Tuesday, July 22, 2014

Don't Listen to Economists

I have said before that I think economists are sloppy thinkers. Here's an example.

This famous Nobel Prize-winner claims that "printing money isn’t inflationary" under certain conditions. His evidence is that lots of money was printed after the financial crisis, but inflation never shot up.

The fact that inflation didn't go up after the money-printing tells us nothing whatsoever about whether the money-printing policy in itself caused inflation. There were a lot of other things going on at the time, and from everything else we know about how money works in the economy, they must have been powerfully deflationary, so that the inflationary effects of printing money were counteracted.

The right question to ask is, what would the inflation rate have been if the money-printing policy had not been implemented? But of course we'll never know, because you can't repeat the years 2008-2012 with a different policy.

I can hear Krugman countering, "What I meant by not inflationary is that even though the inflation rate was higher than it would have been absent the money-printing, it still wouldn't have reached harmful levels, because of all those other deflationary things happening in the economy. It was important to print money to avoid harmful deflation." (He says deflation is harmful later in the same column.)

But is deflation bad or good? If it's good, then preventing it, by printing money for example, is bad. Like inflation, deflation harms some people and helps others. If someone owes you $1000, and suddenly the value of the dollar rises sharply (that's deflation), you'd be pretty happy to see deflation. On the other hand, if you're the person who owes the $1000, you might not be so happy. Economists like to say that deflation is bad for the economy as a whole, and they point to Japan as an example, but in fact the Japanese standard of living is as high as it's ever been.

Personally, I really like deflation. The fact that I can buy a computer today for $1000 that would have cost $1 million a couple of decades ago is just fine. It might make me hesitate to buy a computer today if I think I can get the same performance in a year for a lower price, but so what? If people stop buying computers, then the computer companies have less money to invest in new deflation-causing technology, so the rate of deflation is self-limiting.


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