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llard s remarks from back in february which i reviewed beginning here is one example of this kind of good economics marcus nunes post is another in my day job i take drawings from customers and make drawings for the shop so the shop can make what the customer wants it s a good job sometimes it is difficult to figure out what the customer wants so i will make a guess about what he shows me and proceed on that basis what i do then is look for discrepancies if i made a bad guess there will be discrepancies and i will know if there are no discrepancies and things fall into place then i can figure my guess was a good one discrepancy analysis is a useful tool marcus nunes opens his post with a look at the consensus view of how the great moderation emerged he points out a discrepancy in this view regarding the fed s responsiveness to inflation because of the discrepancy orphanides discrepancy nunes says the consensus view represented by roger farmer s statement is a bad guess nunes then makes a new guess his guess is that there was a change in the doctrine of the federal reserve a change from thinking in terms of cost push to thinking in terms of demand pull the old doctrine led to low ball predictions of inflation so that based on what we know today the fed s policy responses seem weak when compared with new doctrine responses the analysis explains the discrepancy orphanides observed this makes a strong introduction for the alternative view for the guess nunes provides at this point nunes asks so how come the great moderation emerged the new doctrine challenged the old nunes says and implicitly accepted that rising inflation is caused by demand pull nunes writes to volker the policy adopted by the fomc rests on a simple premise documented by centuries of experience that the inflation process is ultimately related to excessive growth in money and credit volker believed that inflation was the result of excessive ad the new doctrine assumed that control of the growth of money would enforce control upon inflation and it proved true if we may judge by the result the result of the change in doctrine nunes says is visible in the change in nominal spending growth visible in the chart he provides me i love graphs and logic and when nunes logic led to that graph well i was flabbergasted but there comes a time when the suspension of disbelief has to be terminated marcus nunes whole argument good as it is is built upon on the change of doctrine the change from thinking of inflation as cost push to thinking of it as demand pull and judging by the results volcker was apparently correct when he said the inflation process is ultimately related to excessive growth in money and credit treating inflation as if it was demand pull reduced inflation significantly but what if arthur burns was right what if the inflation was in fact cost push treating it a demand pull suppressing money would hinder the rise of prices but it would do nothing about cost push pressures those real as opposed to monetary pressures that were driving prices up with cost push pressures ignored they could fester for decades while economic performance deteriorated meanwhile to circumvent that deterioration a whole new system of supply side policies would have to be put in place however with cost push pressures ignored inflation would never really go away away 3 unsolicited afterthoughts arthur burns was wrong oh not about inflation being cost push he was right about that but according to nunes burns identified the push as pressure on costs arising from excessive wage increases wage push inflation burns was wrong about that hey if wages were the driving force then wages would have been gaining relative to other costs wage earners would have been doing better not worse so there is no way wages were the driving force behind this inflation and i can show it to you too interest costs rise as employee compensation falls wages the red line were not increasing as a portion of corporate costs wages were falling it was interest costs that were rising financial costs the blue line that s what was pushing prices up not wages and look what that got us thirty odd years later wage earners deep in debt and a financial sector grown too big to fail update 6 october 2015 fixed a graph that was not displaying posted by the arthurian at 4 00 am 5 comments monday may 28 2012 wesley changed my life i worked with a guy named wesley years ago he worked behind the counter in a steel warehouse he dealt with customers he dealt with demand back then i still thought of inflation in the demand pull terms expressed by milton friedman and anna schwartz too much demand i said is the cause of inflation too much money chasing too few goods you know wesley said but prices go up because costs go up related posts the cost push economy 20 feb 2011 indonesia now 11 jan 2011 ignorance is bliss 6 july 2010 the long decline 17 june 2010 the schwartz 31 oct 2009 posted by the arthurian at 4 00 am 1 comments sunday may 27 2012 don t we want to think about that marcus nunes a last ditch defense of inflation targeting still has my attention tryin to work through what he says so i can summarize it before i say what i think i got stuck where he says the short run as sas curve was perceived as horizontal when output is below potential i like to read nunes because he will often add a parenthetical phrase that works for me to make sense of a technical concept didn t happen this time here here is the whole paragraph when placed in the dynamic aggregate supply as aggregate demand ad framework this cost push view as advocated by policymakers in the 1970 s suggests that the short run as sas curve was perceived as horizontal when output is below potential as is aggregate supply short run i can imagine what that is cost push this is what fascinates me most about the article because we need to look more at cost push and output below potential i get that i get all of that it s the aggregate supply curve that stopped me cold what are the axes if the curve is perceived as horizontal then i need to know what s on the vertical axis supply is a curve that slopes one way demand slopes the other where they cross is the perfect price or something i get all that but i didn t memorize the supply curve axis labels i have to stop and work that out it rolled around in the back of my head a few days then suddenly made sense nunes says it was thought that prices would not go up due to increased demand if supply was below potential in other words sas is horizontal no change in prices when demand increases if supply is below potential or so it was thought in the 1970s so price is the vertical axis and supply is the horizontal google brings up some images these all show price on the vertical axis got it wikipedia out of context at low levels of demand there are large numbers of production processes that do not use their fixed capital equipment fully thus production can be increased without much in the way of diminishing returns and the average price level need not rise much if at all to justify increased production the as curve is flat as wikipedia has it at low levels of demand the as curve is flat as nunes has it when output is below potential the as curve is horizontal as i have it if supply is below potential increasing demand won t raise prices so it was thought in the 70s now i guess we know better prices go up all the time regardless of the output gap regardless of demand that s why cost push fascinates me now i have a question according to nunes and the world prices do go up when demand increases even when supply is below potential inflation is due to aggregate demand the world says but even when demand is below potential before the crisis in the bush years the economy was really slow prices went up anyway that was a demand problem once upon a time prices went up and down as the red line shows now prices only go up the red line almost never goes below zero and by one measure at least economic growth since the 1970s has been substantially below the average of the past 200 years growth was better back when prices went up and down these days growth is less and prices only go up now aggregate demand ad is relatively low demand is not sufficient to pull prices up but now for decades before the crisis i mean prices only go up doesn t this support a view that nunes and the world reject the view that inflation was cost push in the 1970s and maybe that inflation has been cost push for quite some time prices don t go up and down prices only go up prices are going up even while demand is relatively low doesn t that sound like there must be something other than demand that is pushing prices up doesn t it sound like cost push don t we want to think about that sure you can suppress the quantity of money and thereby keep demand and inflation and growth at a low level but that does not mean it was demand pull inflation if there are cost push forces at work suppressing demand will not solve the problem it will reduce or moderate economic growth it will reduce or moderate inflation but cost push forces will continue to eat away at profits and living standards so the question that must be asked is whether in our experience inflation is cost push or demand pull the question is easily answered because the two inflations are related to two different economic conditions under demand pull incomes are plump and the economy is good under cost push incomes are lean and the economy is not good don t we want to think about that posted by the arthurian at 4 00 am 7 comments saturday may 26 2012 spring fever she rests upon my coffee table face up atop discover the model hollie witchey posted by the arthurian at 12 00 pm 0 comments labels tot explaining stagflation the name nairu arises because with actual unemployment below it inflation accelerates while with unemployment above it inflation decelerates with the actual rate equal to it inflation is stable neither accelerating nor decelerating one practical use of this model was to provide an explanation for stagflation which confounded the traditional phillips curve phillips curve wikipedia the phillips curve said there was a tradeoff between inflation and unemployment one went down when the other went up but then in the 1970s unemployment and inflation both went up the phillips curve was confounded and a new explanation was needed that s when keynesian economics fell into disrepute and economists invented new explanations like the nairu after 30 years of building upon such explanations the economy tanked to explain the problems in our economy you cannot go back to the subprime crisis or to the 1990s or the 1980s when policy fixes were being put into place to explain the problems you have to go back to when those problems first arose back to the great inflation beginning in the mid 1960s you have to go back to what the problems and policies were then posted by the arthurian at 4 00 am 0 comments friday may 25 2012 mom and who from my rajan post regulation is ineffective the profit motive is an irresistible force regulation is not an immovable object the trick is to use taxation to make different things profitable use it to make some things more profitable and other things less profitable for example the existing business income tax favors bigness so if things go their way a business can grow like crazy that s how you get giants like microsoft and google and the too big to fail banks and then we have anti trust because sometimes we seem to think some companies are too big but it would be much more effective just to change the tax system we could redesign the business tax to favor small business instead for example but it would be better to make the tax so it favors no one by size let walmart compete on equal footing with mom and pop posted by the arthurian at 4 00 am 5 comments thursday may 24 2012 jobs you think jobs is the problem okay but it s our problem a problem for people it s not a problem for the economy if you want jobs from the economy you have to give the economy what it wants of course everybody thinks they know what the economy wants to cut the growth of government spending that s not it and now to ruin a perfectly good brief statement let me explicitly point out that i am not saying we must expand the growth of government spending i am not saying we should cut it and i am not saying we should expand it what i m saying is the size of government is not the problem the spending of government is not the problem the debt of government is not the problem the government is not the problem i m saying we should stop talking about the government and focus on the problem excessive private debt is the problem we need to wipe out that debt private debt before life as we know it ends like a game of monopoly posted by the arthurian at 4 00 am 8 comments wednesday may 23 2012 holy crap for your shuddering pleasure glimpses into the logic and literacy of gina aveni at conservative daily news john maynard keynes is the author of keynesian economics who was both an investor and economist of his time keynesian economics stemmed from ideas that have taken a toll on the american economy keynes was opposed to say s law which states that supply creates demand keynes believed the opposite output determined demand posted by the arthurian at 4 00 am 2 comments tuesday may 22 2012 gunnar tomasson from gang8 i have long been persuaded that we will ultimately run into a stonewall with our debt dilemma and how to handle it the solution so far has been to let the less well placed individuals of society bear the burden this is the austerity programs that are imposed and it is getting us nowhere we are cutting down the economies through austerity programs we are cutting down the welfare system we are cutting down health and education and so on this reduces and cuts out purchasing power from the economy and the purchasing power is what keeps the wheels of industry going and this we have seen it playing out in europe now where they have taken steps one after another and they basically have not identified the problem and if you have not identified the problem and you cannot do that with modern monetary economics when you cannot identify your problem you cannot design a solution for it you must know what your are talking about and they don t you have a system overburdened with debt and the solution cannot be to add more debt to it posted by the arthurian at 4 00 am 4 comments monday may 21 2012 liquidity trap found this by accident source introductory microeconomics and macroeconomics by tr jain vk ohri i can duplicate that graph dunno about the interest rates though posted by the arthurian at 4 00 am 1 comments sunday may 20 2012 i want all of it from the role of monetary policy 17 page pdf by milton friedman accordingly the authority increases the rate of monetary growth this will be expansionary by making nominal cash balances higher than...
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