17 Apr 2017

The American Public Only Thinks It Likes Motherhood and Apple Pie

Inflation, Scott Sumner 89 Comments

After all, in a big enough apple pie, you would drown.

Scott Sumner has a curious post at EconLog, titled, “The public only thinks it likes low inflation.” He says that such a view is reasoning from a price change, and that low inflation is actually really undesirable–even from the public’s own viewpoint–when it’s caused by tight money.

To make his point, Scott gives (what I think) is a really bad analogy:

[T]he public’s view of the economy fell sharply during the first half of 2008, as an adverse supply shock drove inflation higher. But by early 2009, inflation had fallen to roughly zero, the lowest level of my entire life (since 1955.) And yet the public’s view of the economy continued to fall to extremely low levels.

Some would argue that I am not holding other things equal—unemployment was rising sharply during early 2009. That’s true, but unemployment was rising sharply precisely because tight money was driving inflation down to zero. (It would be like saying the public doesn’t mind falling out of 100 story buildings, just hitting the ground.) The public may say it likes low inflation, but it behaves as if it likes low unemployment.

As I say, Scott’s analogy seems almost exactly wrong for this situation. The reason it’s silly to say “I don’t mind falling out of 100 story buildings, I just don’t like getting crushed on the ground” is that the one just about necessarily follows from the other, at least in normal experience. A more analogous statement would be something like, “I like flying in airplanes, I just don’t like crashing.” And notice that there is nothing absurd about such a statement.

Contrary to Scott’s assertions, high price inflation is bad, per se. To see why, consider this: Would Scott endorse an outcome whereby the Fed locked in perfectly stable–down to the day–NGDP growth, except that the annualized rate of growth was 1 billion percent? I’m pretty sure he wouldn’t. The reason is that the dollar could no longer function as a useful medium of account if prices were rising so rapidly. It would be very difficult to make long-term financial plans at such outrageous rates of price inflation. (I’m assuming real GDP wouldn’t spike accordingly, so that the 1 billion percent of NGDP growth would translate to almost 1 billion percent price inflation.)

In sum, I think the layperson is being quite reasonable when he says, “I would prefer low to high (price) inflation.” Yes, there are scenarios where low inflation goes along with other undesirable things, but that’s true about a lot of goals in life. I recognize that Scott thinks tight money is the great villain in Western economics nowadays, but I think his periodic efforts to convince free-market readers that inflation has gotten a bad rap, miss the mark.

89 Responses to “The American Public Only Thinks It Likes Motherhood and Apple Pie”

  1. Darien says:

    “Drowning in a giant apple pie” is officially how I want to die.

    That notwithstanding, I normally get [the other] Sumner’s point about reasoning from a price change, but I’m not entirely sure it’s wrong to do in this situation. If people are objecting to price inflation, is it not the price change itself that they’re unhappy about? Sumner writes:

    “Thinking you like low inflation is reasoning from a price change, which is almost always a bad idea.”

    I’m just not confident that makes any sense in this context. His classic “never reason from a price change” example is about gasoline consumption:

    “In EC101 we constantly emphasize that students should not reason from a price change. Higher gasoline prices are not expected to be associated with lower consumption, it depends entirely on whether the price increase was due to less supply (1974) or more demand (2007.)”

    … which makes sense. As such, I suppose it would be silly to dislike price inflation because you think it would lead to a direct reduction in “aggregate demand,” but I *don’t* think that’s the reason people dislike it. I’m pretty sure the main reason people dislike price inflation is because their incomes haven’t kept pace. If I go to fill my tank, *why* the price of gasoline has gone up is simply not important to me in the moment; what matters to me is that gasoline is more expensive now than it was (say) last week, but my income is the same, meaning that purchasing the same amount of gasoline now takes a greater proportion of my income. In what possible sense is it “a bad idea” for me to dislike this?

    • Tel says:

      “Drowning in a giant apple pie” is officially how I want to die.

      Once you get that locked in, just avoid giant apple pies and you can live forever.

      Don’t laugh, the same trick works just fine when lowering interest rates in order to produce a perpetual boom.

      In what possible sense is it “a bad idea” for me to dislike this?

      Oh that’s easy. Why do economists such as Sumner believe that there is any link between “tight money” and unemployment in the first place? Well, because in a situation where wages are held firm by unions but deflation should cause wages to fall if we were to achieve some type of “economic equilibrium”, something has to give… hence unemployment.

      So how to bypass this problem? Give the workers a Grubering (i.e. treat them as stupid and lie to them, for their own good of course) by inflating the money supply and telling them they all got a pay raise, while actually prices have risen even more than that. Then jigger the official price inflation metric to convince them even more that the prices they think are going up, really aren’t.

      In other words… you have to swallow this, for the good of the economy, so stop your annoying whinging and get back to work. If you don’t like it, that’s probably because you aren’t smart enough, and you are a bad person.

      • Michael Sandifer says:

        Wages have always been sticky, which is why inflation, disinflation, and deflation have always had real effects. We did have mass unemployment during economic slowdowns before much unionization and well before minimum wage laws, though these changes probably made wages even stickier.

        • Tel says:


          Unemployment jumped up and then bounced back within the space of one year. Clearly wages and prices are not *always* sticky.

          • Mike Sandifer says:


            That depression was a purely monetary phenomenon in the context of WWI demobilization. It’s well-understood as such, and it demonstrates that wages are sticky, otherwise much of the episode wouldn’t have occurred. Were wages somewhat less sticky at the time? Probably, yes, but they were still sticky.

            • Tel says:

              That depression was a purely monetary phenomenon in the context of WWI demobilization.

              If you are demobilizing after a war, it CANNOT be purely monetary… there are real decisions to be made, real resources that must be redeployed… people to find jobs for. Consumer preferences kick in. The question is how quickly the economic system can adapt to changing circumstance, and whether the system as a whole does a good job of reaching a new equilibrium (and there’s no completely objective way to measure that, but there’s a lot of subjective ways). Money is part of that, but only as an intermediary assisting the physical economy “under the hood”.

              Obviously where you draw the line is a bit arbitrary (and that’s unavoidable) but if prices can move within a year or less, then that’s not sticky in the way people like Sumner talk about sticky.

              If you want to argue about stuff that happens in a timeframe of six months or less then we end up concluding “everything is sticky”; simply because it takes time for information to propagate, takes time for people to adjust their plans, search for new options, etc. Humans are naturally somewhat persistent in their approach, and that’s often a good thing.

              And yeah, the “six months” is kind of an arbitrary line in the sand, we could argue a bit more, a bit less… but why bother nitpicking? Point is that Keynesians talk in terms of DECADES of sticky prices, and they argue that only central bank interference can fix things. Clearly the 1920’s quick recovery (without central bank assistance) is proof this is wrong.

              Getting back to the initial question at hand, “Why are we expected to think inflation is a good thing?”

              The implicit answer is, “We need inflation to fix sticky prices.”

              Well… no we don’t. The inflation still takes time… people still need to adjust their plans. When workers discover that they cannot purchase as many household groceries as they used to do (even as their nominal wages have gone up, their real wages have gone down) these families still need to adjust their budget and make decisions about what they can live without.

              These people are no better off with inflation compared with a direct nominal pay cut. They face the same loss of purchasing power regardless. We still need to juggle out the balance between wages and prices because that’s the only process able to resolve the necessary decision making inherent in running an economy. There’s not the slightest evidence that inflation makes this process run faster, and quite a bit of evidence that it slows things down by attempting to keep nonviable business practice running longer than they would otherwise.

              The only “good thing” about inflation is in terms of serving as obfuscation, temporarily convince people they are better off, and the constant money printing gives a convenient source of funds for a small group of people to enjoy, thus creating Cantillon effects. By “good thing” I mean it is good for some, but not for most.

              • Mike Sandifer says:


                No, when it comes to NGDP, to paraphrase Milton Friedman, is always and everywhere a monetary phenomenon.

              • Tel says:

                You are misquoting Friedman, who never had an obsession with NGDP and was talking about “inflation”. Whether he was talking about inflation of the money supply or CPI is arguable, but probably the former.

                At any rate, earlier you said that sticky prices were the cause of recessions, so presumably you must believe there is some relationship between the monetary world and the physical consumption of resources.

                That is to say, if the price of a tin of beans at the store goes up from 50c to $1 and the household budget remains the same… I hope you at least believe this would have some effect on consumption of beans.

                Otherwise you are left with a model of an economy where people randomly toss bundles of money at each other.

              • Mike Sandifer says:


                First, I didn’t misquote Friedman. I paraphrased him. Read what I wrote.

                Second, NGDP = real GDP + inflation. Inflation is 100% a monetary phenomenon, and hence so is NGDP.

              • Tel says:

                NGDP = real GDP + inflation.

                Can you prove that, with numbers ‘n stuff?

                At any rate, can’t say I remember Friedman ever making such a claim. He didn’t talk a whole lot about either GDP or NGDP. He talked about wages, and inflation and interest rates and Phillips curves. I think you added some extra bit in there which has nothing whatsoever to do with Friedman. That’s not exactly “paraphrasing” is it now?

                Hey, did I mention that Friedman used words to explain himself? He really did. Words and a bit of logic, perhaps a diagram here and there. Quite a lot of words.

              • Mike Sandifer says:


                NGDP is conventionally defined as I just defined it. I actually formulate it more explicitly as

                NGDP = (Sm/Dm)RGDP,

                where Sm = supply of money

                Dm = demand for money

                RGDP = real GDP

                So, NGDP rises when the supply of money increases and/or the demand for money decreases, and/or when RGDP changes.

                So, inflation, by this definition, occurs when the supply of money exceeds demand, demand for which is mostly determined by potential RGDP.

  2. Andrew_FL says:

    If an evil gremlin goes around and destroys half of all the goods in the country, are people correctly understanding the nature of their misery if they gripe about the price of everything doubling?

    • Michael Sandifer says:

      What does that have to do with this post? That would be a supply shock, which has nothing to do with what Sumner was talking about, which are demand shocks.

      • Andrew_FL says:

        It has everything to do with this post if you have any actual understanding of economic theory rather than being an equation obsessed weirdo who thinks he’s an economist.

    • Bob Murphy says:

      If the gremlin eats the apple pie after midnight, we get inflation.

      • guest says:

        If it did all that in an airplane, we’d have a nightmare at 20,000 calories.

  3. guest says:

    “T]he public’s view of the economy fell sharply during the first half of 2008, as an adverse supply shock drove inflation higher.”

    If by “supply shock” he really means a shock in the supply of entrepreneurs that were capable of correctly anticipating consumer demand.

    *That* supply shock happened when the FED [further] messed with the unit of account in an effort to fix the Dot Com crash.

    (No such thing as a supply shock as it’s commonly understood to mean.)

  4. Transformer says:

    I think Scott’s point can be rescued by substituting “below-target inflation” for “low inflation”.

    The public might think it likes “”below-target inflation” but as (in Scott’s view) this always leads to rising unemployment it is more like “falling out of a tall building ” than “flying in airplanes” in terms of likely consequences.

    • Bob Murphy says:

      Transformer wrote: “I think Scott’s point can be rescued by substituting “below-target inflation” for “low inflation”.”

      Yes, and it could also be rescued if we substitute “free health care.” But that’s not what the public actually thinks on (price) inflation; they don’t even know what “below-target inflation” means. What they think is that rapidly rising prices are bad. And I agree with them. There’s nothing wrong with such a view.

      • Mike Sandifer says:


        Come on. When a rapid rise in prices occurs, after a symmetric drop in prices coupled with higher unemployment and slower economic growth, the public welcomes the economic turn around that comes with getting nominal spending back on trend.

        • Dan says:

          So in your view, the public cheers, say rising gas prices, as long as unemployment is dropping? Yeah, that never happens. I’ve yet to meet a single person that cheers prices going up on them, and I’ve yet to meet a single person that complains when prices go down. Well, outside of people who have money tied up in an investment that is effected by the price change.

          • Mike Sandifer says:


            You seem to miss the point entirely.

            • Dan says:

              Yeah, had to reread what you wrote. I misinterpreted what you were saying. But you’re still not saving Sumner with that comment. To see why, check out Murphy’s analogy below about people being against getting cut.

              • Mike Sandifer says:

                Tell me how ABCT can be reconciled with the fact that in recessions caused by nominal shocks, both aggregate demand and prices fall. That’s a tell tale sign it’s a demand problem, not one of supply at all.

              • guest says:

                “Tell me how ABCT can be reconciled with the fact that in recessions caused by nominal shocks, both aggregate demand and prices fall.”

                The reason is because it’s not a *shock* as you understand it. Your paradigm is wrong.

                It’s not that everything was going well and then chaos was introduced.

                It’s that you were in an unsustainable configuration of the economy the whole time, and the “shock” is really a correction of malinvested resources.

                The only reason people demanded the goods in the sectors that experience the shock is because it was being paid for by fraudulent credit expansion.

                That cannot be kept up forever because while you can print as much paper as you want, real resources are scarce and being competed for with that paper and real preferences are giving those resources their real value as the new money is making its way through the economy.

                So when more printed money chases after the same amount of goods relative to no more printed money, people stop spending on lower-ranked preferences.

                Part of what it means to have a sector of the economy be stimulated is to provide that sector the means to compete with other firms for scarce resources.

                So prices for those resources are going to be pushed higher, and you have to keep printing money for the “stimulus” to work.

              • guest says:

                “That’s a tell tale sign it’s a demand problem, not one of supply at all.”

                “Demand shocks” are not problems to be solved.

                They’re information that businesses are providing the wrong things.

                Demand is what justifies production, so it’s logically impossible for there to be a “lack of aggregate demand”.

                The point of the economy is not to have a particular level of output or even employment. Rather, it is to satisfy consumer preferences.

                All so-called market failures are really just a failure to meet consumer demand.

                Stop producing what people don’t want – “supply shock” solved.

                Invest your skills toward lines of production the products of which consumers will buy – “sticky wages” solved.

                If you can’t invest your skills in such a way without starting over and lowering the wage you offer, then you accept a lower standard of living so you can build up your savings with a lower wage – “sticky wages” again solved.

        • Rick Hull says:


          It would be great if your argument precludes the following analogy:

          When a rapid increase in temperature occurs, after a symmetric drop in temperature combined with lethargy and frostbite, the body welcomes the heat gun on its big toe where the thermometer lies.

          (lies, heh)

      • Transformer says:

        I suspect Scott’s point is along the lines of:

        If the fed is targeting 3% inflation and you ask the public ‘would you like low inflation right now’ (and you define low inflation as inflation < 2%) , they would say 'yes'. But they wouldn't really like it because assuming it came as a result of the fed missing its target it would represent monetary tightening and come with higher unemployment. Hence 'The public only thinks it likes low inflation.'.

        I agree this is a bit of a specialized meaning of "low inflation" but I don't think its too much of a stretch to see this in the context of Scott's framework and see what he is getting at.

        • Mike Sandifer says:


          Yes, that is Scott’s point.

    • Andrew_FL says:

      “but as (in Scott’s view) this always leads to rising unemployment”

      In Scott’s defense, this obviously wrong view is not actually his view.

  5. Mike Sandifer says:

    Guys, this isn’t hard to understand. The public does not want a slower economy that would come with lower inflation or outright deflation. This isn’t rocket science.

    The public would love lower prices due to productivity growth, but that’s a completely different issue.

    • Bob Murphy says:

      Mike wrote: Guys, this isn’t hard to understand. The public does not want a slower economy that would come with lower inflation or outright deflation.

      Right Mike, I agree it’s not hard to understand. Scott should have written a post titled, “Actually, some things are worse than high inflation” but instead he wrote a post with the indefensible title, “The public only thinks it likes low inflation.”

      Mike wrote: “The public would love lower prices due to productivity growth, but that’s a completely different issue.”

      We’re not talking about the level of prices, we’re talking about the rate of (price) inflation. And it is perfectly correct to say that, other things equal, a low rate of price inflation is preferable to a high rate. Scott himself lists some of the reasons (menu costs, taxation of phantom capital gains, etc.) in another post.

      If I say, “The public doesn’t like getting cut with a knife,” you don’t disprove that by bringing up heart surgery.

      • Mike Sandifer says:


        To me, that Scott was talking about inflation in the context of a negative nominal shock was implied.

  6. Arnie says:

    OK: Convince me that that inflation over a thousand year period is better than an equal percentage of deflation over that same time period. I’m busy, so be brief.

    Clearly, I am unconvinced at this moment of the demonic terror that deflation is to mainstream thought.

    • Mike Sandifer says:


      The situation isn’t as simple as you seem to imply. There’s nothing wrong with a mild general deflation as long as productivity is sufficiently strong to facilitate it, along with proper anchoring of expectations. However, there are strict limits, because if the money supply growth isn’t sufficient versus the potential real output, or potential real GDP, the value of dollars versus output will be expected to rise, increasing the demand for dollars at the expense of output.

      This wouldn’t matter if wages weren’t sticky, but they are. Notice that you never hear about hourly wages being cut during recessions, but only hour and job cuts. Hence, there is a real and persistent drop in demand that can be eased by increasing the money supply.

      By the way, it’s wage stickiness on the upside that allows inflation to have real effects, so it’s not just minimum wages and union contracts that make wages sticky on the downside. It’s a genuine market failure.

      There seems to be the assumption among Austrians that if not for positive inflation targets, all prices would tend to fall over time, but that’s just not true. Apparently, those people have never heard of the Penn effect. Also, many of them don’t seem to realize that in the long run, money is neutral.

      • Dan says:

        Dr. Murphy should write an article explaining sticky wages. https://mises.org/library/are-sticky-wages-market-failure

        • Mike Sandifer says:


          That article is absurd, and I mean no offense to Bob. He claims sticky wages aren’t a market failure, but then assumes another market failure in the form of essentially capital managers eating their own seed corn, presumably due to lower than natural interest rates. Not only does this not follow logically, but there’s no evidence it occurs. That’s why Bob resorts to simplistic analogies. Markets would be ridiculously inefficient if they couldn’t anticipate lower interest rates leading to “malinvestment”. He offers no reason why such inefficiency should exist.

          Sticky wages are certainly a market failure due in large part to incentives. If a limited number of firms were to lower wages across the board during downturns, their competitors could hire away their best workers, leaving them to only employ the least productive. However, if all wages did fluctuate with NGDP, for example, monetary policy would have no real effects, and you’d think Austrians would be happy. But no, Bob prefers that employees not suffer wage fluctuations that have no real effects! They’d only be nominal, but Bob seems to miss that simple point.

          I don’t want to come across as attacking Bob, but the ideas in the article instead. If he has a mathematical model that demonstrates that malinvestment in response to interest rate manipulation even makes sense, I’d like to see it. Then, show me the evidence.

          • guest says:

            “Markets would be ridiculously inefficient if they couldn’t anticipate lower interest rates leading to “malinvestment”. He offers no reason why such inefficiency should exist.”

            The hampered market *is* ridiculously inefficient as a result of not being capable of anticipating artificially low interest rates leading to malinvestment.

            THAT’S WHY they result in bank runs when the government doesn’t outlaw them, and why the government has to coerce people to use a fiat currency so they can hide the malinvestments (and therefore their cause) behind a coordinated monetary inflation.

            • Mike Sandifer says:


              Show me your model that has capital managers eating their seed corn because interest rates are low.

          • guest says:

            “If he has a mathematical model that demonstrates that malinvestment in response to interest rate manipulation even makes sense, I’d like to see it. Then, show me the evidence.”

            This is what we’d say you’d need to know:

            Austrian Business Cycle Theory

            • Mike Sandifer says:

              There was quantitative model nor evidence provided in that Tom Woods speech. He seems to know nothing about business cycles.

              • guest says:

                “There was [no] quantitative model nor evidence provided …”

                The evidence was of a logical nature.

                Either contend with the logic, itself, or provide your evidence that quantitative models are superior to a priori reasoning.

                (This cannot logically be done, because you’d then have to support your quantitative modeling with a priori reasoning, thereby conceding our point that logic can suffice for a legitimate foundation of economic analysis.)

                You reject non-quantitative models of the non-quantitative nature of economic activity.

                The models you prefer are static, and therefore cannot model decisions based on preference rankings of individuals.

              • guest says:

                Mises, in Human Action:

                “The mathematical economist, blinded by the prepossession that economics must be constructed according to the pattern of Newtonian mechanics and is open to treatment by mathematical methods, misconstrues entirely the subject matter of his investigations. He no longer deals with human action but with a soulless mechanism mysteriously actuated by forces not open to further analysis. In the imaginary construction of the evenly rotating economy there is, of course, no room for the entrepreneurial function. Thus the mathematical economist eliminates the entrepreneur from his thought. He has no need for this mover and shaker whose never ceasing intervention prevents the imaginary system from reaching the state of perfect equilibrium and static conditions. He hates the entrepreneur as a disturbing element. The prices of the factors of production, as the mathematical economist sees it, are determined by the intersection of two curves, not by human action.

            • Mike Sandifer says:

              I don’t care about what other people wrote, especially around a century ago. Show me the explicit model and what it can do. Show me specifics. How can it make someone a better investor? How does it make for better policy?

              I’m open to ideas like free banking, but from people like George Selgin who actually understand economics and monetary policy in particular very well. You’re offering nothing.

              • Andrew_FL says:

                Cites George Selgin
                Is apparently unaware of anything Selgin has written about “intermediate spending booms”

              • Mike Sandifer says:


                I didn’t know Selgin held that pespective, but he’s only speculating vaguely and presents no formal model. He’s a good economist who’s good at using models, so if you can find something explicit and which references evidence, that’d be great.

                Selgin is a smart guy, so reading him will benefit you greatly, I think.

                I’m one of the market monetarists he refers to.

          • Dan says:

            Mike, the more you talk the more I realize you are criticizing ABCT in a complete state of ignorance. It’s OK, lots of people feel perfectly capable discussing things they have no background in and have never studied, but you might want to at least read a bit about it so you can have an informed conversation about it sometime. Not that you’ll agree with it, but it’s still better to have informed opinions when you plan on criticizing something.

            • Mike Sandifer says:


              I’m saying show me your model. Show me how this exhaustion of capital stock due to over-consumption works, how it can be spurred by interest rates that are “too low”, etc. If you can’t do that, you have nothing.

              • Dan says:

                Mike, I’ve been coming to this blog for many years now, pretty much since the beginning, and I’ve learned many things. One of them is to not waste my time arguing Austrian economics with someone who hasn’t spent any time studying it first. It’s irritating swatting at constant strawman and ignorant arguments. I don’t mind pointing people to books, articles, videos, etc. if they want to learn what Austrians believe, but I’m not interested in debating an economic theory with them that they know nothing about.

                Another thing I’ve learned on here, though, is that if you have no interest in educating yourself, and are simply looking to argue endlessly, you’ll find many takers. Heck, I like to mix it up with people from time to time on different issues on this site. But I have no interest arguing about a complex economic theory with someone who is flailing around blindly.

              • guest says:

                “… how it can be spurred by interest rates that are “too low”, etc.”

                You put the words “too low” in quotations because you correctly assess that is not logically possible to determine such a thing by looking at the numbers comprising the rate.

                And that’s not what we’re doing.

                What we’re saying is that if you have to lower rates to stimulate economic activity, the rate that results in your desired outcome is *logically* too low, because economic activity never needs to be stimulated in the first place.

                When economic activity slows, it’s because consumers are satisfied with their capacity to consume, at the moment, given the amount of scarce resources available for them to work with.

                There’s nothing to stimulate, at this point.

                When consumers want more, or different, things, they will spend more or work more to acquire them.

                Producers and wage earners are not entitled to syphon away consumers’ wealth just because they find that they are no longer capable of producing what consumers will willingly pay for.

                Your stimulus programs amount to robbery. There is nothing to stimulate.

            • Mike Sandifer says:


              Also, why not address my point about Bob’s article? He confuses real and nominal prices. If wages instantly moved in line with NGDP, there’d be no change in real wages, yet he claims people would be motivated to save more.

              • guest says:

                You don’t need to centrally plan wages at all.

                The purchasing power of your wage is ultimately determined by the demand for the products your wages are intended to buy.

                Your demand is what incentivizes production – whether you express your demand in terms of money or number of hours you will work (lower wage).

                Centrally planning the wage simply redistributes wealth coercively, making cronies out of the firms that survive and creating a barrier to entry for poor startups.

              • Mike Sandifer says:

                Controlling the money supply is not centrally planning wages. It’s centrally planning the money supply.

          • guest says:

            “That’s why Bob resorts to simplistic analogies. Markets would be ridiculously inefficient if they couldn’t anticipate lower interest rates leading to “malinvestment”.”


            Italian Artist Sells Invisible Sculpture For $18,000

      • Arnie says:

        Very useful, Thank you for your efforts, all.
        Sticky wages wouldn’t have to be… sticky. We are used to them being that way, but if the value of a dollar were to increase, I would be OK getting fewer of them in the job market if I saw that I still had the same purchasing power.

        Also, thanks for the Penn Effect.

        I will have to study that now. This entire topic (BE) seems to have no end. No wonder people go in to physics: at some point, you reach an end in your studies (at least until the Hadron sends out its next data stream). 🙂

        • guest says:

          “I would be OK getting fewer of them in the job market if I saw that I still had the same purchasing power.”

          Would you also be ok getting fewer if you saw that government has to use force to prevent poor, unskilled people from building their savings in order to provide you a higher wage?

          That’s the effect of the Minimum Wage.

      • guest says:

        “There seems to be the assumption among Austrians that if not for positive inflation targets, all prices would tend to fall over time, but that’s just not true.”

        All other things equal, that actually does follow logically because the price consumers will pay for a good is decided on the margin.

        Water is extremely important, but if you make enough of it potable, people will eventually spend less of their income on water and start to buy other things, and the price will have to come down and more will have to be produced in order to get the same nominal dollars for it.

        • Mike Sandifer says:

          It doesn’t matter what seems to follow logically to you. The Penn effect is real.

          • Andrew_FL says:

            The Penn effect seems to have nothing at all to do with the ability of prices to generally fall over time. And here’s what the effect’s discoverer, Paul Samuelson said about it:

            “The Penn effect is an important phenomenon of actual history, but not an inevitable fact of life.”


          • guest says:

            I did some cursory research on the Penn Effect, but I couldn’t make sense of it.

            Maybe if you walk me through the logic, I can at least understand where you’re coming from.

            • Mike Sandifer says:

              Basically, the Penn effect involves the tendency of wealthier countries to have higher price levels.

    • Mike Sandifer says:

      I should also point out that it during recessions caused by nominal shocks, both prices and aggregate demand fall, which is not at all consistent with supply-side explanations for such situations.

      • guest says:

        Already addressed this, above.

      • guest says:

        In short, it’s not a shock to a sustainable growth that’s occurring, but a correction of malinvested resources.

        Prices are going down in the previously artificially propped up sectors of the economy because consumers only wanted them when they thought they had more purchasing power than they did.

        Consumers are cutting back as rising prices in some sectors (caused by the previous stimulus) disincentivize consumers from making purchases in others.

        • Mike Sandifer says:

          Yes, that’s what many of you keep saying, but where’s the evidence?

          • Tel says:

            What evidence do you want?

            Do you accept at least that resources were re-deployed during the recession? For example, as I mentioned above 1920 was right after WWI so I guess we can agree that during a major war an economy very likely would be using resources differently to the way they are used in peace time. I’m sure there are other more subtle examples available, but let’s look at the “dot com” boom where everyone was investing in the new Internet that apparently needed a thousand different online pet stores. We can see that at least some of those companies going broke during the following recession would have liquidated and those resources no longer going into online pet store #1001.

            So that’s evidence the economy is restructuring and re-deploying resources. Now this happens outside recessions as well, such as long term trends for more women in the economy, less full time jobs, more part time jobs, different work practices, there’s a long list. If you want evidence that more people change jobs over certain phases of the “business cycle” I think it might be interesting to search that out, but I guess something would be out there. We could look at businesses going bust, or number of new businesses starting.

            OK, the second question is whether the NEW deployment of resources is better or worse than the OLD deployment. That’s more difficult because we need a frame of reference. I think it’s fair to say that at least someone thinks it’s a good idea to do things the new way, else no one would do it. Probably if you search around you can find someone who thinks things were better in the olden days, so the judgment is not unanimous.

            Let’s pick something like using a mobile phone instead of a conventional phone with a wire going to the wall. Each person has a choice, there’s some advantages and disadvantages, but over time quite a lot of people are choosing mobile phones (even despite higher cost). That suggests to me it’s an example where the new way is quite popular, therefore consensus suggests it’s better.

            Maybe consensus is wrong, maybe some collective action problem is at work here and no one really wants to do it… but they feel pushed because others are going it. I can’t rule that out, but I think the onus of proof would be to show evidence for the pathological case. At face value it SEEMS LIKE people are adopting the new ways of doing things because that’s what they want to do. Hence, a “correction” in as much as re-deployment of resources in favour of consumer preferences. If no one goes to “My Space” anymore, that’s because they prefer something else.

            • Mike Sandifer says:


              Resources are only redeployed in most recessions in the sense that capital and labor are left idle. There’s no evidence for the kind of reallocation you’re talking about and the fact that no one here has provided any yet makes me think they have none. It seems many here don’t take evidence-based approaches and in fact, seem to reject the very idea of applying mathematics or the scientific method to economics. I can’t have a discussion with that type, because we don’t even agree on basic logic and evidence.

              About the rise and fall of many dot.coms around the change of the millennium, it is actually pretty rational that many more companies rise than survive in a brand new industry. No one knows for sure which will be successful, but some are always likely to be hugely successful, like Amazon, Ebay, Paypal, etc. For every success story like that, there are hundreds or thousands of companies that fail. Before the 1940s and 50s, there were many more US-based car companies for the same reason.

              That’s why these so called “booms” or “bubbles” often involve innovation, because the reward for picking winners is much greater than otherwise, but the risk of picking a loser is also higher.

              Stop wasting your time trying to explain things to me in words without numbers. I analyze markets with numbers, like anyone who actually wants to understand what’s going on. I do my own quantitative portfolio stress-testing, etc. What you guys are offering here is less than junk to anyone who’s serious about understanding these things.

              • Tel says:


                Why does the red line sit significantly higher than the blue line during the decade of 1992 to 2003 (despite a significant recession during that time)?

                Why does the blue line sit significantly higher than the red line during the decade of 2005 to 2014 (despite a significant recession during that time)?

                If recessions are merely a matter of sticky prices and NGDP the expectation would be that the red line and the blue line move in a manner roughly similar to each other… or at least we would expect similar general behaviour around the time of each recession. A “sticky prices” theory would predict that both of the growth lines should dip towards zero as a consequence of recession, and both should increase away from zero during a boom.

                However, the observation is that wages in one sector of an economy behave very differently to wages in another sector. Indeed these supposedly “sticky” wages can be seen showing NEGATIVE growth (blue line below zero) on a number of occasions, but not in every sector of the economy, and not closely correlated with recessions either. Why is that?

              • Anonymous says:


                That data doesn’t mean what you think it means. Wages are sticky downward and upward, and the reallocation that Austrian theory would predict didn’t occur.

              • Mike Sandifer says:


                Those graphs don’t mean what you think they do. I’ll show you a relevant graph later when I get home.

                You’ve rarely, if ever, heard of a person’s hourly wage being cut, right, even during recessions?

              • Mike Sandifer says:
              • Tel says:

                You’ve rarely, if ever, heard of a person’s hourly wage being cut, right, even during recessions?

                The graph I posted contains several cases where wages dropped right across the mining industry (1994, 2000 and a big dip around 2015), although not correlated with recessions. That’s not unique to the USA… I can find charts of Perth land prices that dip in much the same way, because the mining industry has its own booms and busts, and people involved in that industry can all tell you about it.

                In terms of individual people getting their wages cut, yeah you do hear about that also (do some searching people grumble about it all the time) but now that’s pretty anecdotal and you wanna be a hard numbers man so don’t go all wordy on me.

              • Mike Sandifer says:


                the data doesn’t say what you think it says.

              • Tel says:

                Let’s take the Great Recession, to illustrate. The pre-recession U3 unemployment rate was about 4.7%. NGDP fell about 6.3% below the pre-recession growth trendline. Add those numbers together and you get an unemployment rate of 10.5%. This is about .5% higher than the rate that actually occured, but not a bad rule of thumb calculation.

                Well I did think the question was whether redeployment of resources happened within the economy. So I’m not sure how this even addresses the question, but ignoring that for the time being.

                You have essentially said that the entire Obama stimulus package was irrelevant. That is to say, if there is a stimulus, or if there is not stimulus either way the outcome would be the same. That’s a pretty bold statement.

                It doesn’t work as well, however, when trying to calculate the peak unemployment rate during the Great Depression. Unemployment is widely cited to have peaked at about 25%, but GDP fell about 30%. The baseline unemployment rate was 3.14%. Obviously 33.14% is considerably off from 25%, so the rule of thumb doesn’t work well for really large recessions.

                Unemployment was measured very differently back then, and they did not have an equivalent concept to “GDP” which has been back-calculated retrospectively.

                So, how does this idea work out for predicting how changes in NGDP growth affects stock prices? Apparently, pretty well.

                I dunno, I see a big dip on the Dow Jones early 2016 with no comparable dip in NGDP at the same time. Can you explain that? Or your theory only works during recessions?


                There was a bigger dip in NGDP growth April 2013 without any dip on the Dow Jones, so what makes that different?

                What has caused the recent zoom upwards in the Dow Jones (peak at Feb 2017) ? Do you believe this is driven by recent sudden NGDP growth? Really?!? I would say that NGDP has been pretty lackluster in recent quarters.

              • Mike says:


                As the post explains, the simple model there is just a rule of thumb for looking at shocks. For more precision, one has to look at changes in market expectations for NGDP growth, meaning changes to treasury yields, for example. I will have a more comprehensive, user-friendly post about that in the future.

                In the meantime, when considering the magnitude of changes in broad stock indexes as they relate to GDP, you can think in terms of the little rule of thumb model.

                For example, the S&P 500 is up roughly 13.9% since Trump was elected.and the P/E was around 23. A quick and dirty calculation you can do in your head yields a max change in GDP resulting as

                (E/P of S&P 500 index)(change in S&P 500 Index) = max change in NGDP.

                So, (1/23)(.139) = ~.006.

                So, at most, the election of Trump resulted in an expected bump in NGDP of 6 tenths of one percent, but some of that’s likely inflation and stock prices move for reasons other than changes in NGDP growth expectations. For example, bank stocks within the S&P 500 overperformed due to expectations for some deregulation, and stocks in general can get a boost with expectations for a capital gain tax cut.

                Look at the changes in Treasury yield curves, for example, to filter out factors related specifically to stocks.


  7. Mike Sandifer says:

    It should trouble commenters here that many of them are trying to talk me out of using mathematics and evidence-based approaches to economics. That should be a red flag, but you guys don’t see it. You take ignorance as a virtue.

    • Rick says:


      Check out Don Boudreax’s analogy for determining whether and how much the addition of a drop of water to a swimming pool causes a rise in the pool level. Are we better served with measurement or theory?

      I don’t see any opposition to the use of evidence or mathematics generally, here. Their usage is not always appropriate or the best way to make a particular argument. It is best to complain about such tactics when they are deployed so they may be addressed directly. Your general complaint is difficult to respond to constructively.

      • Mike Sandifer says:


        I’m not interested. Show me what your ideas can do. Show me the money. If you can’t they’re worthless.

        • Rick Hull says:


          Sure. I’d start with Lessons For The Young Economist. Written by some blowhard but the words are good. I can paste it here, but that seems like a waste.

          If that’s too pedestrian, Human Action is a weighty tome indeed full of insight and logic. Some guy you might have heard of has condensed it and made it more palatable for the contemporary reader.

          There are very powerful ideas in these books. They build from basic ideas and observations, and spin out what must be the case if we accept the premises. I’d love to know exactly where you lose the plot.

          • Dan says:

            Mike treats economics like it’s Mardi Gras. Except he throws beads at economists and yells at them to show him their models.

          • Mike Sandifer says:


            I don’t read mises.org stuff. It isn’t macroeconomics, or anything relevant at all for that matter. What else do you have?

            • Rick Hull says:


              I’ve got a really nice set of earplugs so you don’t have to engage with argumentation that makes you uncomfortable.

              • Mike Sandifer says:

                It’s not about discomfort, but wasting my time. it’d be the equivalent of reading Aristotlelian physics.

              • Mike Sandifer says:


                Look, I treat macroeconomics as a precise, deterministic science. I translate changes in NGDP into precise predictions for changes in stock, bond, and gold prices, and I’m working on doing the same for forex. What you offer should embarrass you. Aristotelian approaches may not have been embarrassing before the scientific revolution, but for someone in the 21st century to be satisfied with such nonsense is sad.

              • Rick Hull says:

                The physics analogy seems rather apt. Thanks for bringing it up. Human behavior does not lend itself to the sort of analysis that rocks hurtling through space do.

                Have you read any Jim Manzi? Are you familiar with his notion of causal density? If you were, you would probably not think of macroeconomics as a precise, deterministic science.

                Where NGDP is juiced from the central bank, it certainly makes sense to insert yourself into that cash stream. This doesn’t make the juicing a good thing for society, and I wonder if you question whether your profit taking is productive and beneficial for society. I certainly do not argue against the use of mathematics and evidence to enrich yourself. But please don’t confuse that with doing economics.

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