Archive for the Category Misc.

 
 

No!

I presume everyone knows by now, but I haven’t seen other bloggers discuss the election.  The Scottish independence campaign lost badly.

That’s probably why the Spanish stock exchange was up sharply earlier today. Markets are the first to know.

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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Further thoughts on “inflation”

Nick left the following comment on the previous post:

I really like this post … So I’m sorry to snark … But:

‘I concluded inflation is real.’
And
‘That’s why I keep claiming that inflation is a meaningless concept.’

Me think Econ no fit words good sometime.

What can I say?  I suppose I was thinking about this in two different ways:

1.  The BLS tries to do “hedonic” adjustments to the CPI, i.e. adjust for product quality change.  I showed that when we really did have high inflation you’d see the prices of ordinary items like cars rise very rapidly.  That’s clearly not true today.  I also showed that using what I thought was a plausible hedonic comparison (the 2014 Accord is just as good as the 1986 Legend) you could get zero inflation in new car prices, far less that the 35% assumed by the BLS.  So I’m dubious that the BLS is grossly understating inflation.  Of course I acknowledge that lots of service prices have risen faster than car prices, and thus there has been some inflation.  Even so, using the BLS hedonic approach, the actual BLS numbers seem plausible.

However . . .

2.  When I say inflation is a meaningless concept I’m suggesting that the concept is not well defined, despite the BLS’s attempts to do so.  Here’s commenter Vivian making a very good point:

Taking literally, “hedonic” means relating to pleasure. Did you get more or less pleasure from that 1964 Olds with all its trunk and leg space, steel and chrome and its muscular engine than you would from the Accord? What would it cost today, even with our advances in manufacturing technology, to reproduce that 1964 Olds with the same specs? Are hedonic adjustments confusing functionality with price (or even pleasure)?

These are all debatable questions, and for this reason I doubt the statement “there is no such thing as true inflation rate” is debatable.

In earlier posts I’ve made an argument (similar to Vivian’s and almost the opposite of my previous post)–that if you use a sort of “pleasure” criterion, then price inflation is roughly equal to wage inflation, and living standards haven’t risen at all. Thus people used to get great pleasure from crummy black and white TVs, but now someone with that TV set would be miserable, thinking about the great big flat panel HDTV his neighbor has.  He’d feel poor.  If economists really believe the CPI is supposed to measure a constant utility level, then for all we know there might have been no real wage gains in the past 100 years.  Who’s to say if people are happier than 100 years ago? All of these concepts are so slippery that I’m very skeptical of the notion that there is any “true” rate of inflation.

But my previous post was sort of saying; “if we are going to play the game of trying to seriously estimate inflation using BLS hedonic-type approaches, there is no reason to doubt their claim that inflation has slowed sharply from the Great Inflation period.”  Nice quality cars went from $3600 to $22,500 in 22 years, then to $22,105 in 28 more years.  You can quibble about the models I chose, but the overall pattern is clear.  Inflation has slowed sharply.  Or should I say “inflation” has slowed sharply?  I don’t seem to be able to make up my mind.

The Great Inflation

For God’s sake will people stop talking about inflation!  Especially you inflation “truthers” who insist the BLS is lying and the actual inflation rate is between 7% and 10%. Those are the sorts of rates we averaged during the Great Inflation of 1965-81. For those too young to remember, a little history lesson:

I was so excited when my dad came home with a red 1964 Oldsmobile 88.  That was a car for upper middle class Americans.  We were only middle class, but lived in an upper middle class house, because my dad was smart.  The car was actually used, but almost new.  He used to say a car lost 15% of it’s value the minute it was driven out the door of the dealer.  Now when I go look for late model used cars the dealers ask more money than for a new model. Here’s the car (which sold for $3600):

Screen Shot 2014-09-09 at 8.15.01 PM

Now let’s flash forward to 1986.  The Japanese cars are in style, and the first upper middle class Japanese car on the market is the Acura Legend, which sells for $22,500, more than a six-fold increase in 22 years. It was voted Car of the Year. That’s what high inflation feels like.

Screen Shot 2014-09-09 at 8.18.52 PM

Now let’s go up to the present.  I’m not quite sure what model would be comparable to the Legend, but the Accord is made by the same company, and is slightly larger.  Here’s a picture of the Accord:

Screen Shot 2014-09-09 at 8.22.44 PMI’m pretty sure the Accord LX is better than the Legend LS in almost every way you could imagine.  It’s price?  Brace yourself, because 28 years is even more than 22 years. Surely the price of cars has risen more than 6-fold in the last 28 years. I’d say around $200,000.  Nope.

OK, $100,000.  No.

$50,000?

Actually it’s $22,105. (The link has all the specs.)

Cars have gotten cheaper over the past 28 years.

In nominal terms.

(The CPI says car prices have risen about 35% in the past 28 years–I don’t believe that.)

BTW, wages of factory workers rose from just over $2.50 an hour in 1964, to about $8.90 in 1986, to $20.68 today.  Put away the tissue paper, the middle class is doing fine.

My favorite car was a 1976 powder blue Olds Cutlass with a T-bar roof, whitewall tires and white bucket seats:

Screen Shot 2014-09-09 at 8.47.42 PM

It was a $6000 dollar car, but I bought it used for $3500 in 1981. That’s actually a 1977, I don’t have a picture of my car.

Hmmm, I thought they were a bit better looking than that.

And no, I did not have a “Landau roof.”  I do have standards.

PS.  OK, I cheated a bit by using a Wikipedia photo of the Legend, which isn’t too flattering, and a very pretty official Honda web site photo of the Accord.  But I’m not kidding, I’d rather have the Accord, even for the same price.

Millennials have no idea how lucky they are that they can just go out and buy a Honda Accord, brand new.  On a middle class income.

That BMW you always dreamed of?  Back in 1970 they looked like something made in a Soviet factory.

PPS.  Labor intensive service prices have risen much more than car prices, and high tech goods have fallen dramatically in price.  There is no such thing as a “true rate of inflation,” but there’s also no reason to assume that inflation has not averaged 2% in recent decades.  It’s just as reasonable as any other number the BLS might pull out of the air.

Surprising?!?!?!?

Tyler Cowen linked to this (from the WaPo):

What’s really surprising, however, is that Democrats did not take this opportunity to up the ante on the Republicans by proposing to phase out corporate welfare in all of its forms, including Ex-Im. In the unlikely event that Republicans had accepted the challenge, it could have freed up tens of billions of dollars every year that could be used to reduce the deficit, cut taxes, invest in infrastructure or restore cuts to vital domestic programs. And if Republicans had declined the offer, that would have exposed their effort to kill the bank as the cynical and hypocritical ploy it appears to be.