Last call for futures donations

We plan to wrap up the donations for iPredict this week.  We will look at where we are at that time, and then Ken will also make a donation.  Hopefully the market will be up and running soon.  BTW, the Hypermind full year contract is at 45 (4.5%), I hope to have the link embedded here soon, but for a low tech guy like myself the wheels turn slowly. . . .

PS.  Benn Steil and Dinah Walker have a good post on monetary offset.  Mark Sadowski did some similar empirical work last year, and reached the same conclusion.

My new career

I have spent the past 6 years trying to do two jobs at once, my teaching job at Bentley and lots of blogging/writing/speaking on monetary reform.  I am pleased to announce that from now on I’ll be able to focus on monetary policy. Through a very generous donation of Kenneth Duda (a Silicon Valley entrepreneur who is supportive of market monetarism), the Mercatus Center has created a new program on monetary policy, and appointed me as director.  I’m sure people will have some questions about this, so let me provide a bit more detail.

A few months back I began raising money to set up a NGDP futures market.  At the time, Ken Duda offered to support the project with a large donation.  He also expressed an interest in supporting my NGDP targeting in any way he could. Initially he suggested setting up a foundation to promote monetary reform, and having me direct the foundation.  I thought it might make more sense to work within an institution such as a university or a think tank, where I could get managerial support.  We eventually decided to embed the project within the Mercatus Center.

The Mercatus Center is a bit different from Washington DC think tanks.  It is often regarded as the world’s premier university-based research center with a focus on free market ideas. I was reassured by the fact that Mercatus is attached to George Mason University (my favorite econ program), and that Tyler Cowen is the Chairman of the Board. One nice thing about Mercatus is that they are focused on funding serious academic research, and don’t insist that researchers follow any particular party line.  I’ve done three papers for Mercatus in recent years, but they’ve also funded other researchers with very different views of monetary policy.

Here I might add that at this stage of my life I’m not too worried about a lack of academic freedom. I’ve always been the type to say what I thought, even though my research topics were so unconventional that I often had a hard time getting published, and almost didn’t get tenure. Nonetheless, it’s nice to be in a situation where no one is likely to question my academic independence.  Not only does Mercatus allow me academic freedom, Ken Duda also wants me to follow the implications of my research where ever it leads, even if it leads me away from NGDP targeting.

As you might expect from someone who has donated money to both and Mercatus, Ken Duda is not a strongly partisan or ideological person.  He has told me that he’s basically a pragmatist, who became very frustrated by the condition of the US economy after 2008 and thought that my monetary policy ideas made sense.  He’s been a long time reader of my blog and has commented on numerous occasions.

I actually wouldn’t have had any problem taking a position funded by a much more partisan donor, and/or at a highly ideological think tank.  My policy is to always say what I think and let the chips fall where they may.  But I can’t deny it’s nice to be involved with a donor and research center that encourage academic freedom.

Although I am done teaching, I will actually be a Bentley employee for another 18 months, and after that I hope to maintain my Bentley affiliation through some sort “emeritus” relationship.  I will continue to live in the Boston area, although long term we plan to retire in Southern California. (In a sense I’ll never retire, as I’ll keep promoting NGDP.)  My contract with Mercatus runs through mid-2018.  I won’t discuss the monetary details, other than to say I’ll make roughly as much doing this project over the next 3 and 1/2 years as I would have made teaching at Bentley over the next 2 and 1/2 years.  More work for the money, but that’s fine as I won’t be so stressed trying to do 100 things at once.

I hope to achieve many goals, but the one that might be of greatest interest to MoneyIllusion readers is a book on NGDP targeting and market monetarism, based on this blog.  Mark Sadowski has agreed to work as a research assistant on the project.  I also hope to support academic research that provides more “rigorous” empirical and theoretical support for NGDPLT and related ideas. And I’ll continue to do shorter papers, op eds, speak to academics, business people and policymakers, work on the NGDP futures markets, etc.

And of course I’ll keep blogging here and at Econlog.

I’ve known this was likely to happen for several months, but kept it secret until the funding was in place.  Even my colleagues didn’t know (except my chair.)  It was a bittersweet feeling going down the final stretch last semester after 34 years of teaching.  I always envisioned telling my students it was my last class, but life never plays out as you envision it will.

I’ve started noticing restaurants that offer senior discounts to the over 60 group, a milestone I’ll reach later this year.  But you know what they say, 60 is the new 50.

PS.  I have a new post at Econlog on the zero bound problem.

Update:  Stocks open sharply higher on the news!  :)

Questions for Keynesians

A number of Keynesian bloggers have recently expressed dismay that the rest of us don’t buy their model.  Maybe it would help if they’d stop ignoring our criticisms of their model, and respond to our complaints.  Here are some questions:

1.  What is the proper measure of austerity?  The textbooks talk about deficits.  But most of the Keynesian bloggers focus on government purchases.  So which is it?  And if it’s purchases, why did these same bloggers claim that austerity would result from big tax increases in the US in 2013, and a big tax increase in Japan in 2014?  And why does the measure chosen (ex post) usually seem to be the one that best supports their argument in that particular case?

2.  Why do Keynesians show cross-sectional graphs of fiscal austerity and growth, mixing in countries that have their own independent monetary policy, with those that do not? (I.e. those lacking monetary offset.)  And why don’t they respond to criticisms of those graphs?  And why tout cross-sectional studies of fiscal policy at the level of American states, when no American state has an independent monetary policy?

3.  Why claim that fiscal policy can be effective in the special case where a country is at the zero bound, and then claim that austerity caused the eurozone double-dip recession even though at the time the eurozone was not at the zero bound?  The eurozone’s positive interest rates were prima facie evidence that the ECB had inflation right where it wanted it until 2013, or else they would have further cut their interest rate target.

4.  When claiming that fiscal austerity reduced aggregate demand, why do Keynesians almost always provide data for RGDP growth, when NGDP growth is a much better proxy for AD?  NGDP is a direct test for AD shocks, whereas RGDP can be impacted by either AD or AS.  RGDP doesn’t show AD changes, it shows aggregate quantity demanded.  RGDP rose in the US between 1865-96, was that more AD, or more quantity demand as supply rose?

5.  The transmission mechanism between AD and RGDP in the Keynesian model runs through jobs.  So why claim that low British RGDP growth was due to austerity when in an accounting sense it was almost all productivity—employment keeps hitting record highs?  Is there a new Keynesian model I don’t know about where austerity kills output without killing jobs?  A sort of reverse neutron bomb?

6.  Why did Keynesians say that 2013 austerity in the US will be a test of market monetarism, and that slow growth in Britain “proves” austerity doesn’t work, but then when 2013 comes out with almost twice the US RGDP growth as 2012 (Q4 over Q4), they suddenly say that anecdotal evidence doesn’t matter?

7.  Why act like anti-Keynesians are bizarre heterodox economists, who reject mainstream macroeconomics, when it is the modern Keynesians who have recently rejected the claim in the #1 monetary textbook in America that monetary policy remains effective at the zero bound. Keynesians have walked away from the standard textbook natural rate model that after 4 or 5 years wages and prices will adjust to a demand shock and employment will go back to the natural rate. Keynesians now talk about “paradox of toil,” and claim that employer-side payroll tax cuts (or wage flexibility) are not expansionary.  Keynesians now claim that extended unemployment insurance doesn’t increase unemployment, even though they once said it did, and empirical studies show that the effect on unemployment was even positive in cities with extremely high unemployment rates.

Here’s Paul Krugman in 1999, a year after he wrote his famous “expectations trap” paper of 1998:

What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do – even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy – the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance – are rejected as dangerously radical and unbecoming of a dignified economy.

Will somebody please explain this to me?

Yes, and when you are done then please explain it to me.

Update:  I’d also love to know what Keynesians think of the Dems having a socialist as their lead member on the Senate Budget Committee, who then appoints a MMTer to be chief economist. And Krugman says the GOP relies on voodoo economics!

HT:  Jon

They aren’t coming back

Back in 2013 I argued that the low Labor Force Participation Rate was not evidence of lots of labor market slack:

It’s true the payroll gains and falling unemployment rate overlook the low labor force participation. In my view the falling LFPR is not a cyclical issue, even though the variable is itself cyclical.  This is very confusing to most people.  Imagine a LFPR that has a strong downward trend for structural (non cyclical) reasons.  Also assume the actual LFPR falls in a more cyclical pattern, falling steeply during recessions and leveling off during booms.  The level periods look like “nothing happening,” whereas the LFPR is actually growing relative to the declining trend line.  My prediction is that the LFPR will stay low even after we recover from the recession, and we always recover from recessions.  It’s not a cyclical problem.  This will become obvious by 2016.

Last October I explained the point further:

I noticed that the labor force participation ratio fell to 62.7%, the lowest rate since February 1978. Folks, it’s not coming back.  In less than a year the recession will completely end and we will get a normal unemployment rate (about 5%).  Jobs will be available and those people simply aren’t coming back.  They are early boomer retirements (perhaps discouraged by the previous job market), disabled (perhaps partly discouraged by the job market in previous years) and young people staying in school longer, or choosing to work less (as is true in affluent towns like my own Newton, Massachusetts.)  It pains me to say this but it’s pretty clear they aren’t coming back—the job market is good enough where the LFPR rate should not still be falling, if it really were nothing more than discouraged workers sitting there ready to plunge in again when things got a bit better.

Now it’s 2015 and the progressive mainstream media is finally beginning to contemplate the unthinkable.  Here’s the (Keynesian) New Yorker:

Despite the subsequent economic recovery, which has now lasted for more than five years, the rate has continued to fall. Last month, it stood at just 62.7 per cent, a tie for the lowest level since 1978 (a time when more women stayed at home and did domestic labor rather than join the official workforce).  .  .  .

Most policy-makers, including Janet Yellen, the chair of the Federal Reserve, have been assuming that much of the decline is cyclical and that, as the recovery picks up, more and more discouraged workers will return to the labor force.  .  .  .

I agree with that argument: indeed, I’ve used it myself. By now, though, we should be seeing signs of the participation rate rebounding. The fact that it isn’t is somewhat alarming.

But not surprising to readers of TheMoneyIllusion.

Will Abenomics work? Wrong question

Abenomics is often described as having three arrows:

1.  Monetary stimulus

2.  Fiscal stimulus

3.  Structural reform

There’s no point in even discussing fiscal stimulus, as they just increased their sales tax by 300 basis points.  Another 200 basis point rise is coming in a few years. There isn’t going to be any meaningful fiscal stimulus.  Structural reform may or may not occur in Abe’s second term—we’ll have to wait and see.  So for now, it’s all about monetary stimulus.

There are two reasons not to ask how Abenomics is doing.  It’s not clear what Abenomics is, and it’s not clear what it is trying to achieve.  So let’s simplify things and ask how the monetary stimulus arrow is doing.  Now we have only one unknown; what is monetary stimulus trying to achieve?

Monetary stimulus is not trying to achieve a higher trend rate of real GDP growth. Monetary policy can’t do that.  Structural reform might be able to boost RGDP growth over time, but the reforms haven’t yet been enacted.  If we are talking about monetary stimulus, then it makes more sense to consider these three goals:

a.  Economic recovery—reducing unemployment to roughly the natural rate

b.  A 2% inflation target

c.  An improved fiscal situation

The unemployment rate has fallen during the period of Abenomics—which ironically began even before he was elected in early 2013.  The yen started falling in the forex markets in late 2012, as soon as Abe announced his platform (he was widely expected to win easily.)  Lower unemployment is a plus.  How about the fiscal situation?

Here’s the Financial Times:

Since becoming prime minister a little more than two years ago, Shinzo Abe has forced the central bank to adopt more radical yen-weakening policies to spur inflation while allowing the first rise in consumption tax since 1997.

Such measures are aimed at containing the government’s vast debts, which have swelled to more than twice the size of the economy amid rapidly rising payments for health and social security.

Abenomics has improved Japan’s fiscal situation. A combination of higher corporate profits and the 3 percentage-point consumption tax increase last April seems set to push tax receipts to a 22-year high in the next fiscal year.

This puts the government on course to meet a pledge to halve the gap between what it spends (excluding debt-service costs) and what it collects in tax, as a percentage of gross domestic product.

The finance ministry wants to eliminate that deficit altogether by 2020 — a commitment likely to require big cuts in social security spending, as well as another 2 percentage point increase in consumption tax in April 2017.

So they are on course to improve their fiscal situation.  Another plus.

As I expected, they are falling short on their 2% inflation goal (although Japan is at least out of deflation).  It remains to be seen whether the BOJ will persevere until they hit the 2% inflation target.

Of the three goals mentioned above, the 2% inflation target is the least important.  So the monetary stimulus is a modest success.  Why then is Abenomics often viewed as having failed?  Because monetary stimulus is only one of the three arrows.  Yes, it can do everything that fiscal stimulus could have done (if tried), but it can’t raise the trend rate of RGDP growth in Japan.  Because Japan’s working age population is falling at 1.5%/year, trend RGDP growth is roughly zero. Many people look to RGDP growth when judging the performance of an economy, and by that criterion Abenomics has failed.

As the post title implies, it makes no sense to ask how Abenomics is doing.  That mixes up unrelated issues, such as policies enacted that may or may not have worked, and policies that were not enacted for political reasons.  As an analogy, one of my commenters recently mixed up two types of monetary policy impotence; inability of the central bank to boost AD, and inability of more AD to boost RGDP.  It’s important to always be very clear on which problem you are analyzing.

To summarize, Abe’s nominal policies have improved things, and the supply-side (structural) policies were never tried.

PS.  Simon Wren-Lewis responded to my recent Econlog post.  In the comment section over at Econlog, Rajat anticipated what I would have said:

Wren-Lewis has responded:

Most of it seems besides the point. I’m not sure what levels of government consumption and investment imply about ‘austerity’, which presumably also captures cuts to transfer payments and tax increases.

I pointed out that the “year of austerity” in the US began on January 1st, 2013, and hence that you would want to look at Q4 over Q4 figures growth figures.  He responds with government output data.  Very convenient, given that the austerity that began on January 1st took the form of increases in both income and payroll tax rates.  Sequester came later in the year, and even that included cuts in transfers (which are not output).  Wren-Lewis never even addressed my other two criticisms.

Wren Lewis also implies that I believe that “fiscal policy never matters much.”  I actually believe that demand-side fiscal policy doesn’t matter much when a country has an independent monetary policy and targets an aggregate like inflation or NGDP.  I thought that was the standard view in macroeconomics.  (Now Wren-Lewis calls it “faith based”.)  But even then, supply-side fiscal policy like employer-side payroll tax cuts (advocated by Christy Romer and me) and VAT cuts can be effective.

Marcus Nunes also has a good post.