Archive for January 2018


How many punches should Chuck Norris be allowed to throw?

A number of market monetarist bloggers use the “Chuck Norris” metaphor for monetary policy credibility.  The basic idea is that if the central bank credibly promises to do whatever it takes to hit its target, then NGDP growth expectations won’t fall very far, nominal interest rates will stay above zero, and the central bank won’t have to actually take many “concrete steppes” to hit its target.  Exhibit A is the Reserve Bank of Australia, which never had to cut rates to zero or do QE during the global recession of 2008-09.  And yet the Aussie outcome was better than in other advanced economies.  The Chuck Norris metaphor refers to the fact that he can clear a room without throwing a punch, just due to his reputation.

Chuck Norris is a good metaphor, but (as far as I know) other bloggers have not fully fleshed out this line of reasoning.  The focus has been on what central banks need to do, but perhaps the real focus should be on what governments need to authorize.

Consider two countries with central bank balance sheets equal to 5% of GDP, both on the eve of the Great Recession.  In each case, the balance sheet balloons to 25% of GDP during the Great Recession.  In which case is policy more expansionary?

Case A:  The central bank is legally limited to a balance sheet of no more than 25% of GDP.

Case B:  There is no legal limit on the central bank balance sheet.

In case B, the expansionary impact of the QE will probably be much greater than in case A.  While the “concrete steppes” are identical, in case B there will probably be expectations of a more expansionary future policy than in case A.  Nick Rowe often points out that the current concrete steps taken by central banks are far less important than changes in the future path of policy.  That’s implicit in the Chuck Norris metaphor, and also an implication of state-of-the-art New Keynesian models developed by Michael Woodford and others.

At this point you might assume that the implication of my post is clear—don’t have legal limits on central bank balance sheets.  But a decade of reading deep thinkers like Tyler Cowen and Robin Hanson (or petty much any of the George Mason bloggers) has convinced me that when it comes to human institutions, things are always more complicated than they seem, certainly more complicated than they seemed to me a decade ago.  For instance, let’s add another case:

Case C:  The central bank’s balance sheet is legally limited to 250% of GDP.

Now let’s think about Fed policy during the recovery from the Great Recession.  We know that the Fed did three QE programs, and stopped when its balance sheet was just under 25% of GDP.  We know that Bernanke cited vague “costs and risks” of doing even more QE.  (Although we also now know from the FOMC transcripts that Bernanke himself was less concerned about these risks than other members of the committee.)  And we know that some in Congress were complaining about all the money printing, and almost no one on Congress were complaining that they did not print enough money.

To summarize, while the Fed was in Case B, with no legal limit on their balance sheet, the institution behaved as if there was a sort of implicit limit, probably much lower than 250% of GDP.  In that case, moving to case C might have actually been expansionary.  The Fed would have thought, “Congress has our back, they authorize us to do truly massive QE if necessary to achieve our mandate.”  Think of Russian highway speed limits changing from “no explicit limit but at the discretion of what the police officer views as unsafe” to “150 kilometers per hour”.  Do speeds rise or fall?

In a perfect world, I’d want Congress to tell Chuck Norris that he’s authorized to throw as many punches as required to clear the room.  Or perhaps to authorize a specific number that is clearly more than he would need (say 10,000 punches.)  But I’m not sure about the idea of actually having Congress set a limit.  If they had done so back in 2008, the limit on the central bank balance sheet would likely have been set too low.

Because Congress is so dysfunctional, and likely to remain so, one could argue that the Fed can pretty much do whatever they want.  Who will stop them?  The Fed is about 100 times more respected than Congress, and any Congressional attempt to control the Fed would almost certainly fail to get 51 votes in the Senate (which actually has a few grown-ups).  There are plenty of pragmatic GOP senators (say among people like Lindsey, McCain, Flake, Collins, etc.), some of which would not support a right wing attempt to rein in the Fed.  Heck I doubt even Trump would support it, as he knows he might need monetary stimulus if we again go into a recession.  So perhaps the Fed could simply put on its Superman costume (sorry for mixing metaphors) and unilaterally announce that it views itself as being authorized to lower IOR to as much as negative 0.75%, and boost the balance sheet to as much as 250% of GDP, and then dare Congress to stop them.

That won’t happen (Larry Summers was not picked to be chair), but it’s the sort of issue we should be thinking about.  Instead we think about question like “does QE work?”  Which is such a dumb question it makes my hair hurt every time someone asks it.

Update:  People keep asking me how I enjoy California:

Growth in 2017

The 4th quarter GDP numbers were just released.  Here is how I’d summarize the data:

Growth from 2016:Q4 to 2017:Q4 = 4.4% nominal and 2.5% real

Growth from 2015:Q4 to 2016:Q4 = 3.4% nominal and 1.8% real

So what do we know about this data?

1.  Monetary policy was more expansionary during 2017.  That might explain both the increase in inflation and the increase in real growth.

2.  My hunch is that monetary policy alone does not fully explain the increase in real growth, just most of it.

3.  The rest of the increase in real growth is due to some combination of faster global growth and policy changes in the US.

Here’s my guesstimate.  Of the 0.7% rise in RGDP growth, I’d guess 0.4% was monetary stimulus (i.e faster NGDP growth), and 0.2% was global growth, 0.1% was deregulation, and o.1% was expectations of corporate tax cuts.  Yes, that adds up to 0.8%, but I think there was also a 0.1% drag on growth caused by the US approaching full employment.

I think corporate tax cuts will add about 0.2% to 0.3% to RGDP this year.

I don’t have high confidence that any of these numbers are precisely right (and the data itself may be revised), but I do think they are in the ballpark.

PS. I have a new post at Econlog pointing out that monetary policy in 2017 was nearly perfect.

PPS.  Hypermind currently forecasts 4.3% NGDP growth from 2018:Q1 to 2019:Q1.  My hunch is that it will come in just below 4%.  I’m sticking with my frequently made prediction that this will end up being  the longest expansion in US history.


Odds and ends

1.  In a recent post, I asked people why I should be impressed when people tell me that conservative judges are being appointed.  After all, I’d not impressed if someone tells me they know a conservative plumber.  Alex Tabarrok has a couple of recent posts that help to clarify my thoughts on this issue.  Before discussing the posts, let me emphasize that I am not a legal expert.  But that disclaimer cuts both ways.  If I’m not even smart enough to understand the issues that Alex raises, how could I possible be expected to have an intelligent (and positive) opinion of “conservative judges”?

Alex points out that in many states the police are given legal protections that other Americans do not have.  Thus if they are arrested for a crime, they cannot be vigorously interrogated, in the way that an ordinary person is questioned.  On the face of it, that would seem to violate the “equal protection” clause of the 14th amendment.  Why should some Americans be denied legal rights available to others?

So here’s where the conservative judges come in.  How come I never read about conservative judges upholding the Constitution by striking down these violations of the equal protection clause?  I’m not saying that conservative judges never make “liberal” rulings.  In some obvious cases, such as flag-burning, conservatives did uphold the 1st amendment.  (Of course in this period of radical left-wing speech codes, the 1st amendment is being increasingly viewed as a right wing idea, similar to the 2nd amendment.)  But overall, when I read articles about how conservative justices rule, it usually tends to favor policy outcomes that are “conservative”.

2.  I recently did a post showing how pessimism is intellectually fashionable.  Another good example of this problem is Greece’s supposedly “unpayable” public debt.  I’ve always been skeptical of the claim that Greece’s debt was unpayable.  To me, it seemed more a question of the Greek’s not wanting to repay the debt.  Like a number of other European countries, Greece’s government spends over 50% of GDP.  But you can have a perfectly fine Western social welfare state spending far less (say 30% to 40%), as we observe in both rich countries like Australia and Switzerland and poorer countries such as Estonia and Slovakia.  If Greece reduced the non-interest part of its spending down that range, it would be able to divert enough funds to service its debt.

I have not followed events in Greece, but I do notice that yields on Greek debt are now plummeting, to levels suggesting that Greece is not likely to default on its debt.  I did a post last May that pointed out that the debt market’s implied probability of default had fallen to 40%.  Since then, bond yields on Greek public debt have plunged to well below 4%, 200 basis points below the levels of last May.

That does not prove that Greece will not default on its debt, rather that default is certainly not inevitable.  Once again, the pessimists were wrong.  And once again the good news got almost no press attention, while the previous bad news got headlines in the “serious” international media.

If you form an opinion about the world by consuming the media, you will be consistently wrong about things.  Your views will be too pessimistic on issues where the media is already pessimistic, and perhaps a bit too optimistic in areas receiving no media attention, but where a “back swan” could appear suddenly.

3.  In an opinion piece in the NYT, Angus Deaton made the following claim:

This evidence supports on-the-ground observation in the United States. Kathryn Edin and Luke Shaefer have documented the daily horrors of life for the several million people in the United States who actually do live on $2 a day, in both urban and rural America. Matthew Desmond’s ethnography of Milwaukee explores the nightmare of finding urban shelter among the American poor.

It is hard to imagine poverty that is worse than this, anywhere in the world.

A person may have difficulty imagining far worse poverty levels in other countries, but that’s not because they do not exist.  In fact, the bottom 2% of the world community is so much worse off than the bottom 2% of Americans that they might as well be living on different planets.  For people who don’t understand this fact, I’d suggest they read more about what life is really like for the world’s poorest people in places like Congo, North Korea, Somalia, Mali and Yemen.  (I’m actually pretty surprised to read this comment from Deaton, who’s an expert on poverty.)  Or read a book about the Great Leap Forward.

4.  Unlike me, Ross Douthat does not suffer from Trump Derangement Syndrome.  Indeed he writes opinion pieces that are 10 times more thoughtful and 100 times better written than the trash in this blog. I agree with almost everything is this brilliant essay:

And where an abnormal response to Trump has kept things on an even keel, it hasn’t been furious protests; rather, it’s been a collective decision by many different actors, from his own appointees to his congressional opponents to foreign leaders the world over, to simply behave as if he isn’t actually the president, as if the system around him is what matters, and his expressed desires are just a reality TV performance.

So why will some readers be surprised by my claim that Douthat and I agree?  Because it looks like we disagree:


Douthat:  Calm down folks, the Trump presidency is not a tragedy, just a farce.

Like I keep saying, don’t be fooled by framing effects.

There is one silver lining to Trump—he triggers some truly inspired writing.  Kevin Williamson is one of the best.

5.  I recently did a post on the rise of racism in the conservative movement.  Others are seeing the same thing:

That says a lot about the conservative movement. Intolerance always existed within it, but part of its success was how it managed to suppress the appearance of intolerance, to hide it behind terms and ideas that masked the movement’s true motivations. [William] Kristol said that those elements were “less healthy than I thought or hoped.”

Those elements started to come forward in the 1990s, Kristol said, starting with Pat Buchanan and continuing with Trump. “He’s an effective demagogue,” Kristol said of the president. “And then the rationalization of Trump, acceptance of Trump by so many Republicans and some conservatives, including conservatives I worked with and respect, has been disturbing to me.”

Kristol’s lament echoed what conservative commentator Charlie Sykes told Andrew O’Hehir in October 2017. “I knew that it was there, but I did think it was the drunk at the end of the bar, or it was your bigoted uncle at Thanksgiving,” he said. “This was a fundamental moral failing [of the conservative movement] that we did not draw the line on things like that. And as a result, that kind of racism, those conspiracy theories, that paranoid style festered. And it festered to the point that we can no longer control it.”

6.  My 12 recommendations for better living:

1.  Lead by example, don’t tell other people what to do.  (I.e. Tyler’s best advice is his life, not his list.)

2.  Don’t emulate me.

3.  Don’t write a principles of economics textbook.

4.  Don’t be born in North Korea.

I’m still working on the other 2/3rds of my list.

7.  It’s happening.

Alternative Money University

I’m pleased to announce that I’ll be teaching in a four day program called “Alternative Money University”, organized by George Selgin. The program will take place July 15-18 at the Cato Institute in Washington DC, and George provides some information about registering in his blog:

Students in or entering their last year of undergraduate or beginning years of graduate studies are invited to apply. Successful applicants will be chosen on the basis of their academic records and demonstrated interest in monetary economics.

Those chosen to take part will attend, free of charge (with hotel and travel expenses covered by the Cato Institute), several thought-provoking academic seminars led by top scholars in the field. This year’s seminars will include:

The Evolution of Money and Banks,” taught by George Selgin, the director of Cato’s Center for Monetary and Financial Alternative and professor emeritus of economics at the University of Georgia.

The Economics of Commodity Money (and Bitcoin),” taught by Lawrence H. White, professor of economics at George Mason University and senior fellow at the Cato Institute.

The Role of Monetary Policy in the Great Recession,” taught by David Beckworth, senior research fellow in the Program on Monetary Policy at the Mercatus Center at George Mason University and host of the Macro Musings podcast.

Monetary Rules vs. Discretion,” taught by, Scott Sumner, Ralph G. Hawtrey Chair of Monetary Policy and director of the Program on Monetary Policy at the Mercatus Center at George Mason University, and professor emeritus at Bentley University.

If you wish to apply, or to learn more about the program, visit Applications are open until January 31, 2018.

St. Louis Fed President James Bullard will be providing a keynote address at the beginning of the event.

I’m not sure about the logistics of doing this, but I’d like to use the unpublished manuscript for my new book as a teaching resource. This book will be called “The Money Illusion: Market Monetarism and the Great Recession”, and will be based on my last 9 years of blogging. If I’m able to do so, then students in my course would be the first to use this book in a class.

I’m really looking forward to this project. I’ve never actually taught a course where most of the students wanted to be there—where most of the students actually want to learn the material. So it will be a new experience for me.

Is an NGDP Phillips Curve somehow “wrong”?

I touched on this issue over at Econlog, but I’ll try again here in slightly a different way.

The original Phillips Curve from 1958 had nominal wage inflation on the vertical axis.  (Actually the original original PC was developed by Irving Fisher in the 1920s, and used price inflation.) Then American economists switched to price inflation in the 1960s.  In the 1970s and 1980s, economists accepted the Natural Rate Hypothesis and the expectations-augmented Phillips Curve was developed:

When inflation is higher than expected you are in a boom, and when it’s lower than expected you are in a recession.

But inflation probably not the right variable, for standard “never reason from a price level change” reasons.  Higher inflation can reflect more AD, or less AS:

So what is the right variable?  As far as I can tell, the Phillips Curve should be using unexpected changes in NGDP:

So here’s my question to economics instructors.  Suppose you have an advanced topics chapter at the end of macro 101, which covers the standard Phillips Curve (using inflation), and discusses the Natural Rate Hypothesis and the importance of expectations.  Would it be acceptable to have a section at the very end of that chapter with the final two graphs shown here?  I.e., the two AS/AD graphs to show students the downside of using inflation as an indicator of whether the economy is overheating, and the NGDP version of the Phillips Curve to explain to students why more and more economists favor NGDP targeting.

Or is there something I am missing, which makes NGDP unsuitable for the vertical axis of a Phillips Curve?

PS.  The principles textbook I’m working on will be ready for consideration later this year, available for use in classes in the fall of 2019.