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Larry Summers and the bubbles

Larry Summers is puzzled by the fact that the increase in borrowing and lending during the aughts did not lead to higher inflation and lower unemployment. Hmmm. Did we all forget that the USA current account deficit increased to an almost Spanish 6% of GDP during these same aughts (to go down to 3%, within months,  after Lehman)? And inflation did increase during the booms, at least when you look at metrics which also include prices of investments and especially of ´new residential investment´, like the gross domestic purchases index (ex. food and energy) of the Bureau of Economic Analysis (BEA). The metric of choice of the Fed, the PCE consumer prices index ex. food and energy, indeed does not show any kind of bubble related increases. But the domestic purchases index does. I discovered, by the way, that the BEA also calculates a GDP deflator excluding food and energy. Looking at these broader indexes also shows that disinflation has been considerable after Lehman or at least much larger than indicated by the PCE index.


  1. Danny L. McDaniel, Ph.D.
    November 22, 2013 at 10:28 pm

    Larry Summers is perhaps the greatest American economist of the past quarter century. To read of this man and find him as trashed on this blog as regularly leads to believe that the operator of this blog could use an old school education in economics; because he is certainly no Larry Summers. I feel that many in Congress wish Larry would have been appointed Fed Chief very soon. There is no better economist steeped in criss management than Larry Summers!

    Danny L. McDaniel, Ph.D.i

    • merijnknibbe
      November 23, 2013 at 6:29 am

      Summers gets a bad press in the USA but what he writes about the economy makes much, much more sense to me than the Chicago stuff. However. (1) There is this idea about ´The Great Moderation´, i.e. a period of stable growth and stable inflation, largely during the monetary reign of Alan Greenspan. And though I do know that Summers by now (and unlike Fama to name only one Chicago guy) admits that tensions were building, BECAUSE of the working of our (financial) markets I thought it worhtwhile to show that at least inflation was less moderate than stated by, for instance, Bernanke. This shows especially when you look at the individual series (residential construction…) but it also shows in the aggregate data, i.e. not only at the individual series of consumer prices.

      (2) I did not want to stress this, but Krugman mentioned, in his post against John Taylor, that the GDP inflator contains data on volatile oil and grain prices. Lo and behold! When I checked the BEA site I discovered that the BEA publishes series on GDP and gross domestic purchases excluding energy and food!

      (3) In fact at least I did not attack Summers directly. In my previous blog I mentioned that Krugman as well as Taylor looked at the wrong metric (though the difference between GDP prices and domestic purchases in the USA seems to be smaller than in the EZ, but I at least investigated this, as shown by this post).

      (4) I also published a blog which (a) shows that ideas like those of Summers have been around for a long, long time (as mentioned by Krugman, by the way) and which is also much more detailed about this than Summers, without however mentioning Summers.

      (5) And I actually think that it is a very good thing that Summers starts mentioning things like this. When you look at his lecture a lot of the people listening, many of whom will are no doubt of the technocratic a-historical blend which are used to totally unspecified Euler equations but who haven´t learned to make a proper diagnosis of an specific economy, such ideas seem to have looked totally new! See also the comment of Mason on this blog.

      (6) But even Summers will have to look at the right metrics (if only we had done so in 2005!)

      (7) In the USA, economics is too much of a name game. Which is why I didn´t mention Summers very much in the blog but why I did mention him in the title.

      Any way, these Great Moderation ideas are crap, as also shown by the behaviour of prices

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