostat high and keep it there, but your house stays cold, your heater is broken. In which case holding your thermostat at a high level is not a heating policy, but neither would raising it to 90 if that were possible, be a heating policy. If the heater is broken, the setting on the thermostat is irrelevant.

    A better analogy for fiscal stimulus by the way, would have been Krugman suggesting they need to start an indoor uncontrolled campfire.

    • Major.Freedom says:

      We could simplify even further:

      Whoever is monopolizing the thermostat, has no idea what temperature the house should be at.

      • E. Harding says:

        Riiiiiiiiight.

        • Major.Freedom says:

          Nobody bothered to ask the home owner. Maybe he’s a post cancer treatment patient and wants it at 90, or maybe he’s a big huge dude who sweats profusely and wants it at 60.

          Either way, it is hubris for these bloggers to talk about what temperature the thermostat should be set at. They are as oblivious as any one person who ever lived.

          • Harold says:

            “has no idea what temperature the house should be at.”

            That is not likely to be the case. He knows it is overwhelmingly unlikely that the homeowner wants it above 100°C, or below -150°C. He has some idea, just not a perfect idea.

            • Major.Freedom says:

              Hubristic Harold,

              You have no idea what the optimal USES for all buildings put together are.

              Some spaced used in buildings may in fact be optimal at 100°C, or below -150°C.

              There are in fact uses for those temperatures, and the optimal policy is when each individual space owner can set their own temperature, rather than one individual or group of individuals setting temperatures for everyone “collectively”.

              Why do you stretch and distort and bend over backwards to defend an indefensible position?

              Geez, it is like the more absurd the socialist position, the more eager the true believers swoop in to reassure us all that the statist overlords know best.

              Seems like no evidence will dissuade you from your faith. Hmm, wasn’t that your criticism of libertarians?

              • Harold says:

                It was specified that that this was a house with a single thermostat. This is not inside the oven or inside th efreezer. That very nearly rules out extremes of temperature as optimum.

                Not absolutely rules out, but so close as to not worry me about the extreme unlikelihood of extreme temeratures being desired.

                You will note that I never said whether anyone should act on that information. You just assumed that. I did not say that anyone is in an optimum position. I correctly pointed out that we do in fact have some information about the likely range of temperature desired.

    • E. Harding says:

      You could still set the thermostat to 85 or 90 if you ignore the recommended settings. But after that, the furnace starts to break down.

      Also, even if the furnace is broken, there’s still a river of boiling water beneath, or whatever you want the analogy to QE to be.

      Great campfire analogy.

    • guest says:

      “A better analogy for fiscal stimulus by the way, would have been Krugman suggesting they need to start an indoor uncontrolled campfire.”

      Or, or …:

      ALL KEYNESIANS: Eighty heating units set at 80 degrees doesn’t seem to be enough stimulus to make it warm outside. We need more heating units!

      (Because malinvestments. They’re stimulating the wrong production processes.)

      *Takes a bow*

      • E. Harding says:

        I don’t see any inflation. Isn’t the U.S. in a state of deflation right now? So clearly, there hasn’t been enough demand-side stimulus.

        • guest says:

          You don’t see any inflation because it hasn’t gotten warmer outside, yet.

          Clearly, if prices for the things that Keynesians want raised haven’t risen, then there’s been no price inflation.

          And if stock prices rise in Keynesian-favored industries, but the new demand hasn’t been accompanied by new goods with which to buy said stock (people ultimately want the goods, not the money), then that’s not price inflation, either.

          Those heat-hoarders in their barbarous houses don’t count. They’re a drag on the economy when we need high-powered heat.

    • Tel says:

      If you set your thermostat high and keep it there, but your house stays cold, your heater is broken.

      If the heater is broken, the setting on the thermostat is irrelevant.

      Bingo!

      A better analogy for fiscal stimulus by the way, would have been Krugman suggesting they need to start an indoor uncontrolled campfire.

      … and then growling at everyone for having set the thermostat wrong, which is why he can’t be blamed for the house burning down.

    • Harold says:

      “would have been Krugman suggesting they need to start an indoor uncontrolled campfire.”

      Hang on, isn’t it Paul’s case that the “uncontrolled” campfire was lit, and it has not spread to burn down the house? In this analogy, the uncontrolled campfire seems to be very much in control, perhaps in a fireplace. Which is not a bad idea if the house is too cold. The only problem is that it is not big enough. I may have mis-understood.

      • Tel says:

        There’s a few factors people forget (talking about the monetary system, not thermostats). A lot of debt deflation happened around 2008 to 2010 so the total private debt shrank, which works against the QE. Debt deflation effectively sucks money out of the system, in the reverse process to the way fractional reserve banking creates new money (actually the illusion of new money, but still influences prices).

        In addition, the US federal government has miraculously brought spending under control to some extent in the last three or four years. State governments also brought spending under control because they had no choice. This is completely the opposite of what Krugman wanted… you know that fiscal doomsday machine thingy?

        Another factor is that labour participation in the US has slumped, so basically you have people (mostly young people) not bothering to look for jobs anymore, which means less consumer spending, and some slowing down of the economy.

        I would say there’s no analogy to these things in the thermostat example, except perhaps the window in the house is open and snow is blowing in from outside putting out Krugman’s campfire every time he tries to light it. In this case the people in the house are too afraid to close that window because if they do then Krugman will finally declare success and get that fire going.

        • E. Harding says:

          “In addition, the US federal government has miraculously brought spending under control to some extent in the last three or four years.”

          -That was due to the improving economy, and the gobs of spending that came before it making the succeeding period look good in comparison.

      • Andrew_FL says:

        Krugman is claiming he feels a little warmer because somebody lit a few candles, but he would be feel even warmer still if they’d just lit the dang campfire. Worse yet, somebody (probably a Republican) blew out some of the candles!

        Remember, the stimulus wasn’t big enough. And then there was “Austerity.”

    • Gene Callahan says:

      “On the other hand, it doesn’t make sense to say that holding the thermostat at 80 degrees is not only not a “heating policy” but a policy of cooling the house.”

      And no one ever said that it is.

  4. guest says:

    Hey, look at this:

    Desperate-To-Hike Fed Admits “Inflation Is Not As Low As You Think”
    http://www.zerohedge.com/news/2015-11-04/desperate-hike-fed-admits-inflation-not-low-you-think

    “After San Fran Fed’s Williams admission that “there’s something going on here we don’t understand,” Fischer tonight admitted “US inflation is not as low as you think,” at once contradicting Yellen’s earlier comments and the various market-based measures, while confirming our previous detailed solving of the mystery of the hidden inflation.”

  5. Gene Callahan says:

    ‘Because you guys think that the thermostat being set to 80 somehow indicates “a heating policy.” No it doesn’t, if anything it indicates that the thermostat policy has been incredibly cold.’

    This is a radical mischaracterization of Sumner’s position, and is the basis for your misunderstanding of what he is saying.

    • Bob Murphy says:

      No it isn’t Gene. Are you saying Sumner is NOT saying, “Ultralow interest rates are generally a sign that monetary policy has been tight.” It would be hard for you to maintain that, since I think that is a literal quotation from him.

    • Craw says:

      Do parts of speech matter? The policy could have been cooling, but not cold. This is not just nitpickery. Murphy is trying to pretend Sumner said something obviously stupid, like that 80 is cold but 67 is hot. That really is a mischaracterization of Sumner. Sumner does not say a high setting is indicative of cold, but of cooling, which is a very different thing.

      • Bob Murphy says:

        Craw wrote:

        Murphy is trying to pretend Sumner said something obviously stupid, like that 80 is cold but 67 is hot. That really is a mischaracterization of Sumner.

        What are you guys talking about?! I most certainly did not make Sumner say 80 is cold and 67 is hot. Rather, I made Sumner say that the thermostat set to 80 is a an incredibly cold thermostat policy. That is the analog of 0% interest rates being an incredibly tight monetary policy.

        • Craw says:

          Substitute 43 for 67. 67 was Sumner’s number I think.
          Sumner did not say 80 was a cold thermostat policy. He said the setting was possibly indicative of a past cooling policy. Cold and cooling are different. And if you look at most people’s thermostats he is right. Mine is higher in the summer when I am cooling than in the winter when I am heating.

          • Major.Freedom says:

            “Sumner did not say 80 was a cold thermostat policy. He said the setting was possibly indicative of a past cooling policy.”

            Which persists to this day in the historical argument Summer made. He said that in the last 7 years, the thermostat being at 80 was and has since been indicative of tight money.

            Why do you ignore his other arguments and instead focus on only part of one theoretical argument?

            • Craw says:

              I am only explaining the way Murphy misunderstood Sumner’s key point.

    • Transformer says:

      Gene,

      I think that’s wrong.

      “the thermostat being set to 80 ” = ZLB, right ?

      So to translate Sumner:

      “‘Because you guys think that interest rates being set to zero somehow indicates “a loose money policy.” No it doesn’t, if anything it indicates that monetary policy has been incredibly tight.’

      I think this sums up Sumner’s position quite well. He thinks the ZLB coud have been avoided by looser policy in the past.

      • Bob Murphy says:

        Transformer wrote:

        So to translate Sumner:

        “‘Because you guys think that interest rates being set to zero somehow indicates “a loose money policy.” No it doesn’t, if anything it indicates that monetary policy has been incredibly tight.’

        I think this sums up Sumner’s position quite well. He thinks the ZLB coud have been avoided by looser policy in the past.

        Right, and it’s frustrating that you (and I) are even having to argue this with people. Sumner has been quite clear that this is his view. I think people are resisting it because they can’t believe someone could possibly be arguing that, and so assume I’m twisting his words.

        • Transformer says:

          I’m glad we agree.

          It would be interesting to know why Gene thinks that your paraphrase “is a radical mischaracterization of Sumner’s position”.

          But I’m guessing Gene has probably realized he is wrong by now so will just stay silent on this point.

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