The Emperor repeatedly forgets his clothes
By Scott Sumner
Today I’m going to criticize economists for not knowing what they mean by the term ‘inflation’. But before doing so, I’d like to point to an analogy; economists have no idea what the terms ‘easy money’ and ‘tight money’ mean, even though they use these terms all the time, and they play an important role in discussing key policy issues.
Some economists think easy money is low nominal interest rates, some think it is low real interest rates, some think it is an interest rate that is below the Wicksellian equilibrium rate. Others point to rapid growth in the monetary base. Still others look at the broader monetary aggregates. Or total credit. Mundellians look at the value of the dollar. Supply-siders look at gold prices.
And we haven’t even yet gotten to respectable economists! Milton Friedman say low rates are a sign that money has been tight. Mishkin said you want to look at “other asset markets”. Bernanke has the best definition; easy money is rapid growth in NGDP or the price level.
Even worse, like the emperor with no clothes, economists don’t even understand that the term ‘easy money’ has no well-accepted definition, or that most of them are using silly definitions. They talk about easy and tight money, with the serene confidence that they are not talking gibberish.
The same is true of ‘inflation’. What does that term actually mean, in a world where goods are always changing? The quality of existing goods changes, and new goods are constantly being invented. The prices of many old goods, such as dictionaries, have essentially fallen to zero.
Here’s Brad DeLong, discussing a Brookings paper by David M. Byrne, John G. Fernald and Marshall B. Reinsdorf
I also confess to being annoyed by:
Second, many of the tremendous consumer benefits from smartphones, Google searches, and Facebook are, conceptually, non-market: Consumers are more productive in using their nonmarket time to produce services they value. These benefits do not mean that market-sector production functions are shifting out more rapidly than measured, even if consumer welfare is rising…
Isn’t “measuring consumer welfare” the point? We (a) arrange atoms (b) in forms we find pleasing and convenient, and then use them in combination with (c) information and (d) communication to accomplish our purposes. That our measures of economic growth are overwhelmingly “market” measures that capture the value of (a), much of the value of (b), and little of the value of (c) and (d) is an indictment of those measures, and not an excuse for laziness by shrugging them off as “non-market” and claiming that measuring the shifting-out of market-sector production functions is our proper business.
I’m with DeLong. I had always assumed that inflation was the increase in income (actually consumption) required to maintain a constant level of utility. When I ask millennials if they’d rather live today on $100,000/year or back in 1965 on $100,000/year, many say they’d prefer to live today, because back then there was no internet, smart phones, HDTV, and virtually no good Thai/Vietnamese/Sushi restaurants in America. I can recall when affluent people went out to eat at “Super Clubs” and dined on steak and potatoes. It almost makes me sick just to think about it. De gustibus . . .
In the past I’ve said that inflation is a meaningless concept. That’s a bit too strong; obviously fuzzy concepts can be useful. It’s not meaningless to say Zimbabwe had a lot of inflation in 2008. Rather I’d say inflation is an almost useless concept. NGDP growth (perhaps per capita) is generally a better metric of nominal shocks. So we don’t need inflation.
So DeLong’s debate with the Brookings economists can never be resolved, because economists don’t even know what inflation is.
Even worse, as with easy and tight money, economists don’t even know that they don’t know what inflation is. They talk as if it’s some sort of objective fact, like the height of Mt. Everest, which we ascertain with ever more accurate measurements. It’s more like the size of Trump’s ego—how can you agree how to measure something, when you can’t even agree on what it is?