I heard through the grapevine that Barro’s views were influenced by David Beckworth:

I would prefer to see the Federal Reserve adopt a rule, such as NGDP level targeting, that would lay out an orderly path for monetary easing in recessions and tightening upon recovery. But I don’t think we need to worry about the Federal Reserve losing its grip on any ad-hoc decisions to allow some moderate inflation. It’s just not in this Fed’s nature””and the markets know it.

Market monetarism marches on.

HT:  Lars Christensen

The Atlantic has a new article on Bernanke (by Roger Lowenstein) entitled “The Villain.”   The article itself praises Bernanke, saying the criticism from both the left and the right is unfair.

Matt Yglesias takes issue with Lowenstein:

No Mercy For Ben Bernanke

Ryan Avent has a good post that provides the following quotation from the Lowenstein article:

This might seem to support Krugman’s thesis that Bernanke would like to boost inflation but has chickened out. But after talking with the chairman at length (he was generally not willing to be quoted on this issue), I think that, although Bernanke appreciates the intellectual argument in favor of raising inflation, he finds more compelling reasons for not doing so. First is the fear that inflation, once raised, could not be contained.

Does Bernanke really believe this?  I doubt it.  Consider the following quotation, also from the Lowenstein article:

Though he recognizes the potential for inflation, he told 60 Minutes in December 2010 that he was “100 percent” certain of his ability to control it (a surprising, and troubling, certitude for a normally humble banker).

That’s the Bernanke that I favored for Fed chair back in 2006.  And since I’ve been so tough on him in this blog, let me say something good for a change.  I believe that Bernanke has come to the realization that if the US is going to get a robust recovery, we will need a bit higher inflation.  And I think this is starting to occur.  The “low rates until 2014” policy is pretty meaningless as officially stated, but in my view the markets are able to read between the lines, and see that Bernanke is actually signaling; “we will hold rates near zero at levels of inflation and real growth that would have normally triggered rate increases.”  I agree with those (Ryan Avent?) who say the policy is neither fish nor fowl.  It’s not an unconditional commitment.  But it’s also not merely a commitment to hold rates at zero until 2014 unless the Fed model would normally call for a rate increase.  And I think markets have figured this out.  That’s why stocks have been strong in recent months, and 10 year bond yields are rising fast.  And yes, higher interest rates really do mean easier money, and are thus good news.

The TIPS spreads have risen to well over 2% on the 5 year and over 2.4% on the 10 year Treasury.  Those numbers may overstate actual inflation (according to the Cleveland Fed), but the trend is in the right direction.

So for now we seem to have turned a corner on monetary policy.  There is some risk that the Fed would tighten again during the summer (as during the summers of 2010 and 2011) if oil prices soared, but overall this is the first time in 4 years where I’ve felt that monetary policy is merely “too tight” not “much too tight.”

Alternatively we are no longer digging sideways; we actually seem to moving toward above trend growth in NGDP.  (That’s partly because the trend rate seems to have fallen below 4%.)  I’d still favor QE3, as it would speed up the recovery, and speed up the date at which we could go back to 26 week unemployment compensation.  But at least we seem to be entering a period where reasonable people could disagree.  For the last 3 1/2 years I’ve found myself mostly battling against unreasonable people, who were content to dig sideways.

PS.  I agree with Matt and Ryan that what the crisis really shows is a need for an NGDP target (level targeting.)  But then I guess that’s no surprise.  Even I would concede that it’s too late for this crisis.  What we really need is for the Fed to stop stress testing banks, and instead stress test its own ability to control AD in the next recession, when nominal rates are quite likely to again fall to zero.  I don’t see they’ve done that, but perhaps it’s an issue better examined in a non-crisis atmosphere, when the subject can be examined dispassionately.

Last year I suggested that Britain’s problems are partly supply-side:

Cameron is a fan of the Swedish center-right government, and would like to move the UK in that direction.  But he will probably fail.  British voters have no stomach for the savage inequalities of Swedish-style laissez-faire.  They won’t tolerate public money going to for-profit schools or health care.  Instead, Cameron has signed on to increasing the top rate of income taxes from 40% to 50%.

A few weeks ago at The Economist: By Invitation I proposed replacing income taxes with a progressive consumption tax:

Of course there are practical problems with any tax regime. People will try to shield wage income by calling it “capital income”. To prevent this all income earned by corporate employees as part of their job should be treated as wage income, including earnings on their firm’s stock and options. Likewise, those who work for financial firms such as hedge funds should pay wage tax on any and all income received that is in any way associated with their employment. All income to the self-employed should be treated as wage income, and investments in capital goods can be expensed.

Even with every possible safeguard, there might be some wealthy people who are clever enough to avoid taxation. If this were a serious problem, we could have a wealth tax on luxury consumption (mansions, yachts, private jets and other luxury goods).

It looks like I owe Cameron and Osborne an apology.   Some commenters had told me that the British people were turning against the rich, and that it wasn’t politically possible to role back Gordon Brown’s disastrous big government policies.  Today we find out that they plan to do exactly that:

UK businesses and Conservative politicians have been lobbying for an end to the 50 percent tax rate on income above 150,000 pounds ($235,500) a year since it was brought in two years ago.

They may be about to get their wish, as UK Chancellor of the Exchequer George Osborne is preparing to remove the tax in next Wednesday’s Budget, according to a report in the UK newspaper The Guardian. . . .

“It is widely accepted that it actually brings in little revenue and maybe acts as a deterrent in attracting – or keeping – top talent to the UK; but scrapping it would be a high profile move and politically contentious given the ongoing message that the government is putting across that we are all having to make our fair share of sacrifices to improve the public finances. So the Chancellor would have to offset this by raising other taxes on the wealthy,” Howard Archer, chief European and UK economist at IHS Global Insight, wrote in a research note. . . .

And what are those “other taxes?”

As always with a UK Budget, plenty of the measures have already been reported in the press. Reports say not to be surprised if the basic income tax threshold is raised, if those higher up the tax spectrum are hit by a tax on more expensive houses, or a further cut in tax relief on pension contributions, or if the Chancellor announces a new 100-year bond.

Lower MTRs on income and higher taxes on fancy mansions.  It’s like a dream come true.

Off topic:  An old friend from my hometown of Madison told me that he heard my name on CNBC this morning (around 10:00.)  I couldn’t find the video, but he indicated that Kelly Evans said something to the effect that the PPI number was high enough for the Scott Sumners of the world.  If anyone else can confirm, please let me know.

He has a bike shop that sold nearly 1000 bikes over the past week in a special sale.  The average price of the bikes was about $1000.  I asked; “can’t you buy excellent quality bicycles in the $300 to $500 range.”  He said yes, but people want top quality, especially those who shop early in the year.  I conclude that either a lot of the “one percent” live in Madison, Wisconsin, or recovery winter is for real.  BTW, anyone shopping for bikes in Madison should go to Budget Bicycle Center, there’s a good reason why they sell so many bikes—they are the best.

But there really should be a luxury tax on bikes over $1000.

PS.  I will be very busy with grading and travel over the next few days, so I may be slow to answer comments.

Many people believe that the Chinese steal lots of American jobs because they have low wages, low environmental standards, and various unfair subsidies.  As far as I know no serious economist holds that view.  But there are very serious economists who believe Chinese policies are costing many American jobs.  For instance, Paul Krugman has argued that China’s large current account surplus ($201.1 billion) effectively steals jobs from American workers.  As anyone who has read Pop Internationalism knows, Krugman doesn’t buy into the vulgar protectionist argument that low wages/government subsidies/weak environmental protections, etc, give countries an unfair advantage.  Indeed he believes that the Chinese current account surplus only costs jobs when US interest rates are at zero, not otherwise.

The Swiss current account surplus ($95.7 billion) is nearly half as large as the Chinese CA surplus, suggesting that the Swiss are stealing about half as many American jobs as the Chinese.  (By the way, bi-lateral imbalances don’t matter in the Krugman model.)  I’ve mentioned this fact before, but today I’d like to address it from a different direction.  What is the intuition here?  When most people visualize the Chinese stealing our jobs, they picture tens of millions of low paid workers slaving away in sweatshops.  But Switzerland has a tiny population, most of whom aren’t even employed in export industries.  The few who are earn wages much higher than those of American factory workers.  So how can Swiss workers be stealing nearly half as many jobs as Chinese workers?

The answer is simple; Chinese workers aren’t stealing jobs for the reasons most Americans imagine.  The real problem with large current account surpluses (in the Krugman model) is that they add a big blob of savings to the global economy, just when we need more “spending,” and less saving.  In other words, they worsen the liquidity trap.  That’s why the Swiss steal so many American jobs.  As do the Norwegians, with their $70.7 billion CA surplus.  And let’s not even talk about Germany ($188.1 billion), they are already being blamed for nearly every problem in Europe.

Now as we all know, this model is wrong.  It predicts that core inflation will plummet steadily lower when in a liquidity trap.  If the Fed is targeting inflation, then there is no liquidity trap, no paradox of thrift, no paradox of toil, no fiscal multiplier, no “Depression economics.”  And as we saw in 2010, when the Fed observes core inflation fall below their 2% target they do policies like QE, and extended promises of low interest rates, in order to raise core inflation back up near 2%.

So the good news (for world peace, love and understanding) is that the Chinese and Swiss workers aren’t stealing any American jobs at all!  We are all in this together, and we all benefit from policies that boost economic growth in any one country.

Planet Earth: it’s a positive sum game.

PS.  The CA data is from the most recent issue of The Economist.  They also report that the consensus forecast for RGDP growth in the US is 2.1% in 2012 and 2.2% in 2013.  Because we are in a recovery, that’s obviously higher than the consensus forecast of trend growth.  In other words, most economists now see the US trend rate of RGDP growth as being something like 1.5%.  After 150 years of 3% trend, that’s a startling downshift.  Tyler Cowen is no longer a contrarian; The Great Stagnation is now conventional wisdom.

Before Bernanke became chair of the Fed, I regarded him as someone with shared many of my views on money/macro.  Thus I haven’t been surprised that people were able to dig up old Bernanke articles that sounded almost exactly like TheMoneyIllusion.  Recently I did a post pointing out that Bernanke shares my skepticism of traditional monetary indicators.  Here I quoted Bernanke from 2003:

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman  . . . nominal interest rates are not good indicators of the stance of policy . . .  The real short-term interest rate . . . is also imperfect . . .  Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.

In subsequent posts I emphasized the NGDP part more than the inflation part.  However, even if you average the two, policy has been tighter since mid-2008 than at any time since the 1930s.  And it seemed to me that the inflation remark was an off-handed comment aimed at placating those who were unfamiliar with NGDP.  David Eagle recently left a comment at that post, where he argued that I was wrong about NGDP; Bernanke favored inflation as a policy indicator and target.  I certainly agree that Bernanke doesn’t favor an NGDP target, but of course he’s also opposed to a strict inflation target.  And flexible inflation targets are arguably more like NGDP than inflation.

But David’s comment got me wondering whether there was other evidence that Bernanke viewed NGDP as the best indicator of the stance of monetary policy.  There is.  It’s not incontrovertible, but it’s pretty strong.  The following quotations are from a 1999 paper by Bernanke sent to me a couple years ago by Marcus Nunes, a gift that keeps on giving:

I do not deny that important structural problems, in the financial system and elsewhere, are helping to constrain Japanese growth. But I also believe that there is compelling evidence that the Japanese economy is also suffering today from an aggregate demand deficiency. If monetary policy could deliver increased nominal spending, some of the difficult structural problems that Japan faces would no longer seem so difficult.  (italics added.)

I think the key word is “deliver.”  He’s not saying the BOJ should target NGDP, rather than growing NGDP is a means to an end.  It’s an indicator that the BOJ would have successfully boosted AD, which is a necessary condition for achieving their policy goals.  The same article also says this:

Perhaps more salient, it must be admitted that there have been many periods (for example, under the classical gold standard or the price-level-targeting regime of interwar Sweden) in which zero inflation or slight deflation coexisted with reasonable prosperity. I will say more below about why, in the context of contemporary Japan, the behavior of the price level has probably had an important adverse effect on real activity. For now I only note that countries which currently target inflation, either explicitly (such as the United Kingdom or Sweden) or implicitly (the United States) have tended to set their goals for inflation in the 2-3% range, with the floor of the range as important a constraint as the ceiling (see Bernanke, Laubach, Mishkin, and Posen, 1999, for a discussion.) Alternative indicators of the growth of nominal aggregate demand are given by the growth rates of nominal GDP (Table 1, column 4) and of nominal monthly earnings (Table 1, column 5). Again the picture is consistent with an economy in which nominal aggregate demand is growing too slowly for the patient’s health. It is remarkable, for example, that nominal GDP grew by less than 1% per annum in 1993, 1994, and 1995, and actually declined by more than two percentage points in 1998.  (emphasis added.)

Here’s how I read that paragraph.  The first half is all about inflation.  It does admit that inflation is not always a reliable indicator.  That when AS is growing strongly it is possible for prosperity to co-exist with mild deflation.  Then in the second half of the paragraph he is much more forceful; using terms like “nominal aggregate demand”, “nominal monthly earnings”, “nominal GDP”, and using them almost synonymously—which is not surprising because they are basically equal in the simple circular flow set-up (although the terms can be defined slightly differently.)

I read Bernanke as saying inflation can be a misleading indicator (probably because it reflects both demand and supply shocks), but nominal expenditures is reliable, and by that indicator Japan has been too tight.  Maybe that’s wishful thinking, but unless I get forceful push back from commenters, I’m inclined to take as a given that Bernanke views falling NGDP as tight money.  The last comment in the quotation (about 1998) now seems highly ironic, given that the exact same thing happened in America in 2009.  And Bernanke said the decline in Japanese NGDP occurred because of errors of omission.  And elsewhere he said that financial problems in the banking industry were no excuse for the BOJ allowing a big decline in demand.

The 1999 paper by Bernanke, which I discuss in depth here and here, is the single best published explanation of the crash of 2008-09.  Irony just doesn’t get any more ironic than that.