Since comments are disabled there now, and since I don't want to be accused of sniping for the last word, here is my final comment from 'Au Shucks' in a commentable forum to allow further criticism (or support) of JK's ideas. :)
This is great stuff and I'm learning much from you guys clearly more versed in economic theory than I am. From the sidelines it is apparent the arguments are not "pro-" one side or the other but "anti-" the other side. It's that old "representative democracy isn't the ideal form of government, it's just better than all the others" refrain.
While I fully appreciate all of JK's objections to a fixed money supply I'm more opposed to the US fiat Dollar in its present realization. Perry wrote, "If productivity (which includes technology advancement) offsets inflation, how much better off would we be if we had the same productivity gains *without* a central bank to devalue our wealth? [This is complementary to the point I often make about our potential prosperity in the absence of punitive taxation.] I'll also add that it's a myth that we need inflation for growth. Economies can grow just fine without central planners/bankers. Even 1% per annum inflation is harmful to Scrooge (...) The only beneficiary is the pure spender, chief of which is government."
But there is another beneficiary of constant, carefully cultivated inflation: The central bankers, for whom inflation amounts to their ROI for the "service" of printing, distributing, and retiring all of those fiat Dollars.
When the government and the central bank both benefit from inflation, what do you suppose we'll have?
And this leaves us with Perry's lament: "In theory, if you have men of good character and intentions, they can come close enough with central banking. In theory. However, reality has shown otherwise."
I don't think comments are closed on the other post jg, but I appreciate your setting me up for a few more days of disapprobation...
The discussion has ranged far and wide. I remain at the ready to defend the concept of "finite but unbounded," but I think the base level disagreement is likely my claim that efficiencies in trade and technology are deflationary -- as contrasted to Perry and EE's belief in a rigid, corporeal, and quantifiable money supply.
Let's solve this with a time machine: Beam up 1982 man, all his money and a couple of those really narrow ties. Let's take him shopping:
-- if he smokes, he will surely faint when he sees $4/pack cigarettes, but hey, smoking's bad for you;
-- milk and bread prices are higher, gas prices are astronomical: "Aha jk, see we have proven inflation!" And you're right;
-- At the same time, I am going to take him to Wal*Mart to look at the TVs and portable music devices. Never mind the iPod and plasma, the things that are familiar to him are going to appear amazingly cheap. Let's go to Kohl's next and shop for leather jackets and a basic Men's suit.
The stuff I showed him is all ridiculously cheap, yet folks around here will look me in the eye and say that that does not in any way mitigate the higher prices he sees.
He’ll see that the $500 computer has replaced the $40,000 typesetting machine, obviated the photostat camera, and is pretty close to replacing audio recording equipment worth tens of thousands. (I have 16 digital tracks in my house -- I used to pay a lot to rent a lot less).
None of this is not going to show up in your measures of money. Because it does not fit your equations, you pretend it is not there. Art Laffer, and Larry Kudlow and I see it and realize that it offsets inflation.
Lastly, Perry considers constant inflation worse that deflationary shocks and is surprised I disagree. I take this right out of Chairman Bernanke's book and think it is borne out by history. Deflation is harder to recover from and more likely to cascade into full blown recessions.
Well, you're again confusing prices from supply and demand with prices from true inflation.
That $4 per pack of cigarettes doesn't accurately show what happens with the money supply, since it's not the product of inflation, but rather government intervention both ways. The federal government subsidizes tobacco farmers, while the states and cities tax the end products. Somehow I don't think federalism was supposed to work that way.
Coffee in the early 1990s experienced a huge price surge that some people improperly called "inflation." Similarly, world corn and sugar prices are extraordinarily high compared to the years before the ethanol craze.
Even excluding examples of government intervention, sudden surges in prices are still not inflation. South Korea, for example, has experienced continual "inflation" as its people earned more money from exports. But the same thing would have happened with a commodity-backed money supply as easily as with fiat: it's a normal market adjustment as people acquire greater wealth and thus bid up the prices of both domestic and imported goods.
Oh, I meant to blog a long time ago that Venezuela is experiencing a rise in prices, because of its increasing wealth thanks to oil. Instead of letting prices adjust, instead of letting money flow to the people, Chavez would rather blame "evil imperialistic capitalists," nationalize everything profitable, tax everything else so other industries and their workers don't have money, nationalize schools to indoctrinate people, and now shoot those who still dissent.
Real economists have looked at the prices of gold, oil, copper, etc., and realized that increased global demand just doesn't explain the surge in prices. Bernanke and his cronies decide on a rate cut; oil subsequently surges. Why? Because traders know there will be more dollars out there. Not more wealth, just more dollars. So the first trader figures he'll have that many more dollars to bid on a million barrels of light sweet crude, and other traders must follow suit.
You're sort of putting words into my mouth when you say I pretend technological advances aren't there and, I suppose you're saying, offset inflation. I separate technology and monetary phenomenon because they're not inextricably linked. The former does not need the latter, and the latter often inhibits the former by skewing market forces. Again, if it's so good that cheap imported goods offset our domestic inflation, how much better off would we be if we didn't have the inflation at all?
Going back to my old post there, I point out that when a central bank is so concerned about price stability, and when it calculates "basket" prices, it either encourages the production of something beyond what the free market would dictate (because it causes the price of something to rise), or it discourages production by keeping the price stable. Entrepreneurs who we need doing the latter will forsake the opportunities for the former. We *don't* want government and its agencies to stabilize the prices of corn, sugar, oil, etc. -- we want government to leave the prices alone, so entrepreneurs can judge what commodities we need more of, and discover new and better ways to supply them.
"Deflation is harder to recover from and more likely to cascade into full blown recessions."
Actually, this is a myth several decades old that the Keynesians introduced. The U.S. had several "panics" before the institution of the Federal Reserve, but nothing on the order of the Great Depression. The key is to leave people free to adjust interest rates on their own: when money becomes more valuable, interest rates will adjust themselves automatically, with no need for a central bank, so that borrowers and lenders will always find a balance. Under our centrally planned lending system, borrowers and lenders are told what the bottom rate is, which either sets their expectations too high (easy credit) or too low (unnecessary panics of a credit crunch).
Inflation is an untameable monster, though, and the tragedy is that it doesn't need to be. Central bankers are unavoidably Keynesians at heart, so they all believe inflation is necessary. Then there's the problem of their inability to stop producing more and more money, not just in line with population (like Milton Friedman proposed), but continually more than what's necessary. Like Don Boudreaux said a while back, government acts like inflation is so hard to stop, while universal health care is so easy to give.
Japan needlessly suffered deflation for years, when its central bank could have merely inflated the supply, rather than digging themselves into a liquidity trap (now in this Krugman was right) by tinkering with interest rates.
Greenspan & Co. were directly responsible for the 2001 recession by tightening credit too much, too fast, and Greenspan himself was an irresponsible twit for telling markets (not just the stock exchanges) that they were overheated. Is he God, that he knows better than the millions upon millions of people directly involved in the markets? He's a prime example of the arrogance of central bankers. Like I said, a central bank could theoretically work but only if it had men of good character and intentions. Yet Hayek would remind us that they still wouldn't have all the information and couldn't possibly know enough.
Real economists have looked at the prices of gold, oil, copper, etc., and realized that increased global demand just doesn't explain the surge in prices.
Risking an argument with "Real Economists," I suggest that this points to the basic question: how much of price inflation is demand and how much is inflation? That these REs need to perform penetrating analyses supports my belief that it is not as clear cut as you posit.
I separate technology and monetary phenomenon because they're not inextricably linked.
I pointed to trade, productivity, and technology: three strong anti-inflationary forces. Designing a plane, one needs consider lift and weight, balancing the forces in both directions for stable flight. You (and EE I believe) refuse to believe in or account for these forces because they are not in your model. The fact is that productivity, trade and technology are three strong counter-inflationary (I'm comfortable calling them deflationary) forces.
Because the Great Depression happened under a hapless Fed doesn't really argue for the gold standard. I'd suggest a Bernanke-style inflation target without the dual mandate. That would lean us toward harder money which might make us both happy. I suggested that I'd accept a Friedmanite "computer Fed" as well. But a gold peg? No thanks.
"Risking an argument with "Real Economists," I suggest that this points to the basic question: how much of price inflation is demand and how much is inflation? That these REs need to perform penetrating analyses supports my belief that it is not as clear cut as you posit."
My use of "real economists" isn't meant to be disparaging, but only to separate economists who consider all factors objectively from economists and pundits who ignore inflation's role in driving prices.
The point is that, absent government intervention, prices are driven purely by supply and demand. However, government intervention (including when it uses central banking) has been skewing the prices of gold, oil, etc., by far more than supply and demand alone. So there's another factor at play, and it's inflation. True inflation, caused by a central bank. Do you understand why crude prices were going up the morning the Fed was expected to announce the half-point cut? I myself was betting on no change, going by Bernanke's old reputation as an inflation targetter. I was wrong.
"I pointed to trade, productivity, and technology: three strong anti-inflationary forces."
Those aren't counter to inflation, though. They will tend to push prices down, yes, but we must be precise in our terminology: remember that inflation is purely a monetary phenomenon. Trade, productivity and technology affect the forces of supply and demand. Those are separate from the influence of currencies' value.
"Because the Great Depression happened under a hapless Fed doesn't really argue for the gold standard."
It didn't merely happen "under a hapless Fed." The Fed *caused* it all. Coolidge and Congress cut taxes massively in the 1920s, which helped spur the great economic growth, but the Fed was also inflating the money supply and lending far too much to monetary institutions. Much is said in economic history classes about people buying stocks on low margins, on the hope they could flip soon soon and make a profit. It's rarely pointed out that people could do that only because the Fed made so much money available at low interest rates. It's almost as rarely pointed out that the Fed cut the money supply by a *third*.
Deflation doesn't necessarily cause recessions, and even so, an economy can still grow its way out of it. But it can't if the central bank forcibly perpetuates the deflation via its monetary policies. And as I said, the answer is easy: the central bank need only inflate the economy out of the deflation it caused. Notice my frequent use of "caused," because that's precisely what happens with central banking: it *causes* the artificial ups and downs.
"I'd suggest a Bernanke-style inflation target without the dual mandate."
Even Bernanke couldn't follow that, because he bended to politics and the limelight. As Don Luskin blogged some time back, Greenspan did pretty well when he directly or indirectly used the price of gold as a barometer. It might not make sense at first, but I explain it thus: effectively it was traders who were reminding the Fed of how much money it was producing. But then Greenspan grew to love the limelight, and as a self-anointed economic superstar, he became a politician and speechmaker.
Power corrupts. Effective central banking requires three things: good character, good intentions, and perfect knowledge. Any two out of the three are insufficient, and I'm not sure there's a single Fed member who has even one.
The problem with computer modeling is the question of who gets to write the algorithm. Remember that economists use all sorts of computer models today to analyze past economic performance, forecast future economic indicators, and justify why they must muck things up even more.
Not ALL negative. Thanks for the re-post. I hadn't read beyond Perry's initial comment before your reminder.
Posted by: johngalt at November 18, 2007 12:32 PMSince comments are disabled there now, and since I don't want to be accused of sniping for the last word, here is my final comment from 'Au Shucks' in a commentable forum to allow further criticism (or support) of JK's ideas. :)
This is great stuff and I'm learning much from you guys clearly more versed in economic theory than I am. From the sidelines it is apparent the arguments are not "pro-" one side or the other but "anti-" the other side. It's that old "representative democracy isn't the ideal form of government, it's just better than all the others" refrain.
While I fully appreciate all of JK's objections to a fixed money supply I'm more opposed to the US fiat Dollar in its present realization. Perry wrote, "If productivity (which includes technology advancement) offsets inflation, how much better off would we be if we had the same productivity gains *without* a central bank to devalue our wealth? [This is complementary to the point I often make about our potential prosperity in the absence of punitive taxation.] I'll also add that it's a myth that we need inflation for growth. Economies can grow just fine without central planners/bankers. Even 1% per annum inflation is harmful to Scrooge (...) The only beneficiary is the pure spender, chief of which is government."
But there is another beneficiary of constant, carefully cultivated inflation: The central bankers, for whom inflation amounts to their ROI for the "service" of printing, distributing, and retiring all of those fiat Dollars.
When the government and the central bank both benefit from inflation, what do you suppose we'll have?
And this leaves us with Perry's lament: "In theory, if you have men of good character and intentions, they can come close enough with central banking. In theory. However, reality has shown otherwise."
Posted by: johngalt at November 19, 2007 1:38 PMI don't think comments are closed on the other post jg, but I appreciate your setting me up for a few more days of disapprobation...
The discussion has ranged far and wide. I remain at the ready to defend the concept of "finite but unbounded," but I think the base level disagreement is likely my claim that efficiencies in trade and technology are deflationary -- as contrasted to Perry and EE's belief in a rigid, corporeal, and quantifiable money supply.
Let's solve this with a time machine: Beam up 1982 man, all his money and a couple of those really narrow ties. Let's take him shopping:
-- if he smokes, he will surely faint when he sees $4/pack cigarettes, but hey, smoking's bad for you;
-- milk and bread prices are higher, gas prices are astronomical: "Aha jk, see we have proven inflation!" And you're right;
-- At the same time, I am going to take him to Wal*Mart to look at the TVs and portable music devices. Never mind the iPod and plasma, the things that are familiar to him are going to appear amazingly cheap. Let's go to Kohl's next and shop for leather jackets and a basic Men's suit.
The stuff I showed him is all ridiculously cheap, yet folks around here will look me in the eye and say that that does not in any way mitigate the higher prices he sees.
He’ll see that the $500 computer has replaced the $40,000 typesetting machine, obviated the photostat camera, and is pretty close to replacing audio recording equipment worth tens of thousands. (I have 16 digital tracks in my house -- I used to pay a lot to rent a lot less).
None of this is not going to show up in your measures of money. Because it does not fit your equations, you pretend it is not there. Art Laffer, and Larry Kudlow and I see it and realize that it offsets inflation.
Lastly, Perry considers constant inflation worse that deflationary shocks and is surprised I disagree. I take this right out of Chairman Bernanke's book and think it is borne out by history. Deflation is harder to recover from and more likely to cascade into full blown recessions.
And yes, she sounds awesome. Congrats again.
Posted by: jk at November 19, 2007 7:31 PMWell, you're again confusing prices from supply and demand with prices from true inflation.
That $4 per pack of cigarettes doesn't accurately show what happens with the money supply, since it's not the product of inflation, but rather government intervention both ways. The federal government subsidizes tobacco farmers, while the states and cities tax the end products. Somehow I don't think federalism was supposed to work that way.
Coffee in the early 1990s experienced a huge price surge that some people improperly called "inflation." Similarly, world corn and sugar prices are extraordinarily high compared to the years before the ethanol craze.
Even excluding examples of government intervention, sudden surges in prices are still not inflation. South Korea, for example, has experienced continual "inflation" as its people earned more money from exports. But the same thing would have happened with a commodity-backed money supply as easily as with fiat: it's a normal market adjustment as people acquire greater wealth and thus bid up the prices of both domestic and imported goods.
Oh, I meant to blog a long time ago that Venezuela is experiencing a rise in prices, because of its increasing wealth thanks to oil. Instead of letting prices adjust, instead of letting money flow to the people, Chavez would rather blame "evil imperialistic capitalists," nationalize everything profitable, tax everything else so other industries and their workers don't have money, nationalize schools to indoctrinate people, and now shoot those who still dissent.
Real economists have looked at the prices of gold, oil, copper, etc., and realized that increased global demand just doesn't explain the surge in prices. Bernanke and his cronies decide on a rate cut; oil subsequently surges. Why? Because traders know there will be more dollars out there. Not more wealth, just more dollars. So the first trader figures he'll have that many more dollars to bid on a million barrels of light sweet crude, and other traders must follow suit.
You're sort of putting words into my mouth when you say I pretend technological advances aren't there and, I suppose you're saying, offset inflation. I separate technology and monetary phenomenon because they're not inextricably linked. The former does not need the latter, and the latter often inhibits the former by skewing market forces. Again, if it's so good that cheap imported goods offset our domestic inflation, how much better off would we be if we didn't have the inflation at all?
http://eidelblog.blogspot.com/2005/11/how-government-invisibly-confiscates.html
Going back to my old post there, I point out that when a central bank is so concerned about price stability, and when it calculates "basket" prices, it either encourages the production of something beyond what the free market would dictate (because it causes the price of something to rise), or it discourages production by keeping the price stable. Entrepreneurs who we need doing the latter will forsake the opportunities for the former. We *don't* want government and its agencies to stabilize the prices of corn, sugar, oil, etc. -- we want government to leave the prices alone, so entrepreneurs can judge what commodities we need more of, and discover new and better ways to supply them.
"Deflation is harder to recover from and more likely to cascade into full blown recessions."
Actually, this is a myth several decades old that the Keynesians introduced. The U.S. had several "panics" before the institution of the Federal Reserve, but nothing on the order of the Great Depression. The key is to leave people free to adjust interest rates on their own: when money becomes more valuable, interest rates will adjust themselves automatically, with no need for a central bank, so that borrowers and lenders will always find a balance. Under our centrally planned lending system, borrowers and lenders are told what the bottom rate is, which either sets their expectations too high (easy credit) or too low (unnecessary panics of a credit crunch).
Inflation is an untameable monster, though, and the tragedy is that it doesn't need to be. Central bankers are unavoidably Keynesians at heart, so they all believe inflation is necessary. Then there's the problem of their inability to stop producing more and more money, not just in line with population (like Milton Friedman proposed), but continually more than what's necessary. Like Don Boudreaux said a while back, government acts like inflation is so hard to stop, while universal health care is so easy to give.
Japan needlessly suffered deflation for years, when its central bank could have merely inflated the supply, rather than digging themselves into a liquidity trap (now in this Krugman was right) by tinkering with interest rates.
Greenspan & Co. were directly responsible for the 2001 recession by tightening credit too much, too fast, and Greenspan himself was an irresponsible twit for telling markets (not just the stock exchanges) that they were overheated. Is he God, that he knows better than the millions upon millions of people directly involved in the markets? He's a prime example of the arrogance of central bankers. Like I said, a central bank could theoretically work but only if it had men of good character and intentions. Yet Hayek would remind us that they still wouldn't have all the information and couldn't possibly know enough.
Anyway, I think I addressed everything.
Posted by: Perry Eidelbus at November 21, 2007 3:27 PMBecause the Great Depression happened under a hapless Fed doesn't really argue for the gold standard. I'd suggest a Bernanke-style inflation target without the dual mandate. That would lean us toward harder money which might make us both happy. I suggested that I'd accept a Friedmanite "computer Fed" as well. But a gold peg? No thanks.
Posted by: jk at November 21, 2007 6:24 PM"Risking an argument with "Real Economists," I suggest that this points to the basic question: how much of price inflation is demand and how much is inflation? That these REs need to perform penetrating analyses supports my belief that it is not as clear cut as you posit."
My use of "real economists" isn't meant to be disparaging, but only to separate economists who consider all factors objectively from economists and pundits who ignore inflation's role in driving prices.
The point is that, absent government intervention, prices are driven purely by supply and demand. However, government intervention (including when it uses central banking) has been skewing the prices of gold, oil, etc., by far more than supply and demand alone. So there's another factor at play, and it's inflation. True inflation, caused by a central bank. Do you understand why crude prices were going up the morning the Fed was expected to announce the half-point cut? I myself was betting on no change, going by Bernanke's old reputation as an inflation targetter. I was wrong.
"I pointed to trade, productivity, and technology: three strong anti-inflationary forces."
Those aren't counter to inflation, though. They will tend to push prices down, yes, but we must be precise in our terminology: remember that inflation is purely a monetary phenomenon. Trade, productivity and technology affect the forces of supply and demand. Those are separate from the influence of currencies' value.
"Because the Great Depression happened under a hapless Fed doesn't really argue for the gold standard."
It didn't merely happen "under a hapless Fed." The Fed *caused* it all. Coolidge and Congress cut taxes massively in the 1920s, which helped spur the great economic growth, but the Fed was also inflating the money supply and lending far too much to monetary institutions. Much is said in economic history classes about people buying stocks on low margins, on the hope they could flip soon soon and make a profit. It's rarely pointed out that people could do that only because the Fed made so much money available at low interest rates. It's almost as rarely pointed out that the Fed cut the money supply by a *third*.
Deflation doesn't necessarily cause recessions, and even so, an economy can still grow its way out of it. But it can't if the central bank forcibly perpetuates the deflation via its monetary policies. And as I said, the answer is easy: the central bank need only inflate the economy out of the deflation it caused. Notice my frequent use of "caused," because that's precisely what happens with central banking: it *causes* the artificial ups and downs.
"I'd suggest a Bernanke-style inflation target without the dual mandate."
Even Bernanke couldn't follow that, because he bended to politics and the limelight. As Don Luskin blogged some time back, Greenspan did pretty well when he directly or indirectly used the price of gold as a barometer. It might not make sense at first, but I explain it thus: effectively it was traders who were reminding the Fed of how much money it was producing. But then Greenspan grew to love the limelight, and as a self-anointed economic superstar, he became a politician and speechmaker.
Power corrupts. Effective central banking requires three things: good character, good intentions, and perfect knowledge. Any two out of the three are insufficient, and I'm not sure there's a single Fed member who has even one.
The problem with computer modeling is the question of who gets to write the algorithm. Remember that economists use all sorts of computer models today to analyze past economic performance, forecast future economic indicators, and justify why they must muck things up even more.
Posted by: Perry Eidelbus at November 22, 2007 2:18 PM | What do you think? [6]