Another BOJ flop

During the first several years of Abenomics, the BOJ actively pushed monetary stimulus.  Their announcements were often more aggressive than expected, and the yen depreciated sharply on this news.  The inflation rate rose from negative territory up close to the 2% target.  This year, however, the BOJ seems to have given up on monetary stimulus.  Most of the recent announcements have been less aggressive than the markets expected, and the yen has appreciated from a low of about 125 to the dollar, to 105 as of yesterday.  Today the BOJ produced another disappointing announcement, much less than markets expected, and the yen plunged another 3%, to 102.  This is not rocket science,  If the BOJ allows a strong yen they will fail to hit their target.  If they do enough stimulus to dramatically weaken the yen, they can hit their target.  So why don’t they?

This also shows why we cannot rely on policy discretion.  Policymakers simply are not willing to carry out their instructions.  A CPI or NGDP futures targeting regime (level targeting) would solve the “problem”. Which is probably why it won’t be adopted.

Why did the BOJ allow this to happen?

Screen Shot 2016-07-29 at 1.30.12 PMPS.  It’s amazing how similar Abenomics is to FDR’s policies.  You have highly successful monetary stimulus which is abandoned for no good reason.  You have a weird mixture of fiscal stimulus and austerity.  And you have the government putting the cart before the horse, by trying to pressure firms to raise wages:

Openly pushing companies to raise wages is just one of the unorthodox economic policies attempted under the Abe government to jump-start an economy that seems stuck in a long-term rut.

I wish they’d go back to trying to raise NGDP, that’s the only durable way to get higher wages.

PPS.  Here is a typical media report on the BOJ:

But the truth is, at this stage, three years into his radical program to restart Japan, the BOJ might just be a spent force.

Face palm.

Yeah, the BOJ is out of ammo.  Maybe they can borrow some ammo from Zimbabwe.

My 3% NGDP trend prediction, 2 years later

Back in July 2014, I made a prediction that 3% NGDP growth was the new normal, as soon as unemployment fell to the natural rate. At the time, that prediction raised some eyebrows.  The 12-month NGDP growth rate was running 4.5% in the second quarter of 2014, and rose to 4.9% in Q3.  The Fed’s estimate of the long-term growth trend was considerably higher than 3%, as were private forecasters.  But look what’s happened since:

Screen Shot 2016-07-29 at 9.14.56 AMThe NGDP growth rate has fallen below 2.5% over the past 12 months.  That’s partly due to the falling oil prices, and I expect inflation to bounce back a bit. But I also expect the unemployment rate to stop falling soon, so I’m sticking with 3%, which looks increasingly likely as a long run NGDP trend.

Here’s what I said in July 2014:

3.  The Fed has a big NGDP problem.  It’s becoming increasingly clear that when the labor market recovers, RGDP growth will be very slow, maybe 1.2%.  Add in about 1.8% on the GDP deflator, and 3% NGDP growth looks like the new normal, assuming the Fed intends to stick with 2% PCE inflation targeting.  Bill Woolsey wins!!  Here’s the problem.  The Fed wants to do both of these things:

a.  Continue targeting inflation at 2%.

b.  Continuing to use interest rates as the instrument of policy.

But it won’t work.  At 3% trend NGDP growth, nominal interest rates will fall to zero in every single recession going forward.  The Fed will be spinning their wheels just when monetary stimulus is most needed.  At some point they will need a new policy instrument/target.  Lars Christensen has a very good post discussing a clever idea by Bennett McCallum, but in my view this idea works better for small countries than for the US, which is likely to follow the global business cycle.  NGDP futures anyone?  Level targeting?

4.  Unemployment is likely to fall to the natural rate (estimated by the Fed at 5.6%) quite quickly. There will be a debate about what to do next.  It will be the wrong debate.  The debate needs to be about where the Fed wants to go in the long run.  First figure out where you want to go in the long run, then adjust your short run policy as needed.  Otherwise the blogosphere debate will be like a bunch of drunken frat boys arguing about which street to take, when they can’t even agree on which bar they are going to.

As I expected, unemployment did fall to 5.6% fairly quickly, more rapidly than the Fed predicted.  And growth in both nominal and real GDP was slower than the Fed predicted.  So how was I able to beat the highly skilled Fed forecasters at their own game?

The answer is simple.  Way back in 2011 I noticed that this was a “job-filled non-recovery”, while most pundits were still talking about a jobless recovery.  That is, I noticed that RGDP was not recovering as expected, but the unemployment rate was falling rapidly.  And this process has continued up until the present.  By 2014 I had seen enough to regard this strange pattern as more than a fluke, rather as the new normal.  The asset markets (long term bond yields) were clearly signaling more slow NGDP growth ahead. Thus I figured that if the unemployment rate is falling rapidly, and NGDP growth is still only about 4%, you know that when the unemployment rate stops falling, the NGDP growth rate will slow dramatically.  And that’s exactly what happened.  The trick was to take the data seriously, and not assume we were going to return to some mythical “normal” level of NGDP growth.

Unfortunately, monetary policy remains just as dysfunctional as I feared.  The Fed still relies on interest rate adjustments in a world where we are going to be permanently close to zero rates, and at or below zero in every single recession where we need stimulus.  They have not adopted any of the new procedures suggested by elite economists (including Bernanke) for such a world, such as a higher inflation target or level targeting.  They are very reluctant to admit the obvious; their current policy regime is not working.

And the drunken frat boy metaphor still applies.  There are all these meaningless debates about whether to raise interest rates, with no consideration of what sort of NGDP growth rate is appropriate.  No debate about level targeting.  What are we trying to achieve? As a result, inflation has averaged well below 2% during the period of high unemployment, whereas under the Fed’s dual mandate inflation should average above 2% during slumps, and below 2% during booms.  They have things backwards and don’t even seem to realize it.

The Fed has thrown in the towel and admitted that they will not raise rates 4 times this year.  (The markets predicted 2 times, which itself may be an overestimate.)  How long will it take for the Fed to throw in the towel and admit that under its current operating procedure 3% NGDP growth is the new normal?  (Bullard will probably get there first–he has an open mind, and takes the data seriously.)  And how long until they realize that this sort of NGDP growth rate makes interest rate targeting almost useless as a monetary policy instrument?

PS. Think about this for a moment—the US real GDP grew about 1.2% over the past year, and the unemployment rate fell.  This disconnect between growth and unemployment also explains why I don’t expect the UK unemployment rate to rise very much after Brexit (I predicted a 50 basis point increase.)  My hunch is that Brexit will hurt UK GDP more than it hurts their job market.

PPS.  Another Trump lie, another promise broken.  But hey, the GOP convention is over now.  (Just to be clear, I do not think candidates should be required to release tax returns.  But if they campaign for the nomination on a pledge to release them before the election, then they should honor that pledge.  Now watch the Trumpistas tell me how naive I am.  “All candidates lie that they will release their tax returns, and then renege on the promise.  Don’t you understand that.”  Oh really, which ones specifically?

HT:  Tom Brown

Is price flexibility stabilizing?

Rajat directed me to a post by Miles Kimball, entitled “Pro Gauti Eggertsson”. Over at Econlog I discussed one paragraph from his post.  Here I’ll discuss another:

Gauti has also taken a lead in applying the same principles he applied to the Great Depression to the Great Recession. A hallmark of his papers is very careful discussion of how they relate to key controversies in the academic literature, and indeed, they go to the heart of some of the biggest issues in the study of business cycles and stabilization policy. Price flexibility and advance anticipation of inflation are often said to be the keys to monetary policy having no real effect on the economy. But along with Saroj Bhattarai and Raphael Schoenle, Gauti argues in “Is Increased Price Flexibility Stabilizing? Redux” that, short of perfect price flexibility, greater price flexibility is likely to be destabilizing. This idea has a long history, but had not been fully addressed within the context of Dynamic New Keynesian models without investment. Along with Marc Giannoni, Gauti argues in “The Inflation Output Trade-Off Revisited” that contrary to the idea that anticipated inflation does not matter, it can matter greatly when raising expected inflation loosens the zero lower bound. The argument is made in a very elegant and clear way.

In my view, higher expected inflation is  not expansionary, holding NGDP expectations constant.  Thus if NGDP is expected to grow at 5%, then higher inflation is associated with lower real GDP growth.  The proponents of the alternative view would claim that I’m missing the point, that higher inflation expectations will cause higher NGDP growth expectations.  I don’t think that’s right. A more expansionary monetary policy may cause both inflation and NGDP growth expectations to rise.  On the other hand, supply shocks can affect inflation expectations without impacting NGDP expectations. Never reason from a price level change—always reason from a NGDP growth change.

In 1929-32, President Hoover discouraged companies from cutting wages.  This made the Great Contraction of 1929-32 even worse than it otherwise would have been.  In contrast, wages were cut sharply during the severe deflation of 1920-21. Some free market purists make too much of this comparison, suggesting that tight money is not a problem if the government allows wages to be flexible.  Not true, the 1921 depression was quite deep.

But also pretty short.  And one reason it was so short is that in 1921 and 1922, wages adjusted quickly to the lower price level.  If Hoover (and FDR) had allowed wages to adjust in the 1930s, the Great Depression would have been much shorter.

Stable NGDP growth and non-intervention in wages and prices, these policies work together like a hand and glove.

PS.  I encourage people to read Giles Wilkes’s new piece on blogging.  Wilkes was nice enough to include me in with a group of much more deserving bloggers.  I was also pleased to see him talk about Steve Waldman, a wonderful blogger and also a good example of how the blogosphere is a meritocracy, where professional credentials do not matter.

PPS.  Trump?  Still  . . . an . . . idiot.

HT:  Tyler Cowen, Tom Brown

Trump to the GOP: Thanks for the nomination, see ya later

Hot off the press:

Donald Trump reversed himself on a major policy plank Wednesday as he told reporters he now backs a $10-an-hour federal minimum wage, breaking with years of Republican orthodoxy and his party’s own platform.

“The minimum wage has to go up,” he said at a tumultuous news conference, saying it should go up to $10 from $7.25. He did say that “states should really call the shot,” but “at the same time, people have to be taken care of.”

Asked if he meant the federal minimum wage has to go up to $10 in a followup question, Trump indicated yes. “Federal,” he clarified.

Gee, I wonder what other GOP ideas he’ll drop, now that he has the nomination.

I’ll say this, if Trump is elected we can look forward to 4 years of nonstop comedy. The Onion will become the newspaper of record.  If you don’t believe me, check out this Trump press conference.  

PS.  My sister (who knows many more words than I do), recently taught me another:


Putin’s pawn

Where’s Joe McCarthy when we need him?

There are numerous reports from respectable publications that Trump’s inner circle has been infiltrated by supporters of Vladimir Putin:

MOSCOW—Excited by Donald Trump’s pledge to promote “easing of tensions and improved relations with Russia,” the Kremlin establishment earlier this month invited Trump adviser Carter Page to speak before graduating students of the New Economic School. Page did not disappoint. In his remarks, Page condemned current American policy for its “often-hypocritical focus on democratization, inequality, corruption and regime change.” When a Russian student asked Page whether he really believed that American society was liberal and democratic, Trump’s adviser grinned and delivered a line that might have come from Vladimir Putin himself. “I surround the word ‘liberal’ with quotes,” he said. ”I tend to agree with you that it’s not always as liberal as it may seem,” he said. “I’m with you.”

It was thus perfectly in keeping with Trump campaign’s entente with the Kremlin that last week Trump aides reportedly watered down the new Republican platform on Russia, removing language that called for giving weapons to Ukraine to fight Russian and rebel forces. Page, an energy expert, has close ties to Russian business and relationships with executives at Gazprom, the giant state-run gas company. Trump campaign chairman Paul Manafort has worked as a lobbyist for former Ukraine’s former Russia-aligned president, Viktor Yanukovych.

Putin is arguably the most dangerous person in the world today.  His willingness to conquer neighboring countries and annex territory is something we haven’t seen since the heyday of Hitler and Saddam.  Wars occur when there is ambiguity as to how countries will respond to aggression.  If Bush had made it 100% clear that he would have responded forcefully to Saddam’s aggression in 1990, there would have been no Gulf War in 1991.  If he had made it 100% clear that he would not respond, there would have been no Gulf War in 1991. Instead, he left our response ambiguous, and Saddam guessed wrong.  Bush spoke softly and carried a big stick. The rest is history.

Trump’s policy is to create ambiguity as to how the US will respond to a Russian invasion of a NATO member.  Almost every day the Trump campaign comes out with another test balloon, right out of the Kremlin playbook.  A month ago Trump supported Brexit.  A couple days ago he suggested that he might restrict Frenchmen and Germans from visiting America.  Yesterday it was a threat to withdraw from the WTO:

Donald Trump suggested on Sunday that the US could pull out of the World Trade Organisation and said the EU had been created largely to compete against the US in international trade.

In an interview with NBC, the Republican presidential candidate said the US might withdraw from the WTO if his plans to use tariffs to bring factories back from Mexico were challenged.

Mr Trump also repeated his controversial suggestion that the US might not fulfil its commitments to defend Nato allies under attack if they did not do more to boost defence spending.

When I read Ezra Klein’s piece providing 14 reasons why Trump was unfit to be President (only 14? Klein is slipping) I couldn’t help thinking about how almost all of these also applied to Hitler.  Of course as usual, I am referring to Adolf Hitler, not “Hitler”, so don’t accuse me of comparing Trump to “Hitler”, the mass murderer. There were a few of the 14 that did not apply to Adolf Hitler, candidate in German democratic elections.  And in those few cases, Trump actually looks worse than Hitler.  For instance, Hitler was actually fairly knowledgeable about military and foreign affairs, whereas Trump seems like someone who’s never read a newspaper. Remember that Tiananmen “riot”?  Because Trump is so ignorant, he must rely on his advisors, who are Putin supporters.  Thus unlike Hitler, Trump is just a pawn of the Russians.

Trump and Putin, no scratch that, Trump advisors and Putin (Trump’s too dumb to have his own views) share a common interest in blowing up the western alliance, constructed over decades to prevent a repeat of WWII.  They thrive on chaos. They saw how the President of Turkey gained vast new powers as a result of chaos, and hope to do the same.

People talk about how “the establishment” hates Trump.  But there are other establishments, and I’m afraid “the establishment” is no match for the establishment releasing embarrassing information on Hillary right before the convention.  Putin very, very much wants Trump to win, and he plays very dirty. There are even claims that Putin orchestrated terrorist attacks in Russia to gain more power.  I have no idea if they are true, but it’s certainly the sort of thing he would do.

The press needs to stop asking stupid questions about whether Trump’s wife plagiarized a few lines in a speech (which helps Trump by making it seem he’s a normal candidate, and that this trivia is the sort of reason he should not be elected) and instead start asking his aides the following question:

Are you now, or have you ever been, a supporter of Vladimir Putin?

PS. If I were Hillary’s media people, I’d focus 100% of my TV ads between now and the election on the theme of Trump being Putin’s pawn. It may not be true, but just the fact that it’s possibly true provides the strongest argument against electing Trump. As I said before, a world where it might or might not be true is far more dangerous than either certainty.  And that’s the world we currently live in.

PPS.  In fairness to Trumpistas, if this story is true, Trump will have a right to say, “I told you so.”

PPPS.  Nixon would have destroyed Trump on this Russian influence issue.  C’mon Hillary, show your inner Nixon.