Yet Another Post on Inflation
OK first, let me show what a fair guy I am. (If I were a single lady I’d be the fairest maiden in the land.) Let me admit that the really catchy phrase from Milton Friedman–inflation is always and everywhere a monetary phenomenon–only makes sense if he’s using it to mean “rising prices.”
Now then, down to business. I think most free-market economists like to say things like:
“The government has three ways it can finance its spending: taxation, borrowing, and inflation.”
and
“Inflation acts as a tax, but a hidden one.”
Well guess what kids, those statements only work if you use inflation to mean “increasing the quantity of money.” Because the government can’t finance a deficit through rising prices. Nope, a government can finance a deficit by printing more money.
Now you might say, “Oh, but when it comes to making the public poorer–effectively ‘taxing’ them–the mechanism is through rising prices, so ‘inflation’ must mean rising prices for this to work.”
Wrong again, Zod. When the government prints money (or electronically creates new reserves, to be more accurate) it makes everyone holding dollar-denominated assets poorer than they otherwise would be, regardless of what happens to the level of some price index. When they arrest people for counterfeiting, they don’t go look at the trend in CPI to make sure the guy was hurting anybody by printing off $100 bills on his laser copier. No, when it comes to citizens doing the counterfeiting, everybody seems to get–it’s obvious–that the introduction of extra money, per se, makes everybody else poorer. Even if prices go down, the other holders of dollar-denominated assets are poorer because of the counterfeiter, because without the counterfeiting the prices would have fallen even further.
Now it’s true, if the government has been “counterfeiting” since 1913, we’re going to see a big rise in the price level; it is an indication of just how much skullduggery has been afoot. The fact that wages rise doesn’t negate the fact that the initial counterfeiters benefit; wages would rise if your neighbors doubled the quantity of money from their laser copiers, too. (That’s the point I made in this article, which Blackadder somehow thought proved that I used “inflation” in today’s conventional sense.)
George Orwell on Politics and Language
From his 1946 essay, “Politics and the English Language,” some key passages that perhaps have relevance to our recent controversy over the quixotic Austrians attempting to resurrect (what they claim is) the original meaning of the term “inflation” (all bold is mine, and I’m not going to italicize the whole thing so you can see Orwell’s original):
Most people who bother with the matter at all would admit that the English language is in a bad way, but it is generally assumed that we cannot by conscious action do anything about it. Our civilization is decadent and our language — so the argument runs — must inevitably share in the general collapse. It follows that any struggle against the abuse of language is a sentimental archaism, like preferring candles to electric light or hansom cabs to aeroplanes. Underneath this lies the half-conscious belief that language is a natural growth and not an instrument which we shape for our own purposes.
Now, it is clear that the decline of a language must ultimately have political and economic causes: it is not due simply to the bad influence of this or that individual writer. But an effect can become a cause, reinforcing the original cause and producing the same effect in an intensified form, and so on indefinitely. A man may take to drink because he feels himself to be a failure, and then fail all the more completely because he drinks. It is rather the same thing that is happening to the English language. It becomes ugly and inaccurate because our thoughts are foolish, but the slovenliness of our language makes it easier for us to have foolish thoughts. The point is that the process is reversible.
And
In our time, political speech and writing are largely the defense of the indefensible. Things like the continuance of British rule in India, the Russian purges and deportations, the dropping of the atom bombs on Japan, can indeed be defended, but only by arguments which are too brutal for most people to face, and which do not square with the professed aims of the political parties. Thus political language has to consist largely of euphemism, question-begging and sheer cloudy vagueness. Defenseless villages are bombarded from the air, the inhabitants driven out into the countryside, the cattle machine-gunned, the huts set on fire with incendiary bullets: this is called pacification. Millions of peasants are robbed of their farms and sent trudging along the roads with no more than they can carry: this is called transfer of population or rectification of frontiers. People are imprisoned for years without trial, or shot in the back of the neck or sent to die of scurvy in Arctic lumber camps: this is called elimination of unreliable elements. Such phraseology is needed if one wants to name things without calling up mental pictures of them. Consider for instance some comfortable English professor defending Russian totalitarianism. He cannot say outright, “I believe in killing off your opponents when you can get good results by doing so.” Probably, therefore, he will say something like this:
“While freely conceding that the Soviet regime exhibits certain features which the humanitarian may be inclined to deplore, we must, I think, agree that a certain curtailment of the right to political opposition is an unavoidable concomitant of transitional periods, and that the rigors which the Russian people have been called upon to undergo have been amply justified in the sphere of concrete achievement.”
We can argue about whether the above applies to the Austrian fight over the term “inflation,” but I want to make two specific points:
(1) The general arguments people like Gene Callahan are giving–saying the Austrians are analogous to people pining to call the sun a planet because apparently that’s what term they used in 1400–would apply against Orwell too. So is he wrong for chafing against political euphemisms? Am I out of line for objecting to the term “collateral damage” even though everybody nowadays “knows what that means”?
(2) Guys like Nick Rowe and Scott Sumner are quite openly saying they want to pick terminology to describe monetary policy in ways that won’t scare off the general public. I think everybody knows that if you had polled Americans in the fall of 2008, “Hey, do you think Bernanke should create another $1.5 trillion in new money electronically by buying up government bonds and mortgage-backed securities from the institutional traders who currently hold them?” that a strong majority would answer “no.” Look at the huge public reaction against TARP, which occurred at the same time the Fed began its “extraordinary” operations. So this is definitely political, on both sides. It’s not that the Austrians are injecting ideology into the mainstream’s objective science.
Austrians Are Not Redefining Inflation
There has been some buzz in the blogosphere lately about us wacky Austrians and our idiosyncratic definition of “inflation.” Nick Rowe calls it “a bit daft” (though goodnaturedly, as I imagine Nick would banter with someone robbing him at gunpoint), and Gene Callahan finds it not as useful as the current popular definition says it “won’t do” while Jonathan Catalan is more sympathetic.
In this post I want to make two points:
(1) Contrary to the assertion of Blackadder, the Austrians are not “redefining words” for ideological purposes. We claim that there was an ideological redefinition in the past, which we are trying to undo! Here’s Mises (quoted by Catalan) from Human Action:
The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.
(2) I agree with the standard Austrian position on this. But because I am aware of the confusion it would cause, I always take care in my own writing to say “monetary inflation” and “price inflation” (or deflation).
I could say a lot more about why I think the original definition is important to resurrect, but that would blur the focus of this post. It’s not just Blackadder; I routinely see people claiming that guys like Schiff are “moving the goalposts” etc. with this allegedly wacky definition of inflation, and I want to emphasize that in our minds, we are trying to undo a deliberate semantic revolution that has had pernicious consequences and has served to confuse the public about what’s going on.
Military Suicides and Deployment
In the car I heard this short (less than 4 minutes) clip on a new study that supposedly debunks the popular idea that military deployments in Iraq and Afghanistan are behind the increase in suicides among members of the military. The NPR guy summarizing the study said, “Long deployments did not increase the risk of suicide,” and then they quoted one of the authors (I think) who said, “The strongest predictor is mental health” including depression and alcoholism.
I am really hoping this study didn’t do what I fear it might have, namely, run a huge regression analysis with “Length of deployment” as one of the independent variables and “alcoholism” and “depression” as other ones.
If you don’t see why that would be a really dubious approach, imagine if I ran a regression and then announced, “A lot of people think clinical depression is a good predictor of suicide. But nope, once you control for people holding a noose, a gun, or sleeping pills, clinical depression actually doesn’t have much explanatory power at all.”
(I am truly not trying to make light of an awful topic, but I thought I needed to be crystal clear on what I fear might be going on with this study.)
Yet More (Unimpressive) Evidence of the “Prescient” Janet Yellen
This dispute over the next Fed chair is hilarious. (Thank goodness our system doesn’t place one person in charge of wheat production or computer output. It’s only that little aspect of our economy–the MONEY–that is in the hands of one group of well-connected technocrats.)
I’ve already pointed out one guy who heaps praise on Janet Yellen for thinking we might be in a recession, when it had already started (by the official NBER dating).
Now here’s a new example (HT2 DeLong). James Hamilton writes: “At the outset of the crisis, however, Ms Yellen was also one of the people who saw most clearly the magnitude of the problems facing the economy…. Her speech to the National Association for Business Economics in 2007, when reread today, strikes the reader as amazingly prescient.”
OK, it’s not hard to google that speech. Yes, she did a good job explaining the financial crisis that was already underway. She did indeed point out that the downturn in the subprime market–again, which was already occurring before everyone’s eyes–was being amplified because of derivatives that, in retrospect, the ratings agencies and other institutions hadn’t fully understood. So this was good explanation on her part, but not prediction.
When it came to her assessing prospects for the future, here is what she said in that speech (from September 2007):
While I do think that the present financial situation has added appreciably to the downside risks to economic activity, we should remember that conditions can change quickly for better or for worse—especially in financial markets—so it’s hard right now to speak with a great deal of confidence about future economic developments. It’s also important to maintain a sense of perspective: past experience does show that financial turbulence can be resolved more quickly than seems likely when we’re in the middle of it. Moreover, the effects of these disruptions can turn out to be surprisingly small. A good example is the aftermath of the Russian debt default in 1998. Many forecasters predicted a sharp economic slowdown as a result; but instead, growth turned out to be robust.
Wow! Give that lady a sandwich board! Is the moniker “Dr. Doom” already taken, with over-the-top warnings like that?!
(For people who were decidedly more concerned, try my article from October 1, 2007, Mark Thornton’s truly prescient article from back in 2004, and of course Peter Schiff’s commentary in 2006 on CNBC. Also, I will happily admit that Nouriel Roubini “called the crisis” as well, so I’m not saying this is purely an Austrian thing. What I am saying is that the Yellen boosters are hilarious in their standards for praise. Yes, compared to Ben Bernanke, she was Nostradamus, but that’s not saying much.)
Potpourri
==> You may think this upcoming Mises Academy class, “Delusions of Krugman,” is taught by me, but nope. I am much kinder and gentler than Bill Anderson.
==> A good summary at Reason on the social cost of carbon.
==> When I was at the Senate testifying, OMB rep Shelanski was at the House, saying the opposite. Here’s my parsing of his testimony on the social cost of carbon.
==> Until last week, I had somehow gone my whole life without seeing Hayek on Milton Friedman the Keynesian (on methodology).
==> Just a warning, if you are against ObamaCare, make sure you don’t give your friend money to help with his medical bills, lest Brad DeLong take you to the woodshed.
Thoughts on My Debate With David Friedman
After reviewing our debate (which I’m reposting below), I realized there were a few points where I misunderstood what Friedman was saying. It will not surprise you to hear that I think there were also several points where he misunderstood me. (For one obvious example, of course I know that modern physicists think the universe is non-Euclidean. That has nothing to do with my point: Even in light of that fact, if a student in 7th grade tried to “prove” theorems in geometry by appeal to experiments, he should be marked down heavily for totally misunderstanding how geometry works.)
Rather than re-litigating every twist and turn in the debate, let me try a new way of motivating my position (and I’ll send this post to David to see if he’s interesting in pursuing the discussion). I claim that the people who today consider themselves free-market economists got that way not because of empirical research, but because they read ingenious thought experiments from the likes of Bastiat, Say, Henry Hazlitt, Milton Friedman, Ludwig von Mises, Friedrich Hayek, Murray Rothbard, David Friedman, and Steve Landsburg.
Take free trade in particular. Nobody believes in free trade because of regression analyses, or of “natural experiments” in which some country dropped tariff barriers as an offshoot of some other, unrelated event. Rather, people believe in free trade because of brilliant explanations such as David’s own “Iowa Car Crop” (which I first read in Landsburg’s Armchair Economist, and which Steve correctly described as “a thing of beauty” that can “change the way we see the world”).
Going further, to the extent that you might abandon your teenage belief in free trade, it would again be due to a thought experiment, a simplified tale showing how (say) a big country could affect the world price of cotton and so maybe a small tariff could, in principle, be welfare-enhancing. Even here, the disputes would be more philosophical rather than empirical. Nobody would convince someone to change his mind on free trade, by pointing to empirical evidence. For example, I remember when Pat Buchanan and some others pointed to the strength of the US economy when there were high tariff barriers. That didn’t faze me a bit (and still doesn’t), because there are a million moving parts in these historical analyses. I think the US would have been even richer had they adopted free trade back then.
Another consideration: Intro textbooks or even pop books on economics often start with a section about, “How to Think Like an Economist.” These principles or “laws” of economics are almost always non-falsifiable. They are things like, “There are always opportunity costs,” or, “There’s no such thing as a free lunch,” or, “Decisions are made on the margin.” You don’t go out and “test” whether these statements are true, instead you decide a priori that you are going to use these principles to parse the evidence.
Yes, if we’re trying to assess whether the Great Recession was more due to supply-side or demand-side “shocks,” then that is an empirical question. But it’s not a “law of economics” to ask whether the recession from 2007 onward was due to the supply or demand side.
In contrast, the “laws of physics” are entirely empirical. In principle, they might be different in 200 years, as physicists learn that Nature obeys a different set of rules from what we currently believe. In contrast, when the “marginal revolution” occurred, it wasn’t because of new data, it was because economists came up with a better mental way of organizing and explaining what humans had known for centuries.
The Fruit of Harvard’s Tree
Greg Mankiw writes:
As part of our “marketing” effort to get freshmen into ec 10, Harvard’s introductory economics course, the ec 10 staff and I are trying to construct a list of famous alums of the course. Here is the list we have put together so far:
Steve Ballmer
Ben Bernanke
Lloyd Blankfein
Ryan Fitzpatrick
Jeremy Lin
Sheryl Sandberg
Eduardo Saverin
Chuck Schumer
Cameron Winklevoss
Tyler Winklevoss
Mark Zuckerberg
I don’t know half of the above people, but except for Jeremy Lin, I’m not sure this is good marketing…
UPDATE: I live in Nashville, so I should add Ryan Fitzpatrick to the list of safe bragging…
Recent Comments