Friday, April 18, 2014

A Desperate Expedient

I never saw this one before. Openness:

Graph #1

At FRED the notes on it say:

Exports plus Imports divided by GDP is the total trade as a percentage of GDP. More information is available at

Exports plus imports. Openness. Here's the same data on a log scale:

Graph #2
Skidelsky quotes Keynes:

'If nations can learn to provide themselves with full employment by their domestic policy....there would be no longer a pressing motive why one country need force its wares on another or repulse the offering of its as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle'.

Thursday, April 17, 2014

One of my favorite lines from Keynes:

It is astonishing what foolish things one can temporarily believe if one thinks too long alone...

What Maynard is telling us here is that if you want to understand the economy, you are going to have to do a lot of independent thinking.

He is telling us what he did.

Wednesday, April 16, 2014

"laying the groundwork for the first rate hike"

Tim Duy:

Overall, the Fed appears committed to a long period of low interest rates and I continue to think this should be the baseline view. But actually policy seems to remain hawkish relative to the Fed's rhetoric. By its own admission, the Fed is missing badly on both its mandates. Why then the push to reduce accommodation by ending asset purchases and laying the groundwork for the first rate hike?

Here's the argument Tim Duy is taking a turn at: It's time to start fighting inflation. No, it's not. Yes, it is. No it's not.

Here's the policy version of that argument: It's time to start raising interest rates. No it's not. Yes, it is. No, it's not.

Here's the problem: We need to stop using interest rates to fight inflation.

Does what I'm saying seem irrelevant? Actually, my argument is the relevant one. It's using interest rate hikes to fight inflation that's irrelevant -- and plain wrong -- because we use credit for growth. The policies contradict. Our policy of raising interest rates contradicts our policy of getting good growth. We have to fight inflation a different way.

We should fight inflation by paying down private debt faster. It's time to create policies that encourage and reward the accelerated repayment of debt.

Tuesday, April 15, 2014

Siding with Sumner

Scott Sumner:

Before we consider whether we are likely to repeat the mistakes of the 1960s era Fed, let’s review precisely what those mistakes actually were. Here’s the data as of November 1966:

Unemployment rate = 3.6%, and falling.

Inflation = 3.6% over previous 12 months. That’s a big increase from the 1.7% of the 12 months before that, and the 1.3% inflation rate two years previous. The “Great Inflation” began here.


Keep this data in mind when some fool tells you that the Great Inflation was caused by oil shocks or the Vietnam War or budget deficits or unions, or some other nonsense.

So let me add a little something to that. Sumner says it's not the Vietnam war that caused the inflation, and not Federal deficits. (He also says it's not the oil shocks of the 1970s that got inflation going in the 1960s. That can stand on its own, I think.) Here's a picture of the Federal deficits from 1950 to 1970. Bigger is higher on the graph:

Graph #1
The high point on the graph occurs in 1968, as the label indicates. Follow the blue line down to the left and you come to a low point just above the "5" in the "1965" on the horizontal axis. That low point is the Federal deficit in (you guessed it) 1965. A quarter-inch to the right of that you can see a kink in the blue line; that's 1966. Another quarter-inch to the right there is another kink, just below the horizontal line at the 10 level. That kink is 1967.

Now you can certainly say that the 1968 deficit was a big one, for the 20-year period we're looking at here. And you might say the 1967 deficit was a big one. But the deficits were small in 1965 and 1966; you can see that for yourself. Yet as Sumner points out, the rate of inflation was already climbing vigorously by 1966.

The Federal deficits did not cause the Great Inflation.

You know what I think: The rising cost of finance was the cost that started driving prices up, by the mid-1960s.

Monday, April 14, 2014

Domestic Credit Market Liability -- Federal (green), Financial (blue) and Other (red)

Sunday, April 13, 2014

Inflation and Economic Growth

From the PDF by Robert Pollin and Andong Zhu:
This paper presents new non-linear regression estimates of the relationship between inflation and economic growth for 80 countries over the period 1961 – 2000. We perform tests using the full sample of countries as well as sub-samples consisting of OECD countries, middle-income countries, and low-income countries. We also consider the full sample of countries within the four separate decades between 1961 – 2000. Considering our full data set we consistently find that higher inflation is associated with moderate gains in GDP growth up to a roughly 15 – 18 percent inflation threshold...

Hyperinflations aside, the relationship between inflation and growth has been at the very center of macroeconomic theory debates since the monetarist counterrevolution against Keynesianism beginning in the 1960s. The main progeny of that counterrevolution—the “natural rate of unemployment,” the vertical Phillips Curve, and New Classical Economics more generally—have been focused largely around demonstrating that there can be no positive benefits for economic growth or employment of operating an economy at anything above a minimal inflation rate in the range of 2 – 3 percent...

This position contrasts sharply with the Keynesian perspective and the early Phillips Curve models, which held that inflation and economic growth can be positively associated when inflationary pressures emerge as a byproduct of rising aggregate demand. In this Keynesian framework, it is not the case that inflation is itself a positive engine of growth, certainly not a primary growth-inducing force. The point is rather that, if rising aggregate demand is leading to increased growth, then some inflationary pressures are likely to emerge in this scenario as a relatively benign byproduct...

Considering first our full data set of 80 countries between 1961 - 2000, we have consistently found that higher inflation is associated with moderate gains in GDP growth up to a roughly 15 – 18 percent inflation threshold.

via Reddit.

Saturday, April 12, 2014


From The History of the Phillips Curve: Consensus and Bifurcation by Robert J. Gordon (PDF, 41 pages, 2008):

The history of the Phillips curve (PC) has evolved in two phases, before and after 1975, with a widespread consensus about the pre-1975 evolution, which is well understood...

The pre-1975 history is straightforward and is covered in Section I. The initial discovery of the negative inflation–unemployment relation by Phillips, popularized by Samuelson and Solow, was followed by a brief period in which policy-makers assumed that they could exploit the trade-off to reduce unemployment at a small cost of additional inflation. Then the natural rate revolution of Friedman, Phelps and Lucas overturned the policy-exploitable trade-off in favour of long-run monetary neutrality. Those who had implemented the econometric version of the trade-off PC in the 1960s reeled in disbelief when Sargent demonstrated the logical failure of their test of neutrality, and finally were condemned to the ‘wreckage’ of Keynesian economics by Lucas and Sargent following the twist of the inflation–unemployment correlation from negative in the 1960s to positive in the 1970s.

From After Keynesian Macroeconomics by Robert E. Lucas and Thomas J. Sargent (PDF, 34 pages, 1978):
1. Introduction

We dwell on these halcyon days of Keynesian economics because, without conscious effort, they are difficult to recall today...

That these predictions were wildly incorrect, and that the doctrine on which they were based is fundamentally flawed, are now simple matters of fact, involving no novelties in economic theory. The task which faces contemporary students of the business cycle is that of sorting through the wreckage, determining which features of that remarkable intellectual event called the Keynesian Revolution can be salvaged and put to good use, and which others must be discarded.

For the record...

The "negative" correlation of the Phillips Curve is the tradeoff: a little more inflation and a little less unemployment, or the reverse. The "positive" correlation is when both inflation and unemployment increase, or both decrease.

The negative correlation displays the tradeoff for given economic conditions. The positive correlation shows what happens when economic conditions improve or get worse. When people deny the existence of the tradeoff, it is because they are considering the long term, during which the condition of the economy varies. Even so, the tradeoff still applies to the short term.

But the proper fix for our economy is not to fiddle with the short-term tradeoff. The proper fix is to figure out how to improve conditions over the long term.

Friday, April 11, 2014

Profit versus Interest

Buried deep within JW Mason's The Puzzle of Profits lies a simple insight:

One other thing to clear up first: profit versus interest. Both refer to money tomorrow you receive by virtue of possessing money today. The difference is that in the case of profit, you must purchase and sell commodities in between.

It's an important difference. In the case of profit, you have to come out of the world of finance and deal in the world of real products. Things get done. Things get built. Things get made. GDP expands. Income grows. Wealth increases. All of that.

I take from Milton Friedman the idea that "money" should grow in proportion to "output", and not faster. When things get done and built and made, output expands. And when output expands, it's okay if the quantity of money grows, too. Not a hard and fast rule, but a good conceptual one.

So, when profit is being made, output is increasing and money, one hopes, along with it.

But when interest is being earned, nobody said anything about output.


I'm leaving out important things here. I'm leaving out that Friedman didn't clearly define "money". I'm leaving out that money shouldn't grow slower than output, either. And I'm leaving out the one that's so hard for the "money is debt" people to understand -- that when the money grows, the portion of it that costs interest should not grow faster than the portion that doesn't cost interest.

Yeah, I left out those things. But I only left them out of the post. Others leave them out of their explanations of the world.

I left them out because I want you to distinguish between interest and profit.

Thursday, April 10, 2014

That's what I was trying to show!

I showed you this graph back in November, and even dwelt on it some.

Graph #1
Others also have been bothered by the continuing collapse of long-run Potential GDP estimates:

Graph #2
But wow. Here is the right way to show it, for sure:

Graph #3
Graph #3, from Larry Summers, Brad DeLong, and Laurence Ball, via FiveThirtyEight.

Well done, gentlemen.