I think we all listen to our friends, relatives, and colleagues complain about their predicament, and then silently think, “Well what do they expect?  Their predicament perfectly reflects their character.”  If they are a lazy spendthrift, then they will go through life thinking that adverse circumstances are always denying them the money they need.  If they are envious, then their colleagues will be unfairly promoted ahead of them.  Etc, etc.

But when we think about ourselves, well then things are very different.  If only we could get out from under burden X, our life would be so much easier.  At least that’s the way I look at things, and I am pretty sure that others share this same sort of bias.  Indeed I recall reading about some psychological study that showed this bias is fairly common.  While reading the Portuguese writer Pessoa, I recently came across this quotation:

Whenever I’ve tried to free my life from a set of the circumstances that continuously oppress it, I’ve been instantly surrounded by other circumstances of the same order, as if the inscrutable web of creation were irrevocably at odds with me.

 %$@#& that inscrutable web of creation. 

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A recent book by Louise Levathes showed that in the early 15th century China was ahead of Europe in the art of exploration.  It’s fleet sailed throughout Southeast Asia and all the way across the Indian Ocean to Africa.  I don’t have the book with me in China, but I recall that for some reason the Emperor of China simply decided there was nothing out there of interest, and the government basically banned any further exploration.  I think the ships might have even been destroyed.  BTW, the book shows the Santa Maria next to the Chinese flagship, and Columbus’ boat looks like a little dingy by comparison.

I’m about to give you my pet theory for European supremacy after 1500.  Keep in mind that whenever I think I have a clever idea, it either later turns out to be wrong, or else unbeknownst to me someone else got there first.

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When I decided to read Tyler Cowen’s new book on the airplane to China, I pretty much knew I was going to arrive in Beijing convinced that I was autistic.  Here are some reasons:

1.  Any time I read some psychology I think they’re talking about me.

2.  I recently heard an autistic guy on NPR who was a wizard with numbers.  His description of the autistic personality reminded me a bit of myself.

3.  I had heard Tyler talk about his book, and knew that he had a favorable view of what he called “the autistic cognitive profile.” 

4.  Autistic people like to make lists of things.

I’m not going to try to explain Tyler’s view of autism, as I would get it all mangled up.  But for those not familiar with his perspective I should at least mention that he is not talking about autism as a mental illness, but rather a certain way of thinking, which may be partly genetic.

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3:00 AM— jet lag.  3:30am, now I’m trying to compose three posts in my head.  4:00am, I get up and start in on The Book of Disquiet, full of short essays, observations, maxims.  I can’t help thinking Pessoa would have been a great blogger, if he hadn’t died in 1935.   I’ve got to stop thinking about blogging.

Several commenters asked for my impressions of China.  I need to be careful because there is both an English language and a Chinese language version of my blog.  I’ve found that Westerners like to hear about what is different about a country, especially the “old ways.”  Like the swarms of bicycles and even the occasional donkey cart you used to see on Beijing streets.  Chinese prefer to emphasize the modern aspects of their country, associating the old ways with poverty and backwardness.  So I’ll try to appeal to both audiences by discussing housing, which was pretty primitive when I first visited in 1994, but is improving very rapidly.  I’ll focus on windows.

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This may be my last post for a while, as I leave for China tomorrow and I’m not sure how effective my internet access will be.  Even if it is effective, I will obviously slow down for a while.  I want to enjoy my trip to what is one of my favorite countries.  When I return I will resume blogging, even if the recession is “over” by then, whatever “over” means.  (BTW, in my view the end of the recession should be dated at the peak of the unemployment rate.)  So today I’ll start with a few random observations about China, and then a brief discussion of some research that I recently conducted.

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I’ve always found it interesting that the quantity equation (M*V=P*Y) is linked to the quantity theory of money.  Obviously there is no logical relationship between the two, as one is almost always defined as an identity, while the other is a theory.  But there certainly is a perception that the two are somehow linked.

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I wasn’t invited to participate, but since I have a blog I’ll put in my 2 cents worth anyway.  In my view both sides of the debate are wrong.  I disagree with pundits like DeLong, Krugman and Skidelsky, who have used this crisis to argue that mainstream macroeconomics is fundamentally flawed.  Of course there are a few things I’d like to tweak, NGDP targeting rather than inflation targeting, for instance, but the basic building blocks of modern macro are sound.  These include the need for explicit nominal targets for monetary policy, an assumption of efficient markets, and skepticism about using fiscal stimulus as a countercyclical tool.  But what this crisis did clearly demonstrate is that most mainstream economists, indeed nearly all of them, do not know how to apply these tools to a real world crisis.

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For months I have been arguing that if only the Fed had pumped enough money into the economy to keep expected NGDP growth at around 5%, then we would be back where we were in mid-2008.  As you may recall, in mid-2008 we had already had nearly 2 years of orderly contraction of the housing industry.  Because growth in other sectors took up the slack, unemployment remained in the mid-5% range, only slightly above the normal rate.  So we weren’t doing that bad.  Then the Fed adopted a highly contractionary monetary policy (see Hetzel’s discussion of what they did wrong) and NGDP starting falling fast.  And now we have 9.4% unemployment, and a mind-bogglingly large fiscal deficit as the government futilely tries to stop the recession with deficit spending.

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A few months ago I got into a series of arguments with some old-style Keynesians who kept insisting that monetary policy is ineffective once nominal rates hit zero.  “Period.  End of story.”  I kept trying to explain that unconventional monetary policy could still be highly effective; the problem was that we needed to be much more aggressive.  I pointed to FDR’s currency devaluation in1933 as an example of how an aggressive monetary policy could boost NGDP rapidly, even with interest rates near zero and much of the banking system shut down for months.

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My post on supply and demand produced a lot of good comments, but none better than this one from Michael:

I can relate to this. I’m getting my Ph.D. in economics I feel that with every passing year I am even less confident about answering seemingly simple questions.

I also find that this specific topic makes it incredibly frustrating as a TA to grade work for intro undergrad courses. Some professors expect it to be “obvious” that if the price is lower, quantity has gone up due to the law of demand, and this is the answer they judge to be correct, whereas others are trying to weed out the students who understand that you cannot make a statement about quantity solely based on an observed change in the market price. Quantity could’ve gone up, down, or stayed the same.

I find myself explaining to students, “well, the answer for THIS professor is …” Students do not find professor-specific explanations to be very satisfactory.

Not very satisfactory?  What’s wrong with the young these days, do they expect everything to be handed to them on a silver platter?  I mulled over everything I learned in econ, and then accepted or rejected it on the basis of whether it made sense to me.  But I guess if you’ve been reading my blog you already noticed that.

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1.   Likely fall in nominal GDP between 2008 and 2009:  1%

Last time NGDP fell that rapidly:  1937-38

2.   Fall in monetary base during first half of 2009:  3.1%

Last time monetary base fell that fast in first half (excluding post-Y2K fall):  1938

3.   Current yield on 3 month T-bills:  0.18%

Yield on 3 month T-bills on January 1st, 1938:  0.10%

4.  Date Fed first instituted a policy of paying banks to hoard reserves:  October 2008.

Previous time Fed instituted a policy which increased the demand for reserves:  1937

5.   Increase in the minimum wage since 2007:  41%   ($5.15 to $7.25)

Largest percentage increase in the minimum wage:  Infinity, November 1938  ($0 to $0.25)

6.   Percentage of US economists who want to see the minimum wage completely eliminated:  47%

Voting pattern of US economists:  3 to 1 Democratic

7.  Change in the PPI between June 2008 and June 2009:   -13.2%

Change in the PPI between June 1937 and June 1938:  -10.0%

8.  Change in the DJIA between August 31, 2008 and November 20, 2008:  -34.6%

Change in the DJIA between August 31, 1937 and November 20, 1937:  -33.4%

Because of the recent surge of comments, it has taken me a while to get to the Hetzel paper.  All the comments suggesting that I was nuts defending Rorty have just made me even more ornery.  Thus after returning from China this blog will abandon economics and devote itself full time to:

1.  Showing that Rorty’s argument against objective truth is indisputably correct.

2.  A review of Borges’ A New Refutation of Time, along with some more recent arguments in favor of his view.

3.  A defense of Schopenhauer’s argument that everyone who has ever lived was essentially the same person, the eternal “I.”

4.  Showing the logical impossibility of free will, which you are free to disregard if you’re not interested.

5.  And finally, an argument you have undoubtedly heard ad nauseum, the implication of Nietzsche’s eternal return for the rate of time preference and the time value of money.

.   .   .

Not!

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Whenever I have a slightly embarrassing post, like my preceding foray into philosophy, I want to get something new up as quickly as possible, in the hope that perhaps people won’t notice the previous one.  So here are few interesting Milton Friedman quotations from 1998 that a commenter named “123″ sent me.  Friedman was discussing Japan:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

.   .   .

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

I thought so too Dr. Friedman.  I don’t think he’d view current Fed policy as expansionary.

PS.  I was going to juxtapose this with the recent comments by Anna Schwartz about low interest rates and monetary ease.  But what’s the point of picking on her, thousands of other economists keep saying similar things.  Still, I feel better knowing that at least Milton Friedman agrees with me.

Mere?  So much confusion has been caused by one seemingly innocuous adjective.

A commenter named Jian asked me this question after my previous post:

Your point about the arbitrariness of CPI is well taken, but if you were really serious about physical laws being social constructions, I’ll quote Alan Sokal: “Anyone who believes that the laws of physics are mere social conventions is invited to try transgressing those conventions from the windows of my apartment. (I live on the twenty-first floor.)”

I am very serious.  As I indicated in an earlier post, my views of “reality” are similar to those of Richard Rorty.  He takes a pragmatic view of things.  There is no difference between subjective opinions and objective reality, or at least no difference that is discernible to humans.  But many people wrongly infer that this means that human knowledge is useless, simply because there is no such thing as objective truth.  Rorty says that the real question is not whether some belief is “true,” but rather whether it is useful.  The laws of physics tell us not to jump out of windows in tall building, and hence they are useful.  That is all we can really say.  But haven’t they been “proven” to be true?  Let’s take a quick look at the history of one of the most important parts of physics, astronomy.

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[New readers sent here by the NYT, this is a wacky, offbeat post.  If you want a serious look at my policy views please check out my FAQs.  In addition, this link discusses what went wrong last year.  And finally, I want to thank Tyler Cowen for his very kind review of this blog.]

When Bob Murphy sees this title he’ll probably think it is a dream come true.  The evil inflationist finally sees reason.  Well I’m afraid it’s more like his worst nightmare.  I don’t propose to abolish the phenomenon of inflation, but rather the concept of inflation.  And to be more precise, price inflation, which is what almost everyone means by the term.  I want it stripped from our macroeconomic theories, removed from our textbooks, banished into the dustbin of discarded mental constructs.

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