Market monetarism is gaining ground

I recently did a post over at Econlog, discussing how Jerome Powell has adopted some ideas that sound vaguely market monetarist.  Marcus Nunes sent me another example, this time from St. Louis Fed President James Bullard:

In his talk, Bullard laid out a possible strategy for extending the U.S. economic expansion—one that relies on placing more weight on financial market signals, such as the slope of the yield curve and market-based inflation expectations, than has been customary in past U.S. monetary policy strategy. He explained that the empirical relationship between inflation and unemployment has largely broken down over the last two decades and that many current approaches to monetary policy strategy continue to overemphasize the now-defunct empirics of the Phillips curve.

“U.S. monetary policymakers should put more weight than usual on financial market signals in the current macroeconomic environment due to the breakdown of the empirical Phillips curve,” he said. “Handled properly, current financial market information can provide the basis for a better forward-looking monetary policy strategy.”

Market monetarists have long argued that financial market indicators are superior to the Phillips Curve as a forecasting tool for inflation.

On another topic, Karl Rhodes directed me to some Richmond Fed research on the zero bound.  Here’s the abstract of the paper, written by Thomas A. Lubik, Christian Matthes and David A. Price:

The likelihood of returning to near-zero interest rates is relevant to policymakers in considering the path of future interest rates. At the zero lower bound, the Fed can no longer lower rates and thus can respond to a contraction only through alternative policy measures, such as quantitative easing. Recent research at the Richmond Fed has used repeated simulations of the U.S. economy to estimate the probability of such an occurrence over the next ten years. The estimated probability of returning to the zero lower bound one or more times during this period is approximately one chance in four.

I certainly don’t have any reason to contest their finding, but I do have doubts about the method they used:

Lubik and Matthes began by estimating the TVP-VAR model over the full sample from 1961 to 2018 for quarterly data on real GDP, inflation (personal consumption expenditures inflation), and the federal funds rate. They then used the model’s estimated coefficients to produce forecasts over a ten-year horizon. The researchers generated multiple simulations of the shocks hitting the economy over the ten-year period and recorded their effects on macroeconomic variables for each quarter. The result of this process was a distribution of likely outcomes for each quarter.

In my view, the US is extremely likely to hit the zero bound in the next recession.  Thus for me, the chance of hitting the zero bound over the next 10 years is almost identical to the chance that there will be a recession during the next ten years.

If they agreed with my intuition, and used a VAR model to predict the chance of recession during the next 10 years, they might have come up with a figure higher than 25%. So does that mean that the risk of hitting the zero bound is greater than 25%?  I’m actually not sure, because I’m also skeptical of whether past performance is the best way to predict the timing of the next recession.  Yes this is true:

1. The US has never gone more than 10 years without a recession.

But these claims are also true:

2.  The US business cycle has recently been “stretching out”, getting longer.

3.  Other similar economies such as the UK and Australia have recently experienced extremely long expansions—about 15 years for the UK, and 27 years (so far) for Australia.

Is fact #1 more relevant for forecasting the risk of recession in the US over the next 10 years?  Or facts #2 and #3?

Forecasting is more an art than a science.

The marginal product of US Presidents

When I evaluate how good a job my plumber did, I don’t look at how the US is doing.  The same is true of Presidents.

You might argue that Presidents are much more influential than plumbers.  I agree.  My plumber might contribute 1/330,000,000th to the success of America.  The president might be 10 million times more influential.  Maybe 3% of America’s well being is due to the President.  But that leaves 97% due to other factors, including other government officials. Unemployment fell sharply under Obama, whereas it rose sharply under Bush (actually both Bushes).  I doubt you’d find many Republicans that believe this was due to Obama’s superior economic policies.

Almost every day we receive new evidence of the unbelievable incompetence of our current President—by far the worst in US history.  A recent NYT piece written by a high government official argues that Trump is enacting some good policies.  I think he exaggerates the success of Trump’s policies (although I concede the corporate tax cut has likely boosted growth).  But let’s put that debate aside.  Where we both agree is that this success is not a reflection of Trump, rather it’s due to broader trends in government policy.  Indeed according to this official, Trump’s aides spend much of their time trying to stop him from doing crazy things:

But these successes have come despite — not because of — the president’s leadership style, which is impetuous, adversarial, petty and ineffective.

This is one reason why I find theories of a “deep state” to be so amusing.  The people trying to prevent Trump from wrecking the world are precisely the people that he appointed to become high government officials.  If you are a Trumpista, the real problem you should be worried about is the “shallow state”.  Trump’s own appointees.

Those of us who see Trump for what he is should thank people like Gary Cohn, who prevented Trump from tearing up the Korea free trade agreement.  They are the true patriots.

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Why are Trumpistas so much nicer than Trumpian politicians?

We all know that Trump’s a bully.  What many people don’t seem to know is that bullying is an important attribute of many Trump-like politicians.  I’ll just provide a few examples here.  Let’s start with a recent article in The Economist, discussing Swedish politics:

Many municipalities, like Gothenburg, are already in this situation. The city’s 13-member executive is split between right and left; the odd seat was won by the Sweden Democrats in 2014. They are shunned by other parties. Besides ideology, says David Lega, the city’s deputy mayor, there is a character issue: the Sweden Democrats’ council member was expelled from his party for allegedly bullying subordinates.

OK, that’s just an anecdote.  But on the very same page of The Economist, there’s an article on Slovenia:

But the SDS has been unable to form a coalition. Many parties refused even to talk to it. Instead, five smaller centre-left parties banded together to form a minority government with outside support from the hard left. Other politicians justify their decision to exclude the SDS by arguing that Mr Jansa is a divisive bully. “When someone attacks us so personally and so aggressively, he should expect to see the results during negotiations,” says Vojmir Urlep, Mr Sarec’s economic adviser. Luka Mesec, of Levica, a leftist party, accuses the SDS of “scary anti-migrant discourse.”

OK, that’s just two anecdotes.  But the most powerful figure in Italy’s new government (Salvini) is almost universally viewed as a Trump-like figure, and he’s also a bully.  (In addition to being an overt racist and a fan of Mussolini. In other words he’s even worse than Trump.)

It’s also worth noting that Trump seems to despise polite leaders such as Obama, Trudeau and Merkel, whereas he’s drawn to leaders who are bullies, such as Duterte, Orban, Putin, etc.

However, I see no evidence that Trump voters are any less polite than Trump’s opponents.  When I moved from an anti-Trump area (Boston) to a pro-Trump area (south Orange County), I immediately noticed that people were nicer, on average.)  So why are Trumpian leaders such jerks?

One possibility is that Trumpistas have a more “tribal” view of the world.  People who travel to regions dominated by tribalism, say Afghanistan, often remark on how the people they meet are incredibly generous and kind.  This despite the fact that these societies are often tearing themselves apart with civil war.

Here’s a hypothesis.  The global rise of right-wing authoritarian nationalism is not really about immigration, it’s about Islam.  Consider the following regions, which have seen political developments that seem a bit “Trumpian”:

The USA, Europe, Russia, India, China, The Philippines, Burma, Thailand.

What do they have in common?  The public worries about Islam.

Now think about countries that have not seen such developments (Argentina, New Zealand, South Korea, etc.)

The first two regions with Trumpian problems (USA and Europe) face immigration issues. Maybe Russia to a lesser extent. But in the remainder, immigration is less of an issue. On the other hand, Islam is a big issue in all of the countries in the first list.  In each case, the majority of the population has a rather negative view of Muslims.  In my view, that’s what’s driving the global rise of Trumpism.  That causes even individually polite voters to support bullies—they want someone strong enough to fight against the perceived threat of Islam. (Yes, some Americans supported Trump for tax cuts or Supreme Court picks, but that’s not what got him the nomination.)

Burma is a particularly interesting case.  In perhaps no other country in the world would you less expect a Trumpian leader.  Burma’s leader is an almost universally revered Nobel Peace Prize winner.  Her career is almost a textbook definition of liberalism.  But the forces of anti-Islam in Burma are so strong that even she has turned into a right-wing authoritarian nationalist. If Burma is not safe, then nowhere is safe.  Except, of course, for countries where Islam is not viewed as a threat (like Argentina, New Zealand and South Korea.)  BTW, so much for the “great woman” theory of history.  If Burma doesn’t refute that theory, I don’t know what will.

You may recall from high school that bullies are less likely to be intelligent than non-bullies. A new book by Bob Woodward confirms that even Trump’s closest aides regard him as an idiot.  They see their job as protecting the country from his rash instincts:

The book is said to claim:

  • One month after Trump became president, he asked Chairman of the Joint Chiefs of Staff Gen. Joseph Dunford for plans for a preemptive strike on North Korea.
  • After a chemical attack in April 2017 was tied to the Syrian regime and President Bashar al-Assad, Trump told Defense Secretary James Mattis that he wanted Assad assassinated, saying, “Let’s fucking kill him! Let’s go in.”
  • During Trump’s practice session with his lawyers for a potential interview with special counsel Robert Mueller, he disastrously melted down — which led his then-attorney John Dowd to tell him, “Don’t testify. It’s either that or an orange jumpsuit.”

Much like Michael Wolff’s book Fire and Fury, the book portrays President Trump as detested and scorned by many of his top advisers, who are said to see themselves as working to protect the country from someone they see as ignorant and irresponsible.

  • White House Chief of Staff John Kelly purportedly called Trump an “idiot” and “off the rails,” and said “we’re in Crazytown.”

  • Mattis is described as telling associates that Trump acted like, and had the understanding of, “a fifth- or sixth-grader.”

  • Former National Economic Council director Gary Cohn purportedly took trade-related documents off Trump’s desk to prevent him from signing them and causing crises.

  • Dowd is described as believing Trump to be a “fucking liar.”

In fairness to Trump, he’s a bit better at noticing flaws in others:

Trump himself, meanwhile, is described insulting current or former aides such as Reince Priebus (“like a little rat”), H.R. McMaster (“like a beer salesman”), Jeff Sessions (“mentally retarded, he’s this dumb Southerner”), Wilbur Ross (“past your prime”), and Rudy Giuliani (“you’re like a little baby”).

The new Italian government is even more of a clown show than the Trump administration.  (The ruling party was literally founded by a clown.)  Because Italy has much weaker public finances than the US had when Trump took over, their crazy fiscal proposals threaten to cause a crisis, which might eventually blow the eurozone apart.

There’s another interesting trend in global Trumpism.  In almost every case the populist movement started as a “liberal” party (in the international sense of favoring small government.) In some cases it was a new party (the AfD, etc.)  In other cases they took over an existing party (the GOP).  As far as I can tell, the movement against Islam was almost always associated with a move away from small government ideology in the realm of economic policy.  These parties now favor high government spending.  It’s not obvious to me why these two trends are connected, but they seem to be. I’d be interested in your thoughts.  (This means Corbyn is not as far from Trump as many people assume.  He’s a bigot who talks about going after the “fake news” media.)

I am not interested in your thoughts on whether I was right about Trump.  The fact that his closest advisors have exactly the same view of Trump as I do seals the deal in my mind.  Case closed.  If you still can’t see it, then no amount of debating on my part will help you.

PS.  McCain’s body wasn’t even cold before Lindsey Graham starting kowtowing to Trump.  Sometimes these things just take one’s breath away.

PPS.  Trump’s not the first bully to reach the Presidency, LBJ and FDR also qualify.



What information should we consume?

This is my second “Ted talk”.  Ted asked:

How do you fight against selection bias as you consume information about the world?

One answer is to read “everything”, as does Tyler Cowen.

But you may not have the time, in which case I’d focus on a “diverse” set of reading material. This means much more than avoiding ideological bias (although that’s important too.)

1.  Read material on both sides of the ideological spectrum, indeed on many different sides.  I subscribe to three magazines, which represent three different ideological perspectives.  (NYR of Books, The Economist, Reason.)  I also spend a lot of time reading the NYT, WSJ, FT, WaPo, National Review, Bloomberg, South China Morning Post, Yahoo and lots of other outlets—mostly online.  Don’t let your ideological bias affect how you view a news outlet.

2.  Avoid geographic bias.  It’s almost inevitable that you’ll be biased toward your own country (I’m no exception), but push back against that bias.  Try to read lots of news about other countries.  Don’t focus on the countries that the news media considers important; focus on what’s actually important.  For instance, a few decades ago I decided to stop reading about the Israeli/Palestinian conflict.  I’d had enough.  It’s not that the conflict is not important; it is.  Rather it’s not as important as the news media (on both sides of the issue) assumes it to be.  There’s no objective reason why you would want to pay more attention to the Palestinians than to the plight of Muslim minorities in western Burma, northwest China, or some other region. (One exception is if you are Palestinian or Jewish, or in the case of Northern Ireland, if you are Irish.)

3.  Read about a wide range of topics.  I just read a book about psychedelics, and I now realize that prior to reading the book I knew almost nothing about the subject. That was because I had little interest in the topic, and had never really paid attention.  While reading Michael Pollan’s book I found some interesting material on a wide range of topics, such as mental health, meditation, drug laws, consciousness, the culture of Silicon Valley, etc.  Indeed the book might even be of some interest to a person who has absolutely no interest in LSD.  The book’s main flaw is that it focuses too much on the US (see previous point.)  My next book (on the Great Recession) has the same problem.

4.  Most non-economists assume that economics is the field that studies the economy.  In fact, it would be more accurate to describe economics as a certain way of thinking about the world.  (Think of the joke, “Economics is about how people make choices; sociology is about how people don’t have any choice.”)  If you are an economist you should occasionally look at other social sciences, so that you can examine alternative ways of thinking about problems.

5.  Read lots of fiction.  One of our biases is to put too much weight on our own life experience, and not enough on the life experience of others, especially people from different cultures.  Reading fiction helps us to overcome that bias.  Good films are also helpful, especially when they are not too political.  Books or films with obvious messages are likely to have oversimplified the issue.  (The film “Three Identical Strangers” is a recent example.)  Films where the message is less obvious (say The Death of Lazarescu) are often ones with the more important implications. It’s become a cliche that fiction is often truer than non-fiction.

6.  Read extremely smart bloggers, not people you agree with.  Read people who annoy you.  Paul Krugman has a way of writing that many conservatives and libertarians find to be quite annoying. But he’s still a very bright intellectual who often has interesting things to say.  Ditto for Brad DeLong. I often come across commenters who say, “I don’t see why everyone thinks X is such a genius.”  If you don’t understand why everyone thinks X is such a genius, then it’s likely the problem is with you, not X.

7.  Try to double-check both sides of the story.  If the liberal media describes some conservative outrage, see what the conservative media says about the same event before forming an opinion.  Vice versa if the conservative media describes some liberal outrage.  If necessary, check the moderate media, defined as outlets that frequently criticize both sides.  Also check data sources.  One of my comparative advantages is that I know the data better than most other people. I often read posts by people who are smarter than me, and immediately notice that they are citing implausible data.  Either they made a mistake or their data source was unreliable.  For instance, almost all of the media stories on the richest people who ever lived are based on completely false data.

8.  On the other hand, I don’t know if it’s worthwhile for most people to read as many data sources as I do.  I have an unusually good memory for data and an unusually bad memory for names and other forms of verbal information.  So I’m not typical.

9.  You should occasionally change your media outlets.  After a while you’ll have gotten most of the insights you can expect from any given source, so try a different outlet. Yes, that means TheMoneyIllusion long ago reached the point of diminishing returns. (I don’t do very well following this advice—indeed I probably should have shifted from reading blogs to twitter, but I’m lazy.)

10.  Try to avoid TV news, except perhaps to get a sense of the zeitgeist.  If you consume too much TV then you become a part of the zeitgeist, i.e., a part of the problem.

11.  Travel is another good source of information.  If you travel to China and speak with the people you meet, it might give you a very different view of the country than what you get reading about China in the US media.  I know it did for me.  Travel makes you realize that countries are very complex, not the sort of cartoonish vision you get from the mainstream media.

12.  If you are a macroeconomist then read the pre-war macroeconomists, such as Keynes, Fisher, Cassel and Hawtrey.  Learn about time series data over the past 100 years, not just since WWII.  Read Keynesians, monetarists, and other perspectives as well.

13.  Podcast interviews can provide a perspective that one might not get by simply reading some material written by the interviewee.

14.  When you read articles about social science research, treat the findings as an interesting hypothesis, not settled science.  Much of it does not replicate.

15.  Talk to average people, especially when you travel.  And remember, there are no average people.  Frame questions carefully.  Thus don’t ask if people like Trump, ask what they like and don’t like about him.

PS.  I’m actually not very well read in literature, philosophy, history, etc.  So do as I say, not as I do.

What does it mean to ask “Is money too loose?”

Is money too loose?  That might seem like a simple question, calling for a yes or no answer.  But it isn’t, because people wrongly think of monetary policy is a series of gestures, not a regime.

Our current regime has multiple goals, including an average inflation rate of 2%, and cyclical stability.  Often the two goals do not conflict, as in 2009.  But sometimes they do, like right now.

For example, monetary policy in Japan became more expansionary under Prime Minister Abe, producing slightly higher inflation and substantially higher NGDP growth.  I’ve argued that it’s still too contractionary because Japan remains well below its 2% inflation target.  Others say the labor market is now very strong (which is true) and that no further monetary stimulus is needed.  That’s also true, if you are focusing on the “stabilization” part of monetary policy.  But I believe Japan would still benefit from raising trend inflation high enough to escape the zero rate bound.

Recent Fed policy has given the US economy exactly the same sort of sugar rush as the Japanese felt after 2013.  Both NGDP growth and inflation are accelerating modestly.  From a “stabilization” perspective, policy may be too expansionary.  On the other hand, core PCE inflation is right at 2%, after a long period of underperformance.  From this perspective, policy is finally getting right on track.

Here’s another way of thinking about the dilemma.  The Fed’s dual mandate calls for above 2% inflation when unemployment is high, and below 2% inflation when unemployment is low.  The average rate should be 2%.  Unemployment is currently low, and hence the Fed should shoot for below 2% inflation.  But the Fed ran a tight monetary policy during the Great Recession and slow recovery, so if they run below 2% inflation right now they may lose credibility.  If you run below 2% inflation during both recessions and booms, then the average rate will obviously fall below 2%.

Right now, the Fed can either try to make its 2% long run inflation target credible at the expense of cyclical instability, or it can try to smooth out the business cycle at the expense of its long run 2% inflation target.  It cannot do both.

Or the Fed can adopt NGDPLT and do its best to run a countercyclical inflation rate.  Under NGDPLT, there are no “dilemmas”, just a clear target to shoot for, each and every day.

PS.  Demand-side fiscal policy is quite expansionary, but that doesn’t change anything I said here.  RGDP growth has been raised by supply-side reforms like the corporate tax cut, and that does interact with monetary policy by boosting NGDP growth (assuming the Fed targets inflation at 2%.)  In retrospect, Obama’s biggest policy mistake was not cutting the corporate income tax sharply in early 2009, instead of enacting the actual stimulus bill.  Of course if he’d had that ideology then he never would have gotten the Democratic Party nomination.