Saturday, July 2, 2016

Real Growth versus Inflation

Syll links to Mankiw who links to a PDF by Alesina and Ardagna, who write:

As far as reduction of large public debts, the lesson from history is reasonably optimistic. Large debt/GDP ratios have been cut relatively rapidly by sustained growth. This was the case of post–World War II public debts in belligerent countries; it was also the case of the United States in the 1990s when without virtually any increase in tax rates or significant spending cuts, a large deficit turned into a large surplus... However, it would probably be too optimistic to expect another decade like the 1990s ahead of us; that kind of sustained growth would certainly do a lot to reduce the debt/GDP ratio, but the lower growth we will most likely experience will do much less. Inflation also has the effect of chipping away the real value of the debt, but it may be a medicine worse than the disease. While a period of controlled and moderate inflation would have the potential to reduce the real value of outstanding debt, pursuing such a strategy would

At that point the paragraph turns to garbage. Actually it's all garbage as it ignores private debt. But it got me thinking about debt and GDP in the post–World War II period and the 1990s. And about growth versus inflation, and which of the two might have done more to reduce the debt-to-GDP ratio. So I graphed the ratio of real GDP relative to the GDP Deflator. When the line goes up, real growth is greater than inflation. When the line goes down, inflation is greater.

Graph #1: Real Growth versus Inflation

Thursday, June 30, 2016

"to keep inflation from accelerating"

Syll has a really great Keynes quote (28 June), on the "belief that there is some law of nature which prevents men from being employed". Unreferenced, so I looked it up. Ended up at Wikipedia's Full employment page. They attribute the quote to "J.M. Keynes in a pamphlet to support Lloyd George in the 1929 election." With that out of the way now ...

The wiki page opens with these words:
Full employment, in macroeconomics, is the level of employment rates where there is no cyclical or deficient-demand unemployment. It is defined by the majority of mainstream economists as being an acceptable level of unemployment somewhere above 0%. The discrepancy from 0% arises due to non-cyclical types of unemployment ...

And then comes the part where bells go off in my head:
Unemployment above 0% is seen as necessary to control inflation in capitalist economies, to keep inflation from accelerating, i.e., from rising from year to year. This view is based on a theory centering on the concept of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) ...

This is why the bells were ringing: When I got my three credits in macro, back in the late 1970s, I was taught that one of the goals of economic policy was price stability. But since I've been internetting, the universally accepted current version of that goal seems to be inflation stability. As opposed to price stability.

The reason for this change became suddenly obvious to me as I read the wiki words: "This view is based on a theory centering on the concept of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) ..."

The NAIRU got somehow turned around and used as the basis for saying that inflation is okay, even though accelerating inflation is not. There is no logical argument for that conclusion, that I can see. But the NAIRU is the only explanation I have found for the change from "price stability" to "inflation stability".

So if you are in favor of a little inflation or maybe a little more inflation as economic policy, let me just point out that the full force and power of the NAIRU stands behind your thinking.

That should make you think again.

My view? The goal remains price stability. I recognize that inflation can "erode" debt, in a manner of speaking. I recognize that inflation can have "beneficial" effects for the economy. But I do not and cannot accept the notion that we can or should or might use inflation as a policy tool. The ends do not justify the means.

In all my internet years, the only person I've seen say anything comparable to the view I express is John Cochrane:

The Fed currently interprets "price stability" to mean 2% inflation forever. A CPI standard could enforce 2% inflation. But why not establish a price-level target instead? The CPI could be the same 30 years from now as it is today, and long-term contracts could carry no inflation risk.

I don't know how good his math is. If a CPI standard could enforce 2% inflation, then it could enforce 0% inflation. And that would give you price stability without specifically establishing a "price-level target". I don't know: Maybe he just phrased it that way for emphasis. If I can do the math in my head, I'm sure he can.

Maybe this one is better:

The euro is the unit of value, as the hour is the unit of time and the meter is the unit of value. You could engineer a one-time boost by fiddling with the hour, the meter, the kilo and the euro. Until people catch on ...

Anyone for a drink?

Yeah, me.

Farther from topic: John Cochrane asks why we don't go with zero inflation, rather than two percent. The answer, John, is that we would have to replace inflation with some other policy that helps keep private debt down and provides some of the other good effects as well.

Nobody seems to know what that policy might be. So I'll say it again: We have to start eliminating the policies that encourage credit use and debt accumulation. We have to start creating policies that encourage credit use and the repayment of debt. It's not a big change. It wouldn't be difficult to do. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.


Wednesday, June 29, 2016

How Groups Work

I looked into how groups work a long time back. There's something there, though I'm not sure it's in my grasp.

Steve Randy Waldman writes

Functional nation states generally try to reduce the salience of socioethnic difference in favor of a national identity.

That's the crux of it. A successful group, a successful nation, is successful because non-members want to become members. Not like the UK leaving the EU, and not like Scotland leaving the UK.

I'm pretty sure the way to get people joining your group is to have the best economy.

Tuesday, June 28, 2016


German Chancellor Angela Merkel warned the U.K. to have no illusions about life outside the European Union, hardening her stance ahead of Prime Minister David Cameron’s first meeting with fellow EU leaders since triggering the political earthquake that’s shaken the bloc’s foundations.

Merkel, in her toughest response yet to last week’s British vote to quit the 28-nation EU, said that the U.K. can’t expect favored treatment once it leaves and that there will be no informal talks on a new relationship before the government in London files its application for divorce.

“There shouldn’t be the slightest misunderstanding about the conditions laid out in the European treaties for a case like this,” Merkel said in a speech to Germany’s parliament in Berlin on Tuesday. “My only advice to our British friends is: Don’t delude yourself about the necessary decisions that need to be taken.”

Merkel won applause from German lawmakers ...

Yeah Merkel got the spite down all right, but she missed the comic sensibility.

A metaphor for the economy

The dogs want to go out at three in the morning. I don't want to let the one out because yesterday he didn't come when it was time to go in. (I'm setting policy based on recent experience.)

Then I remembered: He didn't come yesterday because he wasn't out. He was still upstairs, asleep. (So really, I'm setting policy based on misunderstanding recent experience.)

Monday, June 27, 2016

In lieu of patriotism, a disclaimer

Walmart online:

Important Made in USA Origin Disclaimer: For certain items sold by Walmart on, the displayed country of origin information may not be accurate or consistent with manufacturer information.


Sunday, June 26, 2016

¿EZ Catastrophe? and ¿¿Generational Melodrama??

Ja notice how every tiny little bit of televised reaction to the successful "Brexit" vote was horror and the prediction of catastrophe? I wonder which side scripted that news. Reading Scott Sumner was a refreshing change.

Some see it affecting Britain's economy by disrupting trade, whereas it actually hurts the eurozone more ...

British stocks are down around 4% as I write. But French and German stocks are down 7% to 8%. The markets in southern Europe are down 10% to 15%. Brexit's most powerful effect is to make the eurozone crisis worse, by increasing doubts as to whether the eurozone will stay together.

I don't want to overstate things; the level of equity prices in the US is still quite high---and thus the markets currently do not seem to be forecasting a recession.

BTW, there are some very good arguments in favor of Brexit ...

I couldn't have said it better myself. Except the part about equity prices. I don't know anything about equity prices.

Of course, I don't beam over to Sumner's all-too-predictable conclusion: "The single most useful reform at this moment would be a global shift toward level targeting."

You had to see that one coming. And then there's this:
Three in four young voters wanted to remain. They will have to live with the consequences. There is a sense in which the older UK voters stabbed their children in the back (Yes, that's a bit melodramatic, but there's a grain of truth.) When the older voters die off, will Britain rejoin the EU, or will the young get more nationalistic as they age?

... and Robert's response:

As far as young voters, do you feel that younger voters are better or less informed on the underlying issues as older voters? Are younger voters more cynical and less influenced by propaganda than older voters?

You know those models economists use all the time? Simple two-generational models, where, I don't know, the one generation is working and the other is retired, and there is some interaction between the two that the model uses to prove some ridiculous claim? Those models? Well, let's apply a two-generational model to Brexit preference.

As the older voters die off and the young age, the latter's view will become more firm and less liable to change. But there will be a new young generation that has grown up knowing Great Britain as a sovereign state. The generational disagreement will die out with today's young voters, in their old age.


Today, older voters remember Great Britain as a sovereign state. Younger voters think of Great Britain as like New Jersey: nothing sovereign about it. All the TV coverage yesterday relied on the argument that "Remain" is "good for the country" or "good for the nation". Yeah, but for which nation? For Great Britain, which already exists more in memory than in fact? Or the nation of Europe?

"Leave" is good for Great Britain. "Remain" is good for Europe.

Younger voters prefer to remain because they have no real memory of their nation as a nation. Older voters prefer to leave because they have that memory of the nation known as Great Britain.

The result of the vote was political, not economic. It was the right choice, because the creation of the European Union was also political. The creation of the EU was a political solution to economic problems. It was sold to the voters as a solution to economic problems. It would make the economy better, the voters were told.

And the Brexit:Leave decision is the voters' way of saying the European Union is an economic plan that didn't work.

Saturday, June 25, 2016

David and Goliath

Oh, for crying out loud. Nothing is going to happen any time soon.

Here -- I put this up once before:
Article 50 of the Consolidated Treaty on European Union:

1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.

2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.

3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it.

A qualified majority shall be defined in accordance with Article 238(3)(b) of the Treaty on the Functioning of the European Union.

5. If a State which has withdrawn from the Union asks to rejoin, its request shall be subject to the procedure referred to in Article 49.

Here are three points made by Article 50:

--> The EU shall set out the arrangements for a member state's withdrawal

--> The withdrawal agreement shall be negotiated by the Council, after obtaining the consent of the European Parliament. In other words, if the Parliament does not consent, there can be no withdrawal agreement and evidently no withdrawal.

--> "The Treaties shall cease to apply to the State in question" -- that is, the withdrawing state is no longer a member of the EU -- as soon as the withdrawal agreement takes effect, or, "failing that", two years after the state notifies the union of its intent to withdraw, unless the European Council decides to extend this period.

Nothing's going to happen any time soon. Maybe never. It evidently depends on the European Parliament. Athens didn't let member states quit the Delian League. Lincoln didn't let member states quit the United States. And I question the European Parliament's willingness to allow Great Britain to leave the EU. It would be a sign of weakness, after all, and it puts the Euro at risk.

Congratulations to the people of a great nation for doing a great thing.

All the best.