Inflation vs. NGDP: Sumners' Desert of the Real

     As regards the title I should give due credit to not only to Sumners but Yglesias

     http://thinkprogress.org/yglesias/2011/10/24/351374/welcome-to-the-desert-of-real-gdp/

     I was just reading Sumners and his moratorium on the word "inflation"-such a "postmodern" moment: is he the Baudriallard of economics? I got to say as well that I agree with Rortybomb that all the great ideas of economics are in the blogs these days rather than academia. I keep coming across all these great blogs on economics. I myself initially took Sumners' moratorium with a grain of salt. Let's face it the word inflation is not going to disappear anymore than Richard Rorty made the truth-assertions of epistemology disappear.

    Yet while he didn't wholly change the language of philosophers he had a deep effect, and I must say that perhaps Sumners in his own way will have the same effect in economics. Noahpinion likens the new NGDP enthusiasm to the love of RadioHead back when he was in college. I love RadioHead, yet I  would never claim to have a super finicky palate. If it sounds good I think it's brilliant, let the music snobs be sardonic about it.

    http://noahpinionblog.blogspot.com/2011/11/let-them-eat-ngdp.html

     He and Sumners and Yglesias-and others I'm sure-have recently been going back and forth on the NGDP craze-as Noahpinion puts it. Sometimes I don't even bother to decide who is right when the arguments are all so interesting. I will say this though. After reading Sumners' reply to Noah and then finally reading his original moratorium all the way through I find a lot of clarity in what he's saying.

    http://www.themoneyillusion.com/

    For the original "prohibition" on the word inflation see

    http://www.themoneyillusion.com/?p=11607

    Noah says this about NGDP "thinking of everything in terms of NGDP does not make all of macroeconomics suddenly simple and comprehensible and predictable. And Radiohead didn't save rock. Sorry, fans, but there it is."

    As far as NGDP not making "all of macroeconomics suddenly simple and comprehensible and predictable" he's probably right. Though I guess the sardonic souls always like to point out this sort of stuff. However it does bring a lot of clarity to a number of issues that we have been banging our heads against lately and that I myself-as an layman who is fascinated by economics-have been trying to understand better.

   For example, Sumners argues that NGDP is a better gauge than inflation because the concern is not "price stability" but nominal stability:

   "Low and stable NGDP growth is intrinsically good in the same sense that many (wrongly) believe low and stable inflation is intrinsically good.  It reduces nominal shocks.  The level of NGDP is unimportant, for the same reason that the level of prices is unimportant."

    This is good because is this not what monetary policy wants to do? I find this move from price stability to nominal stability as providing a lot of clarity. See I come to the table as a Keynseian. While I enjoy this meeting of the minds between the New Keynesians and the Market Monetarists I presume that the Keynesians are more right and that I am in more agreement with them than the Monetarists. Yet on this point I think that the full importance of the move to nominal GDP is not appreciated. It's about more than simply providing the Fed political cover in increasing inflation or not focusing on fighting it as much.

     I'm beginning to understand it's about a lot more than that. What I like about it is that it provides a level of clarity about what we're discussing when we get into the inflation debates. Sumners makes the important but not usually considered point that there are different types of inflation some that consider good some that we consider bad. And even this is contingent on who we are. As he argues, typically when people inveigh against inflation they have in mind supply side inflation-the prices of our goods and services goes up. This is easy to understand as we are all consumers and as most of us aren't rich when the price of consumer goods goes up it hurts.

    But those who argue against inflation this way, who speak of it as equivalent to a tax increase miss the point that we find it efficacious when wages go up, or the real cost of our loans go down due to inflation. So not all inflation is disagreeable to us.

    I also find it very suggestive where Sumners argues that the problem is never really inflation as we think it is-that prices are going up but actually that real l incomes are going down:

     "Let’s start with the easiest type of inflation to consider, and the only one people really care much about—supply side inflation.  Suppose the AS curve shifts to the left because of a cutoff in oil production, crop failures, bad government tax and regulation policies, etc, etc.  Real GDP will fall, if we do nothing to aggregate demand.  And prices will rise.  People think it is the price rise that is making them worse off, but that’s an illusion; it’s really the drop in RGDP.  How do we know?  Because consider the case where the Fed responds with tight money, which shifts AD far enough to the left to prevent any inflation from the adverse supply shock.  In that case there are two possibilities; the drop in real GDP and real living standards would be just as bad (if money is neutral) or it would be even worse, if money isn’t neutral.  It is the fall in RGDP that is the key problem, and any price change is incidental to what’s really going on.  So if you ever envision an inflation problem that makes consumers worse off, please don’t call it “inflation,” call it “falling real incomes.”

      I think that's true as well and as a liberal and Keynesian have had debates with others who are liberals but really believe that inflation is all due to the greed of Wall St. What is forgotten is that at the end of 2008 till March 2009, oil prices collapsed but this was not stimulative but actually the worst part of the recession.

      So the inflation debates are usually misleading as one side argues against inflation like the old Church Fathers pursued the sins of the flesh while the other is almost tempted to imagine it's a kind of panacea as William Jennings Bryan once did,  in truth it's far from a zero sum game. Is inflation good or bad? It's largely neither. Inflation in and of itself is neither good nor bad.

     Talking about inflation naturally leads to a discussion of deflation: is that good or bad? Recently I've been tending to feel that it is a necessary bad-overall in the debate between the inflation hawks and doves, I've been on the side of the doves. Yet Sumners points out that deflation is not necessarily associated with a recession, weak growth, and a liquidity trap. Irving Fisher himself defined deep recessions and depressions as having the two elements of deflation and deep and chronic indebtedness, elements that we have in abundance right now to be sure.

      Looking at the question of deflation empirically, the first 3 years of U.S. deflation in the late 20s were years of tremendous growth and prosperity, Then after the Depression the next 3 years of delfation were the worst economic contraction in U.S. history. About as good a comparison as you can have is in China and Japan in the late 90s. Both were mildly deflationary but only Japan was stagnant-here looking at inflation is misleading and there is a mistaken feeling that the two countries are comparable. A look at NGDP shows why Japan was in the throes of what appears even now, a decade later to be an Endless Contraction, while China's deflation was no negative harbinger but to realized thus you have to consider its continued high growth. The tell for stagnation is not inflation by itself butt NGDP.

 
    Yglesias does a good job in pointing out that while NGDP seems a strange bird to us as we aren't used to it, NGDP  is the simple concept where GDP is a lot more questioning begging:

     "Something worth flagging for the NGDP conversation is that because both real GDP and inflation are familiar subjects of discourse, it seems natural to many people to take them as “given” and understanding NGDP (= GDP + inflation) as somehow constructed and exotic. But actually NGDP is, relatively speaking, the simple quantity here. It measures total spending in the economy. You count everything, add it all up, and you’ve got your NGDP. It’s actually just like the GDP you may have learned about in your intro textbook: Household consumption plus exports plus government purchases plus investment minus imports. Social construction enters the picture when we try to move from this nominal quantity to the allegedly “real” one"

     It may well be that the term NGDP will never be taken in by the Fed, but like postmodernism, Baudrillard's Desert of the Real or Rorty's epistemological skepticism it can still open up a new perspective which is most important. I for one have no plans to burn all allusions to the word inflation from my mind and vocabulary  Yet that's not what Sumners is really after-in the comments section he spelled it out for those who have doubts that it was 50 percent tongue in cheek. Whether you use the word don't use the word is not the important thing. What NGDP can do is give us one more fresh perspective to view the issues from, one more kind of enlightening tool. And if the Fed were to take it up it seems plausible that it would enable it to better give us "stability" as it would be explicit that the stability we want is not the price level stability as such but nominal stability.