Archive for the Category Monetary Policy


Our great, horrible, indifferent labor market

The Great:

The 4-week moving average of layoffs came out today at 287,750.  Total civilian employment in September was 146,600,000.  The ratio of the two, i.e. the chance of being laid [off---ouch that might have been my most embarrassing mistake ever] during a given week if you had a job, was below 2 in 1000.  That’s only happened once before in all of American history–April 2000.  (We don’t have data going all the way back, but the ratio was considerably higher in the booming 1960s, and I’m confident layoffs were much more common in earlier decades for which we don’t have data.  (“Gilded Age” bosses could lay off workers whenever they wanted.) And it seems very likely that we will soon break the April 2000 record, maybe this month.

Update: a bit higher than 2 in 1000 because not all layoffs put in unemployment claims.

The Horrible:

Total employment has barely budged in 7 years, while the employment population ratio has plunged much lower.  We are even seeing a lower employment/population ratio in the key 25-54 demographic, compared to seven years ago.  The U-6 unemployment rate is a very high 11.8%

The Indifferent:

The unemployment rate (U-3) is 5.9%, slightly above the Fed’s 5.6% estimate for the natural rate.

Thanks President Obama, you’ve given us a European labor market.  Workers with good jobs need not fear layoffs; the rest will have to be satisfied with part time work or unemployment.

Of course I’m half joking about Obama.  But just how good is his economic record?  The Washington Examiner has an article that quotes me.

The newest talking point of President Obama and his supporters, such as Paul Krugman, is that we are doing better at job creation than other developed countries.  I don’t think we are doing as well as Australia/New Zealand/Canada/Britain, but it’s surely true overall for one very obvious reason.  The eurozone.

Let’s examine that Obama/Krugman claim more closely.  Everyone seems to agree that since 2010 the US has done considerably more austerity than the eurozone.  No debate there.  And the huge divergence between the US and the eurozone has occurred since 2011.  The initial recession and initial recovery were quite similar in the US and eurozone.

The GOP Congress did exactly the opposite of what Obama wanted on austerity, and the result was that we grew dramatically faster than the eurozone.  That’s Obama’s success?  The big difference was of course monetary policy.  Obama’s comparing us to a region ruled by a central bank that is more incompetent that the central banks of the 1930s (Krugman has some graphs on that point.)

So yes, we are doing better than the eurozone.  Does Obama deserve credit for the fact that our monetary policy was less incompetent than the ECB?  That doesn’t even pass the laugh test.  Even Obama supporter Matt Yglesias says he’s been horrible on monetary policy.  He left multiple seats empty, when he had 60 votes in the Senate in 2009.  He’s doing the same today.  He never appointed a single person to the board who favored the sort of expansionary monetary policy that I favor, that Yglesias favors, that DeLong favors, that Krugman favors, that Christina Romer favors, and that any progressive with half of brain favors.  He almost picked bubblephobe Summers to head the Fed, and had to be stopped by a storm of protest that began here and then spread through the progressive blogosphere.  (Yes, some progressives always opposed him for other reasons; I’m talking about his monetary policy views.)

President Obama may or may not be a good President.  I think he’s been above average on foreign policy.  I’m willing to concede the Obamacare (which I opposed as a missed opportunity) did some good things like the Cadillac tax on health plans and helping the uninsured.  I think the financial reform was a missed chance, but others disagree. I’m disappointed with his record on drugs and civil liberties.

But there can’t be any serious question about the fact that he did NOTHING effective to help the economy.  The US recovery is less than the old trend rate of growth.  Has that ever happened before?  The Fed’s been less inept than the ECB—that’s all.

And the supply-side?  Even his supporters would admit he did nothing there.  They might disagree with the view that a heavy dose of extra regulation, higher MTRs, and no Keystone pipeline slowed the recovery.  But no one claims those actions sped up the recovery.  And the fracking boom (“drill baby drill”) fell on his lap.

Just a few months ago Obama called for an “emergency” unemployment benefit of up to 73 weeks, much longer than during the President Clinton recovery, all because the labor market was doing so poorly nearly 6 years after he was elected.  And now a few months later they are touting their success in creating jobs—unbelievable.

It will be interesting to see how many liberals agree with him.

HT:  TravisV

Out of the Dark Ages: The first step

I’m finally ready to announce the first step in creating an NGDP future market.

[Update:  I won't say much now other than that some very generous offers have been received. Tomorrow I speak with an organization that helps fund innovative projects like this, so perhaps I'll be able to report more in the near future.  I plan to list the names of the people making offers, but will wait until tomorrow, as I'm checking to see who wants to remain anonymous.  The task is slightly more complicated than usual with two different funding targets, but I'll just say at this point that I am very pleased with how things have gone today.]

Future generations of economists will look back on our era with disbelief. Respected economists like Robin Hanson and Justin Wolfers clearly explained how prediction markets could generate all sorts of valuable information for policymakers, at an absurdly low cost.  And they were totally ignored by both policymakers and the economics profession.  The Fed continued to blunder into errors costing hundreds of billions of dollars (like their decision not to ease policy in the meeting 2 days after Lehman failed, on fear of inflation) partly because they weren’t willing to spend a few thousand dollars setting up and subsidizing prediction markets to gather real time investor forecasts.

The biggest problem by far was the lack of an NGDP futures market.  TIPS spreads are fine, but in a world of 2% inflation targeting much of the variation in inflation represents supply shocks, such as unstable commodity prices.  Interest rates are almost useless as a measure of the stance of monetary policy, and the money supply is only marginally better.  We need real time data on the single most important macroeconomic variable in the universe, expected US NGDP growth, which also happens to be the best indicator of the stance of US monetary policy. (Ben Bernanke once suggested that interest rates and the money supply are not reliable, and that only NGDP growth and inflation can reliably indicate the stance of policy.  But inflation is distorted by supply shocks, whereas NGDP is not.)

In recent weeks I have been working with Eric Crampton at the New Zealand Initiative and Robert Quigley-McBride at iPredict.  Robert put together the following proposal, with input from Eric and myself:

iPredict is a real-money prediction market run by Victoria University of Wellington. With over 8000 traders, iPredict is operated by students of the University with the purpose of forecasting social, economic and political events. iPredict has designed contracts for trading to allow forecasting of nominal GDP (NGDP). Traders will be able to buy and sell contracts paying $1 if NGDP falls within a particular range in a particular quarter.

An example contract would pay $1 if the US GDP for Q1 2014 were greater than or equal to $17,250 Billion and less than $17,500 Billion, based upon the [initial estimate for quarterly nominal GDP from] BEA Table in Section 1 – Domestic Product and Income, Table 1.1.5, Line 1. We would establish similar contracts spanning the intervals $250 Billion above and below the example contract, with two open ended intervals beyond those for outcomes above or below the ranges.

The set of contracts, for each quarter, will generate probability estimates for the different levels of NGDP, as well as providing a gauge of the traders’ uncertainty, or margin of error, on this estimate.

To support the accuracy of the forecasting, we wish to provide the market with an injection of liquidity. This will help by ensuring there is sufficient incentive for traders with beneficial information to bring it to the market. To support contracts for forecasting NGDP for the next 3 years, we will need to raise $1500. This will be used to provide a market maker on the contracts, which will ensure there is always a reasonable bid-ask spread, and that any trader wanting to bring information to the market can do so even if there is not necessarily another trader to take the other side in the trade.

An additional option to improve the accuracy of these contracts would be to pay interest on the value of the contracts to any traders holding shares over a long period of time. This would reduce trader reluctance to engage in the long term contracts because of the cost of the capital invested. This option would require substantial back-end system development to track the funds that traders have invested in the contracts, and so it would require funding in the region of $30,000.

iPredict is an authorised futures dealer in New Zealand under the Financial Markets Authority. However, they must strongly discourage Americans from trading on iPredict due to US laws. Anyone wishing to trade on iPredict should take note of the Terms of Service 1.5 “Nothing on this Website constitutes an offer or invitation to trade with any person who is under 18 years of age and/or outside New Zealand. In trading on iPredict, traders warrant that they are complying with all laws in the jurisdiction in which they are present. [bracketed portion added by me]

A few comments:

Obviously the proposal can be tweaked with further input from commenters.  They think a 5-contract setup is best, and I’d be inclined to go something like:

below 2.5% NGDP growth

2.5% to 3.5%

3.5% to 4.5%

4.5% to 5.5%

5.5% or more.

The actual contracts would have dollar amounts specified, however, as the percentages change with revision to NGDP at the starting point.

We would use initial estimates of NGDP, as the later revisions are unforecastable before the initial announcement, so we’ll get an unbiased forecast.  The advantage is that investors don’t have to wait as long for the payoff.

We have to exclude Americans because . . . well because America is no longer a free country.  More specifically there are two problems.  First, iPredict does much more than the Iowa Electronics Market, and hence doesn’t have their waver from the Feds.  And second, there are now incredibly burdensome “know thy customer” rules that America imposes on foreign financial firms dealing with US citizens.  A small entity like iPredict (run by the Victoria University of Wellington) obviously doesn’t have the funds to meet all these burdensome regulations.  Now when I travel around the world almost everyone I talk to in the financial area regards US citizens in roughly the same way they view the Ebola virus.  They see our government has being a sort of madhouse.

You will notice two sums mentioned.  The $1500 figure is the cost of setting up the market.  If that’s all we can raise the market will still go ahead.  However it would be nice if we could raise an additional $30,000, so that the market can be subsidized with interest-bearing margin accounts, which will help insure more trading, more liquidity.

The market may well fail.  There is currently no NGDP market in the private sector, presumably because there is little market demand.  That’s the whole point of prediction markets. Corporations setting up internal prediction markets to forecast next year’s sales don’t do so to meet “market demand;” they want information, the wisdom of crowds.

The market is only a first step.  The goal is to shame the economics profession and policymakers into to setting up a better funded market in the US, with government funds supporting the market.  I’m not normally a fan of big government, but consider:

1.  Market NGDP expectations are a pure public good.

2.  The cost of a superb market would be trivial, a few millions.

3.  The benefit would be in the hundreds of billions, if not trillions.

4.  The trivial cost could easily be more than recouped by cutting the Fed budget for economic forecasting.

It’s a no-brainer for libertarians, but also for thoughtful liberals who agree with people like Christy Romer and Michael Woodford on the importance of NGDP, and the need for wise policymaking.  I see no good arguments against creating an even better market than we will be able to establish.

My initial inclination was to try something like Kickstarter.  But I’m no good with computers, and very busy.  So first I’m going to try to raise all the funds from one or two rich people.  This really shouldn’t be hard.  It should appeal to everyone from liberals like George Soros, to moderates like Michael Bloomberg, to libertarians like the Koch brothers and Peter Thiel.  I recall a few years back that someone sent me a youtube of a west coast billionaire (Valve Corp?) giving a talk, and suddenly casually mentioning the need for a NGDP futures market.  The startup cost ($1500) is pocket change for a billionaire, and even the $30,000 is very affordable.  If that doesn’t work, we’ll try Kickstarter.

As a reward I’m willing to name the market after the big donor when I write about it in my blog. So if Mr. Jones donates $1500, I’ll call it the “Jones NGDP market,” unless they prefer anonymity. If Mr. Smith later kicks in $30,000, I’ll rename it the Smith/Jones NGDP market.  Extra typing for me.  And I still type with two fingers!

This could be a history making initiative.  I implore potential donors to think about what this might lead to, and to consider whether they want to be seen as the visionary who began the long process of modernizing economic policymaking.

Don’t send me money; contact me and I’ll set you up to talk directly to the people in New Zealand. If we do get the market set up, I hope my non-American readers will participate, at least in a small way. It would help to make the market a success.  But again, the real goal is to shame the people in power into stopping all this Nostradamus nonsense, and move economics and economic policymaking into the 21st century.  It’s long past due.

I can respond to comments, or you can email me directly at

Two big mysteries

Nick Rowe has a post discussing 30 year bond yields in Canada.  He begins by quoting from an official at the Bank of Canada:

All told, we think that the neutral rate of interest is lower than it was in the years leading up to the crisis because of these structural developments. We estimate that the real neutral policy rate is currently in the range of 1 to 2 per cent. This translates into a nominal neutral policy rate of 3 to 4 per cent, down from a range of 4 1/2 to 5 1/2 per cent in the period prior to the crisis.

Then Nick comments:

But what puzzles me is this: the 30-year bond is currently yielding 2.74%. That’s below Carolyn’s 3% to 4%. And Carolyn is talking about the Bank of Canada’s target for the overnight rate (the “policy rate”), and that’s normally below the 30-year bond yield.

I checked the 30-year rate in Germany and the US:

US 30-year bond yield = 3.21%

German 30-year bond yield = 1.91%

So it’s a sort of global mystery.  Why are long-term interest rates so low?

But it’s not the only big global mystery.  There’s also the absurdly slow “recovery” from the 2008-09 recession.  This is the only recovery I ever recall seeing where the growth rate of real GDP in the US was below the trend growth rate.  And nominal GDP growth has also been very low. Indeed both growth rates might well be the lowest in American history for a recovery period.

And it’s not just the US.  Some countries like Canada may have done a bit better, but lots of countries in Europe are seeing even slower recoveries in both NGDP and RGDP.

I am always suspicious of coincidences.  I suppose you could dream up an explanation for the low bond yields.  Maybe all that QE has depressed long term bond yields.  Maybe I am wrong that money has been really tight; maybe it’s really easy, and that explains the low bond yields.

But there’s one problem with that explanation–it makes the other mystery even more mysterious. How likely is it that money has been so easy that it has produced almost unbelievably low bond yields, and yet NGDP is growing at the slowest rates ever seen in a recovery?  Easy money is supposed to lead to fast NGDP growth.  I don’t like “answers” that solve one mystery at the expense of making another mystery even more mysterious.  [There's no law of the conservation of net mysteriousness.]  I like “answers” that solve both mysteries at the same time, using standard off-the-shelf economic theory.

The Great Stagnation!

It explains the low bond yields, and it explains the slow economic growth despite rapidly falling unemployment rates.  But what explains the differences in bond yields between countries?  Here I’d like some help, but I’ll throw out a couple tentative hypotheses.  Although both the US and Canada have 2% inflation targets, I recall reading that the US is more aggressive in the “hedonics” of price adjustments.  Indeed one Fed official said their 2% PCE target is actually more like a 2.4% CPI inflation target.  Is that right?  If so, might that explain why Canada has lower bond yields?  If both countries have 2% inflation targets, but Canada measures inflation more conservatively, then Canada would end up with lower NGDP growth, other things equal.

In the case of Germany, it might be related to the fact that the ECB is targeting inflation at slightly below 2%, an asymmetric target.  In addition, inflation has recently fallen to only 0.3%, and the ECB’s response — how can I put this politely — hasn’t exactly inspired confidence.

So perhaps the entire developed world is entering the sort of growth stagnation that hit Japan 20 years ago, producing low real interest rates everywhere.  Then the differences in bond yields reflect differences in the techniques used to measure inflation, differences in inflation targets (especially the ECB), and differences in how confident investors are that the central bank will actually hit its target (the ECB and Japan.)

I’m glad to see the BOC re-evaluate their interest rate assumptions, but the markets suggest they are still behind the curve.  Of course the Fed has consistently overestimated the Wicksellian equilibrium interest rate, and hence over-estimated RGDP growth, ever since 2007.  And the ECB? There aren’t any words to express my contempt for that organization.

We’re 15 years into the 21st century.  How much longer will it take the world’s central bankers to realize that we aren’t in Kansas anymore?  None of the 20th century rules of thumb have any value in today’s world.

Abenomics is doing better than I expected (shades of grey)

Here’s commenter dtoh:

I think you’re disheartened a little bit by the results of monetary policy which has been less effective in Japan than you had hoped and therefore you are trying to blame it on socio-economic and supply side factors. Yes…. these are problems, but the primary reason monetary policy has not been effective is the hike in the consumption (and other) tax rates.

Stop worrying, it will take a little longer, but Japan will prove you are a clairvoyant genius.

This is half wrong.  Certainly less effective than I had hoped, but more effective than I expected. In my early posts on Abenomics I suggested that it was likely to have a positive effect, but that Japan would fall short of the 2% inflation goal.  I expected about 1% inflation, still a significant improvement.  Japan has exceeded 1% inflation, even if you discount the effects of the sales tax. The yen has also depreciated much more than I (and the markets) expected.  Japanese stocks have risen much more than I (and the markets) expected.  Indeed by almost every metric they’ve done better than I expected.

So why does dtoh (a careful reader) have the opposite impression?  Because I am also very pessimistic about Japan, due to its big public debt and rapidly falling working age population.  I supported the sales tax increase, but even as I did so I predicted it would hurt the economy, and it has.  And regarding monetary stimulus, it’s technically possible for a policy to improve an economy that is doing very poorly, while still leaving it doing fairly poorly.  That’s Japan.

Read this and this for my earlier pessimism about Japan.

For the same reason, people often wrongly believe I’m a fan of the Chinese government, or its economic policy.  It’s a bad policy–perhaps as bad as Greece. But if China ever became as rich as Greece it would be the single most successful economic policy in all of world history.  And China probably will become as rich as Greece, as moving from a nightmarish policy under Mao to a merely bad policy under Deng and Xi has released the entrepreneurial energies of the Chinese population.

Real world economics is never black and white; it’s always about shades of grey. I’ve frequently pointed out that Abenomics was doing all sorts of things that the liquidity trap Keynesians said was impossible.  It boosted stock prices, it depreciated the yen, and it boosted nominal and real GDP.  That made me seem like an optimist. But I also said it would fall short of the announced goals, and I now feel that more strongly than ever.  Contrary to dtoh, if Japan does well I will be forced to admit I was wrong, as I did not expect Japan to do well.

I’ve also been saying that while QE and forward guidance helped, the Fed has consistently been too optimistic about US growth.  We are in a Great Stagnation. Just yesterday I noticed that Fed officials are hard at work explaining why their latest 3% growth forecast will fail to materialize, just like the previous 5 years.

A sharply stronger dollar could hamper Federal Reserve efforts to spur growth and lift inflation, a senior Fed official said today, in unusually direct remarks about the U.S. currency from the central bank.

By the way, Nick Rowe recently had this to say about central bankers:

But I do have a lot more confidence in the BoC than in the BoJ, ECB, or the Fed. Yes. The people who run the BoC are better macroeconomists, they speak with one voice, and they have the support of the government in doing what they are doing. You do not hear them say totally stupid things, like you do with people making decisions at other central banks.

Yesterday I noticed a perfect example of what Nick was thinking about:

Japan is in danger of falling into a recession as the yen’s decline reduces the purchasing power of households and squeezes corporate profits, said a former deputy governor of the Bank of Japan.

“The current yen weakness is slightly excessive,” Kazumasa Iwata, the deputy from 2003-2008, said in an interview on Sept. 19 in Tokyo. “Abenomics entails the risk of ‘beggar thyself’ consequences and signs are already emerging.”

Hmmm . . . .

Totally off topic, fans of drug legalization will love this youtube.

Yglesias on Obama’s missed opportunity

Here’s a great post by Matt Yglesias:

But as the country waits to hear the latest announcement from the Fed about how rapidly it will end its Quantitative Easing programs, we are witnessing the biggest mistake of Obama’s presidency: the systematic neglect of the Federal Reserve and of his ability to influence its course of action.

.  . .

The FOMC that makes these decisions is mostly composed of presidential appointees — the seven members of the Federal Reserve Board of Governors. But Obama has failed to make a point of tapping proponents of monetary stimulus for these positions. Even worse, he’s left two of the slots entirely vacant — not vacant because of GOP obstruction, but vacant because he hasn’t nominated anyone to fill them.

Obama’s neglect of Federal Reserve appointments is, in some ways, mysterious. Nobody denies that the Fed is an extremely important institution — albeit one that operates independently from the elected branches of government. When it comes to other important independent institutions such as the federal judiciary, it’s broadly acknowledged that the presidential appointment powers are among his most important powers of office. Precisely because judges operated independently of presidential oversight, picking the right ones is vital.

The Fed is similar. Except that because the Fed has an important influence on short-term economic growth and short-term economic growth has an important influence on the president’s popularity, it’s even more important.

Except Obama doesn’t seem to see it that way. Earlier in his administration he reportedly told Council of Economic Advisors Chair Christina Romer that “monetary policy has shot its wad.” This remark was dissected for alleged sexism, but is more worth paying attention to as a reflection of monetary policy views.

The viewpoint that there is nothing the Federal Reserve can do to boost the economy when short-term interest rates are already at zero, leaving deficit spending as the only effective stimulus option, is not believed by most experts. This particular combination of views is most closely associated with a somewhat marginal group of left-wing thinkers who describe themselves as modern monetary theorists. Except it’s also something that key Obama advisor Larry Summers believes, and the fact that Obama tried to install Summers as Fed Chair indicates that Obama believes it too.

This belief in monetary impotence likely explains why Obama is so lackadaisical about filling vacancies. He believes the Fed’s role in fighting a potential crisis is crucial, but the current team helmed by Yellen and Deputy Chair Stanley Fisher is up to that job. Bolstering the left flank on the FOMC so that Yellen’s consensus-building efforts would land in a more stimulative spot isn’t on the agenda.

The current vacancies are not a new phenomenon. By April of 2010 when Obama had been in office for well over a year there were three vacancies on the Fed. One of his earlier nominees was a Republican and another — Jeremy Stein — is a Democrat who holds to an eccentric view that tight money is sometimes appropriate even when unemployment is high. That’s the same opinion that led to economic stagnation in Sweden, and electoral defeat for its incumbent government.

How much good could have been done if Obama had listened to Romer, Scott SumnerJoseph Gagnon, or others and placed a higher priority on appointing unemployment-fighters to the Fed? Nobody can say for sure. But the experience of the United Kingdom is illustrative. The UK government has enacted much sharper levels of fiscal austerity than anything done in the US, perhaps partly as a result the UK’s overall economic performance has been dismal. And yet largely thanks to more stimulative monetary policy, the UK has done as well or better than the United States in terms of job creation. If we had paired that kind of monetary policy with our superior fiscal policy and better luck at fossil fuel extraction, we could potentially have enjoyed significantly faster employment growth.

I don’t entirely agree with the last paragraph, but otherwise Yglesias is exactly right.

Some commenters tell me “we Keynesians agree the Fed should do more stimulus, the problem is the right wing.”  That’s half right.  The right wing is a problem, but so are the Keynesians. Keynesians overwhelming oppose additional monetary stimulus, according to polls.  I base that on the fact that only about 5% of economists favor more stimulus, and most economists are Keynesians.  Furthermore, some of the economists who do favor additional stimulus are non-Keynesians.

Update:  TravisV pointed me to an excellent Yglesias follow-up post.

I haven’t had much time to post recently, as I am quite busy now.  But a few other posts worth reading:

1.  Saturos sent me to this post by Greg Mankiw.

2.  File this under “strange but true.”  Noah Smith makes a case for civility.  (Sorry if I sound snarky.)

3.  An excellent post on politics by Ezra Klein.  He points out that most voters agree with the GOP that government is too big.  And most voters agree with the Dems that we should spend more on actual, specific real world programs.  Thus most voters agree with both parties, even where they have diametrically opposed views.

4.  Matt Yglesias says it’s easy to decide who to vote for.  Easy for him!  But what if your views are split roughly 50-50 between the parties?  And what if the parties often govern in ways that is dramatically different from what they promise?  (Bush pushed big government, Obama ignored civil rights in the War on Terror.)  And how do you know which issues will even be addressed? Will Congress act on the War on Drugs?  Will they change monetary policy?  It’s actually really hard to know who to vote for, if you are me.

5.  Thus I won’t tell the Scots (Scottish?  Scotch?) which way to vote.  Just that if they do become independent, they should adopt a Scottish pound, and peg it to the English pound in a one for one currency board system.  Oh wait, they already have a Scottish pound note, and it’s already accepted throughout the UK.  OK, just keeping do that.

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