Five Second ... Sumner

Mixed Messages

The way monetary policy works at the zero bound is by changing inflation expectations. If the expected amount of inflation over the next 5 years doesn’t change after fiscal stimulus is announced, then the fiscal stimulus is expected to fail. ...

The left likes to claim the fiscal stimulus “worked.” The right likes to point out that growth was less than predicted by Obama. The left responds that “other bad things” happened in late 2008 and early 2009, which explain the disappointing growth. My view is that the “other bad things” were mostly an excessively tight monetary policy in late 2008 and early 2009, which was due to Fed passivity in the face of expectations that fiscal stimulus would carry the load.

Comparing Britain and Sweden

Britain looks like a country where both the public and private sector spend too much and save too little. That means they first need monetary expansion to get out of the recession, and then fiscal retrenchment to shrink government (as Canada did in the 1990s.) And more Singapore-style incentives to save.

Inflation vs. Socialism

In the 1930s the right had to choose between a modest amount of inflation (returning prices to the pre-Depression levels) or more socialism. They weren’t thrilled with big government, but their strongest opposition was reserved toward policies of inflation. So we ended up with deflationary policies between 1929 and 1933. Of course the voters wouldn’t accept 25% unemployment, so we got big government instead of the inflation.

As this video shows, we are essentially facing the same choice today. We could pump up the economy through monetary policy, or we can have Fannie and Freddie continue to throw $100s of billions down the drain, socialize the auto industry, extend unemployment benefits to 99 weeks, etc. And if that isn’t enough there are also calls to move away from free trade policies. And then there’s the higher taxes we’ll pay in the future to cover the costs of debts run up in a futile attempt to stimulate the economy.

Friedman supporting Sumner

Here is Friedman in 1998:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

. . .

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

On China

BTW, I just read that China is building a 350kph train line from Chongqing to Chengdu. That’s kind of mind-boggling when you consider the rough terrain. The track will be 66% tunnels and bridges. Does this make sense? My heart says yes but my brain says no. ... I suppose if you wanted to defend these projects you’d make the following argument:

When China becomes rich these project will pass a cost/benefit analysis. But they will be too expensive to build. NYC now wishes it had built a better subway system. But it is too late. Construction costs are now too high. China is building rail lines, subways and airports that are totally inappropriate for a country that is much poorer than Mexico. But they are highly appropriate for a country twice as rich as Mexico, which is where China will be in 30 years. I still lean toward the Huang perspective, because the argument I just made ignores the opportunity cost of capital invested in these projects, but I think the alternative view is also defensible. ...

You can understand why obesity is a bigger problem in China than Japan. A country with many people who went through the Great Leap Forward is inclined to encourage their children to eat as much as they want (when they can finally afford fattening foods.) ...

When I read Suetonius’s Twelve Caesars, my first reaction was; “Those Romans were crazy.” Then I recalled that life expectancies were really low back then, and I realized that Roman society wasn’t nuts, it’s exactly what you’d expect of a country where typical person is a teenager [okay, 26, but it was young and there were few wizened people around]. Sometimes when reading about China or visiting China you find yourself thinking; ”Those Chinese are crazy.” No, they aren’t crazy; it’s what you’d expect if you thrust nearly a billion peasants from primitive farms into sophisticated cities almost overnight. Think of things that way and many bizarre sights suddenly make more sense.