Make nominal spending the new target? We hope not.

In the January 2 2013 edition of the Financial Times Mr. Scott Summer, economics professor at Bentley University, publishes an article titled Make nominal spending the new target, where he argues for the revolutionary, and increasingly MSM-pushed idea of making Nominal GDP Targeting (NGDPT) the official policy of central banks in most western countries. This policy was already hinted last December at a conference in Toronto by the present governor of the Bank of Canada (BoC), and future governor of the Bank of England (BoE), Mark Carney.

This in an article fraught with ideas that, if implemented, will permanently transform the nature of western economies and pave the way for structurally high inflation, potential hyperinflation, economic misallocation of resources, moral hazard (savers, wage earners and pensioners being punished), and general impoverishment of the population except for the few taking advantage of it thru their access to cheap financing: financial institutions and überwealthy individuals.

Mr. Scott Summer states: “Once a central bank sets an inflation target, they have essentially set a path for aggregate demand. In that case, what possible role can there be for fiscal stimulus? But as the past few years have shown, stimulus advocates and opponents are as vociferous as ever. And despite a widespread perception that most developed economies would benefit from more demand, central bankers seem unwilling or unable to deliver that growth.”

TYR states: This paragraph foreshadows the huge amounts of half-truths and outright lies that conform the article. It sets the stage for the assertion that a central bank’s main role is to foster “demand”, foster growth. This has never been the role assigned to monetary policy, whose main aim is, and should be, to preserve the purchasing value of the currency, that is , to keep inflation low. By positing that central banks should aim at fostering demand, the author conveniently ignores the fact that nominal GDP growth comes at the expense of inflation, that by debasing the currency in order to reach a theoretical NGDP target, no real growth is achieved, only the appearance of it, since that growth is basically inflation. This has been well-known since roman emperors clipped their silver coins. A not so obvious harm that such a policy would cause is a further misallocation of resources in the economy. By artificially fostering some sectors of the economy that depend on cheap financing (finance, housing) thru monetary policy, the same misallocation that was an important cause of the 2008 crisis is being perpetuated.

Mr. Scott Summer states: “Inflation targeting failed in two ways. First, it was a poor indicator of the adequacy of aggregate demand. Second, it is susceptible to “liquidity traps”, a period of near zero interest rates where central banks’ favourite tool – interest rate targeting – is rendered ineffective”.

TYR states: Inflation targeting was never intended to be an indicator of aggregate demand, but a (bad) tool to control inflation, the main aim of the guardians of the currency, central banks. Liquidity traps, a Keynesian and non-scientific term, is not caused by inflation targeting, but by debt overhangs, resulting in crisis, like the one in 2008, originated in  previous monetary laxity, precisely what the author recommends as future policy.

Mr. Scott Summer states: “This problem occurs because when the economy is very weak, even a 2 per cent inflation target might not be high enough to generate the sort of bullish expectations needed to stimulate demand. There’s already plenty of money in the system – we need higher spending growth expectations to push that money into circulation.”

TYR states: The author ignores the reasons behind the weakness in the economy, too much debt and misallocation of resources in the economy with some sectors overrepresented, housing and finance.

Mr. Scott Summer states: “Mark Carney’s speech on December 11 in Toronto demonstrated the growing interest in replacing inflation targeting with nominal gross domestic product level targeting, even among central bankers. The central bank would set a growth path for nominal GDP of perhaps 4 per cent or 5 per cent per year, and commit to return to that trend line when spending falls short or overshoots. Nominal GDP targeting would moderate the business cycle by being more contractionary than inflation targeting during a boom and more expansionary during a recession. And NGDP could do this while still delivering roughly the same long-run rate of inflation.”

TYR states: It is a huge mistake to assume that there is a “natural” nominal GDP growth rate, where is the scientific proof for this assumption? For centuries, GDP growth was very low, until the First Industrial Revolution speeded it up. What does that have to do with monetary policy? GDP growth depends basically on population growth and productivity, and productivity depends on availability of resources, capital and technological innovation, none of which are by any means affected by monetary policy.

Mr. Scott Summer states: “And there are many other advantages. If investors had known in 2008 that any declines in NGDP would be quickly made up, then asset prices would have fallen much less sharply, and demand would also have been more stable. The current prices of stocks, commodities and property are strongly influenced by their expected prices several years out. The severe asset price decline of late 2008 reflected the belief that central banks would fail to take decisive action to restore NGDP to the trend line.”

TYR states: Do we have to conclude that the inflated asset prices of 2008 should have been allowed to remain inflated for the sake of mantaining an arbitrarily determined nominal GDP level? In what way is this different from a centrally planned, fascist-soviet economy? What role does the cleansing mechanishm of failure have under such an economic system? This is certainly not capitalism.

Mr. Scott Summer states: “Some fear that inflation will become unanchored if we move to NGDP targeting. In fact, most of the problems that people associate with inflation are more closely linked to high and unstable NGDP growth. Wages tend to follow growth in national income. As long as NGDP growth is low and stable, wages and core inflation will remain well anchored.”

TYR states: Wages do not necessarily follow growth in national income. This has not been the fact in the last 40 years where wages have reduced their share as a percentage of GDP from 53% to 44%. It is corporate profits that have benefited the most from the covert inflation we’ve had since the USA dollar was unlinked from gold in 1971. But even if the author was right in this assumption, assume for example that we have a NGDP growth rate of 5%, an inflation rate of 5% and a wage growth of 5%…do we have any real GDP or income growth at all? No.

Mr. Scott Summer states: “A stable path for NGDP growth will also produce better policy decisions in other areas. Fiscal spending will have to be justified on a cost-benefit basis, once it is no longer expected to boost nominal demand. The cost of bailing out failed companies will be more transparent, as it will be obvious that more jobs in the rescued company are offset by fewer jobs elsewhere. Those claiming that Chinese exports cost jobs will have to provide a mechanism other than “less demand”, and won’t be able to do so. And, most importantly, countries will be able to address the public debt problem, as they should, without fear that austerity will cost jobs.”

TYR states: Here the author assumes that failed companies will be bailed out (moral hazard and misallocation of resources again) and that there will be fiscal prudence just because some mumbo-jumbo cost benefit analysis will conclude that any further spending does not contribute to nominal GDP growth. Central planning, covert economic fascism again. Finally, the author seems to assume that by central banks financing government deficits “countries will be able to address the public debt problem, as they should, without fear that austerity will cost jobs.”. Does anybody believe that by making deficits immune to their collateral negative effects, increase in interest rates and the associated recession, government deficits will be tackled?

Make nominal spending the new target? We hope not.


29 thoughts on “Make nominal spending the new target? We hope not.

  1. Wow! You seem not to even understand Sumner’s original post. It’s one thing to be critical, but you should start by first understanding the thing it is that you are criticizing. Your comments suggest that you decided to respond well before you took the effort to understand the subject.

    It’s not (just) that Sumner is right, and you are wrong. It’s more that you’re irrelevant, because you’re only responding to your idea of what you think Sumner is saying, which turns out to not have too much to do with what Sumner is actually saying.

    • Although I’ve already debated with you @ TheMoneyIllusion and not seen any deeper level of understanding in your interpretation of Mr. Summer’s thesis beyond saying that it looks theoretically as “presentable” as inflation targeting, we can repeat the debate here if you so wish. As I already stated the main rationale behind my aversion to NGDPT is that it offers the FED a convenient cover, a “story” to further dupe the american population,…people like you.

  2. We could have a whole discussion about the pros and cons of Sumner’s NGDPLT proposal. I happen to think it’s a good idea. But you’re not even ready for that, because very few of your comments are even relevant to comparing NGDPLT, vs. the US Fed’s current 2% inflation target. Let me just list a handful of your misconceptions…

    ” the role assigned to monetary policy, whose main aim is […] to preserve the purchasing value of the currency”: clearly false. The US devalued from the gold standard in the 1930’s, and abandoned it altogether in 1970’s. The US Fed has been targeting 2% inflation since the 1980’s, NOT 0%. So it’s exceedingly obvious that “preserve the purchasing value” is NOT the main aim of the central bank, and has not been so for many decades. So clearly, this comment of yours has nothing to do with comparing Sumner’s proposal to current macro policy.

    “nominal GDP growth comes at the expense of inflation”: No, NGDP growth is composed of BOTH real growth, and inflation. The exact mix between the two is determined by supply-side factors. But it’s absolutely false that all NGDP growth is inflation.

    ” Inflation targeting was […] a (bad) tool to control inflation”: No, if that were true, they would have set the target rate to 0%. Instead, they set it to 2%. So they have a goal different than what you believe.

    “Liquidity traps, a Keynesian and non-scientific term, is not caused by inflation targeting”: Non-scientific? Do you just not understand? It’s perfectly well defined. It’s when the central bank is used to adjusting aggregate demand via changing the interest rate, and the economy is currently in a situation where the central bank wishes to do monetary easing, and in any other circumstance would do so by lowering the current interest rate, but the current rate is already near zero, and so it’s not feasible to lower the fed funds rate below zero. Hence, by adopting “inflation targeting”, the central bank finds itself in a situation where it wishes to have a looser monetary policy, but because of their inflation targeting framework, they are unable to perform the action they want. That’s why the framework caused the trap.

    ” It is a huge mistake to assume that there is a “natural” nominal GDP growth rate”: Nobody is making such an assumption. It is your failed understanding of the proposal, that leads you to believe that such an assumption was made.

    ” GDP growth depends … on …. none of which are by any means affected by monetary policy.”: But monetary policy can affect unemployment, as it has done in the current US economy for the last few years. The US is producing wealth below potential, and there are idle unused labor resources, because of poor monetary policy. A better monetary policy would have resulted in higher employment, and thus higher GDP growth.

    “assume for example that we have a NGDP growth rate of 5%, an inflation rate of 5% and a wage growth of 5%…do we have any real GDP or income growth at all? No.”: This is one of the stupidest things you’ve said. You say: “assume we have no real growth; ah ha! then we have no real growth!” You assume your conclusion, and then think that it’s some kind of relevation? The truth is that the most typical mix for a 5% NGDP growth in the US, would be 3% population + productivity growth, along with 2% inflation. Your hypothetical scenario isn’t realistic.

    “Here the author assumes that failed companies will be bailed out”: No, you’ve completely misunderstood. Right now, when the government talks about bailing out companies, one of the justifications they use (among many others), is that the bailout will “create jobs” and “stimulate demand”. Sumner is saying: if the Fed adopted NGDPLT, then it would be obvious that any bailout would NOT create any additional jobs, or additional demand. So the government would no longer be able to use that idea as a justification for why to bail out companies. They would only be able to use the remaining justifications, like some cost/benefit analysis. This makes it LESS likely for government bailouts, then in the current situation.

    “because some mumbo-jumbo cost benefit analysis will conclude that any further spending does not contribute to nominal GDP growth”: Not “mumbo-jumbo”. Instead, there would be a _guarantee_ that _no_ further (fiscal) spending of _any_ kind would _ever_ “contribute to nominal GDP growth”. That never need be part of any further bailout discussion, because the central bank would fix NGDP growth no matter WHAT spending plan Congress adopts. Fiscal government spending would have ZERO impact on NGDP growth.

    “central banks financing government deficits”: Not even close to what the proposal is about. A country like Zimbabwe prints money in order to pay for government fiscal purchases. Sumner is proposing 5% NGDP growth, regardless of whether the fiscal government has a budget surplus, a balanced budget, or a huge budget deficit. In Sumner’s proposal, the printing of money is completely disconnected to any government budget deficits, so it’s simply wrong to claim that the central bank would be financing the deficit.

    Does that help? Most of your comments either apply equally well to NGDPLT and also the current 2% inflation target (in which case they are useless for comparing the two), or else they are addressing some strawman misconception of your own, that has nothing to do with what Sumner actually proposed.

    If you could bother to make a few comments about what Sumner is proposing, _especially_ about how it compares with the current 2% target, then you might have something interesting to say. As it is, your post is basically just irrelevant.

  3. Thanks for your comments. Some of your criticism is valid and I’ll accept it. Some other I find it unwarranted or simply wrong.

    I never intended to explicitly compare NGDPT with inflation targeting from a technical point of view. I admit that if properly implemented the differences between the two are not so big.

    But, as I posted in TheMoneyIllusion, my opposition to NGDPT is based on the idea that it gives the FED an easy cover so that they can debase the currency at an even faster pace than the one at which they are doing it now.

    This is based on my belief that the FED is a dishonest institution that purposely misleads the public about its intentions. I base this belief in the proven fact that published inflation has been systematically understated for decades ( and that the FED knowingly uses distorted inflation measures in order to set monetary policy.

    So what is the difference that I address between inflation targeting and NGDPT? It is psychological. NGDPT sounds better because you are “targeting growth” and, if you want to cheat, it gives you an easier way to do it.

    This is the only way in which I am interested in comparing inflation targeting and NGDPT, and it looks perfectly defensible to me. You prefer to compare them on technical grounds? It is your choice, but not the only approach to the issue of whether NGDPT is desirable or not. For me it is undesirable because of its “marketing” characteristics and this is enough, in my view, to desire it not to be implemented, to be discarded.

    Let me now address your different criticisms to my post.

    Your criticism about the role assigned to monetary policy: here you have a bit of point, but not all. It is true that the fed abandoned 0% inflation rate targeting long ago, but even if they target 2% this is still, to some degree, inflation control, and inflation control is preservation of the purchasing value of the currency. I could have been more precise, or worded the sentence differently. The idea though is the classical one that a central bank should prevent inflation. Implicit in my statement is my conviction that the FED practices a pernicious kind of monetary policy, in that while officially targeting about 2% inflation, In practice they allow higher rates because of them using distorted inflation measurements.

    Your criticism concerning NGDP growth: you are partially right here and I should have been more precise. It is of course true that NGDP has a real and an inflation component. Again I was trying to convey the idea that with NGDPT and the distorted inflation measures used, most of the NGDP would be inflation.

    Your criticism concerning inflation targeting not being a tool to control inflation: here I do not think you have a point. You can control inflation at a 0% rate, at a 2% rate, at a 10% rate or at any rate. In all cases you adjust it to a specific rate decided in advance. I’d call this control.

    Your criticism concerning the liquidity trap being or not being a scientific term: I do not think you have a point here. Liquidity trap has a precise meaning from a Keynesian point of view, but it is not universally accepted. A liquidity trap, when lowering interest rates does not further stimulate the economy or when rates are 0 and the economy continues to be depressed, assumes a lack in aggregate demand and a liquidity preference by the public. Austrians reject this construct, since they consider that such a situation is caused both by previous misinvestment in the economy and by time preference. From an Austrian perspective a liquidity trap is a false Keynesian construct, and this has clear policy consequences when a situation as the present one arises. Keynesians (I assume you are one) would push liquidity and demand (consumption) at any cost (what the FED does). Austrians would let the economy liquidate misinvestments and let it heal on its own. To conclude, a liquidity trap exists in your intellectual framework, not in that of Mises, Rothbard or mine.

    Your criticism concerning the natural GDP rate: I do not think you have a point here, since implicit in a, for instance, NGDPT rate of 5%, is the assumption that an economy should always grow. As you stated before, NGDP has a real and an inflation component, so when you set it at say about 5%, you are implicitly granting that part of it, for example 3% will be real growth, assuming you can fight the business cycle. I do not think you can or should, but it is implicit in NGDPT.

    Your criticism concerning unemployment, potential GDP and monetary policy: I do not think you have a point here. In fact I see many unsubstantiated assertions. The FED’s monetary policy has helped the unemployment situation in the USA in this last crisis?. Really? How can you prove that? And… “there are idle unused labor resources, because of poor monetary policy. A better monetary policy would have resulted in higher employment, and thus higher GDP growth.”…this one is fun…to me there are idle unused labor resources BECAUSE of previous BAD monetary policy that caused a huge level of misinvestment in the economy (housing, finance, extra consumption resulting in high levels of indebtedness public and private). I could not disagree more with you. I do not think your analysis is sound.

    Your criticism concerning my example of 5% everything: you are right, that wasa meaningless example on my part. I should not have written that. My apologies.

    Your criticism concerning bailing out companies and cost benefit analysis: you are right, yours is the right interpretation of Mr. Sumner’s statement. My apologies. But let me say what I’ll repeat at the end. NGDPT, if implemented, will not be implemented in the way Mr. Sumner describes, so this heavenly situation he describes is totally unrealistic.

    Your criticism concerning central bank financing deficits or not under Mr. Sumner’s proposal: you are in theory right but, in my view, wrong from a practical poin of view. You’d like to discuss Mr. Sumner’s proposal in a vacuum, as if it waas ever to be implemented the way Mr. Sumner describes. I see Mr. Sumner’s proposal as similar to Milton Friedman’s M2 growth rule for monetary policy. In its purity it might have its merits (nevertheless even in purity I do not like NGDPT because of its business cycle management nature), but my main point is that while it will not be implemented the way Mr. Sumner describes, it offers the FED a very convenient way to do the things you assume it woulf not do under Mr. Sumner’s proposal.

    You want me to say something directly comparing an inflation rate targeting rule and NGDPT, but I do not think they are technically that different. Both try to manage the business cycle, which I consider bad. One could argue that NGDPT targets it more aggressively in that its target is more explicit. Under an inflation targeting ruleof let’s say 2%, rates of inflation below the target rate are usually accepted as OK as long as not too close to 0. I guess under NGDPT of let’s say 5%, the central bank would more aggressively pursue the nominal 5%, because, and this is my main criticism to any NGDPT, it offers a convenient cover to foster inflation, since it is “growth” that we are targeting, and growth is supposed to be good. When the FED says it wants higher inflation, it does not sound good to the public. When the FED says it wants growth, it sounds good to the public, even if it means the same thing in both cases. This is, to me the biggest drawback of Mr. Sumner’s proposal, that in technical terms is not that different from what we have now. It is a trojan horse for the FED to inflate more without antagonizing the public, a public relations exercise, and a non innocent one.

    Hope you’ll forgive me in the aspects in which you were right in your criticism and that you’ll accept that i approach Mr. Sumner’s proposal from a very diferent point of view than yours, and that I find mine very relevant, perhaps not to you, but it is in order to address the issue of unveiling, fighting, the inflationary intentions of the FED.

  4. Well. I’ll have to say that I’m actually impressed. Usually, people who write the kind of original post that you started with at the top, aren’t the kind of people who are also capable of writing this most recent comment reply. So let me give you credit for having much more of an open mind than I expected.

    On your “marketing” concern, I suppose I’ll agree with you, that if you see the US Fed as a secret conspiracy, where the goal of inflation is to enrich a few elites at the expense of the general public, then I can see how any framework which might enable more inflation, is “bad” for exactly that reason. Of course, Ben Bernanke, Scott Sumner, and I see the Fed as having a goal of doing what is best for all US citizens. Sumner and I just think they’ve not done a very good job of achieving this goal. But you don’t even think that is the real goal of the Fed. I’m not going to try to argue you out of your conspiracy theory. But you need to keep in mind, when you talk with other regular people, that very few will share your assumption that the Fed has secret goals of enriching elites. So if you want to communicate, you need to set that aside, or at least argue for it explicitly, instead of just assuming it.

    Given the reasonableness of your reply, I don’t want to spend too long on all the details, this time. Maybe a few quick followups:

    “liquidity trap … Austrians reject this construct” You can reject the significance of aggregate demand, but the concept of liquidity trap should still be well defined. It’s when the central bank wants to increase aggregate demand, but their tool is lowering interest rates, and rates are already at zero. That’s perfectly easy to understand. You (Austrians) can say that they shouldn’t be trying to increase aggregate demand … but that’s a different claim from the claim that “liquidity trap” isn’t a well-defined thing. For central banks that DO want to increase AD, and have chosen to use interest rates as the tool, “liquidity trap” is when their own framework fails, for their own goals.

    “The idea though is the classical one that a central bank should prevent inflation.” Again, while that may be your (Austrians) goal, that is NOT the goal of the US Fed, and has not been the goal in four or five decades. I’m not going to explain it here, but you ought to be worried that you don’t yet understand why the US Fed chose “stable and low (positive) inflation” rather than “zero inflation”. Or, perhaps, your only explanation is a secret conspiracy to enrich elites. But what you’re missing is why someone like Sumner (or Bernanke), who have no interest in enriching elites, ALSO support (low, stable) positive inflation, as superior to zero inflation. You should use this curious observation, as motivation to educate yourself, at least to understand what the other side is thinking.

    “The FED’s monetary policy has helped the unemployment situation in the USA in this last crisis?” On the contrary, we believe that the US has suffered from 8-10% unemployment for four years, rather than the more typical “natural” rate of 5-6% unemployment, exactly because the Fed has FAILED to stabilize (the growth of) aggregate demand. This is exactly the point of Sumner’s NGDPLT proposal, that it would have been vastly superior for the US economy over the last 4 years, than the actions that the actual Fed took. The Fed mismanagement CAUSED four years of 2-5% excess unemployment.

    Think of it this way: in an economy in equilibrium, printing more money can’t make more growth, it only makes more inflation. (This is what you Austrians say all the time.) The difference is — and here is where you Austrians fail to appreciate the subtlety — if the Fed FAILS to provide enough money, that can CAUSE unemployment. In that case, printing more money can indeed result in additional real growth. Not growth past potential, but mere growth from the avoidance of causing harm. This is where the Fed failed in 2007 and 2008 (and continuing, to a lesser extent, since then). They didn’t print enough money, and thus caused a massive reduction in what would have otherwise been normal annual economic growth.

    “When the FED says it wants higher inflation, it does not sound good to the public. When the FED says it wants growth, it sounds good to the public, even if it means the same thing in both cases.” This is actually very insightful. But even you need to realize that the conclusion from this insight depends on how you view inflation. You think it is always bad. Sumner and I believe that the recent lack of inflation has caused the horrible unemployment of the last few years, with massive pain and loss of wealth, and if only there had been a little more inflation, then the bulk of the Great Recession would have been completely avoided.

    So it really comes down to, whether you can ever understand why some non-conspiracy macro economists, would claim that a little (low, stable) inflation is actually GOOD for the average person. You don’t seem to have a clue why this could ever be true. But it should spur you to attempt to learn a little more.

    • We disagree basically on two issues and I do not see much of a possibility of bridging the gap. The issues are: 1) The benign nature of the FED, and 2) the right way to conduct monetary policy (including whether “some” inflation might be good).

      First the conspiracy thing.

      As you suggest, I do not believe the FED is there for the good of the american economy and people. I am not happy about it, i’d rather believe the FED is “good” even if stupid. I happen to believe it is not stupid and “owned”. Simon Johnson wrote an article in 2009, The Quiet Coup ( that argues a bit in the direction of my ideas, although I’d go further than that and say that that “coup” happened many decades ago, if not earlier. I do not want to discuss this, nor am I to convince you of anything. This is not an easy subject and it is painful to reach certain conclusions, at least it was for me. Read more, think more, if you so wish.

      The inflation, business cycle, monetary policy thing.

      Do you really believe that if the FED had printed more money in 2007-2008 the unemployment resulting from this crisis would have been avoided? I completely disagree, because the cause of the unemployment is not any lack of money in the economy, the cause is the PREVIOUS misinvestment caused precisely by the kind of policies that you advocate (Greenspan era). Was the housing market “natural” both in size and price in 2007? Was the level of indebtedness by households reasonable and sustainable? Was (and is) the size of the financial sector ( based on a neutral level of incentives? There was no scarcity of money in 2007, what there was is huge amounts of failed investments waiting to be written down, caused by previous money creation “intended” to foster growth (Greenspan era again). Money is not neutral, and tampering with it creates misinvestment, because agents assume as genuine demand and capital what it only is availability of credit. There is no monetary policy free lunch. The payback time can be delayed years, sometimes decades, but it eventually comes.

      To express my views more clearly, it is not inflation per se I am against. Inflation is a phenomena, not a policy. Under some circumstances, scarcity, inflation is unavoidable and should be accomodated, accepted. My opposition is with tampering with the business cycle, thinking that a technocrat (even if benign) can do better than the Market. Markets are there to clear prices and send reliable price signals that economic agents use to take investment decisions. By tampering with the quantity of money in the economy, price signals are distorted and misinvestment results, ending in crisis like the one in 2007-2008 when it becomes apparent that the cashflows that would have justified those investments are not there. These malinvestments are a sunk cost, the houses built that will never be sold and will rotten under the sun of arizona or florida is wasted money. The unemploment caused by construction workers having skills no longer needed when the housing bubble bursted is wasted money, wasted human effort. Your solution to this is to print enough money to reflate bursted bubbles and to create new ones in order to create “economic growth” without taking into account that each iteration of this process leaves huge amount of wasted resources, diminishing the stock of material and human capital of the country. What the FED is doing now will cause another crisis. What will you do then, print even more money? Look at the size and evolution of the FED’s balance sheet, consider the fact that any little growth the american economy now has is being bought at the cost of federal deficits of 7-8% of GDP financed with printed money by the FED. Look at history. Even you should be able to see that this ends in an hyperinflationary process, and I’d think it’ll be hard even for you to paint hyperinflation as “good”. In this context, Sumner’s proposal, looks like nothing more than another academic exercise, with the only effect of entertaining people and paving the way for making some concepts “respectable”. Reality is a different thing.

      There is one issue that I mentioned in my latest reply to you that you have avoided, and it is not a trivial one. You continually talk about “a little inflation”. Besides the lack of precision in the term (what is a little, what is a lot?), I think it does not describe the actual inflation situation in the american economy: real inflation is much higher than the officially published one. It is not only the indefensible outstripping of food and energy from the inflation indexes used to set monetary policy, it is the outright falsification of the indexes themselves. I remit you again to and tell me in what way is the calculation there inaccurate, when the only thing done is to compute it according to the way the BLS computed it in 1980. Since then the methodology with which inflation is computed has been modified ( geometric mean averaging, hedonic factoring, substitution effects) with the sole purpose of MAKING IT LOOK LOWER THAN IT REALLY IS.

      If inflation was properly accounted for, the “growth” of the last 30 years would be drastically deflated. Yes, per capita, America has barely grown since it decoupled from gold in 1971. It only happens that you enjoy fooling yourselves using numbers you know are false. I am not even talking conspiracy theory here, it might just be simple…whatever. It is not the same deflecting GDP at a 2-3% rate (official inflation) than to do it at a 5-10% rate (real inflation), year after year.

      You conclude saying that I should try to understand why some non-conspiracy minded macro-economists would argue, the way you do, that “a little (low, stable) inflation” is actually good. I tend to disagree. I know the usual explanations (it fosters investment, it helps borrowers including little mortgage owners, etc.). They do not look compelling enough to me to compensate for the misinvestment that is its unavoidable effect. Sorry, I believe the Austrians are right.

      That said, if it was little, low, stable, I do not think it would be such a big disaster, even disagreeing, I’d say it is something acceptable. What you seem blind to, is the magnitude of the process we are in. I do not want to repeat here what I’ve argued about above, false inflation measures, huge increases in the FED’s balance sheet well beyond any reasonable size, zero interest rates to infinity and beyond. This did not start in 2008, Greenspan already played with such toys. The tinkering with the inflation definition goes back to the 1980s. This is not low, little and stable Sir. It is huge and crazy, and you’ll find many respectable non-conspiracy macro-economists arguing along the same line of reasoning (except for “malign” FED). It is surprising to me you don’t see it.

      Finally, you are right in pointing out that I should not take for granted that whoever reads my posts shares my own “weltanschauung”. I’ll take it into account.

      I appreciate the time you’ve taken replying my post and correctly pointing to some errors in it, but our differences are philosophical and go well beyond Mr. Sumner’s proposal. Thanks anyway.

  5. “Do you really believe that if the FED had printed more money in 2007-2008 the unemployment resulting from this crisis would have been avoided?”


    “when it becomes apparent that the cashflows that would have justified those investments are not there”

    Ah, but “cashflows” are a nominal phenomenum. The overall level of NGDP determines the total nominal cashflows that a business will see, and thus determines whether any given investment turns out to be profitable or not. See, you’re making the mistake of thinking that a particular investment must objectively either be a good idea, or a bad idea, when it begins. But that’s not at all true. The success of an investment, depends on the absolute magnitude of future cash flows. And those, in turn, depend on what the monetary authority does with aggregate demand.

    That’s one of the main mistakes that Austrians make. They confuse real vs. nominal investments. They fail to distinguish nominal failures (e.g. crushing debt burden) from real failures (e.g. not enough oil or iron or concrete to build the bridge).

    One kind of economic failure is greatly affected by monetary policy; the other isn’t.

    “the houses built that will never be sold”

    False. There is plenty of demand for housing. Tons of adults living under their parent’s roof, who would love to own their own house. They just don’t have the money to pay for the house. It’s a nominal problem, not a real problem.

    “The unemploment caused by construction workers having skills no longer needed when the housing bubble bursted”

    You’re so obsessed by your own pet Austrian theories, that you haven’t bothered to check the actual data. Construction unemployment peaked in early 2007, and was already recovering long before the recession began. Meanwhile, when the recession started in late 2007, it hit all industries essentially equally. Unemployment happened across the board, at the same time.

    This isn’t merely a matter of opinion. You are simply wrong. What happened was NOT that there were excess construction workers, whose skills were no longer needed, and thus the economy required real adjustment, and that’s what “caused” the recession (going on four years!). I know that’s the theory you like to imagine, but it simply isn’t true.

    “any little growth the american economy now has is being bought at the cost of federal deficits of 7-8% of GDP financed with printed money by the FED”

    You’re confusing fiscal policy with monetary policy. I don’t want federal deficits. The federal government should run a balanced budget. That’s not how you get growth.

    I want the Fed to print money, WITHOUT there being any federal deficits at all.

    “Since then the methodology with which inflation is computed has been modified … with the sole purpose of MAKING IT LOOK LOWER THAN IT REALLY IS.”

    Again, with the conspiracy theories. Every time you don’t understand, you assume that it’s a conspiracy among the elites, to steal from the average person. Do you ever bother to understand the arguments made by those of good character, who also support the changes? Can you even state the best argument offered by your opponents?

    ” I know the usual explanations (it fosters investment, it helps borrowers including little mortgage owners, etc.).”

    Nope. Only unanticipated inflation would help mortgage owners. Low, stable, predictable inflation just gets priced into the prevailing interest rate, so mortgage owners are completely unaffected. You haven’t yet given a justification for the appeal of low, stable inflation.

    Finally, on inflation, I would say there is no “fact of the matter” about what it is. It’s not actually a concept out there in the real world, and we’re disagreeing about whether we’re measuring “the” concept correctly. The real problem is that “inflation” is a fuzzy thing to begin with. It cannot be precisely defined, for the full complexity of a modern economy. This is yet another reason to prefer NGDP (which can be precisely measured) to inflation targeting.

    As a conclusion, I agree with your that our fundamental disagreement is much deeper than just Sumner’s proposal. This is why I was so disappointed in your original post at the top, since it appeared to be a critique of Sumner’s NGDPLT, but what wasn’t immediately obvious from your original words is that you have almost exactly the same complaints about the Fed’s existing 2% inflation targeting framework. So for people who are considering whether to replace the Fed’s current framework with Sumner’s proposed framework, your (original) comments were close to useless.

    • I criticized Mr. Sumner’s article on “marketing” grounds. They still look valid to me, and I think you conceded that in your second reply.

      It is difficult to argue with somebody that does not stop to consider the causes that lead to the crisis in 2008 and that thinks that just by extra money printing the problem would have been solved. Neither you nor I can prove the effects of something that did not happen.

      Nominal vs. real casflows. An interesting concept, but you take it so far, ignoring whether crushing debt burden (nominal) has a real cause (mistaken investment), that any semblance of market signaling is lost. In fact, taken to the ultimate consequences, what you propose is not capitalism. I guess at the extreme it would be true that money printing might rescue any failing business, but at what cost? Huge amounts of wasted investments, continually, as if the country was in a perpetual war. The price of it is inflation, something you prefer not to measure. It is not about conspiracy theories. What it is, is that the cost of your “nominal” economy is hidden in the extra inflation disguised with the techniques of “hedonic factoring” and “substitution effects”. They are very real.

      Plenty of demand for housing, but no money to pay for it. This looks like a real problem to me. You trivialize and misrepresent what I meant with my reference to housing and construction workers. I meant simply that there had been a huge amount of misinvestment due to false market signals caused by lax monetary policy. And yes, the losses are real, even if under a NGDPT monetary policy you’d find a way to reflate that sector. The price is paid in inflation.

      Fiscal vs. Monetary policy. It is you that do not understand how this system works. Unless the FED hands out money directly to consumers and business, something it has not done so far, the misinvestments that your monetary policy provokes turn into crisis that cause unemployment, bailouts, and less economic growth, resulting in budget deficits on the fiscal side that the FED monetizes. One goes with the other.

      The fact that not little, low, stable but high and higher inflation is what your monetary system provides is the elephant in your conceptual room. This is so because the Austrians are right in noticing that money is not neutral and fosters misinvestment when created freely the way you envision. These misinvestments have to be paid one way or another. Austrians would pay it thru liquidation and depression, cleansing the economic system. You prefer to ignore the cost and assume an even bigger amount of misinvestment will erase previous ones. This will not be the case, resulting in high inflation. Even if you prefer to ignore it by saying it is a fuzzy concept, it is not, inflation is already here and more is on the way. Foodstamp recipients at an all time high is just one of the symptoms of something real you choose to ignore.

  6. “I criticized Mr. Sumner’s article on “marketing” grounds.”

    I agree with you (again), that: if the Fed is a conspiracy only to enrich elites; and if inflation is always bad for the general public; and if Sumner’s NGDPLT provides an apparently justification for more inflation (at times) than the current Fed framework; and if the Fed is looking for any excuse it can find to raise inflation (in order to somehow reward elites over the average person) … then, yes, the Fed adopting NGDPLT would be “bad” for the country.

    Of course, I disagree with each of those antecedents, so naturally your conclusion doesn’t at all follow for me.

    “It is difficult to argue with somebody that does not stop to consider the causes that lead to the crisis in 2008…”

    Why do you make that accusation?! I’ve spent _years_ trying to understand the causes of the current Great Recession.

    “…and that thinks that just by extra money printing the problem would have been solved.”

    But this follows so naturally, since I finally understood that the cause of the recession was a lack of money printing. So of course printing extra money would have fixed the problem.

    “ignoring whether crushing debt burden (nominal) has a real cause”

    I don’t ignore it. I consider that hypothesis, then check the evidence, then reject it when the historical data show that the hypothesis is not supported.

    Meanwhile, the alternative hypothesis that an NGDP collapse at the end of 2007 directly caused the subsequent “crushing debt burden”, is very well supported by the historical evidence.

    “The price of it is inflation”

    The cost of 5% annual controlled NGDP growth is stable 2% inflation, which has essentially no impact on people’s real buying power. Meanwhile, the price of the NGDP collapse in 2008 is millions of workers forced into unemployment against their wishes, untold misery and suffering, and a lack of productive capacity to produce as much wealth as should have been feasible. That’s a huge cost, which you constantly ignore. (Or dismiss as a “necessary” adjustment.)

    • I do not believe you are an “elitist” and you accept I criticized Mr. Sumner’s proposal on “marketing” grounds (even if you do not buy the grounds on which I base my thinking that Mr. Sumner’s proposal is a marketing Trojan Horse), so let’s leave this as “settled”, if you agree.

      From my intellectual framework, even without much of the Austrian paraphernalia, it is very difficult to accept that somebody would disregard the concept of “misinvestment” as trivial or irrelevant. The same with the concept of “debt”.

      I really do not get what your intellectual framework is beyond assuming that for you an hyperinflationary process is ok, because what you propose is much more radical than a simple Milton Friedman quantity of money rule or even Mr. Sumner’s NGDPT at a LOW level. You seem to imply that “misinvestment” and “debt” do not play a role in economic life, that if for instance an economy that had devoted itself to produce only hula-hoops (no cars, no houses, no food, no medicines, no universities, no nothing but hula-hoops), once everybody realized that hula-hoops are not that useful after all, and their market collapsed and there was no anything else to consume but hula-hoops and hula-hoop abandoned factories, and everybody was unemployed, then just the central bank printing money would solve everything. This is ridiculous…and has been proven so since there is a human civilization. The romans, in their decadence, did with coin clippings what they could no longer produce, and it was not a success. John Law tried your way, it was not a success. And your country is in a big mess precisely because of the kind of policies you defend.

      You say: “But this follows so naturally, since I finally understood that the cause of the recession was a lack of money printing. So of course printing extra money would have fixed the problem.”

      I say: how do you reach such a conclusion? What evidence supports it? To me it is a clear case of misinvestment cause by previous lax monetary policy

      You say: “I don’t ignore it. I consider that hypothesis, then check the evidence, then reject it when the historical data show that the hypothesis is not supported. Meanwhile, the alternative hypothesis that an NGDP collapse at the end of 2007 directly caused the subsequent “crushing debt burden”, is very well supported by the historical evidence.”

      I say: ok, where is the evidence?

      Finally, I do not ignore or disregard the cost of a post-debt crisis adjustment. I’d like you to be right, but you are not, because what you propose just causes a bigger crisis afterwards, either deflationary, because the central bank gives up in the face of ramping inflation, or (hyper)inflationary because all that monetized misinvestment is translated into prices and not even hedonically doctored indexes can hide it. Everybody is poorer and the adjustment is yet to be done. What kind of solution is that?

  7. 1. Can you define “misinvestment” in real time, without the benefit of hindsight? I suspect not. Whether an investment is good or not, depends critically on how the future does in fact unfold.

    2. I’m not sure I get the point of your hula-hoop example, but in any case you seem to be confusing supply-side vs. demand-side problems in an economy. I completely agree that low taxes, streamlined regulation, incentives to save and invest, public education, infrastructure, supply of natural resources, etc. are all critical to determining the long-run real growth rate in the economy. And the central bank has nothing to do with any of that.

    Completely separately, you seem not to understand that mismanaging the money supply, can add _additional_ damage to an economy (because of sticky wages, and to some extent prices), on top of whatever is happening on the supply side. The whole point of proposals like NGDPLT, is _not_ to “solve” the problem of economic growth; instead it is merely to prevent unnecessary demand-side damage, so that the usual economic growth from the supply side factors has a chance to actually occur.

    Money printing is not expected to “solve everything”. It’s only expected to prevent self-inflicted demand-side damage. There’s far more to the field of macroeconomics than just demand-side issues.

    3. You seem to only consider possible money futures of: deflation, fixed value (e.g. gold standard), or hyperinflation. You don’t seem capable of imagining stable, low inflation, such as the US experienced from 1980-2006. That multi-decade success story is what the rest of us are trying to replicate, but you never consider it as a serious possibility.

    You ask: “where is the evidence?”

    The evidence is here:
    when combined with an understanding of what macro effects one would expect, when NGDP suddenly declines instead of keeping up with the decades-long trend line. All the effects we’ve seen (“crushing debt”, etc.) are an easily-predicted consequence of that sudden drop in NGDP in 2008. There’s no need for any additional explanation.

    Even more important: the NGDP framework explains why we _didn’t_ see any major recessions after the huge stock market crash in 1987, and the huge dot-com crash in 2000. It’s not enough to just have a theory about the cause of the recent recession. You also need to look for previous times when your theory’s antecendents were true, and be sure that the predictions are still valid then. This is a case of Sherlock Holmes “the dog that didn’t bark”, and is the place where most other theories (e.g. Austrians) fail miserably. “Economists have predicted 11 out of the last 7 recessions.”

  8. !) This is no evidence of what you assume it to be…you extrapolate a growth rate in NGDP as if there was a natural law that would guarantee a certain degree of real growth if only some “smart” money supply management was provided. Real growth does not depend on that. It depends on population growth and productivity, and productivity is greatly affected by misinvestment even if you only can recognize it after the fact (I agree on that, but that does not mean misinvestment does not happen).

    2) the period of 1980-2006 was not a big success…it was the seed of what we are in now. In the first part of that period, Mr. Volcker killed the inflation of the 70s, and I’d agree it is an ok period, but from 1987 on with Mr. Greenspan, we had only a long credit based boom cycle. There is no mystery why there was no big recession after the 1987 crash, the system was still devoid of great quantities of debt, so the reflationary policies of Mr. Greenspan had a fertile ground. It is not that they caused good, what it was is that the harm did not manifest untll 20 years later, in 2007. As indication of this, look at a chart of the relationship between an additional unit of GDP per unit of debt since 1987 until now, you’ll see that you need more and more units of debt to generate a unit of GDP, a clear indication that the system is running not on real capital, but on debt. Hyman Minsky explained all that.

    3) Your money supply side managed stable low inflation economy is a myth in my view. It only “appears” to work until the consequences of misinvestment that your system fosters appear,sometimes decades later.Now I am convinced that you do not have a valid point.

  9. “you extrapolate a growth rate in NGDP as if there was a natural law that would guarantee a certain degree of real growth”

    Did you not read — or not understand — my comment about supply-side vs. demand-side? As you suggest, growing NGDP doesn’t help real growth at all. But what you miss, is that a surprising _fall_ in NGDP, below trend, can cause an additional (unnecessary) recession. Those are very, very separate claims. And you show your lack of understanding, by confusing them.

    “Real growth … depends on population growth and productivity”

    But I agree! The fact that you think I disagree, just confirms that you don’t understand me.

    “the period of 1980-2006 was not a big success”

    It was the greatest creation of real wealth in the history of human civilization. You’re a fool if you discount that.

    “the harm did not manifest untll 20 years later”

    Your theory, that some action in one year will cause economic harm decades later, after decades of continuous moderate growth, is foolish. Economic results don’t have memory like that. You need to explain what happens in one year, based on the circumstances you find in the year prior. It makes no sense to point to a “cause” 20 years earlier. Nor do you really have a theory, if you say “this thing you are doing today will cause an economic crash … some time between next year, and 50 years from now.” You’re being much too easy on yourself. That’s not a prediction, at least not one with any value.

    • “Did you not read — or not understand — my comment about supply-side vs. demand-side?”

      “Supply side economics” and the “supply of money” are conceptually unconnected. The only similarity is the name. And by saying that with the supply of money you can “merely to prevent unnecessary demand-side damage, so that the usual economic growth from the supply side factors has a chance to actually occur” is meaningless. Printing money accelerates economic growth (other things being equal) in the short term, at a big cost in the long term, no matter whether the economy has a good set of supply-side economic measures (low taxation, low regulation, etc.) in place or not.

      “is that a surprising _fall_ in NGDP, below trend”

      Here you have a big chunk of your conceptual mistakes. There is no such trend. You assume there is one because you extrapolate, there is no genuine reason why such a trend would exist. Until the First Industrial Revolution there was barely any growth anywhere. And if the “peak oil” guys are right, there is very little growth in our immediate future (revolutionary technological surprises apart). It has nothing to do with supply-side economics, it has nothing to do with printing money and it cannot be alleviated by printing money, it is just that growth is neither linear nor a given. See link below about growth thru the centuries.

      “sticky wages, and to a certain extent prices” (from prior reply from you)

      This is the usual keynesian excuse to tamper with the supply of money, without realizing that the harm caused is much bigger than any short term benefit. And wages are not as sticky as you think. In my country they have been falling for 4 years and counting.

      “It was the greatest creation of real wealth in the history of human civilization. You’re a fool if you discount that.”

      Who is the fool Sir? A big chunk of the growth in that period is inflation-disguising and the genuine one is due to technological innovation (Internet, etc.), which has nothing to do with the supply of money. It happened, to a much bigger extent, at the end of the 19th century despite most western economies being under a gold standard. Even then, it pales with the Second Industrial Revolution. Read this

      “Your theory, that some action in one year will cause economic harm decades later, after decades of continuous moderate growth, is foolish. Economic results don’t have memory like that.”

      You know Tectonic Plate Theory I guess, where it is posited that pressure under the plates accumulates over time, years, decades, sometimes centuries and finally that energy is released and produces what we call a earthquake. Can anybody predict earthquakes with precision? Can the hypothesis of pressure under plates causing earthquakes be proved in a mathematical way, like a theorem? No. Is it a plausible explanation despite the huge time lags between cause and effect? Many people seem to agree that it is. Under your State, there is something called the San Andreas Fault, and at some point it will cause the “Big One”. I hope it causes the minimum amount of damage when that happens, but when it does, will it be posited that the cause was something that happened a short time before the earthquake? No. The same with misinvestment. Many people accept it as a legitimate and good explanation, in my view, of debt-caused economic crises, and yes, the cause usually starts decades before “the event” (in our case, very likely with the decoupling of the US Dollar from gold in 1971). In both cases, earthquakes and debt-crisis, we deal with “catastrophic” processes occurring in dynamical systems, and these processes have no “real time” cause, only a “real time” trigger. I remit you to the work of Didier Sornette that treats this in a mathematical way applied to the stock market.

      When we started this exchange, despite your arrogance, I thought you might have a legitimate point I could learn from and, in that case, at least partially improve my explanation. You correctly pointed to a silly example in my original post, I conceded that and I appreciate it. Beyond that, I do not think you have true understanding of this subject. Your condescending style is hard enough to swallow if I thought you are right. Believing, as I do, that you are not, makes it even harder.

  10. Unfortunately, you’re again reacting (mostly) to your own ideas, not to what I said. In much of this, it isn’t so much that we disagree (although we also disagree as well), but more that you didn’t understand what I said.

    You said: ““Supply side economics” and the “supply of money” are conceptually unconnected.”

    I know! That was my whole point! The supply of money is a NOT a “supply-side” activity, it is a DEMAND-side activity! Meanwhile, economic growth is caused by supply-side things — we agree on that too!

    The only thing I claimed (which you seem to disagree with, although it’s hard to tell), is that a LACK of money printing (compared to expectations) can cause an ADDITIONAL recession (due to sticky wages), because of lack of aggregate demand, on top of whatever growth supply-side factors would have led to.

    I’m sure you disagree with that too, but at least try to be clear about what you’re disagreeing about. You keep putting words in my mouth (and Sumner’s), that I never said, and don’t believe.

    “Printing money accelerates economic growth”

    Not true. Only printing more money than expected. Instead, printing money at trend level (“low, stable inflation”) merely allows the real growth (determined by supply-side factors, not by money printing) to occur. Printing more money than expected results in inflation (over the long term); printing less than expected results in recession.

    “There is no such trend.”

    There may not be a trend throughout all of human history, you’re right about that. Fiat money in modern economies is only about 50 years old. But there sure is a very stable annual trend of NGDP growth for decades and decades.

    ““peak oil” … has nothing to do with supply-side economics”

    I’m not sure what you think the words mean. Are you using “supply-side economics” as a synonym for “trickle-down economics”? That’s yet a third thing (that I was also not talking about!). I was dividing economics into factors that affect real supply (such as peak oil!), and factors that affect nominal demand (such as the money supply). The money supply has nothing to do with the supply-side (unlike your first comment above). But neither one has much of anything to do with trickle-down economics!

    In any case, yes, peak oil IS a supply-side factor, and of course affects real economic growth. And the money supply, or NGDPLT, can’t help at all with a supply-side slowdown in real growth. That’s not what it’s designed for.

    “wages are not as sticky as you think”

    Have you done any empirical research on this? How sticky do you think they are? How sticky do you think that I think they are?

    Here’s some empirical work on the subject by Paul Krugman:
    Study in particular, the final graph. The data seems pretty clear. Do you have historical studies which contradict this?

    “A big chunk of the growth … is due to technological innovation … which has nothing to do with the supply of money”

    WE AGREE! Real economic growth comes from supply-side factors. I’ve said this from the beginning.

    But you’ve missed the point. The point was, that huge real economic growth occurred from 1980-2006, _despite_ low stable moderate inflation (2-3%) during all of those years. So your hypothesis that low inflation necessarily causes “malinvestment” and ruins real growth, is simply false. They are compatible. It is possible to have huge real growth, and have low stable moderate inflation at the same time. We’ve already had a couple of decades of that.

    • Supply-side economics. I mean this:

      Suppy-side economics NOT equal to trickle-down economics that neither of us has mentioned

      I can concede that, other things being equal, if you withdraw money from an economy, this will depress economic growth. Never denied that. Thing is, other things were not equal at all. In my view there had been TOO MUCH easy money (Greenspan), and that was the cause of the 2007-2008 crisis. Please, consider the tectonic plate part of my post, that was the main one and where you really lack insight, in my view.

      Sticky wages: I can concede that. Although they are falling in my country, it is true that there is some stickiness here.

      Trend in real GDP growth: no trend as you concede. The growth in the last 50 years is mostly either inflation disguised, population growth, genuine techinical development independent from money printing (computers, internet, biotech, etc.) or “growth taken from the future” tectonic pressure to be released at some point. Your rosy view of the last 50 years (a short time btw to extract trends in economic growth) is biased, in my view.

      Peak Oil:another terminology fight. Yes, Peak Oil is a supply-side FACTOR, but not a supply-side economics feature. Supply-side economics is about a certain kind of economic policies. I do not think we disagree on this, just misunderstanding probably due to my limited english.

      In the end it comes to this. You do not accept misinvestment as a MAJOR cause of economic calamities that expresses itself thru accumulating debt (get a graph of total debt/GDP in the USA thru this century and you’ll see how a peak happens around 1929 and another one around 2007). And you think that by money printing you can alleviate demand-side deficits in the economy (and yes, I get the idea of “expected” vs. “unexpected”). My belief is that all this improvement is only apparent and you pay for it thru tectonic pressure…to be released at some point in the future, sometimes a distant future.

      Despite everything I appreciate your zest, but I do not think there is any chance we agree.

  11. I apologize for using the phrase “supply-side economics”. What I meant was “economics of supply-side factors”. I was trying to distinguish it from the money supply, which affects the economics of the demand-side. I’m sorry for causing the conversation to get distracted into this other thing which popularly uses the label “supply-side economics”. I didn’t mean to bring that up at all.

    “You do not accept misinvestment as a MAJOR cause of economic calamities”

    That’s correct. In all this time, you’ve never once defined “misinvestment”, in any way that it could be detected ahead of time. You just believe your theory, and then if a recession happens, you say (in hindsight) “ah ha! there must have been misinvestment earlier!”

    That’s not an explanatory, predictive theory. Your word “misinvestment” doesn’t actually refer to anything in the real world.

    “The [real] growth in the last 50 years is mostly…”

    Again, why would you ever think that I disagree? Real growth comes from population growth, plus productivity growth. You and I agree about that. Nominal growth includes that, plus some inflation growth. We agree about all of this. I’ve never said anything different.

    The fact that you keep saying this over and over again, suggests to me that you still don’t understand what I’m trying to tell you.

    • 1) on misinvestment: it is true you can not “prove” it in real time, although there is a reliable long term indicator, and that one is the ratio of total debt (government + household + corporate) to GDP. When this trends upwards year after year you can assume that misinvestment is happening. Why? because if that was not the case, the cashflows from the investments that incurred the debt would pay for themselves. I remit to the work of Rogoff &Reinhart, “this time is different” to emphasize the importance of debt, something that you disregard.

      2) on misinvestment: I do not believe all recessions are caused by misinvestment. For instance, the 1970s’ recessions were supply-side shocks. Misinvestment did play a very little role there, if any.

      3) on misinvestment: I remit again to my analogy with tectonic pressure. You’ can’t measure that in real time either, but it is there, and you do not seem to doubt the theory despite its lack of precision predictive power. Tectonic Plate Theory does have predictive power, but lacks precision. Same with the Austrian Business Cycle Theory, it has predictive power, but no precision. You can’t tell at what level of of debt/GDP ratio the crisis will happen. You have a numerical education, the work of Didier Sornette on catastrophic events (in a mathematical sense) should come easy to you. Misinvestment’s trail is excess debt, debt that does not extinguish itself but accumulates, until it provokes a catastrophic event (1929, 2007). It is not so outlandish if you get out of the keynesian framework that despises the idea that debt does matter.

      4) Growth in past 50 years: well, we seem to agree about what growth is and the causes of it. Even on the fact that there is no upward trend in the real GDP growth rate of economies. This last aspect is the theoretical core of you thesis. Without a natural upward trend in the real GDP growth rate of economies all your framework is shaky if not outright wrong. What surprises me is that if you agree on that, why do you continue to hold ideas that have no theoretical backing?

      5) Have a look at this: I know it is not a log graph but the idea is very clear…add to this that if you’d buy just a little bit, only a little bit, of my misgivings about how inflation is computed then the stick would be even longer and steeper. In this context, any rosy view about the last 50 years has to be taken with great reservations.

      6) If you accept the no trend in real GDP growth rate, this is significant for your thesis. If you could see that some causes, like tectonic pressure, do exist even if you can’t measure them in real time, this is also significant. If you can see, with the evidence and rationales that I have brought up that the last 50 years are not what they look, that should make you reflect.

      7) To conclude: you seem to agree with me more than at the beginning of this exchange, but you do not draw the conclusions from this (partial?) agreement. I do not know what else to say.

  12. I admire your macro theory, for its consistency. But it seems unfalsifiable. I can’t imagine any real-world historical data that could ever get you to doubt your ideas. Can you? Doesn’t that bother you?

    “the keynesian framework that despises the idea that debt does matter”

    I’m not a Keynesian, but I’ve never heard that claim from their camp. They may have said that debt _today_, under current conditions, is not a significant problem that needs solving today. But to say that debt never matters? I don’t think they ever said that.

    “upward trend in the real GDP growth rate”
    “any rosy view about the last 50 years”

    You’ve used different phrases here, and I’m not sure which you mean. I think that US real economic growth has been pretty steady at about 3% (1% population + 2% productivity) for many decades. This means that the “growth rate” is far, far above zero, and that the US is vastly wealthier today, than it was 50 years ago. Forget about money and prices: just look at an actual side-by-side comparison of the US in 1960 or 1980, with 2005. Military power: aircraft carriers, fighter jets. Compare the computer offerings from Dell, Apple, and Microsoft in 1980, vs. 2005. Recall waiting in line on Fridays at the bank to deposit payroll checks, vs. direct deposit and ATMs today. 500 channels of television vs. three networks. The sq ft in a typical house, and the size of house windows, in 2005 vs. 1960. Incredible advances. It’s just crazy to think that wealth has stagnated.

    Now, the fact that the growth RATE is stable, means that there is “no upward trend in the real GDP growth rate.” Because the growth rate is stable, not increasing. But a stable growth rate means that we’re much wealthier in the future than in the past, and it’s all that I’m assuming for the benefit of Sumner’s original NGDPLT proposal.

    So: did you mean to complain about a lack of upward trend in the growth RATE (which I never claimed, don’t believe, and don’t need), or did you mean to criticize a lack of upward trend in actual economic growth (which I certainly believe, and rely on)?

    If you really want to argue that there has been no economic progress in the US in 50 years, I think you’ve got a tough argument to make.

    On the other hand, if you agree with stable economic growth, but really meant to say what you wrote (that the growth RATE is not increasing) … then I wonder why you think this is significant to me. I never relied on an ever-increasing RATE of economic growth.

  13. BTW: I checked the zerohedge inflation graph. I don’t know why you (and he) think it is important. Of course a gold standard provides stable currency values. Gold has been close to stable in value for thousands of years, not just centuries! And of course, once you take the dollar off the gold standard, and you have fiat currency, then you can see annual inflation.

    But this is just the same as what we talked about at the beginning: the Fed’s goal is NOT to average 0% inflation. The Fed is _trying_ to average 2% inflation. You should expect a historical graph like that, even if the Fed were perfect (which I don’t believe that it is).

    The question is: so what? You need to look at the pros and cons of having a stable (gold-standard) currency, vs. the pros and cons of a fiat currency with low, moderate inflation. The macroeconomists that I listen to, think the second case is _better_ for the economy (and the average person), than the first case. We have a choice, and we _prefer_ a little annual inflation (on net), to the century of stable currency.

    Stable currency is not a goal in and of itself. It’s just a tool, to try to make the economy run smoothly. But there’s a better tool, which is a well-run fiat currency (with low stable inflation).

    • Doesn’t that bother you?: first of all, it is not my theory. This was formulated by the Austrians (Mises, Hayek, Rothbard, others). And It is falsifiable, sort of. I gave you the 2 examples of 1929 and 2007, but it is quite common in world history that there are debt crisis, and misinvestment is the reverse side of the coin of excess debt, as I explained in my last reply. Rogoff & Reinhart has plenty of examples of such crises over the centuries.

      Does it bother you that Tectonic Plate Theory cannot be (with present and foreseable technological means) be falsified but that you choose to ignore this aspect? If I had read in your replies that you reject the Austrian Business Cycle Theory as a plausible hypothesis because of it not being falsifiable AND that for the same reason you reject Tectonic Plate Theory, then I’d say that you are at least consistent, but I do not think that is what you think, you are choosy.

      Your natural positive growth rate of GDP is also a theory that cannot be falsified, in fact, as I showed you in a former reply, for most of human history there was barely any growth at all. 50 years of growth in the face of centuries or more, is not enough evidence. So your main theoretical backing has, at best, the same defect of unfalsifiability as the ABCT.

      Keynesians do not despise debt: well, I’ll take advantage of today’s news here. When Paul Krugman says that it might be a good idea for the USA Treasury to mint a “trillion dollar platinum coin”, there is a “weltanschauung” behind this endorsement.

      Upward trend in GDP growth RATE: you are right here, I used a mistaken expression and did not mean what I actually wrote. What I meant is a natural positive growth in GDP, without the rate, that is, that according to your hypothesis there really is a trend for GDP to be positive. First of all my apologies for the expression used. That said, we already discussed this in a prior reply, and I remember you accepting that there really is no trend for a positive GDP throughout most of human history, but that there is for the last 50 years. I argued, and argue, that 50 years is not enough to build a theory around it.

      I admit that there has been real growth over the last 50 years, only less so than published due to misreported inflation. And I totally agree with technological progress having happened over that period. Let’s define that period as the one since the WWII. It has 2 very distinct phases from a monetary point of view. The first one until 1971 with the USD linked to gold and with a “conservative” (up to a point) monetary policy. The second one from 1971 until now with a “free fiat” regime with huge monetary expansion. Since growth has not been higher in the second period than in the first one, one could conclude that it is technological progress the responsible for this growth, not monetary policy.

      Zerohedge graph: the graph shows an inflation rate not of 2% but of about 4-4,5% from 1970 until now.

      FED wants 2% inflation and not zero: we discussed this in one of the replies. Even if I think 0% inflation is better for the reasons stated many times, I already said that I would not fight a true 2% inflation rate. But this is not the case. The Zerohedge graph shows an inflation rate of 4-4,5% from 1970 onwards (and that without taking into account inflation underreporting). And what the FED is doing now, multiplying its balance sheet by 3 in 4 years and by 4 by the end of 2013, does portend even higher inflation. So I cannot buy that the FED aims at a 2% inflation rate. That might be its public policy, but not its real one.

      I did not expect to have such a long exchange with you, but now we are going in circles. You do not accept my ABCT, and I cannot accept that there is a natural positive growth rate in GDP. Besides you defend the 2% inflation rate of the FED. On my side, I disagree with that policy, but could live with it if I believed it is the real one they have. I believe their true, unstated, policy is a higher inflation rate.

  14. Yes, this has been a surprisingly long conversation. I’ve actually been impressed with your attempts to think about this subject; most of you internet Austrians just like to lecture, but don’t seriously consider another point of view. I give you credit for actually debating me.

    “And It is falsifiable … I gave you the 2 examples of 1929 and 2007”

    Those are positive examples, that reinforce your beliefs. “Falsifiable” means, what could you possibly observe about the world — even hypothetically — that would get you to change your mind, to reject your current theories?

    I think you’ve constructed such an elaborate fantasy, that you can’t conceive of being wrong, and you can explain any data (hence, you really can’t “explain” any of it), so therefore it isn’t even conceivable that you could see data that would force you to admit that you were wrong.

    But that means you’re not really doing science, either.

    “Tectonic Plate Theory cannot be … falsified”

    I do like your analogy, but that theory has vastly more supporting evidence, than your “malinvestment” theory. Plate tectonics was inspired by the shape of the modern continents … but then it predicted things like similar fossils of non-swimming extinct land animals being found near shores that used to be adjacent, but are no longer. And then the fossils were found. But only until the continents split, after which the fossils diverged again. Extremely compelling supporting evidence. It’s a lot more sophisticated than just “plate movement causes earthquakes … eventually”. That latter story, by itself, isn’t much stronger than “Zeus causes lightning by throwing thunderbolts when he is angry.” They’re just words, not real scientific theories.

    “natural positive growth rate of GDP is also a theory that cannot be falsified”

    I’m not proposing it as a law of nature! I’m just observing that, for the last couple of centuries (since the industrial revolution of the 1800’s or so), national productive wealth has reliably increased every year. That’s a heck of a track record. Yes, there was very little human economic progress in the ten thousand years before that (not to mention the millions before that) … and perhaps in the future we will return to an era of no growth, and I’ll support your suggested change to a gold standard then.

    But for next year? The next five years? Ten? Fifty? I’m pretty confident in saying that all mature national economies will see significant real growth, on an annual basis.

    NGDPLT isn’t supposed to be “the answer for all time”. It’s: a very good way to run modern economies during the decades around now. Say, plus or minus a century from today.

    I’m perfectly happy if you want to reevaluate monetary policy every few decades. Perhaps things will change in the future.

    “Paul Krugman … platinum coin”

    As always, you ignore the critical difference between a recommendation “under current (depressed) economic conditions”, vs. a recommendation that is supposed to be valid at all times. We are currently living in very special economic times, and hence the macro advice is similarly special. This advice does not apply to ordinary economies. In the US, probably only for two 5-year periods in the last century (the Great Depression, and now).

    Using this, as an example that “Keynesians don’t care about debt”, just means that you aren’t even trying to understand.

    “technological progress the responsible for this growth, not monetary policy”

    Why do you keep repeating this in every reply, when EVERY time you say it, I say that I agree? I KNOW that real growth comes from productivity (and population) growth. I KNOW that monetary policy doesn’t cause real growth. That isn’t its goal! So why do you keep bringing this up? How can I get through to you, that you are assuming some kind of bizarre claim, that the rest of us never made and don’t believe?

    You should not expect a well-run monetary economy to have significantly higher economic growth, because that isn’t the point of monetary policy.

    “an inflation rate not of 2% but of about 4”

    We could argue over what the right number should be, but I wouldn’t have a problem either of those. Low, stable inflation is sufficient for stable growth. Whether the inflation number is 2% or 4% doesn’t matter much. What matters is that it is NOT 0%, and also (probably) that it is not 20%+.

    “And what the FED is doing now … does portend even higher inflation”

    Are you finally making an actual prediction for the future? If your predicted higher inflation (significantly above 2%) does not come to pass (say, in the next decade) … will you go on record now as agreeing that this invalidates your understanding of macroeconomics, and you will then abandon your allegiance to the Austrian school?

    Because the other macro economists are making the VERY strong prediction that the Fed’s balance sheet will NOT lead to high inflation.

    One of these theories is right, and one is wrong. If you are wrong, will you admit it?

    “I cannot accept that there is a natural positive growth rate in GDP”

    You honestly think that there’s an equal chance that US (or world) real economic growth will be negative over the next decade, as that it will be positive? Care to bet on that?

    • Falsifiable ABCT: I could imagine a test to falsify it: see whether situations with total debt/gdp ratios above a threshold (say 300%) revert to a “normal” situation (say 150%) without either a deflationary crash or average inflation ABOVE the growth rate of the economy for the period of adjustment.

      ABCT as fantasy: it is a respected theory, no more or less falsifiable than your “a little inflation is good” (still wait for you to explain me the rationale of it) theory, fantasy?

      Krugman: you are right on that one, I went easy on myself. Do I believe Keynesians despise debt? Yes i do. Do I have seen it written in a textbook? No. My apologies for the easy excursion.

      Doing science: Do you really believe economics is a science? I never prentended that. I think ABCT is the best explanation, by far, of how the business cycle works (apart from external, supply side shocks), but as you pointed out, it is not easily falsifiable, although as I indicated above, you could think of ways to backtest the hypothesis. But let me ask, what about you, what takes you out of the fantasy realm and into hard science?

      Natural growth in economy: I can agree with most of what you say but for the assumption that just because there is growth a positive inflation kind of monetary policy is the best one. I do not see the logical connection, what theory supports this assertion? During one of the periods with the fastest economic growth in the USA (after the civil war until the Big Depression) the country was under a gold standard. It did not seem to hamper growth and it was a time of even faster technological progress than today. So, can you give a rationale for your theory?

      Gold standard: I am not a fanatic of the gold standard, only about a monetary policy that does not foster inflation. A rule along the lines of Milton Friedman money quantity tracking REAL growth would work fine for me.

      Inflation: many of our disagreements have a root in the definition of inflation. I use a very simple one: A basket of goods and services WITH food and energy, ARITHMETICALLY averaged with weighs corresponding to the approximate consumption of each good and service and NO HEDONIC FACTORING and NO SUBSTITUTION EFFECTS. The way the BLS computed it in 1980. Since then it only cheats. If you can accept this definition, I’ll answer the prediction questions you place at the end of your reply.

      • “still wait for you to explain me the rationale of [a little inflation is good]”

        Because of the human psychological effect of sticky wages, the labor market does not clear efficiently:

        Low, moderate, inflation allows the labor market to allocate efficiently (by causing the effective floor of 0% wage increases to be a real decrease), and thus helps with what would otherwise be widespread unnecessary unemployment.

        ” a gold standard. It did not seem to hamper growth”

        The growth rate depends on technological progress, yes. Electricity, refrigeration, and railroads/steam engines/cars were more important technology than anything in the last century, yes.

        But check your own graph, in more detail. There was much more volatility then, than in the Great Moderation of 1980-2005. That’s what good monetary policy does: it prevents self-inflicted, unnecessary, recessions. The late 1800’s had plenty of (demand-side) recessions.

        “The way the BLS computed it in 1980. Since then it only cheats.”

        As always, you assume a conspiracy, designed to screw the average person, in order to enrich elites. But just for argument’s sake, can you even give the public justification provided by the BLS for their change? Can you think of ANY reason, besides “cheating”, why they might have updated their statistics?

        “If you can accept this definition”

        No, of course I don’t accept it. I admire you for proposing a concrete definition, but besides being silly, I’m not sure that it can even be evaluated.

        In modern life, I can get bananas for about 69 cents/pound. I can get fresh blueberries year-round, for a couple of dollars a box. In 1900, bananas were rare (in temperate zones), and blueberries were unavailable out of season. John D. Rockefeller was worth millions of dollars. How much would it cost him, to get a fresh banana and a box of fresh blueberries in the middle of January in New York? Could he have done it for $5 million, in 1900? I can do it for $5, at the corner grocery store.

        Is “inflation” over the last century, actually a negative thousands of percent?

        In 1985, the Cray-2 supercomputer cost $16 million (nominal cost, in the dollars of that day). Today, I can get an iPhone 5, with similar processing specs, for about $500. What is “the” correct inflation rate, for my personal computing?

        You’re just imagining the easy cases, with goods that are essentially unchanged over thousands of years, and also where the current stock is much greater than the new flow (so that changes to manufacturing costs don’t have much effect either). The best example is gold: we can compare the amount of labor hours required to purchase an ounce of gold, from back in Roman times, to the modern day. That’s a kind of “inflation”.

        But most of what we buy, isn’t like that. The basket of goods changes throughout time. A century ago, lobster used to be what they fed poor dockworkers, who couldn’t afford “real” fish. Now it’s an expensive delicacy. The oceans used to have a lot more edible fish, and we used to eat different species. Most of the species from a century ago, are now overfished and unavailable. But we eat different species today.

        How about cars? Both in 1970, and today, a Chevy Camaro was “an entry-level sports car”. In both years, it was available for a certain nominal dollar price. Of course, the nominal price today is much higher than it was in 1970. But is all that change inflation? It’s not the same car any more. The performance (and safety!) specs of a 2013 Camaro dominate a 1970 Camaro. How do you calculate “the” inflation rate of cars, between 1970 and now?

        You’re too stuck on thinking of the easy cases, like gold. In a modern economy, a concept like “inflation” isn’t a precise thing, even in theory. We’re not arguing over who is measuring “it” most correctly … because there is no real “it” to be measured.

  15. so that was it…sticky wages…it is not enough for me Don.

    We will never agree. For you misinvestment is a conceptual contraption, while for me, in the context of ABCT, is a bigger insight than all keynesian economics packed in a bundle.

    For you sticky wages justify positive inflation while for me, while acknowledging they behave, somewhat, this way, are a secondary factor.

    On the inflation front, I do not want to start another series of tens of replies and counterreplies. Just let me say that while the examples you use are true and insightful in their own way, they relate to measuring technological development, not inflation. Inflation is about measuring the cost of living. I concede that there is some leakage from one to the other, but much less than what you imply….and well…we’ll not start a long discussion about this, will we?

    Finally, the conspiracy. We did not discuss it and we will not. if you ever change your mind about it remember that I planted the first (?) seeds of doubt in your mind. Just a joke.

    I enjoyed this, despite everything you never gave up.

    I have an unrelated question for you. I googled you and saw you have a background in AI. What do you think of Ray Kurzweil’s prediction of machines passing the Turing Test by 2029?

    be well

  16. OK, I’ll stop bothering you about macroeconomics.

    With AI, most people either think it’s impossible, ever — or else, like Kurzweil, they think it’s right around the corner. The truth is that AI will definitely arrive “some day”, but probably not soon. Kurzweil is far, far too optimistic with his timeline.

  17. I watched the first half (20min!). It’s fine work, but it’s not some amazing breakthrough. The biggest lesson from AI, since it started in the 1960’s, is that intellectual tasks which seem to take great mental effort for humans, like playing chess or diagnosing medical problems, are relatively easy for machines to do. That’s not why AI has been stuck for decades. The problem turns out to be all the mental stuff that we humans find easy and automatic: recognizing faces, having a 3D sense of the world around us, speaking and understanding natural language, etc. This is just a small, small, small step along the way.

  18. I read a bit about NN based AI in the 1990s and have not tracked it since. When I saw this it looked to me that having its own motivational mechanism and having NNs 5-6 layers deep should be a big improvement. The example about traffic signal recognition is also quite impressive. All the stuff you mention is the kind of stuff that old AI (not NN based) was unable to tackle but this seems to address, at least partially some of it.

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