JMK's Econ Rant

This is more of a rant than a discussion thread, though anyone is welcome to weigh in. For many reasons--probably the same reason many of you are here--I refuse to return to DDO, nor do I view the vast majority of its member base in a positive light or think of them as particularly clever. But someone sent me a link to a thread in their economics forum, and it left me enraged. Therefore, I'm going to rip it apart. In fact, almost *every single post* in that thread is just jaw-droppingly wrong, and at least two of the three ought to know better than that.

Without further ado, here's the first comment from someone who should know better:

So I've been reading quite a lot of economics lately. A common theme is the idea of self-perpetuating processes, and in particular how they can lead to economic disaster. For example, how a collapse in demand feeds upon itself. However, what's never discussed is the flip side of this equation: shouldn't a collapse in demand, and thus profits, and thus the prices of companies, encourage investment, thus offsetting the effects of collapsed demand? Is the argument that people, as a whole, just aren't rational enough for that to work i.e., are reluctant to lend out money even when it's in their best interest, or is there more to it?


There's a lot more to it. First, this post commits the fallacy of reasoning from a price change -- it assumes a fall in prices is ipso facto expansionary: i.e., that it ipso facto improves consumer purchasing power (i.e., by raises real wages), but this is horribly muffled. Even if I bought your logic--which carries a myriad of bad assumptions, like the notion that prices are relatively flexible and responsive to fluctuations in demand--the mere *expectation* that prices would rise would push prices up (because prices are set ex-ante, not ex-post, or based on expectations of future demand), and thus obviate any "expansionary" gain.

But this logic is highly flawed, anyway--and, at the moment (because of the constraint of the zero lower bound on nominal interest rates), horrendously destabilizing. Let's illustrate. Let's say we have a horrible negative demand shock on par with the financial crisis. There's considerable downward pressure on both prices and wages, but both are sticky in nominal terms (or, more precisely, *log* nominal wages are sticky). Prices are less sticky, so those will tend to adjust somewhat depending on the magnitude of the shock and the elasticity of the AS curve (or the slope of the short-run Phillips curve, which has become progressively flatter over the past few decades). Wages, on the other hand, are extremely sticky. So, holding nominal wage growth somewhat constant--to be fair, it fell from about 3-3.5 percent to about 2 percent, and stayed there, which some researchers call "pent up wage deflation"--real wages will tend to rise as inflation tanks. That's not a free lunch: if real wages rise, we're transferring purchasing power *away* from employers and *toward* employees.

Now, nuts like Bernie Sanders would jump for joy, citing some nonsensically wrong asymmetry between productivity and real-wage growth over the past three decades, taken straight from the confirmation-bias home of the EPI and completely devoid of nuance and reality (but more on this some other time). The problem is, they're hopelessly ignorant of the basis of their *own* ideology.

Indeed, the crux of John Maynard Keynes's General Theory--in contrast to the classical view, wherein prices and wages were flexible and markets self-equilibrating--wages in the real world are sticky. Because of this, demand shocks generate involuntary unemployment. Whereas people--perhaps the most productive--might maintain their jobs and see a rise in their real wages, many will be laid off. The negative income effect of being unemployed surpasses the positive income effect of the people now earning more in real terms; if it doesn't, then we don't actually have a demand shortfall, because the entire reason those people were laid off was a shortfall in total nominal spending. This is how a shortfall in spending is "self reinforcing."

Now, here's the rub: this "paradox of thrift view"--as Krugman would put it, "my spending is your income, your spending is my income, if we both cut back at the same time, neither of us have income"--is only applicable at the zero rate bound on nominal interest rates. Indeed, during "normal times," the Fed can merely adjust the federal funds rate to push up and down on demand; lags in the transmission notwithstanding, the mere expectation of rising future asset prices--assuming away headwinds in the transmission, though that isn't applicable now--tends to push back against and reduce the magnitude of the shock. If the Fed did nothing, eventually wages and prices would adjust downward to clear markets, but (a) this takes an exceptionally long time, and probably undermines the economy's long-run potential in the process and (b) this is a rightward shift in the AGGREGATE SUPPLY curve, not in the aggregate demand curve. Unlike the downward pressure on prices cited in this question, this downward pressure on prices is *expansionary*, and corresponds to rising real GDP growth, whereas a negative demand reduces real GDP.

At the zero lower bound, however, this isn't possible: the demand curve is kinked at the inflation rate that pins nominal interest rates at zero. This self-correcting mechanism breaks down, because as prices and inflation expectations attempt to adjust downward, real interest rates rise--thus reducing output. Investment and consumption fall again, reducing inflation, raising real interest rates once more and gliding us along on the upward-sloping part of the AD curve. This is, of course, self-reinforcing, especially when the real interest rate needed to clear markets is quite negative, and unattainable absent a clear commitment by the Fed to higher inflation. (Don't make me laugh, please.. that's a whole other rant.)

That just about does it with this question, but I'll respond to the other two posts:

Yes, once prices fall it encourages investment again just like it does in the stock market. It's the boom and bust of the business cycle.

Put yourself in the situation of CEO of a multi-billion dollar company. There's strong speculation that in 3 months prices are gonna tank, badly. Would you hold off on any major investment decisions until the end of those 3 months?

The first sentence here is wrong for two reasons. First, *never* equate a fall in stock prices with a fall in the general price level. A fall in stock prices is virtually meaningless. It could signal market expectations about future interest rates or real GDP growth--which feed into the discount rate to value future cash rows--or it could just be a volatile correction. If you were to plot two consecutive closing stock prices, you might see virtually no change. But take a look at what happened in between--up, down, sideways, upside down. Much like China, the stock market is completely disconnected with actual economic fundamentals. Not to mention, lower stock prices tend to signal higher returns. Why? Because, like exchange rates, there are automatic stabilizing mechanisms embedded in stocks, and the capacity for arbitrage (basically, taking advantage of a mispriced security in order to reprice it) prevents persistent misrpricing. Second, this sentence once again conflates expansionary price reductions--a positive supply shock, resulting from enhanced technology or productivity, allowing employers to produce more at a lower price--with any price reduction.

The second part is extremely vague. Why are prices going to tank? Is it a positive supply shock or a negative demand shock? If the latter--as the OP question stipulated--I'm not going to invest nor, or in 3 months. That's not solely because I'm trying to take advantage of lower prices; rather, prices will be low because demand is low--and if demand is low, people won't buy whatever I'm investing in, therefore inhibiting me from investing.

The example is stupid, though, because it suggests that (a) I can predict price changes, which I can't (and if someone suggests otherwise, they're suffering from the Dunning-Krueger effect--even the Fed, which *controls* prices, can't predict them) and (b) that prices will tank suddenly, when in reality they're sticky. These decisions are long-term in nature, and usually demand shocks are smoothed over by that time (again, absent headwinds....2007-09 is obviously a horrid example of a "normal," v-shaped recovery.)

Last comment, though I didn't expect this fellow to ever say anything remotely meaningful:

Careful questioning demand side economics, it is not done in polite company. Macro-economists are tools of politicians, especially those that tell us about the evils of failing prices.

Failing prices are natural in a healthy free market economy. As producers become more efficient, costs are reduced and competition forces prices lower. Higher prices are a function of central planners inflating the money supply, to decrease the burden on debtors, mainly government.

First, "demand side economics" is political buffoonery. Both demand and supply matter--screw politics. Economics is created in academia with spreadsheets and statistical models, not by Ivory-Tower politicians over red wine. Good economics is often horrible politics. Second, to accept that aggregate demand is important, you must only accept that wages and prices are sticky. This isn't up for debate: this is a *fact.* I can physically show you--and will on request--data series after data series after data series after regression model proving this to be the case. This isn't up for debate, and people who try to suggest otherwise are (a) exposing their own ignorance and (b) dragging the debate back a few decades. This was contentious back in the 1990s: it's no longer contentious.

He then talks about "efficiency" reducing prices. Again, that is a *positive supply shock.* That has absolutely nothing to do with the Fed, which can only casually impact supply, nor is that the type of contractionary policy that would reduce a self-reinforcing downward spiral (unless, again, we're at the zero lower bound with a kinked AD curve). This is a classic case of reasoning from a price change.

He then makes some asinine comment on "central planners" and some conspiratorial nonsense that monetary policy involves "monetizing the debt." Ignorance is what ignorance does, and no one with a scintilla of sense believes this rubbish, anyway. Moving on.

He's right that money growth determines inflation--but this is *only over long periods of time.* That's the essence of quantity theory of money: velocity is stable in the long run. In the short run, it's unbelievably volatile, and an increasing function of the nominal interest rate. That's why it tanked in the crisis. The Fed, also, can only directly control the size of the *monetary base.* Banks holding excess reserves and people holding cash reduce the money multiplier--the amount of money supply created from a $1 increase in the base--such that the Fed loses its control over the actual money supply, and thus over NGDP and inflation (because the exchange identity, MV = PY, breaks down: velocity is unstable, hard to control, and only casually controlled by the Fed, and M is unstable).

Then there's the fact that an independent central banks have been proven again and again effective at *reducing* inflation. Central banks have a reputation for tightening, not loosening, policy--and even the Fed's and the BOE's willingness to tighten sooner rather than later, despite headline inflation near zero, epitomizes that. And don't even get me started on why a policy of "zero inflation" is a horrid idea. That's the problem of the two zeroes on crack. If you want to be stuck at the ZLB forever, set an inflation rate of zero, and tell me how it feels.

/end rant

JohnMaynardKeynes: I refuse to return to DDO, nor do I view the vast majority of its member base in a positive light

What about me?

In regards to your rant: wow... lol. I guess I should be careful I don't accidentally say something wrong in the econ forum... I'll get hammered lol

ColeTrain: That didn't apply to you, lol... I like you, and think you're probably smarter than at least 95%--if not more--of the member base.

And it usually depends on my mood. I get more irate when (a) someone claims authority when what they're saying is completely wrong (when "liberals" herald Glassed Steagall as a panacea, I usually feel this way) and (b) when I think they should know better. I do think you know better than to say something silly, but I don't think (a) would ever apply to you.. so you're good, lol.

JohnMaynardKeynes: Well... thanks! I consider you one of the smartest members *from* DDO, and I think it's sad that you're leaving for good, though I understand your resentment. I do wish, however, that more people visited this site as I think (and I believe others do too) it has exponential potential. Hey, look, a rhyme. Lol. Anyways, I have a bone to pick with you. On a Keyne's forum, you promised you'd look at my debates and give me your opinion. You never did. Lol, jk, I'm not mad ;P Regardless, if you were to ever have ample opportunity, I'd appreciate it.

Btw, what's your opinion on 16kadams? And are you really pro liberalized immigration/open borders?

ColeTrain: I agree that it has a whole lot of potential. In terms of features, it beats the hell out of DDO. The one issue is "community," though that certainly has its benefits.. there are a lot of members of the DDO "community" who would pull down the collective IQ on this website and add a whole heep of drama, and no one wants that.

My apologies.. super busy these days, but if you send me a few, I'll take a look as soon as I get a free chance.

16k is awesome -- easily one of my best friends from DDO, and one of the most underestimated members the site has ever seen. Every time I see a "top 10" list--which are stupid, btw--that doesn't have him on it, I cringe. Or when I see people accuse him of "abstract spamming" or berating him for "source spamming." Or when pretentious left-wing hacks try to accuse *him* of misrepresenting the literature, when he's read more academic articles in one day that they'll read in their entire lives. He's probably the best case of underestimated and underappreciated, and it doesn't surprise me one bit that he isn't as active on DDO anymore. It's a real shame. Maybe if "community building" were less focused on feeding certain attention-craven egos, and more focused on attracting the best minds, DDO would be a better place.

I mean, hell, even the "biweekly" updates never included my threads, lol... Evidently grudges trump intellectual honesty. The fun stories I have on that are just endless.

Yeah, I am. There might be a few reasonable restrictions for the purpose of safety, and there probably would be a phase-in period, but the benefits vastly outweigh the costs.

And thank you for the kind words

Another response:

That's interesting. Who predicted the crash of 2007/8? It sure wasn't the Keynesians. They and the Federal Reserve talking heads were all claiming there was no housing bubble. (and some of them still make this claim, cuz "bubbles don't exist").


Okay, this is wrong for several reasons.

First, several "Keynesians" *did* predict the housing bubble. Janet Yellen, for instance, had been warning about it, though didn't forecast is magnitude. The problem with this is, demand *shocks* -- or "Black Swan" events -- are extremely hard to predict. That's by definition. As all of the literature on this says -- literature which this man clearly hasn't read -- you would need a crystal ball to detect a bubble. That's because the fundamental or intrinsic value of an asset is extremely hard to calculate in real time.

Second, the so-called "Austrians" didn't predict the recession. They predicted a downturn every fricking year and it just so happened to take place. If you predict 10 of the last one recession(s), it doesn't really count. Not to mention, *all* of their assessment of causation -- blaming it on "easy money" -- was wrong, and every prediction they've made SINCE the recession -- rocketing inflation, spike in long-term interest rates, foreigners would be dumping our debt, stocks would tank once we ended QE, etc. -- have been embarrassingly wrong. Embarrassingly wrong. Bob Murphy made a bet with Brad DeLong that inflation would rocket above 10 percent... it's averaged a little over 1 percent over the past few years. Headline is basically zero, and the core is about 1.3. He wasn't just wrong; he was EMBARRASSINGLY wrong. Yet, that didn't change his mind. Austrians don't care about reality.

Another thing: bubbles exist, but not for the reason he thinks. "Reaching for yield" behavior isn't a byproduct of loose money -- it's a byproduct of tight money that leads to a prolonged period of low returns and weak regulatory oversight.

If there is anything I've learned in researching this stuff for five years now is that economics is still kind of in the dark ages. Economists can't agree on even the most basic things. Despite that, 95% of economics is taught as if there is consensus. What gives? You can take any subject and find massive disagreement between economists like Krugman, Sumner, DeLong, Murphy, etc.


First of all, don't throw Bob Murphy into the same category as DeLong, Krugman, and Sumner. Murphy is a complete joke.

Second, disagreement isn't a sign that we remain in the "dark ages." There's *some* disagreement, but most of is on policy, not on the root causes of downturns -- that's fundamental. For instance, Sumner leans to the right, but he, Krugman, and DeLong agree (a) that wages are sticky downward, and this causes involuntary unemployment and (b) that the Fed should have been more aggressive in responding to the crisis, and that it should hold off in now in beginning to normalize. The vast majority of economists -- notice I didn't pull the "all credible economists" bait-and-switch -- agree with them.

On some things, there is a consensus; it's a consensus that Austrians are full of sh1t.

Greece cannot be compared to anything in the U.S. A country is wealthy (or not) because it is productive. Greece isn't productive - that's the problem.


This is true, actually. There are other reasons Greece shouldn't be compared to the US -- the fact that it doesn't have its own currency or an independent monetary regime -- but that doesn't preclude conservative know-nothings (I would assume this guy falls into that category) of proclaiming that the failure to gratuitously slash budget deficits puts us on par with Greece.

I'm not sure what your saying here, sorry. Yea, that is what Keynes supported. I just happen to believe it doesn't work. The confusion is that the free market - the natural will of people and voluntary action, is such a powerful force that things will work out despite all this government intervention. Take a look at the difference in government intervention between the depression of 1920-21 and the great depression. Funny how the one with almost no intervention is the one nobody even remembers because it was so short.


I've ripped this point up so many god-damned times... God, these people need to get new arguments.

Completely different causes. The recession of 2007-2009 was caused by a systemic banking crisis and prolonged by headwinds to the transmission of policy -- household deleveraging, credit standards, increased risk aversion, uncertainty, etc. -- and overly tight fiscal/monetary policy. The recession of 1920-1921 was caused *by the Fed.* Inflation after WWI was rather high, so the Fed tightened policy to bring down inflation, and then loosened it not long after, which *ended* the recession. Wages were a bit more flexible in the 20s, so there were shorter policy lags. That's all there is to see here. We also weren't at the zero lower bound in the 1920s, whereby this liquidationist "price adjustment" position becomes destabilizing -- i.e., markets cannot and will not "just get it right," and any attempt to do so will merely exacerbate the problem.

JohnMaynardKeynes: It's fine. Just look at my profile... there's plenty there to go through.

I like 16k as well.

Lol. I think economics gets brushed under because it's ACTUAL stats rather than opinion...

Hmm. I'm overall against it... oh well. ;P

You're welcome. One suggestion, if you'd like more kind words from other people, try to avoid conflict... Though you and bsh/esocial/cybertron +others might each have reasons to dislike each other... try to avoid confrontation. It's sending your reputation as a good debater down the drain and filling it with one of a drama queen. Just a suggestion. I don't really take sides since, personally, I don't have a problem with either party.

ColeTrain: I do avoid confrontation. In that case -- as well as the encounter on DDO -- I didn't instigate an altercation. I finished it. If people attack me, I respond. That thread was a long time in the making, and the byproduct of a year of holding my nose. That isn't going to happen anymore.

JohnMaynardKeynes: Yeah...

What actually happened, though?

ColeTrain: Very, very long story. Don't listen to the victim narrative -- that's all I'll ay.

JohnMaynardKeynes: Who is the victim?

ColeTrain: Didn't you read the DDO thread?

The entire damned thing was a victim narrative. It was priceless. Even its author didn't know where he was going with it, lol.

JohnMaynardKeynes: No, I decided it wasn't worth it. I noticed it wasn't at all civil (in fact, all three that I've noticed recently), so I stayed away. Figured if you wanted to tell me, you would via PM. So if you want to, sure. If not, that's okay too.

ColeTrain: I'd rather not get into it.

JohnMaynardKeynes: Fair enough.

ColeTrain: We could turn this into a running series... post ludicrous and/or questionable economic logic here, and I'll respond to it.

Some more nonsense -- straight from the cockpit of DDO:

Congress shall have the power; to coin money, regulate the value thereof, and of foreign coin, fix the standard weights and measures.
This meant that congress would issue the money, this is very simple to understand, fix the standard weights and measures, however, is not, the phrase standard weights and measures is what people in the 1700s called the gold standard, this put the power over the economy into the hands of the people, gold or silver certificates were issued based on coin being deposited by people, which meant that certificate issue was based on the people and coin supply, coin supply was controlled by congress who ordered minting, and gold/ silver miners who provided gold and silver, and congress/ the treasurer were elected by the people, the people also chose which establishment"s to support, this gave 100% of the economic power to the people. Though the constitution allows for amendments, the Federal Reserve Act was not an amendment, it was just a unconstitutional law. The Federal Reserve ended this, it does not back its money by gold or silver so it is not dependent upon miners, it is separate from the government and the board of governors are not elected, which makes them not accountable to the people, and they will bail out any corporations which people choose not to support, preventing companies from shutting down effectively entrenches said corporations, exterminating any chance for new companies to be established. This has effectively eliminated our free market, creating a command economy, or in layman"s terms- communism.

The first piece here is just a know-nothing libertarian opining on constitutional law -- something he doesn't have a degree in and clearly doesn't understand. If strict constructionism were the basis for judicial interpretation, he might have a point, but he doesn't. Congress created the Fed with the task of dealing with monetary policy -- specifically to deal with employment and with prices. It maintains oversight and could, on a whim, phase the Fed out, unlikely though that might seems. Until he can provide me with some actual evidence that (a) any court has ever ruled otherwise or (b) that this nonsensical judicial interpretation ought to be taken seriously, he ought not opine on things he knows nothing about.

Next point: money isn't backed by gold, so the Fed isn't dependent on miners. This is true -- and it's an amazing thing. To suggest otherwise is to completely ignore why the gold standard was completely and utterly untenable, and why it made the Depression as bad as it was. It wasn't until FDR temporarily moved *off* the gold standard and devalued the dollar considerably that we actually made any sort of meaningful progress at climbing out of that giant, tight-money-induced hole.

Consider it this way: this guy probably believes in quantity theory. He shouldn't, because it's extremely untenable in most cases and subject to "long run" assumptions. But he would agree with me that, because MV = PY, if we hold V and P constant -- and because we can rewrite this as delta M + delta V = delta P + delta Y -- any change in the money supply will produce an equal change in prices in the long run; that is, it will only impact nominal variables. Therefore, over long periods of time the inflation rate is entirely dependent on mining. If we have a mining boom, inflation rockets; if we have a mining bust, we get deflation. This is completely irrespective of the actual state of the economy. This would magnify booms and exacerbate busts. There's no logical to it: if you want stable inflation, you want an independent central bank.

Next, "the Board isn't elected, and thus they're unaccountable." First, the Board are only 7 (5 atm, with 2 vacancies) of the 19 FOMC members. The remaining 12 members are regional bank presidents elected by their respective Board of Directors. Second, Board members, including the Chair, are nominated by the president and approved by the Senate, *whom "the people" elected. In the same way senators vote for bills and approve nominees for anything, including cabinet positions and judicial branches, they approve the BOG. Third, there are extremely valid reasons for separating this from the political process: (a) the American public knows absolutely nothing about monetary policy -- nor does this poster, for that matter -- and I don't want utterly stupid people weighing in on complex issues because QE "sounds scary" or Rand Paul said X, Y, and Z, all of which were patently false and ignorant, and (b) central-bank independence insulates the central bank from short-term political pressures which give rise to a time-inconsistency problem of too expansionary for too long: i.e., central banks would ease around election cycles to smooth over the process for incumbents. This *doesn't* happen if the central bank is independent, and as a result, inflation on average is much lower. Alesina and Summers wrote a great paper on this in 1993.

Then, he's just wrong on the facts. The Fed *cannot* bail out corporations. This is just flat-out untrue and embarrassing. Section 13(3) of the Federal Reserve Act gave the Fed the authority to lend freely in unusual and exigent circumstances, of which 2007-09 was one. It also can lend to banks -- not any random corporation -- via the discount window. Indeed, in 2008 it did lend directly to AIG, for instance, but (a) this was banned under Dodd-Frank -- i.e., it can now only establish lending facilities with broad-based eligibility; (b) the orderly liquidation authority in Dodd-Frank, that allows that "SIFI's" (systematically important financial institutions, or "too big to fail") have higher capital and liquidity requirements and produce plans to the Fed for an orderly resolution, which the Fed can deem as not credible -- i.e., the Fed can basically say, "prove to us that you won't crash the financial system, or break the hell up, or hold more capital"; and (c) had it not done this, acknowledging the few tools it had at the time because regulation--which I'm sure this libertarian clown opposes--was extraordinarily meager--we'd have about 16% unemployment, per Blinder and Zandi. You should be thanking Ben Bernanke. Your criticism, if anything, should be that he didn't do *enough.*

Then he completely misrepresents the terms "command economy" and "communism" -- and is it really any surprise that this moron doesn't know what these basic, poli-sci-101 terms mean? I'm not surprised. Dodd-Frank allows the free market to function: stable NGDP, which is the Fed's job, allows markets to function. Without it, we get booms, crashes, and distortions.

tl;dr: People shouldn't opine on complex issues they don't understand.

Didn't mean to respond directly to a post, lol... but oh well. I'm sure he'll be interested.

I should note that this isn't limited to DDO... that just happens to be where most of this tomfoolery takes place.

Hell, Kevin Warsh and Mike Spence wrote a *horrible* op-ed the other day in the WSJ. I might respond to that.

JohnMaynardKeynes: Lol, it was interesting. Really, though, most of what you say goes over my head in these posts I haven't studied much as extensively as you. My strongest point is the minimum wage, as I *have* studied that extensively.

ColeTrain: Eh, I'm sure you could understand this stuff if you gave it some time, lol. It's not *that* complex (though, even if it were, you'd still probably be able to grasp it, much more so than the vast majority of people who opine on economics on the interwebz).