Archive for the Category Misc.


Short takes

1.  Lars Christensen is now available to do public speaking.  Please hire him.

2.  Speaking of which, Warren Buffett needs to spend more time reading market monetarist blogs.  But at least he understands labor economics.

3.  Ed Dolan has the wrong test of fiscal policy.  He includes lots of eurozone countries for which monetary offset does not apply. Numerous researchers who have done the correct regression (for countries with an independent monetary policy) find no effect.

4.  David Beckworth says Fed policy contributed to the housing boom.  My view is that a counterfactual of 5% NGDP growth, level targeting, would have seen a smaller housing boom, but only slightly smaller.

5.  Marcus Nunes sent me a long NYT article on the question of whether the Fed should raise its inflation target to 4%. Space devoted to the level targeting option?  Zero.  Space devoted to the NGDP targeting option?  Zero.

6.  David Levey pointed me to another British blog advocating NGDPLT, by Anton Howes.

7.  On June 18, 2008, the Fed thought 2009 would be a pretty decent year.  At the time they knew full well that the US housing market was in a horrific free fall.  What they didn’t know is that they had set their interest rate target at a level that would soon produce the biggest fall in NGDP since the 1930s.  It began within days of this forecast, long before Lehman failed.

8.  I wish journals like the AER had more articles similar to this Scott Alexander blog post.  And this excellent follow-up is quite, well . . . depressing.

9.  Are Texas and Arizona dramatically less racist than New York and New Jersey?  Maybe.  But I wouldn’t draw that conclusion based on this study.

10.  Are you a white or black person, and feel like you are a nobody.  Go to China and get involved in real estate promotion. This very amusing 6 minute video shows how.

11.  Scientists like experiments.  Businesses likes experiments.  Artists like experiments.  Governments hate experiments. More than 200 governments control over 50 million square miles of land.  Many of the governments are pathetic, and much of the land is useless.  But they won’t allow even 5 square miles for an experiment in governance.  Not one of them.  Not even the worst of them.  Not even on worthless land.  Paul Romer doesn’t seem that scary to me.  What are they afraid of?

Yes, I know, politics isn’t about good governance.

12.  Speaking of which, lots of people (including me) like to pose as rebels, but the blogosphere contains only one true radical.  Everyone else is struggling to overcome homo sapien bias.

Inflation doesn’t matter (NGDP growth does)

Simon sent me a new NBER paper on inflation by Coibion, Gorodnichenko and Kumar.  Here is the abstract:

We implement a new survey of firms’ macroeconomic beliefs in New Zealand and document a number of novel stylized facts from this survey. Despite nearly twenty-five years under an inflation targeting regime, there is widespread dispersion in firms’ beliefs about both past and future macroeconomic conditions, especially inflation, with average beliefs about recent and past inflation being much higher than those of professional forecasters. Much of the dispersion in beliefs can be explained by firms’ incentives to collect and process information, i.e. rational inattention motives. Using experimental methods, we find that firms update their beliefs in a Bayesian manner when presented with new information about the economy. But few firms seem to think that inflation is important to their business decisions and therefore they tend to devote few resources to collecting and processing information about inflation.

I can’t imagine why a firm would care about inflation.  On the other hand NGDP growth would be at least somewhat important, as it would be linked to the growth in revenue they could expect to earn, and also the growth in costs such as wages that they’d have to pay their workers.

No, trade deficits don’t cause unemployment

David Henderson directed me to an appalling post by Dean Baker:

There is one other big point which in Mankiw’s piece which needs correcting. Mankiw tells readers:

“Politicians and pundits often recoil at imports because they destroy domestic jobs, while they applaud exports because they create jobs.  Economists respond that full employment is possible with any pattern of trade.

“The main issue is not the number of jobs, but which jobs.”

Mankiw probably missed it, but we had a really bad recession when the housing bubble collapsed in 2007-2009 and the labor market still has not fully recovered. Millions of people are still unemployed or have given up looking for work. Tens of millions are unable to get wage gains because of the continuing weakness of the labor market.

In principle we could get back to full employment with large government budget deficits, but that is not going to happen for political reasons. Aggressive use of work sharing leading to shorter workweeks can also move us toward full employment, but this is also not something we are likely to see any time soon.

This means that if we want to get back to full employment, we have to reduce our $500 billion (@ 3 percent of GDP) trade deficit. (This is the intro econ on which all economists agree. It can even be found in Mankiw’s textbook.) Reducing the trade deficit means taking steps to lower the value of the dollar against other currencies. These trade agreements would be the obvious place to have currency rules. If we don’t address the currency issue here, where exactly are we going to do it?

Finally, Mankiw has been more than a little sloppy in his all economists agree proclamation. Among the opponents of these deals he would find Fred Bergsten, the former president of very pro-trade Peterson Institute for International Economics, Nobel Prize winning economist Joe Stiglitz and Nobel Prize winning economist Paul Krugman.

Where does one begin?  Baker insults Mankiw by suggesting that he doesn’t understand that America has an unemployment problem.  Baker doesn’t seem to recognize that this fact has no bearing on the Mankiw claim about trade.

Then Baker suggests that reducing the trade deficit would magically create jobs, even though standard macro theory provides no support for that claim.  Then he talks about the government “taking steps” to lower the value of the dollar, without mentioning what those steps are.  In standard textbook economics, fiscal austerity lowers the value of the currency. Is that the policy “steps” Baker has in mind?  Or maybe he was thinking about monetary stimulus.  That’s actually slightly more plausible, at least in theory.  But in practice the income effect often outweighs the substitution effect, and hence easier money tends to make the trade deficit larger, not smaller.

I’m not sure what’s more appalling, the fact that Baker thinks reducing the trade deficit would create jobs, or that he thinks all economists agree with him.  The first is almost certainly wrong, the second claim is certainly wrong.

As far as adding “currency rules” to trade agreements, I don’t even know where to begin.  Does he contemplate Congress setting the value of the dollar via fiscal policy?  How about the Fed abandoning its dual mandate to target exchange rates? This isn’t even serious; I can’t believe that even Baker believes the US will start targeting the forex value of the dollar.

As for his appeal to authority, the Paul Krugman that won the Nobel Price was the guy who wrote Pop Internationalism, and who would have supported the current trade deal being negotiated, not the guy who’s moved so far to the left that he’s praising the loony Marxist government in Greece that almost everyone else seems to think is a bunch of crackpots.

[Also check out David’s excellent post, which I ripped off.]

Interesting links

Jim Glass sent me a very good piece by Greg Ip of the WSJ:

The U.S. economy has downshifted rather abruptly in the last few months, prompting new discussion within the Federal Reserve about delaying its first interest-rate increase. Yet the growth deceleration should not come as a surprise, because the Fed has already tightened.

True, the Fed’s interest-rate target remains close to zero. But the Fed tightens through its words, not just its actions, and the drumbeat of chatter from the Fed in the last year has made it clear that officials plan to start raising rates sometime this year.

That chatter has made itself felt in stock, bond, and most important foreign exchange markets. The dollar’s sharp rise in the last six months is not due not just to the European Central Bank’s dramatic easing of monetary policy through quantitative easing (QE, the purchase of bonds with newly created money), but to the juxtaposition of the ECB’s action against anticipation that the Fed will soon tighten.

.  .  .

This is a reminder of something investors and Fed officials routinely forget: Markets discount the Fed’s actions long before they actually occur, in ways that are not obvious at the time. We saw that with the 2013 “taper tantrum” that sent mortgage rates up sharply and soon produced a notable slowing in housing and other interest-sensitive parts of economic growth.

The Fed should therefore respond to this in one of two ways. First, the tightening in financial conditions has already done much of the work that its first interest-rate increase was supposed to accomplish. This is a good reason to either delay the start of tightening, tighten more slowly, or both.

Second, if Fed officials feel the tightening in financial conditions is excessive, they should change how they talk. The dovish message of the March Fed meeting arrested the rise in the dollar, and more officials are expressing concern about the tone of recent data.

Some economists think of the stance of monetary policy as the future path of the target rate, relative to the future path of the Wicksellian equilibrium rate.  But it’s easy to lose sight of the fact that changes in the stance of monetary policy generally involve changes in the future path of the Wicksellian rate far more than changes in the future path of the actual rate.

Here’s a good piece by Tim Worstall:

Much as I enjoy seeing people shouting at the EU and the ECB for the near idiot manner in which they have conducted monetary policy in the past few years, for I yield to no one except Scott Sumner in my estimation that their performance has been terrible, I can’t let this from Paul Krugman pass. For he appears to be rewriting economic history on the hoof over this idea of expansionary austerity.

.  .  .

That the ECB and the EU Commission screwed up I’ll accept, even fervently endorse. But that’s not the same as being able to show that expansionary austerity doesn’t work: because the EU and the ECB didn’t actually try it. For the poster child for expansionary austerity is actually my native UK in the 1930s. Yes, it involves reducing the deficit and it can thus be described as austerity. But what is really being done is that austere fiscal policy along with a riproaringly expansionary monetary policy. Rather like, umm, doing QE in fact. What Britain did in the 1930s was to come off the gold standard and devalue the pound by 25% or so. We thus got the expansion through that monetary policy and it worked: two years later we were back above pre-recession levels of output. The other examples of the idea also had significant devaluations of the currency in question. Such a devaluation being an important part of the overall policy.

All of the successful examples of expansionary austerity that I know of involve monetary stimulus.  And that includes the massive $500 billion decline in the US budget deficit between calendar 2012 and 2013, which was accompanied by a speed up in GDP growth, a speed up in job creation, and a speed up in the rate of decline in the unemployment rate.  Of course in early 2013 Paul Krugman thought the austerity would slow the recovery.

In early 2014 Krugman suggested that we would soon get a test of the hypothesis that extended unemployment benefits had raised the unemployment rate, as the benefits were being scaled back.  More recently, he seems to have gone quiet about that test, just as he did after the 2013 test of market monetarism.  The Economist explains why supply-side economics matters, even at the zero bound:

A research paper from the Federal Reserve Bank of Chicago estimates that, if real wage growth had followed its historical relationship with the unemployment rate, by mid-2014 it would have been 3.6 percentage points higher than it actually was. Three big things, though, have held back pay: changes to America’s unemployment-insurance system, the behaviour of firms, and the persistence of labour-market “slack”.

America’s unemployment-insurance system underwent a big change at the end of 2013. Before then, the average American could get 53 weeks’ worth of unemployment benefits; in three states they could get 73 weeks’ worth. Congress then decided to make benefits stingier: the average limit dived to 25 weeks, cutting off 1.3m Americans immediately. With nothing to fall back on, the wage expectations of many unemployed people fell, says Iourii Manovskii of the University of Pennsylvania. Employers in some sectors quickly took advantage of this newly cheap pool of workers. A big chunk of the 3m extra jobs created during 2014 were in poorly paid industries (see chart 3).

And here’s one on Neo-Fisherism in Turkey:

Mr Erdogan claims—against all the evidence and in complete contradiction to orthodox economics—that cutting rates will somehow lower inflation. As a devout Muslim, he may also be uncomfortable with usury; he says a rate of zero is the ideal. And the small businessmen who are loyal AK voters tend to borrow domestically in liras, not abroad in dollars.

If Mr. Erdogan thinks zero is ideal, then he presumably regards Switzerland as having the West’s most Islamic financial system. On the other hand, given the speed at which the Turkish lira is losing value, I wouldn’t look for zero rates in Istanbul anytime soon.

Lost in translation

This piece in the NYT made me smile:

While Mr. Bernanke will remain a full-time fellow at the Brookings Institution, the new role represents his first somewhat regular job in the private sector since stepping down as Fed chairman in January 2014.

His role at Citadel was negotiated by Robert Barnett, the Washington superlawyer who also negotiated a deal for his book, “The Courage to Act,” which Mr. Bernanke recently submitted to his editor and will be published in October.

Mr. Bernanke’s insights are already much in demand.

At a gathering at the Bellagio Hotel in Las Vegas last May, several hedge fund managers said they had attended dinners with Mr. Bernanke in the first months after he stepped down from the Fed.

“At those dinners he gave credence to the idea that the Fed believed in lower potential G.D.P. and lower potential inflation,” Mr. Novogratz told the audience of money managers. For many, that advice was well worth the cost of a seat at the time.

But one hedge fund manager missed out.

”He gave this stuff out,” Mr. Tepper said, “but I didn’t realize what he was saying at the time, so I didn’t do a great trade.”

I’m quite certain that Bernanke did not suggest that we were in an era of “lower potential inflation”, as there is no such thing as potential inflation.  Looks like Mr. Tepper is not the only one who “didn’t realize what he was saying at the time.”

(I’ve been telling finance audiences that rates would stay low ever since I started blogging in 2009.  Of course they don’t pay me as much as Bernanke (nor should they), indeed the London HSBC group I spoke to last year never paid me a dime.)