August 13, 2003

Give Credit Where Credit Is Due

Greg Ransom raves against what he sees as a Federal Reserve devoted to "reducing the value of money":

PrestoPundit.com: The Fed moves to continue its ongoing devaluation of the currency, voting to keep interest rates artificially low. The major worry of the Fed is that there may be some slowing in its highly successful policy of reducing the value of money. Behind all this is the Krugman/ "Keynes" theory of "deflation".... Further evidence in my view that the Fed -- and the economics profession generally -- is overrun by witch doctors and astrologists, not scientists or even competent dentists (reference here to a famous line from Keynes).

Leave to one side the fact this is not a Federal Reserve devoted to reducing the value of money: the inflation rate under Greenspan has been less than under any Fed Chair since the days of Herbert Hoover.

Focus, instead, on the fact that it is definitely not the "Krugman/'Keynes' theory of deflation." The theory is Irving Fisher's (analyzing the impact of a falling price level on the real interest rate and investment), Milton Friedman and Anna Schwartz's (analyzing the effect of a falling price level on the banking system and the money multiplier), and Ben Bernanke and Mark Gertler's (analyzing the effect of a falling price level on interest rate spreads).

Bernanke and Gertler may well get Nobel Prize's someday for their work on deflation and the "credit channel." Paul Krugman won't--he'll get his Nobel Prize for his work on imperfect competition and international trade. He's been pushing the line that deflation is greatly to be feared in his columns, yes. But this is the first time I've ever seen anyone say that it is his theory.

Why slight Bernanke and Gertler--and Fisher, and Anna J. Schwartz, and Milton Friedman? Is it because Ransom doesn't want to explicitly call Ben Bernanke and Milton Friedman "witch doctors"? Is it because his core audience knows little economics and less about the history of economic thought, but breaks into hives at the mention of "Paul Krugman"?

Whatever the reason, a bad move: it is good to give credit where credit is due.

Posted by DeLong at August 13, 2003 11:09 AM | TrackBack

Comments

Paul Krugman really does break these folks into hives. I'm so glad. The PK columns in the New York Times are astonishing in importance, clarity, and courageousness. With PK, Al Franken, and Brad DeLong there is life yet Virginia.

Posted by: Anne - Fairly Unbalanced on August 13, 2003 11:41 AM

Brad DeLong

Just noticed that you are fair and balanced ALMOST every day. Ah ha.

Anne

Posted by: anne - Fairly Unbalanced on August 13, 2003 12:40 PM

Greg Ransom, as you must know, works for the Hayek Center; He's an Austrian, and they have a different worldview when it comes to monetary policy (i.e. it should not exist). When he condemns the Krugman/Keynes "deflation theory" he is really condemning the theory, which he ties with the two names most associated with "deflation" at the moment. Not that I agree with him, but that was his point.

BTW, you disagree with Tyler Cowen's assesment of Krugman at he Volokh Conspiracy? He says Avinash Dixit covered much of the same ground on strategic trade theory before Krugman, and that the work has not aged well. This is why he says Krugman will get the prize "only if they run out of other people to give it to". Your thoughts on this would be interesting.

Posted by: Damien Smith on August 13, 2003 03:03 PM

"When he condemns the Krugman/Keynes "deflation theory" he is really condemning the theory, which he ties with the two names most associated with "deflation" at the moment."

I agree; I think Greg Ransom chooses Krugman and Keynes because they're economists who've written extensively that deflation can be a problem.

What I don't understand is how a person can look at Japan and not conclude that deflation really *can* be a problem. Or look at Germany and not see another country where a deflation problem could exist.

Posted by: Mark Bahner on August 13, 2003 03:51 PM

Another brilliant Mark Gertler:

http://www.artunframed.com/images/compressed/compressed4/gertler.jpg

Posted by: Pooh on August 13, 2003 05:50 PM

Do any economists consider stocks or houses or other assets goods, and thus susceptible to inflation?

Posted by: ts on August 14, 2003 05:49 AM

>>>>>>Leave to one side the fact this is not a Federal Reserve devoted to reducing the value of money: the inflation rate under Greenspan has been less than under any Fed Chair since the days of Herbert Hoover. <<<<<<<<<<

I suspect you and Greg likely have different definitions of inflation.

Posted by: Jonathan Wilde on August 14, 2003 07:53 AM

>>>>>>Leave to one side the fact this is not a Federal Reserve devoted to reducing the value of money: the inflation rate under Greenspan has been less than under any Fed Chair since the days of Herbert Hoover. <<<<<<<<<<

I suspect you and Greg likely have different definitions of inflation.

Posted by: Jonathan Wilde on August 14, 2003 07:57 AM

>>>>>>Leave to one side the fact this is not a Federal Reserve devoted to reducing the value of money: the inflation rate under Greenspan has been less than under any Fed Chair since the days of Herbert Hoover. <<<<<<<<<<

I suspect you and Greg likely have different definitions of inflation.

Posted by: Jonathan Wilde on August 14, 2003 08:00 AM

oops - don't know how that happened.

Posted by: Jonathan Wilde on August 14, 2003 08:43 AM

>>Do any economists consider stocks or houses or other assets goods, and thus susceptible to inflation?

Houses - yes, definitely. Rental income is in almost all inflation indices, and most indices contain a term for "implied cost of owner-occupied housing" which is basically driven by house prices.

Stocks -- in principle yes (as they represent the price of ownership of future goods) but in practice no.

Posted by: dsquared on August 14, 2003 11:29 PM
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