Archive for September 2017


Kevin Warsh for Fed chair?

There is increasing chatter that Kevin Warsh is being seriously considered for Fed chair.  He would not be my first choice, for several reasons:

1.  He is viewed as a well rounded figure, with some knowledge of both monetary policy and the financial system.  I’d prefer someone who has great expertise on monetary policy, even if they knew little about anything else.

2.  He was spectacularly wrong about policy during the Great Recession.  Here is Business Insider:

Back in 2009-2011, while still at the Fed, Warsh was keenly worried about inflation at a time when consumer price growth was actually deeply undershooting the central bank’s 2% target and unemployment remained very high. His concerns, since reiterated in the occasional opinion piece, have proven deeply misguided since the Fed continues to undershoot its inflation goal to this day. Indeed, bond investors have palpable doubts about the Fed’s plans to continue raising interest rates next year and in 2019.

And here is Politico:

Jordan Haedtler of the progressive group Fed Up, which advocates lower interest rates and more diversity at the central bank, doesn’t see Warsh’s Wall Street ties as a positive.

“He was tasked by Bernanke with being the emissary to his former employer and other major Wall Street firms, so his independence from the financial sector is just as questionable as the Trump administration as a whole,” he said.

Haedtler also argued that Warsh was “spectacularly wrong during the lead-up to the crisis, during the crisis and following the crisis.” He cited a March 2007 speech in which Warsh praised the proliferation of new financial instruments, one of the major factors leading to the crisis.

Can we now be sure that Warsh was wrong about monetary policy during the Great Recession?  I think so, but I’d also like to briefly discuss the implications of the other view, that we can’t be sure he was wrong.  If that were true, then monetary economics would be useless. There would be no core of knowledge worth teaching to our students.  The loony right wing critics of the Fed would be correct; it would be a bunch of priests in robes incanting a lot of mystical mumbo jumbo, with no connection to anything real.  Indeed it’s now so obvious that money was too tight during the Great Recession that anyone still denying that claim basically loses all credibility.

Imagine that we actually didn’t know that Warsh was wrong.  Now imagine a cynical student who likes to shoot his mouth, sitting in the front row of a college monetary economics class.  The instructor starts teaching, and the student immediately shoots his hand up in the air.  “How do we know that’s true.”  “Prove it.”  “I don’t believe you.”   “You say the Fed pursues a dual mandate, but then how come even famous monetary economists can’t agree that money was too tight during the Great Recession, when both employment and inflation were far below target, and when the inflation they warned about never showed up, even years later when unemployment fell to 4.3%”.  “If you guys can’t even agree on that, then how can you claim to know anything.”

I don’t think we could criticize that annoying student.  Who’s to say he’s wrong? Why should he accept anything he’s being taught as being true, if even the leaders of the profession can’t agree on its most basic principles?

And BTW, I’d say the same thing about microeconomics.  If we as a profession can’t agree that “price gouging” is a good thing, which should not be outlawed, then how can microeconomists claim to know anything.  And yet a recent post by David Henderson discussed a poll which showed that 8% of leading economists actually hold those deeply unscientific views. (And lots more were uncertain.) Opposing price gouging is not like denying global warming, it’s far worse.  It’s like creationism.  At least with global warming there is some doubt.  (I happen to agree with the scientific consensus.)  But if economists are wrong about price gouging, then you might as well put all EC101 textbooks into a big bonfire.  Greg Mankiw’s (excellent) textbook is probably about 750 pages long, but the basic punch line of much of what he says can be boiled down to something to the effect that, “price gouging is not only good, it’s the whole point of a market economy.” (My words, not his.)  If Mankiw is wrong about that, then he’s wrong about almost everything.

And Madura’s policies in Venezuela would be wonderful.

The value of a human life

Here’s the New York Post:

Better a million dead North Koreans than a thousand dead Americans. The fundamental reason our government exists is to protect our people and our territory. Everything else is a grace note. And the words we never should hear in regard to North Korea’s nuclear threats are “We should’ve done something.”

Instead, we should do something. Pyongyang’s Sunday test of a hydrogen bomb of devastating power begs for decisive action. Must we wait until Americans die?

A pre-emptive strike against Kim Jong Un’s nuclear and ballistic missile programs would be a terrible thing, demanding a vast military effort (if done properly) and leaving broad destruction in its wake. But that terrible option increasingly appears to be the least bad option. The question is whether we’ll delay action until it’s too late to save American lives.

Notice that they ignore the South Koreans.  I wonder how they value South Korean lives?  Perhaps 13 cents on the dollar?

Here’s Elton John, er, I mean Trump:

The United States has great strength and patience, but if it is forced to defend itself or its allies, we will have no choice but to totally destroy North Korea. Rocket Man is on a suicide mission for himself and for his regime. The United States is ready, willing and able, but hopefully this will not be necessary. That’s what the United Nations is all about; that’s what the United Nations is for. Let’s see how they do.

It is time for North Korea to realize that the denuclearization is its only acceptable future.

Just to be clear:

1.  I have no idea what the optimal policy toward N. Korea is.

2. I think Trump makes both tails more likely (nuclear exchange and N. Korea capitulation), but the most likely outcome remains more of the same. The “problem” is that the tail risks may rise from say 1% to 2% under Trump.  That’s still low, but one of those tails is a very bad outcome, should it occur.

I hope readers now have a better understanding of what I meant last year when I claimed that Trump’s reckless personality raised the risk of nuclear war from something like 1% to something like 2%.

PS.  Trump started off his talk with some comments that were of zero interest to the UN audience, and included his usual lies.

Fortunately, the United States has done very well since Election Day last November 8th. The stock market is at an all-time high — a record. Unemployment is at its lowest level in 16 years, and because of our regulatory and other reforms, we have more people working in the United States today than ever before. Companies are moving back, creating job growth the likes of which our country has not seen in a very long time. And it has just been announced that we will be spending almost $700 billion on our military and defense.

Job growth has slowed since Trump took office.  And do you recall what Trump said about the booming stock market when Obama was President?

PPS.  Are a million dead N. Koreans better than one dead American?  If not, why not? Please show your work.

PPPS:  Trump also said:

We know it kidnapped a sweet 13-year-old Japanese girl from a beach in her own country to enslave her as a language tutor for North Korea’s spies.

How should we value the welfare of that sweet Japanese girl against the lives of 13-year old N. Korean girls.  How about South Korean girls?  How about undocumented workers in America like Melania?  How about Hillary?  How about Trump?  Again, I prefer that commenters provide precise numerical answers.  After all, the NYPost says this is all very simple.

Seven hundred $100 bills are lying on the sidewalk. Pick them up!!

I have wonderful news for everyone.  The prize money for two Hypermind NGDP markets has soared to $70,000, which includes $35,000 in prize money for the 2017:Q1 to 2018:Q1 contract (currently trading at about 39, or 3.9% NGDP growth), and another $35,000 for the 2018:Q1 to 2019:Q1 contract.

Update:  This announcement triggered a lot of interest in the contract. Hypermind sent me a better link to the two markets.

Remember that this is free money.  You do not have to invest any of your own money to participate.  You can win money, but you cannot lose.  Our hope is that this prize money will lead to more trading in the NGDP markets, more liquidity.

Once again, NGDP growth expectations are the single most important market price, the single most important measure of the performance of the macroeconomy.  It’s a scandal that the economics profession has ignored this issue, but the Mercatus Center and Hypermind have cooperated so that we will have a real time measure of the public’s NGDP growth expectations.  (Here is the Mercatus announcement.)

Participating in this market can result in free money, thousands of dollars worth of free money for the more talented/lucky (pick one) participants. But the more important reason for participating is that this will tend to shine a spotlight on expected growth in aggregate demand.  Progressives should want that to happen.

And there’s something for conservatives too.  I hope that the financial press will eventually start reporting current NGDP futures prices.  This will gradually put more pressure on the Fed to pay attention to market forecasts, and move from a discretionary policy approach to a more rules-based approach.  Thus NGDP targeting has something for both progressives and conservatives, which is why it’s an increasingly popular idea among economists on both the left and the right.

PS.  I’m also a believer in the “watched pot never boils” theory, so I believe this market makes it less likely that a recession will occur before 2019. (Making this the longest expansion ever.) Recessions only occur when NGDP expectations fall sharply, and I believe the Fed will not want to see NGDP expectations fall sharply. Please file away this prediction, and remind me of it if I am wrong.

PPS.  David Beckworth has a very interesting podcast with Larry Summers.

In this Econlog post I comment.



Read posts carefully

People tend to misread my posts.  The recent post on poverty is a good example.  Here’s what I believe.

1.  On average, the poor tend to be less talented and hard working that the rich.

2.  There is nothing “wrong” with poor people.  They are just as good as rich people.  Being more talented doesn’t make you a better person than being less talented.  Being hard working doesn’t make you a better person than being less hard working.  The government should not encourage people to become more educated and harder working.  But they should stop discouraging people from working hard.

3.  Culture is not carved into stone.  China and Singapore circa 1976 were both largely “Chinese” cultures, but one was hard working and increasingly affluent and one was less hard working and extremely poor.  That doesn’t mean that Singaporeans were better people than the Mainland Chinese.

4.  I am not “fatalistic” about the poor, about drug addicts, etc.  My blog is full of public policy proposals to ameliorate these problems.  I’m optimistic that these problems will become less severe over time.

5.  But I’m also not a dreamy-eyed utopian.  Even with perfect public policies, there would be all sorts of “gaps” between different ethnic groups, and between men and women.  That’s because culture changes slowly, and human capital takes time to accumulate.  Perhaps American Christians will eventually catch up to American Jews in terms of average income, but it’s not likely to happen in the 21st century.  Sorry Christians, but your going to just have to accept that cultural change occurs slowly.  (That’s one area where I agree with conservatives.)

6.  Some of the gaps between groups may be partly genetic, but that’s never been my working assumption.  All groups have good enough genes to be at least middle class by American standards.  Good enough genes to be a truck driver or mailman or plumber or the vast majority of other jobs.  So we might as well focus on public polices, not genes.  (That’s one area where I agree with liberals.)

In general, my views lie completely outside the standard “victims and villains” debate between liberals and conservatives.  I don’t blame blacks and Hispanics and Native Americans for their lower (average) income, nor do I blame “white privilege.”

Again, there is nothing wrong with having a low income.  If you are reading this blog then you probably make more money than Mother Theresa did.  That doesn’t make you a better person.  Nor are you a better person than the desperately poor Indians she helped.  I prefer lots of the low income people I know to lots of the higher income people I know.

Tom Cruise didn’t choose to be born Tom Cruise, nor did I choose to be born me, nor did the homeless guy down the street choose to be born homeless.  Stop thinking in terms of “deserve” and start thinking like a utilitarian.

PS.  NR has a very good post on Trump by Jonah Goldberg, and a great one by Kevin Williamson.


I was wrong about Trump voters (plus “get stuff done”)

During the campaign I insisted that Trump had no actual beliefs, and that all his campaign promises were merely empty rhetoric—telling us precisely nothing about what he’d do as President.  And of course I was completely right.  No repeal of Obamacare, indeed he never even came up with a proposal to do so.  No slashing of income taxes down to a top rate of 25%, indeed his administration never even put together a tax plan.  No infrastructure.  No wall on the Mexican border.  He also abandoned his promise not to intervene against people like Assad (except to protect Americans.) He abandoned his pledge to go after China on trade.  Etc., etc.

But I was wrong about Trump voters.  Like many other people, I wasted many hours during 2016 reading thoughtful opinion pieces by left and right wing intellectuals, discussing “what the voters were telling us”.  One common theme was that voters were becoming more nationalistic and anti-immigrant.

Then when Trump reversed course on DACA and signaled he wanted to deal with the Dems to protect those illegal immigrants, the right exploded and warned darkly that his “base” would not stand for this.  Oh really?

Donald Trump’s tough talk on illegal immigration was a big part of the reason Dave Hagstrom and many others in this booming Phoenix suburb supported him for president. “Walls make good neighbors,” Hagstrom said.

So when the president moved this week to cut a deal — with Democrats no less — to block the expulsion of 800,000 immigrants brought to the U.S. illegally as children, was Hagstrom disappointed?

Not at all.

“If you were to deport them, where would they go?” Hagstrom, 60, a car-warranty manager, asked on his way to a Bible-study dinner at an upscale shopping mall. “To send them across the border would be inhumane almost. There’s no life for them there.”

It turns out that all of those opinion pieces on what the voters were trying to tell us were completely worthless.  The Trump voters have no principles at all.  They will support Trump in whatever he does.  He could install a Maoist economic policy, or a fascist regime, or a libertarian paradise, and his base would be equally happy. They just like the guy.  (Which is weird, as he has the most unlikeable personality I have seen in 62 years of existence—worse than Nixon.)

You’ll probably claim that I’m overreacting, that Hagstron is just an outlier, a 1 out of every 100 Trump supporter, while the other 99 are tough on immigration.

Then consider this:

In more than a dozen conversations with Trump voters in this sweltering Sonoran Desert oasis, not one found fault with Trump’s abandonment of his vow to deport the young immigrants, often referred to as Dreamers. In the bargain, he said, Democrats agreed to much tougher border enforcement, though not construction of a physical wall.

The odds of interviewing “more than a dozen” Trump people (in Arizona!) and finding that all just happen to be among the 1% of Trump supporters who are soft on immigration is . . . well I think it’s less than one in 10 to the 24th power.  I’m not good enough at math to describe those odds, but I think it’s roughly one in a septillion.  Or, maybe those “more than a dozen” are actually pretty common among Trump voters.  That’s the hypothesis I’m going with.

And this is really good news!  Trump has no fixed values.  His base had no fixed values.  It’s a complete crap shoot as to what will happen.  That might not seem good, but it’s less bad that the alternative—that Trump and his supporters actually believed the things they said in 2016.  It also suggests that Trump has no coattails—when he leaves the scene no one will able to pick up his voters, even with the same position on issues.  The issues never mattered.

PS.  This comment from America’s favorite racist cop brought a tear to my eye:

Indeed, even Arpaio seemed willing to go along with the compromise reached this week, if Trump thinks it best.

“He’s trying to make deals and get stuff done,” said Arpaio, a staunch supporter of the president who faced a prison sentence for racial profiling before Trump pardoned him last month.

That suits people like Joseph Wise just fine.

“I know a lot of these kids,” said Wise, 75, a retired electrical engineer from Gilbert, who paused to talk about Trump and immigration as he loaded groceries into the back of his sport utility vehicle. “They’re good kids. I’ve talked to some of them about how they crossed the border and barely survived.”

That’s right, get tough on “illegals” just as long as you don’t hurt any actual, physical, flesh and blood human beings.  As always, when the public is educated into the inner feelings on “the other”, utilitarianism wins.  Sorry Ann Coulter, but you are on the losing side of history.

PPS.  Oh, and Trump’s broken promise on Syria?  That was caused by pictures of children horribly maimed by poison gas.  Utilitarianism wins again.