Archive for January 2012


“I’m a little confused”

It really sucks not having a transcript of the press conference, which I think contained some rather stunning remarks.  I tried to write down notes, but these won’t be exact quotations.

Early on someone asked a very apt and pointed question (almost Svenssonian), which went something like this:

I’m a little confused.  The reports seems to show at the end of 2014 the unemployment rate at or above 7% and inflation at or below 2%.  And yet 11 out of 17 members of the committee wanted to raise rates by that time.  If unemployment and inflation are in fact symmetrical objectives, how can that be the case?  And is there any tolerance to catchup inflation in the service of catch-up growth?

Bernanke seemed to ignore the catch-up inflation question.  The he started talking about the fact that they had done a lot already, listing some of the policy moves.  Then he talked about the complexity of the problem, and that they weren’t going to mechanically make any decision based on these interest rate forecast, but rather consider how the economy evolved, blah, blah, blah.  So he was downplaying the implication of some tightening in 2014.  Then things got more interesting:

Yes, if inflation is going to remain below target for an extended period and unemployment progress is very slow then I think your implicit question is right.   There is a case for additional policy action.  We’ll continue to observe the situation and we’re certainly prepared to look for additional ways to provide support if we continue to have this unsatisfactory situation.  (italics added)

I found this interesting, because the reporters “implicit question” wasn’t a question at all, but an implied critique of Fed policy.  I read Bernanke as agreeing with that critique.  But that’s just one question, and long rambling answers can be misinterpreted.  Fortunately, the question was asked again about 30 minutes later, and once again in a quite pointed way:

Why shouldn’t someone looking at these numbers from the outside say that as aggressive as you say you’ve been, and as aggressive as you have been, it doesn’t look like you’re meeting any of your goals for the next 3 years on the economy.  So why isn’t the Fed doing more now?

Again Bernanke began by emphasizing how much they had done, and that they hadn’t been passive.  Then he took a shot at inflation hawks, pointing out that they’d been continually wrong in predicting that the massive balance sheet increases would lead to inflation.  Then things got interesting:

If the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then more [sic] our framework, the logic of our framework says, we should be looking for ways to do more. It’s not completely straightforward because we are working with a variety of nonstandard policy tools.  We can’t just lower the fed funds rate by 25 basis points like in the good old days.  But your basic point is right. We need to adopt policies that will both achieve our inflation objectives and help the economy recover as quickly as feasible. I would say that your question, actually and the earlier question, shows the benefit of explaining this framework, because the framework makes very clear that we need to be thinking about ways to provide further stimulus if we don’t get improvement in the pace of recovery and a normalization of inflation.  (italics added)

This post took a long time to put together, so I won’t have time to say more tonight.  But two different reporters asked questions that sharply critiqued monetary policy, pointing out that the logic of Bernanke’s emphasis on the dual mandate suggested that the Fed should be doing more right now, and should not be thinking of raising rates in 2014 if economic conditions were as currently forecast by the Fed.  In both cases Bernanke made the required pro-forma statements that they had already done a lot, but then instead of defending the honor of the Fed he basically agreed with the reporters:

I think your implicit question is right.   There is a case for additional policy action.

But your basic point is right. We need to adopt policies that will both achieve our inflation objectives and help the economy recover as quickly as feasible.

As I watched the press conference I found myself agreeing with Bernanke over and over again, on all sorts of points.  I don’t think his views are all that far from mine.  So why isn’t the Fed doing more?  All Bernanke can say is that they’ve done a lot.  And that it’s a complicated problem.  And yes, “your implicit question is right”—there is a case for doing more under current and future expected conditions.  I’d expect QE3 this year.  And I’d also expect Bernanke’s memoirs to say he was occasionally frustrated by both the committee and outside pressure from politicians, and that the Fed should have moved at an even more aggressive pace.

There is more of interest from the press conference.  But no time tonight–maybe tomorrow.

The real story is growing equality

Here’s some data on Chinese incomes:

In 2011, the per capita total income of urban households was 23,979 yuan. Specifically, the per capita disposable income of urban households was 21,810 yuan, the nominal growth was 14.1 percent, or a real growth of 8.4 percent. Of the per capita total income of urban households, the year-on-year growth of wage income was 12.4 percent; transferred income 12.1 percent; net income from business operation 29.0 percent; and 24.7 percent from property income. The per capita net income of rural households was 6,977 yuan, up by 17.9 percent, or 11.4 percent in real terms. Specifically, the growth of wage income was 21.9 percent; household operation income 13.7 percent; property income 13.0 percent; and 24.4 percent from transferred income. Taking the per capita net income of rural households as 1, the ratio of urban-rural income in 2011 was 3.13:1, while that in the previous year was 3.23:1. The total number of migrant workers in 2011 was 252.78 million, an increase of 10.55 million, up by 4.4 percent. Specifically, the number of local migrant workers was 94.15 million and outbound-migrant workers 158.63 million. The average monthly income of outbound-migrant workers was 2,049 yuan, up by 21.2 percent.

That means the migrant worker population (almost as large as the US population) got roughly a 15% pay increase last year in real terms.  Have so many people gotten so much richer in such a short time in all of human history?  I doubt it, although you could argue that human welfare increased even faster in the early 1980s, after Deng freed up Chinese agriculture.  Why will this story receive little attention in the press?

1.  Nationalism.  We care more about growing inequality in America than shrinking inequality in China.

2.  Euro-centrism.  The pain inflicted on a few million Greeks due to austerity is a more interesting story to reporters of European descent that the welfare of hundreds of millions of East Asians.

3.  There’s no such thing as good news.  If it’s not bad, it’s not news.  The only exception is if something really bad ends in a particularly dramatic way—say the fall of the Berlin Wall.

4.  It’s a contrarian story that doesn’t fit the dominant narrative.  The Chinese move toward capitalism really did make things more unequal in China during the 1990s (but not the 1980s), and perhaps (this is debatable) even in the US.  The recent reversal in China toward increasing equality was inevitable, but just doesn’t fit our current concern over inequality.

5.  People don’t believe the story is true.  Actually it is (roughly) true, but I find that when contrarian data is presented, people don’t like to adjust their prior beliefs, they’d rather argue the Chinese government is faking the data.  Even though this is the same government that 10 years ago was reporting increased inequality and near-zero wages for the poor.

The world is rapidly transitioning from a place where residents of rich countries can’t even comprehend the way of life in poor countries, to one where people will all live recognizably similar lives.  The current inequality trends in the US look bad, but it wouldn’t surprise me if we saw a reversal in those trends as well.  The entire world is evolving toward a near 100% service economy in terms of jobs (not output.)  I can’t imagine why low-skilled workers would not be able to do the “jobs of the future,” (which will be serving others) but perhaps I’m missing something.  I’m more worried about my job being replaced by the Khan Academy.  I suppose the big public policy issue will be deciding who should get to allocate all the wealth that will be accumulated by those with great ideas (or rents.)  Should the government or the wealthy get to decide which charities are most deserving?

Consumption inequality won’t be a big issue, especially if there are luxury taxes on big houses, yachts and private jets.  Bill Gates doesn’t need 750 washing machines.

HT:  Free Exchange

A picture tells 1000 words

Update: Well that was an embarrassing error on my part.  It’s actually a post by David Beckworth, which was “borrowed” by the Malaysian blogger.

Nick Rowe directed me to an excellent graph from Economic Mind (produced by an anonymous Malaysian blogger):

Scott Sumner’s case, however, gets even stronger if we look beyond mid-2008 and compare it to the growth rate of nominal spending.  The figure below shows layoff and discharges again, but now it is graphed against the growth rate of monthly nominal GDP.  Now we see there is a surge in layoffs and discharges but it coincides with the collapse in the nominal GDP growth rate.

The data seems very clear to me.  It indicates there was a housing bust that was putting a damper on economic activity, but by itself was not large enough to create the Great Recession of 2007-2009.  Rather, that required the failure of Fed officials to stabilize nominal spending in 2008.

I love the graph.  But as this old post shows, the case against recalculation is even stronger.  During the period after the housing market peaked, non-residential real estate construction and employment continued to rise.  Hence the drop in residential construction employment was much sharper than the drop in overall construction employment.  Non-residential construction employment plunged after mid-2008, when the economy tanked.

Take a look at the graph and ask yourself what the layoffs numbers would have looked like if the Fed had kept NGDP growing at 5% per year.

PS.  I’ll put the following in a postscript, because I know many readers are sick of hearing about the Wren-Lewis/Krugman mistake.  But for those who still think I don’t understand accounting identities, I regret to inform you that there seems to be an epidemic of confusion among some of our most brilliant bloggers, especially those named of “Smith.”  Here’s a new post from Karl Smith:

I took Scott’s point to be that one must invoke the old Keynesian model in order for Wren-Lewis to have been correct. Its not simply that once one acknowledges consumption smoothing that even a child can see Cochrane was wrong.

Even worse, if you do invoke that model (where I is unaffected), then the balanced budget multiplier is one and there is no consumption smoothing.  And smoothing was the factor that allegedly proved John Cochrane wrong.

And here’s several observations that Noah Smith left in my comment section yesterday.

In the classic Keynesian model of a “balanced budget multiplier,” government taxes people X and spends X on building a bridge. People’s income goes down X from the taxes and goes up X from being paid to build the bridge. Hence, there is no change in their after-tax income, so their investment and consumption behavior are unchanged. Meanwhile, output rises by X because now we have a bridge that we didn’t have before (or, alternatively, because now people’s pre-tax incomes are higher by X). Thus, the balanced-budget multiplier in this model is 1. Taxing and spending X increased output by exactly X.

So, basically, Wren-Lewis’ example does not correspond to the classic Keynesian model; he understates his case by forgetting about the extra income that people will receive from being paid to build the bridge, and arrives at a balanced-budget multiplier of 0.8 instead of 1.

In fact, I believe that Scott made exactly this point in his first “S=I” post, where he said that if income doesn’t fall, then no consumption smoothing actually occurred, or something like that.

The more general point is, I can’t think of any Keynesian type of model where the multiplier is inversely related to the elasticity of intertemporal substitution. Multipliers in old Keynesian models would be bigger if people consumed a fixed percent of their income instead of smoothing it. In the main New Keynesian models I don’t think it matters…

Noah Smith is of course the highly respected Keynesian blogger that Paul Krugman linked to as an expert on the issue of misinterpreting identities.  Who says I always disagree with Paul Krugman?

Noahpinion has an opinion

I suppose I should be flattered by the nonstop attention my S=I post has received.  But I guess I’d slightly prefer the attention to be acclaim at my brilliant insight:  “S=I?   Why didn’t we think if that!!”

Paul Krugman devoted three posts to telling me that identities are definitions, not behavioral relationships.  And also explaining how the Keynesian cross model works.  I’ve been blogging for three years and I defy anyone to find a place where I confused identities and behavioral relationships.

In one post he cited Noah Smith, who warned of the danger of confusing accounting identities with behavioral relationships:

Accounting identities are mostly just definitions. Very rarely do definitions tell us anything useful about the behavior of variables in the real world. The only exception is when you have a very good understanding of the behavior of all but one of the variables in an accounting identity, in which case the accounting identity acts like a budget constraint. But that is a very rare situation indeed.

Of course I agree with Noah, as (I assume) does every other economist on the planet.  Last night I saw this in a post by David Glasner:

Have a look as well at Brad DeLong who has a new post quoting Paul Krugman quoting Noah Smith on the dangers of accounting identities, and also quoting moi.

And I found that Brad DeLong also quotes Noah Smith, although Brad doesn’t mention me in his initial post.  (Which is interesting, as he certainly has not been shy about calling me an idiot in previous posts.)  Then Brad DeLong added an update with a quote from an earlier Glasner post.  Here’s the first sentence of the Glasner quotation that Brad provides:

Why Am I Arguing with Scott Sumner? « Uneasy Money: When Scott says he can derive a substantive result about the magnitude of the balanced-budget multiplier from an accounting identity between savings and investment, he is making a theoretically ungrammatical statement. . . .

Most of my disagreement with David is about the S=I identity.  Paul Krugman, Simon Wren-Lewis and I think it’s an identity for actual saving and investment, albeit not for planned saving and investment.  In fact, that distinction lies behind the paradox of thrift.  But David disagrees, claiming that S=I is not an identity at all.  We’ll just have to agree to disagree on that point.  But the sentence DeLong quoted is flat out wrong.  I never would claim that an identity could tell us anything about the size of the multiplier.  That would be nonsense.  Definitions prove nothing about causation.

As I said, David strongly disagrees with Krugman and Wren-Lewis about the identity question, but he and Krugman and DeLong all seem to like Noah Smith’s post (or at least I inferred that from the fact that they all cited him.)  So let’s see what Mr. Smith thinks of these arguments that I’m confusing accounting identities with behavioral relationships:

David –

I really should clear this up. I do NOT think that Scott was trying to make an “argument from accounting identity.” In the first post where he mentioned S=I, Scott was obviously *not* trying to claim that S=I implies a fiscal multiplier of zero. He was using S=I to help him demonstrate that consumption smoothing does not imply the smoothing of total private expenditure. That point is correct. It was not an argument from accounting identity, but rather the use of an accounting identity to illustrate the difference between two concepts (smoothing of consumption and smoothing of total private expenditure), and thus does not violate my Principle #4


Case closed?  Probably not.   So as long as others keep challenging my critique of Wren-Lewis, I’ll keep responding.  And I welcome these challenges, as I think this is a very important point.  Identities don’t prove anything, but proofs must be consistent with identities.  Krugman endorsed Wren-Lewis’s faulty “proof” and as far as I know has never retracted that endorsement.

PS.  I prefer the ultra-polite criticism by people like David Glasner, to the snarky stuff from you-know-who.

Recent links

Here are some recent links that might be of interest:

1.  James Pethokoukis has a piece in Commentary on NGDP targeting.  David Beckworth provides a good analysis.

2.  Bob Murphy has a very amusing post showing a previous example of Paul Krugman throwing insults at a Chicago economist for saying something that was true.  Only in this case a few months later Krugman himself made the same claim, seeming to forget his earlier comment that only the truly uninformed could believe such rubbish.  Someone should send Murphy’s post to Mulligan.

3.  Russ Abbott, who is a computer science professor at Cal State LA, sent me an ingenious plan for having the Fed use fiscal policy to stabilize the economy.  It involves sales tax rebates when times are bad and tax surcharges when times are good.  It would be easiest to implement in an economy that already had a VAT, and/or state sales taxes.  I see it as analogous to my proposal to makes cyclical adjustments to the employer-side payroll tax rate.  These plans tend to work best when the central bank is targeting inflation.  Of course an even better policy is to directly target NGDP expectations.

The entire paper is only 2 pages, a model of clarity and concision.

4.  Here’s Paul Krugman making a case for tax simplification:

But in the real world, governments must collect taxes, and given that necessity, making that tax collection as simple and efficient as possible can easily trump more rarefied notions of efficiency.

The best way to do this is to abolish the highly complex personal and corporate income taxes, and replace them with a VAT, a progressive payroll tax, a subsidy for low wage workers, and some taxes on negative externalities.  No more confusing 1040 forms to fill out.  But Paul Krugman wants to increase tax rates on capital.  Interestingly, he does understand that the standard argument for doing so (i.e. the claim that all income should be taxed equally) is completely bogus.  Krugman may be wrong on occasion, but he’s not stupid:

So, the case for low rates on capital gains is that by taxing investment income as ordinary income, we effectively discourage saving: if you spend your income now, you pay taxes only once, while if you invest for the future, you pay taxes twice, so eat, drink, and be merry.

There is, however, no evidence that this effect is at all important.

Of course 99% of his readers would skim right over that point.  He’s saying that if you have twin brothers, each making $100,000 a year for life, and one spends it all on eating, drinking, and being merry, while the other saves and invests to boost the capital stock, which boosts worker productivity and real wages, then he’d like the thrifty guy to not just pay more taxes, but pay a higher rate as a fraction of lifetime consumption.

4.  Rather than the Keynesian cross, Paul Krugman should have argued that I was clueless about how research works in my own field:

So, the starting point for me, when thinking about how economics works as a discipline, is to realize that the traditional model of submit, get refereed, publish, and then people will read your work broke down a long time ago. In fact, it had more or less fallen apart by the early 80s. Even then, nobody at a top school learned stuff by reading the journals; it was all working papers, with the journals serving as tombstones.

And how did you know which working papers to read? In the fields I worked in, NBER Working Papers — yellowjackets — became the principal outlet for new research. If you were an associate, you got those papers in the mail, and at least checked out the abstracts — and if you were in the loop, you got to put out your own work the same way.

And who was in the loop? Well, there were groups of people in each subfield that were the real centers of information and reputation. I was part of two such groups, one in real trade, one in international money. I referred at the time to the “floating crap game”, hence the video above — there would be various conferences around the world, but the same 30 or so people would show up at each conference, like Nathan Detroit’s gamblers finding different hideouts each night.

I started out in the early 1980s, and for 25 years submitted papers to journals, and then patiently twiddled my thumbs and waited for referee reports.  Since my papers came from a small school, made bold claims, were very counterintuitive, and were poorly explained, you can imagine what happened.  Indeed it kind of reminds me of my recent dispute with Krugman and Wren-Lewis.  At first I’d be rejected, then I’d write the editor explaining why the referee was wrong.  On three occasions (including one at the JPE) the decision was overturned.  That generally doesn’t happen, but I was an unusual case of someone making a rather poor first argument, but being able to strongly defend my position when attacked.  And I’d guess that’s carried over into blogging.  The difference is that blogging is a pure meritocracy and doesn’t require any connections, so I’m more successful in this field.  Also my writing style is less bad than it used to be.

Update: W. Peden just sent me this link from the Guardian:

The British government, along with other western governments, must replace its redundant inflation target with a target for the growth of the value of the goods and services we produce – the growth of GDP in cash terms.

NGDP targeting continues to gain in popularity.