Comments on economics, mystery fiction, drama, and art.

Thursday, July 24, 2014

Predictions that don't pan out.

A friend posted (on her Facebook page) two pages from Time magazine in 1953, because of the Kraft Credit Union ad.  On the facing page was an essay ("Asking for More Inflation") by Henry Hazlitt, an economist who has had quite a following.

I'm finding myself amused by the way the essay begins: "In the issue of March 2, I wrote here:  'We shall soon learn whether the American people really want to halt inflation, and whether they are willing to pay the price.' "

Being the kind of guy I am, I looked up the numbers. From March 1952 to March, 1953, the rate of inflation as measured by the Consumer Price Index was, um, 1.4%. For subsequent months:

4/52-4/53: 0..8%
5/53-5/53: 1.1%
6/52-6/53: 1.1%
7/52-7/53: 0.4%
8/52-8/53: 0.7%
9/52-9/53: 0.8%
10/52-10/53: 1.1%
11/52-11/53: 0.7%
12/52-12/53: 0.8%

It didn't get any faster (in fact it was slower) in 1954 and 1955...

Uh...there was an inflation problem?
(Hazlitt was a crank.)

Friday, July 04, 2014

Thinking about "Price Stability"

I read recently James Grant's essay in the Wall Street Journal, in praise of the gold standard (in what purported to be a book review).  Among other things, he argued that prices are more stable under the gold standard than under a fiat money standard.  And he used the sort of evidence often used when making the argument for price stability under the gold standard.  In the US, between 1774 and 1933, inflation as measured by the CPI (retrospectively estimated for years before 1913) averaged 0.3% per year.  But from 1933 to 2013, inflation averaged 3.3%.  (One gets similar results using the GDP deflator--from 1790 to 1033, inflation averaged 0.4%; from 1933-2013, it averaged 3.4%).  Clearly, then, prices were more stable when the US was on a gold standard.

Well, not so fast.  To measure stability of prices, we need to account both for price increases and for price decreases.  If the CPI doubles from year 1 to year 2, and then falls by 50% from year 2 to year 3, we will measure zero inflation between years 1 and 3.  But I don't think anyone would suggest that prices were stable.

So, I calculated the absolute value of the year-to-year changes n the CPI (1774-2013) and in the PCE Deflator (1790-2013), and then calculated the mean absolute percentage changes in these price indexes for the 1774-1933 (1790-1933) and 1933-2013 periods.  I also calculated the standard deviation of the absolute percentage changes.  The table below shows what I found.




Mean Annual Absolute % Change,
1790-1933 (1790-1933)
Standard Deviation, 1774-1933 (1790-1933)

Mean Annual Absolute % Change,
Standard Deviation, 1933-2013









What happened, obviously, in the earlier period is that price increases (inflation) were offset by price decreases (deflation), while in the later period, the economy has mostly experienced inflation.

But the year-to-year changes were, in general, larger before 1933 and smaller after 1933.  Furthermore, the variation in the year-to-year changes were also larger before 1933 and smaller after 1933. 

I would suggest that the price stability question probably ought to be scored as a "win" for the fiat money period.

(Data from the Economic History Association's web site.)