Rules vs. political interference

The relative advantages of rules vs. discretion is a frequent topic of debate in the field of monetary economics. But perhaps the more important distinction is “rules vs. political interference”. The following is from a column I wrote for “The Bridge“:

When considering the President’s criticism of Chairman Powell, it’s important to distinguish between tactical disputes and strategic disputes. Thus, one could imagine someone preferring that the Fed set a different inflation target, say four percent inflation instead of the current two percent target. That would represent a difference in preferred strategy. Alternatively, a Fed critic might accept the desirability of the two percent inflation target, but question whether the current policy stance was appropriate, i.e. likely to achieve two percent inflation. To my knowledge, the President has not made clear whether he is making a tactical or strategic criticism. In fairness, one often sees Fed critics gloss over this distinction. . . .

If Fed independence is desirable, then it is important to consider policy targets that are less ambiguous, less likely to be criticized by public officials. For instance, the ECB has a single mandate to control inflation and thus may have an easier time brushing aside political calls for easier money to boost the economy. Unfortunately, a simple inflation target is subject to the “never reason from a price change” problem. Rising inflation might represent excessive spending, as in the 1960s, or it might represent an adverse supply shock, as during 2007-08. If the Fed responds to supply-side inflation in the same way as demand-side inflation, they may end up destabilizing the economy.

A better approach is to find a single policy goal that best incorporates the Congressional goals embedded in the dual mandate. An increasing number of prominent economists have suggested that targeting nominal GDP growth at a steady rate of four or five percent/year is the best way to achieve the dual mandate, as NGDP growth includes both inflation and real GDP growth. With a single NGDP growth target, the Fed would have an easier time brushing aside political criticism.

Read the whole thing.

A follow-up post on nationalism

A quick point about my previous post.  I regret saying this:

Perhaps Brooks is not familiar with how the term ‘nationalism’ has actually been used over the past 100 years.  It’s all about zero-sum thinking, us vs. them.

Obviously David Brooks knows more history than I do.  I should have said something like:

I wish Brooks had put more weight on how the term ‘nationalism’ has actually been used over the past 100 years.  It’s all about zero-sum thinking, us vs. them.

I really hate nationalism.  And yet while I don’t agree with what I see as his attempt to put a positive spin on the term, it was clearly well-intentioned on his part.  So I apologize for the dismissive way I made my point.

HT:  Christian List

 

Election observations

A few observations on the election:

1.   Focus on the referenda.  Marijuana was legalized in Michigan, by a fairly wide margin.  This suggests that it’s only a matter of time before other Midwestern states follow suit.  Legalization failed in North Dakota, which doesn’t bode well for  . . .  South Dakota?  Voters approved medical marijuana in Missouri and Utah.  Minimum wages continue to be highly popular, even in red states, while expanded rent control failed in California by 62-38.  Go figure.   I actually voted for a tax increase (on gasoline), and it was approved.

2.  Conservatives continue to push for expanded Obamacare, as three more deep red states voted for Medicaid expansion, which was part of the original Obamacare. The GOP insists that Obamacare represented the socialization of health care, but somehow forgot to repeal it.  And now it’s growing with support from GOP voters.

3.  Colorado voters rejected progressive income taxes.  Voters in other blue states like Massachusetts and Washington had previously rejected progressive income taxes.  Progressives should just give up; it’s a bad idea.  Instead, institute a progressive payroll tax.

4.  The election was not actually a referendum on Trump, although it’s being interpreted that way.  The Dems won the popular vote by about 9%, which suggests the public opinion polls were broadly correct.  Betting markets don’t show much change in the odds of Trump being re-elected (currently 38%.)  I actually don’t think Dems should be all that pleased with those odds, as the leading Democratic possibilities at Betfair all look like losers to me.  (Except Biden—and I doubt he’ll get the nomination.  He would have won in 2016.)  They need to nominate someone who can win Wisconsin, Michigan and Pennsylvania.

5. I voted for a left wing Democrat in CA-45 district, who appears to have lost.  But I’m fine with that, as I only voted for her to get a House that would investigate Trump—the only issue that mattered to me.   I don’t like the idea of a President who is above the law, as has been the case since Trump took office.  I recall how the GOP was willing to hold Nixon to account back in 1974, and am disgusted by the spinelessness of the modern GOP.

It would actually be doing Trump a favor for Congress to subpoena his taxes, allowing him to fulfill his campaign promise to release the tax returns.  The Dems may pass some bad legislation, but if it becomes law I’ll blame Mitch McConnell, who now has tight control of the Senate.  After doing nothing to fix our country over the past 8 months, I’m expecting a bunch of foolish big government legislation from the GOP Senate.

6.  I was glad to see Brat lose in Virginia.  In retrospect, his upset win in 2014 was a signal of the GOP’s descent into Trumpism.  Sad to see Steve King re-elected by the voters in Iowa.  A state that voted strongly for Dukakis in 1988 (when California went for Gerald Ford Bush) is now so right wing that they elected a white nationalist anti-Semite with views too noxious for even the National Review.  Also glad to see the GOP’s most notorious Putin supporter (in my very own Orange County) likely went down to defeat.

7.  Only 13 districts voted for both Romney and Clinton, and I live in one of those districts.  I’m pretty sure that you’d find the more numerous districts that went Obama then Trump are on average dumber that the Romney/Clinton districts, even though both types are swing (purple) areas.  There’s a logical explanation for going Romney then Clinton.  There is no logical explanation for going Obama then Trump.

8. The Dems need to adopt a “patriotism, not nationalism” theme. I associate nationalism with European politics: protectionism, authoritarianism, xenophobia, and bigotry against Jews, Roma and Muslims.  In America, the bigotry is usually directed against Mexicans, Muslims, and blacks.  A true patriot supports Americans of all ethnicities, and favors free trade and expanded immigration.  Imagine where America would be today without all the immigration of earlier decades, which was opposed by the nationalists of the 19th and early 20th century.  David Brooks has a recent column where he claims to be a nationalist, but he’s actually describing patriotism:

Donald Trump says he is a nationalist, but you can’t be a nationalist if you despise half the nation — any more than you can be a good father if you despise half your children. You can’t be a nationalist if you think that groups in the nation are in a zero-sum conflict with one another — class against class, race against race, tribe against tribe.

Perhaps Brooks is not familiar with how the term ‘nationalism’ has actually been used over the past 100 years.  It’s all about zero-sum thinking, us vs. them.  Reminds me of millennials who say they favor “socialism”; you know, like in Denmark.  :)

When should we start worrying about inflation?

Jan Hatzius is now forecasting that inflation will soon exceed the Fed’s 2% target for the PCE:

Goldman’s Jan Hatzius wrote Sunday that unemployment should continue to decline to 3% by early 2020, noting the labor market also has room to accommodate more wage growth. Hatzius predicted that average hourly earnings would likely grow in the 3.25% to 3.50% range over the next year.

That rapid pace of wage growth could set the Fed up for a “meaningful overshoot” of its 2% inflation target.

“If unemployment is (perhaps well) below 3.50% and inflation above 2%, we think Fed officials will need to be quite confident that growth will stay at or below trend to sound an all-clear on further rate increases, which could translate into a large easing in financial conditions and a return to growth rates well above trend,” Hatzius wrote.

Hatzius wrote that the economy needs to slow to avoid overheating, and worries that inflation could run away if the Fed does not take action. For now, Goldman has a baseline forecast of 2.3% for core PCE — which it noted as within the Fed’s comfort zone — but warned that inflation is poised to move higher on President Donald Trump’s tariffs.

The note also warned that with the labor market continuing to tighten, inflation will likely push “notably, not just slightly, higher.”

Hatzius said a slowdown could stabilize the unemployment rate, and already predicts that the economy will calm to a GDP growth rate of 2.6% in the fourth quarter. But if the slowdown is not enough, unemployment could destabilize into 2020 and inflation could run rampant.

If Hatzius is correct (and I greatly respect his judgment), then Fed policy is currently too expansionary.  The Philadelphia Fed consensus forecast is for 2.1% PCE inflation in 2019 and 2020.  (I’ll be very interested in the next forecast, which should be out soon.)  On the other hand, TIPS spreads continue to show sub-2% inflation over the next 5 years (once adjusted for the CPI bias) but they are subject to bias from a modest risk spread.

So what would tell me that we have an inflation problem?  Lots of news articles saying “It’s not that bad, because if you take out the rise in the price of X, inflation is only running at Y”.  I saw literally dozens of such articles in the 1960s and 1970s, and essentially 100% of them were incorrect.

It is true to inflation indices can be distorted by the actions of individual markets, but only if it reduces aggregate supply.  In that case, you’d see rising inflation, falling RGDP growth and modest NGDP growth.  In fact, both NGDP and RGDP growth have recently been quite strong, so don’t believe any articles about it not being so bad because it’s concentrated in health care, or education, or rents, or tariffs, or kiwi fruit prices, or some other special factor.  Special factors are not an excuse when NGDP growth is at a pace that is unsustainable if we hope to keep inflation close to 2%.

I’m not a forecaster, so I’m still pretty agnostic on this.  My baseline forecast is still for a slowdown in NGDP growth (predicted by the Hypermind market) and no recession or high inflation in the near term.  That’s good.  But I’ll be watching very closely for signs of excess.  The most likely policy mistake being made right now is too easy, not too tight.

PS.  Hypermind is currently forecasting 12-month 5.2% NGDP growth.  That represents a forecast of a slowdown to 4.2% over the next two quarters, from the 6.2% (actual) rate over the past two quarters.

Cheesecake dreams

I came across some interesting tidbits while putting together a post on LA mass transit over at Econlog, which I’ll share with you over here.

1.  It seems that in today’s election the affluent neighborhood of Eagle’s Landing will try to secede from the majority black city of Stockbridge, Georgia.  (BTW, don’t read “black” as poor and “affluent” as white.  Stockbridge is not a poor city, and a substantial number of affluent blacks live in Eagle’s Landing.)  What caught my eye is the motivation for this attempt at secession:

The Eagle’s Landing plan seeks to merge into its boundaries the primest real estate and wealthiest households from the city of Stockbridge, leaving behind a smaller, mostly African American population with fewer resources to pay for Stockbridge city services. The Eagle’s Landing city proposal will be voted on via ballot referendum on November 6, but Stockbridge residents who live outside the Eagle’s Landing footprint—the people who will be most hampered by the division—are not eligible to vote on it. Meanwhile, neither lawsuits nor letters from global finance agencies warning that the proposal could wreck economies across Georgia have been able to stop it.

And the reason for tearing Stockbridge apart to start this new city? It has something to do with cheesecake. Or at least cheesecake is what was emphasized in a conversation with Vicki Consiglio, the chair of the Committee for the City of Eagle’s Landing, held at the Eagle’s Landing Country Club.

 “I serve on the Henry County zoning board,” said Consiglio, “and so I kept seeing all of these places like Bojangle’s, Waffle Houses, dollar stores, and all this going up in our county. And I was like, why can’t we get a Cheesecake Factory, or a P.F. Chang’s or a Houston’s? We have areas that have high incomes, so what’s the deal?” . . .

According to Consiglio, The Cheesecake Factory did consider coming to Stockbridge at one point, but balked after an income study revealed that the average median income was too low to justify placing a restaurant there. Consiglio blames this on Stockbridge, where median household income is $54,769. So in 2016, Consiglio and her neighborhood colleagues, some of them former Stockbridge city officials, began meeting to figure out what they could do to land if not a Cheesecake Factory, then a Cheesecake Factory-esque restaurant, because the dining halls and pubs in the country club would no longer do.

I’m sure Tyler Cowen or Scott Alexander could find a witty title for this story, but I’m sort of speechless.  Any attempt on my part would (already has?) come across as condescending.  BTW, there actually is a serious economic story here, relating to questions such as who absorbs Stockbridge’s bond obligations.

As an aside, I like key lime cheesecake–how’s that for bad taste! 

2.  Last week my wife and I drove through LA’s skid row neighborhood, which has an extremely dense concentration of homeless people.  This is by far the poorest neighborhood I’ve ever seen while traveling throughout the US.  Just a few miles away you have the ultra rich suburb of Beverly Hills.  But here’s what I find surprising, the difference in poverty rates between Skid Row and Beverly Hills is less than I would have imagined.  Beverly Hills is 10.2% poor while Skid Row is 41.8% poor.

You may be asking, “What’s so confusing out that; Skid Row is 4 times more poor, exactly what’s you’d expect.”  No, I get that it’s poorer; I’m surprised the gap is not even larger.  If you asked me to guess, I might have estimated that Beverly Hills was 2% to 4% poor—a few live-in nannies, plus the odd 30-year old living in his parents’ basement, while Skid Row was 80% poor.  I’m surprised the gap is not even larger.

I’m too lazy to do the research, but is there some sort of national tendency for poverty rates to cluster close to the national average of 14%, regardless of how rich or poor a neighborhood is?

3.  LA’s homeless problem got me thinking about the today’s rent control referendum in California.  Obviously, I oppose all rent controls.  At the same time, I doubt that rent controls are a major cause of homelessness.  Think about the following three groups of people:

a.  My daughter, and 5 other UCLA students who share two small rooms and one bath in a dorm.

b.  Six illegal immigrants from Fujian who share a single room in a Chinatown apartment building, work in a restaurant, and send money home.

c.  Six homeless men living in tents on LA sidewalks.

While LA’s housing policies undoubtedly make things a bit more difficult for the homeless, I’m really having trouble seeing how they could be a major cause of the problem.  Around here, fast food restaurants are desperate to get unskilled labor, even at a starting wage of $13.50/hour ($27,000/year.)  Now you may argue that $27,000/ year is a pretty low income in LA’s housing market.  But that’s entirely missing the point.  At no time in all of human history has it been assumed that poor people would be able to afford to live alone.  The expectation has always been that lower income people will live in groups, to spread housing costs.  If you have 4 people making $27,000/year, their combined income is easily large enough to share a decent LA apartment.  Lots of young professionals share apartments in California.

Please don’t read this post as offering advice to homeless people.  I understand that they may not be able to do what I suggest in the post.  My actual point is entirely different—homelessness has very little to do with high housing costs.  The reasons why it might be hard for 4 homeless people to get jobs flipping hamburgers and then share an apartment have little to do with cost; rather there are other more complex social issues.  Maybe some have drug issues that make it hard to hold a job.  Maybe some have mental health issues that make it hard to live with roommates.  Maybe they face discrimination from landlords. I could imagine any number of reasons why it’s hard to get housing.  What I can’t imagine is how any of this could be fixed by building more housing.  If I’m missing something here, please enlighten me.