8 ms·

Absolutely no discussion of inflation is complete without recognition of the fact that inflation and inflation expectations are at historically low levels[1] ri

by enoch_r 13y ago

Absolutely no discussion of inflation is complete without recognition of the fact that inflation and inflation expectations are at historically low levels[1] right now. Economists aren't arguing that we should inflate our way out of debt--they are arguing that we should return to the historical norm. Of course, it's possible that these economists are secretly just pushing inflation as the "hidden tax" we're all up in arms about. But I find this unlikely. I find it far easier to believe that most economists actually believe that moderate inflation is good for the economy. Why do economists believe this? Prices are sticky, and some prices are stickier than others. Prices for labor are especially sticky, which means that when growth expectations fall, it's very difficult to decrease wages, which in turn makes it difficult for supply and demand of labor to balance. In the Cliff Note version, inflation helps because people are willing to take real pay cuts when they're disguised as a nominal pay increase. There's a vicious cycle during a recession, where falling output causes the price level to fall, which in turn causes more imbalance in the labor market. It's important to recognize that the standard argument for inflation has literally nothing to do with "the government printing money to pay for things." Does the US government make money from seignorage? Yes, it does. Is it a significant source of income? No, not in the context of US government spending or revenue--it's roughly $30 billion dollars a year. Are these crazy inflationary economists suggesting policies that would increase seignorage to a significant level? No, they're not. Finally, most of these arguments are disputed by the so-called "Austrian school" of economics. It's important to recognize that this school is much, much, much more popular with laymen than with professional economists. This doesn't mean that the school's arguments are wrong, but it does raise questions about why the school's arguments which seem so utterly convincing to so many people, don't manage to gain many converts among people who research the subject professionally. Once again, I don't find "conspiracy" a particularly good argument. [1] http://www.clevelandfed.org/research/data/inflation_expectations/archive.cfm?dyear=2013&dmonth=9 http://www.clevelandfed.org/research/data/inflation_expectat...

ra 13y ago
My (layman's) understanding of it is that central banks seek to keep inflation within a target range; in Australia this is between 2 and 3 percent [1]. The primary tool to manage inflation is interest rates, however interest rate movements also have other effects, positive and negative, so it's not as simple as turning on a tap. It's important not to let inflation get too high because that makes new investment unattractive, the cost of living go up, and retirement savings worth less. [1] http://www.rba.gov.au/inflation/ http://www.rba.gov.au/inflation/
- cotsuka 13y ago
  The other important thing is to reduce uncertainty as much as possible. You don't want your inflation rates to bounce around like crazy from day to day. Instead, you'd like to be able to keep them within certain limits so people can plan ahead to the future. If I'm not sure what inflation will be day-to-day, I can't make an accurate prediction as to whether I should save my money or spend it.
  - sien 13y ago
    And if inflation is really high and fluctuating everyone makes the decision to never save in cash which isn't healthy. But a bit of low level inflation is generally seen as a good thing. The questions over the efficacy of monetary policy as a stimulus tool in all situations is certainly questionable though. It's also worth noting that independent central banks are a fairly new thing. Inflation levels used to be set by politicians who would notoriously let short term interest over ride price stability. The Bundesbank was the first independent bank drawing lessons from the horrors of hyper-inflation. Most (all?) developed countries now follow that model.
- nhaehnle 13y ago
  For your last point, I do wonder. How does high inflation make investment unattractive? It should do the opposite, since holding cash is very unattractive under high inflation. As to the cost of living going up: in nominal terms, sure. But it depends on the type of inflation. Usually wages grow to keep up with inflation, so in the end, it's a wash. I'm sure there are costs associated with extremely high inflation, e.g. restaurants having to print new menus all the time. However, I'm not aware of any serious work being done to quantify that effect. It seems that even at rates of inflation that we would consider very high - let's say 15% anually - those costs would still be irrelevant. Volatile inflation would probably hurt more than merely high inflation as long as the latter is stable.
  - ra 13y ago
    Well, simply put, we don't live in a single economic regime. If inflation is much higher in one country than another, then exports from the country with lower inflation will be more competitive on the global market. Inflation also alters consumer behaviour. If inflation is very high people tend to buy goods way in advance for fear of further price increases. This "bringing forward" of consumer spending means less will be consumed in the months ahead. The general uncertainty created by very high inflation undermines business confidence and reduces investment. Basically, you're money is better off in another country where inflation is lower.
cotsuka 13y ago
Austrian school not holding much weight with academics is like wondering why creationism doesn't hold much weight with academics. Lots of things can be explained with creationism, but it doesn't mean it's right. Many Austrian economists rail against the use of quantitative models and such. But without them, how can you measure the efficacy of your policies? Faith that the policy works... But most academics like to be able to test things. I'm also not saying creationism isn't right. I can't prove anything.
- mistermann 13y ago
  I don't see the similarity.
  - cotsuka 13y ago
    Just edited my comment for clarity.
- mistermann 13y ago
  I'm not sure how this casts doubt on the Austrians or supports the Keynesians, or vice versa.
  - cotsuka 13y ago
    I'm saying calling something Austrian or Keynesian is inherently political. We should come up with economic models, whether they're Austrian, Keynesian, alien, or dumb, test them against data to see if they hold up, and refine until we get close. Aka, what scientists do. Great article the other day from Krugman about this very topic. Economics might be a science, but economists are not being scientists about it. http://krugman.blogs.nytimes.com/2013/10/21/maybe-economics-is-a-science-but-many-economists-are-not-scientists/ http://krugman.blogs.nytimes.com/2013/10/21/maybe-economics-...
    - mistermann 13y ago
      You can make models all day, and I think it should be done in the pursuit of knowledge, but to imply these models can accurately predict behavior is a bit naive IMHO. Economics in a globally integrated economy are of similar complexity as weather, if not worse. Keynesians have been driving the bus for quite some time now, if they have it all figured out as many seem to imply, why do so many things (deficits and debt plus extreme government interference in the bond market, as just a few examples) seem to continue to deteriorate. I don't know if Austrians would do a better job, but to look down one's nose at them seems a bit delusional to me.
TreyS 13y ago
"it does raise questions about why the school's arguments which seem so utterly convincing to so many people, don't manage to gain many converts among people who research the subject professionally." I think it would be easier to convince people with no physics knowledge that a bowling ball falls faster than a golf ball. Intuitively, it seems that bowling ball should fall faster. Austrian economics seems to follow a similar thread. It's more intuitive and easier to grasp than the economics taught in the textbooks, but doesn't have much data to validate it.
- jswinghammer 13y ago
  Most Austrians understand mainstream economic theory much better than mainstream economists understand Austrian theories. Evidence being Krugman's disastrous attempts to discredit Austrian Business Cycle Theory. It isn't a perfect theory but Krugman can't even explain it let alone criticize it.
- ef4 13y ago
  > data to validate it. You've accidentally illustrated the disconnect. Because the fundamental disagreement between the Austrians and the more mainstream academic schools of thought is epistemological. Data can only settle differences when both sides agree on the epistemological ground rules. I have an advanced science degree. I'm not afraid of math, and I've plowed through Keynes "General Theory". It doesn't come close to passing the sniff test for basic scientific rigor. It can't. Economists can't control their variables, and they have no way of knowing what their error bars are. They can make empirical models that work most of the time, but they can't know what regime those models are valid for, and where the breaking point is. There is every indication that economic systems are chaotic, and prone to sudden discontinuous phase changes. Worse, unlike a chaotic system like weather, the underlying primitives are not at all primitive. We can say very precisely how a cubic meter of air (for example) behaves under widely varying conditions. This is why our weather and climate models keep getting better -- you can use more processing power and better algorithms and use the basic laws of physics to get the right answers, despite a system of incredible complexity. But economists have nothing like that to work with. There is no meaningful sense in which we have good statistical models of human economic behavior. We have very limited snapshots, that are invalidated the moment customs or conditions change beyond the originally observed regime. All of this means that you can't even build empirical models unless you have a preexisting, a priori theory of economic cause and effect, and you have no experiments strong enough to falsify bad a priori assumptions. The Austrian argument is simply that all economists are actually engaged in a priori theorizing, despite their protestations claiming to be empiricists. I find the assertion that the Austrian school is more "intuitive" and accessible to be silly. Nobody who has actually tried to study the primary texts would claim so. It takes a pretty strong background in philosophy just to follow the first several chapters of Human Action -- precisely because they focus on epistemological issues. It doesn't require a conspiracy theory to explain the popularity of econometrics. Lots of social sciences spent the whole 20th century pretending to be as rigorous as physics and chemistry, to bask in the reflected glow of progress. Nobody likes to admit that their field has no experimental lodestone, and so drifts along as a popularity contest.
7Figures2Commas 13y ago
Here's a question: how many "professional" economists sounded the alarm about the last bubble?
- jswinghammer 13y ago
  Zero unless they are rewriting history to claim they saw it 6 months to a year out when it was obvious to anyone who wasn't drunk on soaring home and equity prices.
  - syshax 13y ago
    https://en.wikipedia.org/wiki/Nouriel_Roubini https://en.wikipedia.org/wiki/Nouriel_Roubini
  - jayfuerstenberg 13y ago
    http://en.wikipedia.org/wiki/Peter_Schiff http://en.wikipedia.org/wiki/Peter_Schiff He saw it in 2007
    - judk 13y ago
      That was immediately before the crash.
      - dangrossman 13y ago
        The book he wrote about the coming crash was published by Wiley in February 2007, which means he must've been formed the idea some years before to have written it early enough for that publication date. A quick Google search turned up CNBC interviews with him in 2005 and 2006 about the topic.
      - shard972 13y ago
        This has him here as far back as 2006 http://www.youtube.com/watch?v=2I0QN-FYkpw http://www.youtube.com/watch?v=2I0QN-FYkpw
    - jswinghammer 13y ago
newman314 13y ago
Inflation is fine as long as salaries maintain an appropriate growth ratio. I see too many companies take advantage of the relative uncertainty of the last 5-7 years as an opportunity to continue to eek out profits at the expense of compensating the average worker. More and more I am convinced that a purely capitalistic model for companies does not work.
eli_gottlieb 13y ago
>Finally, most of these arguments are disputed by the so-called "Austrian school" of economics. It's important to recognize that this school is much, much, much more popular with laymen than with professional economists. This doesn't mean that the school's arguments are wrong, but it does raise questions about why the school's arguments which seem so utterly convincing to so many people, don't manage to gain many converts among people who research the subject professionally. It doesn't automatically mean the Austrian School arguments are wrong, but it does make it much more probable that they are wrong. When trained and educated economists think something is bullshit economics, we should consider it to probably be bullshit. So why don't we? Because for so many of "us" on Hacker News, deflation is a class interest: "we" hold "our" assets mostly in cash and land. An Austrian-style neofeudal economy thus suits "our" portfolios. Personally, this reminds me that I need to call Vanguard about my actual investments today. Fuck cash and land, I want my wealth in something productive, and a productive investment will have more to gain from inflation eroding away private debt and a steady pick-up in demand from a stronger labor market than from Austrian-style deflation.
- dredmorbius 13y ago
  "we" hold "our" assets mostly in cash and land. I suspect more HN readers likely hold their assets in future income and earning potential. Which is fairly immune to inflation (as it rises with prices).
- Retric 13y ago
  Inflation does not hurt land values only cash and cash equivalents like debt and fixed income annuity's.
  - eli_gottlieb 13y ago
    That would be a pretty good point, except that the real-estate market is currently gunked up with private debt. Eroding private debt with inflation can unlock a whole lot of markets that some asset holders don't want unlocked, because they're using the assets as a store of value (which can be transformed into other people's debt) rather than as a means of production.
deleted 13y ago
[deleted]
judk 13y ago
Cutting real wages is in no way the intended desirable effect of inflation. Inflation is a disincentive to sittin on imaginary cash, am incentive to productive activity/investment. In an inflationary stimulus theory, wages rise with inflation, and cash-rich spend cash to move a worker to produce.

by enoch_r 13y ago

ra 13y ago

My (layman's) understanding of it is that central banks seek to keep inflation within a target range; in Australia this is between 2 and 3 percent [1]. The primary tool to manage inflation is interest rates, however interest rate movements also have other effects, positive and negative, so it's not as simple as turning on a tap. It's important not to let inflation get too high because that makes new investment unattractive, the cost of living go up, and retirement savings worth less. [1] http://www.rba.gov.au/inflation/ http://www.rba.gov.au/inflation/

cotsuka 13y ago
The other important thing is to reduce uncertainty as much as possible. You don't want your inflation rates to bounce around like crazy from day to day. Instead, you'd like to be able to keep them within certain limits so people can plan ahead to the future. If I'm not sure what inflation will be day-to-day, I can't make an accurate prediction as to whether I should save my money or spend it.
- sien 13y ago
  And if inflation is really high and fluctuating everyone makes the decision to never save in cash which isn't healthy. But a bit of low level inflation is generally seen as a good thing. The questions over the efficacy of monetary policy as a stimulus tool in all situations is certainly questionable though. It's also worth noting that independent central banks are a fairly new thing. Inflation levels used to be set by politicians who would notoriously let short term interest over ride price stability. The Bundesbank was the first independent bank drawing lessons from the horrors of hyper-inflation. Most (all?) developed countries now follow that model.
nhaehnle 13y ago
For your last point, I do wonder. How does high inflation make investment unattractive? It should do the opposite, since holding cash is very unattractive under high inflation. As to the cost of living going up: in nominal terms, sure. But it depends on the type of inflation. Usually wages grow to keep up with inflation, so in the end, it's a wash. I'm sure there are costs associated with extremely high inflation, e.g. restaurants having to print new menus all the time. However, I'm not aware of any serious work being done to quantify that effect. It seems that even at rates of inflation that we would consider very high - let's say 15% anually - those costs would still be irrelevant. Volatile inflation would probably hurt more than merely high inflation as long as the latter is stable.
- ra 13y ago
  Well, simply put, we don't live in a single economic regime. If inflation is much higher in one country than another, then exports from the country with lower inflation will be more competitive on the global market. Inflation also alters consumer behaviour. If inflation is very high people tend to buy goods way in advance for fear of further price increases. This "bringing forward" of consumer spending means less will be consumed in the months ahead. The general uncertainty created by very high inflation undermines business confidence and reduces investment. Basically, you're money is better off in another country where inflation is lower.

cotsuka 13y ago

Austrian school not holding much weight with academics is like wondering why creationism doesn't hold much weight with academics. Lots of things can be explained with creationism, but it doesn't mean it's right. Many Austrian economists rail against the use of quantitative models and such. But without them, how can you measure the efficacy of your policies? Faith that the policy works... But most academics like to be able to test things. I'm also not saying creationism isn't right. I can't prove anything.

mistermann 13y ago
I don't see the similarity.
- cotsuka 13y ago
  Just edited my comment for clarity.
mistermann 13y ago
I'm not sure how this casts doubt on the Austrians or supports the Keynesians, or vice versa.
- cotsuka 13y ago
  I'm saying calling something Austrian or Keynesian is inherently political. We should come up with economic models, whether they're Austrian, Keynesian, alien, or dumb, test them against data to see if they hold up, and refine until we get close. Aka, what scientists do. Great article the other day from Krugman about this very topic. Economics might be a science, but economists are not being scientists about it. http://krugman.blogs.nytimes.com/2013/10/21/maybe-economics-is-a-science-but-many-economists-are-not-scientists/ http://krugman.blogs.nytimes.com/2013/10/21/maybe-economics-...
  - mistermann 13y ago
    You can make models all day, and I think it should be done in the pursuit of knowledge, but to imply these models can accurately predict behavior is a bit naive IMHO. Economics in a globally integrated economy are of similar complexity as weather, if not worse. Keynesians have been driving the bus for quite some time now, if they have it all figured out as many seem to imply, why do so many things (deficits and debt plus extreme government interference in the bond market, as just a few examples) seem to continue to deteriorate. I don't know if Austrians would do a better job, but to look down one's nose at them seems a bit delusional to me.

TreyS 13y ago

"it does raise questions about why the school's arguments which seem so utterly convincing to so many people, don't manage to gain many converts among people who research the subject professionally." I think it would be easier to convince people with no physics knowledge that a bowling ball falls faster than a golf ball. Intuitively, it seems that bowling ball should fall faster. Austrian economics seems to follow a similar thread. It's more intuitive and easier to grasp than the economics taught in the textbooks, but doesn't have much data to validate it.

jswinghammer 13y ago
Most Austrians understand mainstream economic theory much better than mainstream economists understand Austrian theories. Evidence being Krugman's disastrous attempts to discredit Austrian Business Cycle Theory. It isn't a perfect theory but Krugman can't even explain it let alone criticize it.
ef4 13y ago
> data to validate it. You've accidentally illustrated the disconnect. Because the fundamental disagreement between the Austrians and the more mainstream academic schools of thought is epistemological. Data can only settle differences when both sides agree on the epistemological ground rules. I have an advanced science degree. I'm not afraid of math, and I've plowed through Keynes "General Theory". It doesn't come close to passing the sniff test for basic scientific rigor. It can't. Economists can't control their variables, and they have no way of knowing what their error bars are. They can make empirical models that work most of the time, but they can't know what regime those models are valid for, and where the breaking point is. There is every indication that economic systems are chaotic, and prone to sudden discontinuous phase changes. Worse, unlike a chaotic system like weather, the underlying primitives are not at all primitive. We can say very precisely how a cubic meter of air (for example) behaves under widely varying conditions. This is why our weather and climate models keep getting better -- you can use more processing power and better algorithms and use the basic laws of physics to get the right answers, despite a system of incredible complexity. But economists have nothing like that to work with. There is no meaningful sense in which we have good statistical models of human economic behavior. We have very limited snapshots, that are invalidated the moment customs or conditions change beyond the originally observed regime. All of this means that you can't even build empirical models unless you have a preexisting, a priori theory of economic cause and effect, and you have no experiments strong enough to falsify bad a priori assumptions. The Austrian argument is simply that all economists are actually engaged in a priori theorizing, despite their protestations claiming to be empiricists. I find the assertion that the Austrian school is more "intuitive" and accessible to be silly. Nobody who has actually tried to study the primary texts would claim so. It takes a pretty strong background in philosophy just to follow the first several chapters of Human Action -- precisely because they focus on epistemological issues. It doesn't require a conspiracy theory to explain the popularity of econometrics. Lots of social sciences spent the whole 20th century pretending to be as rigorous as physics and chemistry, to bask in the reflected glow of progress. Nobody likes to admit that their field has no experimental lodestone, and so drifts along as a popularity contest.

7Figures2Commas 13y ago

Here's a question: how many "professional" economists sounded the alarm about the last bubble?

jswinghammer 13y ago
Zero unless they are rewriting history to claim they saw it 6 months to a year out when it was obvious to anyone who wasn't drunk on soaring home and equity prices.
- syshax 13y ago
  https://en.wikipedia.org/wiki/Nouriel_Roubini https://en.wikipedia.org/wiki/Nouriel_Roubini
- jayfuerstenberg 13y ago
  http://en.wikipedia.org/wiki/Peter_Schiff http://en.wikipedia.org/wiki/Peter_Schiff He saw it in 2007
  - judk 13y ago
    That was immediately before the crash.
    - dangrossman 13y ago
      The book he wrote about the coming crash was published by Wiley in February 2007, which means he must've been formed the idea some years before to have written it early enough for that publication date. A quick Google search turned up CNBC interviews with him in 2005 and 2006 about the topic.
    - shard972 13y ago
      This has him here as far back as 2006 http://www.youtube.com/watch?v=2I0QN-FYkpw http://www.youtube.com/watch?v=2I0QN-FYkpw
  - jswinghammer 13y ago

newman314 13y ago

Inflation is fine as long as salaries maintain an appropriate growth ratio. I see too many companies take advantage of the relative uncertainty of the last 5-7 years as an opportunity to continue to eek out profits at the expense of compensating the average worker. More and more I am convinced that a purely capitalistic model for companies does not work.

eli_gottlieb 13y ago

>Finally, most of these arguments are disputed by the so-called "Austrian school" of economics. It's important to recognize that this school is much, much, much more popular with laymen than with professional economists. This doesn't mean that the school's arguments are wrong, but it does raise questions about why the school's arguments which seem so utterly convincing to so many people, don't manage to gain many converts among people who research the subject professionally. It doesn't automatically mean the Austrian School arguments are wrong, but it does make it much more probable that they are wrong. When trained and educated economists think something is bullshit economics, we should consider it to probably be bullshit. So why don't we? Because for so many of "us" on Hacker News, deflation is a class interest: "we" hold "our" assets mostly in cash and land. An Austrian-style neofeudal economy thus suits "our" portfolios. Personally, this reminds me that I need to call Vanguard about my actual investments today. Fuck cash and land, I want my wealth in something productive, and a productive investment will have more to gain from inflation eroding away private debt and a steady pick-up in demand from a stronger labor market than from Austrian-style deflation.

dredmorbius 13y ago
"we" hold "our" assets mostly in cash and land. I suspect more HN readers likely hold their assets in future income and earning potential. Which is fairly immune to inflation (as it rises with prices).
Retric 13y ago
Inflation does not hurt land values only cash and cash equivalents like debt and fixed income annuity's.
- eli_gottlieb 13y ago
  That would be a pretty good point, except that the real-estate market is currently gunked up with private debt. Eroding private debt with inflation can unlock a whole lot of markets that some asset holders don't want unlocked, because they're using the assets as a store of value (which can be transformed into other people's debt) rather than as a means of production.

deleted 13y ago

[deleted]

judk 13y ago

Cutting real wages is in no way the intended desirable effect of inflation. Inflation is a disincentive to sittin on imaginary cash, am incentive to productive activity/investment. In an inflationary stimulus theory, wages rise with inflation, and cash-rich spend cash to move a worker to produce.