About that “impotent” monetary policy

Here’s Paul Krugman:

The same impotence of conventional monetary policy that makes open-market purchases of Treasuries useless at boosting GDP also mean that broad monetary aggregates that include deposits are largely immune to Fed influence. The Fed can stuff the banks full of reserves, but at zero rates those reserves have no incentive to go anywhere, and even if they do they can sit in safes and mattresses.

Yes, if open market purchases of bonds don’t boost NGDP, then they would also fail to boost M2.  That’s what the liquidity trap theory says.  But it says far more than that. Here are some other implications of Krugman’s claim:

1.  QE fails to boost stock prices.

2.  QE fails to affect bond prices.

3.  QE fails to affect exchange rates.

You thought Japanese QE depreciated the yen?  That’s just your imagination.  You think QE recently caused the euro to depreciate?  You are hallucinating.  The dollar fell 6 cents on the day QE1 was announced, in March 2009?  That’s a coincidence.

GDP growth accelerated in 2013, despite a $500 billion decline in the budget deficit, and hundreds of Keynesians predicting a slowdown or even recession?  Nothing to do with QE.

HT:  Benn Steil

PS.  I have a new post over at Econlog

Update on the American Sunbelt

The census recently released its 2014 population estimates, which reveal some interesting patterns:

1.  During the decade of the 2000s, 38.4% of US population growth occurred in just 3 states; Texas, California and Florida. In the past year that number rose to 47.2%, in the same three states. Florida passed New York to become the third most populous state. These three states are America’s future, and in a few years I’ll be heading out to the worst governed of the three. Speaking of bad governance, Illinois (which contains dynamic Chicago) lost population, while Michigan (home of Detroit) gained population.  Ouch!

2.  So the Sunbelt is alive and well?  Not quite.  All of the south central states other than Texas did poorly, with Louisiana, Mississippi, Alabama, Arkansas and Oklahoma all growing at less than the national average, and far less than Texas. New Mexico actually lost population.

3.  So Texas must be booming due to the fracking boom?  Nope.  Texas’s population growth began slowing about 8 years ago, just as fracking got underway.

4.  But wait; didn’t North Dakota have the fastest population growth of any state? Yes, but North Dakota only added about 15,600 people, versus 7,600 in South Dakota.  So fracking probably added no more than 10,000 people.  Even if you assume that Texas’s fracking industry is twice as large, it would have added only 20,000 to Texas’s population.  (Probably less, as it discourages non-fracking business.)  But Texas added more than 450,000 people. Fracking is a statistical error, nothing more.  That’s why oil producing Oklahoma and Louisiana grew more slowly than the national average, despite the oil boom.  (The data was from July 1, 2013 to July 1, 2014.)

5.  Populations movements don’t affect politics, as the three big gainers are red, blue, and purple. But even if they were all red or all blue, it wouldn’t matter.  If liberals move to a conservative state or vice versa, it changes the nature of that state. During my lifetime many strongly Democratic states have become very Republican, and vice versa.  It will happen again. In the 20th century each party will win about 1/2 of the elections, just as in the 20th century.  It’s all about the ideas, the horserace doesn’t matter.  Which ideas will each party accept?

BTW, I saw this in The Economist:

Less than a decade ago UKIP was a Eurosceptic pressure group run by disenchanted Thatcherites, such as Mr Farage, and EU-obsessed academics. Now it is hoovering up support from disgruntled elderly and blue-collar voters. Yet the fact that it is also hoovering up their prejudices reflects how populist, not serious, the party is.

.  .  . Some Kippers claim that, in its blundering first stabs at policymaking, the party is simply listening to its new members too well. Yet there is no sense that, when it matures, it will reassert liberal principles—as Douglas Carswell, the party’s first elected MP, clearly wants. The truth is Mr Farage is more opportunist (he would say pragmatic) than liberal. He probably still doesn’t much care what UKIP’s economic policy is, so long as it hastens Britain’s departure from the EU. The result is that libertarian UKIP is likely to end up much like its nativist, authoritarian European cousins.

(Recall that outside the US “liberal” means pro-free market.)  Now reread the first paragraph. Does this remind you of the evolution of a certain political party in the US in recent decades?

Update:  Lars Christensen will begin doing Youtube videos.

If Britain were Germany

[Update:  Apparently the German system is more complex than I realized–see comments below, especially regarding the SNP.]

The Conservatives won an impressive come from behind victory last night.  I thought it would be interesting to compare the actual outcome, to the outcome that would have occurred with a German-style proportional representation system.  In that system, seats are assigned in proportion to vote share, but only to parties getting at least 5% of the vote.  I’ll show the number of seats under the German regime, with the actual number won in parentheses.  The difference is stunning:

Conservative   273  (330)

Labour      226    (232)

UKIP       93  (1)

Liberal Dems  58   (8)

SNP    0   (56)

Others    0   (23)

I suppose the Tories could have cobbled together another coalition government, if the Lib Dems were keen on another suicide mission.  But if they weren’t?

Europe has lots of right wing nationalist parties.  While the UKIP is not as bad as some of the others, it is still a bit outside the mainstream.  The reason the UK lacks a big populist party has nothing to do with the UK electorate, it’s all about the system.

PS.  Of course the usual Lucas Critique caveats apply, especially where strategic voting occurs.

PPS.  No surprises in today’s jobs report—more of the same.

Thank God for the “Shy Tory factor”

Back in 1992, the incumbent Conservatives led by John Major went into the election slightly trailing the Labour Party in public opinion polls.  In fact, they won a reasonably comfortable victory.  Here’s what Wikipedia says:

Almost every poll leading up to polling day predicted either a hung parliament, with Labour the largest party or a small Labour majority of around 19 to 23. Polls on the last few days before the country voted predicted a very slim Labour majority.[8]

With opinion polls at the end of the campaign showing Labour and the Conservatives neck and neck, the actual election result was a surprise to many in the media and in polling organisations. The apparent failure of the opinion polls to come close to predicting the actual result led to an inquiry by the Market Research Society. Following the election, most opinion polling companies changed their methodology in the belief that a ‘Shy Tory Factor‘ affected the polling.

That was when the Labour party was still mildly socialist, before the Blair reforms. (Indeed the election led to the Blair reforms.) Based on the exit polls, it looks like a repeat of 1992.  Perhaps Tory voters are a bit embarrassed to admit voting their pocketbook.

There is no better time to begin introducing NGDP into the monetary policy process. In the past few years it would have been entangled in election politics, with Labour claiming the Tories were abandoning control of inflation (even if they privately supported the move.)  The BoE should consider a NGDP target with revisions every 5 years to account for changes in trend RGDP growth.  Since trend growth changes very slowly, that (unnecessary) compromise is a small price to pay for NGDP targeting.

Congratulation to the Tories—the better party won.  (Something I could not honestly say about America’s right wing party.)

PS.  I love British humor.  A disgruntled Labour MP called their unusually left-wing 1983 party platform; “The longest suicide note in history.”

Update:  If my math is right the UKIP would have had about 75 seats under proportional representation, even more with small parties excluded.  They are forecast to end up with 2 seats.  The SNP would get perhaps 33 seats, whereas they actually got about 56. And that’s assuming they get the 5% that is the threshold in countries like Germany. The Lib Dems would have gotten about 50 seats, whereas they’ll end up with about 10. It pays to be a regional party in Britain.

Bankrupt Greece breaks promise, rehires 15,000 public employees

That’s equivalent to about 450,000 new public employees in the US.  Here’s the FT:

Opposition lawmakers accused Syriza of violating that agreement with the new laws, which could expand the government payroll by as many as 15,000 employees.

But government ministers remained defiant. “We aren’t going to consult [bailout monitors], we don’t have to, we’re a sovereign state,” Nikos Voutsis, the powerful interior minister, told parliament.

Yes, and other sovereign states “don’t have to” give Greece any more money.

The municipal police force, which was disbanded 18 months ago, will be revived and several thousand caretakers at state schools, known as “guards”, are to be rehired.

Kyriakos Mitsotakis, who — as the previous government’s minister for administrative reform — implemented past cuts, said Syriza’s legislation marked a return to the clientelist practices of the past.

“It’s not just the hirings, but a lack of transparency . . . and the reversal of new disciplinary procedures that had proved very effective,” Mr Mitsotakis said.

Nikos Pappas, minister of state with responsibility for the media, said the reopening of the state broadcaster would include the rehiring of 1,500 employees at a cost of €30m to be covered from the auction of television licenses.

When Antonis Samaras, the previous prime minister, closed ERT in a deeply unpopular move, he called it a “haven of wasteful spending.”

Imagine if the US hired another 45,000 “workers” for NPR at a time when the old and sick couldn’t get public health care at hospitals.  Perhaps those public school “guards” and state broadcaster “workers” will build some of that “infrastructure” that Greece needs.

I can’t wait to see how the left defends this move.

PS.  I relied on sources like the “World Socialist Web Site” for this post, in case you were wondering.