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*Crunch*, by Jared Bernstein
The book is the latest attempt to write a populist, Progressive economics tract.
There is a chapter called "Why do economists seem to fear inflation? And why do prices always go up, never down?"
Imagine trying to answer those questions without ever writing the two words: "money supply." Yes, there is talk of the Fed changing interest rates to affect the price level. But in an odd converse to the famous joke about Milton Friedman, Bernstein just can't bring himself to utter the "M word." At first I thought it was a semantic oversight but when I came to the passage describing "the wage-price spiral" as "economists' biggest inflationary nightmare" I realized I was wrong.
The chapter on the Fed does mention the money supply but in the context of describing the views of others and even then only in passing.
Yes I know that the broader monetary aggregates are endogenous and yes I know that it is somewhat of a mystery, in theoretical terms, exactly why open market operations are effective. It is fine to acknowledge those complexities. But still, it is no answer to give your readers Hamlet without the Prince or even any mention of his absence.
I would like to see Jared Bernstein called up on The Colbert Show and asked to do nothing but utter those two little words: "money supply."
Posted by Tyler Cowen on February 21, 2008 at 06:17 AM in Books, Economics | Permalink
Comments
I have griped before about _Nickel and Dimed_ writing its section about housing and rents without mentioning zoning. ("The problem of rents is easy for a noneconomist, even a sparsely educated low-wage worker, to grasp; it's the market, stupid." "When the market fails to distribute some vital commodity such as housing, to all who require it, the usual liberal-to-moderate expectation is that the government will step in and help.") I thought the example of the lucrative Key West trailer park which somehow doesn't get upgraded to higher-density housing was particularly telling.
I have also griped before about Samuelson's 1976 _Economics_ writing a chapter about relative success in planned economies, especially outright Communist ones, without mentioning migration-related phenonoma like the Berlin Wall. ("It is a vulgar mistake to think that most people in Eastern Europe are miserable.") Revealed preferences, anyone?
_Crunch_ sounds like a worthy addition to the genre. I wonder whether it will be as successful.
Posted by: William Newman at Feb 21, 2008 8:26:26 AM
It's "The Colbert Report" (silent t's, both).
I'm not much younger than you. Try to stay hip, man.
Posted by: meter at Feb 21, 2008 8:49:18 AM
I guess I will have to pull my old Samuelson down from the shelf. I took Econ 101 in 1974. I seem to remember that Samuelson went on and on and on about inflation and all sorts of reasons therefore without much mentioning money supply.
Oh he did mention it, but I got the impression that only fools and cranks thought it had anything to do with inflation.
John Henry
Posted by: John Henry at Feb 21, 2008 9:05:55 AM
Isn't saying inflation is a monetary issue a lot like saying that obesity is a calorie issue?
Higher money supply is a necessity for inflation, but don't you need to go a little deeper then that to see why monetary growth is higher?
Posted by: spencer at Feb 21, 2008 9:27:08 AM
Higher money supply is a necessity for inflation.
Oh really, what if Fed actions reduce the demand for money, and the Fed keeps the money supply the same.
Posted by: russ at Feb 21, 2008 10:16:49 AM
"And why do prices always go up, never down?"
Oh. Dear. God. Has Mr. Bernstein priced a computer recently? How about in 1989? Has he priced airfare to Miami? How about in 1978?
Real prices per unit of value come down over time for almost everything. Nominal prices do creep up on some goods, but so what?
Posted by: at Feb 21, 2008 10:18:42 AM
Real prices per unit of value come down over time for almost everything. Nominal prices do creep up on some goods, but so what?
It's a problem if your monetary policy creates permanent inflation winners and losers.
Posted by: kurt at Feb 21, 2008 10:37:46 AM
"And why do prices always go up, never down?"
What about gasoline? Approximately the same price today as in 1981.
Posted by: Dave Richardson at Feb 21, 2008 10:43:43 AM
Economics always has upward sloping supply curves -- higher supply equals higher prices .
But in a long run deflationary environment couldn't the supply curve be downward sloping?
the standard answer is that you are shifting to another supply curve, not moving along one curve. But isn't that really cheating?
Posted by: spencer at Feb 21, 2008 1:26:42 PM
"Higher money supply is a necessity for inflation, but don't you need to go a little deeper then that to see why monetary growth is higher?"
You don't need to go much farther to find the cause if the Fed keeps increasing the money supply.
Posted by: liberty at Feb 21, 2008 7:35:04 PM
"I would like to see Jared Bernstein called up on The Colbert Show and asked to do nothing but utter those two little words: "money supply.""
And I would like to hear Tyler utter the words "Real Bills Doctrine".
Posted by: Mike Sproul at Feb 21, 2008 7:44:56 PM
"I would like to see Jared Bernstein called up on The Colbert Show and asked to do nothing but utter those two little words: "money supply.""
And I would like to hear Tyler utter the words "Real Bills Doctrine".
Posted by: Mike Sproul at Feb 21, 2008 7:45:15 PM
Mike, I read about Real Bills Doctrine. Maybe I've read too much Austrian Economics to be able to misunderstand the issue the way you want to, but my understanding of the quantity theory of money is that when you issue more money than is reflected by the total value of the economy, you get inflation. I don't think ANYBODY thinks that when you lend your house (collateral) to a bank, and the bank issues a receipt in the form of money, that the quantity of money has changed.
Posted by: Russell Nelson at Feb 22, 2008 3:11:01 PM
M1 includes checking account dollars issued by banks, so if I post my house as collateral for a loan from Wells Fargo, then Wells Fargo can issue new checking account dollars in the amount of the loan, so M1 has increased. I'm trying to think of any econ textbook that denies this, and I can't think of one. Anyway, the RBD says that the money supply has increased, but that the assets and liabilities of the Federal Reserve are unaffected by Wells Fargo's issue of checking account dollars, so the value of the dollar is unchanged. Furthermore, the RBD adds that if the Fed issues 10% more paper dollars in exchange for equal-valued assets, then the Fed's assets rise in step with its liabilities, and there is no change in the value of the dollar. This, of course, is denied by EVERYBODY, except me.
Posted by: Mike Sproul at Mar 7, 2008 7:23:14 PM
