User talk:JRSpriggs

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Conversation on inflation?[edit]

Hi, I wonder if you remember that I told you a few years ago that I would seriously reconsider my belief in mainstream New Keynesian macroeconomic theory, if inflation exceeded 10% on an annualized basis in any two consecutive months. I believe the last 5 years has been a unique natural experiment and that it confirms the mainstream macro models that:

  1. Price inflation is mainly determined by the relative 'slack' in the economy (measured by unemployment above normal, or by production below capacity) - it decelerates when there is positive slack, and accelerates when there is negative slack.
  2. The quantity of money may be good as a long run guide, but it little to do with inflation in the short run, especially when the economy is near the zero nominal lower bound.
  3. In a modern economy, it is very difficult for wages to fall (and hence deflation to occur), even in the face of depression levels of unemployment.

Given the inflation record of the last few years, I wonder if you would be willing to discuss your beliefs about monetary theory and 'mark to market' your beliefs? LK (talk) 03:05, 28 May 2014 (UTC)

Let me begin by pointing out that, if I recall correctly, you were the one who cut off most of our previous attempts to discuss economics. Although you were often the one to make the last argument, I only refrained from responding because your language made it clear that you did not want to hear my arguments and I did not feel comfortable continuing to argue (on your talk page) with someone under those conditions. Also, I felt that you often read things into what I said that were not there — especially assuming my total agreement with anyone who I mentioned favorably.
A "natural experiment" is not a scientific experiment and cannot serve as a reliable basis for testing hypotheses. In a scientific experiment, the experimenter controls the inputs and deliberately equalizes (or randomizes) the conditions (other than the variable being analyzed) between the control group and the experimental group. In this "natural experiment", there is no control group (indeed no experimental group other than the one case) and no equalizing of the other inputs. Thus any result could be (and probably is) caused by factors other than the variable being analyzed.
I agree that a large quantity of money does not necessarily result in price inflation; there are other considerations.
The ability of the economy to provide jobs has been impaired by taxes, regulations (especially labor law and obamacare), and government spending (raising the cost of raw materials and capital).
Bearing these in mind, if you still want to talk, go ahead. JRSpriggs (talk) 03:10, 29 May 2014 (UTC)
My memory is very bad nowadays, so I don't remember how our last convo ended. If I was brusque with you, I do apologize. I'm not sure if I agree with your assessment about natural experiments. Granted, it's not as good as a double blind random test, but it can be pretty good, and is often the best we have in the social sciences. Given that some events appear to consistently follow certain natural experiments, we can build up certain 'stylized facts' about the behavior of the economy. From this, we reject theories that contradict the stylized facts and try to construct theories that explain them. That's what economics is (at it's best). Science is not forming a set of beliefs, and then looking at the world through colored lenses, interpreting everything in a way to back up one's preconceptions (at least it shouldn't be like that). The last few years appear to have added (or solidified) a few stylized facts to our arsenal, namely 1, 2, and 3 above. LK (talk) 12:17, 30 May 2014 (UTC)
I was not asking for an apology, especially since some of the things I said may have been offensive to you. Rather, I was trying to remind you that in our conversations I have questioned some your ingrained beliefs in ways which may have been disturbing to you. You might want to look back at our previous conversations and consider that possibility before you decide to proceed.
The near impossibility of doing scientific experiments in social science does not mean that we should give more credence to unreliable methods.
I agree that it would be wrong to re-interpret every piece of evidence as necessary to construe it as confirmation of one's favorite hypotheses. However, no field of knowledge (such as economics) can be understood in isolation from the rest of our knowledge of reality. Economic theory must be reconciled with what we know about: physics, chemistry, biology, evolution, psychology, mathematics, business administration, law, politics, ethics, epistemology, metaphysics, etc..
What do you mean by a "stylized fact"? How is it different from an actual fact?
Regarding (1): Is this not just the theory of the Phillips curve which was discredited by the stagflation of the 1970s?
Regarding (2): This appears to be true.
Regarding (3): What do you mean by "modern economy" that would have any bearing on the flexibility of wage rates? If deflation is unlikely to occur, then why has the Federal Reserve been striving so desperately to avoid it?
JRSpriggs (talk) 03:40, 31 May 2014 (UTC)
Economists use the term "stylized fact" to refer to something that (almost) everyone agrees happens most of the time in a certain part of the economy, and that needs to be part of a good theory about that particular part/aspect of the economy.
  • Regarding (1): Not at all! What was discredited was the naive assumption (which few actually believed) that we could 'choose' to stably remain a particular point on a stable Philips curve. What came out of it is the theory of short and long run Philips curves. There obviously is a Philips curve in the short run, but persistently being on one side of the Philips curve (e.g. unemployment persistently lower than the natural rate) will cause the short run Philips curve to shift over time.
  • Regarding (3): Non-modern (especially agrarian) economies apparently could experience relatively high rates of deflation. Post WWII developed economies (with complex supply chains, long term contracts, unions, etc) apparently cannot. Instead, they fall into economic depression – associated with very low inflation or slight deflation. It is this situation that the Fed is trying to avoid.
Best, LK (talk) 03:02, 10 June 2014 (UTC)
Regarding (1): If you want the Phillips curve to be a scientific theory, you need to specify how it "shifts". That is, you need a formula for the change in the curve's parameters. If you have such, please provide a link to it.
What really bothers me about this is that you are treating the economy as if it were some kind of recalcitrant engine which needs to be tweaked to make it work correctly. You are ignoring the fact that it consists of living people. Those people have their own goals which they are trying to pursue to the extent possible given the contradictory demands of reality and the government bureaucracy. Essentially, the policies you are advocating are a kind of manipulation or deception by which you try to get people to do something which they would not knowingly and freely do.
I do not believe that there is ever any "slack" in the economy. If the owner of a factor of production chooses not to use it, he does so because it is not profitable to do so. Probably because some co-factors of production are missing or prices/regulations have shifted in a way that ruined his plans for it. Or perhaps he is holding onto it against a possible future contingency (a scarcity of that factor). If you trick him into using it (by causing inflation, lending money at unsustainably low interest rates), then it will not end well. You may get a temporary burst of economic activity, but the result will be waste.
Regarding (3): So government and the unions it protects have created a situation where instead of correcting itself quickly via rapid deflation, economic activity is choked-off when deflation would be appropriate. JRSpriggs (talk) 05:24, 12 June 2014 (UTC)
Hi, sorry for the long delay, I've been distracted by other things. Regarding the question of how the Philips curve shifts, you should know that nowadays, almost everything in mainstream economics is rigorously mathematically modeled. For an intro to New Keynesian inflation theory (with graphs but little maths), I suggest Macroeconomics[1], by Hubbard and O'Brien, Chapter 16. For the state of the art, see Interest and Prices: Foundations of a Theory of Monetary Policy[2], by Michael Woodford (warning, probably only readable to people with PhDs in economics). For something for free, here's "Keynesian Macroeconomics without the LM Curve"[3], by David Romer, about how to teach New Keynesian economics to undergraduates. Here's a more mathematical version of the same[4]. Here's an even more mathematical version about teaching the basic model[5].
About slack in the economy, it has often been observed that crowds and mobs can be irrational. E.g. Stock market bubbles; people trampling each other to death during panics; people at a stadium concert all standing, when they could all have a equally good view sitting down. Why not the same for the macroeconomy? The failure to coordinate actions can cause individually rational agents to be collectively irrational. Milton Friedman had an interesting thought experiment on this. Rationality implies that money and prices should be transparent to the real economy — it should be equivalent if bread costs $1 and hourly wages are $2, or if bread costs $5 and hourly wages are $10. An hour of work buys 2 bread. Hence monetary policy should have no effect. Equivalently, it shouldn't matter if we label the hour when the sun is highest as 11:00, 12:00, or 13:00, people rationally should behave the same, changing activities depending on how bright it is. Hence, daylight savings time should have no effect. However, experience proves otherwise — monetary policy and daylight savings time change behavior. Why? Coordination failure. Given long enough, people will adapt no matter what the nominal numbers are, but in the short run, changing nominal numbers have a real effect.
Lastly, I hope you recognize that your (3) is akin to a statement of religious belief. LK (talk) 11:39, 27 June 2014 (UTC)
The paper by Carlin and Soskice is more understandable than most papers on economics, but it contains some simple mathematical errors. They lost a factor of two when they differentiated the cost function of the central bank (although this does not matter since the derivative is then set to zero). More importantly, they ignored the continuing effects (future costs) of uncorrected deviations of the rate of inflation from its target. They arbitrarily assume at one point that some of their constant coefficients are equal to 1. And they never specify the units of the variables and constants in their equations. Also, like most papers, it is much too wordy and yet manages to leave important matters to the guess-work of the reader.
Any attempt by business firms to coordinate their activities to be more rational risks running afoul of government regulations and especially the anti-trust laws. Also it would make their tax returns into an even bigger nightmare (how do they account for the tax consequences of the contingent costs and benefits in their contracts?).
My recognition of the effects of minimum wage laws and the contracts which businesses are compelled to negotiate with various unions is not religion, it is a fact. JRSpriggs (talk) 04:26, 28 June 2014 (UTC)
I probably shouldn't have pointed you at that paper, it's a suggested reformulation, not the standard model. The two previous are better representations of the standard New Keynesian model. It's also an internal working document and not peer reviewed. If you are sure that you have correctly identified errors, you should write the authors, I'm sure they'll appreciate the chance to fix it. BTW, Krugman just posted an interesting blog entry on the history of macro, it's a good read[6].
Your statement that "government and the unions it protects have created a situation where instead of correcting itself quickly via rapid deflation, economic activity is choked-off when deflation would be appropriate" is not a "fact'" - at least not one that 99% of macroeconomists would agree with. In fact more economists would probably agree with these "facts": "Because it is impossible to get rid of market imperfections, an enlightened bureaucrat can always find a way to improve on a market outcome." (See Theory of the second best). "Modest increases in the minimum wage have negligible or slightly positive effect on employment." (See Card & Kruger 1995). LK (talk) 11:17, 2 July 2014 (UTC)

Here we get to what I see as the basic philosophical difference between us. You have this belief that an "enlightened bureaucrat" will be making the government's decisions. That is magical-thinking. Rationality is not something that comes automatically or free of charge. In fact, it is very rare outside of matters within a person's painful and hard-earned experience. That is why the people making decisions should always be those who are directly affected by the results. Hence my belief in freedom and capitalism. JRSpriggs (talk) 10:06, 3 July 2014 (UTC)

I hope you do recognize that both your views and the ones you attribute to me are essentially beliefs, and little different from catechisms like "Jesus Christ is my personal savior". BTW, the way I see the difference in our views is like this. "Motor vehicles exist, they cause pollution and hurt/kill a lot of people every year, however, they are fundamental to our modern lifestyles. I'm in favour of restricting the amount of motor vehicles, using them only where necessary, and improving the way they work and how they fit into our societies. You believe that they are fundamentally evil and favour getting rid of them altogether." Substitute government for motor vehicles in the above, and that's how I see our disagreement. LK (talk) 04:26, 7 July 2014 (UTC)
1. I have good reasons for what I believe, it is not like a religion.
2. Argument by analogy (to automobiles or religion) is not a valid form of argument.
3. Automobiles provide a very large benefit — carrying people and goods from one place to another where they may be more valuable. On the other hand, government has only one "benefit" that is not available in the private sector, it can provide overwhelming force to ensure that it gets its way. But force is inherently destructive, so it is not appropriate to use it except in situations where the target is a net evil which cannot be eradicated by any lesser method.
4. History has shown that governments are almost invariably captured (or originally established) by corrupt people who use them for evil purposes. JRSpriggs (talk) 10:49, 10 July 2014 (UTC)


I suggest that this edit is in contravention of Wikipedia:Biographies of living persons policy, which "applies to all material about living persons anywhere on Wikipedia". You might like to revert it. Deltahedron (talk) 17:36, 10 July 2014 (UTC)

Thanks for that. Deltahedron (talk) 06:24, 11 July 2014 (UTC)