NOW you want more than 2% inflation?!?!?

Reading the Fed minutes can sometimes make me want to tear my hair out.  During the long recovery from the Great Recession, the Fed frequently told us that we could not do more stimulus due to the danger of inflation exceeding 2%.  The taper tantrum was caused by Fed hints that monetary tightening was on the horizon, motivated by a fear of higher inflation.  In 2015, the Fed began raising interest rates, with the goal of preventing inflation from overshooting 2%.

And now, with unemployment down to 3.9%, we are suddenly told that the Fed would actually welcome above 2% inflation?  This makes no sense at all.

It was also noted that a temporary period of inflation modestly above 2 percent would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.

Just to be clear, it’s perfectly fine to argue that the Fed should overshoot their 2% inflation target right now.  Thus a market monetarist might favor overshooting for “level targeting” reasons.  There are good arguments on both sides of that question, but it’s certainly a defensible argument.  However these MMs that favor overshooting were also favoring more monetary stimulus during the recovery from the Great Recession.

What’s not defensible is to have have opposed additional monetary stimulus during the recovery from the Great Recession, even as inflation was running well under 2%, and then now suddenly favor above 2% inflation.

Most business cycles are caused by procyclical monetary policy.  A monetary policy that causes inflation to run below 2% during periods of high unemployment and above 2% during booms is procyclical, and hence bad.  Why does the Fed have so much trouble understanding such a basic point?  I don’t get it.

I can already anticipate commenters talking about whether money is too easy or too tight without reference to the monetary REGIME.  That’s just stupid.  Monetary policy is not about whether the fed funds rate should be raised or lowered at a given meeting, it’s about what sort of policy regime you have.  The Fed still hasn’t figured out that a procyclical policy regime is destabilizing.  It’s the primary cause of the business cycle.

PS. I have a blog post at a new AEI symposium on how the US can best compete with China.

Regime change

So Trump recently announced that the intelligence services and federal law enforcement hide a “criminal deep state”, which is out to get him.  Of course the heads of all of these agencies (appointed by Trump) think this is nonsense, and they say so publicly.  Almost every day Trump does something that is an impeachable offense, and these paranoid lunatic ravings about a deep state are no different.  But the Dems are wasting their time thinking about impeachment, as the GOP would not impeach Trump if he murdered someone in broad daylight in the middle of 5th Avenue.  (Actually, I stole that idea from Trump himself.)

So what’s going on here?  Why does Trump say such ridiculous things?  Let’s go back to the 2008 campaign, and look at something that I did not fully appreciate at the time:

Ugly whispers about Barack Obama’s race, birthplace and religion that began during the Democratic primary erupted into full-scale conspiracy theories among some Republicans, including McCain’s supporters.

At a town hall in Ohio that September, just days after he had officially claimed the GOP nomination, McCain was on stage speaking about Obama when someone in the crowd yelled, referring to the Democratic nominee, “Terrorist!” A few weeks later, while McCain was campaigning with his running mate, then-Alaska Gov. Sarah Palin, in Pennsylvania, rally-goers greeted mentions Obama with calls of “Treason!” and “Off with his head!”

After a particularly raucous rally in New Mexico, McCain aides told the candidate about some of the slurs shouted by the audience, and the senator, who hadn’t heard them, was shocked. “Where is this crap coming from?” he asked an aide. . . .

Down in the polls, McCain was in Minnesota looking for a lifeline among working-class voters in the upper Midwest, but what he found were anxious voters who turned their rage on him when he pushed back against attacks on Obama and defended his rival from what would now be described as “fake news.”

When a man stood up and told him he was “scared … to bring a child up” under an Obama presidency, McCain winced visibly. “I want to be president of the United States, and obviously, I do not want Sen. Obama to be, but I have to tell you … he is a decent person and a person that you do not have to be scared of as president,” McCain replied, prompting loud boos and cries of disapproval from the audience.

As he tried to calm the audience, the crowd only seemed to get more riled up. “We want to fight, and I will fight,” McCain said. “But I will be respectful. I admire Sen. Obama and his accomplishments, and I will respect him.”

The audience erupted in loud jeers, including shouts of “Liar!” “Come on, John!” a woman yelled.

“I don’t mean that has to reduce your ferocity,” McCain said, trying to speak over loud boos from his supporters. “I just mean to say you have to be respectful.”

A few minutes later, an elderly woman stood and told McCain she could not trust Obama because was he was an “Arab.” McCain shook his head and took the microphone back, interrupting the woman mid-sentence, something he almost never did. “No, ma’am,” he said, correcting her. “He’s a decent family man, citizen, who I just happen to have disagreements with on fundamental issues, and that’s what this campaign is about,” McCain said. This time, some in the crowd clapped, but the candidate looked aggrieved.

McCain didn’t understand that the GOP had changed, that they no longer sought out candidates with dignity and character.  His supporters wanted a bigoted demagogue that would feed them fake news about the people they hated.  Even by 2008, this was no longer the party of Goldwater, Reagan and Bush. Regime change happened in 2008, not 2016.

It no longer matters that Trump’s own law enforcement and intelligence officials repudiate him every day, on issues ranging from Iran to Russia.  That would have mattered in 20th century America, but we have a new political regime, more akin to Venezuela under Chavez, or Italy under Berlusconi.  Ross Douthat has a interesting column that warns the Dems about playing into Trump’s hands:

One of the few people to really see Donald Trump coming was the University of Chicago economist Luigi Zingales, who warned way back in 2011 that American politics was going the way of his native Italy, that we could easily produce our own version of Silvio Berlusconi, and that Trump was an obvious candidate to bottle the celebrity-populist-outsider cocktail.

So Zingales’s advice to Democrats after their 2016 defeat carried more weight than the average act of punditry. On the evidence of Berlusconi’s many victories and rare defeats, he argued, the best way to beat Trump was to do exactly what many liberals understandably didn’t want to do — to essentially normalize him, to treat him “as an ordinary opponent” rather than an existential threat, to focus on issues rather than character debates, to deny him both the public carnival and the tone of outraged hysteria in which his brand of politics tends to thrive.

Maybe that’s the least bad approach, but I’m not so sure even that will work.  Bush was hammered by the media in 2005 because of the perception that the federal relief effort after Katrina was incompetent.  His poll numbers fell sharply.  The relief effort after the recent hurricane in Puerto Rico has been equally ineffective, and yet Trump’s polls numbers were unaffected.  Perhaps part of the difference is that Puerto Rico is not a state, but I suspect there’s more to it than that.  Trump is not seen by voters as heading a government in the same way that Bush was seen as heading a government.  Remember, Trump says his own government is a criminal conspiracy that is trying to bring him down.  So why would his supporters blame Trump for how that criminal conspiracy did in Puerto Rico, or even New Orleans for that matter?  Trump did so well campaigning against the government that he decided to keep doing so even after being elected.

People often point to his hypocrisy:

Attacking Obama for playing lots of golf and then doing the same.

Attacking Hillary for the lack of a secure email system, and then relying on an insecure cell phone.

Attacking previous administrations for giving in to China, and then caving in to China himself.

Attacking fake news, and then engaging in fake news.

Attacking the “swamp”, then engaging in lots of corruption to enrich himself and his family.

Attacking the fake unemployment data under Obama, and then citing the same data as evidence of a strong labor market today.

There are dozens more such examples, probably hundreds, but none of it matters.  His supporters want the government to keep their hands off their Medicare, and they want the government to stop sabotaging Trump.  The Dems won’t win back the presidency until they figure out that Trump is not the leader of the government.

Trump’s support is like a religious cult.  Eventually the spell will break, and if there were a deep recession that hit ordinary Americans this would somewhat reduce Trump’s poll numbers.  But I don’t expect a deep recession, and smaller issues that don’t affect average people won’t dent his (modest) popularity.  While it’s true that he only polls in the low 40s, there are just enough anti-Trump Republicans who will hold their noses and vote for him anyway to put him over the top in a general election, especially against a left wing candidate like Sanders or Warren.  (Especially Warren, as gender is also a problem for the modern Democratic party.)  If only they’d nominated Biden in 2016, we wouldn’t be stuck with Trump for 4 years.

Or maybe 8.

PS.  Yes, part of the problem in Puerto Rico is the incompetence of local officials.  But that was equally true in New Orleans in 2005.  So why did Bush get more blame?  Maybe conservatives don’t care about Spanish speakers in Puerto Rico, but even the liberal media was far tougher on Bush than Trump.

Again, he’s not viewed as the head of the government, he’s at war with the government.  If Mueller didn’t exist, Trump would have had to invent him.

Commodities are fungible

Here’s the Financial Times, discussing recent trade negotiations with China:

They said that after two days of “constructive talks” China had agreed to “significantly increase” its purchases of US goods and services and on the need for “meaningful increases” in US agricultural and energy exports to China.

Beijing had agreed, they said, to amend relevant laws and regulations, including its patent law, to address US intellectual property complaints that have fuelled Mr Trump’s recent threats to impose tariffs on up to $150bn in imports from China. They also pledged to continue engagement to resolve their differences.

In recent years we’ve heard a lot of complaints about a “China Shock”, the idea that a surge in Chinese exports to the US has cost jobs in manufacturing.  And now the US is pushing China to import more US food and energy, which would create an even bigger China shock, if it were successful. That’s because any trade policy that leads more food and energy exports also tends to lead to more imports of manufactured goods.

On the other hand, the policy is not likely to be successful.  If the Chinese buy more corn and oil for the US, they will buy less corn and oil from Brazil.  Brazil will send those goods to the countries that previously were buying the US corn and oil that are being redirected to China.  The bilateral deficit with China will shrink, but the overall US trade deficit with the rest of the world will not change.  Commodities are fungible.  All that will happen is that trade patterns will be rearranged, imposing more transportation costs.  A deadweight loss for the global economy.  And of course Trump’s fiscal policy will make the trade deficit “worse”.

The Chinese surely understand this, but I suspect the Trump administration does not.  Or perhaps people like Larry Kudlow do understand, but are keeping quiet because they wish to avoid something much worse.

Saturday’s vague statement did not mention telecommunications company ZTE and its lack of firm targets highlighted a continuing gap between both sides’ priorities.

The apparent failure came as political reaction forced the Trump administration to back away from a presidential commitment to resolve a dispute over ZTE, which was forced to suspend business operations after being banned from buying US components. . . . Mr Trump’s tweet provoked a backlash from both Republicans and Democrats in Congress who pointed to US intelligence agencies’ longstanding security concerns about ZTE. Politicians across the US political spectrum warned the president on Friday not to cave in to China.

Trump’s negotiating has been so ineffective that both Dems and Republicans are complaining he’s too weak on China, not nationalistic enough.  ROFL.

Trump is discovering that trade is like health care, much more complicated than he imagined.  It’s already clear that the Bannon wing of the GOP has lost on trade; there will be no meaningful actions to reduce the US trade deficit.  Indeed Trump’s policies will likely widen the deficit.  The alt-right has successfully transformed the GOP into an alt-right party in terms of rhetoric.  You see mainstream GOP politicians like Mike Pence heaping praise on criminal, racist, right-wing extremists like Sheriff Arpaio.  The alt-right can also take comfort in the fact that we have despicable, stupid, bigoted preachers represent the US at the Jerusalem embassy opening.  But the alt-right is losing on policy.  They failed to get an alt-right foreign policy, they failed to get a Mexican wall or a sizable cut in immigration (except refugees, a tiny portion of immigration), they failed to get a big increase in infrastructure spending, and they will fail to get an alt-right trade policy.

The one signature success of Trump—big tax cuts for corporations—is not an alt-right policy. It’s from the traditional Mitt Romney GOP playbook.

The poor, the sick, the sad, and the lonely: Blaming the victims

Most people will want to skip this post, but it’s something I need to get off my chest. One unfortunately aspect of the internet is that it lifts off the lid, and exposes all the dark sides of human nature. One of those dark aspects is the urge to blame the victim.

1.  The sick

If you follow sports, you will eventually come across a case like Derrick Rose, or Kawhi Leonard. These are players that suffered severe injuries, and had trouble getting healthy again. At some point medical science is no longer able to identify the problem. They look healed but they still felt pain, which got worse when they played. When that happens, sports reporters start whispering that it’s a mental thing, that these players are weak. This despite the fact that when healthy, these men were among the toughest in the league, willing to mix it up with much bigger players under the rim. We get frustrated that they aren’t healed yet—and that the problem cannot be identified—so it’s their fault. (This year it’s Markelle Fultz who is being picked on.)

Medical science may be impressive, but there is still a great deal that it doesn’t understand. If you go to the doctor and complain about chronic intestinal pain, there’s a good chance that he or she won’t be able to pinpoint the problem. Indeed there are lots of things that cannot be identified in X-rays or blood tests, including severe back pain, chronic fatigue syndrome, migraine headaches, and dozens of other illnesses. We get frustrated with people who have these hard to pinpoint problems, and label them “hypochondriacs.” Or we say they have a low threshold for pain—as if anyone knows the pain felt by another person. Yes, it’s true that the pain is “all in their head”, but that’s equally true of someone suffering pain from a “phantom limb”, and someone who has their hand on a hot stove. Where else would the pain be?

2.  The sad

It’s even worse with mental illnesses. People suffering from depression are told to just “snap out of it”, or think positive thoughts. They are viewed as losers.

3.  The lonely

There has been recent discussion of “incels”, people who are celibate but who would prefer to be in a romantic relationship. The non-lonely often tell them to just “lower their standards”, as if they had never thought of that. Or join a church. Please, just stop. Even worse, one prominent pundit implied that tech firms might want to get rid of these awful people. After all, one incel in Canada murdered some people.

4.  The poor

Like you and I, indeed like almost everyone, poor people often make bad choices. But the last thing they want to hear is someone telling them what they did wrong. Consider a young woman at the bottom of society (in terms of looks and education). Her life is pretty bleak, with only a few men to choose from. Having a child would provide some meaning to her life. She finds the best man she can, but in the end he walks out on her, leaving her a poor single mother. Or maybe he beat her and she walks out on him.  Sure, she might have been able to stay slightly above the poverty line by becoming a low wage, childless, “incel” worker with nothing in life to look forward to; but not everyone can live that way. Yes, poverty is bad, but being physically ill, mentally ill, or lonely might well be worse.

I understand that there are people out there who are deserving of blame. Think of the famous case of the worker who is on disability for a bad back, but is discovered out skiing. (Or Trump with his “bad feet“.)  These people exit. But unless you have clear evidence pointing in this direction, do not blame victims for their plight. Just don’t do it.

If I were to generalize, I’d say that the biggest mistake made by conservatives is to view the unfortunate as “losers” who are to blame for their plight. In the case of incels, both the left and the right piles on.

On the liberal side, the biggest mistake pundits make is to rank people by how much sympathy each victim deserves. Don’t tell people that their suffering is less bad than someone else’s. YOU DON’T HAVE ANY IDEA WHAT IT’S LIKE TO BE IN THEIR SHOES. For all we know, the most miserable person in America might well be a billionaire. These pundits base their opinions on social science, whereas they ought to spend more time reading great literature.  There’s more to life than money.

HT:  Scott Aaronson, who has a much better post.

NeoFisherism in Turkey

From the FT:

The Turkish lira led a broad drop in emerging market currencies on Tuesday after President Recep Tayyip Erdogan vowed to take greater control of monetary policy if he wins elections next month.

Mr Erdogan has for years harboured a deep antagonism towards high interest rates, taking the unconventional view that they cause rather than curb inflation. Last week, he warned that they were “the mother and father of all evil”, fuelling concern that he would not allow the central bank the freedom to raise rates.

The Turkish president told Bloomberg that cutting interest rates would lower inflation. “The lower the interest rate is, the lower inflation will be,” he said. “The moment we take it down to a low level, what will happen to the cost inputs? That too will go down . . . you will be able to get the opportunity to sell your products at much lower prices . . . The matter is as simple as this.”

PS.  A new paper by Warwick J. McKibbin and Augustus J. Panton makes the case for NGDP targeting:

Looking to the future the importance of supply shocks being driven by climate policy, climate shocks and other productivity shocks generated by technological disruption as well as a structural transformation of the global economy appear likely to be increasingly important. This suggests an important evolution of the monetary framework may be to shift from the current flexible inflation targeting regime to a more explicit nominal income growth targeting framework. The key research questions that need further analysis are: how forecastable is nominal income growth relative to inflation?; and what precise definition of nominal income is most appropriate given the ultimate objectives of policy (nominal GDP, nominal GNP or some other measure that is available at high frequency (e.g. big data on spending)). Also, the issue of growth of income versus the level of income is an open research question with many of the same issues to be faced as the choice between inflation targeting versus price level targeting.