Hehe yes. But if you completely rule out the possibility of hyperinflation, it's easy to fall victim to MMT-style stuff! So even though the Bitcoin people were completely wrong, it was good to have *someone* warning about hyperinflation...this time.
MMT can work, it just must be done covertly by a cabal of policymakers that hold themselves out as orthodox Keynesians. So the cabal would have to identify a problem that needs correcting and just make up a mainstream rationale for the program they are about to implement. I personally would start with paying reparations to descendants of American slaves which would cost $1 trillion and greatly improve America…except I would have done it in January 2021 instead of that round of stimulus.
It could still happen. If the rest of the world abandons the US dollar we will have hyper inflation. If that ever does happen it will happen all at once as no one would want to be the last one still holding dollars.
Please learn from your mistakes and stop leaning on the crutch of what could happen. You don’t know shit about it clearly and should probably just stay away from the topic
I would suggest an F+ for the Bitcoiners, because they actually made a prediction that was falsifiable. As you pointed out the chances of hyperinflation in the United States are vanishingly low. In fact, in my admittedly limited experience, Bitcoiners seem to be wrong about everything all the time.
Bitcoiners would actually deserve an F if Bitcoin went to zero. It's because they're right about it going up in value often enough that they feel smugly superior to normies (they just don't realize it going up in value doesn't mean the dollar is going down).
You should have mentioned the Housing Theory of Everything: housing has been one of the greatest contributors to recent core inflation, and this is magnified when you consider the second order costs of suburban sprawl like car dependency contributing used car price demand, another key driver of core inflation
AFAIK the Housing Theory of Everything is primarily a long-term story about persistent underconstruction of urban housing, so not an ideal explanation of a short-term rise and fall in inflation. Maybe if augmented with a pandemic-specific hypothesis like "the exogenous shocks of lockdowns in 2020 and shifts to WFH made people want bigger homes"?
A few million additional vacant homes in 2020, which would have been closer to the historical norm, would have provided a lot of cover for "overheating" in home sales.
Jul 13, 2023·edited Jul 13, 2023Liked by Noah Smith
How do you rate market monetarists like Scott Sumner ?
Using something as basic as ngdplt they arrived at the correct policy response during COVID and, importantly in my view, started to suggest raising rates much earlier than most mainstream macro people. Had we listened, inflation may not have spiked quite as high.
They're 2 for 2 in the 2008 crisis and COVID response.
To your first point, I think of the "polycrisis" school as "political economy meets complexity theory." It's so over the top that it obscures a more interesting question, "Can political economy - call it the study of the influence and constraints between social and political facts and the economy - really add anything to reductionistic economic theory?" The answer seems to be that, short-term, it can't. Same question with complexity: "Can it provide a sharper analysis and better predictions than reductionistic macro?" Same answer. The question becomes then whether these approaches provide either useful background or useful reminders about the variety of forces in play or descriptions of clearly-relevant events (like bubbles) that are hard to incorporate into standard theory. Here, different answers are possible.
on is that IMHO, Team bitcoin is as delusional as Team MMT and both deserve to be expelled from our lives forever!
Too much of the economic analysis nowadays seems to be of the kind where "experts" draw their conclusions first (depending on their political / social outlook) and then manufacture data/ arguments to support that. No wonder people are losing faith in economists as well as economic coverage (I'm thinking of your takedown of the New Yorker article on the success of price controls last week).
Thankfully there are people like you who call a spade a spade..
NOTE: I received a dm from this address with the same message, not identified as Toby Rogers and bearing Noah Smith's avatar-image. When I responded the reply was an offer to join an investment scheme.
I'm not a proper economist, so this might be wrong, but I think of MMT *best case* as just reframing some mainstream macro without improving it. The core MMT pitch I heard on podcasts was "deficits themselves don't matter; you can just keep spending until you get inflation." Which is maybe not incredibly wrong? But you can work with mainstream macro models to put some real numbers on that & estimate WHEN you will hit that inflation problem... Mainstream macro allows you to get away with deficits in some situations, but not all situations.
It's like you are driving a car, and mainstream macro says "if you move too far to the side you will go on to the shoulder and then into the ditch" and MMT says "it is OK to keep moving to the side until you feel your car wheels touch the shoulder".
Yes, this non-economist geek also reads Mosler/Wray et.al. that way. No theory, just accounting and a reminder of how sovereign fiat currencies function beneath the facade of self-imposed institutional conventions.
The problem with "just keep spending until inflation starts" is that when inflation starts there historically been no easy way to stop it. On top of that, when people have gotten used to easy money, they feel utterly miserable when it goes away.
It’s like leftists said “they have Austrian economics, we should create our own!” In the words of Chris Rock, “Can't go, "Oh, they fucked up, we can be fucked up!" That's ignant!”
Austrian economists don't much go in for making forecasts. The value of that approach is an emphasis on market processes, entrepreneurship, and appreciation of complexity, price mechanisms, and the challenges to central control.
In partial defense of the WEF folks, all they did is stick a bunch of things together with some loose arrows and argue that these things "might create a polycrisis in 2030," which is a much weaker formulation than the Tooze version. The words don't really support the diagram.
Jul 13, 2023·edited Jul 13, 2023Liked by Noah Smith
Great post, but are we missing some contestants, here? Your "mainstream macro" is actually old-style mainstream aggregate supply/aggregate demand macro. What about the "new-style" New Classical / RBC / DSGE / New Keynesian types? Just the fact that a new-style guru like Blanchard based his prediction on an old-style model suggests that there is something to say here about what DSGE models (to use a blanket term) are good for.
Why do you think the European economies, particularly Britain, have done so badly controlling inflation? Is this because we’re more exposed to the energy crisis in the wake of the Ukraine invasion, because we didn’t raise rates fast enough or what?
Britain’s economic outlook looks so crap at the moment, we can’t help but look jealously at the US’s success on inflation.
That's basically it: the US is now energy-independent again due largely to fracking, while European countries are forced to bid for increasingly scarce imported gas. The UK was especially vulnerable because most of its coal- and oil-fired power plants were demolished about a decade ago.
One major European country which hasn't suffered as much inflation as most is France, because most of their electrical power comes from nuclear energy. Although they haven't totally escaped, largely because many of their nuclear power plants had to be shut down for essential maintenance that had been deferred due to Covid lockdowns.
That explanation would be more convincing if not for the conflation of "energy", "gas", and "electrical power"; it might seem pedantic to pay attention to the differences among these, but AFAIK the non-fungibility of gas was an integral part of last year's European energy-cost drama!
Indeed: while the UK was more vulnerable primarily because its electrical generation sector was especially gas-dependent (due to a more aggressive push in the past against coal and oil) Germany (and other mainland European countries) were more vulnerable in the sense that they had previously relied on gas piped from Russia, and were forced to stockpile gas during summer 2022 (at very high cost) because they didn't have enough LNG import facilities to import gas as it was needed.
AIUI during 2022 the UK was importing LNG from the Americas and then re-selling it via pipelines to mainland European countries which had insufficient LNG import capacity to buy it directly from the source.
I think that there are three key reasons, the energy issue being one of them. Additionally, I think that the rather dire demographic outlook in Europe is both an inflationary pressure today, and especially drives doubt of the fiscal stability of European governments in the near future. Finally, the "exorbitant privilege" of the dollar from its international reserve currency status also checks inflation in the dollar. If we do see hyperinflation in the coming decades, I think it's almost certain to happen in the Euro, GBP etc. first, not the dollar for these two reasons.
Your description of mainstream macro Noah seems entirely consistent with a fiscal theory of the price level: "Mainstream macro is basically a synthesis between the ideas of John Maynard Keynes and Milton Friedman. It’s pretty boring, vanilla stuff — it says that when you raise interest rates and/or reduce budget deficits, inflation and economic activity go down, and when you lower rates and increase deficits, inflation and economic activity go up." So it's a bit puzzling that you like this comment and it seems like mood affiliation.
Cochrane in that post highlights a key difference with monetarism: "A core issue separating monetary and fiscal theory is whether a big monetary expansion without deficits or other fiscal news would have any effects. Would a $5 trillion QE (buy bonds, issue money) with no deficit have had the same inflationary impact? Monetarists, yes; fiscalists, no." To me this is the difference between the financial crisis and the current period of high inflation. The update shade on Larry Summers is similarly weird: he hit the nail on the head, real income with stimulus during the pandemic exceeded pre-pandemic incomes, of course there was inflation when Biden added fuel to the fire with an additional stimulus and no expectation of repaying!
Overall, I am disappointed that this post graded a bunch of bullshit theories rather than delving into differences within what you Noah group all together into mainstream macro. I guess some of your readers have friends who believe in modern monetary theory, but they should get better friends and you should draw distinctions within economic theory itself.
The Fiscal Theory take is that inflation was unleashed mostly by a big fiscal stimulus, but that after the debt taken on by the stimulus was inflated away, inflation would itself be transitory. Seems like an OK prediction, given the past year. There is some stuff about higher interest rates raising inflation that's weird, but that only applies if the government doesn't issue any long-term debt, which is not the US case.
You left out the John Cochrane hardcore inflation hawk/"only fiscal policy can stop it once it really gets going" view!
Seems like another C- since monetary interventions are apparently working, huh? Maybe a C since they were probably closer to correct than the Transitories?
Jul 13, 2023·edited Jul 13, 2023Liked by Noah Smith
Who had "The Fed is going to raise rates, inflation is going to come down, and we won't have a recession" on their Bingo card? I didn't, and I think most mainstream economists didn't either. But others did worse.
That’s a good point. But that’s only because the Fed itself is competent enough to ignore them. So in a sense you’re giving them points for somebody else’s competence.
The left leaning factions of the Democratic Party, and even inside Biden’s own factions to some extent, were influenced by the greedflation crowd quite a bit.
A D is too good for the crypto folks. They're a stopped clock that's been predicting hyperinflation since there was crypto in the first place
Hehe yes. But if you completely rule out the possibility of hyperinflation, it's easy to fall victim to MMT-style stuff! So even though the Bitcoin people were completely wrong, it was good to have *someone* warning about hyperinflation...this time.
I see them as symmetric. MMT says we'll never get it (or like, any significant inflation) and goldbugs and crypto guys always say we'll get it
Yes. The difference is that the Bitcoiners are provably wrong, while the MMT people will never admit having gotten anything wrong!
MMT can work, it just must be done covertly by a cabal of policymakers that hold themselves out as orthodox Keynesians. So the cabal would have to identify a problem that needs correcting and just make up a mainstream rationale for the program they are about to implement. I personally would start with paying reparations to descendants of American slaves which would cost $1 trillion and greatly improve America…except I would have done it in January 2021 instead of that round of stimulus.
I think they were desperate for it to be true since bitcoin replacing everything is the only way their "hold the bag" scheme could have worked
It could still happen. If the rest of the world abandons the US dollar we will have hyper inflation. If that ever does happen it will happen all at once as no one would want to be the last one still holding dollars.
Please learn from your mistakes and stop leaning on the crutch of what could happen. You don’t know shit about it clearly and should probably just stay away from the topic
^^^ nerd rage.
This just isn’t true. The move between currencies dominating international commerce literally can’t happen that quickly for various reasons.
I would suggest an F+ for the Bitcoiners, because they actually made a prediction that was falsifiable. As you pointed out the chances of hyperinflation in the United States are vanishingly low. In fact, in my admittedly limited experience, Bitcoiners seem to be wrong about everything all the time.
Bitcoiners would actually deserve an F if Bitcoin went to zero. It's because they're right about it going up in value often enough that they feel smugly superior to normies (they just don't realize it going up in value doesn't mean the dollar is going down).
You should have mentioned the Housing Theory of Everything: housing has been one of the greatest contributors to recent core inflation, and this is magnified when you consider the second order costs of suburban sprawl like car dependency contributing used car price demand, another key driver of core inflation
AFAIK the Housing Theory of Everything is primarily a long-term story about persistent underconstruction of urban housing, so not an ideal explanation of a short-term rise and fall in inflation. Maybe if augmented with a pandemic-specific hypothesis like "the exogenous shocks of lockdowns in 2020 and shifts to WFH made people want bigger homes"?
A few million additional vacant homes in 2020, which would have been closer to the historical norm, would have provided a lot of cover for "overheating" in home sales.
How do you rate market monetarists like Scott Sumner ?
Using something as basic as ngdplt they arrived at the correct policy response during COVID and, importantly in my view, started to suggest raising rates much earlier than most mainstream macro people. Had we listened, inflation may not have spiked quite as high.
They're 2 for 2 in the 2008 crisis and COVID response.
They're definitely mainstream.
Maybe a slightly different flavor of mainstream.
They secretly got A+
Polycrisis is just a lazy mis-application of systems theory. Maybe deserves an F after all.
How is the new Industrial Policy likely to fare (as effective policy, not an explanation for inflation)?
To your first point, I think of the "polycrisis" school as "political economy meets complexity theory." It's so over the top that it obscures a more interesting question, "Can political economy - call it the study of the influence and constraints between social and political facts and the economy - really add anything to reductionistic economic theory?" The answer seems to be that, short-term, it can't. Same question with complexity: "Can it provide a sharper analysis and better predictions than reductionistic macro?" Same answer. The question becomes then whether these approaches provide either useful background or useful reminders about the variety of forces in play or descriptions of clearly-relevant events (like bubbles) that are hard to incorporate into standard theory. Here, different answers are possible.
We'll see!
Brilliant article, only point I might disagree
on is that IMHO, Team bitcoin is as delusional as Team MMT and both deserve to be expelled from our lives forever!
Too much of the economic analysis nowadays seems to be of the kind where "experts" draw their conclusions first (depending on their political / social outlook) and then manufacture data/ arguments to support that. No wonder people are losing faith in economists as well as economic coverage (I'm thinking of your takedown of the New Yorker article on the success of price controls last week).
Thankfully there are people like you who call a spade a spade..
NOTE: I received a dm from this address with the same message, not identified as Toby Rogers and bearing Noah Smith's avatar-image. When I responded the reply was an offer to join an investment scheme.
Some of those D grades are awfully generous! You must have been a very popular TA with grading like that lol
Just had to give MMT the worst
I'm not a proper economist, so this might be wrong, but I think of MMT *best case* as just reframing some mainstream macro without improving it. The core MMT pitch I heard on podcasts was "deficits themselves don't matter; you can just keep spending until you get inflation." Which is maybe not incredibly wrong? But you can work with mainstream macro models to put some real numbers on that & estimate WHEN you will hit that inflation problem... Mainstream macro allows you to get away with deficits in some situations, but not all situations.
It's like you are driving a car, and mainstream macro says "if you move too far to the side you will go on to the shoulder and then into the ditch" and MMT says "it is OK to keep moving to the side until you feel your car wheels touch the shoulder".
Yes, this non-economist geek also reads Mosler/Wray et.al. that way. No theory, just accounting and a reminder of how sovereign fiat currencies function beneath the facade of self-imposed institutional conventions.
The problem with "just keep spending until inflation starts" is that when inflation starts there historically been no easy way to stop it. On top of that, when people have gotten used to easy money, they feel utterly miserable when it goes away.
It’s like leftists said “they have Austrian economics, we should create our own!” In the words of Chris Rock, “Can't go, "Oh, they fucked up, we can be fucked up!" That's ignant!”
Leftist Austrian economics is degrowth!
Rightist MMT is the Republican tax cuts agenda.
Austrian economists don't much go in for making forecasts. The value of that approach is an emphasis on market processes, entrepreneurship, and appreciation of complexity, price mechanisms, and the challenges to central control.
I'd like to hear your thoughts on the factors driving grade inflation— including yourself as one of the factors.
This would be good to discuss on Hexapodia
Definitely.
Yeah, I thought Brad was more Team Transitory and I’d like to hear his thoughts.
In partial defense of the WEF folks, all they did is stick a bunch of things together with some loose arrows and argue that these things "might create a polycrisis in 2030," which is a much weaker formulation than the Tooze version. The words don't really support the diagram.
https://www.weforum.org/reports/global-risks-report-2023/digest
Great post, but are we missing some contestants, here? Your "mainstream macro" is actually old-style mainstream aggregate supply/aggregate demand macro. What about the "new-style" New Classical / RBC / DSGE / New Keynesian types? Just the fact that a new-style guru like Blanchard based his prediction on an old-style model suggests that there is something to say here about what DSGE models (to use a blanket term) are good for.
Why do you think the European economies, particularly Britain, have done so badly controlling inflation? Is this because we’re more exposed to the energy crisis in the wake of the Ukraine invasion, because we didn’t raise rates fast enough or what?
Britain’s economic outlook looks so crap at the moment, we can’t help but look jealously at the US’s success on inflation.
That's basically it: the US is now energy-independent again due largely to fracking, while European countries are forced to bid for increasingly scarce imported gas. The UK was especially vulnerable because most of its coal- and oil-fired power plants were demolished about a decade ago.
One major European country which hasn't suffered as much inflation as most is France, because most of their electrical power comes from nuclear energy. Although they haven't totally escaped, largely because many of their nuclear power plants had to be shut down for essential maintenance that had been deferred due to Covid lockdowns.
That explanation would be more convincing if not for the conflation of "energy", "gas", and "electrical power"; it might seem pedantic to pay attention to the differences among these, but AFAIK the non-fungibility of gas was an integral part of last year's European energy-cost drama!
Indeed: while the UK was more vulnerable primarily because its electrical generation sector was especially gas-dependent (due to a more aggressive push in the past against coal and oil) Germany (and other mainland European countries) were more vulnerable in the sense that they had previously relied on gas piped from Russia, and were forced to stockpile gas during summer 2022 (at very high cost) because they didn't have enough LNG import facilities to import gas as it was needed.
AIUI during 2022 the UK was importing LNG from the Americas and then re-selling it via pipelines to mainland European countries which had insufficient LNG import capacity to buy it directly from the source.
I think that there are three key reasons, the energy issue being one of them. Additionally, I think that the rather dire demographic outlook in Europe is both an inflationary pressure today, and especially drives doubt of the fiscal stability of European governments in the near future. Finally, the "exorbitant privilege" of the dollar from its international reserve currency status also checks inflation in the dollar. If we do see hyperinflation in the coming decades, I think it's almost certain to happen in the Euro, GBP etc. first, not the dollar for these two reasons.
Also deserving of a bad grade: the fiscal theory of the price level.
Your description of mainstream macro Noah seems entirely consistent with a fiscal theory of the price level: "Mainstream macro is basically a synthesis between the ideas of John Maynard Keynes and Milton Friedman. It’s pretty boring, vanilla stuff — it says that when you raise interest rates and/or reduce budget deficits, inflation and economic activity go down, and when you lower rates and increase deficits, inflation and economic activity go up." So it's a bit puzzling that you like this comment and it seems like mood affiliation.
Empirically, a fiscal theory of the price level is doing just fine cross country: https://johnhcochrane.blogspot.com/2023/07/inflation-and-debt-across-countries.html
Cochrane in that post highlights a key difference with monetarism: "A core issue separating monetary and fiscal theory is whether a big monetary expansion without deficits or other fiscal news would have any effects. Would a $5 trillion QE (buy bonds, issue money) with no deficit have had the same inflationary impact? Monetarists, yes; fiscalists, no." To me this is the difference between the financial crisis and the current period of high inflation. The update shade on Larry Summers is similarly weird: he hit the nail on the head, real income with stimulus during the pandemic exceeded pre-pandemic incomes, of course there was inflation when Biden added fuel to the fire with an additional stimulus and no expectation of repaying!
Overall, I am disappointed that this post graded a bunch of bullshit theories rather than delving into differences within what you Noah group all together into mainstream macro. I guess some of your readers have friends who believe in modern monetary theory, but they should get better friends and you should draw distinctions within economic theory itself.
The Fiscal Theory take is that inflation was unleashed mostly by a big fiscal stimulus, but that after the debt taken on by the stimulus was inflated away, inflation would itself be transitory. Seems like an OK prediction, given the past year. There is some stuff about higher interest rates raising inflation that's weird, but that only applies if the government doesn't issue any long-term debt, which is not the US case.
You left out the John Cochrane hardcore inflation hawk/"only fiscal policy can stop it once it really gets going" view!
Seems like another C- since monetary interventions are apparently working, huh? Maybe a C since they were probably closer to correct than the Transitories?
But this wasn't Cochrane's view -- at least not according to the models he writes about.
Say more... I may be conflating him with Kling?
Who had "The Fed is going to raise rates, inflation is going to come down, and we won't have a recession" on their Bingo card? I didn't, and I think most mainstream economists didn't either. But others did worse.
You gave MMT an F, so I'm happy.
That C- for the greedflation crowd is awfully generous. Team transitory was wrong, for sure, but their ideas were not ridiculous.
But they did a lot more damage, policy-wise, by convincing the Fed to wait 6 months too long to start tightening.
That’s a good point. But that’s only because the Fed itself is competent enough to ignore them. So in a sense you’re giving them points for somebody else’s competence.
The left leaning factions of the Democratic Party, and even inside Biden’s own factions to some extent, were influenced by the greedflation crowd quite a bit.