Tyler Cowen linked to a Binyamin Appelbaum interview of Boston Fed President Eric Rosengren:

Q. A number of the academics at this conference said they don’t think you should be trying to raise rates. What do you make of their hesitations?

A. We haven’t hit 2 percent inflation for a while. Some of them have argued that we should in effect be price-level targeting, which is to say that the misses that we’ve had in the past ought to be made up in the future. So they have a different model than we actually are using for monetary policy. We have an inflation target right now. If we wanted to move to price-level targeting, as was advocated by a number of the academics at the conference, we should have that discussion. We should announce it publicly. I don’t think we should do it without telling the public.

I think also the inability of so many central banks to hit their 2 percent inflation target has caused some people to say, “I want to actually see evidence that you can hit 2 percent, and since we’ve just seen the consequences of hitting the zero lower bound, I want to take out some insurance against hitting the zero lower bound more quickly.” I think both concerns are credible. My concern with those arguments would be that the very scenario that causes the next recession might be that we overshoot.

Rosengren currently favors an increase in the Fed’s target rate, whereas I’m a bit more skeptical.  But I do applaud the way he analyzes these issues.  Level targeting makes a lot of sense, but only if you’ve announced that you are going to do level targeting.  Otherwise it may end up destabilizing the economy.  Monetary policy would react in ways that the markets did not anticipate.

The next recession is likely to have the same cause as the previous one—Fed tightening triggered by inflationary concerns.  If you run 3% inflation for a while because you are doing level targeting of prices, that’s fine.  But if you run 3% inflation, and then tighten because inflation is over your 2% target, then the high inflation could trigger another recession.

That’s why I keep insisting that the Fed needs a completely new strategy (NGDPLT), and that we focus far too much on minor tactical issues, such as the question of whether the Fed will raise rates in December.

In contrast, when the economics profession should have been screaming tight money from the rooftops (say in 2008) they were almost completely silent (except a few MMs, and people like Bob Hetzel.)

PS.  Here’s another quote I like:

So you don’t see instances where we go from 4.2 percent to 4.7 or 5 percent and level off. What you actually see is when we start tightening we end up with a recession.

I’ve done a number of posts pointing to the fact that the US does not have any mini-recessions, whereas our macro models predict that mini-recessions should be more plentiful than actual recessions.  That is, when unemployment start rising, you don’t see it rise 1.0% or 1.5%, and then stop.  It either rises by only a tiny bit, or by a lot.  The Fed needs to prevent those cases where it rises by a lot. (Oddly, other countries do have mini-recessions.)  If we switched to any sort of level targeting (P or NGDP), then I predict the US would start having mini-recessions instead of normal recessions.

If the British keep shooting themselves in the foot, before long they are going to run out of toes.  Here’s the latest outrage:

“THEY are not, and never have been, immigrants.” So declared Enoch Powell of international students in an infamous speech against migration in 1968. Ending up to the right of Powell, who was as fierce a critic of immigration as they come, is an uncomfortable position. But that is where Theresa May’s government finds itself with respect to overseas students. As part of a plan to reduce the number of migrants, on October 4th Amber Rudd, the home secretary, announced new restrictions on foreign students, including tougher entry requirements for those going to lower-quality institutions. The proposal is merely the most recent attempt to deter foreigners from paying tens of thousands of pounds to study in Britain.

Since the turn of the century the number of foreign students in Britain has more than doubled (see chart). In contrast to Britain’s overall immigration trend, growth has come not from Europe but from the rest of the world. Chinese students are by far the biggest group, numbering 89,540 last year, up from 47,740 in 2004. The steep fees paid by non-EU citizens have made higher education an important British export. By one estimate foreign students contribute £7 billion ($8.6 billion) a year to the economy in fees and living expenses.

.  .  .

Other countries spy an opportunity. Australia and Canada, popular alternatives for Asian students seeking an English-language education, offer (limited) chances to stay and work, making them attractive destinations. Australia has simplified its student visa system to boost its appeal. Germany is offering more courses in English. And since 2014 public universities there have largely abolished tuition fees, including those for foreigners. This month the Irish government revealed plans to encourage more foreign students. “Everybody is doing the exact opposite to us,” laments Ms Owen Lewis. While the number of foreign students in Britain has stalled, in other countries it is zipping up. In Australia it increased by 11% last year.

Nor does the crackdown look politically necessary. A YouGov poll last year found that students were the most popular group of migrants among voters, three-quarters of whom thought their numbers were about right or should be higher. Even supporters of the right-populist UK Independence Party were keen on them. Reducing immigration in general will hurt Britain’s economy; barring fee-paying students is a particularly damaging way to do it.

Wow, Theresa May has ended up to the right of both Enoch Powell and the UK Independence Party.  I opposed Brexit out of fear that it would open the door to right-wing nationalism, but even I never dreamed that it would end up being this bad.

Statism and nationalism, a poisonous combination.

Trump has raised a lot of new issues in this campaign, including political correctness, trade, and most importantly, immigration.  So will these issues become increasingly important in the future, even if Trump loses?  Don’t count on it.

1.  Trump is doing absolutely horribly among the younger voters, including generation X and Y. Every day, lots of older Trump voters die off, and lots of teenagers who went to diverse high schools and are comfortable with people from many different cultures turn 18, eligible to vote.

2.  Trump does well among blue color whites.  Every day, lots of those voters retire, and some die off.  Younger white people in places like Iowa who used to work in meat packing plants now get service sector jobs.  The plants hire Mexicans instead.  The remaining factory jobs that do hire whites often employ skilled technicians.  Again, the Trump “base” is shrinking rapidly.

3.  The white, non-Hispanic share of the population will continue to shrink.  There is some evidence that the GOP might be able to make gains with groups like Chinese-Americans, but even there the appeal is limited to certain issues like political correctness (which the Chinese see through the lens of China’s Cultural Revolution) and affirmative action in college admissions. Issues like trade and anxiety about legal immigration will not attract Chinese immigrants.

Many stereotypes have a grain of truth, but also cover up a lot of important nuance.  This article says the Trump issue is all about the cities versus the countryside.  OK, but it’s also worth noting that:

1.   American farmers are doing well.

2.  American farmers benefits more from trade than almost any other group.

3.  American farmers benefit from cheap illegals helping to harvest their crops.

Trumponomics would be horrible for America’s farmers.  Yes, I know that most rural people are not farmers, and that many farmers support Trump.  It’s just that these stereotypes cover up a lot of complexity.  Trump will lose Michigan badly and win the south central states.  Of course the auto industry has fled Michigan, and expanded rapidly in the  . . .  yes, south central states.  So it’s all about economics?  You might say, “Yes, he’ll lose Michigan badly but win in depressed Detroit”. Except he won’t, he’ll get slaughtered in Detroit, and Cleveland, and Pittsburgh, and St Louis, and Buffalo, and Baltimore. . . .

And yet in those cities Trump will get lots of votes from white cops and fireman (service jobs!) who get nice salaries and need not fear foreign competition.  Cops who enjoy patrolling immigrant Asian neighborhoods because there is so little crime.  This is a really complicated country—all generalizations are false, (except this one).

In a two-party system, each party wins the presidency about 1/2 of the time each century.  There is a natural equilibrating mechanism, as one party fulfills its various promises, the “issues” seem to become more and more favorable to the “out” party.  In addition, the out party usually begins to adjust its policy views to become more “marketable.”  That’s why I expect the GOP Congress to cave in to Clinton on both the minimum wage and amnesty.  The GOP wants those issues off the table in 2020—they want to run against Clinton’s stagnating economy, high taxes and over-regulation, without being seen as racist and anti-low wage worker.

Pundits that think we can never go back to the old Mitt Romney “country club” Republican Party may be in for an unpleasant surprise.  Or perhaps I should say “pleasant surprise” if the Alt-Right is the alternative.

Here’s a NYT headline:

Europe May Finally End Its Painful Embrace of Austerity

And here’s the claim:

As Europe has grappled with the trauma of a devastating financial and economic crisis, policy makers have consistently relied on one approach to managing the damage — budget austerity.

Shrink government spending by trimming pensions and cutting social programs, the logic runs, and the markets will gain confidence in the tough-minded people in charge. Confident markets make for happy markets. Money will pour in, and good times will roll.

Even as prosperity has remained painfully elusive across much of Europe, leaders have time and again renewed their faith in the virtues of this harsh medicine.

Until now.

Some policy makers are flashing tentative signs that they may be prepared to slacken their grip on public coffers to spur growth and improve the lot of ordinary people suffering joblessness and diminished wealth. In the clearest sign of this shift, the heavily indebted Italy is increasingly inclined to challenge Germany — the guardian of austerity — to loosen European purse strings.

Of course everything is relative, and European fiscal policy has not been particularly austere.  But even so, can we assume that a slackening of “austerity” will boost growth? Veronique de Rugy of the National Review reports:

The Congressional Budget Office recently released its Monthly Budget Review for September 2016. It includes a revised estimate of the deficit for 2016. It isn’t much different than the one projected in August. The document makes it hard to ignore that in 2016 the deficit grew by $149 billion, from $439 billion in 2015 to $588 billion at the end of FY2016. This explains why we haven’t heard president Obama brag about how the deficit is shrinking in a while.

Normally the deficit falls during expansions.  How did the economy respond to this loosening of “austerity”?  RGDP growth slowed to less than 1.3% during the past four quarters, as the Fed tightened policy.  As a result of our foolish fiscal policy, fiscal authorities will now have less room for “stimulus” during the next recession, as the deficit will be starting from a higher base.  Of course this will come as no surprise to readers of this blog.  The austerity of 2013 (when the deficit plunged from about $1,050 billion to about $550 billion between calendar year 2012 and 2013), coincided with an increase in GDP growth. But like Chicago Cubs fans, Keynesians never give up hope.

Now let’s look at the UK:

Before the June 23 vote for “Brexit,” the man in charge of the budget, the chancellor of the Exchequer, George Osborne, was publicly pursuing the aim of delivering a budget surplus by 2020. The target required cuts.

But as the political class absorbed the ballot result, interpreting it as a demand for redress from communities reeling from high unemployment and wage stagnation, Mr. Osborne acknowledged that his goal could no longer be achieved.

His successor, Philip Hammond, has raised the ante.

In a speech at an annual gathering of the governing Conservative Party on Monday, the new chancellor declared that the government would borrow more to finance new infrastructure projects — presumably creating construction and manufacturing jobs.

While reading this, I spied a link in the right column, to another NYT story, this one from May 25th:

‘Brexit’ Could Spell More Austerity for Britain, Study Warns

That’s pretty scary, but could the prediction be trusted?  The NYT says yes:

LONDON — Prime Minister David Cameron’s campaign to keep Britain in the European Union was bolstered on Wednesday by a report from one of the country’s most authoritative economic research bodies, which concluded that a withdrawal from the bloc would lead to up to two more years of public spending cuts or tax increases.

A frequent critic of government economic plans, the research body, theInstitute for Fiscal Studies, this time delivered some welcome news for Mr. Cameron.

Of course it could be trusted (the NYT signals), it came from “one of the country’s most authoritative economic research bodies”, which is also “A frequent critic of government economic plans”.  So we aren’t talking about one of those nutty right-wing outfits, like the Adam Smith Institute or the IEA.

NYT readers never need fear leaving their cosy intellectual cocoon, where fiscal stimulus produces growth miracles, and a continent where governments spend 50% of GDP is struggling because of “austerity.”  Yes, the Trumpistas are even worse (and also oppose austerity), but then I don’t expect much from the “stupid party”. I do expect more from the Times.

In recent months, right wing nationalists such as Donald Trump and Theresa May have criticized the low interest rate policies of the major central banks.  This may reflect the fact that a core part of their political support comes from grouchy old people, who are frustrated by the low interest rates earned on their savings accounts.  Saturos sent me the following:

Mark Carney said on Friday that he would not “take instruction” from politicians after Theresa May warned that there had been “bad side effects” due to Bank of England policies.

In comments which risk an unprecedented clash between the Governor of the Bank of England and the Prime Minister, Mr Carney said that “it can be difficult sometimes if there are political comments on our policies”.

His remarks come just days after Mrs May used her speech to the Conservative conference to criticise the Bank over quantitative easing and ultra-low interest rates.

Carney explained the distinction between tactics and goals:

“The objectives are what are set by the politicians. The policies are done by technocrats. We are not going to take instruction on our policies from the political side.”

The UK government quite properly sets the objectives (such as the inflation target) and then leaves the tactics up to the BoE, which is independent of the government. A few hours later the May government retreated like a dog with its tail between its legs.  Here’s the FT:

Theresa May’s allies have tried to cool speculation about tensions with Mark Carney, insisting the prime minister would be delighted if the Bank of England governor decided to serve his full eight-year term until 2021. . . .

Mrs May’s comments caused concern at the Treasury and the BoE because theyappeared to suggest the government wanted to set monetary policy, although Treasury insiders say this was a misunderstanding and stemmed from naive drafting of Mrs May’s speech.

Philip Hammond said he hoped the governor would remain in Threadneedle St until 2021 to act as a stabilising influence as Britain leaves the EU. One Treasury insider said: “Nobody inside Number 10 seemed to get how her words might be interpreted.” Mr Hammond wants to dampen pre-Brexit concern in the City of London and did not welcome Mrs May’s intervention.

But the prime minister is said by her aides to be fully supportive of the governor.

That’s more like it.  (Her aides seem only slightly more competent than Trump’s. OK, I’m just kidding–May is 1000 times better than Trump.)

PS.  In another FT article I saw this:

In these circumstances, it is hardly a surprise that investors are marking down the UK’s economic prospects by selling its currency. The government says it will not provide a running commentary on Brexit ahead of next year’s negotiations with the rest of the EU. But the faster that Mrs May’s government provides some clarity about exactly what it is aiming at the better.

Over at Econlog I’ve done a number of posts discussing whether this major “uncertainty shock” will cause a recession in the UK.  In my initial post I suggested that the shock would hit RGDP harder than unemployment.  I’m sticking with that prediction for now, but will keep an open mind.  I believe that sharp increases in unemployment are usually due to demand (i.e. monetary) shocks, and that real shocks cause pain spread out over a longer period of time, affecting GDP more than employment (unless the real shock is specifically directed at the labor market, such as a higher minimum wage.)  I believe the fall in the pound is signaling slower long-term British growth, but I still doubt whether we will see a sharp rise in the UK unemployment rate in the next 6 months.

PPS.  I’m allowed to make bigoted statements about grouchy old people, because I am one.