Archive for January 2011


What’s wrong with white people?

The title of this post is perhaps unduly provocative.  I don’t intend to bash all white people, just 21st century white Americans.  Let me also assure readers that some of my best friends are white folks.

About 5 years ago I noticed something wrong with white people, but first a little perspective.  I grew up in the racially-charged 1960s, when there was much turmoil over issues like school desegregation.  Many white parents didn’t want to send their kids to schools that had lots of black children, out of fear that the academic standards would be too low.  Then about 5 years ago I read about white parents in California who pulled their kids out of heavily Asian school districts, fearing the academic standards were too high.  This struck me as odd; can’t white parents make up their minds about whether they want low standards or high standards?

I was reminded of this when I read of the huge hubbub over the Amy Chua book on strict Chinese parenting.  Apparently many people were outraged that Ms. Chua pushed her kids too hard to succeed.  Once again, this brought back memories of when I was younger, and I’d hear middle class white people complaining that welfare moms don’t push their kids hard enough to succeed.

What’s the right way to raise kids?  In my post “The arrogance of the here and now” I hinted at one answer.  The right way to raise kids is the way “we” raise kids “right now” around here.  Isn’t that obvious?

I know that some commenters will accuse me of “relativism.”  I seem to be claiming there is no right or wrong way, and we have no right to criticize others.  They’ll insist there is objective evidence that welfare moms don’t do a good job raising kids.  They’ll point to high rates of incarceration and low levels of income for kids brought up by welfare moms.  OK, let’s say that’s true.  Let’s say it proves “our way” is superior.  Isn’t it also true that Chinese-American kids earn even more than white kids when they grow up?  And aren’t they less likely to go to prison than white kids?  If so, then what’s wrong with white kids?  Why aren’t they pushed harder to succeed?

Some may argue that the big fuss over Amy Chua had no broader implications.  It wasn’t an implied criticism of Chinese parenting styles, just an expression of outrage against a single person.  Yeah, and the huge fuss over the mother of octuplets who got public assistance was just about one family, with no broader implications about society’s attitudes toward welfare moms.

If those with stricter parenting styles than us are bad people, and those with less strict parenting styles are also bad people, then doesn’t this imply that we also used to be bad people?  After all, weren’t our ancestors much stricter with kids a few hundred years ago?  And aren’t our descendants also likely to be bad people too, after all (extrapolating current trends) they are likely to be much less strict than we are.  I find most people are happy to confidently declare that “we” raise kids better than welfare moms, and better than tiger moms, and better than moms who used to send their 12 year old daughters to work in textile mills.  But they don’t necessarily agree with my view that the future moms will also be horrible.  I think that’s because in some sense “the test of time” is implicitly viewed as providing the last word as to what’s right or wrong.

Richard Rorty was once asked what people meant when they said “people currently believe X, but eventually it will be shown that Y was true.”  He responded that this was no more than an implied prediction that people would later believe Y.  I’m predicting that future parenting styles will be very different, and that they will look back at moms of 2011 as some sort of horrible monsters, cruelly abusing children.

Part 2:  Hollywood’s ultimate insult

Each January, Hollywood inflicts upon the world an insult so exquisitely cruel, so mind-bogglingly un-PC, so appalling lacking in taste and refinement, that it goes by completely unnoticed.  I’m referring of course to the best picture nominations.  As you know, in recent years they’ve had to struggle to find 5 worthy entries.  To cover up this embarrassment they recently expanded the category to 10 pictures, in the hope that the mind-numbing mediocrity will be hidden my sheer numbers.

Consider the following 8 best picture nominees:  Grand Illusion (1938), Z (1969), The Emigrants (1972), Cries and Whispers (1973), Gandhi (1982), The Postman (1995), Life is Beautiful (1998), Crouching Tiger, Hidden Dragon (2000.)  I’m not certain, but I believe these are the only 8 films ever nominated where English was not the dominant language of the film (some films are bilingual.)

Now I know what you are thinking, “Sumner’s going to complain that they didn’t nominate more of those artsy foreign films that nobody wants to watch.  This is our celebration, let Cannes cover the foreign films.”  Actually, that wouldn’t be a good argument, as there are lots of great foreign commercial films.  No, you’ve misjudged me, the real outrage is that they’ve nominated 8 too many!  It’s what makes the insult so sublime.

Suppose no foreign films had ever been nominated.  What would people say?  Obviously many people would point to the separate category for foreign films at the Oscars, and perhaps note that it makes sense to have two separate categories.  Not optimal, but perhaps at least somewhat defensible.

Alternatively, Hollywood might have nominated around 200 foreign films, out of the roughly 400 films that have received nominations.  Again, it’s slightly insulting to the rest of the world to claim that we have produced half of all the great films, but then people could say “naturally Hollywood would focus a bit more on their own films, which they know best.”

But Hollywood didn’t choose either option.  Instead they nominated about one foreign film a decade, and only Gandhi actually won.  And Gandhi was partly in English, so no completely non-English film has ever won best picture, not once in 83 years.  Why 8 films?  Why not 200?  Or zero?  Here’s my theory.  Hollywood has an inferiority complex.  They constant prattle on about being “artists” precisely because they know that they aren’t artists.  They are resentful of all the critics who rave about uncommercial films by Antonioni, or Kairostami, or Hou Hsiao Hsien.

So they devised the ultimate insult.  Open up the best picture category to all films, of any language, but never let any non-English language films win.  That will show all those snobby French cineastes who’s really on top of the world.  You might then wonder why they didn’t nominate zero foreign films, to maximize the insult.  Ah, but that’s the beauty of this outrage.  If no foreign film was ever nominated, it would be assumed that, de facto, the category was only open to English language films.  Especially given that there is a separate category for foreign language films.  No, this is much better, have the category open to all films, and then nominate roughly one foreign film a decade to remind the rest of the world that we do consider your movies, we just don’t find any that meet our high standards.  Truly an insult of John Malkovichian subtlety.

Just as white folks don’t like parenting styles that are more or less strict than their own; Hollywood doesn’t like films that are more or less “artistic” than their own.  BTW, when I say “artistic” in scare quotes I don’t mean having aesthetic merit.  Lord knows that’s not what determines which films get nominated for best picture.  If you don’t believe me, just look at a list of films directed by Hitchcock in the late 1950s, and then look at the films nominated for best picture in the late 1950s.  No, Hollywood equates “artistic” with films about the way we live.  And by “we” I mean English-speaking people.  More specifically, white English-speaking people.  Movies with which “we” can identify.

Evaluating German NGDP growth

Kantoos has a German language blog that shares my quasi-monetarist perspective.  He recently sent me an english version of a post that has this graph showing German NGDP and unemployment:

You’ll notice that German NGDP growth is less stable than US growth, even before the recent recession.  Here are a few observations, with the caveat that I am not an expert on Germany.

Smaller economies tend to have more unstable real and nominal growth.  Although Germany is big in absolute terms, it is small relative to the US.  For instance, Germany had 8% real growth in the second quarter, and the slightly smaller UK economy just reported negative 0.5% growth in the 4th quarter.  US RGDP growth doesn’t tend to show such big swings.

Because Germany is part of the eurozone, nominal and real GDP movements are more independent than in the US. Thus suppose the ECB targets 2% inflation.  In that case fast growing eurozone members will have higher NGDP growth than slower growing members, even without higher inflation.  In fact, inflation is usually higher in faster-growing economies.

After the reunification boom, Germany had a difficult period from 1994 to 2006.  Notice that nominal growth was slow and unemployment was in the 10% to 12% range.  It is reported that during this period Germany went through a painful process of adjusting nominal wages downward, to reflect the slow NGDP growth (and inflation, which was lower than elsewhere in the EU.)  Ironically, during this period ECB policy was arguably too tight for Germany, and too easy for fast-growing Spain and Ireland.

Here’s what I found most interesting.  It seems to me that this graph might help explain Germany’s relatively good performance during this recession.  Notice that NGDP growth picked up sharply in 2006, and then NGDP fell sharply in late 2008.  Current levels of German NGDP look very similar to what would have occurred if you extended the fairly straight trend line from 1997-2006.  My hypothesis is that the wage restraint practiced by German unions during the difficult years of high unemployment may have carried over into the 2006-08 boom.  If so, wages may be closer to equilibrium than in the US, where current NGDP is far below the trend line of the past few decades.

This is a very tentative hypothesis.  It is dangerous to look for trend lines, as the eye tends to spot patterns that aren’t really stable.  In addition, I am relying on news reports about German wages, not hard data.  I would add that the low unemployment rate overstates Germany’s success.  Output has fallen sharply in Germany, and many workers had to accept shorter hours.  Still most observers think that Germany has recently done better than other major developed economies, and the temporary nature of the 2006-08 NGDP bulge may partly explain why.

Germany could probably benefit from a bit faster NGDP growth, but from a “level targeting” perspective they may be closer to long run equilibrium than most other developed countries.

PS. Interested readers should also read the Kantoos post, as he covers other topics that I am not qualified to discuss.

The typical rich family is a cop married to a nurse

Ryan Avent recently expressed surprise at the fact that a married couple each earning $75,000 were in the top 5% of the US income distribution.

To get into the top 5%, you need to earn less than $150,000. To me, it’s something of a wake-up-call to realise that a couple who make $75,000 each are in the top 5% of American households. I’m curious whether this is surprising to others, too? Would you, like me, have guessed the thresholds were higher? Does this change what you think about who is “rich” in America today?

In Boston, cops make about $110,000.  I’m sure some of them are married to nurses making around $80,000, putting them well up into the top 5 percent.  I don’t regard this sort of family as rich, but many people I talk to insist the top 5% are rich.  If so, there are far more rich families that are a cop/nurse, or accountant/teacher, or engineer/secretary, then there are Donald Trumps.

Why do people find it surprising that so few families make more than $150,000?  I think I know, because I used to be surprised myself.  Then I realized my mistake.  I was assuming “families” were people like me, a middle age guy with a working wife and kids.  But then I realized a “family” is any adult household.  My first 8 years as an adult I was living on my own, supporting myself with part time work will going to college and grad school.  Definitely bottom quintile.  I was probably technically “poor,” but not poor in a sociological sense.  I was a proto-upper middle class guy.  Then I spent one year in the second quintile, before shooting into the third quintile, where I stayed for a number of years.  Then I got married, then I got lots of raises and promotions, and presto, I’m rich.  (Although my neighbors would laugh, they look down on us plebs living in two-family houses.)

I’ll retire at 62, and live another 15 or 20 years if I’m lucky.  During that stretch my “income” will drop sharply, although I am not quite sure how sharply.  Probably at 70 it will bump up as I’m forced to take money from my 401k.

I think most people have this vague idea in their mind that if everyone was exactly like Scott Sumner, we’d have a fairly equal income distribution.  Not so, it would be less unequal than today, but still highly unequal, as different versions of me would be at different stages of their (my?) life.

People are surprised that only 5% of families make more than $150,000, because they forget that even most upper-middle class people spend the vast majority of their time (between 18 and 80) making much less than $150,000.

Here’s my most recent contribution to The Economist: By Invitation, on the subject of inequality.

Kling and I vs. the interventionists

Here’s a perspective from Arnold Kling that I share:

When you think of the economy, think of a rain forest that you live in and study, not a machine that you fix.

Suppose we have 6% NGDP growth and 14% unemployment.  The interventionists will be running around like chickens with their heads cut off, looking for “stimulus” to “create jobs.”  Fiscal, monetary, whatever.  In contrast, I would point out that NGDP growth was excessive (assuming it was normal in the year before the 6% growth), and call on the Fed to tighten, to slow down NGDP growth.  What about the unemployment?  I’d look to see if there were other things the government was doing that were messing up the labor markets.  And then stop doing them.  I don’t believe the government should try to steer the economy like a ship.

This may seem to conflict with my support for a stable NGDP growth rule.  If you think so, you are confusing real and nominal variables.  It is quite clear that Kling’s metaphors refer to the real economy; machines and rain forests are real things.  The real economy is people, buildings, output, ideas, etc.  NGDP is actually just another way of thinking about the value of the medium of account (like the price level.)

To see why the nominal economy is totally different, assume the dollar price of apples doubles overnight.  I think we can all agree that this won’t have dramatic effects on the overall economy.  Yet NGDP measured in apple terms (i.e. using apples as the “numeraire”) will instantly fall in half.  From this example it’s obvious that changes in NGDP are very different from changes in real GDP.  So why do I think NGDP is so important?

Of all the numeraires, currency is unique.  It is the numeraire in which other goods (and labor) are actually priced.  Even that would be no more consequential than the apple numeraire, if all wages and prices were flexible.  Unfortunately they are often sticky, or slow to adjust.  That’s why monetary policy matters, indeed it’s almost the only reason it matters (seignorage is fairly small.)

Currency has two rather special attributes; it is produced at near zero cost, and the government has a monopoly.  There is an interesting debate about whether it’s a good idea to handle things that way, but I’d like to focus on a different issue.  Given the government is currently running the currency system, how should it do so?

My answer is that it should do so in a way that causes the least harm.   Like someone walking through the rainforest trying to avoid stepping on flowers and bugs.  It can do that by maintaining a monetary policy that keeps nominal wages and prices closest to their Walrasian equilibrium value, the value if wages and prices were reset each minute by a Walrasian auctioneer.  Like Friedrich Hayek, I think a NGDP rule is the best way to do this.  Others favor a price level rule.

Many see this as steering the economy, like a machine.  Nothing could be further from the truth.  It is merely controlling one tiny corner of the economy, currency, in a way that does the least harm.  Currency is already controlled by the state, so let’s minimize the harm.  By analogy, the state already guarantees bank deposits, so we should minimize the harm from this foolish regulation by not allowing insured deposits to be lent out in risky subprime loans.  Keep the government footprint as small as possible. I see the state as like King Kong, rampaging through the forest trying to save his precious Fay Wray, all the while trampling dark-skinned villagers that no one notices.

Remember, currency would be just like apples except for sticky wages and prices.  It’s just a numeraire.  So if you think monetary policy can do lots of harm, you must believe in sticky wages and prices.  But if you do, then shouldn’t we control the value of this dangerous government asset in such a way as to minimize the harm we do?

I would never propose using monetary policy to “fix” any problems in the economy.  If there is a recession, or a banking crisis, or a real estate crash, tough luck.  I can be just as cold-hearted as the right-winger next door.  As long as NGDP is chugging along at the target growth rate, we should not be trying to solve all sorts of macroeconomic problems with stimulus.

That doesn’t mean I believe in laissez-faire, but most of the government regulations I do favor are merely intended to offset the fact that we don’t really have a pure market economy.  Lots of air and water is communally owned, our financial system is riddled with government-created moral hazard, we are too kind-hearted to let people starve after they chose not to save for retirement.  In almost every case, the government intervention I favor is one that I see doing less harm to “the rain forest” than the status quo.

I wonder if Arnold Kling, or for that matter my commenters, will be surprised that I share Kling’s opposition to a government that is always out trying to fix problems.

Almost titled this “The Kling and I.”

Waldman on monetary and fiscal policy

Most economists form their worldviews based on what was going on when they were young.  I teach the Phillips curve as follows:

1.  Phillips Curve “discovered” (actually rediscovered) in 1958.

2.  US policymakers used the Phillips curve in the 1960s.

3.  People in important positions of power are generally in their 50s.

4.  Policymakers in the 1960s came of age in the Depression.

5.  Unemployment was then seen as a more serious problem than inflation.

6.  In the 60s, policymakers pushed us up and to the left on the PC.

I am a product of the 1970s.  My view of the importance of monetary policy was formed by the world situation in 1980:

 inflation 1980 (yearly basis)

CPI Austria  Austria cpi 6.654 %

CPI Belgium  Belgium cpi  7.547 %

CPI Canada  Canada cpi 11.058 %

CPI Chile Chile cpi 31.238 %

CPI Denmark Denmark cpi 10.895 %

CPI Finland Finland cpi 13.762 %

CPI France France cpi 13.733 %

CPI Germany Germany cpi 5.540 %

CPI Great Britain Great Britain cpi 15.121 %

CPI Greece Greece cpi 26.291 %

CPI Iceland Iceland cpi 55.738 %

CPI India India cpi 9.085 %

CPI Indonesia Indonesia cpi 17.057 %

CPI Ireland Ireland cpi 18.251 %

CPI Israel Israel cpi 132.950 %

CPI Italy Italy cpi 19.552 %

CPI Japan Japan cpi 7.240 %

CPI Luxembourg Luxembourg cpi 6.994 %

CPI Mexico Mexico cpi  29.845 %

CPI Norway Norway cpi 13.477 %

CPI Portugal Portugal cpi 13.109 %

CPI South Africa South Africa cpi 15.842 %

CPI South Korea South Korea cpi 32.202 %

CPI Spain Spain cpi 15.213 %

CPI Sweden Sweden cpi 14.127 %

CPI Switzerland  Switzerland cpi  4.426 %

CPI the Netherlands The Netherlands cpi  6.650 %

CPI Turkey Turkey cpi  75.072 %

CPI United States United States cpi 12.516 %

Countries could choose different trend rates of inflation (and hence NGDP growth), just like someone choosing food from a menu.  How did they generate these vastly different trend rates of inflation?  The only answer that made any sense to me then was monetary policy.  And it’s still the only answer that makes any sense to me.  I was reminded of this when reading a new post by Steve Waldman:

Like Andy Harless (but see Sumner’s rejoinder), I think the distinction between fiscal and monetary policy has grown very blurry. Monetary reserves are now interest-bearing obligations, ultimately paid for by the state. Some Fed “liquidity facilities” involved issuing interest-bearing obligations to buy up private sector assets (at prices above those offered in private markets). That sounds like fiscal policy to me. While it can be argued that conventional open-market operations only transform the maturity of government obligations, by anchoring the yield curve and increasing the fraction of debt that can be used directly as a medium of exchange, conventional monetary policy may increase the willingness of private agents to hold US debt, reducing constraints on spending and enabling expansionary fiscal policy. Fiscal policy and monetary policy are intertwined, and it’s not clear to me that either dominates the other. (There’s an aphorism to the effect that “the monetary authority always moves last”, but it doesn’t persuade me. Timing of endogenous phenomena tells one very little about causality. Timing of moves in a game tells us very little about which player has the advantage.) Ultimately, I’ve come to think that the main differences between fiscal and monetary policy are institutional. Decisions about what we call “fiscal” and “monetary” policy decisions are made in different ways by dissimilar entities. Those decisions can reinforce one another, or they can offset and check one another. Some people prefer to emphasize the role of fiscal authorities for “democratic legitimacy”, while others champion action by an “independent central bank”, on the theory that isolation from overt politics will yield technocratically superior choices. You can accept these preferences on face, or more cynically argue that some groups expect one or the other decisionmaking body to execute policy ways that that favor preferred interests. But at a macro level, Sumner’s NGDP targeting monetary policy and MMT-ers’ GDP-supporting fiscal policy look similar to me. Both perspectives arouse my sympathies but provoke misgivings. First, I’m not sure either instrument is up to the task of stabilizing the target over a long horizon, and worry that attempting but failing to stabilize may prove riskier than conventional muddling through. Second, I think the micro-level stuff really does matter. In order to ensure both high quality resource allocation and distributional legitimacy, I think it matters very much what is paid for with fiscal expansion, and precisely how monetary policy is to be conducted. (I offered a proposal a while back that now looks like a bizarre hybrid of Sumnerism and Chartalism, which tries to address micro-level concerns.)

I don’t see any similarity between monetary policy (which is basically a nominal policy) and fiscal policy (which is basically a real policy.)  If a central bank wants to produce a trend rate of NGDP growth of 20%, we know it can do that over time (not ever year.)  Fiscal policy?  I wouldn’t even have a clue as to where to start.  Suppose fiscal policy aims for 20% trend rate of NGDP growth, and the central bank is following Friedman’s 4% M2 growth rule.  What happens?

The analogy I use is driving with my young daughter.  She’s strong enough to reach over and move the steering wheel.  But if I’m driving, and have some place I want to go, I’ll just grip the wheel tighter and offset her push.  If Bernanke and the Fed want to go somewhere, they can always grip the policy wheel and get (eventually) where they want to go.  Fiscal policy is helpless under those conditions.

Yes, there are conditions where the central bank is the handmaiden of fiscal authorities (Zimbabwe a few years ago), but that doesn’t describe the US.

The real reason I wanted to link to Waldman is this paragraph from the same post:

For me, the highlight of the meeting by far was lunch with Scott Sumner and Scott Wentland. We had a grand conversation. Readers of both blogs might imagine the authors of The Money Illusion and interfluidity to be on opposite sides of a great divide, but it didn’t feel like that at all. The quality of mind I value in other people and strive for in myself is a kind of nimbleness, a fluidity of mind. The world is too complex for any particular narrative to be perfect. Good judgment, I think, comes from the ability to slip between and among stories, to understand the ways different accounts might be true, to marshall evidence and reasoning on both sides and then apply weights to a superposition of competing, sometimes contradictory ideas, all of which play a role in ones choices. Sumner and I understood one another’s views very quickly, and took them seriously, though we’d probably assign them different weights. Further, though I suspect he will bristle a bit at the characterization, within the economics profession Sumner is an ideologue in the very best sense. There’s both a moral and a methodological component to that. Sumner is driven, scandalized even, by what he sees as a profound and preventable failure of monetary policy. He’s shocked that the rest of his profession (which he’d previously considered himself to be in the middle of) didn’t notice, that economists don’t get in their guts how awful an abdication of policy has occurred. So Sumner has made it his full-time preoccupation for two years to communicate and persuade, working to change his colleagues’ intuitions about what is acceptable and what is not. He has a reasonable (though not unassailable) model of how the economy works, and a coherent vision of a policy regime that would be wise under that model. Recent experience suggests that implementing Sumner’s policy regime, under which the monetary authority both commits to and is able to target NGDP, would be eased by tools that are institutionally or politically unavailable under current arrangements (e.g. an NGDP futures market, negative interest on reserves, perhaps more flexibility with respect to asset purchases). Rather than working within those constraints, he has made lobbying to alter them part and parcel of his campaign to shift the intuitions of his colleagues with respect to the conduct and duties of monetary policy.

Wait, I thought econ was estimating VARs to refute models.

Greg Mankiw’s always talking about how great Harvard is (and I don’t doubt it’s pretty great.)  Someone ask him how many of his grad students think and write as well as this guy, who’s an econ student at Kentucky.

PS.  I know what you’re thinking; “Naturally you think he’s great–he’s praising you!”