Archive for July, 2012

Inflation predictions and stimulus

Posted on July 30, 2012. Filed under: Uncategorized | Tags: , |

Noah Smith writes about Inflation Predictions.

Let’s remember that the “fear inflation” folk were opposing bigger US gov’t spending, like wasted money on Solyndra.

When Bush did fiscal stimulus, it was thru tax cuts, which resulted in the rich paying a higher percentage of tax collected, yet was falsely demonized by Krugman/DeLong Dems as tax cuts for the rich.

Krugman wants the Dems to give millions of gov’t stimulus to Dem semi-failed businessmen so they can probably waste it while making big donations to Dem politicians promising to spend more gov’t money and increase taxes on those who are hard working, responsible, smart – and successful. If the Rate of Return on gov’t investments (thru stimulus) is negative, how does spending/ wasting more create sustainable growth. It doesn’t.

Great note on predictions, and timing.
In Dec 1996, Greenspan called it “irrational exuberance”, but the bubble didn’t pop until after YE2 in 2000/2001. And not in a day, but over a couple weeks/ months.

In May, 2003, The Economist called it “house of cards”
http://www.economist.com/node/1794873
but the bubble started popping only after 2006.

The reason Cochrane, and S. Palin & Taylor (among others) are wrong, is a reason Krugman doesn’t focus on.
“How much money” a person has is all of income, expected income, and Net Worth (perhaps also expected Net Worth). Few monetarists include Net Worth in their models, which for 40 years has been ok because it hasn’t changed rapidly enough with enough magnitude to dominate interest rate changes.

Starting about 2007, and especially after the 2008 crash, homeowners have been realizing that they’ve lost home equity net worth, so have been adjusting their spending patterns. We don’t have to worry about QE II, or QE III, or Interest on Reserves (which should be set at 0), or even helicopter drops of money, until the housing market bottoms and house prices regain stability.

The stimulus that would be most effective is tax cuts, and more tax cuts for middle income workers (like payroll tax cuts), and yes, a higher deficit and more 1% long term debt, until the productive workers re-establish an economy that is growing.

Since Krugman/ DeLong want ever-growing gov’t, even if the theoretical idea of more stimulus seems justified by the low threat of inflation, their desire for more gov’t waste, er, spending, should be resisted. Their desire for higher taxes (on the rich! on anybody who has enough to offer workers a new job!) is the kind of class war we don’t need.

And the Dem support (with Bush and McCain) for gov’t bailouts to the rich and irresponsible bankers who ARE to blame for finance bubble, make most Dems clear hypocrites.

I predict low US inflation (<3%) for the next 2 years, but hope for more. The Taylor inflation target is easier to track than the Sumner NGDP, tho I’d slightly prefer the NGDP target of 5%.

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