My Inflation Bet with Bob Murphy
By David Henderson
I was going to wait until I officially won my inflation bet with Bob Murphy before announcing it here, but because Brad DeLong and Paul Krugman, each in his own special style, have already announced my win, I’ll address it today.
First, here is the bet we made in December 2009:
At any point between now and January 2013, if there is a year/year increase in seasonally adjusted CPI that is at least 10%, then I pay Bob at that time $500.
If we get to January 2013, and there has not been any 12-month stretch in which the above happened, then Bob pays me $500 at that time.
I still have a month to wait before we know who won the bet but all observers, including Bob Murphy himself, think I will win.
Now to the bet itself. Krugman gives it as an example of what he calls an “Austerian” (Murphy) vs., presumably, a “non-Austerian.” He never defines his terms but I think he’s using the term “Austerian” to combine “Austrian,” as in Austrian economics, with “believer in austerity.”
That’s just strange. First, I do believe in “austerity” if it’s defined to mean “big cuts in government spending.” Here are two pieces I wrote on it: (1) how well it worked in Canada in the 1990s and early 2000s and (2) how well it worked after World War II in the United States. Krugman seems to refuse to distinguish between big cuts in government spending and big increases in taxes. Both Bob Murphy and I see a huge difference, not just in policy, but also in effects. Second, although I am not, and never have been, an Austrian economist, I am much informed by their thinking, especially the thinking of von Mises, Hayek, and Rothbard. I’m in-between. Fellow economist Jeff Hummel said recently, “When I talk to Austrians, I feel like a neo-classical economist; when I talk to neo-classicals, I feel like an Austrian.” That’s how I think about myself.
Steve Horwitz, himself a noted Austrian economist, points out:
The most important point here Bob [Murphy] is your last one: you made a bet with another economist whose ideas overlap significantly with those of Austrians (and who is essentially as “free market” as you are). The debate here was, in my view, about the importance of the demand for money (especially bank reserves).
The kind of thinking Steve displays in his comment was one of the two factors behind my eagerness to bet. The other factor is one I noted a couple of days ago: I’ve learned over the years not to be excessively pessimistic.
I have the following 3 goals in betting about economics, not necessarily in order of importance: (1) to test my own understanding, (2) to cause the person on the other side to reconsider his beliefs, and (3) to have fun and make money. In this case, I think I’ve achieved all 3. The one most in doubt is typically (2). But look at what Bob Murphy wrote on his blog today, in response to Steve Horwitz’s comment above:
No, Steve, clearly the lesson here is: Don’t make bets with a guy who was studying the Fed before I was born.
That gets at the long-run perspective against excessive pessimism that I noted as one of my motives in making the bet.