... and Paul Krugman says they have a strong Keynesian bias.
I tend to agree. Krugman takes a recent Greenspan op-ed to task for regretting that fiscal stimulus does not seem to be causing any inflation, because it makes people "complacent". There's no attempt to delve into why we haven't seen any inflationary response to an unprecedented budget deficit. It's just random and unfortunate for Greenspan. I think it only makes you "complacent" if you don't understand why we haven't seen the inflationary response. I'm not complacent. I don't talk about it as much on here, but in other fora I regularly harp on the long-term debt. There are very real and very obvious risks to public debt. If you know the difference between why we have debt in the short-run and what it is doing and why we're going to have debt continue to accumulate in the long-run and what it will do, there's nothing about the stimulus that makes you "complacent". It's only if you act like all recessions are identical (say, if you're one of those people that thinks 1920-21 is comparable to 2008-2010) that you might get "complacent".
Anyway, I've always wondered when the other shoe is going to drop with these inflation fear-mongers - and I hate to say it, but I'm looking at you, my Austrian readers. A year or two ago we heard warnings about inflation all over the place. They were all sufficiently vague, of course. We never really hear that much anymore. The opponents of stimulus now talk about sovereign default instead. I have news - sovereign default ain't gonna happen just like a large inflation ain't gonna happen. At some point these people need to face reality and account for what they got wrong.
I've wondered this about the inflation of the 70s too in the past. Does it mean nothing to these inflation-fear-mongers that prices were tame (and falling at certain points) after the enormous deficits of the New Deal and World War II? It took decades of boom-year deficit spending and two more grueling wars just to get up to double-digit inflation (which, in the grand scheme of things, isn't that high anyway). I'm no expert on the 70s, but it's also important to note that most economists seem to agree that (1.) price expectations, and (2.) supply shocks had at least as much to do with that inflation as fiscal or monetary profligacy. You would think that would have made a dent in the deficit-doomsdayers arguments, but no! The 1970s are held up as an example of what government spending can do to the economy.
I guess my question is - when does the cognitive dissonance kick in? When do these people start realizing that the story they're pushing doesn't match up with reality? We're not clamoring for year after year after year of deficits, after all. There's strong support in my camp for getting the medium- and long-term debt under control. Nobody is saying that public debt is consequence-free. We're just saying it has different effects under different conditions and the conditions right now warrant fear of just about anything but inflation.
And then there are those who highlight or highlighted inflation as the primary concern. At some point, they have to relent. I suppose the methodological aversion to relying on experience is strong enough with many of these people that the process of aligning their theory with reality might take a while.
Saturday, June 19, 2010
Subscribe to:
Post Comments (Atom)
Posts
There has been moderate general price inflation, and there has been high inflation in the prices of assets, commodities, and food items. Most of this new money was originally lent by investment banks to stock market investors/speculators (whatever you want to call them). Very little of it, as Krugman points out, was lent to general investors in the private sector.
ReplyDeleteI think a non-Austrian would be right to criticize the Austrians for calling wolf on inflation as early as they did, but I don't think the evidence is as convincing as you and Krugman suggest it is. Especially after Krugman continuously criticizes our current administration for not spending enough money (how much of the original stimulus has actually been spent?).
I provide an Austrian analysis on inflation and production here: http://www.economicthought.net/2010/06/robert-murphy-on-the-double-dip/
But, I think it's clear that government spending does have the potential for inflation. A great example is Venezuela, where the government spends a substantial portion of the money supply directly on infrastructure programs. Venezuela suffers from very high inflation, despite a shrinking private sector.
Like I've always said, you can make empirical data fit almost any theory if you try hard enough.
Furthermore, the reason inflation has not been flaring wildly like a brush fire is because the added bank liquidity (you know, when the Fed triple its balance sheets) is stuck in large commercial banks, and they are not lending. Adding liquidity in a "liquidity trap" does not cause inflation immediately, but there exists a greater and greater flood of it when the dam bursts.
ReplyDeleteAs soon as the structural imbalances are corrected and lenders do not fear that they won't get their capital repaid, we still start to see lending on a large scale and all that money they have vaulted is going to come with a vengeance.
dkuehn,
ReplyDeleteI think you tend to forget is that all you have to offer is merely a theory (a model of reality in other words) amongst competing theories.
"We're not clamoring for year after year after year of deficits, after all."
You aren't, but that is the inevitable result of the policy anyway. Then again, in the long run we're all dead, right?
"There's strong support in my camp for getting the medium- and long-term debt under control."
There really is no reason to take that support seriously. After all, it is a common view in your camp that somehow Obamacare will bring about significant savings in government expenditures.
"I suppose the methodological aversion to relying on experience is strong enough with many of these people that the process of aligning their theory with reality might take a while."
Are we supposed to take these sort of bombastic comments seriously?
- Mattheus - good to see you taking the liquidity trap seriously! I actually concur on this point. That, I think, is a sophisticated Austrian view. With demand the way it is, even when the liquidity trap is over (if we're even in one I should add - we PROBABLY are, but it's hard to say), demand is still going to be so weak I doubt we'll see a flood of inflation - and the Fed has new tools to fight it that it never did before.
ReplyDelete- Xenophon - I really don't forget that, and I remark all the time on here about the empirical challenges of developing counterfactuals for estimating fiscal policy. It really is a regular post topic for me, so I really can't accept that criticism. I'm guilty of a lot of things, but not of overstating the empirical evidence for fiscal policy.
RE: "You aren't, but that is the inevitable result of the policy anyway."
I can't see how. I should clarify this at this point, though - I'm fine with year after year of deficits. What I'm not fine with is year after year of debt growth that is larger than GDP growth. And there is absolutely nothing in the policy I advocate that makes that inevitable. Indeed - that being NOT inevitable is one of the central pillars of the policy I advocate!
RE: "Are we supposed to take these sort of bombastic comments seriously?"
Note I said "many of these people". There is a methodological schoool of thought dedicated precisely to the principle of NOT reevaluating theory based on evidence. Insofar as you don't adhere to that methodology, that's great. If the shoe fits, wear it. But insofar as someone does adhere to that methodology OF COURSE we need to take that seriously as an obstacle to the pursuit of truth.
"Indeed - that being NOT inevitable is one of the central pillars of the policy I advocate!"
ReplyDeleteThere is the policy you advocate and there is the real world.
"There is a methodological schoool [sic] of thought dedicated precisely to the principle of NOT reevaluating theory based on evidence."
I agree, but they aren't called Austrians or libertarians or what have you.