Archive for May 2016


The prophetic Onion

Economists cannot predict the future, but The Onion sure can.  In their report on Bush’s inauguration in January 2001, The Onion had Bush reassuring the public that “our long national nightmare of peace and prosperity is finally over”.

Now Peter sent me to an Onion video from right after the 2012 election that is eerily prescient:

Let’s see how they do on their VP prediction.

Off topic.  Dylan Matthews has a wonderful post skewering the eternal cluelessness of the left.  (In the case Google.)  He’s actually far to polite.

Because I’ve been doing a lot of Trump bashing, I’d like to give some air time to the other side.  Here Dylan Matthews defends Trump against the charge that he is a fascist:

Again, fascism requires stepping outside the system and attacking the democratic structure. As long as that structure itself is handling illiberal attitudes on race, those attitudes don’t themselves constitute a fascist trend.

But the views are still illiberal. To be very, very clear: Donald Trump is a bigot. He is a racist. He is an Islamophobe and a xenophobe. He profits off the hatred and stigmatization of traditionally oppressed groups in American society. That makes him, and his European peers, and racists in other eras in American history, a threat to crucial values of equality and fair treatment, and a threat to the actual human beings he’s targeting and demonizing. And he’s in particular mainstreaming Islamophobia, which is on the rise in recent months, as seen in a recent incident in which a Muslim engineer was harassed at a Fredericksburg, Virginia, civic meeting. “I’m really not sure those views in Fredricksburg would be aired were it not for Trump’s ‘mainstreaming’ of these prejudices,” Feldman says.

Yes, there are lots of differences from the 1930s.  It’s a completely different world today, and Trump obviously won’t invade Poland.  But Trump does have many fascist tendencies.  Perhaps the term ‘demagogue’ is more appropriate.

Each week I’ll try to provide at least one defense of Trump, similar to the one above.


David Beckworth on EconTalk

David Beckworth was interviewed by Russ Roberts this morning in a special video version of EconTalk, which was held at the Cato Institute and hosted by George Selgin. Unfortunately I am not able to find a link for the talk, but I’ll put one up if someone else can direct me to it.

Update:  Here’s the link:

Update#2:  I’m told the link no longer works, but a new link should be up in about 10 days.

There was some discussion of whether the market monetarist critique of Fed policy in 2008 is just Monday morning quarterbacking.  David seemed to concede that this complaint had some merit, and perhaps to some extent it does.  But I also think David is being too modest.  Here’s David criticizing interest on reserves, way back in October 2008, right after it was first adopted:

Is the Federal Reserve (Fed) making a similar mistake to the one it made in 1936-1937? If you recall, the Fed during this time doubled the required reserve ratio under the mistaken belief that it would reign in what appeared to be an inordinate buildup of excess reserves. The Fed was concerned these funds could lead to excessive credit growth in the future and decided to act preemptively. What the Fed failed to consider was that the unusually large buildup of excess reserves was the result of banks insuring themselves against a replay of the 1930-1933 banking panics. So when the Fed increased the reserve requirements, the banks responded by cutting down on loans to maintain their precautionary level of excess reserves. As a result, the money multiplier dropped and the money supply growth stalled as seen in the figure below.

.  .  .

Now in 2008 the Fed did not suddenly increased reserve requirements, but it did just start paying interest on excess reserves. The Fed, then, just as it did in 1936-1937 has increased the incentive for banks to hold more excess reserves. As a result, there has been a similar decline in the money multiplier and the broader money supply (as measured by MZM) which I documented yesterday. If the Fed’s goal is to stabilize the economy, then this policy move appears as counterproductive as was the reserve requirement increase in 1936-1937.

David says that in retrospect he thinks that Fed policy went off course even earlier, in the middle of 2008. Speaking for myself, I didn’t really become aware of the problems with monetary policy until September 2008, after the Fed refused to cut rates despite plunging TIPS spreads.  In retrospect, money became much too tight a couple of months earlier.

Because of data lags, it’s not always possible to predict a recession until the recession is already well underway.  During the past three recessions, a consensus of economists didn’t predict a recession until about 6 months in.  That’s right, not only are macroeconomists unable to forecast, we are also unable to nowcast.

This is why NGDPLT is so important. Under a level targeting regime, the market tends to prevent sharp drops in NGDP from occurring in the first place.  Under NGDPLT, the economy would not have fallen as sharply in late 2008, partly because level targeting would have prevented a steep plunge in asset prices, and partly because current AD is heavily dependent on future expected AD.  If you keep future expected AD rising along a 5% growth path, current AD will not fall very far during a banking crisis.

There was also some discussion of the shortage of safe assets.  Two questions came to mind:

1.  Does this theory imply that risk spreads should have widened in recent years, as the demand for T-bonds has increased faster than the demand for riskier bonds?

2.  Has this in fact occurred, and if so to what extent?


Has the Fed “assumed broad responsibility for nominal output growth”?

Deutsche Bank says yes:

The Fed’s dual mandate of maximum employment and price stability implies substantial oversight of the private economy. We develop a proxy for nominal private GDP growth, perhaps the broadest measure of private sector activity, and decompose this proxy into two segments, one that is explicitly within the scope of the dual mandate and one that is not. Weak nominal private growth in the present cycle has been almost entirely due to the latter, in particular the abysmal trend in productivity. We conclude that while a narrow reading of the Fed’s dual mandate might suggest that it is far behind the curve in terms of rate hikes, the Fed has favored a very cautious approach because it has implicitly assumed broad responsibility for nominal output growth. As the productivity slowdown is unlikely to get resolved in the near term, we expect the Fed to remain on hold through much of this year, and possibly into next year.

I highly recommend Gregory’s Clark’s review of Robert Gordon’s book on the growth slowdown.  He does a nice job of explaining why productivity growth is going to remain low for the foreseeable future:

The core of Gordon’s pessimism about future technological advance is that the modern US economy is now heavily based around services, accounting for 80 percent of output. Manufacturing, traditionally a sector with higher efficiency advance, has shrunk to 12 percent of the economy. . . .

A surprising share of modern jobs are the timeless ones of the pre-industrial era— cooking, serving food, cleaning, gardening, selling, monitoring, guarding, imprisoning, personal service, guiding vehicles, carrying packages. Food production and serving, for example, now employs significantly more people (9.1 percent) than do production jobs (6.6 percent). One in ten workers is employed in sales. The information technology revolution to date has left these jobs largely untransformed. Workers in these types of jobs in Europe in 1300, if transplanted to modern America, would need little retraining.

Even outside services, we can find jobs with no gain in productivity since the Industrial Revolution. Builders’ price books in eighteenth century London show the rate at which bricklayers laid bricks in house construction. In 1787 this was 75 bricks laid per hour. For modern England the rates are lower, 225 years later, at around 50–70 per hour.

Combine slow productivity growth with at most 2% inflation and a working age population that’s growing very slowly, and you are left with 3% NGDP growth and very low interest rates for as far as the eye can see.  Get used to it.

HT:  Federico

Trump on the qualities he’d look for in a Supreme Court justice

Here’s Politico:

Trump: I’d pick justices who would look at Clinton’s email scandal

Donald Trump on Wednesday fired back at Hillary Clinton, remarking that he would likely nominate Supreme Court justices who “would look very seriously at her email disaster.” . . .

“Well, I’d probably appoint people that would look very seriously at her email disaster because it’s a criminal activity, and I would appoint people that would look very seriously at that to start off with,” Trump said in a phone interview with ABC’s “Good Morning America.” “What she’s getting away with is absolutely murder. You talk about a case — now that’s a real case.”

Yes, I think the most essential quality of any Supreme Court justice is that they commit to persecute the set of people that the President considers his enemies.

This race is completely beyond parody.  There’s really no difference any longer between The Onion and the mainstream media.

And top GOP officials are endorsing this guy?  Everyone assumes he’ll start acting sane once he’s got the nomination wrapped up.  But what if this is the real Trump? What if he’s too dumb to fake being qualified for President?

And what if it were true that Trump is a stalking horse, secretly try to get his buddy Hillary elected.  He’s trying to lose by saying one outrageous thing after another. But now suppose he wins, despite trying to lose.

Springtime for Hitler?

(Perhaps the only Hitler analogy that actually fits Trump.)

Fed legal authority bleg

I am looking for research from a legal scholar on the Fed’s legal authority to do different things.  I emphasize ‘scholar’, I don’t want stuff on why the Fed is unconstitutional.  Someone sent me a paper a while back, but unfortunately I’ve lost the email.

I have a new editorial in the Orange County Register, discussing the minimum wage.

I’m getting depressed reading George Selgin’s new series on monetary economics. His explanations are so clear and easy to understand that I fear my own book project will fall short by comparison.

I have a new post at Econlog on why Russia’s recession was milder than expected, especially in terms of unemployment.  While they did not exactly follow NGDP targeting, their policy seemed to have moved sharply in that direction, compared to 2008-09.