Lynn Stuart Parramore discusses the work of an economics grad student who recently blew the lid off Reinhart and Rogoff’s infamous study concluding that a 90% or higher GDP-to-debt ratio results in dramatic reductions in economic growth:
Since 2010, the names of Carmen Reinhart and Kenneth Rogoff have become famous in political and economic circles. These two Harvard economists wrote a paper, “Growth in the Time of Debt” that has been used by everyone from Paul Ryan to Olli Rehn of the European Commission to justify harmful austerity policies. The authors purported to show that once a country’s gross debt to GDP ratio crosses the threshold of 90 percent, economic growth slows dramatically. Debt, in other words, seemed very scary and bad.
Parramore notes that austerity advocates have used the Reinhart-Rogoff study to justify the implementation of austerity measures in multiple countries. There is one tiny problem, however: the Reinhart-Rogoff data spreadsheet contains a massive error:
Enter Thomas Herndon, Michael Ash and Robert Pollin of University of Massachusetts, Amherst, the heroes of this story. Herndon, a 28-year-old graduate student, tried to replicate the Reinhart-Rogoff results as part of a class excercise and couldn’t do it. He asked R&R to send their data spreadsheet, which had never been made public. This allowed him to see how the data was put together, and Herndon could not believe what he found. Looking at the data with his professors, Ash and Pollin, he found a whole host of problems, including selective exclusion of years of high debt and average growth, a problematic method of weighing countries, and this jaw-dropper: a coding error in the Excel spreadsheet that excludes high-debt and average-growth countries.
What’s the end result?
In their newly released paper, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff” Herndon, Ash and Pollin show that “when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogoff. That is, contrary to R&R, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.”
I imagine that Reinhart and Rogoff are gearing up for a response. Meanwhile, Parramore also links us to Daniel Schuchman at Forbes, who appears to have quickly respun this fairly devastating academic take-down as simply a sign that “academic economics, like many social sciences, is grounded in hubris and pseudo-precision.”
Perhaps so. But but I don’t think this requires throwing the baby out with the bathwater. Indeed, we needn’t draw any conclusion from this episode other than the narrow one it stands for: there’s nothing automatically devastating about the 90% GDP-to-debt ratio. It would be a mistake to conclude that this justifies terminal apathy about the size of the public debt, just the same as it would be to conclude that discrediting the Reinhart-Rogoff study leaves austerity policies with no other legs to stand on. Nonetheless, it seems proponents of the latter will have to rely on other metrics going forward, as the methodology of the Reinhart-Rogoff study appears to be terminally flawed.
Mark Weisbrot discusses the popular success of Ecuadorian president Rafael Correa, a Phd economist who has used “big government” economics to get his country back on its feet:
[Ecuador’s] Unemployment fell to 4.1% by the end of last year – a record low for at least 25 years. Poverty has fallen by 27% since 2006. Public spending on education has more than doubled, in real (inflation-adjusted) terms. Increased healthcare spending has expanded access to medical care, and other social spending has also increased substantially, including a vast expansion of government-subsidised housing credit.
If all that sounds like it must be unsustainable, it’s not. Interest payments on Ecuador’s public debt are less than 1% of GDP, which is quite small; and the public debt-to-GDP ratio is a modest 25%. The Economist, which doesn’t much care for any of the left governments that now govern the vast majority of South America, attributes Correa’s success to “a mixture of luck, opportunism and skill”. But it was really the skill that made the difference.
Correa may have had luck, but it wasn’t good luck: he took office in January of 2007 and the next year Ecuador was one of the hardest hit countries in the hemisphere by the international financial crisis and world recession. That’s because it was heavily dependent on remittances from abroad (eg workers in the US and Spain); and oil exports, which made up 62% of export earnings and 34% of government revenue at the time. Oil prices collapsed by 79% in 2008 and remittances also crashed. The combined effect on Ecuador’s economy was comparable to the collapse of the US housing bubble, which contributed to the Great Recession.
And Ecuador also had the bad luck of not having its own currency (it had adopted the US dollar in 2000) – which means it couldn’t use the exchange rate or the kind of monetary policy that the US Federal Reserve deployed to counteract the recession. But Ecuador navigated the storm with a mild recession that lasted three quarters; a year later it was back at its pre-recession level of output and on its way to the achievements that made Correa one of the most popular presidents in the hemisphere.
How did they do it? Perhaps most important was a large fiscal stimulus in 2009, about 5% of GDP (if only we had done that here in the US). A big part of that was construction, with the government expanding housing credit by $599m in 2009, and continuing large credits through 2011.
But the government also had to reform and re-regulate the financial system. And here it embarked on what is possibly the most comprehensive financial reform of any country in the 21st century. The government took control over the central bank, and forced it to bring back about $2bn of reserves held abroad. This was used by the public banks to make loans for infrastructure, housing, agriculture and other domestic investment.
It put taxes on money leaving the country, and required banks to keep 60% of their liquid assets inside the country. It pushed real interest rates down, while bank taxes were increased. The government renegotiated agreements with foreign oil companies when prices rose. Government revenue rose from 27% of GDP in 2006 to over 40% last year. The Correa administration also increased funding to the “popular and solidarity” part of the financial sector – co-operatives, credit unions and other member-based organisations. Co-op loans tripled in real terms between 2007 and 2012.
The end result of these and other reforms was to move the financial sector toward something that would serve the interests of the public, instead of the other way around (as in the US). To this end, the government also separated the financial sector from the media – the banks had owned most of the major media before Correa was elected – and introduced anti-trust reforms.
Weisbrot concludes by saying what’s on everybody’s mind:
[T]he conventional wisdom is that such “business-unfriendly” practice as renegotiating oil contracts, increasing the size and regulatory authority of government, increasing taxes and placing restrictions on capital movements, is a sure recipe for economic disaster. Ecuador also defaulted on a third of its foreign debt after an international commission found that portion to have been illegally contracted. And the “independence” of the central bank, which Ecuador revoked, is considered sacrosanct by most economists today. But Correa, a PhD economist, knew when it was best to ignore the majority of the profession.
If anything, these examples demonstrate that there’s a time and a place for every economic policy. Clearly “big government” economics are not always appropriate for every economic situation. but in Ecuador’s case, the “big government” approach appears to have worked. Sweden and Switzerland have also experienced economic success with central banks that intervene far more aggressively in the economies than the Federal Reserve. And despite Sweden’s purported free-market reforms, the Swedish government continues to fund a rather robust welfare state with high income tax rates, steady economic growth, and regular budget surpluses. Surplus-driven welfare states are not only possible, but we currently have many excellent examples of them working in different parts of the world.
Morning Star is a California company that is responsible for processing 40% of California’s tomato crop. They also have no management. (Via Reason.tv):
Morning Star has many of the usual positions that one would expect at an ordinary company: there are floor workers, payroll personnel, folks that handle the mail and outside communications, and so on. The difference is that, from a bird’s eye view, no single person at Morning Star is anybody else’s boss. The entire operation appears to thrive on the power of collective expectations, and by giving workers a direct stake in the success of the company. Workers at Morning Star make their own decisions about how to perform their job, what tools they need to keep the machines running, and how to structure their work day to keep production running smoothly. As one employee put it, there is no bureaucracy that he has to fight through if he needs something for his lab. He just goes out and purchases it.
To some, this may seem like a frightfully inefficient way to run a business. If employees can make instantaneous discretionary purchases of lab equipment on the company dime, then where is the cost control? Such a system seems doomed to failure without a hierarchy of some sort to check potentially unwise exercises of indiscretion.
The answer is that these checks are built into the system of collective expectations. As another Morning Star employee put it, Morning Star’s business model presumes that employees who are closest to a particular business process are the most qualified to make decisions about how to keep that process running efficiently. Thus, one would expect an unwise purchase to be met with scrutiny by one’s peers on the factory floor. Morning Star’s firm model thrives by ensuring that one individual is never and uncontested decision-maker solely responsible for decisions related to a business process at the company. Every worker has a stake in the outcome of everybody else’s labor. The threat of discipline from management is unnecessary to achieve desired outcomes.
Morning Star is not the first company to adopt this business model. Valve Corp., a wildly successful Video Game company that currently dominates the Video Game industry through it’s Steam platform, also has no formal management. Gore Inc., the makers of Gore-Tex, are an 8,500 strong company that has no company organization chart. Though Gore does retain a few corporate officer titles for various purposes within the company, those officials have little direct power over other employees in the corporation. Those same officers are also not unilaterally chosen by the Board of Directors, but rather, in a more democratic fashion:
In Gore’s self-regulating system, all the normal management rules are reversed. In this back-to-front world, leaders aren’t appointed: they emerge when they accumulate enough followers to qualify as such. So when the previous group CEO retired three years ago, there was no shortlist of preferred candidates. Alongside board discussions, a wide range of associates were invited to nominate to the post someone they would be willing to follow. ‘We weren’t given a list of names – we were free to choose anyone in the company,’ Kelly says. ‘To my surprise, it was me.’
Other firms have shown that “non-management management” approach is feasible. At IDEO Corp., a Palo Alto engineering company responsible for such ubiquitous inventions as squeezable toothpaste tubes, or the mouse you are using to point & click things on your computers, there are no bosses, and no management structure. Sun Hydraulics is a $170 million dollar manufacturing firm with no job titles, no organization chart, and even lacks job performance criteria for its employees. There is a Plant Manager, but their job is not to supervise employees: it’s to water the company’s plants.
How are so many companies, in areas as diverse as tomato farming, hydraulics production, and video game production, running successful businesses without traditional management? In a society built on Capitalism, the common wisdom is that productive firms require managers with coercive authority to motivate people to do their jobs. Most ordinary people are shocked when they learn that there are companies who stay profitable with no bosses. How can this be an efficient way to run a company?
As it turns out, there’s a lot of evidence that top-down management is an inefficient form of firm organization. Gary Hamel, writing for the Harvard Business Review, noted several reasons to abandon traditional management hierarchies, one of which is the fact that managers add both personnel costs and unnecessary complexity to a firm:
A small organization may have one manager and 10 employees; one with 100,000 employees and the same 1:10 span of control will have 11,111 managers. That’s because an additional 1,111 managers will be needed to manage the managers. In addition, there will be hundreds of employees in management-related functions, such as finance, human resources, and planning. Their job is to keep the organization from collapsing under the weight of its own complexity. Assuming that each manager earns three times the average salary of a first-level employee, direct management costs would account for 33% of the payroll.
Top-down management also centralizes risk-taking in the hands of fewer decision-makers, which increases the likelihood of a disastrous event:
… As decisions get bigger, the ranks of those able to challenge the decision maker get smaller. Hubris, myopia, and naïveté can lead to bad judgment at any level, but the danger is greatest when the decision maker’s power is, for all purposes, uncontestable. Give someone monarchlike authority, and sooner or later there will be a royal screwup. A related problem is that the most powerful managers are the ones furthest from frontline realities. All too often, decisions made on an Olympian peak prove to be unworkable on the ground.
The personal whims of managers can also kill or disincentivize ideas that are good for the company, especially when ideas have to be filtered through multiple levels of management:
…[A] multitiered management structure means more approval layers and slower responses. In their eagerness to exercise authority, managers often impede, rather than expedite, decision making. Bias is another sort of tax. In a hierarchy the power to kill or modify a new idea is often vested in a single person, whose parochial interests may skew decisions.
Then there’s “the cost of tyranny:”
The problem isn’t the occasional control freak; it’s the hierarchical structure that systematically disempowers lower-level employees. For example, as a consumer you have the freedom to spend $20,000 or more on a new car, but as an employee you probably don’t have the authority to requisition a $500 office chair. Narrow an individual’s scope of authority, and you shrink the incentive to dream, imagine, and contribute.
The success of these business models demonstrate one of the fundamental criticisms of traditional Capitalist modes of production that Marx attempted to illustrate when he was writing Das Kapital. While Marx was wrong (in my opinion) about quite a few things, the success of the companies above demonstrates that Marx was correct to point out that divorcing employees from management decisions related to their own labor is an inherently inefficient means of production. Divorcing employees from the product of their labor separates them from one of the primary motivating forces to perform that labor. This process of alienation itself is what creates the necessity for “bosses”—employees whose primary purpose is to oversee & discipline other employees in their assigned tasks.
Thus, what we really see in Marx’s Theory of Labor Alienation was, inter alia, an argument about firm management: the need for “bosses” in the workplace only arises when employees are completely divorced from the means of production. When workers have a direct stake in the final product of their labor, they no longer need the threat of coercion from superiors to do their job. An employee’s direct interest in the outcome, combined with the power of collective expectations of their peers in the workplace, replaces the threat of, and need for, discipline from above.
With all this being said: I am not attempting to argue here that the success of non-managed firms proves that stateless socialism is viable, or validates Marxism writ large. Indeed, I’m sure that the folks at Reason have a much different view on Morning Star’s success than I do—and moreover, I remain, as I have always been, a fan of mixed economies.
What I think is clear, however, is that Marxist theorists are right to point out that there is nothing inherently “natural” or “necessary” about the way the workplace is organized in most Western societies today. There is plenty of evidence to suggest that top-down hierarchies in the workplace are neither necessary for profitability, nor an extension of natural human activities. Indeed, if Gary Hamel’s observations about the inefficiency of management are true, we appear to have been doing it wrong for quite some time. Though perhaps we could have come to the same conclusion more easily by just reading Dilbert comics:
A recent NYT article discusses the plight of users of an online crowd-sourced room rental service called Airbnb, which allows users to offer their rooms for rent for travelers looking to avoid paying exorbitant hotel fees. The problem? In many cities, such as New York City, people offering their rooms for rent to travelers are breaking local laws:
Back in September, Nigel Warren rented out his bedroom in the apartment where he lives for $100 a night on Airbnb, the fast-growing Web site for short-term home and apartment stays. His roommate was cool with it, and his guests behaved themselves during their stay in the East Village building where he is a renter.
But when he returned from a three-night trip to Colorado, he heard from his landlord. Special enforcement officers from the city showed up while he was gone, and the landlord received five violations for running afoul of rules related to illegal transient hotels. Added together, the potential fines looked as if they could reach over $40,000.
New York City ordinances outlaw this sort of “crowd-sourced” approach to offering lodging for travelers:
local laws may prohibit most or all short-term rentals under many circumstances, though enforcement can be sporadic and you have no way of knowing how tough your local authorities will be. Your landlord may not allow such rentals in your lease or your condominium board may not look kindly on it … [NYC law] says you cannot rent out single-family homes or apartments, or rooms in them, for less than 30 days unless you are living in the home at the same time.
The NYCRR is a labrynthine mess that even lawyers have trouble navigating. Needless to say, though I’ve worked with the NYC regs before, I was unaware of this particular restriction.
What struck me about these ordinances, however, is that it appears to be a textbook definition of rent-seeking by hotel concerns when I read it. Indeed, after reading further, the justification for these laws seem flimsy at best:
New York City officials don’t come looking for you unless your neighbor, doorman or janitor has complained to the authorities about the strangers traipsing around.
“It’s not the bargain that somebody who bought or rented an apartment struck, that their neighbors could change by the day,” said John Feinblatt, the chief adviser to Mayor Michael R. Bloomberg for policy and strategic planning and the criminal justice coordinator. The city is also concerned with fire safety and maintaining at least some availability of rental inventory for people who live there.
These justifications don’t hold up upon interrogation. The “bargain” in question is one governed by the terms of the lease, and landlords are generally free to dictate the terms of that lease as they please. Landlords could, for example, place a restriction on this sort of short-term room rental if they wanted to. The fact that the landlord at issue in this case did not only proves further that this isn’t really a concern that comes up that often. If it was, you can bet the landlord would have a section in their lease devoted to banning this practice, so as to ensure they don’t get held liable for their tenants’ violation of the ordinance in question.
Second, the fire safety concern is related to the number of people in the building at any given time. That would be controlled by placing restrictions on maximum occupancy, which already exist. Notably, the fire hazard concern would also be implicated where people simply allowed friends to sleep over in their apartments, which a ban on individual room rentals would not prevent.
Third, the idea of “maintaining at least some available rental inventory for the people who live there” doesn’t even make sense. The only way these rooms get rented out is by someone who already occupies them. There’s no way that crowding out of rental space could occur here. The room is already “unavailable” to the other residents of the city because somebody already lives there.
So all we are really left with in this case is a law that represents rent-seeking by hotel businesses in New York City. There doesn’t seem to be a good reason to place a per se restriction on this sort of transaction where other laws already account for the justifications given. Which makes this whole thing a shame, because people clearly benefit from having this option available to them. Particularly in New York City, where reasonably safe and clean hotel rooms are notoriously expensive.
This is a good example of an instance where we really should just let the market (and the wonders of the internet) do its thing. For the reasons cited above, I can see no legitimate reason for this type of ordinance other than fattening the pockets of both hotel concerns and city governments, who get to impose fines every time a violation occurs. Regulations that attempt to solve legitimate problems with land use in a heavily populated suburban area are one thing. Regulations that serve merely as revenue-raising and rent-seeking provisions for the city—and its attendant private beneficiaries—are another thing entirely.
"Using data on annual crime rates for large cities in the United States, we find that living wage ordinances are associated with notable reductions in property related crime and little impact on non-property crimes."
— Jose M. Fernandez et al., The Impact of Living Wage Ordinances on Urban Crime (2012). Download the paper at SSRN. h/t CrimProf Blog.
The life of a 19th-century steel worker was grueling. Twelve-hour shifts, seven days a week. Carnegie gave his workers a single holiday-the Fourth of July; for the rest of the year they worked like draft animals. “Hard! I guess it’s hard,” said a laborer at the Homestead mill. “I lost forty pounds the first three months I came into this business. It sweats the life out of a man. I often drink two buckets of water during twelve hours; the sweat drips through my sleeves, and runs down my legs and fills my shoes.”
For many the work went without a break; others managed to find a few minutes here and there. “We stop only the time it takes to oil the engine,” a stop of three to five minutes, said William McQuade, a plate-mill worker in 1893. “While they are oiling they eat, at least some of the boys, some of them; a great many of them in the mill do not carry anything to eat at all, because they haven’t got time to eat.
The demanding conditions sapped the life from workers. “You don’t notice any old men here,” said a Homestead laborer in 1894. “The long hours, the strain, and the sudden changes of temperature use a man up.” Sociologist John A. Fitch called it “old age at forty.”
For his trouble, the average worker in 1890 received about 10 dollars a week, just above the poverty line of 500 dollars a year. It took the wages of nearly 4,000 steelworkers to match the earnings of Andrew Carnegie.
To put this in perspective: a minimum wage worker in 2012 who worked 12 hour days, 7 days a week, would receive 40 hours straight pay, and 44 hours overtime. that’s 768.50/week, at 52 weeks/year, meaning he or she would be earning just under $40,000/year.
When folks complain that government has too much of a role in the economy, I take them at their word that many of the harms they associate with said involvement are real. But in terms of increasing the welfare of the poor, history seems to tell a cautionary tale about removing all economic intervention completely from the picture. Uncle Sam was not telling Andrew Carnegie what he had to pay his workers in 1890, or whether he a had a legal duty to let them unionize. Yet if you compare Carnegie’s steel workers to a person making minimum wage flipping burgers at McDonalds, it’s pretty clear who’s in better shape. And it’s not the guy working 12-hour days for America’s most famous steel Magnate under comparatively laissez-faire industrial policies.
With all this being said, there’s no question that potential problems can crop up with minimum wage laws. As fellow Tumblogger Jakke said back in October:
Minimum wage is NOT about forcing employers to pay more than worker productivity. This would just result in mass layoffs for people in low-productivity jobs, and banning layoffs would drive those employers out of business. For raising wage levels above marginal productivity, this isn’t the right approach. You’ll most likely need to look at government subsidies instead.
Personally, I’m on record for repealing the minimum wage and replacing it with a Basic Income Guarantee (also known as a “Guaranteed Minimum Income” or “Negative Income Tax”). However, the analysis doesn’t end there. Any number of circumstances will change the empirical impact of a minimum wage law. For example, there is evidence that minimum wages have helped drive industrialization in developing countries. So it is difficult to make sweeping declarations about when or under what circumstances a minimum wage becomes detrimental. The devil, as they say, is in the details.
Yet what seems clear is that not a single modern thriving 1st-world economy has failed to introduce some sort of regulated wage floor, or alternatively, an organized system of collective bargaining, like that which exists in many European countries. Indeed, institutional trade unionism has helped countries like Germany increase the wages of unskilled workers without stymieing economic growth. Many countries have gotten by just fine without minimum wage laws by making Unions an indispensable player in labor relations. I see no issue with this approach, but I don’t see it taking hold in America anytime soon.
As in all things, there is a line to be crossed when regulating economic activity. many of the choices we face in economic policy are not simply a matter of “best” or “worst,” but rather, take the form of trade-offs. The challenge of policy is to discover a way in which to make that trade-off inherent in any regulatory proscription worth the effort. I know there are people who think that any attempt to do so is a waste of time. But Carnegie’s beleaguered steel workers prevent me from seeing the wisdom of that proposition.
… Currency reforms of the sort Diocletian undertook still happen sometimes in the modern era, but they almost always go in the other direction. When a country has in the recent past suffered a bout of serious inflation that’s just come to an end, sometimes the government will choose to put an asterix on the new regime by basically striking a zero or two off the old currency. So in 1960, France introduced a New Franc and announced that one New Franc was worth 100 Old Francs, and that 1 Franc Coin of the old vintage could stay in circulation as one New Centime. You could describe the impact of that switch as a giant one-off deflation, but that’s a pretty misleading way to think about it.
Yeah, that is a pretty misleading way to think about it. So why suggest it as “going in the other direction”? Coming up with a “new” currency with new denominations is not necessarily any less inflationary if the effect is still the same. If the U.S. government prints brand new money out of thin air, it doesn’t matter if they print five Dollarinos worth $1,000 each or simply five thousand dollars.
I’m not sure I follow your objection. The French monetary exchange didn’t involve just printing new money per se. Under the traditional definition of inflation (an increase in the money supply), the French deflated their currency. The old centime pieces were never circulated widely, and fell out of use under the new system. So under the exchange that took place, the total amount of practically usable legal tender was reduced.
Now if you click on the link above, you’ll see in the relevant Wikipedia entry that “Inflation continued to erode the [new Franc’s] value, but much more slowly than that of some other countries.” Fair enough. But as Tyler Cowen noted the other day, “I don’t see that two to four percent inflation has unacceptable costs,” and “The decline in the value of the dollar since 1913, or whenever, has not been a major economic cost.” I suspect that the counter-point to this would be something along the lines of Robert Wenzel’s parade of horribles, e.g., since the start of the Federal Reserve, “the money supply has increased 12,230%,” and “prices have increased at the consumer level by 2,241%.” These numbers look scary. But again, there is zero evidence that this has had any impact on the actual ability of Americans to thrive. As Phil Horwitz likes to note, “the real income of poor Americans today is higher than it used to be, even though their share of total income is somewhat lower.” So even Libertarian economists like Horwitz are claiming that Americans are prospering under the Federal Reserve, despite the fact that the dollar has seemingly lost 98% of its value since the Fed was created. It seems to me that this statistic had far more shock value than analytical value. And I understand that the orthodox Libertarian tradition interprets inflation (as does Ron Paul) as nothing short of theft. But even if we assume this arguendo to be true, there’s nothing indicating that inflation wouldn’t occur under a Gold Standard (see links below). Under this theory, whenever new Gold is discovered, or the real price of gold decreases, a theft has occurred. The only way to prevent this is to peg the currency, which would return us to Milton Friedman’s objection.
Oddly enough, however, this is all somewhat besides the point. I linked to Yglesias’s article because Ron Paul accused Krugman of supporting the economic policies of Emperor Diocletian. Krugman rejected that accusation, and I think the article demonstrates that Paul was being overwrought: I don’t believe I’ve ever heard Krugman calling for an overnight 100% doubling of the exchange value of the currency, which is what Diocletian did when he issued his final currency Edict. I think we can both agree that such a policy decision would be catastrophic and ruinous. And Keynes certainly agreed as well:
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
I suspect that we disagree on what the definition of “debauch” is. I would measure it not only as against the expansion of money, but also of relative purchasing power. If Horwitz is right that the real purchasing power of the poorest Americans has increased over time, then that means Americans have prospered under the Fed’s ostensibly ruinous policies. Futhermore, if we were to do what Ron Paul wants us to do and return American currency to the Gold Standard, the economic consequences would be dire: there is currently not enough Gold in the world to facilitate international trade. I understand that advocates of the Gold Standard, such as Gary North, feel that the dearth of Gold is a myth, and market forces will simply adjust. But in North’s case, he offers zero empirical evidence to support that proposition (Ford’s price decreases were in no way motivated by monetary policy, and he knows that). Nor does he reckon with the Private/Public Financial Liability Problem: ”the US alone is running liabilities in excess of $55 trillion. That’s well over 10 times the value of all gold and its just the US. There is an entire rest of the world we’d have to split the gold with..” North also completely misconstrued Ellen Hodgson’s argument, which was that the late 19th — early 20th century Gold Standard was bad for poor workers, because they had zero access to credit. The Gold Standard of yesteryear regulated credit markets at the expense of poor workers. To requote the relevant passage from Hodgson:
The bankers made loans in notes backed by gold and required repayment in notes backed by gold; but the bankers controlled the gold, and its price was subject to manipulation by speculators. Gold’s price had increased over the course of the century, while the prices laborers got for their wares had dropped. People short of gold had to borrow from the bankers, who periodically contracted the money supply by calling in loans and raising interest rates. The result was “tight” money — insufficient money to go around.
None of this means that many of the perennial objections to the Fed’s policies don’t have merit. I personally have noted the disastrous oversights of Alan Greenspan’s Fed in the 90’s. But to return to the original point: Krugman’s assertion that he doesn’t support the policies of Diocletian is correct. He has never supported an overnight doubling of the exchange value of the currency coupled with price controls intended to increase the purchasing power of the United States military; which is what Diocletian did. With all due respect, I think it’s fair to call Paul’s assertion a mischaracterization of Krugman’s position. Is Krugman an Inflation advocate? Under current circumstances, certainly. Keynesian? New Keynesian, actually. Diocletian? I don’t think the evidence bears out that proposition.
Since the subject of inflation under Emperor Diocletian won’t seem to stop dogging Paul Krugman, I thought I might try to bring a little information to the table following Prόdromos-Ioánnis Prodromídis’ 2006 paper “Another View on an Old Inflation: Environment and Policies in the Roman Empire up to Diocletian’s Price Edict” which brings a valuable multidisciplinary perspective to the price level changes experienced by the Roman Empire during the third century.
As Prodromídis explains it, the inflation in question was really three separate trends that people sometimes run together.
In the first part of the century, the Roman Empire doesn’t have a bond market it can raise funds on so instead it finances budget deficits by coining money. This leads to positive inflation, but of a fairly normal non-ruinous sort in the 3-4 percent range. That’s about what America was doing during the Reagan administration and it’s perfectly consistent with prosperity.
Then comes the “Crisis of the Third Century” when for about fifty years starting in 235 AD the Empire is wracked by invasion and civil war. This leads to a large increase in the price level primarily because of negative shocks to the real economy. Political disruption sharply reduces the quantity of market transactions conducted with money, leaving a higher ratio of coins to transactions and higher prices. By the same token, if marauding barbarians were to cut the Northeast Corridor off from the Farm Belt, the price of agricultural goods would skyrocket for reasons that are basically non-monetary in nature.
Then, just when the Emperor Diocletian has brought political stability back and is in fact making progress on solving the underlying problem, he decides to do something weird:
At any rate, the received wisdom is that, overall, the overwhelming/unprecedented increase in the money supply (especially ‘silver’/bronze issues) in the reign of Diocletian, eventually brought about pronounced price increases (Schwartz, 1973; Duncan-Jones, 1982; Harl, 1996). But, this is not the full story; though the second part of it, is perhaps not widely known or recognised for its inflationary impact: In 301, Diocletian apparently issued a Currency Edict, effective September 1st, doubling the face value of the silver and cop- per issues (Erim et al., 1971; Whittaker, 1980; Bagnall, 1985; Lo Cascio, 1996; Rathebone, 1996; Harl, 1996; and the literature mentioned therein). Perhaps he hoped to raise the purchasing capacity of his (military and administrative) staff or make the possession of these coins more attractive and influence the ‘unfreezing’ of the out- standing precious metal (gold) that was held in private stores.
Whatever it is he hoped to accomplish, the result was a final large one-time increase in the price level that left the legacy of Diocletian the Inflator.
Currency reforms of the sort Diocletian undertook still happen sometimes in the modern era, but they almost always go in the other direction. When a country has in the recent past suffered a bout of serious inflation that’s just come to an end, sometimes the government will choose to put an asterix on the new regime by basically striking a zero or two off the old currency. So in 1960, France introduced a New Franc and announced that one New Franc was worth 100 Old Francs, and that 1 Franc Coin of the old vintage could stay in circulation as one New Centime. You could describe the impact of that switch as a giant one-off deflation, but that’s a pretty misleading way to think about it.
There’s lots of good stuff in here. One particular commenter, Phokus, appears to have it out for Peter Schiff:
[I] find it ironic that libertarians here trash Dr. Krugman all the time, yet somehow they hold him to different standards to someone like Peter Schiff, an Austrian “Economist” (emphasis on quotes) that they worship, yet has a much worse track record than Dr. Krugman, who has largely been right about the economic collapse while Austrian doomsayers like Schiff were largely wrong post-collapse (on Glenn Beck’s show, he predicted 20-30% hyperinflation in 2-3 years, back in 2008). I think if you were a little more open minded, you would see Krugman has largely been right (for example: he correctly pointed out that we wouldn’t see that ‘hyperinflation’ because we’re in a liquidity trap).
Examples of Schiff’s predictions that have fallen flat:
I haven’t fact-checked any of these links (my studies keep me overdue). But I’m sure someone else will. Edit: I encourage anyone amenable to Peter Schiff’s worldview to give these a once-over and critique whether this link-spam (thank you L.A. Liberty) is actually a fair treatment of Schiff’s “failed predictions,” or an obscurant aggregation of links that don’t necessarily support the commenter’s point in toto.
PCEPI =/= CPI, but regardless, how do you suggest determining the level of price inflation without econometrics?
There is no such thing as a “general level of price inflation”. Price inflation affects different asset classes at different times. The money supply works in odd ways we can’t exactly predict. Furthermore every asset class has different supply/demand considerations which also affect their price movements differently. So to try to come up with some magical formula to determine a “general level of price inflation” tells you absolutely nothing.
LTMC: Under Austrian orthodoxy, the money supply works in extraordinarily predictable ways: namely, if you increase it, inflation follows. Austrians have always defined inflation solely as an increase in the money supply. Differences in supply and demand across sectors have nothing to do with it. Are you suggesting that Mises et al. were wrong in this regard?
