Archive for October 2017


No matter how cynical I get, I can’t keep up

Commenter Ben Cole likes to point out that the Wall Street Journal was dovish when Reagan was President, but then became hawkish under Democratic Presidents.  It looks like they are back to their old tricks:

But Mr. Trump is counting on tax reform and deregulation to boost growth to 3% a year from 2%. If that growth happens, the Yellen-Powell Fed may believe it has to raise rates rapidly, endangering faster growth. Guess whose policies will be blamed? Not the Fed’s.

This is why the old “hawk vs. dove” monetary debate isn’t all that relevant at the current moment. Outsiders like Messrs. Warsh and Taylor, or Columbia’s Glenn Hubbard, believe that tax reform and deregulation can increase the economy’s capacity to grow above 3%. They therefore might raise interest rates more slowly than the Yellen-Powell faction would.

Translation:  Now that we have a Republican President we need easy money to hide the fact that Trump’s “pro-growth” policies are likely to fail.

They are right about one thing, with a 2% inflation target the question of hawks and doves becomes far less important; it’s really about competence vs. incompetence.

PS.  I wonder what John Taylor thinks of the WSJ claim that he’d be more dovish than Yellen.

Warsh on fiscal and monetary policy

Because Kevin Warsh is apparently the frontrunner for Fed chair, his record has been attracting a lot of attention.  Here’s Ike Brannon of the Weekly Standard:

In 2010, in his waning days on the board, Warsh remained preoccupied with the specter of inflation despite the complete lack of evidence suggesting its incipient appearance. In an FOMC meeting late that year he argued that the Fed should consider pulling back on its quantitative easing despite the fragile nature of the economy, reasoning that if it were to do so it would prompt Congress and the White House to act with another round of expansionary fiscal policy.

Suggesting that the Fed play political chicken with Congress is, in a word, insane. The Federal Reserve has a legislative mandate to pursue both full employment and price stability in monetary policy. What Warsh suggested would have effectively set that aside and inserted the Fed into the middle of a highly charged political battle that could have harmed the economy. People who allege that Warsh’s appointment would make the Fed more political can point to this as Exhibit A.

I agree that this sort of policy would be insane, although I’m not sure that this is precisely what Warsh was proposing.  I found this passage in the transcript of the November 2010 meeting, which suggests a slightly different interpretation (albeit equally “insane”):

First, my views on policy. As I said when we met by videoconference, my views are increasingly out of step with the views of most people around this table. The path that you’re leading us to, Mr. Chairman, is not my preferred path forward. I think we are removing much of the burden from those that could actually help reach these objectives, particular the growth and employment objectives, and we are putting that onus strangely on ourselves rather than letting it rest where it should lie. We are too accepting of dangerous policies from others that have been long in the making, and we should put the burden on them.

I can think, Mr. Chairman, of a tough weekend that the Europeans had, particularly your counterpart at the ECB, in the spring or summer, when we all knew that the European Central Bank, rightly or wrongly, was going to take action. But Jean-Claude Trichet did not take action until very late that Sunday night, until the fiscal authorities did their part. He thought that if on Friday night he were to say all of the things he’d be willing to do, he’d be taking the burden off the fiscal authorities. He chose to wait. I think we would be far better off waiting. If we proceed on this path, as I suspect we will, I would still encourage you to put the burden where it rightly belongs, which is on other policymakers here in Washington, and to do so in a way that is respectful of different lines of responsibility.

A few comments:

1.  Warsh’s comments in the transcripts are consistently disappointing, on almost every level.  Unlike other people I often disagree with (Krugman, Summers etc.) he doesn’t have a first rate mind.  His reasoning process is poor and he lacks good communication skills.  He has very poor judgment when interpreting data.  I really don’t know what he’s trying to say here, but the reference to Trichet is interesting.  Trichet was trying to encourage fiscal authorities to adopt more contractionary fiscal policies, not expansionary policies.  Trichet did not want to “bail out” expansionary policies with ultra-low interest rates, and Warsh seems to be endorsing Trichet’s approach.  And given Warsh’s reputation as a conservative, and the massive deficits being run by Obama back in 2010, I find it odd that Warsh would be advocating fiscal stimulus, as Brannon suggests.  But again, the passage is so garbled that I could easily be wrong.

2.  Warsh doesn’t seem to take the Congressional mandate seriously.  He seems to believe the Fed should be free to ignore this mandate, as a way of pressuring Congress to do what a few unelected private sector bankers want it to do.  To say that’s deeply disturbing is an understatement.  The Fed’s only argument for policy independence is that they are selfless non-political technicians trying to achieve goals set by Congress.

It is, of course, good news that equity prices have moved up, but I’m less convinced of their durability if this achievement is mostly because of what we’re doing here in the FOMC rather than because of what’s going on in the real economy.

This is disturbing on so many levels.  Start with the fact that no one could care less whether Warsh thinks the rise is equity prices was “durable”.  His opinion is worthless.  The fact that he thinks his opinion is worth mentioning is itself quite revealing.  And of course it’s not a question of monetary policy vs. the real economy; policy impacts stocks precisely because it impacts the real economy.  And of course he was totally wrong; the rise was durable.  Indeed stocks could crash tomorrow, and still be far above 2010 levels.

Warsh was also totally wrong about the NAIRU:

I share the staff’s view that the NAIRU has moved up.

In researching this post I came across this very revealing passage:

CHAIRMAN BERNANKE. President Evans, did you have a question?

MR. EVANS. Well, I just wanted to ask a question and offer a reaction to something that has come up at the last several meetings. I second the proposal of characterizing what optimal policy is in some way that we could better appreciate. President Bullard was absolutely correct when he pointed out that, after a big shock, optimal policy could well lead to fairly substantial gaps, or however you want to describe this outcome. But it’s also the case that bad policy would lead to gaps like that, too, and we need to understand why the current situation should be characterized as optimal and not simply bad. [Laughter] I mean, there is just a presumption here.

MR. BULLARD. Can I just clarify?

CHAIRMAN BERNANKE. President Bullard. November 2–3, 2010 141 of 238

MR. BULLARD. I just said that merely saying that unemployment is high and inflation is very low doesn’t tell you anything one way or the other about the quality of the policy, so that’s consistent with what you’re saying. It could be that we are following completely horrible policy, but we can argue that.

MR. LACKER. My point was that we don’t want to lead people to believe that, if unemployment is ever high, it’s because we have failed and are doing bad policy. You’d agree with that, wouldn’t you? MR. EVANS. I second the proposal for clarity on all of these objectives. [Emphasis added]

This is an amazing exchange–just amazing.  It perfectly demonstrates why we need the sort of accountability I’ve called for in recent posts.  Evans is right, OF COURSE you’d want to be able to discriminate between bad outcomes due to bad policy, and bad outcomes due to bad luck.  The Fed needs to establish a criterion by which policy actions can be judged, at least retrospectively.  If the Federal Reserve cannot establish a set of agreed upon metrics by which to evaluate whether previous policy stances were too expansionary or too contractionary, then the Fed ought to be abolished, with monetary policy turned over to the Treasury.

I found the experience of reading this transcript to be very depressing, giving me even greater respect for Ben Bernanke.  There were many people resisting monetary stimulus for reasons that are very hard to understand.  Bernanke is very polite, but it must have been an incredibly frustrating experience for him, knowing that the economy needed more stimulus and finding so much resistance.  In retrospect, it’s clear that many of his comments at the press conferences were attempts to explain the views of the committee as a whole, not necessarily his personal views.  Here I’m especially thinking in terms of his warnings about costs and risks associated with QE.

Basically you had one group of people seriously trying to hit the Fed’s targets, and another group that looked for any excuse they could find to do nothing.

HT:  Stephen Kirchner, Adam Ozimek, Craig Torres

Off topic:  As a child I had a very severe case of hay fever (fortunately I outgrew it).  So I was pleased to see Japan’s number two political party plans to address this underrated problem:

Yuriko Koike’s ‘zero policy’ pledges:

Zero nuclear power

Zero corporate cover ups

Zero corporate political donation

Zero children waiting for places in day care

Zero passive smoking

Zero packed commuter trains

Zero putting down of unwanted pets

Zero food waste

Zero violation of labour laws

Zero hay fever

Zero disabled and aged people unable to receive means of transport

Zero overhead power cables

Define “cause”

Tyler Cowen links to a couple of studies looking at the contribution of sectoral shocks to the business cycle.  Here’s one example, from a paper by Enghin Atalay:

Next, I examine whether the choice of elasticities has implications for individual historical episodes. Figure 4 presents historical decompositions for two choices of εM. In both panels, εD = εQ = 1. In panel A, I set εM = 1; and, in panel B, εM = 0.1. With relatively high elasticities of substitution across inputs, each and every recession between 1960 and the present day is explained almost exclusively by the common shocks. The sole partial exception is the relatively mild 2001 recession. In 2001 and 2002, Non-Electrical Machinery, Instruments, F.I.R.E. (Finance, Insurance, and Real Estate), and Electric/Gas Utilities—together accounting for GDP growth rates that were 2.0 percentage points below trend.

Table 3, along with panel B of Figure 4, presents historical decompositions, now allowing for complementarities across intermediate inputs. Here, industry-specific shocks are a primary driver, accounting for a larger fraction of most, but certainly not all of, recent recessions and booms. According to the model-inferred productivity shocks, the 1974–1975 and, especially, the early 1980s recessions were driven to a large extent by common shocks.27 At the same time, the late 1990s expansion and the 2008–2009 recession are each more closely linked with industry-specific events. Instruments (essentially computer and electronic products) and F.I.R.E. had an outsize role in the 1996–2000 expansion, while wholesale/retail, construction, motor vehicles, and F.I.R.E. appear to have had a large role in the most recent recession.

Let’s think about this using an analogy.  Suppose you study the causes of cycles in house collapses.  Assume a community where 90% of houses have solid foundations, and 10% have rotten wood foundations.  Also assume that during floods the rate of house collapses rises from 7 per week to 450 per week.  A cross sectional study shows that 425 of the 450 collapsed houses during a flood had rotten foundations, while 25 had solid foundations.  This despite the fact that only 10% of overall homes had rotten foundations.

How much of the “cycle” in house collapses is “caused” by floods, and how much is caused by rotten foundations?  Show work.

The important question is: “How big would the business cycle be in a counterfactual where the Fed successfully stabilized NGDP growth?” I say “fairly small”.

Another question that is actually much less important, but seems more important to most people is: “How much of the instability in NGDP is due to monetary policy mistakes triggered by sectoral shocks, such as a decline in the natural rate of interest that the Fed overlooked, which was itself caused by a housing slump?”

When you read impressive looking empirical studies in top journals, do not assume that the authors are asking the right question.

2.9%! (Good news for Yellen)

The recent wage report presents very good news for Janet Yellen:

It might have been slightly impacted by the hurricanes, but the loss of 100,000 low wage hospitality jobs in a 150,000,000 strong labor force isn’t very significant for aggregate hourly wages.  And that’s not just my view, the markets feel the same way:

Yellen is on a glide path to near perfection, as she will probably end her term achieving the Fed’s dual mandate better than any other chair in history.

So let’s replace her with someone lacking qualifications and a history of bad logic and bad judgement!

Elections matter less than you think

Here’s another example of a point I keep making:

The second was the 2015 general election. The Conservatives won this election with a slender majority, but on policy terms, Ed Miliband’s Labour party were the victors. His policies on capping energy prices and a national living wage were laughed at but later adopted by the Tories, as was his rhetoric on the dangers of unfettered capitalism. Mr Miliband lost the election but won the ideas war.

Meanwhile Americans elected Trump and we ended up with Obamacare.

Speaking of Trump, I’d like to see a bit more respect for our President from the cabinet:

Tillerson was responding to an NBC News report that Vice President Pence had to talk him out of resigning following Trump’s rambling, highly politicized speech to a gathering of Boy Scouts this summer. Tillerson is a former national president of the organization.

The NBC report also said that after the speech Tillerson called Trump a “moron.”

Meanwhile Josh Barro says that’s not exactly what he said:

On MSNBC, @SRuhle cites a source who says Tillerson called the president a “fucking moron,” not just a regular moron.

I can’t understand how these cabinet members get so hysterical about Trump.  Sure he’s a moron, I’ve said so many times.  But calling him a f****** moron is a bit over the top, don’t you think?  Take a chill pill.

Meanwhile, Black Lives Matter attempts to push more people into the Trump camp:

Students affiliated with the Black Lives Matter movement crashed an event at the College of William & Mary, rushed the stage, and prevented the invited guest—the American Civil Liberties Union’s Claire Gastañaga, a W & M alum—from speaking.

And Matt Yglesias says that Trump is causing a surge in support for anything that Trump opposes.