Archive for July 2011


Deleted post

I deleted the post responding to the comment from Brad DeLong, as I wasn’t able to verify if was actually sent by DeLong.  Looks like I was the gullible victim of a hoax.  Oh well, live and learn.

The 2009 NGDP shock keeps looking worser and worser

I’m reluctant to even do this post, as the GDP figures keep getting revised downward, suggesting my former comments are “inoperative.”  Fortunately for me the revisions keep strengthening my argument.  First the BEA said NGDP fell about 2% between 2008:2 and 2009:2.  Then last year the figures were revised sharply lower, especially for 2008:3, which showed that the recession got much worse before Lehman.  NGDP fell 3% between 2008:2 and 2009:2.  Now we have another revision, and the fall is nearly 4%!  (minus 3.85% to be precise)  What was already the worst AD collapse since 1938 just got even deeper. 

What’s up with the BEA?  It isn’t just that they are revising RGDP data from years ago (I suppose a new price index formula could explain that), but they are also sharply revising nominal GDP data from years ago.  They are still getting new reports of nominal output!  Even more bizarre, the nominal numbers are being revised downward by massive amounts, more than $100 billion.  So they are getting new reports that nominal output for early 2009, which they still thought existed a year later in early 2010, did not in fact exist.  I’m pretty sure that I would be horrified by seeing what goes on inside the BEA—I’d rather visit the Oscar Meyer factory in my hometown, to see how hot dogs are made.  Employment numbers are probably our best “real” indicator.

So we now have a nice three year data set.  NGDP fell nearly 4% from 2008:2 to 2009:2, and has risen at a tad over 4% a year for the next two years.  We are up by only 4.1% in 3 years, that’s a little over 1% per year.  In other words, per capita NGDP has barely risen in 3 years!  To maintain full employment everyone would have had to go nearly three years without a pay rise.  But with soaring minimum wage rates, that wasn’t too likely.  I’m sure lots of people in government, health care, education, etc, got raises.  I did (even with one year of no raise), as did my wife (a scientist.)  So with almost no extra NGDP to go around (per capita), we essentially have a game of musical chairs.  The lucky ones get pay increases, the other 9.2% are sitting on the floor. 

Now I’ve got to revise my papers.  I’ve been saying NGDP fell 8% below trend during the contraction, actually it was 9%.  And we are 11% below trend over the three year period.  Obviously we are never going all the way back, nor would I advocate that.  But we are 5% below Bill Woolsey’s quite conservative 3% NGDP target, starting from mid-2008.  A target most ultra-conservative inflation hawks would have grabbed in a heartbeat, if offer the chance in mid-2008. 

There’s a bit of good news for those pushing the structural problems argument.  Previously the real/nominal split during the recovery was estimated at 2.8%/3.9%.  Now it’s estimated at 2.5%/4.1%.   So we have a tad more stagflation that we thought, but still not very much.  More worrisome is the split over the last two quarters, 0.85%/3.4%.  That may reflect the effects of the oil shock, but we need to watch that carefully to see how severe the economy’s structural problems really are.  I am a moderate on this issue, and believe we have some structural problems in the labor market, but that it’s mostly demand-side.  The new figures haven’t led me to revise this view, but if they continue for several more quarters, I will definitely revise this view.  Although I won’t revise my monetary policy recommendations, which don’t depend at all on real variables.)

I finally figured out why we can’t have a better press corps

Robin Hanson expresses skepticism about IP laws:

Similarly, the kinds of innovation activities and intellectual property rights that make sense depend on available institutions and technologies. I’m happy to admit that today intellectual property (IP) is not obviously a good idea. Such property can create large “anti-commons” transaction and enforcement costs that greatly raise the cost of combining old ideas into valuable new ideas. Such costs often outweigh the social benefits of the incentives to create IP, in order to sell it. Today, it is often better to rely on other social incentives to innovate, incentives that don’t require such expensive support.

Brad DeLong read Robin’s post, and summarized the argument as follows:

Robin Hanson appears to think that people have the right to send killer robots off to hunt down people who use their ideas without paying.

Me? I think this is an example of how thinking too much about property rights can madden the mind.

That’s basically it (plus some quotations.)  Then it hit me.  That’s why we can’t have a better press corps!  Too many reporters are sloppy, biased, prone to mischaracterize one’s argument.

PS.  I originally left a much nicer version of this comment at DeLong’s blog, but he deleted it.  Big mistake Brad.  I have my own blog, which is much more widely read than your comment section.

Where MMT went wrong

I must be a masochist.  I feel like Humphrey Bogart, about to slide back into that leech-infested water.  But here goes:

Suppose we pick a fairly “normal” year, when NGDP growth and nominal interest rates and unemployment are all around 5%.  It might be 2005, 1995, 1985, whatever.  The exact numbers aren’t important.  Now the Fed does an OMP and doubles the monetary base by purchasing T-securities.  They announce it’s permanent.  What happens?

One MMT answer is that the Fed can’t do this.  It would cause interest rates to change, and they peg interest rates.  But the more thoughtful MMTers seem to be willing to let me do this thought experiment, as long as I acknowledge that interest rates would change and that it’s not consistent with actual central bank practices.  I’m fine with that. 

So let’s say they double the base and let rates go where ever they want.  I claim this action doubles NGDP and nearly doubles the price level.  MMTers seem to disagree, as I haven’t changed the amount of net financial assets (NFA) at all.

But here’s the Achilles heel of MMT.  Neither banks nor the public particularly wants to hold twice as much base money when interest rates are 5%, as that’s a high opportunity cost.  So they claim this action would drive nominal rates to zero, at which level people and/or banks would be willing to hold the extra base money.  Fair enough.  But then what?  You’ve got an economy far outside its Wicksellian equilibrium.

The MMTers like to talk about cases where large base injections did coincide with near zero rates—The US in 1932 or 2009, Japan in the late 1990s and early 2000s.  But those were all economies that were severely depressed and/or suffering deflation.  I find it hard to believe that you could cut rates from 5% to 0% in a healthy economy without triggering an explosion of AD, especially if the economy was already experiencing normal levels of NGDP, normal growth in NGDP, and normal unemployment levels.  The closest example might be the US after WWII, but remember that people (wrongly) expected deflation after the war, and by 1951 the Fed gave up on that policy due to rapidly rising inflation.

MMTers forgot that the nominal interest rate is the price of credit, not money.  The Fed can’t determine that rate, it reflects the forces of saving supply and investment demand.  Hence an attempt to set interest rates far below their correct level in savings/investment terms (the Wicksellian natural rate), would trigger an explosion in AD, and much higher inflation.  Central banks know this, which is why after the inflationary 1965-1981 period they adopted the Taylor Principle. 

That’s the flaw with MMT; it’s not net financial assets that matters, it’s currency.   And the Fed doesn’t set interest rates, markets set interest rates.  The Fed can briefly push them out of equilibrium (due to sticky prices) but this triggers big changes in AD and the price level.

The whole point of my Quantity Theory of Money post (and especially the Canadian/Australian comparison) was to smoke out their views of currency and the price level.  It was hard sifting through all the comments, which were often on side issues, but it seems they regard base money as just another financial asset.  But it’s not, which is why their view of monetary policy is wrong.  Indeed in a sense they don’t even have a theory of monetary policy, they have a fiscal theory that implies open market operations don’t matter.   But the Canadian/Australian data tells us that currency does matter, and NFA is the wrong aggregate to look at.

This is my very last MMT post . . . until the next one.

PS.  Quiz question:

1.  Sumner claims that a 5% NGDP growth rule will lead to roughly 5% NGDP growth, 5% interest rates, and 5% unemployment.  What would a 3% NGDP target lead to?

Answer:  About 3% NGDP growth, about 3% interest rates, and about 5% unemployment.

PPS.  The previous MMT post has 292 comments, and counting.  I may not have time to answer all the comments here.  In that case I’ll answer the 1% or 2% that actually comment on what I say here.

You can’t redistribute income . . .

 . . . but you can and should redistribute consumption.  Here’s Matt Yglesias discussing a recent post by John Quiggen:

John Quiggin makes the case that redistribution of income away from the top 1 percent is essentially the only thing that matters in American politics. After all, as Willie Sutton said, “that’s where the money is.”

I’m all for that, but I really do think it’s an unduly limited view of political life.

Income really is the Achilles heel of the progressive movement.  The income statistics simply don’t mean what progressives think they mean–something like “resources available for redistribution.”  If you want something closer to resources available, you’d use consumption, or wage income.  If you combine wage and capital income in the same aggregate, you are counting the same resources twice.  This is deeply counter-intuitive, yet all public finance economists understand this.  The policymakers in Nordic countries understand this.  But progressives don’t seem to understand this.  Even Paul Krugman, who must know better, keeps citing income distribution data, which is about as informative as examining the entrails of a chicken.

A rich guy with lots of income has three choices, consumption, savings/investment, and charity.  Let’s dispose of charity quickly.  Yes, we could redistribute the money Gates in spending on malaria in Africa, and give it to other Americans.  Would that be a gain?  I think everyone would say no.  On the other hand if a rich guy gives a lot of money to Princeton, to have his name on a building, perhaps that’s really a form of consumption.  I’m fine with treating it that way, if the tax authorities decide that’s the way to go. 

But the real money here is obviously in the consumption/investment categories.  You can redistribute consumption from the top 1% and give it to average Americans working in a car factory, or a Walmart.  But it’s an illusion to think you can redistribute investment from the top 1%, so that average Americans can have a higher living standard.  Where do people think the car factory comes from?  Or the Walmart building?  BTW, this has nothing to do with trickle-down economics, a theory I reject.  This is simple accounting.  Money put into investment projects isn’t available to boost living standards for the lower classes, unless you don’t do those investment projects.

So what’s available to be redistributed?  Basically consumption (including a modest amount of vanity charity.)  And that’s it.  Now come back to me with the consumption distribution data, and let’s see what that looks like.  I predict that consumption inequality is far lower than income inequality.  And that consumption inequality is rising at a far slower rate than income inequality.  I’m not saying there’s no problem, but it’s way smaller than the progressives imagine, as the data they use is pure nonsense.  Consumption inequality is economic inequality.  Income inequality is . . . well it’s meaningless gobbletygoop.

This Will Wilkinson posts cites study after study supporting my consumption inequality claim.

I’m not trying to make an Ayn Randian argument here.  I favor 4 types of income redistribution, on utilitarian grounds:

1.  Education vouchers

2.  Catastrophic health insurance

3.  Government subsidy of HSAs for low income workers.

4.  Wage subsidies for low income workers, combined with abolition of minimum wages and occupational licensing.  Thus a single mom with two kids making $8 hour, might get a government subsidy of another $8 hour.  And someone making $16/hour might get a $4 hour subsidy.  But they have to be employed.  Have government jobs paying 1 cent per hour as a residual, for those claiming they can’t find a job.  Give them a $12/hour subsidy.  

They would also get the other three subsidies discussed above.  As one’s income rose, one would get less and less of a HSA subsidy, but I’d probably make the education voucher and catastrophic insurance universal.  Importantly, I’d try to spend less on education than we do now.

You do all this redistribution with two consumption taxes; a VAT and a progressive payroll tax.  Plus perhaps some other taxes on efficiency grounds (carbon, land, etc.)  No personal or corporate income taxes, no forms to fill out.  K.I.S.S.

BTW, other than my quibble over “income,” I basically agree with the thrust of Yglesias’s post.

PS.  Oh, and get rid of the debt ceiling, for God’s sake.