Mark Sadowski Responds: Sumner on Stagflation and the Price Level

     Tom Brown holds Sadowski in pretty high regard. l

      "Mike!!! Wow, thanks for the feature article... very very kind of you!!, but now the pressure really is on. Here I was gladly hiding in the shadows... and suddenly you're amplifying my careless taunting of Sadowski! I HOPE he doesn't notice, care, or take you seriously... I'm in no mood to cross out my entire blog just yet! :(""

        http://diaryofarepublicanhater.blogspot.com/2013/09/for-those-who-seek-understanding-on.html

      Well, Tom, I've got news for you-now I've really done it. I went with Mark directly in the comments section of Interfluidity and wrote a piece I challenged him to respond to. 

       http://diaryofarepublicanhater.blogspot.com/2013/09/strange-things-scott-sumner-has-said.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

       Basically I called out Sumner, so the post really was a challenge for Sadowski to back up his man, which he did. I questioned Sumner on two things:

      1. His definition of stagflation-he defines it as high inflation and low GDP. This sounded wrong to me-and a lot of other people as well. As I understood it, stagflation is high inflation along with high unemployment-thereby frustrating the crude version of the Phillips Curve which believed in a stable tradeoff between unemployment and inflation. Here is Sadowski's response. 

      "As for the meaning of the word “stagflation” I appeal to the history of its origin. On November 17, 1965, Iain Macleod, the spokesman on economic issues for the Conservative Party, warned of the UK’s economic situation in the House of Commons by saying “We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of “stagflation” situation. And history, in modern terms, is indeed being made.”

    "At that time the unemployment rate in the UK was only 1.4%, so it’s obvious he wasn’t talking about the unemployment rate:

http://research.stlouisfed.org/fred2/data/LMUNRRTTGBM156S.txt

     "Moreover, the word “stagnation” refers to a state of inactivity, and in an economic context it carries the connotation of slow growth."

    "When the word came to be applied to the US it may have acquired the additional meaning of relatively high unemployment. But that was not how the word was originally used by Iain Macleod in 1965."

     I didn't buy it. I mean, even if we're certain that Macleod was the first to speak of it, this was not the usage it has come to have. I was sure that this was wrong. However, in looking it up I see that Sumner is actually not wrong. 

    "Stagflation, a portmanteau of stagnation and inflation, is a term used in economics to describe a situation where an inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high. It raises a dilemma for economic policy since actions designed to lower inflation may exacerbate unemployment, and vice versa."

     http://en.wikipedia.org/wiki/Stagflation

     My definition is not wrong either-Wiki has it as having 3 elements: high inflation, low GDP, and unemployment 'remaining steadily high.' However, I was wrong that Sumner was wrong. Maybe it sounded strange to me and a number of others-read the comments section at the time-in this link you will find the link to Sumner's use of the word stagflation.

     http://diaryofarepublicanhater.blogspot.com/2013/09/sumner-vs-waldman-on-great-inflation.html 

     Though he seemed generally surprised that stagflation necessarily included high unemployment as well. 

      "He later defends this statement by pointing to the relatively high levels of unemployment during that decade. I had thought the word ‘stagflation’ meant high inflation plus slow output growth (due to slow growth in AS.) Karl seems to think it means high inflation plus other bad things, like high unemployment."

       So we were all right, but incomplete. 

      2. I also questioned Sumner's claim that in Japan the price level is 100 times as high as in the U.S.-and the South Korean price level is 1000 times as high. Actually this has been something the commentator Greg has brought up. It seems to me that what Sumner is doing is conflating the price level and the exchange rate between the U.S. and Japan-$1 Us dollar gets you almost 100 Japanese yen. Still I think the price level and the exchange rate are two different things. Sadowski comes down on Sumner's side-as he admits it's not a big surprise. Yet he does admit that Sumner at least leaves it ripe for confusion in the way he describes it:

      "Sumner is evidently referring to the nominal exchange rate which is correct from a simple unit of account perspective (e.g. the Korean won is about 1000 to the dollar). Personally I think he should have spent more time clearly explaining what he meant by “price level”.

      So that's the discrepancy. Sumner thinks that what's most important about money is its status as a medium of account (MOA) rather than as a medium of exchange (MOE). Many disagree with him here too, including fellow MMer, Nick Rowe. 

      http://www.themoneyillusion.com/?p=23269

       Marcus Nunes has also written about the MOA-MOE distinction. 

       http://thefaintofheart.wordpress.com/2012/10/31/two-kinds-of-money/

       So on stagflation Sumner wasn't wrong but I wasn't either, exactly. We were both kind of right but incomplete. However, I had implied that he said something ludicrous and clearly this is not true. On the price level issue it seems that it may turn on the distinction between MOA-MOE. Still ,Sadowski does admit that Sumner could have been clearer here. On a MOE basis the statement that the price level is 100 times as high in Japan as in the U.S. would be ludicrous.