The Market Wants More Stimulus

[DSGE]

It didn't happen because aggregate demand had been permanently increased.

how do you permanently increase demand when war demand was mostly for weapons that had no permanent use? You have described a bubble without realizing it.

You permanently increase it with a permanent monetary expansion. During the Depression the Fed doubled (I think. You'll have to check, but they increased it anyway) the monetary base. It wasn't expansionary though because of the gold standard; everybody knew that in the long run base money is constrained by the quantity of gold, so it'd have to be taken out. And temporary monetary injections aren't expansionary. What the war did was result in so much government debt that it had to be monetized. That created a permanent increase in the money base which resulted in a permanent increase in the price level and NGDP.

To be clear, I don't want the government to spend money or enter into excessive debt. I don't want demand increased through fiscal stimulus. I want monetary stimulus. So it would have had the same effect (actually it would have been much better) if there were no WWII which required government spending and instead they just devalued the exchange rate of gold.

 

[EdwardBaiamonte]

It didn't happen because aggregate demand had been permanently increased.

how do you permanently increase demand when war demand was mostly for weapons that had no permanent use? You have described a bubble without realizing it.

You permanently increase it with a permanent monetary expansion.

1) actually that causes inflation, nothing more 2) if you print money people know it and instantly want their gold of course 3) real demand comes from supply side innovation not money magic or liberal leadership

 

[ShackledNation]

It didn't happen because aggregate demand had been permanently increased.

how do you permanently increase demand when war demand was mostly for weapons that had no permanent use? You have described a bubble without realizing it.

You permanently increase it with a permanent monetary expansion. During the Depression the Fed doubled (I think. You'll have to check, but they increased it anyway) the monetary base. It wasn't expansionary though because of the gold standard; everybody knew that in the long run base money is constrained by the quantity of gold, so it'd have to be taken out. And temporary monetary injections aren't expansionary. What the war did was result in so much government debt that it had to be monetized. That created a permanent increase in the money base which resulted in a permanent increase in the price level and NGDP.

To be clear, I don't want the government to spend money or enter into excessive debt. I don't want demand increased through fiscal stimulus. I want monetary stimulus. So it would have had the same effect (actually it would have been much better) if there were no WWII which required government spending and instead they just devalued the exchange rate of gold.

First of all, prior to the Great Depression and during its early years, there was no gold standard. The gold exchange standard was the international monetary policy from 1926-1931. The result was a pyramiding of U.S. on gold, of British pounds on dollars, and of other European currencies on pounds--the "gold-exchange standard," with the dollar and the pound as the two "key currencies." In 1933-34, the US went off the classical gold standard. The only remnant of it left was that foreign governments and central banks could still redeem dollars for gold. Throughout world war II, there was no gold standard restricting US money supply creation. That is precisely what allowed the US to pursue such policies in the first place.

Second, the money supply prior to the Great Depression expanded dramatically. That is the definition of expansionary monetary policy; the existence of a gold standard has no bearing on that definition.

The World War II economy was one of the worst in US history. People were rationing food, consumer goods and amenities were scarce, the workforce was off fighting wars, total war forced people to work to create war machines, and all the war material produced ended up at the bottom of the ocean. War is a massive waste of economic resources. There was massive spending, but that spending did not fuel economic growth, it fueled destructive warfare.

 

[DSGE]

Indeed they did write that. And Bernanke now says that the Fed can't/won't do much more, and Krugman now bangs the table for more spending.

It's easy to say when applying the standards to others, i.e. Japan. However, when one is in the morass, ideas can change.

I don't know why Bernanke isn't pushing for more monetary stimulus. Everybody always talks about political constraints that he's under, but I wouldn't know about that. Hopefully now that there's some new blood on the FOMC we'll see the Fed get more aggressive.

As for Krugman, I guess he just accepted that central banks aren't willing to be aggressive. I side with Scott Sumner though, if that's the case then you shouldn't push for fiscal stimulus, you should push for the Federal Reserve Act to be changed until the Fed are forced to do their job.

First, given your knowledge of the topic at hand, I'm assuming your handle isn't a coincidence.

Thanks for noticing.

However, though its been 15 years since I sat down in front of econometric software and hence my mathematical skills have disappeared down black hole, after spending my career in the capital markets, I've come to the conclusion that the assumptions in economic modeling in a Gaussian framework do not accurately reflect human behavior, at least all of the time. I think such a framework can be a useful approximation under normal conditions, but in times of stress and unusual circumstances, I believe the models can fly out the window. Thus, in times of duress or war, human behavior changes, and the models break down.

That's a fair criticism of econometric models - in exceptional times it's probably not especially robust to calibrate them with long run averages - but I was thinking more of the underlying theory itself. I can't think of any case where it'd be preferable to do fiscal stimulus over monetary stimulus unless you think monetary policy becomes completely ineffective in some unusual circumstances. A lot of people might think that's what the liquidity trap is, but not even New Keynesian economists believe that. Bernanke doesn't, Krugman doesn't, Svensson doesn't, Woodford doesn't.

But even if we accept such a framework, its not that monetary velocity has to rise to a permanently higher plateau. Instead, it has to be brought up to where it was before if it has collapsed, as it did during the Depression.

Right but what keeps it there. The government can raise it through spending, but once that stimulus stops why won't velocity collapse again? The government spending has to permanently return it to its "normal" level. And to get that you have to believe a story about multiple equilibria. So if V falls, why not just raise M? That'll be your normal policy response. Say we hit the liquidity trap and increases in M are canceled out by equally sized decreases in V. Then should we use fiscal stimulus to raise NGDP? Well we've got a bunch of ways to deal with the liquidity trap already. Theory tells us that an explicit and credible price level or NGDP level target will get us out of the "trap". We may not even need to go that far (although I'd like a binding target anyway). Sweden had their repo rate near zero for a while during the GFC. The Riksbank stuck to their 2% inflation target, expanded the balance sheet to 25% of GDP and charged interest on reserves. They've managed to increase NGDP back to near trend. I just don't see any justification for fiscal stimulus.

As to your last sentence, I agree to some extent. The government pegging long-term rates at 2.5%, which monetized the debt, was significant. (Hello future!) The answer is, of course, complex, and not dependent upon any one thing. After a generation of depression and war, for example, there was tremendous pent up consumer demand that was unleashed in the 1950s and 1960s. Also, the conceptualization and development of suburbs influenced the patterns of economic growth. Government programs such as the GI bill - which were passed in an attempt to avoid a collapse like after WWI - also had an affect. But I also think government war spending was very significant.

I definitely think government spending can boost demand at least temporarily (when it's not being offset by a central bank; but they had the gold standard back then), I just don't see any reason to use it when we have a perfectly good tool in monetary policy.

Since I assume you are well versed - and certainly much better versed than I - on the DSGE framework, you'll understand the concept of agent-based modeling. I'm not sure if it can be modeled properly when the tails get fat, but I look at the world in terms of agents, with government being an agent through which economic activity flows. The arguments of guys like Lucas, Cochrane, Roll, etc., are that the government is an inefficient allocator of capital and income. In general, I would agree. Generally, the government is an inefficient allocator of capital. However, to assume that it is always an inefficient allocator of capital assumes that individuals are hyper-rationalists, constantly maximizing infinite utility curves under all circumstances. I do not believe this is correct. Peoples' motivations are not always driven by the maximization of individual utilities (unless one assumes that utility also includes the desire to maximize the utilities of others, which may be a fair point). At times, individuals will sacrifice their own well-being for the good of the whole, which should be patently obvious in a discussion about war, given that people are willing to sacrifice their lives for the country. If people are willing to die for their country, why is it unreasonable to assume that people will also subsume their own desires and work as hard for the nation as they do for themselves? If this is true, then in war time, people may be as productive working for the collective, i.e. the nation, as they are for themselves, which may not be true during peacetime. And if this is true, then the assumptions behind traditional econometric modeling break down.

Ergo, government war spending in a time of duress can have an independent positive affect on the economy that can be sustained when the economy reverts back to a more normal framework, even when the government spending is withdrawn, especially when excess capacity is expunged from the economy.

I'm not sure I agree with the "ergo..." bit. I don't see how one paragraph logically leads to the other. Fair enough maybe the normal models break down, but that's not the same as having a model where government stimulus is actually useful. Even if you had such a model where in exceptional times government spending can be useful, would that model preclude monetary policy from being a better alternative?

 

[DSGE]

how do you permanently increase demand when war demand was mostly for weapons that had no permanent use? You have described a bubble without realizing it.

You permanently increase it with a permanent monetary expansion.

1) actually that causes inflation, nothing more 2) if you print money people know it and instantly want their gold of course 3) real demand comes from supply side innovation not money magic or liberal leadership

So I take it then you're not familiar with the idea of nominal business cycles? Guess you've got some homework to do.

 

[ShackledNation]

You permanently increase it with a permanent monetary expansion.

1) actually that causes inflation, nothing more 2) if you print money people know it and instantly want their gold of course 3) real demand comes from supply side innovation not money magic or liberal leadership

So I take it then you're not familiar with the idea of nominal business cycles? Guess you've got some homework to do.

So the cure to all economic woes is printing money?

 

[Toro]

Right but what keeps it there. The government can raise it through spending, but once that stimulus stops why won't velocity collapse again? The government spending has to permanently return it to its "normal" level.

Not necessarily, no. If before a depression, velocity was X then falls to, say, 0.5X during the depression, the government can get it back X. Velocity can collapse when confidence collapses. If government spending boosts confidence, then the government can withdraw spending when velocity comes back to X. There might be a recession because of the cutback in government spending, but if confidence is fairly constant, the economy shouldn't fall back into depression.

I'm not sure I agree with the "ergo..." bit. I don't see how one paragraph logically leads to the other. Fair enough maybe the normal models break down, but that's not the same as having a model where government stimulus is actually useful. Even if you had such a model where in exceptional times government spending can be useful, would that model preclude monetary policy from being a better alternative?

I guess what I'm saying is that from a mathematical perspective, there may not be a model which can capture such an environment (at least not yet). So the fact that there isn't such a model would be a flaw of modeling techniques rather than proof that government spending is never effective.

 

[DSGE]

how do you permanently increase demand when war demand was mostly for weapons that had no permanent use? You have described a bubble without realizing it.

You permanently increase it with a permanent monetary expansion. During the Depression the Fed doubled (I think. You'll have to check, but they increased it anyway) the monetary base. It wasn't expansionary though because of the gold standard; everybody knew that in the long run base money is constrained by the quantity of gold, so it'd have to be taken out. And temporary monetary injections aren't expansionary. What the war did was result in so much government debt that it had to be monetized. That created a permanent increase in the money base which resulted in a permanent increase in the price level and NGDP.

To be clear, I don't want the government to spend money or enter into excessive debt. I don't want demand increased through fiscal stimulus. I want monetary stimulus. So it would have had the same effect (actually it would have been much better) if there were no WWII which required government spending and instead they just devalued the exchange rate of gold.

First of all, prior to the Great Depression and during its early years, there was no gold standard.

The gold exchange standard was the international monetary policy from 1926-1931.

In 1933-34, the US went off the classical gold standard.

Don't those last two sentences contradict the first?

Throughout world war II, there was no gold standard restricting US money supply creation. That is precisely what allowed the US to pursue such policies in the first place.

Yes. The increase in the money base in the early years wasn't going to be permanent. Roosevelt left the gold standard in 1933 and insisted the Fed run an expansionary policy (as well as the problem of the gold standard there was also the problem that the Fed was extremely incompetent. But that's not relevant) which led to recovery, though not fully restoring demand. The monetization of the war created enough permanent money to keep NGDP stable after the war ended.

Second, the money supply prior to the Great Depression expanded dramatically. That is the definition of expansionary monetary policy

No it's not. To begin with, there's no one definition of "expansionary" policy. If you had to go with a definition though you'd go with rising NGDP, since increasing the money stock does nothing if velocity falls.

The World War II economy was one of the worst in US history. People were rationing food, consumer goods and amenities were scarce, the workforce was off fighting wars, total war forced people to work to create war machines, and all the war material produced ended up at the bottom of the ocean. War is a massive waste of economic resources. There was massive spending, but that spending did not fuel economic growth, it fueled destructive warfare.

Yeah. Remember where I said it'd have been better if there were no war requiring government spending; if instead there'd just been a sufficiently expansionary monetary policy? I don't disagree with anything you said there.

 

[DSGE]

1) actually that causes inflation, nothing more 2) if you print money people know it and instantly want their gold of course 3) real demand comes from supply side innovation not money magic or liberal leadership

So I take it then you're not familiar with the idea of nominal business cycles? Guess you've got some homework to do.

So the cure to all economic woes is printing money?

No. The cure to nominal business cycles is stabilizing a path for NGDP. We'll likely still have real business cycles, but we can't/shouldn't fight those.

 

[DSGE]

Right but what keeps it there. The government can raise it through spending, but once that stimulus stops why won't velocity collapse again? The government spending has to permanently return it to its "normal" level.

Not necessarily, no. If before a depression, velocity was X then falls to, say, 0.5X during the depression, the government can get it back X. Velocity can collapse when confidence collapses. If government spending boosts confidence, then the government can withdraw spending when velocity comes back to X. There might be a recession because of the cutback in government spending, but if confidence is fairly constant, the economy shouldn't fall back into depression.

Yeah that's the multiple equilibria story. There's a "good" equilibrium where agents are confident and a "bad" equilibrium where agents are "uncertain" and the government can push the economy to the good one. What's the actual mechanism for this in reality though? Why does government spending create confidence? Is it that people only have adaptive expectations and their expectation of tomorrow's output is whatever output is today (which can be effected through government purchases)? And still, why bother? Why not just use monetary policy?

I'm not sure I agree with the "ergo..." bit. I don't see how one paragraph logically leads to the other. Fair enough maybe the normal models break down, but that's not the same as having a model where government stimulus is actually useful. Even if you had such a model where in exceptional times government spending can be useful, would that model preclude monetary policy from being a better alternative?

I guess what I'm saying is that from a mathematical perspective, there may not be a model which can capture such an environment (at least not yet). So the fact that there isn't such a model would be a flaw of modeling techniques rather than proof that government spending is never effective.

Sure. But what I'm saying is why should "models break down" lead to government spending? That doesn't follow. It's not enough to just guess that it'll be effective. It could very well be destructive! After all, we don't have a working model to guide us. I'm saying you need a robust model to actually justify the government spending.

 

[ShackledNation]

You permanently increase it with a permanent monetary expansion. During the Depression the Fed doubled (I think. You'll have to check, but they increased it anyway) the monetary base. It wasn't expansionary though because of the gold standard; everybody knew that in the long run base money is constrained by the quantity of gold, so it'd have to be taken out. And temporary monetary injections aren't expansionary. What the war did was result in so much government debt that it had to be monetized. That created a permanent increase in the money base which resulted in a permanent increase in the price level and NGDP.

To be clear, I don't want the government to spend money or enter into excessive debt. I don't want demand increased through fiscal stimulus. I want monetary stimulus. So it would have had the same effect (actually it would have been much better) if there were no WWII which required government spending and instead they just devalued the exchange rate of gold.

First of all, prior to the Great Depression and during its early years, there was no gold standard.

The gold exchange standard was the international monetary policy from 1926-1931.

In 1933-34, the US went off the classical gold standard.

Don't those last two sentences contradict the first?

No. The gold standard is completely different than the gold-exchange standard and the peculiar pseudo-gold standard that followed it. Free market economists heavily criticized both standards, and some even predicted the Great Depression would follow.

Yes. The increase in the money base in the early years wasn't going to be permanent. Roosevelt left the gold standard in 1933 and insisted the Fed run an expansionary policy (as well as the problem of the gold standard there was also the problem that the Fed was extremely incompetent. But that's not relevant) which led to recovery, though not fully restoring demand. The monetization of the war created enough permanent money to keep NGDP stable after the war ended.

The economy did not recover during the war. During the war years there was a distorted capital structure where all resources were directed into the war processes, completely out of line with the needs and wants of individuals in the economy. The result was poverty, rationing of food, and a crippled economy.

By nature of the way nominal GDP is calculated, if the amount of goods produced in an economy is exactly the same but the price of goods has doubled, the economy will have doubled. This, of course, is a logical contradiction, for an economy cannot both grow and produce the same amount of goods at the same time. Thus, nominal GDP is a flawed tool of measured. GDP is not an adequate measure of economic growth especially when it is comprised primarily of government spending. Nominal GDP with heavy government spending, for reasons stated above, is even more useless than real GDP, so what its numbers did during WWII matter very little.

Second, the money supply prior to the Great Depression expanded dramatically. That is the definition of expansionary monetary policy

No it's not. To begin with, there's no one definition of "expansionary" policy. If you had to go with a definition though you'd go with rising NGDP, since increasing the money stock does nothing if velocity falls.

That is an odd definition. If expansionary policy is defined as rising NGDP, and rising NGDP is defined as economic growth, then expansionary policy and economic growth are one in the same, and there is no need for a term like expansionary, for one could simply state "economic growth." Otherwise, terms like "expansionary policy" are merely contrived to obfuscate what is actually going on.

Saying the government is pursuing policies of "economic growth" begs the question "What specific policies are you referring to?" and government would then respond "expansionary policies." That then begs the question "what are expansionary policies?" to which the government would respond "rising NGDP". The public then asks "what is rising NGDP" to which the government would reply "economic growth". In other words, your definition of expansionary policy leads to circular reasoning. The same circular reasoning is present if the government first says it is pursuing "expansionary policies."

The World War II economy was one of the worst in US history. People were rationing food, consumer goods and amenities were scarce, the workforce was off fighting wars, total war forced people to work to create war machines, and all the war material produced ended up at the bottom of the ocean. War is a massive waste of economic resources. There was massive spending, but that spending did not fuel economic growth, it fueled destructive warfare.

Yeah. Remember where I said it'd have been better if there were no war requiring government spending; if instead there'd just been a sufficiently expansionary monetary policy? I don't disagree with anything you said there.

So you reject the notion that WWII brought the US out of its economic slump?

 

[DSGE]

The economy did not recover during the war. During the war years there was a distorted capital structure where all resources were directed into the war processes, completely out of line with the needs and wants of individuals in the economy. The result was poverty, rationing of food, and a crippled economy.

I never said it recovered during the war. I said it recovered in 1933 and I said that the monetized war debt allowed NGDP to remain boosted after the war spending finished.

By nature of the way nominal GDP is calculated, if the amount of goods produced in an economy is exactly the same but the price of goods has doubled, the economy will have doubled. This, of course, is a logical contradiction, for an economy cannot both grow and produce the same amount of goods at the same time. Thus, nominal GDP is a flawed tool of measured. GDP is not an adequate measure of economic growth especially when it is comprised primarily of government spending.

It's not supposed to be. Even if you want to use GDP as a measure of growth (rather than private consumption and investment), everybody uses real GDP. NGDP is a measure of aggregate demand, which is important in nominal business cycles.

Nominal GDP with heavy government spending, for reasons stated above, is even more useless than real GDP, so what its numbers did during WWII matter very little.

I've said it a few times already, and if you read my posts to Toro that'd reinforce the point, I don't claim that government spending is a good thing. I'm not claiming that the fiscal expansion in WWII was beneficial to the economy. In the post that you originally replied to I said explicitly: the spending of war doesn't matter, in fact it'd have been better had there been no WWII that required such huge spending, it's the monetary policy that matters.

That is an odd definition. If expansionary policy is defined as rising NGDP, and rising NGDP is defined as economic growth,

Except nowhere have I or anyone defined rising NGDP as economic growth.

So you reject the notion that WWII brought the US out of its economic slump?

Not exactly. The monetary expansion that brought the US out of its slump was caused by the war. So when asked "did WWII end the depression" I'd answer "yes". However it's not necessary for there to have been a war or any government spending at all to end the depression, just the monetary expansion was needed.

 

[ShackledNation]

The economy did not recover during the war. During the war years there was a distorted capital structure where all resources were directed into the war processes, completely out of line with the needs and wants of individuals in the economy. The result was poverty, rationing of food, and a crippled economy.

I never said it recovered during the war. I said it recovered in 1933 and I said that the monetized war debt allowed NGDP to remain boosted after the war spending finished.

Ok, fair enough. Let me put it this way. The war did nothing to increase economic growth, during it or after it ended.

By nature of the way nominal GDP is calculated, if the amount of goods produced in an economy is exactly the same but the price of goods has doubled, the economy will have doubled. This, of course, is a logical contradiction, for an economy cannot both grow and produce the same amount of goods at the same time. Thus, nominal GDP is a flawed tool of measured. GDP is not an adequate measure of economic growth especially when it is comprised primarily of government spending.

It's not supposed to be. Even if you want to use GDP as a measure of growth (rather than private consumption and investment), everybody uses real GDP. NGDP is a measure of aggregate demand, which is important in nominal business cycles.

Aggregate demand is not very useful in understanding business cycles at all.

I've said it a few times already, and if you read my posts to Toro that'd reinforce the point, I don't claim that government spending is a good thing. I'm not claiming that the fiscal expansion in WWII was beneficial to the economy. In the post that you originally replied to I said explicitly: the spending of war doesn't matter, in fact it'd have been better had there been no WWII that required such huge spending, it's the monetary policy that matters.

I am implying that monetary policy of increasing the money supply is bad, and resulting in the Depression.

So you reject the notion that WWII brought the US out of its economic slump?

Not exactly. The monetary expansion that brought the US out of its slump was caused by the war. So when asked "did WWII end the depression" I'd answer "yes". However it's not necessary for there to have been a war or any government spending at all to end the depression, just the monetary expansion was needed.

[/quote]
And that is exactly what I have been trying to refute this entire time. If war spending brought the US out of the depression, exactly what was produced by the war that did so? Monetary expansion leads to bubbles and malinvestment, not growth.

 

[DSGE]

Aggregate demand is not very useful in understanding business cycles at all.

Well it is. What I'm asking for is that the central bank stabilize aggregate demand. Then we don't have to worry about it.

I am implying that monetary policy of increasing the money supply is bad, and resulting in the Depression.

Well that's not the case. An increase of the money supply isn't invariably bad, despite what most internet Austrians seem to think. You know Hayek wanted NGDP targeting too, right? He called it "stabilizing the stream of total income".

And that is exactly what I have been trying to refute this entire time. If war spending brought the US out of the depression, exactly what was produced by the war that did so? Monetary expansion leads to bubbles and malinvestment, not growth.

War spending didn't bring the US out of depression. The easing of monetary policy did, which occurred because the government needed to pay for the war. I've made explicitly clear a hundred times that I don't think government spending is productive. It would have been better if the Fed had just eased money sufficiently to begin with.

I don't go in for that Austrian stuff, I don't think it makes any sense at all. But even within the Austrian framework, not all monetary expansion results in malinvestment. Like I said, Hayek wanted nominal income targeting. As a pioneer of ABCT, I doubt very much he would have supported anything other than fixing the quantity of high powered money if it caused malinvestment.

 

[ShackledNation]

Aggregate demand is not very useful in understanding business cycles at all.

Well it is.

Now there's an argument.

I am implying that monetary policy of increasing the money supply is bad, and resulting in the Depression.

Well that's not the case. An increase of the money supply isn't invariably bad, despite what most internet Austrians seem to think. You know Hayek wanted NGDP targeting too, right? He called it "stabilizing the stream of total income".

Again, no argument, you just say no. And I am more a follower of Rothbard or Mises than Hayek, as is most of the Austrian school today. And what you and Hayek have proposed are very different, even with that said.

And that is exactly what I have been trying to refute this entire time. If war spending brought the US out of the depression, exactly what was produced by the war that did so? Monetary expansion leads to bubbles and malinvestment, not growth.

War spending didn't bring the US out of depression. The easing of monetary policy did, which occurred because the government needed to pay for the war. I've made explicitly clear a hundred times that I don't think government spending is productive. It would have been better if the Fed had just eased money sufficiently to begin with.

I don't go in for that Austrian stuff, I don't think it makes any sense at all. But even within the Austrian framework, not all monetary expansion results in malinvestment. Like I said, Hayek wanted nominal income targeting. As a pioneer of ABCT, I doubt very much he would have supported anything other than fixing the quantity of high powered money if it caused malinvestment.

[/quote]
If ABCT makes no sense, you probably are not understanding it correctly. I understand Keynesian analysis, for example, but it is flawed in many of its premises. Where you end up confusing me is in making comments like "World War II ended the depression" but then saying world war II spending did not.

Define "easing of monetary policy."

 

[DSGE]

Aggregate demand is not very useful in understanding business cycles at all.

Well it is.

Now there's an argument.

Right, but "it's not very useful" is? How about "it's not very useful because..."?

Again, no argument, you just say no. And I am more a follower of Rothbard or Mises than Hayek, as is most of the Austrian school today. And what you and Hayek have proposed are very different, even with that said.

And again, you also just made an assertion with no justification. And how exactly are they very different?

If ABCT makes no sense, you probably are not understanding it correctly.

I think I understand it fine, but this is a different discussion.

I understand Keynesian analysis, for example,

If I had a dollar for every time somebody said that but didn't...

but it is flawed in many of its premises.

Such as?

Where you end up confusing me is in making comments like "World War II ended the depression" but then saying world war II spending did not.

I think I've been pretty clear. Monetary policy needed to be eased. The thing that finally resulted in that was war debt being monetized. So in that sense WWII ended the depression by being the thing that finally forced the Fed to ease. It's the easing that ended the depression, it was the war that caused the easing, so the war effectively ended the depression. It's a bit misleading to say "the war ended the depression", so when people ask me I always actually explain myself rather than simply "yes" or "no". As I said before, this isn't endorsing government spending.

Define "easing of monetary policy."

Returning NGDP to trend.

 

[ShackledNation]

Well it is.

Now there's an argument.

Right, but "it's not very useful" is? How about "it's not very useful because..."?

Now now, it was you who originally made the claim that it is useful. I didn't bother saying why it wasn't because I was waiting for an explanation from you first.

And again, you also just made an assertion with no justification. And how exactly are they very different?

It should have been implied, if not sorry for being unclear. They did not support NGDP targeting.

I think I understand it fine, but this is a different discussion.

I agree.

If I had a dollar for every time somebody said that but didn't...

You'd probably be pretty poor, because the average person would draw a blank face if you brought up the name Keynes or Rothbard.

Such as?

Spending is the driver of economic growth, for one. As well as his misrepresentation of Say's law, and his incorrect bundling of all the various free market economists into one category, as if they were the same. But explaining all that would require a topic of its own.

Where you end up confusing me is in making comments like "World War II ended the depression" but then saying world war II spending did not.

I think I've been pretty clear. Monetary policy needed to be eased. The thing that finally resulted in that was war debt being monetized. So in that sense WWII ended the depression by being the thing that finally forced the Fed to ease. It's the easing that ended the depression, it was the war that caused the easing, so the war effectively ended the depression. It's a bit misleading to say "the war ended the depression", so when people ask me I always actually explain myself rather than simply "yes" or "no". As I said before, this isn't endorsing government spending.

So you are asserting that in order to end the depression, the country had to go into debt so that debt could be monetized?

Define "easing of monetary policy."

Returning NGDP to trend.

That begs the question "what trend?" And also the question of "what specific monetary policy would be advocated to do that?"

 

[DSGE]

Now there's an argument.

Right, but "it's not very useful" is? How about "it's not very useful because..."?

Now now, it was you who originally made the claim that it is useful. I didn't bother saying why it wasn't because I was waiting for an explanation from you first.

Okay. It's useful because of nominal wage rigidity.

It should have been implied, if not sorry for being unclear. They did not support NGDP targeting.

Rothbard and Mises didn't. You said "what you and Hayek propose are very different". Hayek did want a constant NGDP target.

Spending is the driver of economic growth, for one.

That's not a premise or conclusion of any economic theory. Everybody agrees that growth is driven by productivity. Keynesian economics isn't even about growth. It's a business cycle theory.

As well as his misrepresentation of Say's law

He didn't misinterpret Say's law at all. The misinterpretation is where people don't stop and think for half a second. "'Supply creates its own demand?! If I supply dirt from my backyard, it doesn't mean anybody is going to want it. Deeeerrr.". That's obvious to everybody, so chances are that's not what the phrase means? Supply creates its own demand means that somebody only supplies a good for the explicit purpose of demanding another good. For every good you supply, you demand other goods totaling to the same value. The criticism of Say's law Keynes made was that it doesn't necessarily hold at all times in a monetary economy. People don't need to demand other goods to the same value of what they supply, they can demand to hold liquid money also. This can create disequilibrium in the short run. So this is a case where an expansion of the money supply isn't harmful, if the expansion is to satisfy an increase in the demand for money.

and his incorrect bundling of all the various free market economists into one category, as if they were the same.

Not sure why this is relevant to economic theory.

Another thing you should keep in mind is that modern "Keynesian" theory doesn't really have a lot to do with Keynes. The worst thing you can do to understand Keynesian economics is to read anything Keynes wrote. It's actually a bit of a misnomer. Maybe it would have been better to call it "New Monetarist" theory rather than "New Keynesian"? Either way, you need exposure to modern theory.

So you are asserting that in order to end the depression, the country had to go into debt so that debt could be monetized?

God damn it. I've explained this a million ******* times. I'm asserting that to end the depression monetary policy needed to be loosened. The Fed kept it tight. When the war came along, monetizing the debt accidentally loosened monetary policy appropriately. That shouldn't have been necessary, the Fed should have just loosened to begin with. There is no room in my economics for counter-cyclical government spending.

Define "easing of monetary policy."

Returning NGDP to trend.

That begs the question "what trend?" And also the question of "what specific monetary policy would be advocated to do that?"

The linear trend of the log of NGDP. The same monetary policy as normal: you adjust the money supply til NGDP is on target.

 

[ShackledNation]

Right, but "it's not very useful" is? How about "it's not very useful because..."?

Now now, it was you who originally made the claim that it is useful. I didn't bother saying why it wasn't because I was waiting for an explanation from you first.

Okay. It's useful because of nominal wage rigidity.

You know that begs the question "why."

Rothbard and Mises didn't. You said "what you and Hayek propose are very different". Hayek did want a constant NGDP target.

It appeared you were asking me what the difference was between Rothbard/Mises and Hayek. I meant the entirety of the theory in general when referring to Hayek.

That's not a premise or conclusion of any economic theory. Everybody agrees that growth is driven by productivity. Keynesian economics isn't even about growth. It's a business cycle theory.

In order to even have a theory of the business cycle you have to explain how economic growth works, and obviously Keynes did. Growth and productivity are virtually the same thing. The very definition of economic growth is an increase in production. And yes, Keynes did in fact say that spending drove production and thus growth.

He didn't misinterpret Say's law at all. The misinterpretation is where people don't stop and think for half a second. "'Supply creates its own demand?! If I supply dirt from my backyard, it doesn't mean anybody is going to want it. Deeeerrr.". That's obvious to everybody, so chances are that's not what the phrase means?

Yes, actually, you have completely misinterpreted it. Just like Keynes. In order to demand something, you must have a supply of something to demand it with. Demand is not want, otherwise we could get out of economic slumps by just proclaiming how much we want stuff. Dirt is not something many people would want, so it could not be used to demand much at all. Money is simply the medium of exchange, the common item used, with which to demand other goods and services. You cannot demand a TV without having the money to pay for it. In reality, you are simply exchanging your money for the TV. The seller of the TV is demanding your money, and paying for it with the TV.

Supply creates its own demand means that somebody only supplies a good for the explicit purpose of demanding another good. For every good you supply, you demand other goods totaling to the same value.

It is correct that somebody supplies a good in order to demand another good, if by supply you mean sell. If I sell a TV, I am demanding money. It is incorrect to say you demand other goods totaling to the same value. Value is subjective. You are selling goods you value less than the goods you are buying. That is the entire point of an exchange. If you valued both items in an exchange equally, the exchange would not take place because it would be of no benefit to you.

The criticism of Say's law Keynes made was that it doesn't necessarily hold at all times in a monetary economy. People don't need to demand other goods to the same value of what they supply, they can demand to hold liquid money also. This can create disequilibrium in the short run. So this is a case where an expansion of the money supply isn't harmful, if the expansion is to satisfy an increase in the demand for money.

Again, the argument you are using is largely a strawman. Say's law is not about demanding goods of the same value. People do not exchange goods that are equal. They exchange a good they place a lesser value on for a good they place a greater value on. Money is simply one of those goods. If people demand money, it is no more negative than if they demand a TV.

So what does this mean?

1. Prices will tend to fall.
"Standard demand and supply analysis shows that any increase of demand entails an increase of the price of the good in question. This price increase is not contingent (accidental), but systematic (necessary), which is what we mean when we assert that the increase of demand causes the price increase. Now in the case of money, its "price" can be defined as the total array of goods and services that can be exchanged for one unit of money. In other words, the price of money is the purchasing power of a money unit. If the demand for money increases, therefore, the purchasing power of money tends to increase beyond the level it would otherwise have reached, which means that the general level of money prices will tend to decrease."

There is more here that goes into depth about the topic.
The Demand for Money and the Time-Structure of Production - Jörg Guido Hülsmann - Mises Daily

Not sure why this is relevant to economic theory.

Because much of Keynes criticisms of free market economists were criticisms of very few, and in discrediting them he claimed to have discredited them all.

Another thing you should keep in mind is that modern "Keynesian" theory doesn't really have a lot to do with Keynes. The worst thing you can do to understand Keynesian economics is to read anything Keynes wrote. It's actually a bit of a misnomer. Maybe it would have been better to call it "New Monetarist" theory rather than "New Keynesian"? Either way, you need exposure to modern theory.

I understand that there are differences between Keynesians and modern Keynesians. Much of what you call "modern theory" is more similar to the economic theories of mercantilism that preceded even Ricardo and Smith.

God damn it. I've explained this a million ******* times. I'm asserting that to end the depression monetary policy needed to be loosened. The Fed kept it tight. When the war came along, monetizing the debt accidentally loosened monetary policy appropriately. That shouldn't have been necessary, the Fed should have just loosened to begin with. There is no room in my economics for counter-cyclical government spending.

Not very well. If you wanted to say that the depression ended because the Fed pursued loose monetary policy, then you should have said so clearly in the first place. Either way, that is completely inaccurate. When the Fed increased the monetary base by 100% over 5 years, conditions got worse. It was not until most of FDRs policies were repealed and inflationary monetary policy ended that the depression ended.

Returning NGDP to trend.

That begs the question "what trend?" And also the question of "what specific monetary policy would be advocated to do that?"

The linear trend of the log of NGDP. The same monetary policy as normal: you adjust the money supply til NGDP is on target.

Dear lord, I give up.

 

[DSGE]

Okay. It's useful because of nominal wage rigidity.

You know that begs the question "why."

If you understood Keynesian analysis you wouldn't be asking. A fall in demand means that nominal wages and prices must fall to restore equilibrium. Downward rigidity of nominal wages means that a fall in demand can result in a long period of disequilibrium and highly persistent unemployment.

In order to even have a theory of the business cycle you have to explain how economic growth works

That's completely untrue. Business cycle theory is about explaining why the economy deviates from its balanced growth path. The growth path is determined on the supply side. Keynes though business cycles, short run deviations from the growth path, were a demand side phenomenon.

Growth and productivity are virtually the same thing. The very definition of economic growth is an increase in production. And yes, Keynes did in fact say that spending drove production and thus growth.

Yes. And everybody agrees that long run per capita growth is driven by technological progress. I don't even understand what argument you're trying to make. First off, as explained, Keynes was describing a theory of the short run and admitted that in the long run everything is determined on the supply side. But let's say for a second that Keynes had said some craziness about long run growth being demand side. Who cares? "Keynesian" doesn't mean you follow the word of John Maynard Keynes as gospel. No economist now thinks growth is demand side. If you're going to criticise anything, it should be what current Keynesian economists think, not something from 75 years ago.

It is incorrect to say you demand other goods totaling to the same value. Value is subjective. You are selling goods you value less than the goods you are buying. That is the entire point of an exchange. If you valued both items in an exchange equally, the exchange would not take place because it would be of no benefit to you.

My fault for not being clear on what I meant by value. I mean you buy goods whose total price is equal to the price of what you supplied. I was using value in the "unit of account" sense, not the "subjective utility" sense. My bad.

So what does this mean?

1. Prices will tend to fall.
"Standard demand and supply analysis shows that any increase of demand entails an increase of the price of the good in question. This price increase is not contingent (accidental), but systematic (necessary), which is what we mean when we assert that the increase of demand causes the price increase. Now in the case of money, its "price" can be defined as the total array of goods and services that can be exchanged for one unit of money. In other words, the price of money is the purchasing power of a money unit. If the demand for money increases, therefore, the purchasing power of money tends to increase beyond the level it would otherwise have reached, which means that the general level of money prices will tend to decrease."

There is more here that goes into depth about the topic.
The Demand for Money and the Time-Structure of Production - Jörg Guido Hülsmann - Mises Daily

Exactly. This is where nominal rigidities come in. Everybody agrees that in a world of perfectly flexible wages and prices, you get the classical world where all markets clear and there's only structural and frictional unemployment. Downward nominal wage rigidities prevent the labour market from clearing following a fall in demand. That's why the demand-side prescription is to accommodate an increase in the demand for money by increasing the supply of money. That's what Hayek wanted with a constant NGDP target. That way demand side business cycles will not be an issue and we can concentrate on structural reform to remove barriers to productivity.

Because much of Keynes criticisms of free market economists were criticisms of very few, and in discrediting them he claimed to have discredited them all.

Whatever personal opinions Keynes had are irrelevant to modern economic theory. Are you attacking the theory or are you attacking Keynes?

I understand that there are differences between Keynesians and modern Keynesians. Much of what you call "modern theory" is more similar to the economic theories of mercantilism that preceded even Ricardo and Smith.

It's not at all similar to mercantilism. I don't know what you're talking about there. But the point is, it's extremely irritating when people claim to understand the other side but then go on to attack a 75 year old book that nobody gives a shit about anymore.

That begs the question "what trend?" And also the question of "what specific monetary policy would be advocated to do that?"

The linear trend of the log of NGDP. The same monetary policy as normal: you adjust the money supply til NGDP is on target.

Dear lord, I give up.

Okay.