Krugman recently had two in a row on inflation and the politics of economics. I'll try to ignore the latter.
#1
July 29, 2013, 4:57 pm
I’ve been saying for a long time that we aren’t having a rational argument over economic policy, that the inflationista position is driven by politics and psychology rather than anything the other side would recognize as analysis.
The She-Devil of Constitution Avenue
I’ve spent five years and more watching the inflationphobes, who weren’t particularly sensible to begin with, descend into shrill unholy madness. They could have reacted to the failure of their predictions — the continued absence of the runaway inflation they insisted was just around the corner — by stepping back and reconsidering both their model and their recommendations. But no...I’ve been saying for a long time that we aren’t having a rational argument over economic policy, that the inflationista position is driven by politics and psychology rather than anything the other side would recognize as analysis.
#2
July 30, 2013, 8:52am
These differing views reflected fundamental differences in economic models — differences that tended to be associated with political leanings, although there are a handful of politically conservative market monetarists out there.
And history has given us as decisive a test of rival economic theories as I’ve ever seen.
In the first couple of years, as the data kept coming in favoring the liquidity-trap view, I kept hearing accusations that those of us citing these data were “cherry-picking”, that the evidence was actually running the other way. I don’t hear that so much now — it’s just too obvious that the promised inflation and rate surge never materialized.
Triumph of the Doves
When we first entered this crisis, economists and economic pundits quickly sorted themselves out into two camps. One camp — the “doves” — basically said, we’ve turned into Japan; we’re a liquidity-trap economy in which even large deficits won’t drive up interest rates and even huge expansion of the Fed balance sheet won’t cause inflation. The other camp said that we weren’t Japan, we were or soon would be Weimar, or maybe just the 1970s: high rates and high inflation were just around the corner.These differing views reflected fundamental differences in economic models — differences that tended to be associated with political leanings, although there are a handful of politically conservative market monetarists out there.
And history has given us as decisive a test of rival economic theories as I’ve ever seen.
In the first couple of years, as the data kept coming in favoring the liquidity-trap view, I kept hearing accusations that those of us citing these data were “cherry-picking”, that the evidence was actually running the other way. I don’t hear that so much now — it’s just too obvious that the promised inflation and rate surge never materialized.
For me, the squabbling over who-is-right in economics isn't economics. It's politics. And it is the least interesting thing. I quoted those last few lines because of the last bit of it -- "the promised inflation and rate surge never materialized."
Sounds pretty final, doesn't it? "Never" is a long time. It might be too early yet to make that judgment call.
I did a post the other day...
By the way, in mine of 4 June I related the Depression-era increase of the monetary base to inflation. I made reference to "three massive spikes" of inflation in that era. You can see those three spikes, in red, on the graph below. Each spike occurs approximately eight years after the corresponding spike in the monetary base:
Eight years is a long time, certainly longer than I would have thought. But the economy was unresponsive in that era, and this could account for the eight-year delay.
There is a fourth blue spike on the graph, just a hump really, between 1950 and 1955. Perhaps it is related to the Korean War? Anyway, about five years later there is a red hump of roughly equal size. This time there is only about a five-year delay between the monetary inflation and the price inflation.
Why five years instead of eight? Perhaps because the economy was more responsive... because the economy was growing again.
Finally, beginning around 1960 there is another increase in the blue, the monetary base. And sure enough five years later there is an increase, a comparable increase in the red, in the rate of inflation.
I never looked at this before. The relation is remarkable. I suppose I should point out that the relation seems to break down by 1970.
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| Graph #3: The Rate of Money Growth (blue) and the Rate of Inflation (red) 1925-1970 |
Eight years is a long time, certainly longer than I would have thought. But the economy was unresponsive in that era, and this could account for the eight-year delay.
There is a fourth blue spike on the graph, just a hump really, between 1950 and 1955. Perhaps it is related to the Korean War? Anyway, about five years later there is a red hump of roughly equal size. This time there is only about a five-year delay between the monetary inflation and the price inflation.
Why five years instead of eight? Perhaps because the economy was more responsive... because the economy was growing again.
Finally, beginning around 1960 there is another increase in the blue, the monetary base. And sure enough five years later there is an increase, a comparable increase in the red, in the rate of inflation.
I never looked at this before. The relation is remarkable. I suppose I should point out that the relation seems to break down by 1970.
But you know, I don't think the relation breaks down by 1970. I think time is relative, and the eight-year delay which turned to a five-year delay which turned into a much shorter delay is all part of some pattern that has to do with the "rat-race" or the metabolism of the economy or something like that.
During the Great Depression there was a huge lag. Some time later, the lag was only half as long. Later yet, the lag was practically gone. That's why Milton Friedman was evasive about lag time. He couldn't pin it down.
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