Over the years, I’ve done a number of posts reacting to Paul Krugman’s columns and blog posts. Now that Krugman is retiring from his NYT column (but not from academia), I thought I’d share a few observations about his career as a pundit. What made Krugman such an influential economic pundit, perhaps the most influential?Some pundits are especially good at showing how a seemingly simple problem might actually be quite complex. I’ve seen blog posts by people like Tyler Cowen and Scott Alexander that discuss an issue about which I can only think of 2 or 3 relevant factors. They somehow come up with 10 or 12 important perspectives, most of which I’d never considered. My mind tends to move along a narrow track.Other pundits are especially good at showing that a seemingly complex problem actually has a fairly simple underlying cause. They are good at getting to the heart of an issue that seems very messy at first glance. Paul Krugman is one of the most talented at that sort of analysis.  (He also has excellent writing skills.) Many of my readers have views closer to mine than Krugman on questions such as size of government, deregulation, and fiscal stimulus.  They are often surprised to find that I have a very high opinion of Krugman as an economist, despite important policy differences in some areas. Although my policy views are closer to those of people like Tyler Cowen, my analytical approach is often closer to Krugman’s.  Indeed, some would argue that I oversimplify things.  Thus I argued that the Great Recession of 2008 was caused by overly tight money that depressed NGDP, and the other things we observed (such as financial distress) were mostly symptoms of that decline in aggregate demand.  In a recent post, I argued that the Great Depression was more complicated than many people assume, but even in that case I believe the underlying cause was pretty simple: the hoarding of gold by central banks and the hoarding of currency by the public.  The increased demand for those two media of account caused NGDP to fall in half between late 1929 and early 1933.  Because of sticky wages, the sharply lower NGDP greatly reduced employment and output. I’ve argued that Krugman’s 1998 Brookings paper entitled “It’s Baaack . . .” was the last example of an innovative paper that fundamentally changed how we think about money/macro.  Of course there are lots of excellent research papers being done all the time, but we now seem to be running out of truly transformative ideas, or at least transformative ideas that are broadly accepted.   In that paper, Krugman developed a new way of thinking about the zero lower bound problem, also known as the “liquidity trap”, which occurs when nominal interest rates fall to zero.  I won’t do an in depth discussion here; interested readers can look at my (fairly long) paper on the Princeton School of Macroeconomics.  Most importantly, Krugman showed that underlying a liquidity trap is a deeper problem of an “expectations trap”, the challenge of shaping expectations of the future path of monetary policy.  In my Princeton School paper, I used the analogy of the Coase Theorem to explain this insight. Coase had showed that underlying the issue of external cost, there’s a deeper problem associated with transactions costs. Coase is another economist that was good at seeing beyond all the surface complexity, and getting to the essence of a problem.   Congratulations to Paul Krugman on a distinguished career as a NYT columnist.   (0 COMMENTS)

Crypto doesn’t have intrinsic value; neither does paper money and neither does gold. A friend who regularly reads both the Financial Times and my posts on EconLog and on my Substack sent me the following email: I was talking with a friend who is a wealth manager at JP Morgan, and he is advising some clients who have the appetite for more risk and volatility to consider investing in “Crypto Plays.” Perhaps something like a crypto ETC to start. Traditional economists seem to be evaluating the crypto economy from their rear-view mirror. A recent FT article repeated common assumptions as accepted reality. That crypto, “has no inherent value” and if there is a “liquidity crisis in crypto there is no lender of last resort.” I bought and sold Bitcoin years ago when it was still below $100. I actually think certain investors should consider investments in the crypto area. We plan on doing so in 2025. What do you think about the future of crypto in the world economy? Here’s my answer: I don’t know the future of crypto. No one does. I especially don’t because I don’t follow it enough. But when I talk to friends who buy and hold crypto, I typically hear one or more of three reasons for doing so. Here are the reasons, along with my comments on each. (1) It’s a hedge against inflation. It is. It’s volatile, but it is a hedge against inflation. (2) It’s a way of keeping assets away from the intrusive prying eyes of government. I don’t know enough about this, but my impression is that that’s not as true as it was, that government has several ways of piercing the veil. Commenters on this site, many of whom probably know more than I, might want to comment. (3) It’s a reasonable asset to hold as part of a diversification strategy. This makes sense. That raises (not begs) the question why I don’t invest in crypto. The basic answer is that I don’t need to. My wife’s and my wealth is substantial and we are well diversified, with a market index stock fund, a much smaller (by value) bond fund, a huge inflation-indexed bond in the form of our Social Security benefits and my federal employee pension, and property (mainly our house, but also a small percent of a large apartment complex.) So I don’t want to buy yet another asset that I would need to pay attention to.   I do want to point out the problem with the criticism that crypto “has no inherent value.” Of course it doesn’t. But nothing does. Value, as we learned from the 1870 marginal revolution in economics, is subjective. It’s in the eyes of the beholder. Indeed, that’s Pillar #7 of my Ten Pillars of Economic Wisdom. Now what the critics might have been getting at is that crypto is not like gold because gold has a non-monetary use. That’s true. Crypto, certainly Bitcoin, which is what I know best, is more like paper dollars. Paper dollars have no non-monetary use. (Well, not quite. In one of my drawers, I have a Canadian $1 bill because when the Canadian government introduced the Loonie, I knew the paper dollar would disappear. I have the bill as a collector’s item, a trivial exception.) But paper dollars have value. (0 COMMENTS)

[Editor’s note: We’re bringing back price theory with our series on Price Theory problems with Professor Bryan Cutsinger. You can view the previous problem and Cutsinger’s solution here and here. Share your proposed solutions in the Comments. Professor Cutsinger will be present in the comments for the next two weeks, and we’ll again post his proposed solution shortly thereafter. May the graphs be ever in your favor, and long live price theory!]   Question: Consider a consumer who uses her money income to purchase only two goods: X and Y. Suppose the prices of these goods double as does this consumer’s money income. Evaluate: There will be no change in the quantities of X and Y she purchases.   Solution: This question is one I like to ask my students when I introduce the notion of a budget constraint. As I’ll explain shortly, it highlights an important point in consumer theory–namely, that what influences consumer behavior is their real (i.e., inflation-adjusted) wages and the real prices of the goods they consume. The simplest way to answer this question is to set up the consumer’s budget constraint. In this case, we have a consumer who uses all her money income to purchase two goods, X and Y. Let’s assume that the prices of X and Y are unaffected by how much of either good she purchases–a reasonable approximation for many consumer goods. We can express the budget constraint mathematically as:     Here, M denotes her money income, which equals the number of hours she works times her hourly wage, Px  and Py denote the prices of the two goods, and X and Y denote the quantities she consumes. [1] Since the question tells us that she uses her money income to purchase only two goods, we know that whatever combination of X and Y our consumer purchases must satisfy this condition. Solving the budget constraint for Y will be more useful for our purpose:       The ratio Px/Py  is the price of X in terms of Y. It represents the amount of Y our consumer must give up in exchange for an additional unit of X. This ratio is the real price of X. By the same logic, the ratio Py/Px is the real price of Y. The ratio M/Py is the purchasing power of her income in units of Y. Think of this ratio as her real income (we could also express her real income in units of X). The question states that her money income doubles along with the prices of X and Y. We can illustrate this change as follows:     Viewed this way, it’s clear that doubling her money income and the dollar prices of the two goods she consumes has no effect on her budget constraint, as the twos will cancel out, yielding the initial budget constraint.  Since real prices and real income are what influence people’s behavior, doubling the dollar prices of X and Y and her money income will not affect the quantities of these goods she purchases (assuming  this doubling did not affect her preferences for goods X and Y). We could consider interesting extensions. For example, what happens if prices double but her money income doesn’t. Or, we could consider a case where the prices of the two goods rise by different proportions. These extensions involve changes in real prices and real income, and, unsurprisingly, would result in our consumer changing her behavior.     [1] Note that we could express her money income in hourly terms, in which case, M would just be her wage, or in monthly or annual terms. While it doesn’t matter much which option we pick, it’s crucial that we express the quantities of X and Y she consumes in the same terms. For example, if M denotes her annual income, then X and Y should denote the quantities of these goods she consumes per year.   Bryan Cutsinger is an assistant professor of economics in the College of Business at Florida Atlantic University and a Phil Smith Fellow at the Phil Smith Center for Free Enterprise. He is also a fellow with the Sound Money Project at the American Institute for Economic Research, and a member of the editorial board for the journal Public Choice. (0 COMMENTS)

A story in three acts, dear reader, that you may have seen in various forms before: Act one: An activist or TV talking head declares that the economy is failing, particular for those who are struggling most, and economic conditions are terrible. Act two: An economist interjects that actually, the economy is doing quite well, and as evidence cites all manner of statistics and perhaps tosses in some graphs for good measure. Act three: The aforementioned activist rolls their eyes and says this is why everyone hates these egghead economists. Sure, you can put your blinders on and just look at what your charts say, but if you ever descended down from your ivory tower and just talked to ordinary people, you’d learn how much everyone is struggling to make ends meet. Keep your charts and graphs, I’m putting my trust in what people on the ground are telling me! To be fair to the hypothetical activist, there are fair criticisms that can be made about trying to infer too much about people’s genuine well-being from aggregate economic statistics. It could be the case that numbers that seem too be very good drastically overstate how much people’s lives have improved. Of course, it can also be the case that those numbers drastically understate the improvement in people’s lives. To me, the latter scenario seems to apply far more often, but others may disagree. On the other hand, there are good reasons to be skeptical of what the “people on the ground” say about how they view the economy. To see one example of why, consider this rather striking graph: When asked how the economy was doing when Obama was President, the opinions of Republicans was very low and Democrats was pretty favorable. Then, when a Republican became President, suddenly Republican opinion skyrocketed ad Democratic opinion steadily declined. When the COVID pandemic derailed the world both parties lowered their assessment sharply, but Republican opinion quickly rebounded while Democratic opinion stayed at rock bottom. That is, until a Democrat was elected to the Presidency, at which point Democratic opinion immediately shot up and Republican opinion plummeted. And according to this article, these positions have already been reversed, again. The takeaway? To say we should try to gauge the strength of the economy by just going out and talking to people presupposes that the answers people give are meant to reflect some kind of objective assessment of economic conditions. But as I’ve argued before, many people talk about politics as if they were political noncognitivists. That is to say, their statements aren’t really meant to make factual assessments about the objective state of the world – their statements are simply a mean to express particular attitudes or loyalties. A given Democrat who rated the economy highly a few months ago but is now suddenly saying the economy is in the dumps isn’t really trying to say the state of the economy has been radically transformed in a handful of weeks. They were just saying “Hooray Biden!” before, and are saying “Boo Trump!” now. (0 COMMENTS)

To get rich slowly, hang on to that beat-up old sedan. In an EconLog post on December 7, Giorgio Castiglia surprised me with the following story: At a 10-year high-school reunion, a middle school math teacher arrives in a beat-up old sedan and an old buddy of his pulls up in a shiny new convertible and all the trappings of wealth. The math teacher recalls that this friend barely squeaked by in his high school classes. “You seem to be doing well”, he says as he greets his friend, “what’s your secret?” The friend replies, “I just follow the 5 per cent rule. Buy something for $5, sell it for $10.” When I read the first sentence, I thought Giorgio was going to go in a completely different direction. There was a famous book published decades ago titled The Millionaire Next Door. I could tell the story in length about how the authors came up with the content and the title. It’s a fascinating story and one I love to tell. But I’ll be brief. The main insight in the book is that most millionaires don’t buy expensive things. When the authors studied millionaires, they found that the vast majority lived modest life styles. They didn’t spent a lot on shoes, clothes, or watches, and many bought used cars rather than new ones and hung on to their cars for a long time rather than trading them in every 3 years or so. Two economists, who are also friends, Dwight R. Lee and Richard B. McKenzie, wrote a great book in 1999 on how to get rich slowly. They aptly titled it Getting Rich in America: Eight Simple Rules for Building a Fortune and a Satisfying Life. I highly recommend it to people of all ages but especially to people under age 40. The latter have longer for the law of compound interest to yield its wonderful results. In my Wall Street Journal review of the Lee/McKenzie book, I wrote, “‘Getting Rich in America’ is the how-to handbook for becoming the millionaire next door.” So when I read Giorgio’s story, I thought the middle school math teacher driving the beat-up sedan would be the one getting rich. Think about it. If you’re a teacher in a government school in America, you’re making pretty decent money, you have over 2 months off in the summer and you could get a nice vacation while still spending one of the months doing lucrative tutoring, you have incredible job security, and you have very generous health insurance. So it shouldn’t be that hard to save 10% of your gross income and invest it in a market index fund such as the Vanguard Total Market Index. Indeed, you probably don’t need to save 10% to get rich because if you last in your job for 35 years or more, you can typically get the now-rare defined benefit pension. If you save even 8% of your gross income and invest it in a total market index and do that for 30 years, then, when you’re 60, your net worth, including the present value of your defined-benefit pension (assuming that your life expectancy conditional on reaching age 60 is 20 years or more), you will have a net worth of well over $1 million.   (0 COMMENTS)

Today marks exactly one year since Javier Milei rose to the presidency in Argentina. Expectations were high among libertarians, as this was the first time a self-described ‘anarcho-capitalist’ was elected to the highest office anywhere in the world. During his first year, Argentina has certainly experienced change. The country is no anarcho-capitalist paradise, but is certainly more deregulated and has a more austere government than in the past. Indeed, the vehemence with which Argentina has balanced its budget was unexpected. Milei inherited a deficit of 5% of GDP but achieved a financial surplus in the first quarter of his administration, and has maintained it ever since. Spending cuts have mostly targeted pensioners and public employees, which has caused some to question their sustainability. But in a country whose budget was unbalanced in 113 out of the last 123 years, balancing the budget so quickly is by far Milei’s biggest achievement. The sudden halt of money-printing and the expectation that Argentina will stay on its current fiscal course have caused the peso to appreciate (after many years of depreciation) and inflation to plunge. The monthly inflation rate for December of last year was 25%, yet the latest available figure was 2.7% in October. While the government aims for much lower inflation in the future, this is the lowest monthly value since November 2021. Throughout 2023, Argentina had the highest inflation rate in the world, at 211%, the highest since the country’s 1989-1990 hyperinflation. All of this seems like history now. The country has stabilized. At the same time, Milei has set up a new Ministry for Deregulation tasked with deregulating Argentina’s economy as much as possible. Through the use of executive orders and extraordinary faculties delegated by Congress, the government has already implemented several measures that introduce competition in formerly closed markets. Examples range from rent decontrol, which has caused the supply of available apartments to nearly triple and real prices to drop by as much as 40%, to the authorization of new satellite internet companies, the arrival of which is expected to revolutionize agriculture through an increased use of technology. Argentina currently ranks 148th in regulation according to the Fraser Institute’s Economic Freedom of the World Index. So what about everything that is not economic policy? Argentina’s first libertarian president has not made significant changes in terms of personal liberties, though the country already ranks relatively high in that area according to the Cato Institute’s Human Freedom Index. If anything, state-run media companies have stopped airing left-wing propaganda and the Milei administration has closed its anti-discrimination agency, citing its misuse for political purposes. Of course, a myriad of challenges remain for Milei. Currency controls are still active and it is unlikely that Argentina will receive large investments as long as they are in place, although the government has started offering benefits for projects over $200 million. Argentina is also still a long way from liberalizing trade, even though Milei has lowered some tariffs. So far, no state-owned companies have been privatized, and taxes remain as high as they were when Milei took office. But the government is aware of all these challenges and is likely to attempt reform at some point, perhaps after the 2025 midterms. Without these reforms, it will be hard to reduce poverty, which is currently at 53%, consistently. Despite implementing what is perhaps the largest fiscal adjustment ever made in Argentina, Milei is not only still popular, but is seemingly growing more popular as time goes by. According to the latest poll by Universidad de San Andrés, 54% of Argentines view him favorably. He is also trusted by markets, which is why Argentina’s sovereign risk premium went down almost by two thirds during 2024 to its lowest in five years.  Ironically, many expected Milei to last in power for only a few months, even weeks. Sergio Massa, his main opponent in the 2023 presidential race, was so confident that Milei would fail that he wrote a book to vindicate himself which he planned to present in March. However, its release has been postponed month after month as Milei popularity endures. If things continue as they are now, that book may never see the light of day.   Marcos Falcone is the Project Manager of Fundación Libertad and a regular contributor to Forbes Argentina. His writing has also appeared in The Washington Post, National Review, and Reason, among others. He is based in Buenos Aires, Argentina. (0 COMMENTS)

The following is not the most important aspect of the murder of Brian Thompson, the CEO of UnitedHealthcare. But it does illustrate how using the correct words and being conscious of figures of speech help avoid confusion. Technically, a firearm cartridge is made of (1) a casing, which holds gunpowder and a primer to ignite the latter, and (2) a bullet, which is a projectile fitted at the end of the casing. A bullet is thus part of a cartridge but it is not the same thing. Now, a figure of speech called synecdoche consists in using a part to represent a whole (or sometimes the whole to represent a part) like “boots on the ground” to speak of soldiers on the ground. People, especially those not familiar with firearms, may be repeating a synecdoche by saying “bullet” to represent the whole “cartridge,” like Mr. Jourdain was doing prose without realizing it; or they are just confused. Even dictionaries are often not clear. When using this figure of speech, one must understand, and be sure his reader understands, that the boots are not marching by themselves and that the cartridge does not leave the gun through the barrel at (or close to) the speed of sound as the bullet does. A Wall Street Journal story (“Police Zero In on New York Hostel in Hunt for UnitedHealth Shooter,” December 5, 2024), signed by three journalists, mentioned that the killer of Mr. Thompson had used a Sharpie to leave coded messages … on bullets that came out of his gun when it jammed, the [law-enforcement] official said. This sentence is a case of taking a synedoche literally. How could the killer write on the bullets when there is not much space on a 9mm (diameter) bullet? If the killer had managed this impossible task, how could have his messages been deciphered after the deformed or fragmented bullets had been fired (“came out of his gun”) and recovered, probably embedded in some object? Or were bullets separated from the casings when the shooter cleared a jam?  That’s also impossible. Or is it that the killer more realistically wrote on the casing part of his cartridges? Just yesterday, the newspaper repeated its confusing statement, but dropped the jamming part (“Person of Interest in Killing of UnitedHealthcare Executive in Custody in Pennsylvania,” Wall Street Journal, December 9, 2024, updated 12:31 pm ET). The journalists were speaking not of bullets but of casings, which are ejected through the ejection port of the pistol slide after each firing (and possibly of one casing still part of a whole cartridge that would have been ejected through the magazine well when a jam was cleared). The police would have found all these on the ground where the shooter stood when firing. Of course, the confusion could have originated from the law enforcement source, but these people have usually seen a pistol in action. It is not impossible that the law enforcement official felt he needed to dumb it down for the journalist, who should then have objected and asked clarifying questions. The original story in Financial Times was somewhat less obscure (“New York Police Investigate Bullet Casing Inscriptions in Killing of Insurance Executive,” December 5, 2024): Detectives in New York are investigating inscriptions of “deny”, “defend” and “depose” on bullet casings left at the scene of the murder … according to a person familiar with the case. The FT at least distinguished the casings from the “bullets,” even if it used the confusing synecdoche as if the casing were part of the bullet instead of being part of the cartridge. If the casing is literally part of the bullet, then the bullet is part of the bullet. One may say that all this does not matter much. Yet, it would not have been more complicated to use the correct words and avoid any confusion. Incidentally, a Financial Times story of yesterday mentioned that the suspect’s pistol was a home-made (“ghost”) gun, which would explain why it jammed (“US Police Detain ‘Person of Interest’ in UnitedHealth Executive’s Murder,” December 9, 2024). Top commercial semi-automatic firearms do jam, but not often. Sometimes, a synecdoche is more treacherous and consequential. Saying “the United States” (or “France” or whatever country’s name) “did this or thinks that” to refer to the government of the United States confuses the bullet (the government) with the whole cartridge (the country), as if the government were identical to the country. In political-speak and social analysis, synecdoche is dangerous, perhaps more than metaphor or hyperbole. These figures of speech can hide confusion or propaganda. ****************************** A cartridge is made of a casing (and its internal components) and a bullet (0 COMMENTS)

Tyler Cowen recently challenged us to try to stump an AI named “o1”: 1. o1 is a very good economist.  Try to stump it if you can. I could not find o1, so I used ChatGPT 4o mini.  I hope someone will try the following question with an o1 and report the results in the comment section: The thing I keep noticing with AIs is that they are like a super smart student that is capable of memorizing vast quantities of information, but lack an ability to actually see the essence of a problem.  In the example above I gave one hint after another, practically begging the AI to avoid reasoning from a price change.  It had so little awareness of what it was doing that it ended up telling me that Qd fell while Qs rose and yet the market remained at equilibrium.  Perhaps I used the wrong AI, or perhaps this question is unusually tricky.  (To a college student, “tricky” means a question where you actually have to understand something, and cannot just regurgitate what you’ve read in your notes.)  So let’s take a question that Tyler asked the o1 economist: Please write an essay on how current macroeconomists find inflation dynamics so very difficult to predict, and why that has made them reject various forms of monetarism, even as approximations of what is going on behind price level behavior. The answer is very long, so I’ll just focus on a few key portions of the response: Several factors have contributed to the increasing complexity and unpredictability of inflation. First, the financial innovations and regulatory changes of the late twentieth and early twenty-first centuries dramatically altered the relationship between money and economic activity. Monetary aggregates—like M1 or M2—that once served as dependable indicators of policy stance and future inflation now behave erratically due to shifts in the velocity of money, the proliferation of shadow banking, and the globalization of financial flows. Simply put, where money resides and how quickly it moves through the economy has become too fluid and too complex for older monetarist simple rules to capture. Second, the nature of central banking and fiscal policymaking has changed. Central banks now intervene in a host of unconventional ways, from massive purchases of financial assets to the forward guidance of policy expectations. These tools are not well-explained by the classic monetarist perspective, which centered on controlling a particular measure of the money supply. The recent experience following the Global Financial Crisis vividly illustrates this: The Federal Reserve and other central banks undertook unprecedented quantitative easing programs, dramatically expanding their balance sheets. According to traditional monetarist logic, this rapid increase in the monetary base should have led to substantial inflation. Yet inflation remained persistently below target levels in many advanced economies for years, confounding those who relied on old monetary aggregates as a guide. Third, the determination of prices today involves a bewildering interplay of global supply chains, technological advances, labor market transformations, and shifts in consumer behavior. Globalization means that prices for goods and services are influenced not just by domestic monetary conditions, but also by distant supply shocks, currency fluctuations, and international competition. Technological change increases productivity and can compress prices in certain sectors, while leaving other parts of the economy less affected. Labor markets have also evolved, with changes in union power, demographic shifts, and altered labor-force participation patterns influencing wage formation and cost pressures. These micro-level frictions and structural changes make the older macro-level equations linking money supply growth to inflation too coarse and imprecise. Sorry, but this is mostly a mix of empty clichés and irrelevant comments.  Again, it’s the sort of thing that I’d expect a student to put down if they didn’t know the answer.  I’ll explain why in a moment, but first let me clarify an important point.  I am pretty sure that o1 is more intelligent than I am, at least in the way that most people define “intelligence”.  In other words, o1 knows way more than I do.  It is far more intelligent than I am in roughly the sense that the New York Times is far more intelligent than I am.  And that’s really, really impressive. But o1 is not a good economist.  Sorry, it just isn’t.   Let’s first dispose of the final paragraph, which is utter nonsense.  Technology has been advancing for more than 100 years, and the pace of productivity growth is not accelerating.  So that’s not a factor making inflation harder to forecast.  Union strength goes up and down, and that fact does not make inflation harder to forecast.  Shifts in consumer behavior?  Now the student is really getting desperate.  It’s an “I need to fill up the page with something” sort of comment. Global supply chains?  Again, it doesn’t make inflation harder to predict.  Not at all.  Global commodity prices had a bigger impact on US inflation 100 years ago than today. None of those four factors have made it any more difficult to predict inflation.  Indeed I’m not even sure it is becoming more difficult to predict inflation.  It seems to me that inflation was far harder to predict when I was young than it is today.  The first sentence in the middle paragraph is a bit less bad.  Central banking really has changed in one respect.  And the relationship between the base and the aggregates really has gotten looser.  Unfortunately, the AI seems to have no idea why the relationship has gotten looser.  It mentions a bunch of irrelevant stuff like QE, and misses the key point that the payment of interest on reserves and the zero lower bound problem have made the money multiplier far more unstable.  The AI also says that fiscal policymaking has changed.  That was probably just a wild guess.  I cannot think of any changes in fiscal policy that make inflation harder to predict.  Given that the AI is silent on the issue, I suspect that it also has no idea what has changed about fiscal policy, or why those changes would make inflation harder to predict.  In the first paragraph the AI says: Monetary aggregates—like M1 or M2—that once served as dependable indicators of policy stance and future inflation now behave erratically due to shifts in the velocity of money, the proliferation of shadow banking, and the globalization of financial flows. False.  The aggregates were never dependable indicators of inflation.  Money velocity has always been unstable.  But don’t the textbooks say that money velocity used to be stable?  Yes, many do.  That’s probably where the AI got its misinformation.  It might be more unstable now, but it’s never been stable enough for the aggregates to be good predictors. Also notice the odd list, which includes velocity, shadow banking and financial flows.  That’s kind of silly.  An AI that understood what it was talking about would have put a period after velocity, and then had a separate sentence explaining some reasons why velocity changed.  Right now, it’s a confusing jumble of concepts. If you are a math-oriented person who is confused by economics, this equation might help you see my point: V = PY/M The AI is basically saying that the PY/M ratio is changing due to things like changing V, shadow banking and financial flows.  The ratio is V!!  The other variables help explain why V might change. Even though the NYT is much smarter than I am, when I happen upon a NYT article in an area where I have some expertise, the paper suddenly seems much less smart.  I won’t say “dumb”, because even at its worst the NYT employs talented reporters.  And I cannot expect them to have devoted their entire life to studying monetary economics. In my view, the o1 response provided by Tyler is modestly below the level of the NYT.  At a minimum, the Times would have mentioned interest on bank reserves or the zero lower bound.  Nonetheless, AIs are truly impressive when it comes to the quantity of information they have memorized.  Even within monetary economics, an AI will often have more information at its fingertips than I do.  An AI could write a better essay on all the new Fed policy tools than I could write.  Where it falls down is in a certain type of understanding.  I’m not sure I can even put this concept into words.  Maybe understanding doesn’t really exist, and we just fool ourselves into thinking we have a deep understanding of something.  Perhaps a super-intelligence would mock my writing in the same way that I mock the AIs that engage in reasoning from a price change.  All I know is that AIs have a long way to go before they impress me in the domain of understanding monetary economics.  But outside my field, I’m already highly impressed. Here’s how AI Overview defines Gell-Mann Amnesia: Gell-Mann Amnesia (GMA) is a defense mechanism that occurs when someone reads a news article about a subject they know well and finds it to be full of errors, but then proceeds to read the rest of the newspaper as if it is more accurate. The term was coined by Michael Crichton after discussing it with Murray Gell-Mann (0 COMMENTS)

Tariffs are in the air. Will they help or hurt Americans? Listen as economist Scott Sumner makes the case against tariffs and various other forms of government intervention that go by the name of industrial policy. Along the way he looks at some of the history of worrying about the economic and military dangers posed […] The post Why Industrial Policy Is (Almost) Always a Bad Idea (with Scott Sumner) appeared first on Econlib.

A recent article in The Economist discussed what they assume is the president-elect’s view of interest rates: A more hawkish Fed may, in turn, invite the wrath of Mr Trump, who has insisted that, as president, he should have a say over interest rates. He will surely want to see steeper rate cuts now that he is in charge. This reminds me of a story entitled The Monkey’s Paw, where the protagonist is granted three wishes, which don’t turn out as well as intended.   Let’s consider some possible outcomes, and then evaluate the sort of interest rate path that Donald Trump should prefer. 1. In most occasions, steep interest rate cuts are associated with recessions.  Recent examples occurred in 2020, 2008, and 2001.  Recessions are unpopular. 2. One might argue that The Economist meant that Trump prefers a steep decline in interest rates combined with a strong economy.  And the economy currently does appear quite strong, with the Atlanta Fed forecasting 3.3% growth in Q4.  But there is a substantial risk that a steep cut under that scenario could trigger high inflation.  At the moment, the fed funds futures market is predicting some rate cuts over the next few months, but at a less steep rate of decline than we’ve seen in recent months.  At the same time, market inflation expectations are slightly above target.  If the Fed were to adopt even “steeper rate cuts” than seen in the recent past, despite the robust NGDP growth, there would be a very real risk of inflation re-accelerating.  Inflation is unpopular. 3. Perhaps the Fed rate target is still far above equilibrium.   (But then why is growth so strong?)  Perhaps it will be possible to cut rates and keep the expansion going, as we saw in 2019 and 1998.  But we’ve already seen a 75-basis point cut.  It would be almost unprecedented to see an even steeper cut from this point forward, without either re-igniting inflation or being a response to recession. To be clear, I am not saying that we are likely to get a recession or high inflation.  But that’s because I do not expect to see even steeper rate cuts.  I expect the pace of rate cuts will actually slow in 2025.  And I believe this would be the best possible result.  Indeed I’ll go even further.  If these three scenarios were fully explained to Trump, I doubt he’d be rooting for “steeper rate cuts”, especially if he had recently read The Monkey’s Paw. Or Goldilocks and the Three Bears. This is an illustration from The Monkey’s Paw:   (0 COMMENTS)