Archive for the Category Uncategorized


The only real solution to Too Big To Fail

In a recent post I suggested that higher capital requirements might be called for if policymakers were unwilling to bite the bullet and remove moral hazard from our financial system.

The FT has a new article discussing a Treasury proposal to end Too Big To Fail, by setting up a new type of bankruptcy for big banks.  I wish them well, but remain skeptical.  In my view, the only way we’ll ever be able to remove moral hazard is with monetary policy reform.  If we can get to a policy of NGDPLT, then policymakers will no longer have to worry about the consequences of the failure of a big bank.  Unfortunately, that’s likely to take many decades, as we first need to implement the policy, and then see how it does during a period of financial distress.  Only then would policymakers begin to feel comfortable rolling back TBTF.  (And even then, special interest groups will try to keep it in place.)

PS.  The NYT has a new post showing that historians view Trump as being the worst President in American history.  That’s also my view.  Some people judge presidential performance by how the country is doing.  That’s about like judging my blogging based on how monetary policy is doing.  A couple posts I’d recommend are Yuval Levin explaining why Trump is not actually the President, in the conventional sense of the term.  He’s not qualified to be President, so day-to-day decisions are made by others.  Thus the GOP “deep state” wisely vetoed his recent attempt at crony capitalism, which would have re-regulated the coal and nuclear industry as a backdoor way of bailing them out.  The outcome was good, but Trump’s specific input into the process was destructive.  Matt Yglesias also has a good post, explaining why Trump is much more corrupt that even lots of left-of-center reporters assume.

PPS.  I have a new post on budget and trade deficits, over at Econlog.

$110 bills are still lying on the sidewalk

I have a new post on the Hypermind NGDP prediction market, over at Econlog.  I argue that it might be best if the market fails.

Even so, I’m encouraging people to participate.  The prize money for each contract is over $36,000, and it costs nothing to participate.  Where else in life can you win money with no risk of losing?

Only 321 people have participated in the first contract, which ends in April, and even fewer in the second, which ends at the end of April 2019.  At that rate, the average amount of winnings per participant will exceed $110.

I’d also encourage journalists to pay more attention to this market.  What other data point better describes the expected growth in aggregate demand over the next year?  Be specific.



Friedman on monetary policy

At the recent AEA meetings in Philadelphia, there was a panel discussing Friedman’s famous AEA presidential address, which occurred 50 years ago. Rereading the paper, I found it to be just as impressive as I remember.

Here Friedman discusses the relationship between money and interest rates:

These subsequent effects explain why every attempt to keep interest rates at a low level has forced the monetary authority to engage in successively larger and larger open market purchases. They explain why, historically, high and rising nominal interest rates have been associated with rapid growth in the quantity of money, as in Brazil or Chile or in the United States in recent years, and why low and falling interest rates have been associated with slow growth in the quantity of money, as in Switzerland now or in the United States from 1929 to 1933. As an empirical matter, low interest rates are a sign that monetary policy has been tight-in the sense that the quantity of money has grown slowly; high interest rates are a sign that monetary policy has been easy-in the sense that the quantity of money has grown rapidly. The broadest facts of experience run in precisely the opposite direction from that which the financial community and academic economists have all generally taken for granted.

Paradoxically, the monetary authority could assure low nominal rates of interest-but to do so it would have to start out in what seems like the opposite direction, by engaging in a deflationary monetary policy. Similarly, it could assure high nominal interest rates by engaging in an inflationary policy and accepting a temporary movement in interest rates in the opposite direction.

These considerations not only explain why monetary policy cannot peg interest rates; they also explain why interest rates are such a misleading indicator of whether monetary policy is “tight” or “easy.” For that, it is far better to look at the rate of change of the quantity of money.2

The “financial community and academic economists” still have a lot of catching up to do, even after 50 years.

Notice the italics Friedman used for “has been” in the first paragraph.  It’s almost like 50 years ago Friedman anticipated the rise of NeoFisherians, and wanted to disassociated himself from that group, (while also disassociating himself from the Keynesians.)

In 2003, Ben Bernanke stood on Friedman’s shoulders and saw the picture a bit more clearly:

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman (in his eleventh proposition) and by Allan Meltzer, nominal interest rates are not good indicators of the stance of policy, as a high nominal interest rate can indicate either monetary tightness or ease, depending on the state of inflation expectations. Indeed, confusing low nominal interest rates with monetary ease was the source of major problems in the 1930s, and it has perhaps been a problem in Japan in recent years as well. The real short-term interest rate, another candidate measure of policy stance, is also imperfect, because it mixes monetary and real influences, such as the rate of productivity growth. . . .

Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation. On this criterion it appears that modern central bankers have taken Milton Friedman’s advice to heart.

Now another 15 years have gone by, and I can try to advance the ball a tiny bit further downfield.  Inflation is not a good monetary policy indicator, for standard “never reason from a price change” reasons.  Rising inflation can mean rising demand (easy money) or a reduction in aggregate supply (not easy money.)  In contrast, rising NGDP growth is almost always easy money, at least in the US (maybe not Ireland.)

Interestingly, I had never noticed footnote 2 in Friedman’s 1968 article, which seems to anticipate why inflation or NGDP might be superior to money:

This is partly an empirical not theoretical judgment. In principle, “tightness” or “ease” depends on the rate of change of the quantity of money supplied compared to the rate of change of the quantity demanded excluding effects on demand from monetary policy itself.  However, empirically demand is highly stable, if we exclude the effect of monetary policy, so it is generally sufficient to look at supply alone.

If you view money demand as M/PY, not M/P, then this is exactly my view.

Interestingly, the empirical relationship Friedman cites broke down about a decade after his paper was published in 1968:

Recessions are no longer preceded by sharp slowdowns in M2 growth.  (It’s an open question as to whether alternative monetary indicators, such as divisia indices, can fill the gap.  I’m a bit skeptical.)

The breakdown in the empirical relationship that motivated Friedman’s advocacy of money supply targeting helps to explain why late in his life he became more supportive of Greenspan’s inflation targeting approach.  Friedman was a pragmatist.  When the facts changed, he changed his views.

PS.  I have another post on this paper over at Econlog.


Another promise kept

Right after Trump kept his promise to cut the top personal income tax rate from 43.4% to 25%, another promise was also kept:

President Trump is celebrating Republicans’ passage of the tax overhaul bill as a two-fer: On Wednesday, in addition to tax cuts, he checked off his promise to repeal Obamacare, pointing to a provision in the bill to end the penalty on Americans who don’t get health insurance.

“We have essentially repealed Obamacare,” Trump told reporters during a Cabinet meeting at the White House.

I’m hoping that in a similar fashion Trump also keeps his promise to build the wall, end trade agreements, construct infrastructure and expel Dreamers.

Random thoughts

I have a piece on Jerome Powell over at the Washington Post.

Trump’s instincts were apparently to reappoint Yellen, but his aides talked him out of it.  This is one of those rare cases where he should have gone with his instincts.  He replaced a highly qualified woman with a far less qualified man, and is hoping that that the less qualified man does the exact same policy as the highly qualified woman.  How does that make sense?  (BTW, I think Powell will do fine in the short run.)

Progressives are bashing the new tax plan as being highly regressive, but I’m not buying it:

1.  They claim that corporate tax cuts benefit the rich.  Actually they benefit everyone.  Do you seriously think all these left wing welfare states in Northern Europe would have slashed their corporate income taxes (and in the case of Sweden abolished inheritance taxes) if these moves merely helped the rich?  No one knows the tax incidence of the corporate income tax, but I suspect it’s pretty broadly shared.

2.  The inheritance tax is almost certainly not going to be repealed.  The Dems reinstated it last time the GOP tried to repeal it, and President Sanders/Warren will do the same.  I think the GOP knows this deep down, which is one reason the repeal was put off to 2024.

3.  The plan keeps the top federal income tax rate at 43.4%!  How weird is that?  After all the discussion of the need for supply-side tax reforms in the GOP, there is no cut in the top rate.  Obama wins!  (Just as with Obamacare.)  And still the progressives complain.

4.  They’ll point to the fact that rich people below the top rate get tax cuts.  Some do, some don’t.  Our (upper middle class) family’s marginal tax rate will rise from 43.0% to 48.1% under the new tax plan.  I’d like Arthur Laffer to explain to me how this will motivate my wife and I to work more hours.  No cut in the capital gains rate, which was raised sharply by Obama.  How does that motivate me to invest more?  I just don’t get it.  And ours is not that unusual a family in southern Orange County.  There will be lots of families that face higher marginal tax rates, while the MTR on working class families (up to $90,000) falls from 15% to 12%.  So no, this is not a highly regressive plan by GOP standards.

[My estimate of the top rate for 2017 is the California tax rate of 6.2% (after federal deduction), plus 33% plus 3.8%).  For 2018 it’s 9.3% California income tax (because no deduction), plus 35% plus 3.8%.  Someone tell me if this is wrong.]

5.  Last month we put a $1000 down payment on a new Tesla.  We will now lose the $7000 tax credit.  Meanwhile Trump will do just fine:

There are several proposals in this plan that would directly benefit President Trump’s family.

Currently, owners of “pass-through” companies, like LLCs, partnerships, sole proprietorships, and S corporations — the Trump Organization, for example — are taxed as personal income. The Republicans proposal offers a new low tax rate for owners, at 25 percent, a substantial cut from what is typically taxed at 36.9 percent.

The Trump Organization is a large pass-through; it owns golf courses and hotels and pulls in about $9.5 billion in annual revenue. But because it is exempt from the corporate income tax, and its profits are instead taxed upon distribution to shareholders, this new low pass-through rate is a huge win for the Trump family — and the many other businesspeople who structure their companies like this. . . .

Another provision in this bill would also directly benefit Trump’s family. While most companies would have a new limit on interest deductions — capped at 30 percent of earnings before interest and taxes — real estate firms and small businesses would be exempt.

Become president to cut your taxes.

One of my biggest disappointments is that they did not equalize the treatment of debt and equity financed investments.  Interest can still be deducted, but not dividends.  Also, they did not eliminate the marriage penalty, which is a disgrace.

However . . . the tax proposal contains lots of real reform, more than I expected.  If it passes as is (a big if) it would make our tax system far simpler for most people. Most people would simply take the standard deduction.  The truly evil AMT would be abolished. I could do my taxes again!  Investments are expensed; no complicated depreciation schedules.  These are amazingly good reforms.  Best of all, the deductions for mortgage interest and state and local taxes would be so weakened that they could easily be eliminated in a future reform.  There would be little left to protect.  That makes me think this is too good to be true, and the reform parts of the plan won’t go through.  I hope I’m wrong.

One other thing. Whereas the Dems will bring back the inheritance tax, I don’t think they’d unwind the “tax simplification” reforms.  If we can get those through Congress, I think they would stick.  Yes, other complications will be added over time, but the biggies are getting rid of itemizing and getting rid of the AMT.  We have an insane system (which other countries don’t have) and it has to end at some point.  Just end the misery.  Please.

PS.  People ask about my ideal tax system:

1. No personal or corporate income taxes.  No inheritance tax.

2.  A VAT where the poor pay nothing (due to a rebate of the VAT times poverty level income.).

3.  A steeply progressive payroll tax.  People who are self-employed or form corporations to avoid tax have their income treated as wage income.  Investments are expensed.  Low wage workers get wage subsidies.  No universal basic income (except the VAT rebate).

4.  A progressive property tax.  (The opposite of the current property tax, which has much lower rates on NYC mansions than ordinary homes.)

5.  A carbon tax.

This system of multiple taxes raises enough revenue, without requiring the sort of high rates that a single system would require.  You don’t want a 50% VAT, tax evasion would be massive.

We can have a consumption tax system that is highly progressive, simple and efficient.  So let’s stop bickering and do it.