The View From 1776

Macroeconomists Trade Punches

Both of them are dead wrong.

Posted by .(JavaScript must be enabled to view this email address) on 04/27 at 11:48 PM
  1. The error in macro manipulation is that guys like Krugman believe they can direct and control the behavior of businesses and the people of America with their top down policies. Krugman wrote.
    Posted by bill greene  on  04/28  at  11:07 PM
  2. Because unemployment levels and inflation rates are more or less inversely related, it is clear to many that a single-minded focus on zero inflation as a goal, at the expense of high unemployment rates, is not prudent. At very low rates of inflation and productivity growth, employment suffers. Okun's law projects that 1 additional point of unemployment results in a 2% drop in GDP.

    Of course, a high rate of inflation has a negative effect on the economy as well, but few would argue that a zero rate of inflation is optimum.

    John Taylor (Stanford) likes a zero rate. Martin Feldstein (Harvard) favors a rate of about 2%. Bernanke (Princeton) warns that a zero rate takes you perilously close to deflation, when all hell can break loose. Japan's recent experience of low interest rates show that they were not an economic blessing.
    Posted by .(JavaScript must be enabled to view this email address)  on  04/29  at  10:42 PM
  3. Mr. Jay-- You claim that inflation and unemployment rates are "more or less" inversely related. That does not make it a direct relationship.

    According to Wikipedia, "Since 1974 seven Nobel Prizes have been given for work critical of the Phillips curve. Some of this criticism is based on the United States' experience during the 1970s, which had periods of high unemployment and high inflation at the same time. The authors receiving those prizes include Thomas Sargent, Christopher Sims, Edmund Phelps, Edward Prescott, Robert A. Mundell, Robert E. Lucas, Milton Friedman, and F.A. Hayek.[2]"

    Thus the whole relationship is in doubt, reminding us that you can lay all the Princeton and Harvard economists end to end and they still will not reach a conclusion!.

    In a relatively unregulated market, when business is booming, and accordingly unemployment is down, and consumers are spending relatively freely, one might expect inflation to creep up--that is unless huge productivity gains held costs down; or the public increased their savings rate, or paid down debt, or other variables came into play such as trade balances, or swings in the value of the currency. But note that the inflation, if any, was caused by the high employment and high spending; the high employment and spending was not caused by the high inflation rate. Simple cause and effect. You can't lower unemployment by raising inflation--as Krugman incorrectly argues.

    In college my investment teacher stressed that when interest rates go up, the price of bonds goes down, and when the interest rate goes down, the price of bonds goes up. BUT, it is the interest rates that are the causative factor. Declining rates will make bonds (with a given coupon) increase in value. But if a meddlesome Federal Reserve flooded the market with high priced bonds, it would not reduce interest rates. Keynesian bankers might try it, but they just wouldn't sell! Similarly, giving consumers extra money to spend does not necessarily lower unemployment, or increase the GDP, or increase employment. They might use the money to add to savings, pay down debt, buy Chinese and German imported goods, etc. If consumers spend a lot because they are earning a lot and the economy is booming, that is one thing, but giving them money to spend will not make a boom economy. Keynesians confuse cause and effect. It's like giving students higher grades to prove they're smarter, or being taught better!
    Posted by bill greene  on  04/30  at  10:13 PM
  4. Clearly, J. Jay is cut-&-pasting (i.e., plagiarizing) his responses again. He avoided the mistake he made last time of plagiarizing from the same source as his post, but it is obviously not the product of his own pen; nor does he get the full implications of his borrowed argument (else would not have used it). Of course, there is no shame in borrowing ideas and information; assuming you give credit where due and use them appropriately. What is it about some liberals they see nothing wrong in plagiarizing (until it is done to them)?

    How can we tell this material is borrowed? First of all, it is coherent and free of anti-conservative invective (though we hold out hope this is a change for the better), which is not J. Jay
    Posted by .(JavaScript must be enabled to view this email address)  on  04/30  at  10:25 PM
  5. Without rising to the invective of Bob, I would point out to Bill G, (who does write a thoughtful piece) that I generally agree with his points -- except for two.

    1) It is probably academically true that you cannot lower unemployment by setting out to "raise inflation," but that is because there is no single magic action you can take "to deliberately raise inflation."

    The set of actions you take to lower unemployment may have inflationary effects (spending large amounts of money to rebuild roads and bridges, for instance), but an increase in the inflation rate is a side effect, rather than a goal. The Keynesian says that spending to reduce unemployment may increase inflation a little, but the reduction in unemployment and resulting growth in GDP and productivity are worth it.

    2) Bill says giving consumers money may not increase GDP because they might use the money to pay down debt or buy German goods. This argument is valid depending on how the government stimulus spending is done. Giving a tax break to somebody in the market for a Mercedes will likely result in exactly what Mr. Greene projects. Hiring additional school teachers is much more likely to result in that money quickly being spent in the grocery store.

    Stimulus must be targeted to be effective.
    Posted by .(JavaScript must be enabled to view this email address)  on  05/03  at  07:24 PM
  6. J. J.

    Great-we agree that Krugmnan is nuts to advocate raising inflation in order to reduce unemployment. It won't work, and is wrongheaded anyway because inflation is generally not a positive force.

    Second, we agree that most stimulus spending is counter-productive, but. if targeted perfectly, might raise GDP and employment. Of course, why bother trying to do it perfectly? If the funds were left in the taxpayers' pocket it would probably be used better and stimulate activities that are of actual importance to the people of America.
    Posted by bill greene  on  05/03  at  07:48 PM
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