Very good sentences

by on March 16, 2012 at 3:09 pm in Uncategorized | Permalink

If the Fed is targeting inflation, then there is no liquidity trap, no paradox of thrift, no paradox of toil, no fiscal multiplier, no “Depression economics.”

That is from Scott Sumner, Q.E.D.  The rest of the post is about Switzerland, sort of.  Scott also reports in a p.s.:

The CA data is from the most recent issue of The Economist.  They also report that the consensus forecast for RGDP growth in the US is 2.1% in 2012 and 2.2% in 2013.  Because we are in a recovery, that’s obviously higher than the consensus forecast of trend growth.  In other words, most economists now see the US trend rate of RGDP growth as being something like 1.5%.  After 150 years of 3% trend, that’s a startling downshift.  Tyler Cowen is no longer a contrarian; The Great Stagnation is now conventional wisdom.

Andrew' March 16, 2012 at 3:17 pm

What does that mean?

Adam March 16, 2012 at 3:42 pm

It means that those other things don’t matter because if they have an effect, the Fed will offset it to get it’s desired level of inflation.

Andrew' March 17, 2012 at 6:27 am

Does it mean that (1) they target and hit and (2) Scott is right about what he thinks inflation will do to the economy?

Wonks Anonymous March 16, 2012 at 3:25 pm

I agree with Sumner, but you are using Q.E.D incorrectly. Unless you believe in proof-by-assertion.

Yancey Ward March 16, 2012 at 3:33 pm

Proof by assertion is the only proof.

Dan Weber March 16, 2012 at 4:31 pm

No it isn’t.

zz March 16, 2012 at 6:15 pm

yes it is

Anon March 16, 2012 at 9:32 pm

Q.E.D.

Careless March 16, 2012 at 6:51 pm

Maybe he meant that the writing proved itself to be written by Sumner

cthorm March 16, 2012 at 8:21 pm

I agree. What does this have to do with Quantum-electro-dynamics?

Rahul March 16, 2012 at 3:32 pm

>>>Tyler Cowen is no longer a contrarian; The Great Stagnation is now conventional wisdom.<<<

Malthus, Ehrlich, Cowen?

Brock March 16, 2012 at 6:25 pm

Malthus was never wrong, as long as you realized that his predictions were conditioned on population growth rate > productivity growth rate. During the eras he studied, that was the case.

axa March 16, 2012 at 6:35 pm

Ehrlich never reached the status (insight) of Malthus. Prof Cowen? We’ll know as the time passes by.

GiT March 17, 2012 at 2:07 am

…and Marx and all the Marxist economists who talk about secular stagnation…

spencer March 16, 2012 at 3:37 pm

The CBO estimate of real potential GDP growth are:
…………%
2013…1.3
2014….1.9
2015….2.1
2016….2.3
2017….2.5
2017….2.6
2018….2.6
2019….2.6
2020…..2.5

spencer March 16, 2012 at 3:38 pm

Did not format very well did it

Adam March 16, 2012 at 3:41 pm

As always with Scott, I wish he would add “is effective at” before “targeting inflation.” He seems always to leave out that the Fed pretty much universally misses (no surprise) but worse pretty consistently misses in only one direction.

B March 16, 2012 at 4:09 pm

Which direction? >2% was the norm for more than a decade.

Wimivo March 16, 2012 at 5:53 pm

For at least the last 40 year period, and probably longer, if you use CPI, then inflation >2% is the norm for any five year period you choose – including the last five years.

(That being said, the CPI is junk and NGDP growth does indeed seem to paint a different and usually more telling picture.)

Adam March 16, 2012 at 6:03 pm

But the Fed wasn’t targetig 2% for much of that history.

It has been targeting 2%, allegedly, since 2008 though, and has rarely been on the high side.

B March 16, 2012 at 11:46 pm

Can you provide sources that say 2% became the implicit target in 2008? Not sooner? Not later?

Matthew C. March 17, 2012 at 1:20 am

As was said earlier in the thread, CPI is complete and utter crap. As evidenced by the fact that CPI as calculated before 1980 is running at a rate in excess of 8% annually.

In fact, the entire concept of “inflation” is crap designed to misdirect you from the fact that your dollar holdings are being diluted at the rate of 10-20% per annum through money printing. We stupidly “feel good” because the money printing drives us the cost of our homes and equities.

Adam March 19, 2012 at 2:43 pm

I did not mean to imply that the target became 2% in 2008. But it’s been assumed to be that since before then.

Matt Waters March 16, 2012 at 7:50 pm

Here’s the rub. Krugman and Delong (especially) would say that the Fed becomes absolutely inconsequential at the Zero Lower Bound. And according to Krugman’s own analysis, real government growth if you include federal, state and local has been the same 2008-11 as it was 2003-07. In other words, total government spending (the “G” in Keynes’ formula) has had no effect on the demand growth. By not slowing down total government spending growth, government merely took itself out as a factor in growth YoY of C+I+G+NX.

That means the variability in NGDP since 2008-11 has to be explained by the (C+I+NX) part. That’s also exactly the part that Krugman and Delong says we can’t affect with monetary policy and with no change in the real growth rate of government spending, the paradox of thrift could theoretically push (C+I+NX) down to the bare minimum 1933 levels. The only possible reasons NGDP hit an inflection point in early-2009 was either:

1. The monetary base and the new money in fact did not have zero velocity as a liquidity trap would suppose.

2. The velocity of the existing monetary base increased. In other words, the propensity to save turned around.

Both are these are things that should never happen under the basic Keynes framework of a liquidity trap, no matter the messaging of the central bank. But 2009 did in fact see the bleeding stop in AD and if federal deficit growth was completely offset by state and local cuts, then the only explanation is central bank action.

Matt Waters March 16, 2012 at 8:17 pm

I realize that my wording on how government growth has not changed may be very confusing. Let me be more mathematically precise.

First of all, demand/NGDP for a given year is given by the following equation:

NGDP = C + I + G + NX.

Due to sticky wages, an output gaps develops if NGDP (or really NGDP per worker) does not have a steady growth. A lower NGDP growth rate means that more companies will face lower revenue/worker. After cutting parts of total compensation other than wages, such as 401k matching and Christmas parties, companies always cut employees instead of lowering wages, leading to the output gap.

In turn, the YoY change in NGDP is given by the following equation (think delta symbols instead of “d”):

dNGDP = dC + dI + dG + dNX = d(C+I+NX) + dG

Remember like I said above, the change in overall NGDP, dNGDP, is the crucial component here. NGDP at a certain point in time is just an arbitrary number.

Now, Krugman has argued forcefully and, IMO, correctly that the dG component above has been constant through 2003-11. That means that despite all the new government spending at the federal level, that has only been offset by increased austerity at the state and local level.

So that leaves d(C+I+NX) to explain the changes in dNGDP. This component went significantly negative from mid-2008 to early-2009 but, if dG remained constant, something other than government spending turned it around in early 2009. Under a liquidity trap, neither central bank messaging nor actions matter after the central banks has lowered interest rates to 0%. The central bank will swap money with risk-free assets, but since investors are happy earning no interest and since no creditworthy borrowers have a demand for loans, they will not invest it in the regular economy like they normally would. Without dG to fill in the gaps, d(C+I+NX) will keep going more and more negative until people only buy the bare necessities.

That all sounds good except…nothing like that has taken place except for the 6-9 months in 2008/09. After the Fed signaled that it would not let NGDP drop below a certain level, not only did the rate of change of private spending, d(C+I+NX), stop going down, d(C+I+NX) has gone back to pre-recession levels. The pure *level* of C+I+NX has, of course, went down due to those 6-9 months, but otherwise d(C+I+NX) has had the same growth rate before and after that demand shock. The return to growth was after the Fed decisively signaled that, unlike the 1929-33 Fed, they would not let systemic deflation happen, no matter what.

This experience in the data simply does not match the liquidity trap hypothesis. Krugman can argue either that State/Local cuts have negated federal fiscal stimulus or that monetary policy has had no effect. He cannot argue both.

TallDave March 18, 2012 at 1:20 am

Good points, through I think Krugman is probably wrong about the former. http://www.usgovernmentspending.com/us_20th_century_chart.html

Matt Waters March 18, 2012 at 3:22 am

Yes, government spending (federal, state, local) has increased dramatically as a percentage of GDP. That’s mainly because the non-government portions of GDP have declined so rapidly though. From the point of view of old-school Keynesians, it doesn’t even really matter whether government spending is financed by taxes or by debt in a liquidity trap. Due to the paradox of thrift, private consumers will continue holding on to every dollar possible and only spend on the very bare necessities. Either taxes or new Treasuries will mobilize cash that would otherwise be sitting on balance sheets.

If one believed all this, like Krugman does, then one would have to say that NGDP movements have been explained entirely by the paradox of thrift reducing private spending and increases or decreases in government spending. Government spending clearly does not explain the movements in NGDP since we hit the zero lower bound, such as the bottoming out in 2009, and perhaps Krugman should admit that the paradox of thrift and the liquidity trap has been somewhat falsified. Maybe not falsified if we were still on the gold standard and the central bank still had shackles on its policy. But the ideas are certainly falsified for today’s situation where we have fiat money and the central bank can print unlimited amounts to inflate currency however much they want.

TallDave March 19, 2012 at 2:34 pm

Well, actually overall GDP has already recovered to exceed pre-recession levels, so I don’t think Krugman’s position is very defensible on those grounds.

http://www.ers.usda.gov/Data/Macroeconomics/Data/HistoricalRealGDPValues.xls

So I think he’s pretty much stuck with the other, though I doubt he’ll ever acknowledge that.

I think that ultimately Krugman is probably married to the liquidity trap for mood affiliation reasons, since he’s more of a statist polemicist than an economist now.

Bill Stepp March 16, 2012 at 10:00 pm

Matt Waters:

The press has reported that numerous G initiatives (e.g., “green” energy projects) have been budgeted for, but only a small fraction of the G funds supposedly allocated for them have been spent. How does this effect the above?
As an Austroid, I don’t believe in the theory of the liq. trap (see Rothbard’s refutation in Man, Economy, and State).
More importantly, reasoning at the macro level ignores the crucial role of prices and interest rates (and G interference with these) in coordinating (discoordinating) economic activity. It also ignores the fact that G is not spent in anticipation of consumer demand by profit-seeking investors, but by State planners in cahoots with pols seeking electoral power. G spending is done in anticipation of politicial demand by the political criminal caste.
Finally, Y = C + I – (G + T), leaving X aside, or to put it in words,
Income = private production – State depredation. Make it N or R, whichever you like.

Matt Waters March 18, 2012 at 3:37 am

Sorry for being late in responding, but I am having a hard time understanding what you’re saying, especially Y=C+I-(G+T).

If you incorporated taxes into the consumption form of GDP and disregarded NX, you would get Y = C + I + G + T – T. That’s because taxes are a flow and do not actually involve real economic activity. You can’t arbitrarily make government spending negative because government spending on real economic activity (vs. pure transfers, which aren’t counted) does in fact make up a country’s production. By your logic. Soviet Russia always had a production of zero because all of its GDP was from government spending.

Of course, having more government involvement in the real economy leads to serious distortions and deadweight losses. But the equation for Y is an accounting equation and the role of government spending has to be included to get a hold on how much the country produces.

Anyway, I’m weary to get in an argument with Austrians because by basing your views purely on logic and not evidence, it’s hard to use evidence to argue with you. But like with the liquidity trap, an argument cannot rest on pure qualitative reasoning from causal arguments. At a certain point, even the most pristine and beautiful of causal arguments need to make falsifiable assertions. Actually, Austrians have in fact made falsifiable assertions such as saying that hyperinflation is right around the corner due to all the money printed.

For that matter, I never did understand the logic of:

1. The private sector is easily fooled by government signals of low interest rates and therefore misallocates capital.
2. ????
3. The private sector should be trusted with all capital allocation decisions, including the denomination of capital allocation (free banking).

Bill Stepp March 18, 2012 at 7:06 am

Government is a monopoly protection racket, an anti-productive parasite. G is waste consumption, as Rothbard pointed out.
The evidence is in front of you unless you live in a cave.
Re: falsifiability, hyperinflation, etc. I don’t know of any Austrians who have predicted hyperinflation. Hyperinflation has existed recently in places such as Zimbabwe. Inflation is happening now in the U.S. albeit at a much lower level. An inflation rate of 1 or 2 percent is still inflation.
C = C + I – G – T
G = state waste C
T = state theft crookery

GiT March 18, 2012 at 10:44 pm

Hahaha, wow.

The Hat of the Three-Toed Man-Baby March 19, 2012 at 11:18 am

Take off the tin-foil hat before lightning strikes you, Bill. You got caught trying to play around with an identity. Leave economics to the people who actually understand it. Of course, that includes no one posting in this thread other than myself.

TallDave March 19, 2012 at 2:46 pm

government spending on real economic activity (vs. pure transfers, which aren’t counted) does in fact make up a country’s production

I’ve always thought that was a little too neat, because with gov’t it’s harder to be sure the activity is really productive, and you end up aggregating things that aren’t the same. I don’t know that G should actually be negative, except in some extreme cases like the Khmer Rouge or Mao’s Great Leap, but it usually probably deserves some coefficient between 0 and 1, because ultimately an economy isn’t about numbers of stuff but rather what individuals demand.

By your logic. Soviet Russia always had a production of zero because all of its GDP was from government spending.

I agree, that was not sensible because they did actually produce some things that satisfied demand, but somewhere between zero and what was reported lay the truth.

Martin March 16, 2012 at 11:04 pm

Note that Sumner is much less committed to the “the liquidity trap is wrong” assertion than Cowen, when you read what he says in his comment section. And contrary to what Cowen always wants Krugman to do, but he himself is obviously unable/unwilling to deliver, Sumner is clearly able to anticipate or acknowledge a counterposition – I haven’t seen Cowen doing anything the like pertaining to the piquidity trap, he’s simply dishonest here. File this unter “silly Tyler Cowen triumphalism without even a smidgeon of an argument added”, thereby proving that he’s as bad as Krugman himself when it comes to talking about arguments he doesn’t like. If Cowen could at least produce the snark himself instead of always linking to others when he clearly wants some Krugman bashing; so that he can posture as the rational guy, or something, I guess. I mean, how silly is this…

Ricardo March 16, 2012 at 11:36 pm

It’s a pity that a blog that is often interesting and intellectually stimulating can be so easily tainted by Tyler’s occasional childishness, such as the QED in this post.

MG March 17, 2012 at 2:27 am

Huh huh … you said ‘taint’

Jim Clay March 17, 2012 at 5:21 am

Time to leave the blog to the adults, MG.

MG March 18, 2012 at 1:21 pm

Get a life, boyo.

Frank March 16, 2012 at 11:58 pm

Grant me the following speculation. This period of relative stagnation may bake the nascent fields of nanotechnology, biotechnology, and machine intelligence into GDP growth drivers of tomorrow.

Grant me the following anecdotes. Watson is the first iteration of a publicly recognized less-narrow AI, less than a decade prior, previous challenges developing driver-less vehicles were overcome. We may yet see Watson Junior engage in experimental research in place of the already impressive Eureka research system.

MikeP March 17, 2012 at 4:43 am

As more of the economy is shifted toward the maintenance of the unproductive gerontocracy, it shouldn’t be a surprise that our future growth will be stunted.

Lord March 17, 2012 at 10:36 am

The truth is half of that growth was due to population which makes for more people but not for wealthier people so its disappearance isn’t that significant and, in fact, slower population growth should provide for somewhat greater growth in wealth.

MikeP March 17, 2012 at 11:00 am

Following that logic, the Italians, for example, are poised to become wealthy as their population plummets. Unfortunately, precisely the opposite is the case. In just a decade over half the population in Italy will be of retirement age and the consequences for their economy and wealth will be catastrophic.

TallDave March 17, 2012 at 5:26 pm

I think if you asked someone from the 1950s what was most different about today’s society, it would be that people expect to spend about a third of their adult years retired on the taxpayer dime.

MG March 18, 2012 at 3:06 am

I’ll say what we’re all thinking: Logan’s Run time.

TallDave March 19, 2012 at 2:50 pm

No, it’s even worse than that.

[DRAMATIC MOViE VOICE NARRATES]In this terrifying dystopia, people over 60 are…
expected to work!!![DRAMATIC MUSIC PLAYS]

msgkings March 19, 2012 at 4:54 pm

TallDave brings the funny again. I LOL’d

TallDave March 17, 2012 at 5:24 pm

In other words, most economists now see the US trend rate of RGDP growth as being something like 1.5%. After 150 years of 3% trend, that’s a startling downshift. Tyler Cowen is no longer a contrarian; The Great Stagnation is now conventional wisdom.

I predict numerous state solutions that will make the problem worse (e.g. Solyndra/BeaconPower/LightSquared/SunPower etc.).

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