Thursday, October 8, 2009


Deflation Propaganda Campaign Claims Bryan Caplan

Bryan Caplan defends Scott Sumner (already we should suspect trouble) and remarks:
Looking at the numbers makes it hard to believe in a quick return to full employment. During the 1980-2 recession, there was high inflation. All employers had to do to get real wages down to full employment levels was (a) avoid nominal wage increases, and (b) wait. Now that we've actually got deflation, waiting doesn't help. Even with a pay freeze, workers are getting more overpaid by the day. [Emphasis added.]
Bryan Bryan Bryan! The CPI started falling sharply in August 2008. But then it bottomed out in December 2008. Since then, the (non-seasonally adjusted) CPI is up 2.7% (through August 2009), which is an annualized price inflation rate of more than 4 percent.

I am really baffled by Bryan's statement. Even the seasonally adjusted CPI is up 1.8% year-to-date (through August), which translates to an annualized rate of 2.7%. So why does Bryan imply prices are falling "by the day"? Is he looking at year/year figures and assuming past performance is indicative of the future?

(BTW if you are getting lost in all the numbers, just look at the picture of the price level. You can see how misleading the year/year figures are.)

My understanding is that productivity is way up.

If so, prices SHOULD be falling.
price aint falling. english muffins at walmart were $2.04 today. up from $1.89 the last 6 months which was up from $1.64 when I started consuming them a year or so ago. That's a 25% increase.

And don't get me started on pickles.

milk and gas and home prices have dropped. Lot's of other stuff has maintained or gone up.
Here is some empirical evidence against Sumners obsession with nominal gdp:

I must add that the German experiences do not support the theory according to which in the last phases of the expansion, because of the increase of production due to the extension and improvement of productive apparatus, prices fall; and, it is argueq), it is this fall in prices which causes the end of the expansion
and the beginning of the depression. In Germany, in 1928, prices were kept at a high level, and in many cases were increased; and according to many authoritative views, among which is that of the Reichsbank,+ it was precisely these high prices which had an unfavourable influence on the expansion and hastened its end. These high prices showed that, owing to mistakes, the transformation of the productive apparatus had not brought about the anticipated fall in production costs. A fall in prices, if it had been the result of that fall in costs which was the principal object of rationalization, would not have created financial difficulties for industry.

“The Economics of Inflation: A Study of Currency Depreciation in Post-War Germany” by Constantino Bresciani-Turroni pw 427.

In Germany, prices were rising, so ngdp had to have been rising as well, yet the depression happened anyway. Why? Because the rise in prices consumption goods did not keep up with the rise in wages, so profits fell and businesses failed or quit investing. This is classic Hayek.
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