Williamson as Historian

Here's the part of Stephen Williamson's post that I thought was so interesting:

Romer says some things about economic history in her piece, but of course she is very selective, and seems to want to ignore the period in US economic history and in macroeconomic thought that runs from about 1968 to 1985. Let's review that.
(i) Samuelson/Solow and others think that the Phillips curve is a structural relationship - a stable relationship between unemployment and inflation that represents a policy choice for the Fed.
(ii) Friedman (in words) says that this is not so. There is no long-run tradeoff between unemployment and inflation. It is possible to have high inflation and high unemployment.
(iii) Macroeconomic events play out in a way consistent with what Friedman stated. We have high inflation and high unemployment.
(iv) Lucas writes down a theory that makes rigorous what Friedman said. There are parts of the theory that we don't like so much now, but Lucas's work sets off a methodological revolution that changes how we do macroeconomics. One of the things we still like about Lucas's work is his "critique" paper, which tells us why we need theory to make good policy decisions. The key example from the Lucas Critique paper is the Phillips curve: treating an observed correlation in the data as structural can be bad.
(v) Paul Volcker takes Friedman seriously. Friedman had said that "inflation is everywhere and always a monetary phenomenon." The confirmed empiricists are skeptical. They seem to think that the Phillips curve is very flat, and that there will have to be a very long period of very high unemployment to bring the inflation rate down. Not so. Volcker engineers a severe monetary contraction and the ensuing recession is fairly painful, but not so long. Success! Inflation comes down quickly and has remained low since then.

(SLIGHTLY REFORMATTED.)

I had a complaint similar to Williamson's about Romer in my Christina at '50. I expressed concern about evidence selection and the omission of data. Maybe that makes me sympathetic to Williamson's view here. Can't say. In any event, I want to review the points he makes in his little history.

(i) "Samuelson/Solow and others think that the Phillips curve is a structural relationship..." The key phrase here is "structural relationship." As Williamson points out, there IS a relationship between inflation and unemployment, but it comes and goes:

The upshot of that research is that the empirical Phillips curve relationship is in the data for some time periods and not for others, and that ... the sometimes-observed Phillips curve is not a structural relationship.

To me, determining why the Phillips relation comes and goes is much more interesting than being satisfied to point out that the relation is not structural. But that's a post for another day.

(ii) "Friedman (in words) says that this is not so." Friedman's objection is well-known. It must be. Even I am aware of it.

(iii) "Macroeconomic events play out in a way consistent with what Friedman stated." I heard this before, too. Actually, bought a house just before that bout of high inflation. Worked out good for me.

(iv) "Lucas writes down a theory that makes rigorous what Friedman said." This is the "X" on Williamson's treasure-map. I googled LUCAS ECONOMICS and found gold.

(v) "Paul Volcker takes Friedman seriously." On my fourteenth re-read of that sentence, Williamson seems to make it sound like nobody before Friedman knew there was a relation between money and prices, which is certainly not the case. Regardless, the Volcker squeeze is another well-known part of history.

Williamson's Volcker item concludes with this claim: "Inflation comes down quickly and has remained low since then." C'mon Stephen, inflation below the double digits is not the same as low inflation. Friedman bemoaned an inflation rate of 3-to-4 percent, linking it to the fall of Rome.

When I took Economics 101 in the 1970s, the goal was price stability. Not inflation stability. Calling moderate inflation "low" is a way of boasting that economic policies are right. We pretend victory over inflation and see good in the trade-off that gave us high unemployment, the great recession, endless trade deficits, unbalanced budgets, and the debt, my God, the debt.

But I really like Williamson's little history. My next blog topic is Robert Lucas.

On Differences

A follow-up to my 4-o'clock.

Something came to mind recently, a remark in a footnote from Joseph Schumpeter:

The distinction is, in a sense, quite unrealistic. But if we do not make it, we shall never be able to say any more than that everything depends upon everything.

I remember. I was gonna use it to insist on seeing a difference between money and credit. Another time, maybe.

The quote is from "An Analysis of Economic Change" by Joseph A. Schumpeter, in Readings in Business Cycle Theory, selected by a committee of the American Economic Association; The Blakiston Company, 1951.

Slotting

This is out of context (from what I thought was a most interesting post by Stephen Williamson) and I apologize for that, but I'm gonna say it anyway. Williamson writes:

On the FOMC, Janet Yellen, Eric Rosengren, Charles Evans, and Bernanke himself are clearly Keynesian. Yellen and Rosengren are more Old Keynesian, and Bernanke and Evans are more New Keynesian.

SOURCE: edHelper.com

It is important to see differences. I do it often, to show how my thinking differs from everybody else. But you don't catch me drawing lines from people's names to the names of economic cliques like it was some kind of matching game for kids.

It's not the categories of economic thought that are important. It's the ideas that matter. I suppose if I was educated in the subject, I'd know how a "new" Keynesian differs from an "old" Keynesian, and maybe the categories would seem useful. But what I'm sayin really is that all of 'em are wrong. Don't study the schools of economic thought. Study the economy.

God forbid we should have to cross a line and say that one idea from some other clique might just happen to be right. It's like economists have to belong to one wing or another of one political party or the other. Most people know that kind of thinking doesn't work. Not even in politics.

In One Lesson

Stopped at the used-book store t'other day, saw Henry Hazlitt's Economics in One Lesson and grabbed it. 50 cents. Thought I had a real bargain there. Then I noticed the cover price: 95 cents.

It's my kind of book -- small and thin. A paperback from Manor Books. Ninth printing: 1974. And that would account for the price. 1974.

Original copyright on Hazlitt's book, 1946.

Oh!... Nobody ever read this copy. The well-yellowed pages don't fall open easily.


In Chapter One, Hazlitt writes

There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: "In the long run we are all dead." And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.

But the tragedy is that, on the contrary, we are already suffering the long-run consequences of the policies of the remote or recent past. Today is already the tomorrow which the bad economist yesterday urged us to ignore. The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades.

That was written (or copyright, anyway) in 1946, the same year Keynes died. (Keynes is "the bad economist" whose "shallow wisecrack" Hazlitt quoted.)

So I guess Hazlitt was right. Oh, it wasn't a few months. It wasn't even several years. It was decades. First we had the golden age of postwar capitalism. The good years started in 1947, just a few months after Hazlitt wrote the book, and continued until 1973.

My own copy of Hazlitt's book was printed a year later. That was the year the problems began. 1974.

A lot of people, most people maybe, don't see 1974 as the year our problems began. They look to the Obama years and the Great Recession. That puts the beginning of this problem at 2008, the year of the Paulson crisis.

1946 to 2008 is 62 years. Six point two decades. So Hazlitt was right: It was decades after Keynes, before problems arose. Three decades of Keynes, followed by three decades of Wanniski-nomics.


Hazlitt continues:

From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

It's a fair observation. But of all people, Keynes is the wrong one to accuse of not thinking things through. And in six point two decades, a lot of other people had plenty of opportunity to screw things up.

As for myself, I deal with it by treating Hazlitt's "art of economics" as science.

The Two Economies

Dr. Duru at Inflation Watch points to a Fidelity article "considering the implications of the inflationary boom that seems to be driving stocks skyward."

Ya.

Federal Reserve QE policy makes lots and lots of money available to those who already have lots and lots of money. So the things they buy are gonna inflate in price. "Asset inflation," it has been called.

Meanwhile, for the rest of us inflation has been late in coming. Oh, we're starting to see it now. But it isn't demand-pull inflation. It isn't driven by some great burst of spending by people who can't make the ends meet. Ours is cost-push inflation, driven by low profits and the scent of money.

Ours is opportunity inflation, because sellers know there is lots of QE money around and -- optimistically misreading the distribution of that money -- they think we'll be okay with paying the higher prices they need to ask.

So prices go up for us, but not as soon as stock or asset prices.

//and a follow-up:

Doc Duru again, with a post title supporting the above remarks: Economist Diane Swonk sees continued inability to pass along price increases to consumers

Beckerath: The Public Good

From Must Full Employment Cost Money? by Ulrich von Beckerath, pages 126-127:

The value of money is primarily determined by the effective demand for it, precisely as the value of commodities generally.

Sounds like something Milton Friedman would say. Something I accept implicitly.

The same paragraph that begins with the above sentence, ends with the following:

So long however, as the effective demand is not regarded as the most important basis for the value of money and people believe that the value of money is created by the Government fiat, so long will people consider the State omnipotent and will turn to it for aid in every emergency, particularly for financing re-employment during a trade depression. And the following fallacy will last as long as this only supposedly logical association of ideas: If the State can impart value to money, it can without much difficulty impart value to that money which is printed and issued specially for financing employment and it would roundly neglect its duty if it did not use its monetary prerogative in this way for the public good.

Now, I need some MMT people to explain to me a few particulars of how their thinking differs from this fallacy described by Beckerath. Here, as a point of reference, is the first relevant MMT quote I found, from Ralph Musgrave's An introduction to Modern Monetary Theory:

MMT says basically that given excess unemployment, the government / central bank machine should just create more money and spend it.

Occam's razor applies.

Beckerath

From Must Full Employment Cost Money? by Ulrich von Beckerath (Berlin), originally published in 1935.

The effect of inflation on the supply of means of payment could be frequently witnessed in Berlin during the monetary crisis of 1923. The bank messengers, sometimes several hundred of them, queued up over night at the Reichsbank. Many of them brought stools with them. Towards noon they received then a small parcel of notes sufficient to last for a day. During all periods of inflation, similar observations were made.

In any case, it will be difficult to rouse in German workers enthusiasm for a new inflation, and one of the many causes why the present German Government has numerous supporters among the workers is that under it their is no fear of an inflation.

One sees what one expects to see

A white plastic shopping bag relaxes on the kitchen counter.

Through the window I see a pile of snow, lit somehow in the pre-dawn darkness.

It strikes me odd that there is so little snow outside. I turn, and discover that the snow is a reflection of the shopping bag.

I expected to see snow outside, not shopping bags.

One sees what one expects to see, and one expects what one has been told to expect.

If everyone tells you government debt is the problem, you expect that government debt is the problem. And when you see pictures of government debt alone, you come to believe it is true.

Private debt is six times larger than government debt. Government debt has been roughly stable (relative to GDP) while private debt grew relentlessly for 50 years or more. These facts should make us ponder the problem of private-sector debt.

But no one speaks of private debt. So we expect it is not a problem.

It is a problem. It is the problem.

"Credits created by orders placed"

Last I looked at Beckerath's work, I quoted his question:

How much of the credits created by orders placed, by monopolies, or by taxation may be utilized for the payment of expenses, without the fractionalized parts of these assets i.e., the purchasing certificates, the railway money, the State paper money being exposed to a discount in the open market?

I want to put that in language I'm more familiar with. The phrase being exposed to a discount to me is the same as what we normally think of as inflation. It means you have to pay more (of the discounted money) to buy a thing that otherwise wouldn't cost more. That's crude, and Milton Friedman is probably turning in his grave, but I think the comparison makes sense.

We have gas stations that advertise "Same price, cash or credit." And we have others that offer different prices for cash and credit. These "others" provide an example of discounting one kind of money, and not another.

One may imagine also an economy where a surcharge is added to the price when payment is by check, to cover on average the losses arising from bad checks.

With more difficulty, perhaps, one can imagine an economy where those with accounts receivable issue their own currency, which is backed by the obligation of the buyer to pay. This, I think, is what Beckerath describes as "credits created by orders placed."


In an economy with sufficient money, rather than receivables we might largely have payments of money, and transactions actually completed. Then, rather than issuing currency based on receivables, companies could simply use the income from sales.

Note, however, that an economy moving toward sufficient money, which also knows how to turn every new dollar of money into 30 or 35 dollars of credit-in-use, will be an inflationary economy -- unless the increase toward sufficient money is accompanied by a sufficient decline in the reliance on credit.

The trick is to substitute money for credit-use by clever policy, so that economic growth is not disrupted in the process. I don't think that it would be difficult. I do think it has never been tried.

The outcome of the change I envision would be that people have a lot more money and a lot less debt than we have today.