One shock to rule them all

Marcus Nunes directs me to a new Brad DeLong post, discussing six big shocks that have hit the US economy since 2005. But I agree with Marcus, I only see one. First let’s look at DeLong’s six:

(1) The collapse of residential investment after the end of the mid-2000s housing bubble, in order of their size (-3.8% of potential GDP):

(2) The wave of austerity–mostly state-and-local, but considerable at the federal level as well–hitting government purchases (-3.0% of potential GDP):

(3) The collapse of business fixed investment in the aftermath of the financial crisis (-2.9% of potential GDP):

(4) The blockage of the credit channel that prevented there from being much significant bounce-back to normal in residential construction (-1.8% of potential GDP):

(5) The (closely-associated with (3)) collapse of exports as the effects of the financial crisis spread beyond U.S. borders (-1.8% of potential GDP):

And (6) on a different graph (since it is not one of the four salient components), and also closely-associated with (3), the adverse shock to consumption as it became clear first that there was going to be a deep and then a long downturn (-1.8% of potential GDP):

All I see is a big monetary shock; a tight money policy in 2008 that caused NGDP to fall during 2008-09 at the steepest rate since the 1930s.

1.  Residential construction fell more than in half between January 2006 and April 2008, but unemployment merely edged up from 4.7% to 5.0%, and the consensus view of economists was that 2009 would be an OK year.  Yes, 2009 turned out not to be an OK year, but that wasn’t because of a housing collapse that economists were already well aware of, but rather because of a NGDP collapse that they did not predict, even in April 2008.

2.  What austerity?  Has government spending fallen as a share of GDP?   Yes, it’s slowed relative to trend, as you’d expect in a economy that has slowed relative to trend.  Sorry, but living within your means is not a “shock.”

3.  Yes, investment is highly cyclical, and falls sharply in deep recessions caused by too little NGDP.  It’s the effect of a shock.

4.  OK, this is an independent shock, but we’ve already seen that housing is no big deal.  With adequate NGDP growth the labor market would have been fine.

5.  Yes, money was also tight in Europe and Japan.

6.  Even DeLong admits the fall in consumption is an endogenous response to the deep recession.

Please don’t misinterpret this post.  The world is very complex.  The causes of the NGDP shock were very complex.  Perhaps all six items mentioned by DeLong played some indirect role in monetary policy going off course.  But the sooner we start thinking in terms of 2008-09 being a single shock, the sooner we’ll demand more from our central banks, and the sooner we’ll get better monetary policy.

Regardless of whether I am right or DeLong is right, it’s very much in America’s interest if the Fed believes that I am right.

PS.  DeLong ends as follows:

And they say: given those six shocks and their magnitude, haven’t we done rather well at stabilizing the economy? Haven’t we certainly done much better than the BoJ, or the ECB, or the Bank of England?

And they are right: they have.

Since late 2008, the Federal Reserve has a lot to be proud of.

I’m not so sure of that.  The US has faster population growth than Japan, and faster productivity growth than Britain, but haven’t their labor markets done much better, in the sense that employment population ratios are soaring to new highs, while ours languishes?  (I’m relying on memory here due to a hectic holiday schedule, correct me if I’m wrong.)

But yes, much, much, much better than the brain dead ECB.

Merry Christmas, and check out my Econlog post.

 


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137 Responses to “One shock to rule them all”

  1. Gravatar of E. Harding E. Harding
    24. December 2015 at 21:23

    Here are the shocks I see since 2005:

    1. The monetary shock.

    2. The oil price shock of 2005-2008.

    3. The oil supply shock of 2008-2014.

    4. The oil price shock of late 2014.

    5. The manufacturing productivity shock.

    https://research.stlouisfed.org/fred2/graph/?g=Vzx

    6. The labor force shock.

    Also, I support the recent monetary policy tightening, but only to hurt Obama&Clinton and to support Trump.

  2. Gravatar of foosion foosion
    25. December 2015 at 03:17

    >>Regardless of whether I am right or DeLong is right, it’s very much in America’s interest if the Fed believes that I am right.>>

    Excellent point!

    >>Sorry, but living within your means is not a “shock.”>>

    Cause everyone with a mortgage or other significant debt to cut spending in light of their debt and see what happens. Perhaps I’m misinterpreting what you mean by “living within your means”.

    >>I support the recent monetary policy tightening, but only to hurt Obama&Clinton and to support Trump.>>

    I hope this is satire. Otherwise, one might want to compare historic economic and market performance under Democratic and Republican administrations.

  3. Gravatar of Major.Freedom Major.Freedom
    25. December 2015 at 05:45

    “Marcus Nunes directs me to a new Brad DeLong post, discussing six big shocks that have hit the US economy since 2005. But I agree with Marcus, I only see one.”

    Thank you for implicitly admitting that economics is a priori, that is, the way you understand data is determined by your theory, not the other way around.

    If economics really was empirical,if your convictions really were empirically based, then you and Delong would fully and completely agree with the content of the data. You would “see” identical events.

    In other words, what you and DeLong need to do is critique your theory from an a priori framework to actually test whose theory is right. You can’t do it on the basis of the data because there is only one historical past. If two theories are consistent with the past, and yet they contradict, then the past cannot settle the dispute. Direct, deductive ratiocination is your only method.

    The problem however is that you and DeLong are unable or unwilling to do this, and so you have always “seen” what your theory only let’s you “see”, regardless of whether the theory is internally consistent (which in both of your cases it is not).

  4. Gravatar of ssumner ssumner
    25. December 2015 at 05:57

    E. Harding, I was referring to big shocks.

    foosion, Yes, you misinterpreted what I meant by living within your means, I was referring to national income. Keeping the ratio of G to GDP stable in the very long run is not a “shock”. The G to GDP ratio rose in 2009, which is appropriate. But that rise should have been temporary, and was.

    I did not mean no borrowing, as the government can borrow a certain amount in the steady state, as long as the debt to GDP ratio stabilizes.

    It’s hard to believe that Trump is not doing this as a joke. He obviously doesn’t believe the things he is saying, which are utterly nonsensical. I wonder if he is like the comedian Pat Paulson, who also once ran for president. The funniest part is that his supporters don’t seem to regard it as a joke.

  5. Gravatar of Ray Lopez Ray Lopez
    25. December 2015 at 07:05

    Merry Christmas professor Sumner, I hope Santa gives you the gift of sanity for 2016.

    Sumner: “Regardless of whether I am right or DeLong is right, it’s very much in America’s interest if the Fed believes that I am right” – parody right?

    First, the Fed has 3.2% to 13.2% effect on a variety of variables (out of 100%) says Bernanke (2006, FAVAR paper) so what the Fed believes is irrelevant.

    Second, your attempt to reduce everything to a monetarist solution is ludicrous. It’s like saying everybody is dying because of lack of Vitamin C (Nobelian Linus Pauling believed that, and took extra Vit. C, even injecting it into his body, and lived to nearly 100, lol, but he’s the exception).

    Third, if you wish to reduce everything to a single variable, you might want to start preaching “animal spirits” like both Keynes and Shiller teach. The reason the economy falls apart is often the same reason fashion fads come and go: herd behavior. A herd of homo economicus animals hear that the economy is getting worse, so they stop investing, spending, ergo, this makes the economy worse. How does NGDP targeting affect that? Is it a form of behavioral economics maybe where these creatures will confuse real and nominal variables? Your program depends on misdirection and deceiving people, is that it? And you think this will work consistently despite the Lucas Critique? Your expectations are not rational my fiend.

  6. Gravatar of Philip George Philip George
    25. December 2015 at 08:14

    You and Prof DeLong agree on one thing: that the fall in consumption was an endogenous response to the recession.

    Actually, that is the main error, in my opinion, that both of you commit. It is also why economists are unable to agree on so many issues.

    The recession was caused by the sharp curtailment in consumption expenditure. And the fall in consumption in turn was caused by the collapse in multiple asset markets. According to the Fed’s consumption survey, the median household lost 18 years of net worth in these asset market crashes. It is the attempt of households to recover lost net worth that has made them curtail spending for so long. It is this which made the recession so deep and has made the recovery so long-drawn.

    The NGDP collapse did not cause the recession. The arrow of causation leads from asset market collapses to steep consumption curtailment to recessions.

    Why else would the Great Depression, the Great Recession and Japan’s Lost Decade all follow large asset market collapses?

    That there is a monetary cause can of course be seen from the graph on http://www.philipji.com/item/2015-12-05/the-fed-is-set-to-squeeze-during-a-monetary-contraction. It also shows that another financial collapse is on the cards, probably in the second half of next year.

  7. Gravatar of ChrisA ChrisA
    25. December 2015 at 08:44

    Tyler Cowen over at MR keeps warning of looking for simple causes of economic trends, as economies are complex. But it really does seem to me as simple as Scott says, perhaps we are just not as smart as Tyler…

    Actually I am reminded of the debates that we were all having about 7 or 8 years ago when commodity prices started to soar. To many people the oil price rises were clear evidence that we had reached peak oil production, in other words it was a supply shock. To me and others it hard to square this with other commodities also soaring in price, were we really reaching peak orange juice and peak iron ore, and peak coal all at the same time as peak oil? But there were people justifying each and every commodity price rise by supply problems, each one individual to that commodity and just coincidentally happening at the same time. This just seem too much of a coincidence and so I concluded this was really a demand shock, and it wasn’t hard to find the source of this new demand (hint 1 billion people entering the middle class). To bring this back to De Long’s point – can it really be true that all these very bad things were all happening at the same time in the US economy for different unrelated reasons? One coincidence is suspicious, 6 is far too many for my liking. Again, you don’t have to look to hard to find one pretty reasonable cause…..

  8. Gravatar of Gary Anderson Gary Anderson
    25. December 2015 at 09:31

    OMG, the Fed was not clueless. It even said in 2007 that the housing crisis could effect the ENTIRE ECONOMY. Does that mean they allowed the crash on purpose? From the article link to my name:

    In September, 2007 the Fed that supposedly was clueless issued this ominous warning:

    At its September meeting, the FOMC lowered its target for the federal funds rate 50 basis points, to 4-3/4 percent. The Board of Governors also approved a 50 basis point decrease in the discount rate, to 5-1/4 percent, leaving the gap between the federal funds rate target and the discount rate at 50 basis points. The Committee’s statement noted that, while economic growth had been moderate during the first half of the year, the tightening of credit conditions had the potential to intensify the housing correction and to restrain economic growth more generally. The Committee indicated that its action was intended to help forestall some of the adverse effects on the broader economy that could otherwise arise from the disruptions in financial markets and to promote moderate growth over time. Readings on core inflation had improved modestly during the year, but the Committee judged that some inflation risks remained, and the Committee planned to continue to monitor inflation developments carefully. The Committee further noted that developments in financial markets since the last regular FOMC meeting had increased the uncertainty surrounding the economic outlook. Accordingly, the Committee would continue to assess the effects of these and other developments on economic prospects and remained ready to act as needed to foster price stability and sustainable economic growth.

  9. Gravatar of Gary Anderson Gary Anderson
    25. December 2015 at 09:36

    And Scott, they had this data illustrated by this Fred chart: http://www.talkmarkets.com/content/us-markets/scott-sumner-and-friends-want-unbridled-growth-chicago-school-update?post=80548 You can see that LIBOR was climbing like an SOB with certain conflict with the Swaps rate. Greenspan knew what derivatives were and how this was trending.

  10. Gravatar of E. Harding E. Harding
    25. December 2015 at 11:48

    “I hope this is satire.”
    -It’s not.

    “Otherwise, one might want to compare historic economic and market performance under Democratic and Republican administrations.”

    -Don’t be stupid.

    “It’s hard to believe that Trump is not doing this as a joke.”

    -He may have started out that way, but now, he’s in it to win it. Trump 2016!

    “He obviously doesn’t believe the things he is saying, which are utterly nonsensical.”

    -Dunno about that. In any case, they’re better than what any other Republican candidate is proposing, except on trade and civil liberties. Nevertheless, Trump is still by far the best candidate on foreign policy (other than maybe Sanders).

    “I wonder if he is like the comedian Pat Paulson, who also once ran for president. The funniest part is that his supporters don’t seem to regard it as a joke.”

    -It’s not a joke. He’s the only man who can save America (and that’s really saying more about the field than about Trump).

  11. Gravatar of E. Harding E. Harding
    25. December 2015 at 12:04

    “But it really does seem to me as simple as Scott says, perhaps we are just not as smart as Tyler”

    -Tyler’s not that smart. Believe me, I’ve looked for evidence of his supposed intelligence. It’s not there. He’s just well-read.

    “Tyler Cowen over at MR keeps warning of looking for simple causes of economic trends, as economies are complex.”

    -What he actually said was way more stupid.

    “To me and others it hard to square this with other commodities also soaring in price, were we really reaching peak orange juice and peak iron ore, and peak coal all at the same time as peak oil?”

    -Never reason from a price change.

    “The NGDP collapse did not cause the recession. The arrow of causation leads from asset market collapses to steep consumption curtailment to recessions.

    “Why else would the Great Depression, the Great Recession and Japan’s Lost Decade all follow large asset market collapses?””

    -The U.S., 1987 and 2001-2003 had massive stock market collapses. No recession in the first case, and only a mild one in the second. All these cases you cite were blatantly caused or greatly exacerbated by NGDP shocks. Supporting your case is that ’97 crisis and that early ’80s crisis.

    “The recession was caused by the sharp curtailment in consumption expenditure.”

    -Investment was more important.

    “It is the attempt of households to recover lost net worth that has made them curtail spending for so long. It is this which made the recession so deep and has made the recovery so long-drawn.”

    -That’s stupid. Think about what you’re saying. Is the Fed impotent? No. Russia and Belarus had fantastic NGDP recoveries.

    “It also shows that another financial collapse is on the cards, probably in the second half of next year.”

    -Not that soon, in all likelihood, though the leading indicators aren’t looking good for next year. I blame the Fed, but support its actions nevertheless to give Trump (hopefully) the presidency.

    -Good point on the $ supply, though. I didn’t realize the situation was that bad.

  12. Gravatar of Gary Anderson Gary Anderson
    25. December 2015 at 12:31

    Harding, you didn’t look at my link, at my chart in the post right above yours. LIBOR was toast. LIBOR was toast because bogus collateral made its way into the money markets. Fed tightening, which seems to have occurred, was after the damage had been done. The tightening made things worse, for sure. But it didn’t kickstart the recession. LIBOR exploding upward in yield caused the banks to freeze up.

  13. Gravatar of E. Harding E. Harding
    25. December 2015 at 12:47

    Never reason from an interest rate change.

  14. Gravatar of Joe Eagar Joe Eagar
    25. December 2015 at 14:38

    Scott: “What austerity?”

    You’ve written a rather lot about U.S. austerity over the past few years. Care to explain that sentence? Do you have interns how? :)

  15. Gravatar of Benjamin Cole Benjamin Cole
    25. December 2015 at 17:12

    Good post.
    Trump? Who is crazy and who is not? Should we “carpet bomb” Syria? Is Planned Parenthood primarily a baby-organ harvesting enterprise? Do men only talk while women get things done?

    They say Trump is bad on immigration. The rest of the GOP field has migrated to this position: “We want to import 13 million workers and we do not want to give them the vote.” GOP nirvana! A working class without voting rights.

    Trump may be the best of the lot.

  16. Gravatar of E. Harding E. Harding
    25. December 2015 at 17:46

    Joe, that austerity ended two whole years ago. Over 600 days. Get with the program.

  17. Gravatar of Gary Anderson Gary Anderson
    25. December 2015 at 19:20

    “Never reason from an interest rate change.” Only when it is a change in LIBOR. :)

  18. Gravatar of Ray Lopez Ray Lopez
    25. December 2015 at 20:06

    Thread winner: Philip George 25. December 2015 at 08:14 – clear winner, for the fact recited therein.

    @ChrisA – oil supply shock (“peak oil”) in 2006/7 was real, and the fact we have cheap oil now is only because so many people are no longer as active as before, relative to potential GDP.

    @E.Harding – a drop in investment is not the reason for a fall in GDP relative to trend. Consumption is a much bigger component (two-thirds) of GDP than investment (15%). GDP = Consumption (66%) + Investment (15%) + net gov’t expenditures (20%) + exports (13%) – imports (15%) plus some rounding error… read Philip George above for reasons behind this ‘balance sheet recession’.

  19. Gravatar of Joe Eagar Joe Eagar
    25. December 2015 at 20:28

    E. Harding, and that is relevant why. . .? Brad Long was listing shocks since 2005. Austerity was one of them. Scott seemed to be denying that it ever happened at all. I mean, why write posts praising the Fed for offsetting fiscal austerity and then turn around and say it never happened?

    I say that sentence is either Due To Intern (if Scott is so lucky), or Writing Too Late At Night.

  20. Gravatar of Scott Sumner Scott Sumner
    25. December 2015 at 21:07

    Chris, Excellent point.

    Joe, You are mixing up different kinds of austerity. I’ve written about the austerity of 2013, when the Federal deficit fell sharply. DeLong’s talking about total government spending, (emphasizing state and local, and excluding taxes). And he’s looking at the period since 2008. Has total government spending fallen as a share of GDP? I’m skeptical,

    Ray, Seeing you try to evaluate which comments are the best is not insane, it’s not insanity squared, it’s like insanity cubed. Most other crazy people ignore other commenters.

  21. Gravatar of E. Harding E. Harding
    25. December 2015 at 21:31

    Ray, consumption is much less variable than investment. Recessions are best correlated with the investment/consumption ratio.

  22. Gravatar of Joe Eagar Joe Eagar
    25. December 2015 at 21:39

    Scott, certainly public spending hasn’t fallen relative to GDP, but I’m not sure I’d go so far as to claim it wasn’t a (necessary) major shock.

  23. Gravatar of Gary Anderson Gary Anderson
    25. December 2015 at 22:30

    I bet you guys didn’t know that Wikileaks revealed that the Saudi government warned the US government that the price of oil was being manipulated in 2007. I bet Scott Sumner is for a rise in assets even if wicked and evil men cause innocent women and children to starve and go without. Hopefully I am wrong about what I think his views are.

    http://www.reuters.com/article/us-cftc-manipulation-idUSBRE83J19X20120420

  24. Gravatar of John Handley John Handley
    25. December 2015 at 22:56

    Scott,

    Merry Christmas!

    “What austerity? Has government spending fallen as a share of GDP? Yes, it’s slowed relative to trend, as you’d expect in a economy that has slowed relative to trend. Sorry, but living within your means is not a ‘shock.'”

    The only way it wouldn’t be a shock is if fiscal policy was behaving according to the fiscal rule that the government has. The large output gap should have implied large, long lasting deficits. I would argue that deficit reduction has been faster than this. Of course, the way that the government has behaved (sequestration) clearly represents a fiscal shock. In fact, I’m pretty you’ve even told me in a comment that (paraphrase since I don’t remember which post it was) “austerity in the US has been larger than austerity in Europe.” It seems at one point you acknowledged the austerity’s existence. What has changed? Absent tax changes, RBC models even predict that a slowing of government spending relative to trend results in a slowing of output growth (since the multiplier is greater than zero in most calibrations).

    “too little NGDP.”

    Why does it always have to be NGDP? It seems clear to me that you really think the unemployment was caused by too-high nominal wages, which are the result of a combination of DNWR and too-little inflation that was not reversed by temporarily higher than trend inflation afterward. I can understand how you’d get level-targeting as an implication of DNWR, but why jump to NGDPLT as opposed to some other target that has a more direct relationship with what I gather you think the problem is (e.g. price level targeting)? Your focus on nominal GDP seems completely arbitrary to me, especially since it is utterly unimportant in every macro model I can think of. On top of that, why have the Fed target something it can’t control in the long run? I think even you’d agree that money is neutral in the long run, so output growth over large timescales is largely exogenous. In such a case, the long run inflation rate would be not at the mercy of the Fed, but of exogenous factors of the economy. Is slowing productivity and population growth really a reason for increasing inflation? Loose money can’t solve demographic problems.

    “Yes, money was also tight in Europe and Japan.”

    Interesting how monetary policy was somehow magically coordinated across the entire developed world, such that the ECB, the BOJ, the Fed, and the BOE all managed to manufacture recessions in their countries/regions at roughly the same time. I mean, it’s not as if they had no ability to prevent what happened and that they didn’t cause the collapse in output at all. After all, all central banks are omnipotent, so they have the ability to follow policy rules that will stop any recession from ever occurring, since every recession is their fault in the first place, without actually spelling out how they can achieve that policy; because they can announce a level of NGDP they want to hit tomorrow and, through the power of nothing in particular, NGDP will be on target. [that paragraph was intended as a joke, I hope it entertains everyone sufficiently. Of course, behind the joke lies a bit of my actual perception of market monetarism, let’s see who can weed the satire from the serious criticism].

    “Perhaps all six items mentioned by DeLong played some indirect role in monetary policy going off course.”

    Yes, a collapse in housing *definitely* caused the federal reserve to *intentionally* fail to satiate money demand. [sarcasm is intensely entertaining to write].

    “I’m not so sure of that. The US has faster population growth than Japan, and faster productivity growth than Britain, but haven’t their labor markets done much better, in the sense that employment population ratios are soaring to new highs, while ours languishes?”

    To a degree, I think you’re right on. Nevertheless, I’m fairly certain the Federal Reserve, at least between 2010 and 2014, was basically powerless to help the economy. Maybe this could be different if the Fed had not grown the monetary base so quickly, but I think that the sheer size of QE solidified the expectation that it would not be permanent; it’s clear that the Fed would act to immediately stop a hyper inflation, so it would be irrational to expect such a large increase in the monetary base to not be reversed. I’d like to expand more on this, but I think I’d end up writing an absurdly long amount of confusing morass…

    “But yes, much, much, much better than the brain dead ECB.”

    Indeed.

  25. Gravatar of E. Harding E. Harding
    25. December 2015 at 23:24

    “I would argue that deficit reduction has been faster than this.”

    -And I would argue the opposite (at least, on the Federal level).

    John, NGDP level targeting is better than price level targeting due to its better handling of supply and demand shocks.

    “To a degree, I think you’re right on. Nevertheless, I’m fairly certain the Federal Reserve, at least between 2010 and 2014, was basically powerless to help the economy.”

    -And you’re wrong. What else is new?

    “Interesting how monetary policy was somehow magically coordinated across the entire developed world, such that the ECB, the BOJ, the Fed, and the BOE all managed to manufacture recessions in their countries/regions at roughly the same time.”

    -It is strongly coordinated, and not by magic, but by custom:

    https://againstjebelallawz.wordpress.com/2015/07/17/bretton-woods-chaos-price-stability/

    Countries that went against the grain on monetary policy are listed here:

    https://web.archive.org/web/20100325110137/https://www.cia.gov/library/publications/the-world-factbook/rankorder/2092rank.html

    They include Rwanda, Belarus, Pakistan, Ukraine, Iran, Kenya, South Africa, Uruguay, and India. Curiously, Russia had a two-quarter long NGDP collapse, but no collapse in CPI. Must be the oil at work.

    “In such a case, the long run inflation rate would be not at the mercy of the Fed, but of exogenous factors of the economy.”

    -If it was targeting NGDP, yes.

    “Is slowing productivity and population growth really a reason for increasing inflation?”

    -Yes.

    “without actually spelling out how they can achieve that policy”

    -Legalize Internet gambling. Do you read this blog often? It seems you haven’t read it for any more than a week.

  26. Gravatar of E. Harding E. Harding
    25. December 2015 at 23:44

    Here are those countries mapped by the way:

    https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_pcap_cd&idim=country:RWA:BDI&hl=en&dl=en#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_pcap_pp_kd&scale_y=log&ind_y=false&rdim=region&idim=country:RWA:BDI:BLR:UKR:PAK:KEN:IRN:ZAF:IND:URY&ifdim=region&hl=en_US&dl=en&ind=false

    Only ZA and Ukraine suffered downturns.

  27. Gravatar of John Handley John Handley
    26. December 2015 at 00:40

    E. Harding,

    “John, NGDP level targeting is better than price level targeting due to its better handling of supply and demand shocks.”

    Thanks for the detailed application of economic theory in your useless and vague attempt at explanation.

    “And you’re wrong. What else is new?”

    You clearly menaced to make the best argument against the existence of liquidity traps of all time. That rebuttal is of such quality, that it may have persuaded me of your position. That is, if every somewhat reasonable model of money demand (CIA, MIUF, transaction cost, cash-credit) that I can think of didn’t disagree with you.

    If it was targeting NGDP, yes.

    ““Is slowing productivity and population growth really a reason for increasing inflation?”

    -Yes.”

    Once again, your argument is impeccable. Just one question: why?

    ““without actually spelling out how they can achieve that policy”

    -Legalize Internet gambling. Do you read this blog often? It seems you haven’t read it for any more than a week.”

    I’ve actually been reading Sumner for quite a while. As a firm advocate for concrete steppes, I think I am justified in my comments.

    I’m too tired to do a decent rebuttal at the moment; expect a more detailed argument soon.

  28. Gravatar of John Handley John Handley
    26. December 2015 at 00:43

    E. Harding,

    Earlier I wrote “menaced” but intended to write “managed”. Just thought I’d clear that up in advance.

  29. Gravatar of ssumner ssumner
    26. December 2015 at 07:46

    Joe, If it has not fallen relative to GDP, then how in the world is it a shock? So GDP growth since 2008 is slower than normal, as is government spending growth since 2008. That’s no “shock”, that’s living within your means.

    Gary, You said:

    “I bet Scott Sumner is for a rise in assets even if wicked and evil men cause innocent women and children to starve and go without. Hopefully I am wrong about what I think his views are.”

    Holy cow, you almost make Ray seem smart! I want them to starve, but not go without. I want them to starve with affluence. And yes, I”m sure I want a rise in assets, if I knew that that sentence meant. You are an adult who writes like a kid, and John is a kid who writes like an adult.

    John, On austerity, I already answered that question above.

    You said:

    “Why does it always have to be NGDP? It seems clear to me that you really think the unemployment was caused by too-high nominal wages, which are the result of a combination of DNWR and too-little inflation that was not reversed by temporarily higher than trend inflation afterward.”

    No, no, no! Inflation doesn’t matter at all. The problem is that nominal wages are sticky and NGDP is unstable. Real wages don’t matter at all, that’s where the NKs went off course, they focused on real wages but didn’t find them to be reliably countercyclical, and switched over to inflation targeting.

    As we saw in 2008, that was a big mistake.

    There is nothing policymakers can do about wages (in the short run) so rather than say the problem is wages are too high, I’d rather say the problem is NGDP is too low. I.e. money is too tight.

    You said:

    “Your focus on nominal GDP seems completely arbitrary to me, especially since it is utterly unimportant in every macro model I can think of. On top of that, why have the Fed target something it can’t control in the long run? I think even you’d agree that money is neutral in the long run, so output growth over large timescales is largely exogenous.”

    I’ve said nominal total labor comp may be slightly better, but they are highly correlated in the US. The reason NGDP is unimportant in the models you look at is that the models are wrong. They think the welfare cost of inflation is proxied by the CPI, but it’s much better proxied by NGDP growth. It’s easy to write down models where NGDP matters, and the profession is now beginning to do so.

    The Fed can target any nominal variable, even if money is 100% neutral. You are confusing NGDP and RGDP.

    On your point about population, I favor a per capita target, or per working age population. Yes, lower productivity growth is a reason for higher inflation. Inflation doesn’t matter, it’s a number pulled out of thin air by Washington bureaucrats, which doesn’t correspond to anything going on in the real world. The measured inflation rate has nothing to do with inflation used in economic models. It seems like you haven’t done your homework, and read the papers explaining why NGDP targeting is superior to inflation targeting, based on the questions you are asking.

    On your satire, are you surprised that the major central banks would make roughly the same mistake, if they all rely on the same flawed Keynesian model of inflation targeting? And they all lacked plans for dealing with the zero bound. If the results had differed you’d be whining “How come they all use similar monetary regimes, and got vastly different results?” Some people just can’t be convinced by any evidence. And by the way, wasn’t the US and Eurozone path very different after 2010, and isn’t monetary policy the only plausible explanation for that divergence?

    As for monetary policy being ineffective at the zero bound, that doesn’t even pass the laugh test after what’s happened in Japan since 2013. And given we’ve been teaching our students for 30 years that monetary policy is highly effective at the zero bound (check out Mishkin’s textbook), don’t you need like a shred of evidence that it isn’t?

    In your view why didn’t Australia have a recession? Magic? Back in 2010 my commenters told me Australia avoided recession because of a commodity boom. Now they are in a deep commodity slump, and unemployment has fallen in 2015 in Australia.

    I think you need to take a deep breath and do some homework. Every question you’ve raised I’ve dealt with 50 times in this blog, and swatted them down each time. Don’t think you are raising any new points.

    You said:

    “Nevertheless, I’m fairly certain the Federal Reserve, at least between 2010 and 2014, was basically powerless to help the economy.”

    Sorry, but that’s just nonsense. You’re a very smart guy, I expect more from you. Please look at the evidence. And look at the theory. What would the demand for base money have looked like in late 2008 with a 5% NGDPLT policy?

  30. Gravatar of Gary Anderson Gary Anderson
    26. December 2015 at 08:23

    Sorry, Scott, “rise in asset prices” is what I meant to say. It was late, I was tired. Sheesh. One question, are you surprised that assets are manipulated by creating artificial scarcity of contracts, Scott? So, what I mean, since I am childlike, is that you could have adequate supplies of an asset but hoard the contracts, making it look like the asset is scarce.

  31. Gravatar of jonathan jonathan
    26. December 2015 at 09:05

    Let’s say you’re right and 2008 was a big monetary policy shock. As I understand your views, you think that monetary policy works primarily by affecting peoples’ expectations of NGDP growth.

    So my question is, what did the Fed do in 2008 that lowered peoples’ expectations of NGDP growth so much?

  32. Gravatar of John Handley John Handley
    26. December 2015 at 09:21

    Scott,

    “No, no, no! Inflation doesn’t matter at all. The problem is that nominal wages are sticky and NGDP is unstable.”

    If nominal wages are sticky, then countercyclical real wages must exist. Inflation that is high will, because of sticky wages, result in low real wage growth, which is consistent with more labor demand. I’m not sure how you can’t see that they pretty much logically follow from each other, especially since you seem to know that “[NKs] focused on real wages but didn’t find them to be reliably countercyclical.” It appears that DNWR is the only wage rigidity with sizable empirical evidence. This would imply that only very large deflationary shocks would cause a problem (since they would cause negative equilibrium wage growth). Otherwise, as you pointed out, real wages are not countercyclical enough, so nominal wage regidity must logically not be an important or large nominal rigidity in the economy.

    “The reason NGDP is unimportant in the models you look at is that the models are wrong.”

    So what papers do you suggest I read? I know NK models suggest flexible inflation targets, which I guess you could call quasi-NGDPLT and that an NK model with DNWR would suggest something along the lines of a price level target (see e.g. http://www.columbia.edu/~mu2166/Making_Contraction/paper.pdf or http://www.columbia.edu/~mu2166/temporary_inflation/temporary_inflation.pdf ) Nowhere do I find evidence for an NGDPLT, sometimes it is better than inflation targets, but it is not what would be drawn from determining Ramsey optimal policy.

    “The Fed can target any nominal variable, even if money is 100% neutral. You are confusing NGDP and RGDP.”

    I don’t think they can’t target NGDP, I think that they can’t ensure that each aspect of GDP grows at the desired rate. At some point, RGDP will exogenously grow slower than before and this will cause the Fed to loosen monetary policy basically by accident. If inflation does have welfare costs (say, e.g., there is some cash-in-advance constraint in the economy and prices are sticky because of adjustment costs, so inflation greater than -r causes a welfare loss since the nominal interest rate will be positive and inflation greater than zero causes firms to pay a price adjustment cost), then an NGDPLT would needlessly increase those costs over time given an exogenous RGDP slowdown.

    “There is nothing policymakers can do about wages (in the short run) so rather than say the problem is wages are too high, I’d rather say the problem is NGDP is too low. I.e. money is too tight.”

    If wages are sticky, then the problem is that the price level is too low, not NGDP.

    “On your satire, are you surprised that the major central banks would make roughly the same mistake, if they all rely on the same flawed Keynesian model of inflation targeting?”

    Yes. If anything, any mistakes that they made were the result of financial frictions which that actually did unreasonably ignore coming up to the crash. Otherwise, DNWR only becomes a problem if equilibrium nominal wage growth becomes negative. This could only happen if inflation or productivity growth or both are sufficiently low, which they were because the central banks failed at keeping inflation on target. Deflation and low subsequent inflation is what would be a problem in the case of DNWR.

    “If the results had differed you’d be whining “How come they all use similar monetary regimes, and got vastly different results?””

    In that case, because they weren’t all hit by a large negative financial shock that caused money demand to increase so much that the central banks couldn’t prevent a recession. The ones that ended up in liquidity traps in your counterfactual are the ones that had a big real shock that their central banks could not control. Could the recession have been smaller had the Fed cut rates sooner? Maybe, but the recession would have happened anyway.

    “And by the way, wasn’t the US and Eurozone path very different after 2010, and isn’t monetary policy the only plausible explanation for that divergence?”

    That and austerity. How does that invalidate my point about 2008/9 exactly?

    “As for monetary policy being ineffective at the zero bound, that doesn’t even pass the laugh test after what’s happened in Japan since 2013.”

    So, in Japan, it’s been two years and inflation has not returned to target and long rates have continued to fall. Yes, the output gap has shrunk, which has made NGDP grow (given then slightly positive inflation). I think the jury is still out on monetary policy in Japan, and besides, maybe Japanese citizens finally expect the monetary expansion to not be fully reversed. I know we’ve had this argument before; central banks can only get out of liquidity traps if 1) interest rates are expected to rise at some point in the future and 2) the money supply is expected to grow quickly enough (the current monetary base is small relative to the monetary base when the zero lower bound no longer binds and the expected growth rate is greater than negative the rate of time preference). I’m fairly certain that the US hasn’t met these requirements, hence the lack of response of inflation or NGDP or anything at all to QE.

    “In your view why didn’t Australia have a recession? Magic?”

    Australia was not hit by the same shock as everyone else, same with Canada. That’s why the recessions were smaller and/or nonexistent.

    “Sorry, but that’s just nonsense. You’re a very smart guy, I expect more from you. Please look at the evidence. And look at the theory. What would the demand for base money have looked like in late 2008 with a 5% NGDPLT policy?”

    Evidence: despite QE, inflation is consistently below target, money demand clearly will rise to meet any level of the monetary base the Fed supplied. Specifically in 2008, the Fed did fail to raise the money supply fast enough (cut rates fast enough), but the idea that this somehow caused such a large slump is implausible. Perhaps the recession was slightly bigger because interest rates were ~1% above the natural rate, but that’s beside the point. Let’s say the Fed follows a Taylor Rule that adjust for the NGDP gap instead of inflation and output. Assuming NGDP was on target in 2007, that the coefficient on the NGDP gap was 1.5, and that the long run equilibrium rate of interest is four percent, then the Fed Funds rate in 2008 would be 0%. The average Fed Funds rate in 2008 was 1.93%. This seems consistent with, if anything, a small negative demand shock; something that could not have caused a recession larger than 4% of potential GDP. The Fed shouldn’t be expected to prevent every recession from occurring.

    Theory: There was deflation in 2009, I guess this would have caused DNWR to be a problem and some persistence in unemployment. Monetary models suggest that the zero lower bound does represent a constraint on monetary policy. This may not be because the central bank has committed to tightening monetary policy in the future, just that the equilibrium real rate has fallen. Read Krugman’s and Andolfatto’s (I sent this to you a while back) papers on Japan. If you really think you’re position is so obviously correct, why do they and they models agree with me?

  33. Gravatar of Britonomist Britonomist
    26. December 2015 at 09:26

    “3. Yes, investment is highly cyclical, and falls sharply in deep recessions caused by too little NGDP. It’s the effect of a shock.”

    It can be both an effect AND a cause, and a massively magnifying one at that – hence the term ‘financial accelerator’ that Bernanke and others aptly apply to it.

    “4. OK, this is an independent shock, but we’ve already seen that housing is no big deal. With adequate NGDP growth the labor market would have been fine.”

    This makes no sense, you could rephrase it as: “yes it reduced NGDP growth, but if NGDP growth was adequate it wouldn’t have mattered”.

  34. Gravatar of E. Harding E. Harding
    26. December 2015 at 09:31

    @ssumner

    “And by the way, wasn’t the US and Eurozone path very different after 2010,”

    -Sure. In RGDP, not the CPI.

    “and isn’t monetary policy the only plausible explanation for that divergence?”

    -Only if you count “really sticky prices” as monetary policy. Sure, the NGDP situations differed, but the insufficient (or missing) deflation suggests something else is at work.

    https://research.stlouisfed.org/fred2/graph/?g=2ZSj

    Clearly, the short-term variations in EZ RGDP are caused by NGDP, but look at the long run! The EZ has massive supply-side problems. If it had zero inflation from Q1 2011 to today, it wouldn’t have had a secondary recession, just a period of slow growth. The U.S. during the Great Depression actually had deflation!

    “On your point about population, I favor a per capita target, or per working age population.”

    -I favor a per labor force target.

    “In your view why didn’t Australia have a recession? Magic?”

    -Australia did have a recession, but it was mild. It was tempered by its proximity to China.

    “Back in 2010 my commenters told me Australia avoided recession because of a commodity boom. Now they are in a deep commodity slump, and unemployment has fallen in 2015 in Australia.”

    http://consultingbyrpm.com/blog/2015/10/what-evidence-for-market-monetarism-sumner-giveth-sumner-taketh-away.html

  35. Gravatar of John Handley John Handley
    26. December 2015 at 09:43

    E. Harding,

    “John, NGDP level targeting is better than price level targeting due to its better handling of supply and demand shocks.”

    Show me a model that says that NGDPLT is optimal and I’ll listen, but I have no time for amateur rationalizations. It turns out that the most widely accepted (by economists) economic theory suggests that inflation and/or price level targeting is optimal. If you want to turn that on it’s head, you better have a model and a paper ready to publish in which inflation is not the most important variable that the central bank can affect.

    “And you’re wrong. What else is new?”

    So, in your mind, the Fed could have grown the monetary base slightly quicker over the period and inflation would have been higher. Why do you think the relationship between velocity and interest rates basically broke down when we hit the zero lower bound? Economic theory says that this is because we entered a liquidity trap, but you seem to not think they exist.

    “It is strongly coordinated, and not by magic, but by custom:”

    Or because each region faces similar shocks and targets a similar value of the same variable.

    ““Is slowing productivity and population growth really a reason for increasing inflation?”

    -Yes.”

    This doesn’t make any sense. You seem to be advocating for the Fed to loosen monetary policy (by increasing the rate of inflation) as the economy goes into an exogenous period of slow growth. Why would the Fed want to create a boom in this case, exactly?

    “-Legalize Internet gambling. Do you read this blog often? It seems you haven’t read it for any more than a week.”

    Magic then, all right.

  36. Gravatar of E. Harding E. Harding
    26. December 2015 at 11:07

    BTW, Scott, why did Australia have a huge recession in the early 1980s, but not such a huge recession in 2008-9, despite the NGDP shocks affecting the country being the same size?

  37. Gravatar of E. Harding E. Harding
    26. December 2015 at 11:46

    “Economic theory says that this is because we entered a liquidity trap, but you seem to not think they exist.”

    1. You don’t know what a liquidity trap is:

    http://www.nakedcapitalism.com/2014/07/philip-pilkington-paul-krugman-understand-liquidity-trap.html

    2. Zero lower bound does exist (sorta; negative nominal interest rates are possible, but not much below 3%), but it does not signify what you think it signifies. The monetary base is more powerful than the zero nominal interest rate. Cf., Japan today.

    “Show me a model that says that NGDPLT is optimal and I’ll listen, but I have no time for amateur rationalizations.”

    -If you read this blog often, you don’t understand what it says. At all. And there are dozens of papers on NGDP level targeting Scott has linked to. How many of them have you read?

    A price level shock can be due to either good aggregate supply or bad aggregate demand. NGDP shocks are always due to aggregate demand. When unemployment rises, why should inflation stay the same? Rather, inflation should rise to better lubricate the labor market. This function is not as necessary when RGDP growth is strong, as in the 1960s U.S..

    “It turns out that the most widely accepted (by economists) economic theory suggests that inflation and/or price level targeting is optimal.”

    -They’re wrong. What else is new?

    “So, in your mind, the Fed could have grown the monetary base slightly quicker over the period and inflation would have been higher.”

    -I think a much larger expansion of the monetary base would have been required to significantly affect inflation.

    “Or because each region faces similar shocks and targets a similar value of the same variable.”

    -Well, yes. That’s basically what I said, isn’t it? Monetary shocks are coordinated between regions via a combination of similar targets and groupthink among central bankers.

    “Why would the Fed want to create a boom in this case, exactly?”

    -To help the labor market adjust. Look at Indonesia, for example. It didn’t have an unemployment spike during its ’97 crisis. The labor market was quite flexible in 1990s Russia (though unemployment, most likely voluntary, did continuously rise due to the Depression). Look at the countries with above 10% inflation in 2009. With the exception of fossil fuel exporters, Iceland, and Country 404, their recessions, if present (and, for the most part, they were not), were all milder than in the United States.

    https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_pcap_cd&idim=country:RWA:BDI&hl=en&dl=en#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_pcap_pp_kd&scale_y=log&ind_y=false&rdim=region&idim=country:RWA:BDI:BLR:UKR:PAK:KEN:IRN:ZAF:IND:URY:AFG:ERI:ZMB:SYC:NPL:UGA:EGY:ETH:ISL:LBR:TZA:MHL&ifdim=region&tstart=1040878800000&tend=1419570000000&hl=en_US&dl=en&ind=false

  38. Gravatar of Derivs Derivs
    26. December 2015 at 12:54

    Gary,

    “is that you could have adequate supplies of an asset but hoard the contracts, making it look like the asset is scarce.”

    No!!! There is not a limited number of contracts available at any given time. I DO NOT have to purchase a contract from someone that already owns a contract. I can find someone who is flat or even short and willing to take a naked short position on the contract. When this occurs (and it occurs all day – every day) it is called increasing “open interest”. This is why Future markets report open interest.

    Once again, there is no fixed number of contracts available!!!
    Of course I am saying this to someone who I told margin requirements are risked based, who in their next reply told me who cares if there is no risk, margins will be ginormous… sheesh!

    “I bet you guys didn’t know that Wikileaks revealed that the Saudi government warned the US government that the price of oil was being manipulated in 2007.”

    Banging a close is not an example of directional price manipulation. It’s more like marking a book for P+L purposes, and it is rarely or never done in an active month or contract (just too many people with too much size all banging into one another to make it worth the effort). I don’t really feel like explaining it…

    John,
    “Show me a model that says that NGDPLT is optimal and I’ll listen, but I have no time for amateur rationalizations.”

    I think I could write one, but it would require directly reasoning from a price change.

  39. Gravatar of Willy2 Willy2
    26. December 2015 at 13:23

    One S. Sumner is still looking at the wrong indicator. The reason why we had a financial shock in 2008 was that home prices started to go down in 2006 !!!

  40. Gravatar of Gene Frenkle Gene Frenkle
    26. December 2015 at 14:16

    The Iraq War distorted the oil market just as thr Saudis distorted the oil market in the 1970s-80s and the Financial Meltdown is simply the S&L Crisis on a global scale to the globalization of capital markets from 1986-2001.

    So how do we know the Iraq War distorted the oil market just as the Saudis distorted it in the 1980s–global production plateaued while prices increased! Iron ore and copper production increased due to Chinese demand so profits were reinvested in production whereas oil profits wreaked havoc in the global capital markets.

  41. Gravatar of E. Harding E. Harding
    26. December 2015 at 15:15

    Gene, the Iraq War had nothing to do with the oil price rise; if anything, it alleviated it. Try again.

  42. Gravatar of Gene Frenkle Gene Frenkle
    26. December 2015 at 15:27

    We are discussing the Housing Bubble and Financial Meltdown–the price of oil peaked in 2008 largely due to increased demand in the context of underinvestment in production by the major oil producers. Why do you think the major producers failed to properly invest in oil production while the producers of other commodities were investing in increased production? The answer is pretty obvious when you consider a war was being waged over sand that had HUGE amounts of very cheap oil production!

    Iraq is finally producing more oil but the major players believed Itaq would be producing significantly more oil in 2010 than in 2000 whereas it was producing less!?!

  43. Gravatar of Gene Frenkle Gene Frenkle
    26. December 2015 at 17:48

    ChrisA, great comment, but the key is on the supply side not the demand side. So all commodities were rising in price due to Chinese demand BUT–to highlight my BUT one just has to Google “world ______ production by year” for every commodity and then look at the bar graphs under images. The outlier is clearly OIL in that production plateaus…and the plateau coincides with the Iraq War! COINCIDENCE? I think not.

  44. Gravatar of John Handley John Handley
    26. December 2015 at 20:48

    E. Harding,

    “You don’t know what a liquidity trap is:”

    You should know what you’re talking about before you make a statement about what other people know. I’m extremely offended by the lack of intelligence you assume I have, especially given your rampant arrogance (e.g. claiming that the entire economics profession is wrong and you are somehow know better than people who have spent the better part of their lives studying economics). 1) A liquidity trap occurs when government bonds and money are perfect (or, seemingly in reality, close to perfect) substitutes. In this case, agents are *indifferent* between holding money and bonds. The link you provided is wrong about this. Equal interest rates imply that agents no longer care to minimize their money holdings because there is not an opportunity cost to holding money. This does not mean that people don’t want bonds, it means that people don’t care if their bonds are swapped for money. Otherwise, low bond yields can still mean that there is a large demand for government liabilities. David Andolfatto has a lot of good work on this in his blog or, for a more academic explanation of the same thing, see http://www.imes.boj.or.jp/research/papers/english/me21-4-1.pdf (also by Andolfatto)

    “The monetary base is more powerful than the zero nominal interest rate.”

    I invite you to look at the post-war time series of the monetary base and the Federal Funds Rate. In every period where the Fed Funds Rate was significantly above zero (or, more recently, IOR), the velocity of the monetary base was roughly a linear function of the FFR. Since 2009, this has ceased to be the case; the monetary base expanded, but velocity fell drastically despite the lack of movement in interest rates. Given what we understand about money demand from theory, this should only occur when the opportunity cost of holding money is zero (i.e. a liquidity trap). Economic theory further tells us that monetary expansions are only useful to the extent that they are expected to be useful at the zero lower bound. Cash carrying costs mean that interest rates can go slightly negative without causing a flight to cash, but their still is an effective lower limit on nominal interest rates. Of course, since IOR is positive, the interest rate at which we an in a liquidity trap (=IOR) is positive.

    “If you read this blog often, you don’t understand what it says. At all. And there are dozens of papers on NGDP level targeting Scott has linked to. How many of them have you read?”

    There are hundreds of papers on inflation targeting an optimal monetary policy with sticky prices. Should I more readily believe the academic consensus or the small fringe group? To be fair, I like the idea of level targeting, but NGDP pretty much comes from nowhere in terms of theory. I see how you might rationalize an NGDPLT by using a mental-AD-AS model, but that really isn’t sufficiently rigorous for me, or even probably Sumner even though he really doesn’t have much regard for mathematical rigor.

    “To help the labor market adjust.”

    So, grow output faster than potential for an extended period of time, representing large welfare costs because of too much employment. This plan is perfectly sound. More people need to think about maximizing welfare than just maximizing outputs.

    “-Well, yes. That’s basically what I said, isn’t it? Monetary shocks are coordinated between regions via a combination of similar targets and groupthink among central bankers.”

    No. It’s not coordination in monetary shocks, it’s coordination of non-monetary shocks that causes coordination of monetary policy. The central banks don’t all choose to follow similar policy because of some kind of group think, they choose to follow similar policy because they have similar targets, similar policy rules, and experience similar real shocks.

  45. Gravatar of Philip George Philip George
    26. December 2015 at 22:32

    Prof Sumner,
    Paul Krugman and Brad DeLong are confident they are right and other economists not of their school of thought are wrong. For a few years you have been harping about NGDP; of late you even seem to have won quite a few supporters.

    My question is: What event in the next 12 months or two years can you think of which would prove your theory wrong? What event in the same period would prove Paul Krugman et al wrong?

    If a collapse in some major asset market occurs during the next year or so, would you agree that you were all this time cheerleading an asset market bubble? Or would a major asset market crash prove you were right all along? If so, why?

    If no event can prove either of you wrong, should bystanders conclude, by an application of Popper’s principle, that the economics both of you are propagating is not science but religion.

    The Austrians predicted rampant inflation after the massive monetary expansion by the Fed. The fact that their prediction was way off the mark does not seem to have dampened their enthusiasm for their theories. Would you say they are just propagating religion?

  46. Gravatar of Gene Frenkle Gene Frenkle
    26. December 2015 at 23:09

    Philip George, this may sound crazy but the one thing all schools of thought got wrong was oil–$40 barrel oil is essentially magic whereas $100 oil is just another commodity…it is more physics than economics. Oil in this day and age is just one of those things that is hard to explain, I liken it to the historical standards in baseball that developed over time (prior to steroids). So .300 batting average, 30 home runs, 100 rbi, 200 hits, 20 wins, 3.00 era, 200 strikeouts. So when baseball was created they didn’t start out with those benchmarks, they just developed that way. Our economy depends on cheap oil and that is just the way it worked out.

  47. Gravatar of E. Harding E. Harding
    27. December 2015 at 00:16

    “No. It’s not coordination in monetary shocks, it’s coordination of non-monetary shocks that causes coordination of monetary policy. The central banks don’t all choose to follow similar policy because of some kind of group think, they choose to follow similar policy because they have similar targets, similar policy rules, and experience similar real shocks.”

    -What are you even talking about? Again, I don’t see how what you’re proposing is in any way inconsistent with what I’m proposing. Central banker groupthink combined with similar central bank targets leads to similar monetary policy mistakes in Japan, Europe, the U.S., and Britain. Probably Canada, too. Belarus and Russia are outside of this Washington/Brussels consensus.

    “I’m extremely offended by the lack of intelligence you assume I have, especially given your rampant arrogance (e.g. claiming that the entire economics profession is wrong and you are somehow know better than people who have spent the better part of their lives studying economics).”

    -Take the offense, man. I dish it out regularly. And years of study and true knowledge are, at best, moderately correlated, and the direction of causality is decidedly unclear. Also, we are debating matters of fact and policy, not matters of personality. I don’t know your IQ, nor do I know or care about any of your other measures of human capital. Einstein was a socialist for goodness’ sake. I do think you’re thoroughly wrong on this subject.

    As for the definition of the liquidity trap, did you take a good look at

    https://fixingtheeconomists.wordpress.com/2013/07/04/what-is-a-liquidity-trap/

    ?

    “A liquidity trap occurs when government bonds and money are perfect (or, seemingly in reality, close to perfect) substitutes.”

    -What happens with a negative nominal interest rate, then, as in the Eurozone? Are bonds and $ still perfect substitutes at a negative interest rate? Serious question, BTW. You gave a partial answer to this, but I don’t think you explored it enough.

    “So, grow output faster than potential for an extended period of time, representing large welfare costs because of too much employment. This plan is perfectly sound. More people need to think about maximizing welfare than just maximizing outputs.”

    -Whatever you’re talking about, inflation/price level targeting exacerbates, rather than alleviates. Think about it. There’s no such thing as “too much employment” in modern labor markets outside of wars. And full employment maximizes welfare as well as outputs.

    “Since 2009, this has ceased to be the case; the monetary base expanded, but velocity fell drastically despite the lack of movement in interest rates.”

    -Velocity collapsed because banks aren’t going to pay excessively large interest to borrowers (though paying interest to borrowers does happen nowadays).

    “Should I more readily believe the academic consensus or the small fringe group?”

    -The latter. Most people believe in God, too. And, as in your case, sometimes, an excessive focus on mathematics is an impediment to understanding. Use logic.

    “Economic theory further tells us that monetary expansions are only useful to the extent that they are expected to be useful at the zero lower bound.”

    -? Monetary base expansions are, in a ZLB framework, money supply expansions. And there are no limits to money supply expansions. The Fed is not prevented by law from printing trillion-dollar bills.

  48. Gravatar of Postkey Postkey
    27. December 2015 at 02:18

    @S.S.
    “And by the way, wasn’t the US and Eurozone path very different after 2010, and isn’t monetary policy the only plausible explanation for that divergence?”

    Not according to W. Mosler?

  49. Gravatar of Postkey Postkey
    27. December 2015 at 02:30

    “ According to that column, a classic liquidity trap occurs when “a zero short-term interest rate isn’t low enough to restore full employment”.
    Krugman – who won the Nobel economics prize in 2008 – is widely regarded as the USA’s most articulate and effective spokesman for Keynesian ideas. For those uninitiated in macro-economic theory his words are taken as gospel. However, the trap called “classic” by Krugman is no such thing.
    Krugman talks about the “short-term interest rate”, by which he means the interest rate set by the central bank. Yet, Keynes’ trap arises when increases in the quantity of money cannot push nominal bond yields beneath a certain level (which must be above zero) because investors have perverse expectations about the price of bonds. Krugman’s trap holds when the central bank cannot, by increasing the monetary base, cut the short-term interest rate beneath zero. That leads to an unacceptably high real interest rate if people are concerned about falling prices. Krugman’s trap is not at all a classic trap originating in the debates of the 1930s. It is an entirely new trap that he has invented. Keynes’ trap is implausible and certainly does not exist today.
    Modern Keynesians are untrustworthy, if they can so wilfully misunderstand and misrepresent their supposed intellectual hero. The supposed “liquidity trap” is a plaything of left-wing intellectuals, not an argument for the subversion of a hugely successful capitalist economic system. In the form suggested by Keynes the liquidity trap does not exist today. In the form suggested by Krugman, his so-called liquidity trap does not invalidate monetary policy because monetary policy can still be effective using instruments other than short-term interest rates.”

    http://www.imr-ltd.com/graphics/recentresearch/article26.pdf

  50. Gravatar of Brent Buckner Brent Buckner
    27. December 2015 at 03:57

    John Handley – you wrote: “Show me a model that says that NGDPLT is optimal and I’ll listen”

    c.f. http://www.themoneyillusion.com/?p=30024

  51. Gravatar of John Handley John Handley
    27. December 2015 at 08:15

    E. Harding,

    “What are you even talking about? Again, I don’t see how what you’re proposing is in any way inconsistent with what I’m proposing. Central banker groupthink combined with similar central bank targets leads to similar monetary policy mistakes in Japan, Europe, the U.S., and Britain. Probably Canada, too. Belarus and Russia are outside of this Washington/Brussels consensus.”

    You suggest that central bankers will choose similar interest rates for the sake of choosing similar interest rates. This does not happen as it is stupid. The ECB raised rates in 2011, but the Fed did not. If they were coordinated in the way you suggest central banks would engage in the same monetary policy because other central banks are doing it. This is ridiculous. The reason that interest rates in the Euro Area resemble interest rates in the US, Canada, and the UK is that each area has similar economic conditions that result in the central banks making similar decisions. Since 2011, Europe diverged from the US in terms of output; because of this, they will not raise rates anytime soon. The ECB isn’t stupid enough to tighten simply because the US has.

    “Take the offense, man. I dish it out regularly. And years of study and true knowledge are, at best, moderately correlated, and the direction of causality is decidedly unclear. Also, we are debating matters of fact and policy, not matters of personality. I don’t know your IQ, nor do I know or care about any of your other measures of human capital. Einstein was a socialist for goodness’ sake. I do think you’re thoroughly wrong on this subject.”

    Meanwhile you’ve clearly demonstrated a lack of a grasp of economic theory. But, you may be right, maybe your *grand* intuition in economics is right and everyone else is wrong. You simply understand everything about the field while economists who actually know what they are talking about are *naturally* wrong.

    “What happens with a negative nominal interest rate, then, as in the Eurozone? Are bonds and $ still perfect substitutes at a negative interest rate? Serious question, BTW. You gave a partial answer to this, but I don’t think you explored it enough.”

    It’s kind of unclear because there are different kinds of liabilities on a central bank balance sheet. Mainly, there are reserves, which earn IOR, and money, which earns zero interest. Because of this, the interest rate at which there is a liquidity trap isn’t necessarily clear. In the US, the situation is complicated further because some institutions are not allowed to earn interest on reserves, so the Fed Funds Rate will often be *below* IOR. Since the actual liquidity trap interest rate is unclear, it makes sense to look for the signs of a liquidity trap, which are certainly there. There are excess reserves, which means that the opportunity cost of holding money is so low that no one wants to economize on their money balances, something that they otherwise would do because money has an opportunity cost (when not in a liquidity trap). Since people don’t economize their money balances, the effect of money injection on the price level is indeterminate and depends on whether or not agents expect it to be effective.

    “There’s no such thing as “too much employment””

    Yes, there is. Look at any DSGE and you’ll see it. People derive dis-utility from working, which is why they don’t work infinite hours to receive infinite income. Welfare falls when output is too high and when it is too low.

    “Velocity collapsed because banks aren’t going to pay excessively large interest to borrowers (though paying interest to borrowers does happen nowadays). ”

    This doesn’t make any sense. Velocity should be a function of the opportunity cost of holding money, which is approximated by the Federal Funds Rate. When this relationship breaks down in the way is has since 2009, then it’s apparent that the opportunity cost of holding money has fallen to zero and that money demand is indeterminate.

    “The latter. Most people believe in God, too. And, as in your case, sometimes, an excessive focus on mathematics is an impediment to understanding. Use logic.”

    This is the *best* epistemology ever. I should clearly deny the existence of global warming and evolution to spite the overwhelming majority of climate scientists and biologists that support it. I think you fail to understand how math is used in economics (or at least macro). It is used to distill what would otherwise be immensely complicated analysis into a few easily understandable equations. Being able to write down an RBC model is extremely useful for economic analysis. There’s a very low limit on the amount and quality of economic analysis you can do without going to a model.

    “Monetary base expansions are, in a ZLB framework, money supply expansions. And there are no limits to money supply expansions. The Fed is not prevented by law from printing trillion-dollar bills.”

    I would hope that you would understand the literal text of what I write, at least. This interpretation is downright terrible. Regardless, I never said the money supply was stopped from increasing. At all. I said that the increase in the money supply is useless unless people expect it to be useful.

    Brent,

    That paper says NGDPLT is superior to inflation targeting, not optimal.

  52. Gravatar of Gary Anderson Gary Anderson
    27. December 2015 at 08:37

    Gene, Wikileaks revealed that the price of oil spiked due to investment banker speculation. Wikileaks says the Saudis informed the Americans that this speculation was indeed happening.

    Scott, I mentioned you again, and this article shows you are onto something, saying the Fed tightened through IOR, but there were other factors preceding IOR that should have given the Fed reason to loosen way before the LIBOR line passed the Swaps line. That chart, again, is in the article at the back. Chart don’t lie, Scott! http://www.talkmarkets.com/content/bonds/the-federal-reserve-knew-libor-was-exploding-in-2007-and-did-nothing?post=81296

  53. Gravatar of E. Harding E. Harding
    27. December 2015 at 09:43

    “Meanwhile you’ve clearly demonstrated a lack of a grasp of economic theory.”

    -Where? :-) Come on, man, don’t hold your breath. Say where I’m wrong.

    “Involuntary employment” is, in the modern labor market, only possible during wartime. How can overly flexible wages/(NGDP/labor force) force people to work? It’s ridiculous. The problem facing the First World today is overwhelmingly not involuntary employment.

    “But, you may be right, maybe your *grand* intuition in economics is right and everyone else is wrong. You simply understand everything about the field while economists who actually know what they are talking about are *naturally* wrong.”

    -I’m right. Svensson is right. Sumner is right. Beckworth is right. So I’m not an army of one here. And, in any case, if I was, I’d still be right. Remember, most people believe in God, the most ridiculous idea of all time.

    “You suggest that central bankers will choose similar interest rates for the sake of choosing similar interest rates.”

    -Interest rates are not monetary policy; they are a product of monetary policy. A rise in interest rates could mean either tighter (U.S., 2005) or looser (Brazil, last two years) money. I suggest that central bankers will choose similar inflation rates because of common or correlated errors in their inflation forecasts due to groupthink.

    “If they were coordinated in the way you suggest central banks would engage in the same monetary policy because other central banks are doing it.”

    -Again, interest rates are not monetary policy.

    “Since 2011, Europe diverged from the US in terms of output; because of this, they will not raise rates anytime soon.”

    -That’s not the real reason. The real reason is that since 2013, Europe diverged from the U.S. in terms of the price level.

    “This doesn’t make any sense.”

    -How?

    “money demand is indeterminate.”

    -What, exactly, do you mean by this?

    “This is the *best* epistemology ever.”

    -And this is the *best* strawman ever.

    “I should clearly deny the existence of global warming and evolution to spite the overwhelming majority of climate scientists and biologists that support it.”

    -LOLNo. But you certainly shouldn’t pretend “because the overwhelming majority of climate scientists and biologists tells you” is a particularly strong argument in favor of their validity. Most biologists deny any socially significant average genetically-based differences between the races, and most climate scientists don’t know the latest IPCC report indicates the cost of cutting carbon dioxide emissions to limit global warming to under 2 degrees Celsius is greater than any benefit.

    http://instituteforenergyresearch.org/analysis/using-ipcc-defeat-un-climate-agenda/

    “I would hope that you would understand the literal text of what I write, at least.”

    -For the sentence I was responding to? I don’t.

    “This interpretation is downright terrible.”

    -Why? What’s wrong with it?

    “I said that the increase in the money supply is useless unless people expect it to be useful.”

    -Isn’t that a tautology, true for everything? Trillion. Dollar. Bills, man.

  54. Gravatar of E. Harding E. Harding
    27. December 2015 at 09:45

    Also, Sumner doesn’t say NGDPLT is optimal; he just says it’s much better than the current state of affairs.

  55. Gravatar of Derivs Derivs
    27. December 2015 at 09:52

    “Wikileaks says the Saudis informed the Americans that this speculation was indeed happening.”

    I heard the tape…

    USA: “You need to increase production, these high prices are inflationary and potentially disruptive to the economy. Your production costs are $7 p/b, pump this stuff”

    Saudis: (While driving a forklift with a palette of USD into a room filled with palettes of USD stacked as far as the eye can see) It is not our fault these prices are occurring, it is those NY latte drinking, times reading, matzo brie eating speculators in NY that are doing this.

    USA: can you provide proof of that claim, reference any transactions?

    Saudi: (confirming on excel spreadsheet that it is better to sell 50 at $140 than 55 at $35) “No, but we are even having difficulties selling this stuff at this price. Do you have any idea how much work it is to pick up a phone and say “sold”. Then the price goes better bid and I get called again and have to again say “sold” (Serious note.. how the hell do bids go higher if you are offering and not getting filled at lower prices…can’t happen! the lie here is just knee-slapping funny)

    USA:”but back to the details on these claims of price fixing, can you expound upon this a bit more?”

    Saudis: We already said it was the matzo speculators in NY, and that always satisfies every one over here in our country, no details necessary. (hangs up phone snikering greedily about his $7 oil trading for $140, then he looks at the mountain of USD and begins to laugh about all the hookers he will have waiting for him in Porto Banus next week).

  56. Gravatar of Gene Frenkle Gene Frenkle
    27. December 2015 at 10:38

    The issue with oil was clearly the global supply plateauing while demand increased. Maybe just like the California energy crisis that makes speculation and manipulation easier but in both instances the underlying issue was lack of energy supply. Economists generally pointed to Mexico’s production decline and the North Sea’s decline but they also believed we were coming up against some notion of “peak oil” so they discounted the underinvestment angle. I think in 2015 we can say that the issue was clearly underinvestment in production by the major players which is why fracking was developed and fracking is essentially a different business than XOM and Aramco are involved in.

    Once again we get back to why did the major players not foresee $140 oil and then an extended period of $100 oil? Everyone knew China was about to boom in 2000 and the oil price was an issue in the 2000 election. The only explanation is that potential cheap Iraqi production scared off any investment because if Iraq is producing 6 mbd in 2010 heading towards 10 mbd then the price of oil probably never goes above $60-$70.

  57. Gravatar of Gary Anderson Gary Anderson
    27. December 2015 at 11:07

    I already showed you proof of manipulation. And Derives, that was borderline bigoted, the hooker sentence. The globalists rule the Saudis, or should I say the Saudis are part of the globalist cabal. Don’t forget that. Even Joe Biden said he was a Zionist. And no, Zionism isn’t Judaism. Anyway, here is proof of the manipulation:
    http://www.reuters.com/article/us-cftc-manipulation-idUSBRE83J19X20120420

    Why would you deny the truth, Derivs? Do you have a financial stake in this truth of manipulation not being revealed? Just wondering.

  58. Gravatar of E. Harding E. Harding
    27. December 2015 at 11:26

    “I already showed you proof of manipulation.”

    -But how big of an impact does it have on the price?

    “And Derives, that was borderline bigoted, the hooker sentence.”

    -It was funny! :-) Probably true, too.

    “The globalists rule the Saudis, or should I say the Saudis are part of the globalist cabal. Don’t forget that.”

    -Riiiiiight. So why did this globalist cabal to keep oil prices high fall apart in 2014-15? And how could speculators be a part of a globalist cabal? Aren’t they there to make money? And didn’t those speculators get burned after 9/15/08?

    “Even Joe Biden said he was a Zionist.”

    -I’m by no means very pro-Semitic and even I’m a Zionist. Better have those Jews building their own fine state than corrupting our country with Leftist and degenerate (mostly; the main thinkers behind libertarianism were Jews, too) doctrines. Even the annual tribute the U.S. pays to the Jewish State is an acceptable burden. Sadly, there’s an adverse selection problem: the Jews who moved to Israel are, on average, much less intelligent than those who stayed behind.

  59. Gravatar of Gene Frenkle Gene Frenkle
    27. December 2015 at 11:29

    Gary, that type of manipulation is not responsible for the price of oil skyrocketing. I think conventional wisdom is more the culprit than collusion or manipulation…nobody believed fracking could be done economically and the business the major players are in is relatively public with long lead times and huge capital outlays so everyone knew what everybody was up to and they just all came to the wrong conclusion. So in a sense the dearth of investment in oil production is like the opposite of a BUBBLE. All the major players had a good thing going and they saw a few years of solid returns so they were complacent.

  60. Gravatar of Gene Frenkle Gene Frenkle
    27. December 2015 at 11:31

    OPEC is a “cabal” and the Saudis have manipulated the price of oil before and they came to the conclusion it was a mistake.

  61. Gravatar of Gary Anderson Gary Anderson
    27. December 2015 at 11:47

    Gene, I don’t really believe that, but it is plausible. Speculation was rampant in the Great Depression as well and Will Rogers spoke out against it. There is a lawsuit against the CME alleging that 1/2 the trades are FAKE.

    Harding, my natural father was Jewish and I am adopted. Anti Semitism and anti Zionism are two different things. I hate the first but support the latter.

    But clearly, the Zionists were predated in Palestine by the True Torah Jews, by 100 years, and who are correct when they say the New Zion was not established by the Zionists. The Zionists want them in the military because they want the idea that their Zion is fake dead and buried forever. Only thing, God knows the Zionists are a fake Zion. America has been cursed since the assassination of JFK by the globalists and LBJ. That cabal still rules the USA.

    As far as the prices falling, I think it was likened to when the prices crashed to destroy the Soviet Union. It was done, with the help of the Saudis, to weaken Russia. It may not be over. I believe it is completely political.

  62. Gravatar of Brent Buckner Brent Buckner
    27. December 2015 at 12:06

    John Handley – actually, the paper has NGDPLT as superior to output gap targeting too, in the presence of (sufficient) error in measuring the output gap. Also, in your earlier comment you had written: “It turns out that the most widely accepted (by economists) economic theory suggests that inflation and/or price level targeting is optimal. If you want to turn that on it’s head, you better have a model and a paper ready to publish in which inflation is not the most important variable that the central bank can affect.” Of course, no skin off my nose if you want to ignore a paper that does just that.

  63. Gravatar of Gene Frenkle Gene Frenkle
    27. December 2015 at 12:11

    Just Google “annual Saudi oil production”. So around 1980 the Saudis had 10 mbd capacity and they drastically reduced output. They did this the context of a glut which was the outcome of ME oil production being unstable and exploration in other regions. So in the early 1980s there was oil price stability but everyone knew the Saudis had huge amounts of capacity that they weren’t using.

    So after a few years the Saudis determined what they were doing wasn’t working and opened the spigots. The players that invested in production or structured government spending based on expensive oil went bust in 1986. The Gulf Coast was greatly harmed by the Saudi decision and I have read that Bush and Cheney (Wyoming is a big energy state) lobbied Reagan to promote tariffs or do something to mitigate the harm being done to their constituents. Reagan chose to stay the course because he knew what the impact would be to the Soviets.

  64. Gravatar of Gary Anderson Gary Anderson
    27. December 2015 at 12:14

    “Reagan chose to stay the course because he knew what the impact would be to the Soviets.” Nice work Gene, but know this, the motive for Saudi output could have been, hurt the Soviets first, and help their balance sheet second. Reagan is a hint that it could be either.

  65. Gravatar of Alexander Hamilton Alexander Hamilton
    27. December 2015 at 12:14

    @Gary Anderson I don’t understand. Is it US Bankers or Saudi Arabia that you think set oil prices? Could you explain how the type how the type of speculations you’re talking about can overwhelm the effects of supply and demand that usually determine the price?

  66. Gravatar of Gary Anderson Gary Anderson
    27. December 2015 at 12:26

    Hi Alex. Demand is the key. If the elite choose not to push prices up they are not pushed up. If the elite choosse to push prices up they are pushed up. I don’t think, with 1/2 the CME trades possibly fake, that supply and demand factor in at all.

    When you corner markets, supply and demand laws are terminated.

    Will Rogers said this: “We never will have any prosperity that is free from speculation till we pass a law that every time a broker or person sells something, he has got to have it sitting there in a bucket, or a bag, or a jug, or a cage, or a rat trap, or something, depending on what it is he is selling. We are continually buying something that we never get from a man that never had it.” DT #1301, Sept. 24, 1930

    So, Alex, it is pretty clear that banks have been able to, starting in the 1990’s, take major positions in the futures markets and have manipulated prices by making the contracts scarce much like what happened in the Great Depression. This is exactly what Will Rogers was talking about: http://onlinelibrary.wiley.com/doi/10.1002/fut.3990130609/abstract

  67. Gravatar of E. Harding E. Harding
    27. December 2015 at 12:33

    “Speculation was rampant in the Great Depression”

    And….?

    “I hate the first but support the latter.”

    -As I’ve said, my tendencies are toward the reverse. Israel’s the only truly functional part of the Middle East today, but the vast majority of Jews in America vote Democrat, and a vastly disproportionate number of the overwhelmingly powerful in this country are Jews.

    The JFK assassination is a million mysteries (I may not be exaggerating) inside several hundred enigmas. I’ve seen no evidence LBJ was responsible and I continue to maintain Lee Harvey Oswald was the most likely assassin.

    “It was done, with the help of the Saudis, to weaken Russia.”

    -There is reason here, given Iran, Venezuela, and Russia are all oil exporters, but why didn’t this happen earlier, in 2007-8? And you didn’t answer my questions about the speculators, which I think are the more important ones.

  68. Gravatar of Gary Anderson Gary Anderson
    27. December 2015 at 12:40

    All I know is that one guy cornered the cocoa market, also onions were banned from the futures markets by Eisenhower, due to speculation in onions. So, the idea that a group of investment banksters could not corner the oil market is a ridiculous idea.

  69. Gravatar of Scott Sumner Scott Sumner
    27. December 2015 at 13:30

    John, You said:

    If nominal wages are sticky, then countercyclical real wages must exist.”

    Nope, check out Sumner and Silver, JPE I think June 1989.

    Unfortunately I am on vacation today, so I’ll have to get to your other comments later. But one quick point. Mainstream macro assumes that the welfare cost of inflation is better proxied by inflation than NGDP growth. That’s wrong in my view. I’ve never seen a single good argument for that claim, it’s just assumed. That’s where the models go off course.

  70. Gravatar of Gene Frenkle Gene Frenkle
    27. December 2015 at 13:52

    Gary, the oil cabal (OPEC) has attempted to control the price and they have been successful for short periods and then they fail. So I think you are failing to see their failures.

    In the 2010s the oil cabal has finally come to realize their commodity has the most value at a price much less than $100 a barrel because as I said in a previous comment $40 barrel oil is essentially magic. So if in 1980 I could have guaranteed oil at $40 in today’s $ for 60 years we would still have supersonic passenger jets in the air, helicopters would be even more ubiquitous, highway speeds would be higher, Caribbean/Hawaiin vacations would be cheaper, etc.

  71. Gravatar of Derivs Derivs
    27. December 2015 at 14:19

    “-It was funny! :-) Probably true, too.”

    E.. Thank you. Always humor first!!

    Gary,
    I don’t deny the truth. What they did was wrong and went a little too far past a grey area into price manipulation and they got what they deserve.
    What I object to is your making a statement of manipulating prices up to la la land and then using an example that in no way represents such type of manipulation. But once again if you understood what they were doing, you would understand they were basically trying to arb settlement prices by a fraction of a penny. Not move markets by dollars. Do you specifically know what they were even doing? Can you describe the trades? Do you even have any idea what a TAS is?

    I explain to you open interest and you still talk about scarcity that doesn’t exist. I tell you about how contracts are margined and you still continue to insist otherwise. I can walk you through the very trades Optiver did and show you it didn’t move markets like you suggest, and you will continue to spew stupidity.

    “So, the idea that a group of investment banksters could not corner the oil market is a ridiculous idea.”

    Yes, ’cause colluding to manipulate markets on a Federally regulated exchange where each and every one of your trades goes through a rigorous compliance algorithm is exactly what a guy who graduated in the top % of his class from an Ivy (or equivalent), who is making 8+ figures a year wants to do. Greed might lead people to do stupid things.. but that’s just begging for a bruising…

  72. Gravatar of Gary Anderson Gary Anderson
    27. December 2015 at 15:29

    Derivs, the example I cited does make your case. But speculation exists, which is why I cited it. And speculation is much more complete than that example. Again, if ONE MAN can corner the cocoa market, it is easy for bankers working in concert to corner the petroleum futures market. http://www.nytimes.com/2010/07/25/business/global/25chocolate.html The onion market was cornered: http://www.npr.org/2015/10/22/450769853/the-great-onion-corner-and-the-futures-market and the silver market was almost cornered by two brothers: https://en.wikipedia.org/wiki/Nelson_Bunker_Hunt

  73. Gravatar of Gary Anderson Gary Anderson
    27. December 2015 at 15:34

    And the oil market is EASY to manipulate. A few hedge funds could do it. And a concerted effort by banks taking large positions could make it easier still: http://www.cjr.org/the_audit/cornering_a_crucial_market.php

  74. Gravatar of ssumner ssumner
    27. December 2015 at 16:50

    Jonathan, I’ve probably answered that question 100 times, but I’d say the two big mistakes was too little money printing and bad communication about the future path of policy. The first factor was the biggest problem in early 2008, the latter factor was the biggest problem in late 2008.

    John, You said:

    “I don’t think they can’t target NGDP, I think that they can’t ensure that each aspect of GDP grows at the desired rate. At some point, RGDP will exogenously grow slower than before and this will cause the Fed to loosen monetary policy basically by accident. If inflation does have welfare costs (say, e.g., there is some cash-in-advance constraint in the economy and prices are sticky because of adjustment costs, so inflation greater than -r causes a welfare loss since the nominal interest rate will be positive and inflation greater than zero causes firms to pay a price adjustment cost), then an NGDPLT would needlessly increase those costs over time given an exogenous RGDP slowdown.”

    This is a very confusing paragraph. The Fed should not be trying to control the components of NGDP, because inflation doesn’t matter. They should control NGDP growth because NGDP growth is what matters. NKs simply assert that inflation instability is bad, without providing a shred of evidence that unstable inflation during a period of stable NGDP growth is bad. If they can’t provide even a shred of evidence, then why should I take their models seriously? They just say “assume there is price stickiness and hence that inflation instability is bad”. But why should I assume that to be the problem, when the evidence suggests that labor and financial market instability are by far the bigger problems, and both of those are better correlated with NGDP? Even worse, the welfare costs of excess taxation of capital due to “inflation” is also better correlated with NGDP growth.

    You said:

    “If wages are sticky, then the problem is that the price level is too low, not NGDP.”

    No. You are looking for lost keys under the streetlight, try looking in the area you lost them. You have all these “models” that obsess about inflation, with no justification.

    You said:

    “Could the recession have been smaller had the Fed cut rates sooner? Maybe, but the recession would have happened anyway.”

    I see no evidence for that claim, the recession seems to have been caused by inadequate AD. But even so, a much smaller recession (say like 2001, where U peaked at 6.3%) would have been a huge gain.

    “DNWR” What is that acronym?

    You said;

    “That and austerity.”

    No, the US did more austerity. Look at the actual data, don’t rely on people like Krugman. So I repeat the question, isn’t monetary policy the only explanation?

    You said:

    “Australia was not hit by the same shock as everyone else,”

    Other than not being hit by a monetary shock, what other difference is there? You don’t provide any.

    You said:

    “Evidence: despite QE,”

    You are already off course. The term “despite” suggests you think QE is easy money, and are surprised that it has had no effect. It’s not easy money, so there is no mystery to be explained. And easy money policy is a policy that raises NGDP growth expectations.

    Now I repeat my question. Assume a policy that raises NGDP growth expectations to 5%. I don’t care what it takes, say they have to buy the entire planet. Now tell me what does the demand for base money look like given NGDP is expected to grow at 5%? I say about 6% of GDP. That’s how much QE they would have had to do with a sensible policy target.

    You said:

    “Perhaps the recession was slightly bigger because interest rates were ~1% above the natural rate, but that’s beside the point”

    You are missing the point. The problem was not that the Fed had too high a target rate, it’s that they drove the equilibrium rate too low, indeed into negative territory. With sensible policy (like Australia) they never would have hit the zero bound.

    On Japan, it’s not too soon to say the BOJ drove the exchange rate from 80 to 120, is it? So how is policy ineffective? Inability to impact the exchange rate is sine qua non of liquidity traps. Even Krugman now says the policy has been effective.

    So you aren’t just debating me, you are debating Mr. Liquidity Trap Paul Krugman. Even he doesn’t agree with you.

    You say:

    “Monetary models suggest that the zero lower bound does represent a constraint on monetary policy.”

    So why don’t Bernanke, Mishkin, Svensson, McCallum, etc. know about these models? What do you know that they do not?

  75. Gravatar of ssumner ssumner
    27. December 2015 at 17:08

    Britonomist: You said;

    It can be both an effect AND a cause

    I never said it was.

    E. Harding, If you are quoting Bob Murphy and his “contradictions” you are really getting desperate. I’ve responded to all those posts.

    Willy2, You said:

    “One S. Sumner is still looking at the wrong indicator. The reason why we had a financial shock in 2008 was that home prices started to go down in 2006 !!!”

    Yes, and the reason WWII began in 1939 is that Mr. and Mrs. Hitler had a baby named Adolf in 1887.

    Philip, You asked:

    “If a collapse in some major asset market occurs during the next year or so, would you agree that you were all this time cheer leading an asset market bubble? Or would a major asset market crash prove you were right all along? If so, why?”

    No, the whole point of MM is that asset prices cannot be predicted.

    I have other posts on what would refute market monetarism. The easiest short answer is the musical chairs model failing to hold.

  76. Gravatar of E. Harding E. Harding
    27. December 2015 at 17:54

    @ssumner

    “No, the US did more austerity. Look at the actual data, don’t rely on people like Krugman. So I repeat the question, isn’t monetary policy the only explanation?”

    -No. See my remarks above. I suspect austerity may have hurt on the supply side.

    Most of Murphy’s contradictions are spurious; about a third are legitimate. I don’t think you responded to his Australia remarks well, and I suspect (though I haven’t done an exhaustive search) you didn’t respond to all of them. Australia had the same NGDP shock in the early 1980s it had in 2008-9, yet, unemployment skyrocketed much more in the early 1980s. There are other facts about Australia that don’t fit your NGDP narrative for it. See Murphy’s Australia post+comments.

    Remember, I was reading Murphy’s blog since late 2008. I only began reading your blog in late 2014. The fact you so thoroughly convinced me to reject the Austrian explanation of the Great Depression in a week should make you proud. Don’t ruin it by pretending there’s no legitimate criticism in Murphy’s blog posts.

  77. Gravatar of E. Harding E. Harding
    27. December 2015 at 18:16

    http://www.pewsocialtrends.org/files/2013/04/Asian-Americans-new-full-report-04-2013.pdf

    Yup; the Japanese are natural Democrats. Only the first-generation Vietnamese (almost certainly not the second generation), and, perhaps, the Filipinos (!?!) and possibly Koreans (guess they remember Rodney King) are natural Republicans.

  78. Gravatar of E. Harding E. Harding
    27. December 2015 at 18:20

    ^ Wrong post.

  79. Gravatar of Ray Lopez Ray Lopez
    27. December 2015 at 19:20

    I’m really impressed by the answers John Hanley gives, see: John Handley 26. December 2015 at 09:21. Handley, who shares the same name as a prominent finance professor (I don’t care who he really is however), schools Sumner, who comes back with a lame one-liner and cites a 1989 paper supposedly refuting Hanley. In economics and indeed science you can always find one paper that seems to support your view, see: “publication bias” jerrydallal.com/LHSP/multtest.htm

    [But I think it’s significant, and not just statistically, when Ben S. Bernanke puts his name on the FAVAR paper from 2002 that says the Fed, out of 100%, has only 3.2% to 13.2% effect on a variety of economic variables due to monetary shocks from 1959 to 2001.]

    So Hanley’s views that NGDPLT may be a better monetary framework rule in inflationary times to targeting inflation, but, even by monetarist measures, not that good in deflationary times, deserves attention. Sumner ignores this argument. Indeed since “money” these days is so fluid that government paper and actual paper are interchangeable (not unlike the 19th century, when promissory notes were used as cash), and with today’s credit card ‘digital economy’ (Sweden only uses 3% cash; the USA / EU are 8-10%, and only developing countries like here in the Philippines, Greece, and Russia, to my personal knowledge, use lots of cash), you can safely say the old-fashioned M. Friedman-type ‘rules’ involving stable or predictable velocity are no longer valid. We’re in a new age, yet Sumner clings to old myths like: “Fed caused Great Depression (GD)”, “Gold standard caused GD”, “Fed caused or made worse Great Recession”, “NGDPLT is a panacea” and other such nonsense. Krugman was right to call Sumner a “sad” case in a 2012 article.

  80. Gravatar of Gary Anderson Gary Anderson
    27. December 2015 at 19:32

    The Fed didn’t cause the Great Recession, but it watched as it happened. Technically, the chart on page 3 shows LIBOR crossing the Swaps line caused the Great Recession. http://www.talkmarkets.com/content/bonds/the-federal-reserve-knew-libor-was-exploding-in-2007-and-did-nothing?post=81296 But the Fed let it happen! They, IMO, deliberately let it happen and then added IOR on top of that!

  81. Gravatar of Gary Anderson Gary Anderson
    27. December 2015 at 19:42

    And LIBOR rose because of perceived risk of interbank lending. http://www.learningmarkets.com/understanding-libor-london-interbank-offered-rate/ The cause of this perceived risk was the fact that the banks knew they had taken the floating LIBOR side of the bet and the counterparties had been given the fixed Swap rate and they were on the verge of crossing the streams. Lol. Collateral must have gone bad in the money markets to cause this floating rate to exceed the fixed rate in the swap. And that was, of course, the MBSs that were no good.

  82. Gravatar of E. Harding E. Harding
    27. December 2015 at 23:00

    Ray, John’s comments are very poor, and show the arrogance of his ignorance. See my own comments. You’re totally wrong here.

  83. Gravatar of John Handley John Handley
    27. December 2015 at 23:46

    Scott,

    I read about half of the paper and I’m pretty sure you agree that countercycical wages are necessary for wage rigidity to be relevant, it just happens that the cyclicality of wages is not robust to the kinds of shocks that hit the economy. I think my argument still holds; any time wage rigidity is relevant is when real wages are empirically countercyclical. In other words, demand shocks should make wages appear countercyiclical while supply shocks should give the opposite impression. Alternatively, the only type of wage rigidity is DNWR, so wages only appear countercyclical at sufficiently low inflation rates (or sufficiently low ‘equilibrium’ nominal wage growth rates). If wages appeared countercyclical during the great inflation, then I think the predominant type of wage rigidity would be clear.

  84. Gravatar of Derivs Derivs
    28. December 2015 at 05:19

    http://www.cjr.org/the_audit/cornering_a_crucial_market.php

    Gary,
    Thanks for making my point for me. They did it a total of 2 times over 2 trading days and got thrown into hell at the Federal level for it… always fun fun fun times when you have to deal with the Feds!!!

    ..and once again, maybe it will register this time, you can not take a float position without having a fixed position. One side does not take float while the other side takes fixed!!!!!!! +fix -float, other side MUST be -fix +float.

    Hunt’s blew themselves to pieces trying.. and as for your coffee example… nothing more than a giant fish in a small pond. (As I said yesterday bullying/banging DOES occur in lesser traded contracts and months…) Coffee on a busy day is 20,000 contracts, crude is 1.5 million. Although it’s guys like Ward that make me chuckle at those that pontificate from the bleachers about random walks… “Hey, see that guy over there… he’s about to accumulate a massive long position in a thin market. Since it’s a random walk and always 50/50, why not sell some futures right now and then come talk to me in about a month or 2 about random walks…

  85. Gravatar of Gary Anderson Gary Anderson
    28. December 2015 at 07:48

    Derivs, we now find out from a Bank of America big shot that the Fed pushes up asset prices. So, I believe the Fed allows the banks to expand asset prices far more than that one little company did, and then the Fed, or a violent event comes in and crushes the price. Of course, the Fed warns the big banks first. What a criminal organization.

    http://www.talkmarkets.com/content/us-markets/even-the-big-banks-now-admit-it-this-is-how-the-feds-massive-manipulation-broke-the-market?post=81391 From the blog. Scott really needs to understand this:

    From Bank of America

    Central bank’s risk manipulation well explains local tails

    A good way to explain why we have seen local tail risks arise so frequently since central banks began to heavily manipulate asset prices is with the following analogy, illustrated in Exhibit 1. Essentially central banks, by unfairly inflating asset prices have compressed risk like a spring to unfairly tight levels. Unfortunately, the market is aware the price of risk is not correct, but they can’t fight it, and everyone is forced to crowd into the same trade. By manipulating markets they have also reduced investors’ inherent conviction by rendering fundamentals less relevant.

  86. Gravatar of John Handley John Handley
    28. December 2015 at 10:56

    Scott,

    DNWR = Downward Nominal Wage Rigidity

    More soon.

  87. Gravatar of Scott Sumner Scott Sumner
    28. December 2015 at 11:05

    E. Harding;

    “Don’t ruin it by pretending there’s no legitimate criticism in Murphy’s blog posts.”

    Instead of just asserting I am wrong, what precisely is wrong with my reply to Murphy on Australia?

    Which criticisms of Murphy have I not responded to?

    John, You said;

    “I read about half of the paper and I’m pretty sure you agree that countercycical wages are necessary for wage rigidity to be relevant, it just happens that the cyclicality of wages is not robust to the kinds of shocks that hit the economy.”

    No, I don’t think inflation matters at all in macro, nor do I think real wages matter. What matters is the ratio of NGDP to hourly wages.

    What does DNWR mean?

  88. Gravatar of Gary Anderson Gary Anderson
    28. December 2015 at 11:29

    So, Scott, the Fed mispriced risk to establish the housing bubble. It was premeditated, Scott. That link at my post above was to Tyler Durden’s blog, not mine. But I claimed that I believed the Fed let it crash on purpose. And BAC said both the asset inflations and crashes were all based on mispriced risk and that they were premeditated by the Fed. http://www.talkmarkets.com/content/bonds/the-federal-reserve-knew-libor-was-exploding-in-2007-and-did-nothing?post=81296 Your root canal, Scott, is that the Fed is a criminal organization and that it mess up a lot of people and caused murders, divorces, dead animals and massive dislocation and distress.

  89. Gravatar of Gary Anderson Gary Anderson
    28. December 2015 at 11:31

    Sorry, here is Tyler Durden’s post about this Fed fraud: http://www.talkmarkets.com/content/us-markets/even-the-big-banks-now-admit-it-this-is-how-the-feds-massive-manipulation-broke-the-market?post=81391

  90. Gravatar of E. Harding E. Harding
    28. December 2015 at 12:00

    Scott, just answer this question about NGDP: how come the early 1980s and 2008-9 shocks to Australian NGDP were the same, but led to vastly different unemployment outcomes?

  91. Gravatar of Steven Kopits Steven Kopits
    28. December 2015 at 12:10

    “2. The oil price shock of 2005-2008.

    3. The oil supply shock of 2008-2014.

    4. The oil price shock of late 2014.”

    An oil price shock in the US typically occurs when spend on crude oil exceeds 4.25% of GDP.

    This did not occur before 2008; however, a slowing in productivity is clearly visible after 2005. See Fernald’s work on this, for example. VMT growth also slows after 2005, with VMT historically a near-proxy for GDP.

    The 2008 oil shock counts as a classical oil shock, with the exception that is a demand, not supply, shock. The presumption is that oil prices spiral upwards in a bidding war between China and the OECD countries, which of course, the OECD countries were slated to lose.

    The April 2011 Arab Spring also qualifies as an oil shock, and indeed, it is succeeded by a recession in Europe which does not end until Q2 2013. The US suffers a crypto recession, leading to talk of secular stagnation.

    The collapse of oil prices in mid-2014 is a positive shock for the OECD, bar Norway and the oil sector in the US. It has certainly helped in Europe.

    Internationally among commodity producers, oil was a negative shock in 2014, precipitating a recession in places like Canada, Russia and Brazil, as well as a political crisis in Venezuela.

    We are currently in some kind of commodity demand shock, at least if I believe Jim Hamilton or the BoE (http://www.prienga.com/blog/2015/12/7/weak-brent-is-it-supply-or-demand). I have argued that it is largely, if not entirely, caused by an over-valued yuan. The Chinese did not understand (or failed to act on) the notion that the dollar was not strengthening because the US’s major trading partners were weak. Instead, shale oil had moved the US trade deficit by almost 2% of GDP since 2011, ie, US terms of trade were vastly improved. (http://www.prienga.com/blog/2015/9/15/impact-of-shales-on-the-us-trade-deficit) Under such circumstances, China should have devalued the yuan in line with the yen, won and Euro, but didn’t. This led to an over-valued yuan and a resulting weak Chinese export and manufacturing sector–and arguably weak commodity prices. In turn, such weakness may be precipitating (or exacerbating) a broader economic / financial meltdown there.

    If the over-valuation story is right, then a sharp devaluation in China should right commodity prices. If China is facing some more systemic issue (and it might be), then things could get worse before they get better.

    So here’s my timeline:

    1. 2005-2007: Increasing oil prices stunt OECD productivity growth, but remain below shock levels
    2. 2008: A recession-inducing oil shock, coupled with classical financial crisis (both caused by China)
    3. 2011 Q2: Arab Spring oil shock, prompting a European recession and US ‘secular stagnation’ until Q2 2013
    4. Q3 2014: Positive oil price shock, recovery of US and European mobility, modest growth returns, talk of secular stagnation in the US ends.

  92. Gravatar of John Handley John Handley
    28. December 2015 at 12:20

    Scott,

    Reasons for welfare costs of inflation:

    1) Opportunity cost of holding money. Deviating from the Friedman rule (i.e. allowing inflation greater than negative the rate of time preference) is suboptimal because it requires agents to hold an asset (money) that is dominated in interest by other assets.

    2) Sticky prices. If prices are sticky, then volatile inflation marks a welfare cost because of the corresponding output volatility. In the case of specifically Rotemberg price stickiness, firms pay costs for adjusting prices, so non-zero inflation has a direct welfare cost. For Calvo price stickiness, non-zero inflation means that firms that cannot change their prices in a given period have suboptimal profits.

    By the way, by saying “They just say ‘assume there is price stickiness and hence that inflation instability is bad’. But why should I assume that to be the problem,” you seem to be suggesting that you don’t think prices are sticky. I find this especially puzzling since on one of your previous posts (“It is time to blow up the New Keynesian model?”), you responded to one of my comments with “The key friction is wage stickiness, not price stickiness, even though there is of course lots of price stickiness out there.” You seemed to believe in sticky prices a month ago, what has changed?

    You seem to have misunderstood my comment about low prices being the problem if nominal wages are rigid. It’s easier to convey what I mean with a model:

    There is a representative household that maximizes the utility function U_t = u(c_t) + B U_t+1 where c_t is consumption and 0 < B = b W_t-1

    where 0 <= b = b P_t-1(1-a)h_t^-a

    solving for labor supply growth yields:

    (h_t/h_t-1)^-a >= b P_t-1/P_t

    here you can see the importance of inflation even in a model where only downward nominal wage rigidity exists. If the gross rate of inflation (P_t/P_t-1) is less than b, the labor supply must fall. The reason for this is that the low price level requires a low nominal wage in order for the labor market to clear. Since nominal wages can only adjust at b, inflation below b must result in a too-high real wage which means that the firm will demand less labor. This is what I mean when I suggest that the problem if wages are sticky is low prices. Nowhere here does NGDP even appear; it has noting to do with whether or not the real wage is too high and the labor market fails to clear.

    Considering the general lack of understanding of what ‘liquidity trap’ means, it is also useful to explain the notion with a couple of common money demand models.

    Cash-In-Advance:

    A representative household maximizes the utility function U_t = u(c_t) + B U_t+1 (same variable definitions as before). The household uses money not spent on consumption in the last period as well as interest from maturing government bonds and a constant endowment y to pay for new government bonds, taxes, and new money. The household’s budget constraint can be written as

    (1) R_t-1 B_t-1 + (M_t-1 – P_t-1 c_t-1) + P_t y = M_t + B_t + T_t

    The household then enters the cash market in which it uses newly acquired cash balances to pay for consumption

    (2) M_t >= P_t c_t

    The first order conditions to the maximization problem are as follows:

    (3) u'(c_t) = B u'(c_t+1) R_t P_t/P_t+1

    (4) M_t = P_t c_t if R_t > 1, M_t >= P_c c_t if R_t = 1

    Once again, the government sets B_t = 0 for all t, this time expanding the money supply through lump sum transfers (levying negative taxes) on the household. (1) simplifies to

    (5) c_t = y

    (4) is the equation of primary interest because it shows that, should the nominal interest rate fall to 1 (0 in net terms), the household is indifferent between holding the marginal dollar and the marginal government bond; they are equivalent in its eyes. This means that one the nominal interest rate falls to zero, open market operations are completely useless. Normally, the central bank in this model creates inflation by forcing the household to hold more money, which it doesn’t want to do, so prices must increase to equate the money supply with money demand. If B rises above one, then the expected inflation rate consistent with the zero lower bound may indeed be positive; the liquidity trap may not be entirely the central bank’s fault. Once the zero lower bound is hit, the cash-in-advance constraint won’t bind unless the household expects it to in the future. In this way, liquidity traps are expectations traps.

    Money-in-the-Utility function:

    [Note: I personally don’t like MIUF models, by they are nevertheless popular, so I may as well present a liquidity trap from that perspective]

    This time, the household has the utility function U_t = u(c_t) + v(M_t/P_t) + B U_t+1. The household uses money and bonds maturing from the last period as well as constant endowment y to pay for new government bonds, taxes, and consumption:

    (1) R_t-1 B_t-1 + M_t-1 + P_t y = M_t + B_t + P_t c_t + T_t

    This yields the following first order conditions:

    (2) u'(c_t) = B u'(c_t+1) R_t P_t/P_t+1

    (3) v'(M_t/P_t) = P_t u'(c_t) – P_t+1 B u'(c_t+1) = u'(c_t) (1 – 1/R_t)

    And, given fiscal policy,

    (4) c_t = y

    In this model, no amount of open market operations will ever result in R_t = 1. This is because of the non-linearity of the model; R_t = 1 implies that v'(M_t/P_t) = 0 which (because of diminishing marginal utility) means that M_t/P_t = infinity. In this model, the zero lower bound is impossible to reach. The effectiveness of monetary expansion at increasing the price level is diminishing in the level of the money supply, also thanks to diminishing marginal utility.

    There are other models of money demand worth noting like transaction cost models or cash-credit models, but they are unnecessarily tedious and have the same properties as cash-in-advance models when it comes to analysis at the zero lower bound; when cash and bonds are perfect substitutes, theory suggest that money demand is either indeterminate (Cash-In-Advance case) or infinite (MIUF case).

    Regarding QE, you said “You are already off course. The term “despite” suggests you think QE is easy money, and are surprised that it has had no effect. It’s not easy money, so there is no mystery to be explained. And easy money policy is a policy that raises NGDP growth expectations.”

    I hope from the above that you get why I think QE is useless, at least from a theoretical perspective. I understand that you define easy money as a change in NGDP growth expectations, and I guess you’re entitled to that definition, but it really doesn’t seem useful to me. Using adjectives to describe monetary policy as ‘tight’ and ‘easy’ don’t describe what is actually going on. Clearly a lot of people see QE as having been expansionary, so that’s why I said ‘despite.’ The overwhelming evidence that I see is that the actual concrete steppes that central banks take at the zero lower bound are useless. while ‘open mouth operations’ are effective. This squares with a basic New Keynesian view combined with simple monetarist analysis; forward guidance is effective, monetary expansion is useless at the zero lower bound (unless the central bank is particularly clever and adjusts expectations for the path of money supply growth and interest rates in such as way that agents want to economize their money balances, but this clearly hasn’t happened in the real world; in Japan or in the US or the UK).

    “Now I repeat my question. Assume a policy that raises NGDP growth expectations to 5%. I don’t care what it takes, say they have to buy the entire planet. Now tell me what does the demand for base money look like given NGDP is expected to grow at 5%? I say about 6% of GDP. That’s how much QE they would have had to do with a sensible policy target.”

    You’re missing my point, I don’t think it’s possible for the Fed to hit its target. Yes, if the nominal interest rate on short term safe assets is above the interest that can be earned from holding money then money demand will not be a problem, but at the zero lower bound, it is. You’re basically asking ‘if we weren’t at the zero lower bound, wouldn’t everything be normal?’ The answer is yes, obviously.

  93. Gravatar of John Handley John Handley
    28. December 2015 at 12:30

    There seems to have been some screw up with my previous comment.

    “There is a representative household that maximizes the utility function U_t = u(c_t) + B U_t+1 where c_t is consumption and 0 < B = b W_t-1

    where 0 = b P_t-1/P_t”

    should read

    “There is a representative household that maximizes the utility function U_t = u(c_t) + B U_t+1 where c_t is consumption and 0 < B = b W_t-1

    where b represents the degree of downward rigidity. Because of this rigidity, the labor market may be prevented from clearing. It is useful to plug (5) into (6) in order to understand this

    (7) P_t (1-a) h_t^-a >= b P_t-1 (1-a) h_t^-a

    solving for labor supply growth yields:

    (h_t/h_t-1)^-a >= b P_t-1/P_t”

  94. Gravatar of Major.Freedom Major.Freedom
    28. December 2015 at 13:56

    “…consumption is much less variable than investment.”

    If recessions really were rooted in aggregate fluctuations such as NGDP, then we would not see investment change significantly differently from consumption. But we do see this, hence aggregate changes, despite any correlations, is not the root problem.

  95. Gravatar of Gene Frenkle Gene Frenkle
    28. December 2015 at 16:39

    Steven Kopits great comment. With regard to the Housing Bubble/Financial Meltdown the issue is the DEGREE of malinvestment. So the question is why was there so much malinvestment in various real estate markets across the globe. First is the dynamics of the global oil market in which profits wreaked havoc in global financial markets.

    But a related crisis was going on at the exact same time–the US natural gas crisis in which serious discussion was taking place about where to build LNG IMPORT terminals!?! Europe is always in a state of crisis with regard to natural gas because they get it from Russia. Japan has many problems including LNG prices. So in the context of the US being an LNG importer the global business elite simply didn’t see a lot of quality investments due to energy issues.

    So the Housing Bubble/Financial Meltdown was a symptom of underlying energy insecurity/energy crisis.

  96. Gravatar of Gene Frenkle Gene Frenkle
    28. December 2015 at 20:40

    Steven Kopits, here is an example of the negative conventional wisdom that plagued the US energy industry, from June 2005–

    “Gas production has peaked in North America,” Chief Executive Lee Raymond told reporters at the Reuters Energy Summit.

    Asked whether production would continue to decline even if two huge arctic gas pipeline projects were built, Raymond said, “I think that’s a fair statement, unless there’s some huge find that nobody has any idea where it would be.”

    http://mobile.reuters.com/article/idUSN2163310420050621

  97. Gravatar of E. Harding E. Harding
    28. December 2015 at 23:42

    @MF
    “If recessions really were rooted in aggregate fluctuations such as NGDP, then we would not see investment change significantly differently from consumption.”

    -You’re wrong. Demand shocks to NGDP have a stronger impact on things people can afford to put off to the future.

  98. Gravatar of derivs derivs
    29. December 2015 at 03:22

    “http://www.talkmarkets.com/content/us-markets/even-the-big-banks-now-admit-it-this-is-how-the-feds-massive-manipulation-broke-the-market?post=81391 From the blog. Scott really needs to understand this:”

    Poor Scott.. I don’t even understand it. If I was coming off a deserted island and read his opinion on tails and volatility I would assume the market should be pricing risk in a way that you would see low VIX and high SKEW. So I just looked and I see low VIX and high SKEW. To my little reptilian brain it looks like the market is pricing risk exactly as he is suggesting it should be priced. So I’m confused.

    Also, I am not much of a fan of the FED but if they are responsible for constraining volatility, then I applaud them. Business hates volatility and high volatility is expensive for them to remove, so one of my personal requirements for a positive business environment would be a low volatility environment.

    A great book for you to read would be ‘Reminiscences of a Stock Operator’. It’s about trading over 100 years ago. Amazing how you can read it and think it was written a year ago. Same stories… Panic of 1893 (lead by commodities crashing), Crash of 1907… Markets move on fear, greed, and complacency. Always been the same old same old, herd mentality > complacency > followed by everyone trying to hit the same exit simultaneously when someone yells fire…

    And surprisingly, BofA really is not much of a big player outside of currencies.

  99. Gravatar of Derivs Derivs
    29. December 2015 at 04:20

    …. I left out.. I see BofA saying A = low volatility C= Fed did this… where is B? HOW?? Did they have their trading desk put a collar on the market. SPX 2056 bid at 2058.. unlimited size both sides??? Or is getting on TV when a market is dropping and assuring liquidity in the system and Jawboning manipulation? Isn’t that what they are supposed to do, try and instill confidence? Aren’t you accusing them, in this very thread, of allowing the 3mo-10yr rates to cross and criticizing them for allowing markets to crash??? (…and why am I writing this while thinking to myself in the voice of the guy that asked all the questions at the end of the TV show SOAP)…”all these questions and more will be answered in the next episode”

    I have to go play tennis right now and I am so preoccupied by all this that I am now worried I am going to outright whiff when I am trying to hit the ball. Me thinketh that I’m going to break out my late 70’s Prince 135 sq in racquet head just to be safe…

  100. Gravatar of Gary Anderson Gary Anderson
    29. December 2015 at 08:01

    It is well known, Derivs, that risk for MBSs were obviously mispriced. The article covers recent stock market mispricing of risk, but the Fed permitted the Gaussian Copula that mispriced MBSs. This article just confirms that the Fed causes bubbles and crashes, all to make banksters some money.

    You should give up tennis and try golf, since the ball doesn’t move in golf.

  101. Gravatar of Steven Kopits Steven Kopits
    29. December 2015 at 08:23

    Gene –

    I was part of that negative conventional wisdom. For oil market forecasts, two things are incredibly hard to predict. One of these technological innovation, the other is market discontinuities like war and revolutions.

    The victors in the shale argument were those who made the bland, optimistic case that, don’t worry, we’ll figure out something to improve the oil supply. Tough to be an analyst if that’s the extent of your opinion–and yet it was true, even if it took a long time and a couple of trillion dollars to perk up oil production.

    By the way, it’s by no means clear that we’ve solved ‘peak oil’ forever. Some consultancies are forecasting oil prices over $100 in 2017 as supply/demand balances reverse.

    If you look at other data (initial unemployment claims, for example), you might want to pencil in a recession for 2017. Now, what could cause a recession in 2017? High inflation and monetary tightening? That seems unlikely at present. A financial crisis, also looking unlikely. That leaves a classical oil shock. To prompt a recession, however, we’d need oil prices north of $130 / barrel, and probably at the $150 range, I would guess. Thus, if we think a recession is probable or at least possible, and we think oil prices could return to $100+ by 2017, then the presumption would be that oil prices in fact substantially overshoot to the upside, causing yet another oil shock. So it’s not entirely clear that we’ve put high oil prices behind us in the longer term.

  102. Gravatar of ssumner ssumner
    29. December 2015 at 11:08

    E, Harding, When did I ever claim that two identical NGDP shocks would produce identical outcomes?

    The musical chairs model doesn’t just involve NGDP, it also involves wages. I’d have to see the nominal wage data in both cases.

    Then there is the composition of NGDP. How much of the decline was lower commodity prices? That’s not a big issue for the US, but could be for Australia.

    Murphy had claimed I had no explanation for why slower NGDP growth in Australia had not produce a recession.

    NGDP shocks are basically demand shocks, but there is more to life than demand.

    Steven, I agree that China should have devalued, although not as much as those other countries you mention.

    John, You said:

    “1) Opportunity cost of holding money. Deviating from the Friedman rule (i.e. allowing inflation greater than negative the rate of time preference) is suboptimal because it requires agents to hold an asset (money) that is dominated in interest by other assets.

    2) Sticky prices.”

    I agree that these are both welfare costs of inflation, but they are both utterly trivial and not worth thinking about. The art of macro is realizing what is important. There are three big problems the Fed has to avoid:

    1. The welfare cost of excess taxation of capital due to rapid NGDP growth. This reduces investment and slows economic growth. The solution is to set a NGDP growth target low enough that the excess taxation of capital income is less than it would be with a higher NGDP growth target.

    2. But not too low, as the second big cost is labor market instability, i.e. mass unemployment, which matters 1000 times more than opportunity costs of holding currency (most of which is held by tax evaders anyway, so the “cost” discussed by Friedman is probably a net benefit).

    3. And financial market instability is the third big cost. People often say that unstable inflation hurts borrowers or lenders, but recent research has shown that it is unstable NGDP growth that actually hurts lenders and borrowers.

    When you correctly understand the welfare costs of nominal instability, you realize that the so-called costs embedded in the NK models are trivial and the the real costs point to a need for NGDP targeting.

  103. Gravatar of Gene Frenkle Gene Frenkle
    29. December 2015 at 11:15

    Steven, the conventional wisdom was pervasive which is why George Mitchell, the fracking pioneer, is such an important historical figure. I think once fracking for natural gas was proven economical that the US (and NAFTA region) has been in the geopolitical “catbird seat”. So abundant cheap natural gas gives our economy a competitive advantage because the LNG market is not as fluid as the oil market.

    I also think our natural gas situation is a big factor in why it is unlikely oil prices will go above $70 barrel for the foreseeable future. LNG and oil compete in the electricity markets of island nations. Also, a HUGE gas to liquids facility was going to be built in Lake Charles, LA but was cancelled once the oil price fell, so natural gas can compete directly with oil in transportation given enough time and capital.

  104. Gravatar of ssumner ssumner
    29. December 2015 at 11:15

    John, You said (after me):

    “”Now I repeat my question. Assume a policy that raises NGDP growth expectations to 5%. I don’t care what it takes, say they have to buy the entire planet. Now tell me what does the demand for base money look like given NGDP is expected to grow at 5%? I say about 6% of GDP. That’s how much QE they would have had to do with a sensible policy target.”

    You’re missing my point, I don’t think it’s possible for the Fed to hit its target.””

    I know of no other economist in the entire world who holds this view. But even if you were right (and obviously you are wrong) the worst case is that the US buys up all of planet Earth, and Americans become fabulously wealthy, living off the work of others. Is that so bad?

    On your other points, I never suggested that prices are not sticky, rather I suggested that price stickiness is not a major problem.

    On wage stickiness, yes, you can write down a model where inflation shocks distort the labor market, and create countercyclical real wage movements. But so what? Those models don’t do very well empirically. You are much better off creating models where NGDP shocks are the relevant nominal shock, and where NGDP shocks distort the labor market. In those models real wages need not be countercyclical. It depends on the relative importance of supply and demand shocks.

  105. Gravatar of Steven Kopits Steven Kopits
    29. December 2015 at 11:18

    Scott –

    I think I’ve come to the view that Chris Balding is more or less required reading on China. http://www.baldingsworld.com/

    I’ll throw in my two cents on China in the next few days over at CNBC. It will be a kind of China-as-Hungary view of things.

    Should I not turn up here again this week, Happy Holidays to you, your commenters and readers.

  106. Gravatar of Matt Corbett Matt Corbett
    29. December 2015 at 15:12

    I generally like to agree with you on things, but you are more than a bit monomaniacal about this “one shock” idea. The points below are not in any particular order but I’ll number them so people can argue with me on a point-by-point basis

    1) Keep in mind that the rise and fall of housing investment 2004-8 happened in many countries that operate on different currencies, including the UK, Ireland, Spain,etc and did not occur on a remotely similar scale in a country (Canada) that is highly integrated with the US economy. My #1 pet peeve of all explain-the-crisis theorizing is the nonexistent or perfunctory ways in which the international coincident crises and non-crises are considered.

    2) The sharp drop in housing investment 2006-8 is of a sufficient size to be considered a shock in any macro model that isn’t operating on assume-the-conclusions tautologies.

    3) Of massively underrated importance (not even addressed by DeLong) is the shock of dropping housing value 2006-8. This represented a huge wealth loss for consumers and would have resulted in a shock to consumption independent of monetary policy during mid-2008. Consumption growth 2001-6 exceeded personal income growth, which would be rational consumption smoothing (as would the increased home-equity borrowing) for a consumer who believed the increase in their home’s value was permanent and that such value growth would continue. The most logical explanation for consumer behavior was that 2001-6 they actually believed that “housing never goes down” and were very surprised by what happened to their net worth 2006-8. That difference in expectations vs reality ought to also count as a “shock” in any non-tautological macro model (being effectively a single event it wouldn’t break a rational expectations model since any single error can be considered idiosyncratic).

    4) Related to 3), the drop in housing value put a lot of individuals and companies into financial distress before tight-money 2008, and thus independently of 2008-9 monetary policy. Financial distress increases intermediation costs, and that increases money demand. The best argument you have in your favor for tight money in 2008 is the Milton Friedman-depression-deja vu argument: The Fed ran too-tight monetary because they mistakenly believed policy was loose because they got used to looking only at nominal interest rates. The reason they made that error was because they did not perceive the increase in money demand that resulted from the aforementioned distress. The repeated public assertions of Fed officials in 2007 re: “limited” and “manageable” effects of housing decline make that clear. In short, your monomanical argument re: tight money in 2008 causing all the world’s problems is bolstered rather than weakened by allowing for a pre-2008 shock to money demand. Don’t fight against it.

    5) While it’s not as big as the the other shocks, the sharp rise in real energy & commodity prices 2005-8 was a shock to consumer spending behavior. That also precedes 2008 monetary policy and is thus not caused by it. In concert with a reduction on overall consumer spending, this would have amplified the reduction in demand for other consumption categories. It also ought to be considered a shock, especially given that during the time period the US as a whole was a much larger energy importer than it is today.

  107. Gravatar of Gene Frenkle Gene Frenkle
    29. December 2015 at 15:59

    Matt, the lack of Housing Bubble in Canada is consistent with my theory in that Canadian oil production increased during the pertinent period. So capital and oil profits in the Canadian market were directed towards investment in oil production in response to rising oil prices. The conventional wisdom by the US business class was simply stifling with regard to investment in energy production.

  108. Gravatar of John Handley John Handley
    29. December 2015 at 23:13

    Scott,

    I would like to reiterate my point about wages once again, this time I will try and do it as simply as possible.

    Assumptions:

    1. Labor demand is a negative function of the real wage

    2. Nominal Wages are fixed

    Math:

    W/P_t = -a n_t

    where W is the constant nominal wage, P_t is the price level, and n_t is the level of employment.

    It is obvious from this that rigid nominal wages required countercyclical real wages empirically. What is also obvious is that the reason real wages are too high at any given point is because the central bank has failed to set prices high enough, given the sticky nominal wage. It doesn’t get much simpler than this.

    I completely agreed with you here: “On wage stickiness, yes, you can write down a model where inflation shocks distort the labor market, and create countercyclical real wage movements. But so what? Those models don’t do very well empirically.”

    That’s right, sticky wage models do terribly empirically. The data support sticky prices as the primary friction in the economy, so inflation or price level targeting is clearly the ideal monetary policy. I’m surprised you admit that nominal wage rigidity is had to find in the data, since it basically invalidates your proposition that the divine coincidence regularly fails.

    “I know of no other economist in the entire world who holds this view.”

    So, from this I gather that you don’t know any economists who think that liquidity traps represent constraints on monetary policy. This is intriguing. I’ll give you the benefit of the doubt and assume you misunderstood me. I think that a central bank won’t be able to hit its target in a liquidity trap, unless it fallows the Friedman rule on purpose. It seems that you would suggest the reason that inflation has been below target recently is because the Fed has made it that way. I find this to be absurd: 1) because the Fed has rarely been as close to target as you would suggest is possible; it can’t target anything with pinpoint accuracy practically and 2) because, until recently, we were in a liquidity trap. As of yet, new data haven’t been released, so I don’t know whether or not the excess reserves have begun to disappear. Regardless, the existence of excess reserves is evidence of a liquidity trap in itself. It looks exactly as if we were in a cash-in-advance type world where monetary expansions at the zero lower bound do nothing to the price level because agents refuse to economize on their cash balances.

    “2. But not too low, as the second big cost is labor market instability, i.e. mass unemployment, which matters 1000 times more than opportunity costs of holding currency (most of which is held by tax evaders anyway, so the “cost” discussed by Friedman is probably a net benefit).”

    I’m still unsure how you link NGDP to the labor market, especially since you admit that nominal wage rigidity doesn’t square well with the data. Even then, the price level is the only important bit. I see no direct link between NGDP and the labor market theoretically. I guess something like NGDPLT is implied by sticky wage models, but you’ve repeatedly said that “[t]hose models don’t do very well empirically,” so I don’t really get why you would suggest we follow policy advice from a class of models that isn’t empirically supported, by your own admission.

    Since sticky prices are supported by the data, the natural monetary policy is inflation or price level targeting. Ignore supply shocks, since the point of monetary policy is the approach a competitive equilibrium, in which supply shocks are dealt with optimally, and inflation targeting and/or price level targeting is clearly the welfare maximizing policy because it limits the impact of demand shocks, whereas NGDPLT would exacerbate them.

  109. Gravatar of Gene Frenkle Gene Frenkle
    29. December 2015 at 23:29

    Matt, Norway is in the midst of a Housing Bubble due to conditions similar to the 1980s S&L Crisis/2000s Global Housing Bubble. So Norway is an energy producer but even with record high oil and natural gas prices production has declined for both products. So the energy profits go searching for yield and due to lack of solid energy investments the capital wreaks havoc in the economy.

    Contrast that with Canada and Texas which will have recessions or economic slow downs but the slow downs will have pretty straight forward economic dynamics. So the energy profits in Texas and Canada were reinvested in the energy sector and production increased which is generally how properly functioning markets work. Capital searches for yield and if profits can be found in the same market they will stay in that market. The problem with energy profits is that high energy prices decrease investment opportunities for the overall economy and that has more to do with physics than economics.

  110. Gravatar of flow5 flow5
    30. December 2015 at 08:12

    “a tight money policy in 2008 that caused NGDP to fall during 2008-09 at the steepest rate since the 1930s”
    ———-

    “Tight”? No, the trajectory of monetary policy as early as Dec. 2007 was unambiguously contractionary beginning in July 2008 (less than zero beginning in October 2008).

    The biggest shock? The flattening of the yield curve; the compression of net interest rate margins; and the policy induced dis-intermediation of the non-banks (where savings are paired with investments). AKA: the 1966 S&L credit crunch.

    Our declining standard of living is directly related to a protracted impounding of 10 trillion dollars of voluntary savings within the confines of the commercial banking System (viz., the deregulation of commercial bank’s interest rates). CBs do not loan out existing deposits, saved or otherwise. They always create new money when they lend/invest.

    The Fed can control the monetary “mix”: the investment-driven expansion of real-output with no inflation (simply by the invariable distributed lag effect of money flows, money times velocity).

    Monetary policy objectives should be formulated in terms of desired rates-of-change, roc’s, in monetary flows, M*Vt, relative to roc’s in R-gDp. Roc’s in N-gDp (though “raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp”), can serve as a proxy figure for roc’s in all transactions, P*T, in Professor Irving Fisher’s “equation of exchange”. Roc’s in R-gDp have to be used, of course, as a policy standard.

    Real-growth during the U.S. “golden age” (1953-1965), was accomplished by encouraging non-bank growth (principally the S&Ls), matching savings with investment outlets. During this period, Vt increased instead of M. After c. 1965, given the portfolio composition of the CBs, the redistribution of economic growth via CB financing (money stock growth), generated more consumption – and less investment.

    Congress can do much more to legislate cap-ex and therefore influence productivity. Investment gravitates towards the most profitable disposition of savings (the stock market’s surge with a 15 percent long-term capital gains tax being a good example).

  111. Gravatar of ssumner ssumner
    31. December 2015 at 09:51

    Steven, The guy who says 1/2 of all houses in Beijing are empty? The guy who says China has a very high cost of living?

    Matt, It’s clear you have not read my arguments for this claim. I suggest you google “The Real Problem is Nominal”

    1. The UK had a big price run-up, and then prices stayed high. In Japan and Germany there was no housing boom. And yet all three had recessions comparable to the US.

    2. You are wrong about housing. The unemployment rate in the US stayed very low between January 2006 and April 2008, even as housing production fell more than 50%, as workers from residential housing construction shifted to exports, commercial real estate, services, and many other sectors.

    3. You said: “This represented a huge wealth loss for consumers and would have resulted in a shock to consumption independent of monetary policy during mid-2008.”

    This is flawed Keynesian thinking. A loss of wealth does not make NGDP go down, monetary policy determines NGDP. And on the supply-side, why would a loss in wealth make people want to take long vacations?

    4. Yes, the Fed misjudged monetary policy.

    5. Energy shocks don’t impact NGDP, as long as you have sound monetary policy. Instead the Fed tightened policy sharply in late 2007 and early 2008.

  112. Gravatar of ssumner ssumner
    31. December 2015 at 10:08

    John, You are completely wrong about real wages. Sticky wages do not imply countercyclical real wages. Read my JPE paper. Your mistake is to assume all changes are simply movements along a stable labor demand curve. The curve can shift.

    You said;

    “So, from this I gather that you don’t know any economists who think that liquidity traps represent constraints on monetary policy.”

    Don’t be ridiculous. Please read what I write more carefully. You are the one who said the Fed could buy up all of planet Earth with currency, and still create no inflation, not me. You are the only one who believes this, AFAIK. That’s what I was responding to. Don’t switch to a different and much more debatable claim, and thereby misstate what I am saying.

    You said:

    “I’m still unsure how you link NGDP to the labor market, especially since you admit that nominal wage rigidity doesn’t square well with the data.”

    I don’t admit that at all. See my 1989 JPE paper. You are not paying attention to what I am saying. Wage stickiness fits the data very well, as long as you understand that real wages are meaningless, and should be eliminated from macroeconomics. It’s all about W/NGDP. Whatever you say about real wages, my response will always be the same “I don’t care, because real wages don’t matter.” The price level as measured by the BLS is a number pulled out if thin air, which is basically unrelated to the price level in macro models.

  113. Gravatar of Gary Anderson Gary Anderson
    31. December 2015 at 10:17

    Scott, you said: “The UK had a big price run-up, and then prices stayed high. In Japan and Germany there was no housing boom. And yet all three had recessions comparable to the US.”

    1. The UK is used to blowing housing bubbles. 1 every ten years.

    2. Germany does not permit toxic loans for its citizens, only for PIIGS and Americans.

    Also, you said: “Energy shocks don’t impact NGDP, as long as you have sound monetary policy. Instead the Fed tightened policy sharply in late 2007 and early 2008.”

    LIBOR exploded upward and crossed the Swaps rate in late 2007 and the Fed permitted it, even though it froze the banking system. That was the exact time the Great Recession began. My article link shows the chart at the back of the article. This was prior to IOR being put in place.

  114. Gravatar of Gene Frenkle Gene Frenkle
    31. December 2015 at 19:47

    “Energy shocks don’t impact NGDP, as long as you have sound monetary policy.”

    This is the key quote, except replace “sound monetary policy” with properly functioning capital markets. So Canada’s capital market performed properly by directing capital at the energy market and increasing oil production. During the 2000s Norway’s capital market functioned properly by directing oil profits at the related industry of natural gas production. However, the GLOBAL oil market clearly did NOT function properly as oil prices increased but production plateaued. So the Housing Bubble/Financial Meltdown was the product of a dysfunctional energy market that impacted global capital markets.

  115. Gravatar of Major.Freedom Major.Freedom
    1. January 2016 at 07:20

    “Energy shocks don’t impact NGDP, as long as you have sound monetary policy.”

    Assuming the definition of “sound” is “NGDP targeting.” , and is as such a statement based on a premise that is itself.

    Replace “NDGP” with any variable, and define “sound” as targeting that variable, and no more and no less is said.

  116. Gravatar of Don Geddis Don Geddis
    1. January 2016 at 09:19

    Gene: you’re confusing real with nominal. You’re giving examples of the beginning of a real supply shock, and then noting that with “properly functioning capital markets”, investment will flow to moderate the real supply shock. And of course, if you wind up not having a deep real shock, then you won’t get an NGDP collapse either.

    But you’ve totally missed the point. The point is that NGDP is a nominal quantity, not a real quantity. NGDP can remain on target (given “sound monetary policy”), even if there is an actual, deep, real supply shock (like an oil production collapse).

    Keeping nominal GDP on target does not require keeping real GDP on target.

  117. Gravatar of Don Geddis Don Geddis
    1. January 2016 at 09:22

    Major.Freedom: why did you add the dot between your fake names? You used to just have a space, back before you spent a year pretending to be “Geoff”. Just curious: what is the significance of replacing the space with the period?

  118. Gravatar of Gene Frenkle Gene Frenkle
    1. January 2016 at 11:36

    Don, I have laid out a coherent theory and backed it up with facts. Basically 10 of the top 15 largest companies on earth screwed up really badly during the 2000s and you contend that was innocuous with regard to the overall economy. What happened to their profits?

    I wonder why Apple even tried to top the Blackberry in 2007 when Blackberry had a great product and was making big profits? Could it be that Apple wanted to make even bigger profits in the tech sector?

  119. Gravatar of Don Geddis Don Geddis
    1. January 2016 at 16:20

    Gene Frenkle: Even this followup comment continues to be sloppy about distinguishing real effects from nominal effects. You talk about companies “screwing up”, or Apple dominating phone sales. This is discussion about real wealth, physical products, ownership and market share, etc. That is the real economy, and for sure there can be a reduction of output in the real economy.

    What you have failed to do, is describe any necessary connection between a reduction in real economy output, and a reduction in nominal GDP. The whole point of this blog, is that real shocks (like you describe), can — in the presence of an incompetent central bank — cause NGDP to drop, which then subsequently — on its own! — causes a business cycle recession. But that it is possible — with a more competent central bank — to break the connection between the real shock and the drop in NGDP. And (continues the argument), even if you have a real shock in a particular industry, but the central bank keeps NGDP on trend, then the overall macroeconomy will not see a business cycle recession, unemployment won’t rise significantly, etc.

    Perhaps you dispute this. But you’re going to have to be more specific about why. All you’ve been talking about is various kinds of real shocks. But your comments are irrelevant to this blog, because nobody is disputing that industry-specific real shocks can happen.

    If you disagree, but want to make a relevant comment, then you either need to justify why you think a motivated central bank cannot continue to target NGDP during a real shock; or you need to justify why an industry-specific real shock necessarily causes highly elevated economy-wide unemployment even if NGDP stays on trend.

    I haven’t seen you say anything relevant about nominal GDP (only real GDP), so your comments aren’t particularly relevant to anything being discussed on this blog.

  120. Gravatar of Gene Frenkle Gene Frenkle
    1. January 2016 at 17:43

    Don, I went back and searched “Volcker” on this site and it appears Sumner believed that the US had “sound monetary policy” during the first Reagan term. Guess what happened at that time? The Texas Real Estate Bubble that had almost the exact same conditions as the 2000s Housing Bubble. So oil was expensive but for some reason US oil production plateaued. So what happened to those oil profits in the context of “sound monetary policy”? The profits wreaked havoc in the Texas economy because they were not directed at increasing oil and gas production.

  121. Gravatar of Lorenzo from Oz Lorenzo from Oz
    1. January 2016 at 19:30

    Gene Freckle: and did the other 49 states with Volcker’s monetary policy also have real estate bubbles?

    Even the housing booms and busts in the lead up to the GFC were in particular housing markets. As Paul Krugman pointed out in his Zoned Zone versus Flatland analysis.
    http://www.nytimes.com/2005/08/08/opinion/that-hissing-sound.html

    Monetary policy cannot guarantee protection against asset booms and busts, no matter how sound it is. The UK spent most of the C19th under the gold standard (i.e. low inflation and interest rates), but also had various asset booms and busts which are fairly inevitable in a technologically dynamic society, since technological dynamism, by its nature, leads to sudden shifts in information which leads to sudden shifts in asset prices.

  122. Gravatar of John Handley John Handley
    1. January 2016 at 19:30

    Scott,

    From the abstract of your paper:

    “In this study, we found that real wages were either procyclical or countercyclical depending on the sample period chosen. Employment changes generated by aggregate supply shocks were associated with procyclical real wage movements, while during years dominated by shifts in aggregate demand, real wages were highly countercyclical.”

    I don’t know about you, but what I draw from this is that 1. countercyclical real wages are a requirement if nominal wages are rigid and 2. This is the case if you know how to filter out supply shocks. I also learn that you, at the point of writing the paper, didn’t have any qualms with deflating nominal wages to determine real wages. It seems that your paper would be completely useless if, as you say “[t]he price level as measured by the BLS is a number pulled out if thin air, which is basically unrelated to the price level in macro models.”

    So, in the case that nominal wage rigidity does exist, inflation should be higher if employment is low and lower if employment is high. If both wages and prices are sticky, then the ideal target for inflation would move around with output. This seems like exactly what the Fed tries to do with a Taylor Rule.

  123. Gravatar of Gene Frenkle Gene Frenkle
    2. January 2016 at 16:55

    Lorenzo, it was actually the Texas/Gulf Coast Real Estate Bubble as cities like Mew Orleans and Mobile had a lot of oil and gas jobs. I stated earlier that capital markets were less advanced so profits stayed closer to the market they came from.

    Houston recovered pretty quickly due to consolidation as companies moved jobs from NO and Mobile to Houston. So if you visited NO or Midland in 2000 you might have wondered who worked in the tall office building in those cities? They were empty except some attorneys that got cheap rent. Houston also recovered quickly as the industry focused more on natural gas…Enron was a natural gas company.

  124. Gravatar of ssumner ssumner
    2. January 2016 at 18:15

    Gary, You said:

    “The UK is used to blowing housing bubbles. 1 every ten years.”

    Not true.

    John, You said:

    “I don’t know about you, but what I draw from this is that 1. countercyclical real wages are a requirement if nominal wages are rigid”

    No, that’s not at all what we claimed, just the opposite. Nominal wages are always sticky but real wages are not always countercyclical. Only sometimes. I don’t know how I could be any clearer. It depends on the type of shock hitting the system. For instance, during the 1920s and 1930s real wages were very countercyclical. But during the 1970s they were procyclical.

    So there is no “requirement” that they be countercyclical.

    You said:

    “So, in the case that nominal wage rigidity does exist, inflation should be higher if employment is low and lower if employment is high.”

    No, both inflation and unemployment were quite high at times during the 1970s. Friedman and Phelps predicted the unreliability of a stable Phillips Curve as far back as 1968.

    You said:

    “This seems like exactly what the Fed tries to do with a Taylor Rule.”

    The Taylor Rule may work fairly well under certain conditions, but not when the natural rate of interest is very unstable, and/or when the potential level of output is difficult to ascertain.

  125. Gravatar of John Handley John Handley
    2. January 2016 at 20:10

    Scott,

    “No, that’s not at all what we claimed, just the opposite. Nominal wages are always sticky but real wages are not always countercyclical. Only sometimes. I don’t know how I could be any clearer. It depends on the type of shock hitting the system. For instance, during the 1920s and 1930s real wages were very countercyclical. But during the 1970s they were procyclical.”

    I’m fairly sure I made that distinction properly in my comment. See: “2. This is the case if you know how to filter out supply shocks.” That is, business cycles caused by demand shocks must exhibit countercyclical wages.

    “No, both inflation and unemployment were quite high at times during the 1970s. Friedman and Phelps predicted the unreliability of a stable Phillips Curve as far back as 1968.”

    Fine, inflation minus expected inflation should be high when unemployment is high. Regardless, my point does not require a stable Phillips Curve; inflation should be high so as to reduce the real wage given the sticky nominal wage.

    “The Taylor Rule may work fairly well under certain conditions, but not when the natural rate of interest is very unstable, and/or when the potential level of output is difficult to ascertain.”

    How exactly is NGDPLT supposed to help? Suppose the Fed does have an NGDPLT and the interest rate at which NGDP is on target becomes negative. There is no difference between NGDPLT and inflation targeting in this case; at some point the interest rate will be above the natural rate and there will be a recession.

  126. Gravatar of Gene Frenkle Gene Frenkle
    2. January 2016 at 21:35

    Don, so I searched Norway and “market monetarism” and I came up with this,

    http://marketmonetarist.com/2013/02/21/is-norges-bank-targeting-nominal-gdp/

    Currently many believe Norway is experiencing a Housing Bubble and lo and behold the conditions I laid out have been in effect.

  127. Gravatar of Don Geddis Don Geddis
    2. January 2016 at 23:01

    John Handley: “Suppose the Fed does have an NGDPLT and the interest rate at which NGDP is on target becomes negative.

    But if a central bank is running an NGDPLT monetary policy, then it neither targets nor cares about nor monitors interest rates. Instead, the central bank conducts OMOs to change the money supply. Money supply changes (and expectations), can alter NGDP without going through the interest rate channel.

    Yes, it is possible that under some conditions, interest rates might drop to zero. That doesn’t prevent OMOs (and expectations) from increasing NGDP. There is no requirement at all that interest rates turn negative. That’s never a necessary condition for further monetary easing.

  128. Gravatar of John Handley John Handley
    2. January 2016 at 23:41

    Don,

    “But if a central bank is running an NGDPLT monetary policy, then it neither targets nor cares about nor monitors interest rates. Instead, the central bank conducts OMOs to change the money supply. Money supply changes (and expectations), can alter NGDP without going through the interest rate channel.”

    This doesn’t matter, money demand is still a function of the nominal interest rate, even if it’s now endogenous. If, at some point, the interest rate associated with NGDP being on target is below zero (i.e. the central bank cannot satiate money demand no matter what it does to the money supply), then there will be a recession.

    “Yes, it is possible that under some conditions, interest rates might drop to zero. That doesn’t prevent OMOs (and expectations) from increasing NGDP. There is no requirement at all that interest rates turn negative. That’s never a necessary condition for further monetary easing.”

    See some of my previous comments; open market operations are theoretically useless at the zero lower bound. For more of an analysis of ‘unconventional monetary policy’ in a liquidity trap see http://web.mit.edu/krugman/www/trioshrt.html

  129. Gravatar of ssumner ssumner
    3. January 2016 at 10:18

    John, Then don’t say countercyclical wages “are a requirement”, when they are not. And don’t say the wage cyclicality data undercut sticky wages, when they support the theory of sticky wages, as we showed in our 1989 paper.

    You said:

    “Fine, inflation minus expected inflation should be high when unemployment is high.”

    Why?

    You asked:

    “How exactly is NGDPLT supposed to help?”

    There is no longer a need to estimate the potential level of output under NGDPLT.

    You asked:

    “Suppose the Fed does have an NGDPLT and the interest rate at which NGDP is on target becomes negative.”

    I’ve done many, many posts on this. The Fed has two choices, raise the NGDP target, or expand its balance sheet as much as necessary to hit the existing target. As a practical matter, I very much doubt this “problem” would ever occur under a 5% NGDP level target.

    You said:

    “If, at some point, the interest rate associated with NGDP being on target is below zero (i.e. the central bank cannot satiate money demand no matter what it does to the money supply), then there will be a recession.”

    You have reversed causation. In the real world it is tight money policies that cause recessions, which then cause the Wicksellian equilibrium rate to fall below zero.

  130. Gravatar of John Handley John Handley
    3. January 2016 at 14:17

    Scott,

    ““Suppose the Fed does have an NGDPLT and the interest rate at which NGDP is on target becomes negative.”

    I’ve done many, many posts on this. The Fed has two choices, raise the NGDP target, or expand its balance sheet as much as necessary to hit the existing target. As a practical matter, I very much doubt this “problem” would ever occur under a 5% NGDP level target. ”

    A higher NGDP target would not help, it would just push the equilibrium rate lower in the short run. Yes, in the long run, a higher target rate of NGDP growth would be consistent with a higher interest rate, but in the short run, this is not the case. The problem is that high interest rates mean that money is expected to be loose, not that it currently is. If NGDP is expected to grow quickly, then the interest rate will be high, but this says nothing about whether current NGDP is high relative to past NGDP. In fact, because under NGDPLT, NGDP is expected to revert to trend, a high interest rate, and therefore high expected NGDP growth, will basically always be consistent with NGDP below trend.

    “You have reversed causation. In the real world it is tight money policies that cause recessions, which then cause the Wicksellian equilibrium rate to fall below zero.”

    This is where I completely disagree. Suppose the Wicksellian natural rate is the real interest rate at which the economy is in competitive equilibrium. In this case, the natural rate is always determined by LRAS; monetary policy has nothing to do with it.

  131. Gravatar of Britonomist Britonomist
    3. January 2016 at 14:52

    John are you seriously 15? Because that’s fairly impressive that you understand and can write about these concepts at your age – you’ve got a bright future.

  132. Gravatar of Gene Frenkle Gene Frenkle
    3. January 2016 at 15:01

    Not really a “shock” but an important event–Bernanke’s GSG speech in March 2005,

    http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/

  133. Gravatar of John Handley John Handley
    3. January 2016 at 15:07

    Britonomist,

    Yep, I’m really fifteen. Thanks!

  134. Gravatar of John Handley John Handley
    3. January 2016 at 15:22

    Scott,

    ““Fine, inflation minus expected inflation should be high when unemployment is high.”

    Why?”

    Well, suppose firms face menu costs for changing wages [prices]. In this case, the lagged wage [price] is in the ‘menu cost function,’ so the firm will rationally take the next period into account when deciding this period’s wage [price].

    Alternatively, suppose firms are aware that there is a constant chance that they won’t be able to change the nominal wage [price] in the next period. In this case, the firm will rationally take the future into account when deciding wages [prices] that have a chance of being used in the future.

    Or, if the firm consciously enters multi-period wage [price]contracts with its workers, it will use its expectations of the future as well as current conditions to decide the wage [price] that will prevail over the course of the contract.

    (Basically: Rotemberg’s menu costs, Calvo’s fairy, or Taylor’s contracts)

    In all of these cases, we get something closely resembling the canonical NKPC, where inflation minus expected inflation indicates the size of the output gap. Or, alternatively, inflation depends on the discounted sum of expected marginal costs, instead of simply the current marginal cost.

    This is the Keynesian answer to stagflation; the reason output was low in the 1970s is because everyone expected inflation to accelerate. Now, since inflation expectations are basically anchored, the Keynesian answer to RBC and new-monetarist critique that it’s hard to see a Phillips curve in the 2008-2015 data is either that wages are downardly rigid, so the Phillips curve becomes flat at low inflation rates or that the current data doesn’t actually invalidate the NKPC (see https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr618.pdf).

    In other words, the key lesson from NK economics is that the relationship between inflation and output is structural, it just depends on expectations of the future as well as (if not more than) current conditions.

  135. Gravatar of Don Geddis Don Geddis
    3. January 2016 at 20:33

    John Handley: “money demand is still a function of the nominal interest rate

    The current nominal interest rate certainly influences money demand. But money demand is surely not a function only of the nominal rate. Many other things influence money demand as well.

    the interest rate associated with NGDP being on target is below zero (i.e. the central bank cannot satiate money demand no matter what it does to the money supply), then there will be a recession.

    Sure, I accept your conclusion, in that hypothetical world. But the antecedent never holds. Money demand is finite, and cannot exceed the central bank’s infinite ability to create new money. E.g., Sumner’s “buy up all of planet earth” scenario. It is not realistic to imagine that prices (and thus NGDP) will not rise, even with a purchaser that will buy any quantity of items at any price.

    open market operations are theoretically useless at the zero lower bound

    I disagree. If your model suggests that conclusion, then your model is wrong. There is plenty of empirical evidence (e.g. Japan in the last few years) that your claim is wrong. If your model draws absurd conclusions, that should cause you to doubt your model.

    liquidity trap

    Like you, Krugman assumes that money demand becomes infinite at the ZLB. He then explores the consequences of this assumption. But the assumption is false. (He also has only a brief mention of expectations, admits they could also solve the problem, but doesn’t really know how to achieve them. NGDPLT is one effective approach to properly setting expectations.)

  136. Gravatar of Scott Sumner Scott Sumner
    4. January 2016 at 12:40

    John, You said:

    “A higher NGDP target would not help, it would just push the equilibrium rate lower in the short run.”

    No, the nominal Wicksellian equilibrium rate would rise, as expected NGDP growth rose. Check out what happened when FDR devalued in 1933, and we were at the zero bound.

    Check out what happened to the value of the yen when Japan raised their inflation target.

    You said:

    “Suppose the Wicksellian natural rate is the real interest rate at which the economy is in competitive equilibrium.”

    Yes, many people make that assumption, but it’s clearly not true. In a deep recession there is little demand for credit, and the Wicksellian natural rate falls.

    I don’t understand your comments about the 1970s. The 1970s were the exception, generally unemployment is low when inflation is above expectations. Check out Friedman’s natural rate hypothesis. Phillips had 100 years of data pointing in exactly the opposite direction from your 1970s example. And when inflation plunged well below expectations in late 1981 and early 1982, unemployment soared. Ditto for late 2008 and early 2009.

  137. Gravatar of John Handley John Handley
    6. January 2016 at 21:09

    Scott,

    “I don’t understand your comments about the 1970s.”

    I said that inflation was expected to accelerate, which means that expected inflation is, by definition, above current inflation. That’s why the NKPC works for the 1970s while the static/backward looking version doesn’t.

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