[jolepp]

... At this point, inflation is once again running a bit below the Fed’s self-declared target of 2 percent.

Now, the Fed has, by law, a dual mandate: It’s supposed to be concerned with full employment as well as price stability. And while we more or less have price stability by the Fed’s definition, we’re nowhere near full employment. So this says that the Fed is doing too little, not too much. Indeed, some Fed officials — notably Charles Evans, the president of the Chicago Fed — have tried to make exactly that case.

To be sure, more aggressive Fed policies to fight unemployment might lead to inflation above that 2 percent target. But remember that dual mandate: If the Fed refuses to take even the slightest risk on the inflation front, despite a disastrous performance on the employment front, it’s violating its own charter. And, beyond that, would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.

How so? For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.

In short, far from fearing that more action against unemployment might lead to an uptick in inflation, the Fed should actually welcome that prospect. ...

http://www.nytimes.com/2012/04/06/opinion/krugman-not-enough-inflation.html

[GeneV]

I'm not sure where they get their benchmark for inflation. Some of the most prosperous years have had inflation rates in excess of 2%. The oil-spiked figures of the late '70s are considered a bit too strongly.

[jolepp]

I suppose the 2% target is an educated guess as in having some is better than having none to keep clear of deflation and to make some room for monetary policy by adjusting the interest rate (which is hard to do once you get close to zero interest rate). In 'normal' times that 2% is probably very reasonable, ECB for one has the same target.

Earlier Krugman has been advocating higher inflation for the Eurozone with the idea that it would actually help some as such: in effect this would mean lowering the wages in the troubled countries (assuming no pay raises there while these would be expected in the countries doing better). In general this would allow more lenient monetary and fiscal policies to help improve unemployment (which I think he is advocating here, not higher inflation as such, but as the price of better employment).

[Winder]

Historically inflation was an increase in the money supply (MB). That is where the word comes from "Inflating the monetary base". Krugman is a Neo-Calssical economist and believes that inflation is a product of the prices of goods/services and that the money supply is only a small part of the equation. The Federal government made the change to the CPI to measure inflation back in the mid-80's. Krugman is referring to the CPI (Consumer Price Index) not Real Inflation. CPI is a politicians dream because like the unemployment rate it can be easily manipulated. Since the government subsidizes food and taxes things like gasoline (both major expenses to the consumer) taxes and subsidies play a big role in the real numbers. As of February 2012 CPI is at just over 2%, but CPI-U (which includes food and energy prices) is at just under 3% (BLS), but real inflation (increase in MB) is running between 9-10% which is a politicians nightmare. But then real unemployment is at least 15% and probably closer to 22% depending on which measure you chose to use. Politicians don't like to talk about that either. Nobody gets reelected if the media is reporting 10% inflation and 22% unemployment.

Krugman wants to see more inflation because inflation destroys debt just as it destroys wealth. It encourages spending and as long as interest rates are low it will encourage borrowing/spending which over the short run will stimulate the economy. Basically Krugman wants to inflate another bubble. Spending lot of money you don't have is only a problem if inflation stays low. Inflation destroys debt (and wealth) and Krugman is a huge proponent of deficit spending (debt). His economic model depends on inflation to destroy the debt that his policies would create.

[jeffkrol]

UNDERSTANDING THE MODERN MONETARY SYSTEM | PRAGMATIC CAPITALISM

Conclusion

In sum, most of what we have been taught in school is based on a now defunct monetary system (the gold standard). Modern Monetary Realism seeks to describe the operational realities of a modern fiat currency system. While its description of the modern monetary system is accurate, it is by no means a holy grail. And those who apply policy prescriptions are merely utilizing the realities of the system to apply what they believe are sound uses of the system. It does not mean the government can just credit accounts and create real wealth.

One of the keys here is to understand that government can be used as a tool to help the private sector to achieve prosperity. I think it’s important to understand that government is not always bad or that government spending is always evil. In fact, government serves a vital purpose within our society. How involved that government is in the day to day lives of its citizens is to be decided by the citizens themselves.

I believe Modern Monetary Realism provides a more accurate portrayal of the monetary system in which we reside in the USA and in many other autonomous countries throughout the world. It is my hope that a greater understanding of our monetary system will result in a less dogmatic, more pragmatic and more rational perspective of our economy so as to help us all in achieving the prosperity we desire.

[Winder]

I don't think anyone is saying government is always bad or that government spending is "evil". There is a cost associated with government programs and that cost is often pretty high. One of the criticisms of the original Department of Health, Education, and Welfare (before Education was split out under Carter) was that more than half of the entire budget of the department went to pay salaries and support the bureaucratic structure. Because of this cost the government has to take a lot more money out of the economy (through taxes or borrow it) than it can inject back into the economy. The 3rd option is of course printing more money which leads directly to real inflation.

Krugman has argued that the velocity of money and the multiplier effect off-sets the cost of government but even then it only works if there is demand, and not everyone agrees that it really works. There is a lot of smoke and mirrors in econometrics. We have gone through a period of low demand, so even though the Fed has pumped money into the system and interest rates are at record lows few people are using the money. Business that are taking advantage of the low rates are doing it to refinance existing loans and not investing in new capital expenditures. For every dollar the federal government takes out of the economy (taxes or borrowing) they are lucky if they can cover their own operating costs and return .65 cents into the economy. It is a net loss. Krugman argues that the government can target where and when to inject this money into the economy for the greatest good and this can offset the cost of government. There are no historical examples of this actually working. I think that is what excites Krugman. He sees an opportunity to test his theories. This is all a grand experiment for him.

Krugman has his own agenda and has been caught in the past presenting data in misleading ways. He wrote a well known piece in the NYT on income inequality which got ripped to shreds by the academic community. Krugman uses median Household income to show (correctly) that household income adjusted for inflation has be flat for most of the last 50 years. It is a true statement and it fans the flames of income inequality in this country, but it is also very misleading. Krugman elected not to adjust for changes in household compositions over time or income levels, and never should have used household income in the first place. In the 30's it was common to have 3 generations living in one household with 4 working adults contributing to the household income. In the 90's households had shrunk to 2 working adults per household. So if household income was "stagnate" and both households made the same amount of money after adjusting for inflation, then individual income had actually doubled after adjusting for inflation. Krugman is obviously smart enough to know this, but most people who read the Times don't understand what he is doing. Household income is very misleading. Always use individual income to track changes in income. During prosperous times people move out on their own and households (and household incomes) actually shrink. When the economy gets bad people get roommates and children move in with their parents, so household size and income rises during hard economic times. He used household income to grab some headlines and fan the flames.

Back to the topic. BLS released their latest CPI today.
Consumer Price Index Summary
CPI is not real inflation, but it is what the government gives us. If we track inflation by the same standards used in 1983 then we are running at 9%+/-. Real inflation is not a bad thing in itself. It is one economic component. Real inflation has to keep up with population growth or you have a problem. If wage growth is actually negative, and inflation is 2% (the Feds target rate) then we have a serious problem even though inflation low. The rate of growth or decline in population, the change in median income, & interest rates are all relevant in determining whether inflation is good or bad regardless of the number.

One of the keys here is to understand that government can be used as a tool to help the private sector to achieve prosperity.

This is a nice general statement, but can we be more specific? Exactly how can government accomplish this? Let's see some real world examples where this has occurred.

[jeffkrol]

This is a nice general statement, but can we be more specific? Exactly how can government accomplish this? Let's see some real world examples where this has occurred.

simple.. railroads roads bridges, water works education UNDERSTANDING Soc. sec and medicare taxes are unnecessary.. ect..

The government exists to further the prosperity of the private sector – NOT to benefit at its expense

Governments should be actively involved in regulating and helping build the infrastructure within which the private sector can generate economic growth. The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore,some level of government intervention and involvement is not only beneficial, but necessary

Money is always created by the state and must therefore be regulated by the state, however, ultimately the private sector must accept this money as the currency unit. Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces. Government by the people and for the people is not the antagonist in this story, but rather an entity that should be best utilized to maximize private sector prosperity

Government deficit spending and tax collection should be maintained at a rate that does not impose financial hardship on the private sector. Because the Federal government is not a state or household it should not manage its balance sheet for its own benefit. Rather, taxes and government spending should be managed in a way that most benefits the private sector and encourages private sector prosperity

Understanding Modern Monetary Theory (Mmt) & Our Modern Monetary System _ Pragmatic Capitalism

Keep in mind consumer spending is a large part of the economy..

[jeffkrol]

First of all, this is all highly complex.

Second, this system in its current format is not very old and most of the people in power currently were educated by a generation in which this system was not largely applicable. Therefore, the theories of old run rampant in modern economic circles.

Thirdly, politicians and ideologues have a vested interest in keeping the American public from understanding that the government is fundamentally different from a household, state or business

Boooo....

Let's pretend that both political parties understand MMT. How would that explain their actions;

Republicans fear that too much money will be taken out of the economy and it will be hurt, so they fight taxes.. pretending (note pretending) to balance it w/ austerity...but all they will simply do is shove more money in to the upper levels and renig on many cuts (or postpone them for later, possibly using the Dems as excuses why things don't pass).....

Democrats fearing Republicans will take too much money out of the hands of the "little "big spender " people, decide to take it out of the upper levels knowing they will spend it on the lower creating a shift in "spenders".. (yes it is a bit of wealth redistribution but wait for the catch).. They will renig on the upper cuts using the same types of excuses the Repubs use..

Note none really care that much for the size of the deficit.. though I assume they will have to pretend to tweak it a bit..

Why the smoke and mirrors?.. IF the US population realized there money has been collected (and basically burned) for really no good reason since 1972 well.. I know I'd be a bit angry (though not as much as others).....

chaos could ensue........ w/ an angry white middle class leading the charge..

Just for fun and not completely coherent since
1)Many digbats in Congress surely don't understand MMT
2)Many dingbat advisers don't either..

but the seed is there since "Cheney "Reagan proved deficits don't matter"..............

[jolepp]

Krugman has his own agenda and has been caught in the past presenting data in misleading ways. He wrote a well known piece in the NYT on income inequality which got ripped to shreds by the academic community.

Which particular piece you are referring to?

[jeffkrol]

Which particular piece you are referring to?

I'm curious to:
This one:
http://www.nytimes.com/2012/02/10/opinion/krugman-money-and-morals.html

So we should reject the attempt to divert the national conversation away from soaring inequality toward the alleged moral failings of those Americans being left behind. Traditional values aren’t as crucial as social conservatives would have you believe — and, in any case, the social changes taking place in America’s working class are overwhelmingly the consequence of sharply rising inequality, not its cause.

or this one:
Blaming the Victims of Inequality - NYTimes.com

And Alec MacGillis points out that Murray himself grew up in a company town where Maytag provided good jobs for blue-collar workers — until it shut the plant and moved operations to Mexico.
From an analytical point of view, this would seem to be a very odd time to focus on the alleged moral decline of the lower classes. During the 60s, it was at least somewhat reasonable to ask why social ills were rising despite a booming economy producing widely shared gains (although as William Julius Wilson pointed out, work was disappearing in the inner cities, and this helped explain rising social problems among those trapped in those inner cities). But now we have an economy that has left blue-collar workers behind; why invoke social values to explain their plight?
And to the extent that social decay is a reality among, say, the bottom third of the income distribution among whites, doesn’t this say that Wilson was right, that lack of economic opportunity is what breeds social disruption?
Of course, the sudden fuss about values makes perfect sense from a political point of view, as a distraction from the issue of soaring incomes at the top.

maybe this one:
http://www.nytimes.com/2012/01/16/opinion/krugman-how-fares-the-dream.html

Mitt Romney says that we should discuss income inequality, if at all, only in “quiet rooms.” There was a time when people said the same thing about racial inequality. Luckily, however, there were people like Martin Luther King who refused to stay quiet. And we should follow their example today. For the fact is that rising inequality threatens to make America a different and worse place — and we need to reverse that trend to preserve both our values and our dreams.

or.. sigh......
http://www.nytimes.com/2012/01/09/opinion/krugman-americas-unlevel-field.html

If Mr. Romney has come out for any of these things, I’ve missed it. And the Congressional wing of his party seems determined to make upward mobility even harder. For example, Republicans have tried to slash funds for the Women, Infants and Children program, which helps provide adequate nutrition to low-income mothers and their children; they have demanded cuts in Pell grants, which are designed to help lower-income students afford college.
And they have, of course, pledged to repeal a health reform that, for all its imperfections, would finally give Americans the guaranteed care that everyone else in the advanced world takes for granted.
So where is the evidence that Mr. Romney or his party actually believes in equal opportunity? Judging by their actions, they seem to prefer a society in which your station in life is largely determined by that of your parents — and in which the children of the very rich get to inherit their estates tax-free. Teddy Roosevelt would not have approved.

[Winder]

Which particular piece you are referring to?

It's an old piece that he wrote after his book The Conscience of a Liberal was published. He used the same comparison in the book. Book came out in late 2007 so the piece would be late 2007 or early 2008. He made several replies in his blogs defending his choice to use household income and continues to do it.

Or my memory might be backwards. He may have used Household income in his book and defended his decision to use household income in his NYT piece after it was criticized.

Krugman is a smart guy. He is making a lot of money off of the recession and the publicity he has gotten. Should we call him a profiteer because he is getting rich off the recession?

[Winder]

simple.. railroads roads bridges, water works education UNDERSTANDING Soc. sec and medicare taxes are unnecessary.. ect..



Understanding Modern Monetary Theory (Mmt) & Our Modern Monetary System _ Pragmatic Capitalism

Keep in mind consumer spending is a large part of the economy..

You do realized that the railroads where built by private money. The Railroad Barons of the 1800's are pretty famous, so is the government corruption that lead to the railroad monopolies. The first head of the Interstate Commerce Commission was a lawyer for the railroads. The ICC has one of the most corrupt histories of any government agency.

Water works and education are local programs, and most water purification plants in this country are managed by private companies that contract out with the city.

Let's talk about federal spending. Be specific. give me some examples and explain the mechanics of it. It is not possible for the government to put more into the economy than it takes out unless it prints money. Government spending is a net loss. I have yet to see an example where the government was able to take $1.00 from the taxpayers and give them back $1.01 back in service. It that were possible government would not have to mandate the taxes. People would pay them willingly, and we could tax ourselves into prosperity.

[Winder]

You Tube

You Tube

Forward to 19 minutes and 13 seconds into this clip and you can listen to Professor Thomas Sowell (Stanford University's Hover Institute) give his opinion of Krugman's brilliance and use household income.

[jeffkrol]

Facts and Fallacies with Thomas Sowell - YouTube

Forward to 19 minutes and 13 seconds into this clip and you can listen to Professor Thomas Sowell (Stanford University's Hover Institute) give his opinion of Krugman's brilliance and use household income.

Wow.. prime example of idiocracy...........






http://www.newyorker.com/

Household demographics are not, however, the cause of the growing gap between the top 5% and the rest of the upper quintile. The top 5% had fewer dual earner households and full-time workers than the top quintile overall. In 2003 a household in the 95th percentile earned 77.2% more than a household in the 80th percentile, compared to 60.5% in 1967, a 27.6% increase in the earnings increase discrepancy between the two groups. Overall the income of the 95th percentile grew 15.2% faster than that of the 80th, 146.8% faster than that of the median and 159.9% faster than that of the 20th percentile.[32]

Households in the top 1% experienced the by far greatest increases in household income. According to economist Janet Yellen "the growth [in real income] was heavily concentrated at the very tip of the top, that is, the top 1 percent."[33] A 2006 analysis of IRS income data by economists Emmanuel Saez at the University of California, Berkeley and Thomas Piketty at the Paris School of Economics showed that the share of income held by the top 1% was as large in 2005 as in 1928. The data revealed that reported income increased by 9% in 2005, with the mean for the top 1% increasing by 14% and that for the bottom 90% dropping slightly by 0.6%.[34]

While per-capita disposable income has increased 469% since 1972, it has only increased moderately when inflation is considered. In 1972, disposable personal income was determined to be $4,129; $19,385 in 2005 dollars. In 2005, disposable personal income was, however, $27,640, a 43% increase.[35][36] Since the late 1990s, household income has fallen slightly.[3

http://en.wikipedia.org/wiki/Household_income_in_the_United_States

[jeffkrol]

Sowell is more eager to skewer intellectuals than quibble over definitions. His position is straightforward. Intellectuals do not understand the genius of the market. They ignore empirical evidence. They are elitists. They operate with ideological blinders. Ultimately, they are "unaccountable to the external world." They judge ideas by how clever or complex they are, not whether they work. "But no one judged Vince Lombardi's ideas about how to play football" by their complexity or novelty, writes Sowell, but by "what happened when his ideas were put to the test on the football field." Mr. Sowell champions what might be called the Vince Lombardi Interpretation of Ideas, or VLII. Test ideas in the field.

VLII might be a tad simplistic. After all, Nazism "worked" and yielded a bustling economy, until it was militarily defeated. Would Sowell say all was well with Nazi ideas until 1945? The Soviet Union lasted many decades. Did Stalinism "work" until it did not?

Putting aside those bigger issues, Sowell slams Western intellectuals for their misconceptions about society. Activist judges, teenage pregnancy, gun control, city planning, the war in Vietnam, income distribution, and crime all get brief hearings. Everywhere intellectuals miss the boat. They do not understand the facts and their consequences. For instance, intellectuals agitate over the "widening income gap." While that gap exists—and has grown—intellectuals do not understand the difference between statistical categories and real people. Studies of income mobility show that individuals move between economic strata, Sowell claims.

Intellectuals and Society covers many topics but feels like an "oldies but goodies" compilation for conservative seniors at Leisure Lakes Golf. Everything here has been played countless times. Inasmuch as Sowell rarely identifies intellectuals he derides, except in discussions of the past, where he becomes fearless, the book lacks punch. He slams Bertrand Russell's pronouncements on peace and George Bernard Shaw's statements on the Soviet Union, but he pussyfoots about the present. For instance, he disdains city planners for the usual reasons. They are biased and insular. He gives "a typical example" where planners ask leading questions from the audience about their preferences. "Would you like to have more or less time commuting? Would you like to live in an ugly neighborhood or a pretty one?" Sowell judges those queries "tendentious" and dishonest to boot. They show no awareness of costs. But who are these planners? In fact, the "typical example" derives from a book published by the conservative Cato Institute, in which the author paraphrases the planners he wants to put out of business.

Like many conservatives, Sowell stands tall in the name of the people against the intellectual elite. He writes that his book is "about intellectuals," but not "for intellectuals," and he cannot be bothered if his victims find fault with him. But who besides intellectuals would be reading a book on intellectuals? He also writes in the name of the market, but sometimes his loyalties conflict. "Many intellectuals," he says, do not grasp executive compensation. "They do not understand how corporate executives can be worth such high salaries—as if there is any inherent reason why third parties should be expected to understand, or why their acquiescence should be necessary." Is it only "intellectuals" who have doubts about executive pay and bonuses? Where has Sowell been...............................

Skewering Intellectuals - The Chronicle Review - The Chronicle of Higher Education