*Crunch*, by Jared Bernstein

by on February 21, 2008 at 6:17 am in Books, Economics | Permalink

The book is the latest attempt to write a populist, Progressive economics tract.

There is a chapter called "Why do economists seem to fear inflation?  And why do prices always go up, never down?"

Imagine trying to answer those questions without ever writing the two words: "money supply."  Yes, there is talk of the Fed changing interest rates to affect the price level.  But in an odd converse to the famous joke about Milton Friedman, Bernstein just can’t bring himself to utter the "M word."  At first I thought it was a semantic oversight but when I came to the passage describing "the wage-price spiral" as "economists’ biggest inflationary nightmare" I realized I was wrong.

The chapter on the Fed does mention the money supply but in the context of describing the views of others and even then only in passing.

Yes I know that the broader monetary aggregates are endogenous and yes I know that it is somewhat of a mystery, in theoretical terms, exactly why open market operations are effective.  It is fine to acknowledge those complexities.  But still, it is no answer to give your readers Hamlet without the Prince or even any mention of his absence.

I would like to see Jared Bernstein called up on The Colbert Show and asked to do nothing but utter those two little words: "money supply."

1 William Newman February 21, 2008 at 8:26 am

I have griped before about _Nickel and Dimed_ writing its section about housing and rents without mentioning zoning. (“The problem of rents is easy for a noneconomist, even a sparsely educated low-wage worker, to grasp; it’s the market, stupid.” “When the market fails to distribute some vital commodity such as housing, to all who require it, the usual liberal-to-moderate expectation is that the government will step in and help.”) I thought the example of the lucrative Key West trailer park which somehow doesn’t get upgraded to higher-density housing was particularly telling.

I have also griped before about Samuelson’s 1976 _Economics_ writing a chapter about relative success in planned economies, especially outright Communist ones, without mentioning migration-related phenonoma like the Berlin Wall. (“It is a vulgar mistake to think that most people in Eastern Europe are miserable.”) Revealed preferences, anyone?

_Crunch_ sounds like a worthy addition to the genre. I wonder whether it will be as successful.

2 John Henry February 21, 2008 at 9:05 am

I guess I will have to pull my old Samuelson down from the shelf. I took Econ 101 in 1974. I seem to remember that Samuelson went on and on and on about inflation and all sorts of reasons therefore without much mentioning money supply.

Oh he did mention it, but I got the impression that only fools and cranks thought it had anything to do with inflation.

John Henry

3 russ February 21, 2008 at 10:16 am

Higher money supply is a necessity for inflation.

Oh really, what if Fed actions reduce the demand for money, and the Fed keeps the money supply the same.

4 kurt February 21, 2008 at 10:37 am

Real prices per unit of value come down over time for almost everything. Nominal prices do creep up on some goods, but so what?

It’s a problem if your monetary policy creates permanent inflation winners and losers.

5 spencer February 21, 2008 at 1:26 pm

Economics always has upward sloping supply curves — higher supply equals higher prices .

But in a long run deflationary environment couldn’t the supply curve be downward sloping?

the standard answer is that you are shifting to another supply curve, not moving along one curve. But isn’t that really cheating?

6 Mike Sproul February 21, 2008 at 7:44 pm

“I would like to see Jared Bernstein called up on The Colbert Show and asked to do nothing but utter those two little words: “money supply.””

And I would like to hear Tyler utter the words “Real Bills Doctrine”.

7 Russell Nelson February 22, 2008 at 3:11 pm

Mike, I read about Real Bills Doctrine. Maybe I’ve read too much Austrian Economics to be able to misunderstand the issue the way you want to, but my understanding of the quantity theory of money is that when you issue more money than is reflected by the total value of the economy, you get inflation. I don’t think ANYBODY thinks that when you lend your house (collateral) to a bank, and the bank issues a receipt in the form of money, that the quantity of money has changed.

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