The standard Monetarist answer going back to Milton Friedman is that, yes, inflation is everywhere and always a monetary phenomenon.
"Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output."
http://en.wikipedia.org/wiki/Milton_Friedman
http://azizonomics.com/2013/03/10/is-inflation-always-and-everywhere-a-monetary-phenomenon/
Randy Waldman argues that this is not the case using the 70s as an example. Rather, he thinks what happened in the 70s was two factors that conspired to raise inflation:
1. A very large increase in population-the coming of age of the Baby Boomers, coupled with
2. A sharp drop in productivity.
"The root cause of the high-misery-index 1970s was demographics, plain and simple. The deep capital stock of the economy — including fixed capital, organizational capital, and what Arnold Kling describes as “patterns of sustainable specialization and trade” — was simply unprepared for the firehose of new workers. The nation faced a simple choice: employ them, and accept a lower rate of production per worker, or insist on continued productivity growth and tolerate high unemployment. Wisely, I think, we prioritized employment. But there was a bottleneck on the supply-side of the economy. Employed people expect to enjoy increased consumption for their labors, and so put pressure on demand in real terms. The result was high inflation, and would have been under any scenario that absorbed the men, and the women, of the baby boom in so short a period of time. Ultimately, the 1970s were a success story, albeit an uncomfortable success story. Going Volcker in 1973 would not have worked, except with intolerable rates of unemployment and undesirable discouragement of labor force entry. By the early 1980s, the goat was mostly through the snake, so a quick reset of expectations was effective."
"It seems to me that the Fed did a pretty good job of matching NGDP to workers in the 1970s. If anything, they were a bit too tight, but permitted some catch-up growth in the 1980s to offset that."
"Since the 1970s, macroeconomics as a profession has behaved like some Freud-obsessed neurotic, constantly spinning yarns about how the trauma of the 1970s means this and that, “Keynes was wrong”, “NAIRU”, independent (ha!) central banks. A New Keynesian synthesis made of output gaps and inflation and no people at all, just a representative household reveling in its microfoundations. Self-serving tall tales of the Great Moderation, all of them."
http://www.interfluidity.com/v2/4561.html
"Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output."
http://en.wikipedia.org/wiki/Milton_Friedman
http://azizonomics.com/2013/03/10/is-inflation-always-and-everywhere-a-monetary-phenomenon/
Randy Waldman argues that this is not the case using the 70s as an example. Rather, he thinks what happened in the 70s was two factors that conspired to raise inflation:
1. A very large increase in population-the coming of age of the Baby Boomers, coupled with
2. A sharp drop in productivity.
"The root cause of the high-misery-index 1970s was demographics, plain and simple. The deep capital stock of the economy — including fixed capital, organizational capital, and what Arnold Kling describes as “patterns of sustainable specialization and trade” — was simply unprepared for the firehose of new workers. The nation faced a simple choice: employ them, and accept a lower rate of production per worker, or insist on continued productivity growth and tolerate high unemployment. Wisely, I think, we prioritized employment. But there was a bottleneck on the supply-side of the economy. Employed people expect to enjoy increased consumption for their labors, and so put pressure on demand in real terms. The result was high inflation, and would have been under any scenario that absorbed the men, and the women, of the baby boom in so short a period of time. Ultimately, the 1970s were a success story, albeit an uncomfortable success story. Going Volcker in 1973 would not have worked, except with intolerable rates of unemployment and undesirable discouragement of labor force entry. By the early 1980s, the goat was mostly through the snake, so a quick reset of expectations was effective."
"It seems to me that the Fed did a pretty good job of matching NGDP to workers in the 1970s. If anything, they were a bit too tight, but permitted some catch-up growth in the 1980s to offset that."
"Since the 1970s, macroeconomics as a profession has behaved like some Freud-obsessed neurotic, constantly spinning yarns about how the trauma of the 1970s means this and that, “Keynes was wrong”, “NAIRU”, independent (ha!) central banks. A New Keynesian synthesis made of output gaps and inflation and no people at all, just a representative household reveling in its microfoundations. Self-serving tall tales of the Great Moderation, all of them."
http://www.interfluidity.com/v2/4561.html
He doesn't get into it here but also had some major supply shocks thanks to OPEC's feeling its oats in 1973-1974 and 1978-1979; there was also a food shortage in 1973. Sumner, of course, is having none of it-it's about monetary pehomemon.
"In a new post, Steve Waldman suggests that the inflation of the 1970s was not a monetary phenomenon. I have two issues with Steve’s post. One is that (in my view) he is actually arguing that it was a monetary phenomenon, but he characterizes the argument differently from the way I would. That is, he suggests the monetary stimulus was done for a reason; to prevent high unemployment. In his view that made it a non-monetary phenomenon. Irecently criticized a Matt Yglesias post on the same grounds. He had claimed hyperinflation was not a monetary phenomenon, because the expansionary monetary policy was done for a reason (monetizing debts.) Of course by that logic fiscal stimulus did not boost the economy in the early 1940s."
http://www.themoneyillusion.com/?p=23413
So he right away reaches to the hyperinflation argument. Usually he uses it when someone argues that the Fed can't raise inflation by simply increasing the money supply-which would seem to be borne out by the fact that the Fed did roughly triple the monetary base in 2008. Sumner argues that with IOR it's different.
"In a new post, Steve Waldman suggests that the inflation of the 1970s was not a monetary phenomenon. I have two issues with Steve’s post. One is that (in my view) he is actually arguing that it was a monetary phenomenon, but he characterizes the argument differently from the way I would. That is, he suggests the monetary stimulus was done for a reason; to prevent high unemployment. In his view that made it a non-monetary phenomenon. Irecently criticized a Matt Yglesias post on the same grounds. He had claimed hyperinflation was not a monetary phenomenon, because the expansionary monetary policy was done for a reason (monetizing debts.) Of course by that logic fiscal stimulus did not boost the economy in the early 1940s."
http://www.themoneyillusion.com/?p=23413
So he right away reaches to the hyperinflation argument. Usually he uses it when someone argues that the Fed can't raise inflation by simply increasing the money supply-which would seem to be borne out by the fact that the Fed did roughly triple the monetary base in 2008. Sumner argues that with IOR it's different.
He says that Waldman's theory isn't a bad theory:
"The easiest way to see this is to imagine a scenario where Waldman was right. Suppose the Fed was targeting nominal wage growth, in order to maintain stable employment. And let’s assume that productivity growth slowed in the 1970s, which it did. Then Steve would have a point. Real wages would have to fall, and that would occur through higher inflation (since the path of nominal wages is stable, by assumption.) In that case a very reasonable policy of nominal wage rate targeting would lead to higher inflation during low productivity periods such as the 1970s, just as Waldman hypothesized. So it’s not a bad theory."
However, he argues that the theory is debunked due to the movement in average wage growth between 1964 and 1980-he puts up a St. Louis Fed chart that shows it exploding.
"This led to the famous shifting Phillips Curve phenomenon, which (after a lag of a few years) completely negated the effects of steadily higher (wage) inflation."
He argues that original Phillips Curve was better as it relied on wage inflation rather than price inflation. Waldman returns the volley with an answer to Sumner's answer contained in the title: agreeing in different languages.
"I think Sumner says basically what I’m saying, when he describes stories of the Great Inflation he considers reasonable:
"I think Sumner says basically what I’m saying, when he describes stories of the Great Inflation he considers reasonable:
There are some theories that help us to understand why the Fed blew it in the 1966-81 period:
Waldman’s theory deserves to be added to that list. It’s not the whole story, but it’s a significant piece of the story.
- Assumption of stable Phillips Curve.
- Mis-estimation of the natural rate of U, which was rising.
- Confusion between nominal and real interest rates.
"In the language that Sumner (like many economists) uses, the “natural rate of unemployment” was rising. In that language, my claim is simply an explanation of why this rate was rising: Growth of the workforce was temporarily outstripping the economy’s capacity to employ marginal workers at expected levels of productivity. It sounds like Sumner considers this to be at least a reasonable conjecture."
"The Great Moderation consensus was that unemployment should be reduced to this “natural” or “non-accelerating inflation rate of unemployment“, but no lower. But that reflects a value judgment about the relative pain of inflation versus unemployment, a judgment that central bankers of the 1970s simply did not share. To say that policymakers erred or even misestimated, you’d have to claim they did not understand that their employment-focused policies might bring inflation. I think it’s pretty clear that they did understand that. They simply made a choice that became taboo during a later period. They accepted a risk of accelerating inflation in pursuit of full employment."
"So was the Great Inflation a “monetary phenomenon”? It really depends on how you assign causality. Suppose that I am right, that largely for demographic reasons, the “natural rate” of unemployment was higher than the socially acceptable rate of unemployment. Central bankers deliberately tolerated a risk — unfortunately realized — that inflation would become a significant problem. Does that mean the inflation was a monetary phenomenon? In a sense, yes, in a sense, no. The inflation could have been avoided with different monetary policy at cost of accepting a painfully high “natural” rate of unemployment. In that sense, it was monetary."
"But the deeper cause, the factor that created the conditions under which the central bank was faced with so terrible a choice, was a real mismatch between the growth rate of the work force and the speed with which organizations and machines could be arranged to make all that labor productive."
"Let’s try an analogy. Consider the hair loss of a cancer patient. Doctors make a choice, weighing the harms of chemotherapy with the risks of nontreatment. When doctors choose to apply chemotherapy, they “cause” the loss of hair and other toxic side effects of chemotherapy. The choice to treat or not to treat may sometimes be a close call, so doctors and patients never really know whether the putative reduction of cancer risks was worth the certain pain of chemo."
"Nevertheless, we don’t often describe all that hair loss and pain as “iatrogenic illness“, even though strictly speaking it is. To do so, we recognize, would be to place blame where it doesn’t belong, on the people making very difficult choices in response to circumstances they did not create. We rage about iatrogenic illness when people are hurt because doctors fail to wash their hands or follow checklists. But during chemo, we acknowledge the cancer as the true cause of the bad situation, and don’t blame the doctors."
http://www.interfluidity.com/v2/4583.html
Sumner retorts with an answer to Waldman's answer to his initial answer to Waldman's initial post. Say that fast... The title of this latest post is Why Causality Matters. He has two objections to considering the Great Inflation of the 70s as a demographic phenomenon. The first is-you guessed it-hyperinflation again:
"Some have argued that hyperinflation is not a monetary phenomenon because the ultimate cause is deficit spending. The inflation occurs because the government prints money to pay its bills. There’s obviously some truth in that, but I think it makes more sense to view monetary expansion as the cause, and deficit spending a a reason for the monetary expansion. Here’s why. Suppose you learned in school that deficit spending was the cause of hyperinflation. Then Reagan is elected in 1980 and starts running huge deficits. What would you predict to happen to inflation? And what actually happened? Deficit spending is only a problem (for inflation) when governments finance the deficits by printing money, not when they finance the deficits by selling bonds. That’s why it’s more useful to think of monetary policy as the cause of hyperinflation, and fiscal expansion as a reason for inflationary monetary policies. [Of course even looking at the supply of money is not enough, the demand is also important, as we've seen since 2008.]"
http://www.themoneyillusion.com/?p=23432
Now that's not the reason many argue that hyperinflation is not a monetary phenomenon. Both Yglesis-Sumner references his objection to Yglesias' argument-and Unlearning Econ-also linked to above-don't argue that hyperinflation is due to deficit spending but political instability.
However, peripherally, it's interesting that while Sumner argues that monetary stimulus is always preferable to fiscal as MS has no cost while FS has a cost-allegedly in increased borrowing costs, though interestingly the deficit during this recession has no more led to an increase in interest rates than the increase in the money supply has led to an increase in inflation-according to his own theory, only monetizing the debt gives us inflation not the debt itself. So why is MS supposed to be costless?
As it stands, the empirical world has made both premises-an increase in the MS leading to inflation and an increase in the deficit leading to higher interest rates, kind of look like conceptual cap guns.
The debate over the 70s of course has been going since the Great Recession begun. Which is a welcome development. As Waldman says, prior to the GR we had all the hubris and self-congratulations with this narrative of the 70s as having disproved Keynesianism once and for all. I find his suggestion that the 70s 'Great Inflation' was far from the great cautionary tale that conservatives tell is as, actually was the optimum policy regime, even a Panglossian policy-best of all possible worlds.
I'm not so sure I agree with Waldman entirely here:
"Ultimately, hubris is the issue. I am writing in 2013 about choices made in 1973 because I think a mythology has developed around 1970s experience that is very harmful. Whether he agrees or disagrees with anything I’ve said here, Scott Sumner is much more ally than adversary. He as much as anyone has challenged the new orthodoxy symbolized by “divine coincidence”, a property woven into some New Keynesian models to sanctify the claim that there are no trade-offs in macroeconomic policymaking. Stabilizing inflation is always enough in these models, because stabilization of output necessarily follows. That is a terrible error. Arthur Burns was pushed around by Richard Nixon and knowingly made difficult trade-offs. Jean Claude Trichet was pushed around by no one, and stabilized inflation “impeccably“. In doing so, Trichet made errors that have already been far more costly than the American experience of the 1970s, mistakes whose costs have yet to be fully tallied."
I said I'm not sure and that's the truth. I'd say that Sumner may not be 100% adversary from where I sit but he may wyll be more adversary than ally. Just the same I agree with Nietzsche about not having opponents you despise-even if you hate them.
http://thinkexist.com/quotation/you_may_have_enemies_whom_you_hate-but_not/336286.html
At a minimum I agree that one should 'keep your friends close and your enemies closer.'
Sumner has written many posts about the 70s-which is fair enough, that is one of the most interesting decades for monetary policy. However, in the past he's shown that he has a rather idiosyncratic definition of what 'stagflation' means.
"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."
http://diaryofarepublicanhater.blogspot.com/2012/07/sumner-macro-is-50-money.html
Sumner is the only person I'm aware of who defines stagflation that way. Interestingly, though, he has argued that if the Fed had done the kind of policy he has in mind starting in 2008 we would have had stagflation-again, he defines this has high inflation and low output-everyone else defines it as high inflation and high unemployment. In any case, he does sort of sound like Waldman here. At least he admits that the 70s were better than the last 5 years. So many conservatives try to make it sound like the 70s were the absolute worse of all worlds which is certainly not true. Actually it was a strange decade. It was far from an ideal economy but it did have pretty healthy GDP-again undercutting Sumner's definition of stagflation.
I also take Waldman's point about policymakers in the 70s. It seems to me that in the 70s policymakers considered high inflation preferable to high unemployment. During the GM it was the opposite. As both Sumner and Waldman agree the 70s was preferable to the status quo why are those that prefer low inflation to low unemployment right?
Sumner retorts with an answer to Waldman's answer to his initial answer to Waldman's initial post. Say that fast... The title of this latest post is Why Causality Matters. He has two objections to considering the Great Inflation of the 70s as a demographic phenomenon. The first is-you guessed it-hyperinflation again:
"Some have argued that hyperinflation is not a monetary phenomenon because the ultimate cause is deficit spending. The inflation occurs because the government prints money to pay its bills. There’s obviously some truth in that, but I think it makes more sense to view monetary expansion as the cause, and deficit spending a a reason for the monetary expansion. Here’s why. Suppose you learned in school that deficit spending was the cause of hyperinflation. Then Reagan is elected in 1980 and starts running huge deficits. What would you predict to happen to inflation? And what actually happened? Deficit spending is only a problem (for inflation) when governments finance the deficits by printing money, not when they finance the deficits by selling bonds. That’s why it’s more useful to think of monetary policy as the cause of hyperinflation, and fiscal expansion as a reason for inflationary monetary policies. [Of course even looking at the supply of money is not enough, the demand is also important, as we've seen since 2008.]"
http://www.themoneyillusion.com/?p=23432
Now that's not the reason many argue that hyperinflation is not a monetary phenomenon. Both Yglesis-Sumner references his objection to Yglesias' argument-and Unlearning Econ-also linked to above-don't argue that hyperinflation is due to deficit spending but political instability.
However, peripherally, it's interesting that while Sumner argues that monetary stimulus is always preferable to fiscal as MS has no cost while FS has a cost-allegedly in increased borrowing costs, though interestingly the deficit during this recession has no more led to an increase in interest rates than the increase in the money supply has led to an increase in inflation-according to his own theory, only monetizing the debt gives us inflation not the debt itself. So why is MS supposed to be costless?
As it stands, the empirical world has made both premises-an increase in the MS leading to inflation and an increase in the deficit leading to higher interest rates, kind of look like conceptual cap guns.
The debate over the 70s of course has been going since the Great Recession begun. Which is a welcome development. As Waldman says, prior to the GR we had all the hubris and self-congratulations with this narrative of the 70s as having disproved Keynesianism once and for all. I find his suggestion that the 70s 'Great Inflation' was far from the great cautionary tale that conservatives tell is as, actually was the optimum policy regime, even a Panglossian policy-best of all possible worlds.
I'm not so sure I agree with Waldman entirely here:
"Ultimately, hubris is the issue. I am writing in 2013 about choices made in 1973 because I think a mythology has developed around 1970s experience that is very harmful. Whether he agrees or disagrees with anything I’ve said here, Scott Sumner is much more ally than adversary. He as much as anyone has challenged the new orthodoxy symbolized by “divine coincidence”, a property woven into some New Keynesian models to sanctify the claim that there are no trade-offs in macroeconomic policymaking. Stabilizing inflation is always enough in these models, because stabilization of output necessarily follows. That is a terrible error. Arthur Burns was pushed around by Richard Nixon and knowingly made difficult trade-offs. Jean Claude Trichet was pushed around by no one, and stabilized inflation “impeccably“. In doing so, Trichet made errors that have already been far more costly than the American experience of the 1970s, mistakes whose costs have yet to be fully tallied."
I said I'm not sure and that's the truth. I'd say that Sumner may not be 100% adversary from where I sit but he may wyll be more adversary than ally. Just the same I agree with Nietzsche about not having opponents you despise-even if you hate them.
http://thinkexist.com/quotation/you_may_have_enemies_whom_you_hate-but_not/336286.html
At a minimum I agree that one should 'keep your friends close and your enemies closer.'
Sumner has written many posts about the 70s-which is fair enough, that is one of the most interesting decades for monetary policy. However, in the past he's shown that he has a rather idiosyncratic definition of what 'stagflation' means.
"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."
http://diaryofarepublicanhater.blogspot.com/2012/07/sumner-macro-is-50-money.html
Sumner is the only person I'm aware of who defines stagflation that way. Interestingly, though, he has argued that if the Fed had done the kind of policy he has in mind starting in 2008 we would have had stagflation-again, he defines this has high inflation and low output-everyone else defines it as high inflation and high unemployment. In any case, he does sort of sound like Waldman here. At least he admits that the 70s were better than the last 5 years. So many conservatives try to make it sound like the 70s were the absolute worse of all worlds which is certainly not true. Actually it was a strange decade. It was far from an ideal economy but it did have pretty healthy GDP-again undercutting Sumner's definition of stagflation.
I also take Waldman's point about policymakers in the 70s. It seems to me that in the 70s policymakers considered high inflation preferable to high unemployment. During the GM it was the opposite. As both Sumner and Waldman agree the 70s was preferable to the status quo why are those that prefer low inflation to low unemployment right?
Mike, nice summary! Did Sadowski's long response to you influence this at all (I didn't read his response)? I suppose not.
ReplyDeleteI did have a little trouble (as I non-infrequently do with your posts) keeping track of who's voice I was reading... I wish there was a better way to set your commentary off from the quotes... and to match the quotes with the quoted people better (like boxes or something). I guess I shouldn't complain about your free summarizing services. :D (cue Mike's tip jar at right)
For example... when I read this:
"It seems to me that the Fed did a pretty good job of matching NGDP..."
I was pretty sure I'd seen that from Steve Waldman before... but it didn't have the quotes, so I wasn't sure.
Cullen has neat little quote boxes at his disposal, which are nice. I don't know if Blogger has such a thing.
Anyway, I'll stop complaining now, and again express my gratitude for you putting this together! Thanks! :D (again, cue Mike's tip jar at right)
Yes that was Steve. In that case I forgot the quotes. So if I just remember that it should be easier. I don't know about the box, but I guess one thing to differentiate quotes could be to have them in a different font or something. Often when I cut and paste something from another blog it's already in a different font but I change them to mine as I thought it's better aesthetically.
ReplyDeleteHowever, manybe not. Maybe it's more clear who's being quoted if I left the other font. In any case I will try to make sure I don't leave out quotes in the future like I did above. I admit I'm not a big fan of proofreading. I always run a spell check when I'm done-even then stuff sometimes gets by. I usually don't read the post in full when I'm done, however, and maybe I should.
Anyway, glad you like it. I certainly enjoyed Sadowski's info but I don't know that it changed it for me-though over time as I absorb it more you never know. I'm still not sure what to make of the issue of it being a monetary phenomenon vs. being real. What Yglesias and Unlearning Econ say about hyperinflation being about political instability makes sense.
Then too, we have the fact that-as I mentioned in the post-that we saw the Fed expand the monetary base by almost 300% in 2008 and there was no spike in inflation whatsoever.
As far as deficit spending goes there was no rise in interest rates so Sumner is 0 for 2 on predicted effects here.
Ok Steve hopefully it's a lot clearer now who said what. I had further confused the issue by putting myself in quotes mistakenly 'Randy Waldman argues that this is not the case...'
ReplyDeleteI said that then I quote Waldman. So, yeah, simply not mixing up the quotes should help a lot.
Geez! LOL. I mean Tom. See how easy it is for me. LOL
ReplyDeleteMike, have you seen Steve's latest updates on this in response to Sadowski's criticisms? (Of course by the time you read this, things may have changed... I'm referring to the Steven's post that he essentially crossed out and called "bullshit."). I have to hand it to a guy that can admit mistakes! It'll be interesting to see what develops from here!
ReplyDeletehttp://www.interfluidity.com/v2/4624.html
Now Sadowski swoops in for the coup de grace?
Deletehttp://www.interfluidity.com/v2/4624.html#comment-35460
We'll see!
Mike! Congratulations on the link from Waldman!! I'm jealous:
ReplyDeletehttp://www.interfluidity.com/v2/4706.html
Way to go!
I'm sure you've seen this:
ReplyDeletehttp://www.onalyticaindexes.com/2013/07/31/top-200-influential-economic-blogs-aug-2013-2/
Hey Mike, check it out: I got my own plug today:
ReplyDeletehttp://pragcap.com/if-you-cant-explain-it-with-accounting-you-cant-explain-it
:D
Of course the blog you got it from was #26, while mine was #53... and you got that DeLong link (yup, that REALLY is impressive).
Nah Tom Pragcap is pretty darn impressive. You have arrived. LOL Good job.
ReplyDeleteActually in reading it it's even more impressive than I thought. When Cullen Roche says you explain accounting right that's a real compliment.
ReplyDeleteBTW Mike, one of my co-workers is an econ buff too... he used to put up pages (maybe still does!) about economics (we're not in that field BTW.. engineers both of us) and I told him about you & your DeLong link (he's a Krugman fan).
DeleteTurns out that DeLong linked to his article too! I guess years ago... he was running the server out of his house, and suddenly he says he's getting 2000 hits an hour! Ha. I think this was about the 2006 time frame (sorry I don't have a link). So I guess I know two DeLong link recipients now! Cool... :D
Agreed, Mike. Well done Tom!
DeleteYou have done Yeomans work on your blog. Its obvious you think like an engineer and are adept at breaking things, like balance sheets, down into their composite parts and putting them back together.
On a different but older note, Ive been at Sumners place the last week or so (I shower every time I leave) under the name of gasman (could not login under my old handle of greg for some reason) trying to get him to explain his "Japans prices are 100x ours" statement that he has made on more than one occasion.
I know you said before Tom that you didnt think it was that big a deal but Im curious as to why you dont think its important to get this right? He's basically claiming that Japans prices are 100x higher than ours and trying to relate it to their 100X increase in base money and relate this to NGDP and inflation. To me his whole theory falls apart if this contention of his is false, which it is. To make the proper comparison of prices both prices must be converted to a common numeraire, either convert dollar prices to Yen and compare or vice versa. And if you do this you see that Japans prices are nowhere near 100x ours. This seems as elementary of an error as doctor weighing you in kilos last year and this year he sets his scale to pounds and telling you your weight has doubled!
Where am I wrong here Tom, if you think I am?
Yes. Greg the idea that Japan's prices are 100 times our seems absurd to me too. I can't believe that a loaf of bread or a carton of orange juice is 100 times what it is in Japan.
DeleteStill it's true that $1 is about 100 Yen.
http://www.bloomberg.com/quote/USDJPY:CUR
Maybe that's what he has in mind? I don't think that means however that the 'price level'-however you choose to define it is 100 times higher. However, I do see how this can get confusing regarding apples and oranges.
In real terms I'm sure the price of bread in the U.S. and Japan are much closer than 100.
DeleteWell I tried to really get him to be specific on his claim. He said this;
Delete"Yes, Japanese prices are 100 times higher than US prices, I noticed that right away in the Tokyo airport. That difference can only be explained by looking at the markets for the two MOA. There’s way more yen than dollars floating around. Roughly 100 times as many per capita."
In response to this of mine
"When you say “Japans price level is 100x ours” it is necessary to convert both prices to the same UOA in order to make the comparison correctly. When you do that you see that Japans price level is nowhere near 100x ours its simply expressed in different units that have more zeros. So, what do you mean when you say “Japans price level is 100x ours” ?"
So stating that Japans prices are 100x higher than ours is flat out wrong. I looked at the Tokyo airport site and checked on how much a shuttle to Disneyworld Japan would be, figuring it would be 2-3000$ since its 100x higher than here. Well it was 2500 yen or about 25$. If we started listing our prices in cents AND did not change the number of cents in a dollar our prices would be no higher when expressed in dollars and thus we would not have inflation but to Scott we would be experiencing 100x price increase ...........or hyperinflation.
He's seriously deluded here I think and I dont think its trivial
Right. He seems to think that the exchange rate of the two currencies is price level. This is not the first time he's said something really curious. He seems to be the only person I know, certainly the only economist who defines 'stagflation' not as high inflation and high unemployment simultaneously, but rather as high inflation and low GDP.
Delete""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."
http://diaryofarepublicanhater.blogspot.com/2013/09/sumner-vs-waldman-on-great-inflation.html
I guess I linked this post-LOL
DeleteGreg, Mike: First off, thanks for your compliment Greg! Appreciate it!
DeleteRe: Sumner: I haven't followed the debate between "gasman" and Sumner carefully. (I did suspect that was you Greg... did you see my comment here? Asking if you knew this "gasman chap?" Ha!)
It's still my impression that Sumner is not that dumb. It may sound like it, but I just don't see it. Like I say I haven't followed the debate closely, and it's quite possible he wrote something dumb and didn't want to concede the point. I really don't know. But here's my take:
It has everything to do with his cases 1, 2, 3, and 4 here:
http://www.themoneyillusion.com/?p=23314
The key here is sticky prices and sticky wages (I think he just mentions prices in the post). That's what separates case 4 from the others.
If there were no stick prices or wages (and by prices, I'm including debts!... that's something that's not clear!)
Then case 4 would hardly differ from the others. To see this, suppose we make a new case, case 4a, in which the quantity of gold is constant, but the gov changes the UOA on an hourly basis: At 8 AM $1 = 1 oz, at 9 AM $1 = 0.5 oz, at 10 AM $1 = 2 oz, etc. Since prices and wages are not sticky (let's just assume no debt, or perhaps that there's only indexed debt... indexed to 'inflation'), then nothing changes: all we're doing is changing the yardstick on an hourly basis. Prices and wages change on an hourly basis so that their value remains proportional to gold. We're experiencing massive hourly inflation or deflation, but lack of stickiness makes this irrelevant.
So now for case 4b: instead of changing the UOA, say we kept $1 = 1 oz, and instead every hour we used a magic box to change the total quantity of gold in the world: halving it one hour, multiplying by four the next. Since there's no stickiness, it's the same effect. Everything changes their value in relation to gold (due to its scarcity or abundance), and since gold is the MOA, prices and wages jump all around on an hourly basis, but again it makes absolutely no difference. An apple is still worth 6 minutes of work is still worth 2 oranges etc. Only the gold market and prices and wages are effected. If gold were NOT the MOA, then only gold prices would be affected, and the rest would stay stable.
So my read on what you're saying is "Look Scott, in case 4a and 4b, nothing changes (except the value of gold in case 4b)! 1 apple still buys you 6 minutes of work or two oranges! Only the price level is changing but it's meaningless! (except for in the market for gold in 4b)"
(continued from above):
DeleteBut here's what I think Scott is saying (at least the bigger message... I'm not referring to any particular statement he made to you, which he may be defending as a matter of pride at this point): "In my case 4 prices and wages ARE sticky!" That's literally what his case 4 says.
So now an instantaneous change in the UOA (4a) or quantity of gold (4b) is meaningful, because it will take some time for equilibrium to be restored. It's easy to see this for the case of making prices smaller rather than larger: if the amount of gold is halved, it's value goes up, but it's price remains fixed because it's the MOA and we haven't changed the UOA: $1 = 1 oz still... prices and wages don't change instantaneously (people still have labor contracts and existing contracts to buy or sell other items)... but the realization of what a dollar is worth does change!... business owners suddenly realize that the pay of their employees doubled... and they can no longer afford them, so they fire half of them, etc. A different set of consequences arises if the total quantity of gold is doubled instead... but the point is that there are now consequences.
All I think Sumner is saying is that because 100 yen = $1, it's evidence that they've undergone an inflation sometime in the past. I read it as an implicit assumption that $1 = 1 yen at some point in the past (approximately) and that they must have experienced inflation and the effects of stickiness, etc. They may not be experiencing it any longer... and it may have reached equilibrium again and thus the fact that we pay $1 for a candy bar and they pay 100 yen makes absolutely no difference as you point out.
So perhaps I am giving him too much credit, but that's my read.
... also I should point out that there are TWO major differences between Scott's cases 1, 2, and 3 on the one hand and case 4 on the other:
Delete1. gold is the MOA (with the UOA defining the $ in relation)
2. sticky prices
Also, implicit in my hourly changes in 4a and 4b and lack of stickiness in 4a and 4b is that people don't keep inventories of cash. You can think of it as either they get paid every hour and they go spend it or save it immediately (save as in invest in stocks), or they total their hours for the week, and then get paid at the current wage rate, and then go spend or save all of it immediately. Again, debt (mortgages, bonds, etc) really are a major source of "stickiness" I think, so that's why they have to be indexed to inflation/deflation or gotten rid of to make these non-sticky examples work.
A lot to chew on here but on the face of it I think I'm in Greg's camp here. Is the exchange rate the same thing as the price level? If yes then Sumner's right. If no he's made a pretty serious boneheaded mistake.
ReplyDeleteI actually started a post on this that maybe I'll get to publish later.
Tom, it's done. I got the fearsome Mark Sadowski's option on this.
ReplyDeletehttp://www.interfluidity.com/v2/4706.html#comment-35586
Greg do you have a link to you and Sumner's thread?
ReplyDelete