No sign yet of the UK “uncertainty shock” recession

I’ve done a number of posts over at Econlog on the massive uncertainty shock that hit the UK in June.  Most experts expected real GDP growth to immediately slow sharply, perhaps leading to a recession.  I had an agnostic view, and thought any negative effects were more likely to show up in lower RGDP than higher unemployment.  I still feel that way, although I’m starting to think that even RGDP will do better than I assumed:

The UK’s first official growth figures since the Brexit vote have confounded the government’s warnings of an immediate recession if Britain voted to leave the EU.

The economy was 0.5 per cent larger between July and September than three months earlier, according to the Office for National Statistics. The Treasury had predicted it would shrink 0.1 per cent.

[Those are quarterly figures, roughly a 2% annual rate.]  Why is the UK doing better than predicted?  I can’t be sure, but one possibility is that the BoE’s monetary offset was more effective than expected.  The British pound has depreciated sharply, even more than people expected:

“We would not get too carried away,” said Ruth Gregory of Capital Economics. “It could be that the economy is in a post-referendum ‘sweet spot’, whereby some of the positive developments since the vote, such as action by the MPC [BoE] have been felt before the major adverse consequences, such as a rise in inflation.”

I think that’s right, and I also still believe the actual Brexit (which will occur in about 2 1/2 years) will be modestly negative for growth.  But I can’t help pointing out that the only reason I think she’s right is because I totally reject the consensus of the economics profession on long and variables lags in monetary policy.  I believe that monetary policy affects NGDP within a month or two.  If I agreed with the consensus on lags I would have thought Ruth Gregory’s explanation was nonsense, and I would have looked for another explanation.  Those who do agree with the consensus on long and variable lags need to figure out how the UK economy held up after the Brexit vote.

To summarize:

1.  Brexit is an uncertainty shock, followed in 3 years by a real shock.

2.  The uncertainty shock might depress the economy by reducing AD (NGDP) or by reducing AS.  The central bank can prevent any reduction in NGDP.

3.  It appears that the impact of severe uncertainty shocks on AS is rather modest, although we’ll need another 6 months of data to have confidence in that preliminary judgment.

If the UK economy holds up, it will be further evidence that monetary policy drives the business cycle, especially in terms of changes in the unemployment rate.

That does not mean AS is not important, indeed in the long run it’s 10 times more important.  I.e. the US in a recession is more than 10 times better off than India in a boom.  Brexit still may have a long run negative supply-side impact on the UK; the size of the impact will depend partly on the sort of treaty they negotiate with the EU, and partly on how the political changes in the UK triggered by Brexit affect its economy.  My hunch is that the latter effect will be larger.  That is, the damage to Britain from May’s statist policies will exceed the damage from losing free access to the EU.

PS. It would be nice if the UK government had a NGDP prediction market, so that we’d know what the markets expected immediately after Brexit.

Beckworth and Hendrickson on NGDP targeting vs. the Taylor Rule

David Beckworth and Josh Hendrickson have a new working paper at Mercatus.  Here is the abstract:

Some economists advocate nominal GDP targeting as an alternative to the Taylor rule. These arguments are largely based on the idea that nominal GDP targeting would require less knowledge on the part of policymakers than a traditional Taylor rule. In particular, a nominal GDP targeting rule would not require real-time knowledge of the output gap. We examine the importance of this claim by amending a standard New Keynesian model to assume that the central bank has imperfect information about the output gap and therefore must forecast the output gap based on previous information. Forecast errors by the central bank can then potentially induce unanticipated changes in the short-term nominal interest rate, distinct from a standard monetary policy shock. We show that forecast errors of the output gap by the Federal Reserve can account for up to 13 percent of the fluctuations in the output gap. In addition, our simulations imply that a nominal GDP targeting rule would produce lower volatility in both inflation and the output gap in comparison with the Taylor rule under imperfect information.

It seems to me that this argument is becoming increasingly persuasive over time.  Both the natural rate of interest and the output gap are increasingly difficult to estimate, as both the natural rate of interest and the trend rate of growth seem to be becoming increasingly unstable.

Speaking of David Beckworth, I’ve enjoyed listening to his podcasts of people in monetary economics/finance.  The latest with Narayana Kocherlakota is particularly interesting, as it gives listeners a perspective on what things seem like for someone on the inside of the Fed.  (He recently retired as the Minneapolis Fed President.)

How the GOP treats women

Here’s the Washington Post:

As a former communications aide to Sen. Ted Cruz (R-Tex.) and former senator Jim DeMint (R-S.C.), I can personally testify that Republican women have, for years, fended off accusations from the Democrats of the party’s allegedly anti-woman beliefs. What did we get for it? The nomination — by way of a largely older, male voting base — of a brazen and unapologetic misogynist.

I want to ask the men leading the GOP some questions. Why didn’t you defend women from this raging sexist especially after so many Republican women — for so many years — eagerly defended the party from charges of sexism? You must make us out for fools.

Over the course of the GOP primary, it became clear that too many Republicans felt it was too politically risky to do anything that would offend the types of voters Trump was attracting in droves — the types who showed up at rallies wearing T-shirts that said, “Trump that b—-” and “She’s a c—, vote for Trump.”

Somehow, in some amorphous but unambiguous way, it was decided that appealing to those voters was more important than appealing to women.

Some of my commenters actually claim Trump is a “dove”.  Not quite:

On the tapes, Mr. Trump describes a passionate enjoyment of fighting, which started during his adolescence in Queens. It did not matter, he said, whether an altercation was verbal or physical. He loved it all the same.

MR. TRUMP: I was a very rebellious kind of person. I don’t like to talk about it, actually. But I was a very rebellious person and very set in my ways.

INTERVIEWER: In eighth grade?

MR. TRUMP: I loved to fight. I always loved to fight.

INTERVIEWER: Physical fights?

MR. TRUMP: Yeah, all kinds of fights, physical …


MR. TRUMP: All types of fights. Any kind of fight, I loved it, including physical. …

His behavior was so belligerent that his parents sent him off around age 13 to the all-boys New York Military Academy, a highly regimented school about an hour north of Manhattan. He seemed to revel in the masculine culture of confrontation there. In the interview, he sounds nostalgic for the time when roughness and physical conflict were more acceptable:

 MR. TRUMP: I’m standing there at the military academy and this guy comes out, he’s like a bulldog, too, rough guy. He was a drill sergeant. Now they call him “Major Dobias,” but he was a sergeant. When I first knew him, he was “Sergeant Dobias,” right out of the Army.

And he was a rough guy, physically rough and mentally rough. He was also my baseball coach. He said things like, “Stand up!” and I went, “Give me a [expletive] break.” And this guy came at me, you would never believe it. I mean, it was really fantastic.

INTERVIEWER: Did he rough you up?

MR. TRUMP: Oh yeah, absolutely.

INTERVIEWER: Grabbed you by the shirt …

MR. TRUMP: It doesn’t matter, it was not like what happens today. And you had to learn to survive. It was tough. It wasn’t today. Those were rougher times. … These guys, you go back to some of those old drill sergeants, they can’t even understand what’s going on with this country.

“But how do you explain the fact that he opposed the Iraq War?”  Simple, he supported it.

He’s also using campaign donations for his personal profit:

The Daily Beast previously reported that Trump spent $55,000 in money from his own campaign to buy copies of his latest book, Crippled America, which was published by Simon and Schuster. Copies were distributed to GOP delegates attending the summer convention in Cleveland.

The purchase of books is just the latest example of Trump using donors’ money to purchase goods and services from his own businesses and generating personal profit for himself.

Trump houses his campaign headquarters in Trump Tower in midtown Manhattan, where the campaign pays $169,758 a month for office space at about $100 per square foot. (The Clinton campaign, in contrast, rents two floors in a Brooklyn Heights office building for about $32 per square foot.)

Trump paid his Mar-a-Lago resort in Palm Beach $423,373 on the same day in May that his campaign finalized a deal with the RNC that began bringing him hundreds of millions of dollars of outside donations ― even though the only events he’d held there were two victory parties and an afternoon news conference two months earlier. He could have held those three events at nearby hotels for a total of about $40,000.

In July, Trump’s campaign sent $48,240 to his Westchester County golf course. The only event it had hosted for him was a June 7 victory party. Trump could have used a ballroom at a nearby Marriott hotel for less than half that much.

And Trump’s insistence on using his own personal Boeing 757 jet is now costing taxpayers millions of dollars extra. Because Trump’s Secret Service detail is making up a large percentage ― and on some days even a majority ― of the flying passengers, the agency must pay a proportionate share of the $10,000-an-hour flying costs.

In a recent post I suggested that Trump cared so little about America that he was only spending 1% or 2% of his $10 billion fortune on “saving the country”.  I was wrong.  He’s spending an order of magnitude less than that, more like 0.2%:

Trump’s staff has defended his decisions to spend more at his own businesses rather than use less-expensive alternatives by pointing out that he is contributing $2 million a month to his own campaign.

That $2 million figure, however, is dwarfed by the many tens of millions of dollars per month coming to Trump’s campaign from both large and small donors.

He might be the most selfish bastard in all of American political history.  And yet despite everything, including dozens of press stories claiming that he’s already lost the race, he still has a reasonable chance of winning (about 17%.)  Indeed the polls have tightened slightly this week.

Zero fiscal multiplier, example #371


Fed Inclined to Lift Rates If New President Adds Budget Bump

The Federal Reserve is inclined to raise interest rates higher than otherwise if the next president pursues a more stimulative fiscal policy.

U.S. central bankers say they would welcome such a step as shifting some onus for supporting the economy away from the Fed. But they suggest they would offset the extra demand that a bigger budget deficit would spur by making monetary policy less stimulative.

Once again, market monetarists have known all along what the media is just beginning to discover—just as with negative interest rates.

And this made me shake my head:

It also could pose some political problems for the Fed if it was perceived by lawmakers as working at cross-purposes with their efforts to spur economic growth.

Congress has been whining about low rates for years.  And now were are told that if the Fed raises rates to 1% or 2%, Congress will start complaining about high interest rates?

BTW, the entire premise of the article is wrong.  Fiscal policy will not have much impact on interest rates, because rates mostly depend on NGDP growth, and the Fed isn’t going to let that rise above 3% on any sustained basis.

Hillary and Trump aren’t going to give us growth, they are going to deliver big government.

HT:  Michael Darda

PS.  Time for the daily Trump dump:

1.  Trump has threatened to sue people on at least 20 occasions since the campaign began.

2.  The ABA prepared a report on Trump’s excessive litigation, which called Trump a “libel bully“.  But the ABA refused to release the report .  .  . (and this is not a Onion joke) .  .  . for fear of being sued by Trump.

3.  Trump praised Hillary as a great senator and a great person.  Said Bill was a great president.  But don’t worry Harding, that was back in 2008, when he was not running for president and was free to speak his mind.  I’m sure his views since he had to begin kowtowing to the alt-right are much more representative of his actual beliefs.

4.  And talk about “first world problems“:

For all their sharp differences, supporters of Hillary Clinton and Donald Trump have one thing in common: election-related stress.

HT:  Tom Brown


Utility: It’s (increasingly) all in your mind

We are long past the days of “fat cats”, when rich people could afford to eat more food than poor people.  And I’d argue that this is increasingly true almost everywhere you look.  When I was young, a Cadillac Eldorado was a vastly different car from a VW Beetle or Datsun.  Especially if cruising down the highway at 80 mph.  Today Datsun is called Nissan (one of the stupidest name changes in US history).  And while an Infiniti is a bit more luxurious than a Nissan, and the BMW handles somewhat better, I no longer think the experience of driving the Nissan is much different from a typical luxury car.  Even the size is similar.  Here’s the interior of their economy model (Sentra):


I went to Zillow, and randomly pulled off an ad for a 2800 sq foot condo in Chelsea—this one priced at $11 million.  And here’s a random 2600 sq. foot condo in Oklahoma City, priced at $260,000.  The NYC unit is more tastefully designed by NYC standards, but the OKC unit is more luxurious by OKC standards. In the Chelsea unit, you might want to have a $4000 midcentury-modern Poäng chair designed by Alvar Aalto:


In the OKC home you could install the Ikea version of the chair (shown above) for $79, down from a (inflation-adjusted price of) $350 in 1990.  How much utility does one get from the $4000 chair?  How much from the $79 chair?  It’s depends how you think about it–it’s the same chair.

Over at Econlog, I recently did a post about our post-stuff economy.  I grew up in the “stuff economy”, and I don’t think I’ll ever adapt to this new one.  But I suppose the millennials are right, it’s stupid to accumulate lots of stuff, for all the reasons that philosophers have emphasized down through the ages.  The upshot of all this is that the concept of “economic inequality” will become increasingly amorphous.  It won’t disappear by any means, indeed it might get “worse” in some sense.  But it will be harder to measure.  As an analogy, both cancer patients and hypochondriacs feel lots of pain. In both cases, the pain is “all in their heads”. That’s where you feel pain.  And that’s also where you register utility. What’s new is that it’s increasingly difficult to connect utility with physical objects (tumors in my medical analogy). (By the standards of peasant life in the Middle Ages, we are all a bunch of hypochondriacs—every one of us.) This has implications for everything from measuring the “Great Stagnation” to adjusting Social Security for “cost of living” (what does that even mean?) increases.

PS.  OK, maybe it’s not all in your head. I can’t really deny that this guy is better off than I am.  I’m jealous:screen-shot-2016-10-21-at-3-30-07-pm

PPS.  Did Donald leave a window open?  Look at Melania’s dress.

PPPS.  Seriously, this is more my style.

PPPPS.  Off topic.  The rich plan to vote Democratic this time.