Archive for the Category Uncategorized

 
 

Are the tax cuts affecting growth?

Probably, but it’s too soon to say.  Here is some (annualized) data on RGDP and NGDP growth:

2009:Q4 to 2016:Q4:  NGDP growth averaged 3.8%, RGDP growth averaged 2.1%

2016:Q4 to 2018:Q1:  NGDP growth averaged 4.5%, RGDP growth averaged 2.4%

2018:Q1 to 2018:Q2:  NGDP growth was 7.4%, RGDP growth was 4.1%

Conclusions:

1.  Monetary policy has recently become more expansionary, especially in 2018:Q2.  This would be expected to modestly boost RGDP growth, and it did.  But NGDP growth has no effect on long-term trend RGDP growth.

2. There is a small amount of evidence that RGDP growth picked up after 2016, but it’s really only in the last three months where we seem to see significant effects from Trump policies—especially the corporate tax cut.  (I’m not interested in the demand side effects of other tax cuts, which are offset by monetary policy over any significant period of time.) But it’s still not completely clear if this growth surge is any different from 2014-15.

In my view, about 1/2 of the 0.3% initial boost to growth was due to deregulation, and the rest was due to easier monetary policy.

This year I expect a bigger growth surge due to the tax cut.  I predict an extra 1% of RGDP growth, and I also predict this growth burst will fall off sharply in subsequent years, so that the long run effect will be RGDP about 2% higher than otherwise, at most. But 2% more RGDP is a lot–well worth doing. (Here I’m referring to actual RGDP, the tax bill might slightly distort the figures by changing the way corporations report the location of economic activity.  We’ll know that occurred if Ireland’s GDP takes a hit.)

I have not factored in a major (and persistent) international trade war, as I still consider that outcome to be unlikely.

BTW, the 7.4% NGDP growth in Q2 is not likely to be sustained, according to the Hypermind prediction market (which shows 4.6%).   Ditto for real GDP growth.  I recall that RGDP growth averaged over 5% during the second and third quarters of 2014, but that was not sustained.

PS.  Earlier GDP figures were revised downwards, so the NGDP growth under the previous year’s Hypermind market was actually 4.6%, not 4.8%.  Of course the payoffs depend solely on the initial announcement.

PPS.  The employment situation is of course much less impressive.  Job growth has not increased under Trump, despite the fantastic claims of some in the media:

Trump’s policies have produced the best of all economic worlds — surging growth and employment, with little inflation and a rising dollar.

That’s simply not true:

Screen Shot 2018-07-27 at 12.44.44 PM

Love this tweet

Vaidas Urba directed me to this tweet from Vitor Constâncio, who’s term as the Vice President of the ECB just ended. Also recall Bernanke’s recent advocacy of level targeting.

Screen Shot 2018-06-13 at 11.06.06 AMLove it!

PS.  Here is the link embedded in the tweet:

https://www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180504.en.html

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.