Archive for the Category Monetary Policy


Better homeless than in a lunatic asylum

A few weeks ago Paul Krugman suggested market monetarists were homeless.  By that he means we don’t have much support among GOP Congressman.  He doesn’t say why we’d want to have their support, after all, they don’t make monetary policy.

I pointed this out in a post a couple weeks ago, in reply to the Krugman post.  Now Krugman has posted again, repeating the claim that we are “homeless” because the House GOP doesn’t like us. Of course there is no sign he read my reply.  The only surprise is that lots of commenters think I need to reply again.  But why?  I already replied to his argument even before he wrote the latest post.

Still, I suppose one can always find something to comment on, so let’s consider this:

But there’s also a big difference in the intellectual roles of MM on the right and Keynes on the left.

Talk with Barack Obama, and you’ll find that he has a basically Keynesian view of the world. It may have wobbled a bit in the past, at times when he seemed to buy into the Confidence Fairy, but it’s still his basic outlook — and his aides are very much IS-LM macro types. True, they haven’t gone all out to push for fiscal expansion in the face of opposition (but remember the payroll tax cut), but that’s mainly a political judgement on their part. It’s not a fundamental difference in worldview from friendly economists.

Contrast this with Republican leaders, who get their macroeconomics from Hayek and Ayn Rand, and are clearly liquidationist; it’s not that they don’t take advice from MM, they’re actively hostile to its very concepts.

That’s what I mean when I say that MM is homeless, in a way that my tribe isn’t.

Most politicians are morons when it comes to economics.  That’s nothing to be ashamed of; I’m a complete moron about most non-economics fields in science and the humanities.  Would you care about my views on particle physics or French poetry? What I don’t see is why someone would be proud that certain politicians seem to like their economic theories.  I never get a chance to “talk with Barack Obama,” but I very much doubt he is a “Keynesian.”

1.  Obama thought the high unemployment of 2008 was due to ATM machines taking jobs from bank tellers.  Maybe he’s a Luddite.

2.  Obama thought a low interest rate policy was dangerous, because it could lead to asset bubbles.  Maybe he’s an Austrian.  Or maybe he listens to Larry Summers.

3.  Obama would often leave Fed seats empty for long periods, believing the Fed could do nothing when rates had fallen to zero.  When he finally did appoint people to the Fed, they were not people who agreed with Krugman on monetary policy.  At one point 6 of the 7 members of the board were Obama appointees, and not a single one agreed with Krugman on monetary policy.  Obama didn’t even bother making any appointments in 2009, when they would have been really helpful, and when he had a filibuster-proof majority in the Senate.  Maybe Obama only reads Krugman on the days where Krugman says monetary policy is ineffective at the zero bound, not the days when he says monetary stimulus is highly desirable at the zero bound.

4.  Obama thinks so little of monetary policy he is supposedly looking for someone with “community banking experience” for the Board.  I’m sure all the community banking experts out there are up to date on Woodford’s latest models of how to do policy at the zero bound.  Maybe Obama is a follower of Elizabeth Warren, the senator who said super inflation hawk Paul Volcker would be a great choice to head the Fed. (After all the Fed is all about regulation, not monetary policy, isn’t it?)

Oh, and that payroll tax cut that Krugman mentions, it was a GOP idea, Obama had to be convinced:

The White House is counting the 2 percent payroll tax cut among its “wins” in the tax deal worked out with congressional Republicans. But it’s a win based on a Republican idea and one that many congressional Republicans support.

You may recall that a payroll tax break or “holiday” was a Republican proposal back in 2009. Conservatives liked the idea then in lieu of a tax credit.

.  .  .

In 2009, the White House rebuffed the idea, preferring its grab bag of stimulus spending programs.

Of course the employee-side payroll tax cut did not speed up the recovery in 2011, nor did the repeal in 2013 slow it down, as Keynesians like Krugman predicted.  They should have done the employer-side payroll tax cut that Christy Romer suggested, which would have cut labor costs and boosted employment.

And followers of the IS-LM model?  Those would be the folks who thought money couldn’t have been tight in the early 1930s (or 2008), because interest rates were low.  Or the people who thought the US economy would slow down in 2013 due to savage austerity.  Or the people who thought monetary stimulus in Japan was pointless, they were at the zero bound.  Or the people who said the Swiss National Bank would not be able to stop the franc from appreciating.  Or the people who blamed the eurozone double dip recession on fiscal austerity, even though the US did slightly more austerity.  Or the people who said British fiscal policy really, really, really was quite contractionary, until growth picked up suddenly and they realized it could not have been contractionary.

PS.  And now Congress wants to pass a law requiring the Board of Governors to have at least one expert on community banking.  You can’t make this stuff up.

Vox on market monetarism did a fairly long article on my views on monetary policy, and market monetarism more generally.  I´m traveling so I´ve only quickly read it once, but I thought it worth linking to.  I was also told that on Sunday the big Frankfurt newspaper (FAZ) may do a piece on me.  Let me know if you see anything.

I´d like to thank Timothy Lee for taking the time to research this topic, and also interview me.  It looks like an excellent piece.

PS.  I see that Tyler Cowen linked to my Kansas tax post.  Rereading the post I realize my claim about a 25% rise in Kansas GDP was too strong.  Tax avoidance might fall, and there are the lower tax rates to consider (which were cut by fairly similar amounts.)  But I stand by the gist of my argument.

Update:  I’m told the FAZ story was delayed.

Party like it’s 1999 (1.385 million ZMP workers go back to work)

What a first half!  We don’t have a GDP report for the second quarter, but all indications are that first half RGDP growth will come in around 0.00%.  Meanwhile, it’s the best half year for jobs since late 1999.  When you break things down further, the first quarter was typical of recent years, coming in at 569,000 jobs.  Was that held back by winter weather?  I’m not sure, but the second quarter was unusually strong, coming in at 816,000 jobs.  Wage growth is still running at 2%, so the economy shows no sign of overheating.  Some thoughts:

1.  This is the natural rate hypothesis in action.  Even though NGDP growth remains slow, and indeed is getting slower, wage moderation does eventually allow the labor market to heal.  And no, it’s not about discouraged workers leaving the labor force.  Recent job growth is far above labor force growth, which is now very slow due to boomers retiring.  Indeed if you take the slowing labor force growth into account, then the job growth was actually far, far better in the first half of 2014 than during the housing boom, and even better than 1999.

2.  The jobs speed-up may have something to do with the extended unemployment benefits ending at the beginning of the year.  But the excess job growth is only a few 100,000s, so there is no sign yet that the extended benefits had a major impact on the unemployment rate.  That was my assumption all along, and although the data isn’t strong enough to draw any firm conclusions, I see no reason to change my prior that the recession was mostly about demand, with some modest supply-side factors such as extended UI and 40% higher minimum wages.

3.  The Fed has a big NGDP problem.  It’s becoming increasingly clear that when the labor market recovers, RGDP growth will be very slow, maybe 1.2%.  Add in about 1.8% on the GDP deflator, and 3% NGDP growth looks like the new normal, assuming the Fed intends to stick with 2% PCE inflation targeting.  Bill Woolsey wins!!  Here’s the problem.  The Fed wants to do both of these things:

a.  Continue targeting inflation at 2%.

b.  Continuing to use interest rates as the instrument of policy.

But it won’t work.  At 3% trend NGDP growth, nominal interest rates will fall to zero in every single recession going forward.  The Fed will be spinning their wheels just when monetary stimulus is most needed.  At some point they will need a new policy instrument/target.  Lars Christensen has a very good post discussing a clever idea by Bennett McCallum, but in my view this idea works better for small countries than for the US, which is likely to follow the global business cycle.  NGDP futures anyone?  Level targeting?

4.  Unemployment is likely to fall to the natural rate (estimated by the Fed at 5.6%) quite quickly. There will be a debate about what to do next.  It will be the wrong debate.  The debate needs to be about where the Fed wants to go in the long run.  First figure out where you want to go in the long run, then adjust your short run policy as needed.  Otherwise the blogosphere debate will be like a bunch of drunken frat boys arguing about which street to take, when they can’t even agree on which bar they are going to.

Not much blogging over the next few weeks—happy 4th!

Update:  The US population age 16 to 64 is growing at about 0.4% per year, and will slow further. In the first half payroll employment rose at an annual rate of more than 2%, and the household survey was up 2.26%.  I beg you not to mention “discouraged workers.”  That’s the old story, not what’s going on now.

BTW, 3% may well be an overestimate of trend NGDP growth, if current productivity trends hold up.

Silence is golden

My comment section has recently gone quiet, and I’m loving it.  Before explaining why, let’s consider this comment from Ryan Avent:

This misreading begins with its assessment of the stance of monetary policy; in the BIS’s view low interest rates are indicative of loose monetary policy. My colleague seconds this view, writing that central banks are determined to “keep monetary policy as loose as possible for as long as possible”. But this doesn’t add up. It suggests, for one thing, that monetary policy was remarkably loose during the Depression and extremely tight during the inflations of the 1970s, which we know is not true. It ignores, for another, that central banks have not remotely used all the tools at their disposal.

Remember the old Mad magazine “Spy vs. Spy?”  Reading Free Exchange sometimes makes me think “The Economist vs. The Economist.” Obviously I agree with Ryan the Economist, but what’s more interesting to me is that I can’t get the conventional wisdom to change its mind on this issue, even though I’ve won every argument.  On other issues I can force a debate.  Take monetary offset. I’ve had lots of debates on this issue, and people have presented me with very good arguments against my point of view.  Arguments that I find hard to refute.  It’s an open question.  In contrast, the conventional wisdom continues to plod ahead with the view that money has been easy over the past 6 years, despite the fact that when I challenge anyone on this issue their arguments collapse almost immediately.  No one has ever put even the slightest resistance to my demolition of the “low interest rates implies easy money” argument.  And I’ve debated dozens of economists.  But I can’t budge the conventional wisdom by one inch.  It’s rock solid.

One response is that it doesn’t matter what we call it, it’s just a question of semantics.  But it does matter, as the people who insisted that money was easy have been wrong about the effects of monetary policy.  Many of them argued we needed tighter money to help savers.  They applauded the fact that the sensible Germans stopped the ECB from going headlong into “easy money” like the British and Americans.  They applauded the eurozone interest rate increases of 2011, even though we explained that tight money leads to LOWER interest rates in the long run.  Well now the long run is here, and the German dominated ECB has just driven interest rates into negative territory. How’s that hawkish German policy working for those thrifty housewives in Stuttgart?

Of course being wrong about everything doesn’t stop them from making the same claims over and over again.  Here’s Ryan, sensibly directing his frustration against the BIS so that things can remain civil at The Economist:

Of course, it is grimly amusing to recall that the BIS wanted tighter policy in 2011 to fend off inflation. Had it pushed for more expansionary policy then in order to get a faster recovery despite—or even because of—the risk of inflationary pressures, then the case for higher rates now would be open and shut (assuming rates had not already begun rising). Though it wishes to cast itself as rising above short-termism in macroeconomic policy, it is strangely blind to the risk that excessively tight policy in the short run might lead to interest rates that are lower for longer than would otherwise be the case.

Now about that quiet comment section.  A few years ago I had near constant debates on two fronts. Exhausting debates.  On the left I faced one commenter after another ridiculing the idea that monetary policy could be stimulative at zero rates.  Ridiculing the notion that the “expectations fairy” could help the Japanese economy.  When the 2% inflation target fairy sent the yen sharply lower, and Japanese stocks sharply higher, and NGDP higher, and RGDP higher, and inflation higher, and unemployment to the lowest level in 16 years, it became a lot harder to ridicule my views.  Even fanatics don’t like to appear absurd, and making liquidity trap arguments in 2014 looks absurd. The monetary offset criticism has also died down, although it’s still a bit more of an open question than the liquidity trap nonsense.  But the failure of Krugman’s 2013 “test” certainly helped our cause.

On the right I was hammered by people who claimed my policies were hurting savers.  I tried to patiently explain that in the long run monetary stimulus was the best way to help savers, the best way to boost nominal and real interest rates.  I pointed out that tighter money would simply cause a double dip recession, as in the US in 1937 and Japan in 2001, and that it would lead to lower rates in the lower run.  The ECB ignored this advice in 2011, had their double dip recession, and German savers are now paying the price.

So there’s really nothing much left to debate.  My comment section has become a snoozefest. Maybe I should be like Krugman, and shift over to the inequality issue.  Like me, he was also proved right about everything, or at least that’s what we both claim.  :)

PS. Speaking of The Economist, this is a fascinating article.  If we must have governments, why can’t they all be like the Estonian government?  As my commenter Lorenzo says, small is beautiful.

Watch for the endgame

I just returned from the UK where I gave several talks and interviews.  The main purpose of my trip was to give the Adam Smith Lecture at the Adam Smith Institute.  I was very impressed with the people there, especially Ben Southwood and Sam Bowman.  Here is a link with a video of the lecture.  I also spoke at the Cambridge Union, and to some bankers and Treasury people.  I did a BBC radio interview, and an interview on BBC’s “Newsnight” TV show, which should be broadcast soon.

Almost from the beginning, I’ve been more popular in the UK than the US.  That’s probably because the US has a sharper left/right split.  Over here my views are too right wing for the left (which is rapidly moving ever further leftward), whereas the right sees me as a redistributive Keynesian inflationist.

I noticed that in the UK all the talk is of raising interest rates later this year, as their economy is growing fast and the employment population ratio is nearing the previous all time peaks of 1971 and 2006 (what a contrast with the US!)  You may recall that a few years ago I said that the exit from policies can be very revealing.  It can help us to understand the effects of policy (as when tapering had a market reaction in the US) and also the underlying dynamics of the monetary fiscal interaction.

First a bit of background information.  Since 2008, the UK has run extremely large budget deficits, bigger than the US as a share of GDP. Everyone agrees these are too large, and need to be reduced. But Keynesians have argued that austerity should be very gradual, to avoid derailing the recovery. That’s a fair argument (although I have doubts due to monetary offset), but the implication is that if the recovery ever becomes so strong that you need to raise rates, then clearly the first place to tighten is fiscal policy, and policymakers should only raise rates when the budget deficit has returned to the optimal level based on the classical principles of public finance.  Britain is obviously far from that point.

A few years back I was very skeptical of the notion that fiscal stimulus in the US was being done because of a lack of effectiveness of monetary stimulus.  I predicted that when the time came for tightening Keynesians would prefer monetary tightening to fiscal austerity, even though their own model says that fiscal austerity should be done first, as it reduces the (still too high) budget deficit.

In my admittedly unscientific survey of the UK press it seems to me that there is more enthusiasm for monetary tightening than accelerated fiscal austerity, just as I expected.  Here is an editorial in The Independent, which doesn’t even mention of the option of fiscal tightening.  (And here’s the Times.)

Just to be clear, I am not criticizing the BoE, which has done a good job under Mark Carney. NGDP is rising at a brisk rate.  Given the refusal of fiscal policymakers to speed up the austerity process, the BoE may need to raise rates in 6 months to a year.  That’s monetary offset, and it is quite appropriate.  The real problem in Britain is government spending, which is still too high.  (Or if you are a left-winger, the real problem is that taxes are too low.)

PS.  Obviously I’m pleased that there is a single-minded focus on the BoE as the institution that should and does steer the nominal economy.  It’s a pity that single-minded focus wasn’t there in 2008 and 2009.

HT:  Travis, W. Peden