My views on monetary policy: An update

It’s time to update my current preferences on monetary policy:

Monetary authority structure:

1.  As in the UK, monetary policy decisions should be made by a committee of monetary specialists.  They need not be economists, but they must be experts. Self-taught is fine. Financial regulatory decisions should be made by a separate (Treasury) committee, composed of experts on finance.

2.  The FR Board should continue to be independent.  The regional Fed banks should be abolished.

3.  The Fed balance sheet should be moved over to the Treasury so that the Fed does not incur any balance sheet risk.

4.  Anyone should be able to have a “reserve” account at the Treasury. It would pay no interest.  I.e., electronic cash.

5.  Paper currency should not be abolished (as it provides privacy.)

Policy Tool:

The Fed should use just one tool, open market operations.  Generally these operations should involve Treasury securities.  There’s no need for the Fed to recommend discount lending, reserve requirements and interest on reserves as tools of monetary policy.  Other assets should be purchased only if necessary.  If we don’t get my optimal NGDP level targeting strategy and the zero bound problem occurs frequently, then there is a much stronger argument for making the purchase of other (non-Treasury) assets a routine part of policy.  Bank bailouts should be done by the Treasury, if at all. (Hopefully not at all.)  There should be an iron curtain between the Fed and the banking system, like the separation of church and state.

Policy Target:

Nominal growth targets should be high enough to avoid the zero bound problem.  With level targeting, a 4% NGDP growth rate should be high enough.  We should target expected per capita NGDP growth, level targeting.  (Perhaps growth of one basis point a day is a nice round number, for that future time when “big data” allows us to know daily changes in NGDP.)  A nominal total labor compensation target is better for some countries.  The Fed should completely offset the impact of any fiscal policy action.

Policy Rule:

The Fed should commit to a “guardrails approach”, a willingness to sell unlimited NGDP futures contracts at a implied NGDP growth rate slightly above target and buy unlimited NGDP futures contracts at an implied NGDP growth rate slightly below target.

Policy Accountability and Transparency:

The Fed should report to Congress twice a year on the effectiveness of previous policy decisions.  They should explain whether, in retrospect, policy settings adopted 12 months earlier were too easy or too tight, even if only slightly so.  They should clearly explain the metrics they used to make this determination.  This form of accountability is especially important if NGDP targeting is not adopted, less so if it is.

What am I missing?  I may add a few items based on comments.


I don’t use twitter, but I occasionally come across news stories discussing tweets that shame someone for not being politically correct.  How should we think about those tweets?  In principle, shaming should serve a valuable public function—discouraging offensive comments and behavior.  But shaming non-PC speech does not seem to be effective.  Why?

The straightforward interpretation of shaming is that the tweets are punishment for various racist and misogynist comments.  That might be true, but it doesn’t seem to fit the facts very well.  The actual racists and sexists among us are not damaged by the shaming tweets intended to punish them.  In contrast, the people who are damaged are generally not racist or sexist.  Shaming doesn’t hurt Donald Trump or Steve Bannon at all; indeed Bannon insists on wearing the “racist” label as a badge of honor in front of his adoring crowds.  Instead, these sorts of attacks tend to adversely affect people who are not bigoted, someone like Larry Summers.  Those who intentionally make racist or misogynist statements do so precisely because the public shaming will not hurt them.

Now consider the high school model of twitter shaming.  Recall that the cool kids in high school would create a set of rules that were impossible for the uncool kids to adhere to.  When the uncool kids fell short, they were ridiculed.  Isn’t that today’s twitterverse?

Suppose that you want to make sure your group is composed of only those with a high level of political correctness.  One method is to create rules that are so extreme that most people will not be able to keep up.  Thus Katy Perry did not know that dressing up like a geisha is insulting to the Japanese.  Why not?  Well, because Katy Perry dressing up like a geisha is not in fact insulting to the Japanese.  Indeed the Japanese were honored by her performance.  How could it be otherwise, as “cosplay” is a big part of Japanese culture?  If you make political correctness this detached from reality, it’s hard for anyone but the most committed to keep up.

The same dynamic occurred during the Chinese Cultural Revolution, where the Red Guards made increasingly extreme demands for ideological purity.  In fact, this technique goes far back in history.  A new book by Kevin Simler and Robin Hanson has this anecdote from ancient China:

Zhao Gao was a powerful man hungry for more power.  One day he brought a deer to a meeting with the emperor and many top officials, calling the deer a “great horse”. The emperor, who regarded Zhao Gao as a teacher and therefore trusted him completely, agreed that it was a horse—and many officials agreed as well.  Others, however, remained silent or objected.  This was how Zhao Gao flushed out his enemies.  Soon after, he murdered all the officials who refused to call the deer a horse.

[At least Jeff Flake wasn’t murdered!]

Even people far to the left of Larry Summers can be ensnared in the web.  During the 2016 campaign, Bernie Sanders got into trouble for saying that “all lives matter”.  For someone of his (1960s) generation, it’s not obvious why this statement is offensive.  After all, don’t all lives matter?  The whole point of PCism is to make things so confusing that only the insiders, the cool kids, avoid shaming. Sanders didn’t realize that saying all lives matter would be seen as an implied criticism of the Black Lives Matter movement (as it sometimes is, but not in Sander’s case). Bernie Sanders was once considered cool, but I predict his age, gender and race will eventually catch up with him, and he’ll be exchanged for someone who is not an old white male.  In 2019, being cool is no longer about standing up for blue collar workers that largely vote for Trump.

Suppose I’m wrong, and that twitter shaming really is about punishing offensive statements.  Let’s consider the most offensive statement in the mainstream media during the past year.  Here’s my vote, from Bloomberg:

A figure of 15 million births would be the third-lowest total since the People’s Republic of China was founded in 1949, He Yafu, one of the demographers cited by China Times, told Bloomberg News. It would only exceed 1960 and 1961, when the country was hit by natural disasters and famine.

As Bob Dole might have said, “Where’s the outrage.”  The Great Leap Forward of 1959-61 was one of the two or three worst crimes in human history.  And unlike the others, it occurred during my lifetime.  Perhaps 30 million died from the cruel policies imposed by Mao, and countless others enduring unspeakable pain, even as Mao was warned that his actions were having disastrous consequences.   Is there anything more offensive than implying this crime was a “natural disaster”?

The problem here is that shaming for ignorance of the Great Leap Forward is nowhere near as effective as shaming for saying that “all lives matter”, or for dressing up like a geisha, if your goal is to ostracize people who have insufficiently extreme views on race, sex and gender.

One popular form of shaming is to criticize statements that are not directly offensive, in a logical sense, but seem tone deaf.  The people likely to make these sorts of statements are often the exact same types who were viewed as “nerdy” in high school. Ironically, some of their oppressors are also former nerds, finally getting their chance to retaliate for all the misery they suffered in school.

PS.  I should say that the ideas in this post were partly inspired by the Simler/Hanson book on hidden motives.  But they should not be blamed (or shamed) if I’ve misused their theories.

PPS.  Please don’t tell me that the Bloomberg quote said natural disasters and famine.  I know that, but what does that phrase clearly imply to most readers?  A natural disaster that led to famine.

What if cherry pie could cure cancer?

[After reading this post, please check out my related Econlog post, an increasingly rare example (for me) of a post where I discuss a NEW IDEA for monetary policy. At least new to me.]

Imagine a world where eating lots of cherry pie was bad for healthy people.  (Not hard to do.)  Now imagine that for some strange reason the consumption of cherry pie improved the health of cancer sufferers.  And the more you eat, the quicker you get over your cancer.  A slice after every meal is good for cancer sufferers; adding an afternoon snack is even better.  Sweet!

This scenario is fanciful, but actually does describe one important aspect of monetary policy.

When LBJ became president in late 1963, the economy was in decent shape.  It was three years into an expansion and inflation was less than 2%.  But he couldn’t leave well enough alone, and a couple years later began pressuring the Fed to stimulate the economy.  The Fed responded with a massive purchase of government debt, which led to a rapid increase in the money supply.  The monetary base had risen from $33.4 billion to $44.3 billion between November 1945 and November 1963, but soared to $83 billion by November 1973—the Great Inflation was underway.  BTW, these purchases reduced the value of US government bonds, for those worried about “Cantillon effects”.

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Just as eating too much pie is bad for a healthy person, monetizing lots of debt is bad for a healthy economy.  It causes high inflation, which discourages saving and investment.

Oddly, when the economy is so unhealthy that interest rates have fallen to zero, printing money to buy back the public debt becomes a healthy policy.  The more you buy the better you feel.  And it’s also highly profitable, at least in most cases.  Of course it’s theoretically possible that you’d buy assets with a lower rate of return than cash, which earns zero.  But that’s unlikely.

Because eating lots of cherry pie has a bad reputation, lots of doctors would discourage their cancer patients from eating too much for fear they might get diabetes. Even if consuming cherry pie worked miracles for cancer patients, some doctors would keep recommending chemo and radiation.  As an analogy, certain mushrooms dramatically reduce depression in patients with terminal cancer, but many doctors refuse to recommend this enjoyable drug because . . . well . . . I’m not sure why.  Perhaps it’s our puritan instincts.

Even though QE is a miracle drug that helps a zero bound economy get better and usually leads to big profits for the government, our economic doctors warn against taking too much of this delicious medicine.  After all, QE is bad for healthy economies.  In their view it’s better to rely on fiscal stimulus, which not only is not profitable, it imposes trillion dollar losses on the Treasury.  We live in a world where the Very Serious People tell us we need economic equivalent of chemo, not cherry pie.  Even though cherry pie is far tastier, and more effective.


PS.  Kevin Erdmann has a new piece in the Wall Street Journal.  Also, please order his excellent new book on housing, it will lead you to completely rethink many of your views of what happened during the boom and bust.



What should we expect from Fed officials?

I occasionally see comments from people who have an unrealistic set of expectations for Fed officials.

An institution like the Fed will tend to reflect the consensus view of economists. Back in late 2008, I was among perhaps a few dozen people in the entire world who blamed the Great Recession on a tight money policy of the Fed. Even today, that view is only slightly more popular, mostly due to the effort of market monetarist bloggers. It’s entirely unrealistic to expect Fed officials to reflect the views of market monetarists—that’s now how our system works. Nor will they reflect the views of other obscure groups, like MMTers or fans of the fiscal theory of the price level. That’s why I favor NGDP level targeting, it’s a regime that will lead to pretty good results under almost any competent leadership.

I’m not saying the people appointed to the Fed don’t matter at all. Bernanke did better than Volcker or Greenspan would have done (based on their public comments during the Great Recession), and better than the average economist would have done. Mario Draghi did better than Trichet. But for the most part, Fed policy merely reflects the consensus view of economists and financial market pundits. Don’t expect anything more than that.

David Beckworth recently interviewed Neil Irwin, who pointed out that Bernanke was under a lot of pressure to adopt a more contractionary policy.  He also noted that while Trump has criticized the Fed for raising rates, he has also appointed Marvin Goodfriend to the Fed, a relatively hawkish economist.  Obama also appointed several people who were more hawkish than Bernanke.  If Trump wants dovish policies then he might try appointing doves.

Over at Econlog, I have a “Ted talk” on the future of money.

Is populism popular? Has it peaked?

I don’t know the answer to these questions, but Simon Kuper presents an interesting contrarian view:

Sometimes, our street is so packed with protesters that you can hardly open the front door. But last Saturday, I gingerly stepped outside to encounter only a few hundred marchers in gilets jaunes (yellow vests). Later, on TV, I watched the tear gas and shoving on the Champs-Elysées. But the odd aerial camera shot revealed that the Champs was mostly empty. Friends abroad asked if we were safe. We were: I spent half the weekend freezing on suburban touchlines watching my kids play football.

About 10,000 gilets jaunes marched in Paris and 125,000 across France, says the government. That same day, the green “march for the climate” drew about twice as many protesters in Paris

His observation on the US election is also interesting:

Populist movements may be the past, not the future. In November’s midterms, Trump’s Republicans lost the popular vote for the House of Representatives by 8.6 per cent — the biggest defeat for a majority party since records began in 1942. Meanwhile, as Brexit becomes increasingly hilarious, polls consistently show that most Britons now oppose it. Approval of the EU across the rest of Europe is the highest since 1983, says the European Commission’s polling wing.

Don’t assume that “the populists” are equivalent to “the people”.  Hillary got millions more votes than Trump.  The French gas tax increase was defeated, but worry about climate change is extremely widespread:

The new obsession with white-working-class politics misses much else. If you’re worried about poverty, look at very poor non-whites. And if you want to identify movements of the future, try the greens. For a so-called elitist movement, they seem pretty broad-based. About two-thirds of French people say they support the gilets jaunes, but 85 per cent worry about climate change, according to pollsters Ifop. In Germany, the much fussed-over far-right Alternative für Deutschland party now polls at 14 per cent; the Greens are six points higher. German anti-immigrant rallies (like Tommy Robinson’s British versions) are typically dwarfed by protests against them.

Scott Alexander has a post showing that Trump’s views on trade and immigration are becoming less and less popular.  I made a similar observation about 20 months ago.

Speaking of Alexander, another of his posts provides an almost perfect example of how commenters misinterpret my views:

Imagine the US currently devotes 100% of its defense budget to countering Russia. Some analyst determines that although Russia deserves 90% of resources, the Pentagon should also use 10% to counter China. Since no one person can shift very much of the defense budget, this analyst might spend all her time arguing we need to counter China more, trying to convince everyone that China is really very dangerous; if she succeeds, maybe the budget will shift to 99-to-1 and she’ll have done the best she can. But if she really spends all her time talking about China, this might look to other people like she’s an extremist – that crazy single-issue China person – “Why are you spending all your time talking about China? Don’t you realize Russia is important too?” Still, she’s taking the right strategy, and it’s hard to figure out what she could do better.

Because I’m trying to talk the US out of starting a foolish cold war with China, I’m seen as an apologist for Xi Jinping’s authoritarian policies.  In fact, I view almost all countries as being too authoritarian (think of the 400,000 Americans in jail for drug violations), and China as being far too authoritarian, much worse than the US.