Sometimes people will ask me what I think of a liberal or conservative being put on the Supreme Court.  I usually answer that I don’t care whether the nominee is a communist or fascist or vegetarian or utilitarian, as long as he or she is a good judge.  Of course they role their eyes at my naivete.  “You’d don’t really think that ideology has no impact on their decisions, do you?”  No I don’t, but it shouldn’t.  If I were on the court I’d rule Obamacare constitutional, even though I don’t like the bill.  And I’d expect the actual justices to be equally unbiased.  It’s sad that they are not.

Tim Duy recently linked to this interesting speech by Cleveland Federal Reserve President Sandra Pinalto:

I’ve been part of the Federal Reserve for a long time, more than 28 years. Those labels actually came into play when there wasn’t agreement around an inflation objective. There were some members of the Committee who felt a higher rate of inflation was appropriate. Those individuals were dubbed doves. And there were some that felt that we needed a lower rate of inflation. In fact, one of my predecessors, Lee Hoskins, was focused on achieving zero inflation. And he was considered a hawk.

We now have agreement and a statement by the Committee that 2 percent is the appropriate level of inflation. So I don’t think the titles of hawks and doves are useful when the Committee has stated that we have a 2 percent inflation goal.

If there are titles that people want to use, I would like to be labeled someone who is open-minded. Or someone who is pragmatic…

Of course a 2% inflation target should eliminate inflation hawks and doves at the Fed, and of course it won’t.  That’s because even with the Fed target of 2%, policy is neither accountable nor transparent.  The Fed has a dual mandate (not just inflation targeting), and the Fed doesn’t do level targeting.  This allows lots of wiggle room for ideological bias.

With level targeting, Fed officials would be forced to lay their cards on the table.  If a hawk wanted less inflation now, he’d know it came at the expense of more inflation later.  And if a dove wanted more inflation now, she’d know that it came at the expense of less inflation later.  They’d be forced into choosing the inflation path that resulted in maximum macroeconomic stability, which just happens to be pretty close to NGDP targeting (especially if the trend rate of real growth is stable.)

During 1933 most of the experts on Wall Street railed against FDR’s dollar depreciation program, insisting it wouldn’t work.  Meanwhile traders drove stocks higher and higher as dollar depreciation triggered rapid growth in output.  In the 1970s high inflation drove stocks lower, even as Keynesian economists peddled their Phillips Curve theories.  Since 2008 lower inflation expectations have driven stocks lower, even as old-time monetarists insist there’s an inflationary time bomb waiting to explode.  That’s why we need to replace the FOMC with an NGDP futures targeting regime.  There are no hawks or doves on Wall Street, no ideologues.  Just realists.

Tim Duy recently quoted Bloomberg:

European Central Bank Executive Board member Joerg Asmussen said the bank could start to raise interest rates to curb inflation if the economy picks up.

“The ECB will act when needed,” Asmussen said in a speech in Berlin today. “Like last spring when the economic outlook had improved and we started carefully raising interest rates.”  Still, inflation remains “in check” and will drop below the ECB’s 2 percent limit next year, he said.

Duy then made this comment:

I am not exactly sure that the ECB’s rate hikes last year are something to be proud of, nor would I describe the action as careful.  Those rate hikes arguably accelerated and deepened the European debt crisis, which necessitated a policy reversal in the fall and the massive ballooning of the ECB balance sheet.  One would think that the “careful” policy would have been to have not raised interest rates, thus lessening the degree of financial stress and perhaps avoiding subsequent large scale intervention.  Moreover, one has to question the success of any policy that helped trigger this unfortunate unemployment path:

I think Tim was being kind, this kind of statement is just bizarre.  Central banks absolutely hate doing embarrassing reversals.  It boggles the mind that someone could use this as a example of success.  Or am I missing something?

Matt O’Brien sent me a CNBC article showing that the Fed also has some rather strange employees:

Federal Reserve Bank of Dallas President Richard Fisher initially provided the only “No” vote on a motion before the Federal Open Market Committee at the height of the financial crisis””only to reverse his vote after an unrecorded lunch break, according to a heavily redacted transcript of Fed documents released Monday afternoon.

The vote took place during the first day of a two-day meeting of the FOMC on December 15 and 16. The subject of the vote is not revealed by the minutes released by the Fed. A large passage of the discussion prior to the vote is redacted.

The next day, however, the Fed announced a target range for the federal funds rate of 0 to 0.25 percent.

Immediately following the mystery vote, Federal Reserve Chairman Ben Bernanke requested a break for lunch.

Upon returning from lunch, Bernanke announced that Fisher had changed his mind.

That’s funny, I never knew Ben Bernanke was skilled at waterboarding.  Seriously, regional bank presidents should never, ever, be allowed on the FOMC.

Marcus Nunes found this gem in the WSJ:

Thirty-six of the 51 economists surveyed, not all of whom answer every question, say the central bank will refrain from another round of large-scale bond buying in 2012. The number who expect no action is up from 30 in the January survey.

“An entrenched upturn in growth, albeit anemic relative to history, is entering a sweet spot,” said Allen Sinai of Decision Economics. He noted that with the economy expanding at an adequate pace, the Fed should remain on the sidelines.

We have an “anemic recovery.”  But we don’t need monetary stimulus.  And why not?  Because we have an “adequate recovery.”  That seems to pretty much sum up macroeconomics circa 2012.

Here’s Arnold Kling discussing a recent talk by Bernanke:

Bernanke points out that on any given bad day on the stock market, more paper wealth gets lost than was lost in the subprime mortgage market. This poses a puzzle as to how the mortgage market problems could have had such greater effects. Some comments I would make:

1. Isn’t it interesting that the magnitude of the bailouts was greater than the magnitude of housing market wealth lost in 2007 and 2008? And isn’t it interesting that the economic collapse was much larger still in magnitude (particularly taking into account that economic activity is a flow rather than a stock)? This pattern of relative magnitudes is evidence in favor of Scott Sumner’s view that the financial crisis was an epiphenomenon in the context of an aggregate demand shock.

Sumner is the last holdout for conventional macroeconomic analysis. DeLong wants to go back to a pre-Hicksian version of Keynes, with all its deep logical difficulties (although empirically it makes for a spellbinding just-so story). Most economists, probably including Bernanke, want to wave their hands and talk about how breakdowns in the financial sector cause economic disaster.

And yet elsewhere in the piece Bernanke acknowledges exactly what I’ve been arguing.  It wasn’t just the financial crisis causing the recession, the recession also drove housing prices much lower (which obviously worsened the crisis):

On the surface, the puzzle of disproportionate cause and effect seems somewhat less stark if one takes the boom and bust in the U.S. housing market as the trigger of the crisis, as the paper gains and losses associated with the swing in house prices were many times the losses associated directly with subprime loans. Indeed, the 30 percent or so aggregate decline in house prices since their peak has by now eliminated nearly $7 trillion in paper wealth. However, on closer examination, it is not clear that even the large movements in house prices, in the absence of the underlying weaknesses in our financial system, can account for the magnitude of the crisis. First, much of the decline in house prices has occurred since the most intense phase of the crisis; the decline in prices since September 2008 is probably better viewed as largely the result of, rather than a cause of, the crisis and ensuing recession. (Emphasis added.)

I’d go even further. A substantial part of the December 2007 to September 2008 decline was also due to slowing NGDP growth.

Evan Soltas has a very good post on Chinese reforms:

.  .  .  China realized it faced a fork in the road: market reforms which will cut deep and make it effectively converge with capitalist economic models, or an alternative, which Bo represented, to “turn back” and reaffirm older values of egalitarianism and state-led development. The choice has now been made decisively. It wants to be South Korea.

China’s leadership will undergo change this year, with the exits of Hu Jintao and Wen Jiabao for (presumably) Xi Jinping and Li Keqiang, respectively. You should know that both Xi and Li are seen as substantially more free-market than their predecessors; this is both a generational thing in China and their particular political orientations. (See here and here.)

Furthermore, there’s been a lot of very important quiet stuff going on; the sort of change-the-world news that gets somehow put in the back of the news section. For example, today the Chinese government has decided to liberalize currency trading significantly, according to The New York Times:

“The People’s Bank of China, the country’s central bank, said that effective on Monday it would allow the renminbi to fluctuate up or down in value by as much as 1 percent against a fixed benchmark with the dollar during daily trading…Increasing the allowed range of daily volatility could increase the renminbi’s role in international financial markets.”Another thing you probably missed was the relaxation of capital controls, reported in late March. This is a very big deal because it shows how these reforms are beginning to pile on top of each other — there’s very much a point-of-no-return in liberalization (barring turmoil or outright regime change), and China is nearing it.

I call this the Korea model. Why? It’s because the Jinping-Keqiang wing of the Chinese Communist Party is looking more and more like the story of the South Korean “Grand National Party,” recently renamed Saenuri. Like China, this Korean party began with state-led export-oriented growth under Park Chung-hee, and Park’s successors have clung to this strategy. (I’ve done some reading up on this.) Since then, Korea has liberalized economically and politically, and I expect China to do the same, slowly. Although China has pursued the former more than the latter, I think this is going to begin to change, as it did in Korea, as the forms of liberalization begin to require each other to continue. That has not been true, but it will become increasingly so.

I also call it the Korea model because China’s economic development strategy, in the nitty-gritty details, is looking more and more like South Korea’s two decades ago.

It’s bad enough to come across grad students who are smarter than I am (Noah Smith and Steve Waldman); now I face the prospect of being passed by undergrads like Evan Soltas.  Time to retire.

Update: Evan is in high school.  Even worse for me!

By the way, many of his links are worth reading.  One points out that the next Chinese leader (Xi) was head of Zhejiang province, which is China’s most capitalist and most egalitarian province.  Yes, that’s right, I put ‘capitalist’ and ‘egalitarian’ in the same sentence.  The fight in China today is basically over whether China will follow the Zhejiang model.  In my view it will.  The big question is for how long can the reactionaries obstruct the reforms?

PS. For a well-informed but more pessimistic view check out this long comment by Rien Huizer.  He concludes as follows:

Unfortunately, the status quo bias is now much higher than in the 1990s and there is real money at stake. So we may see lots of symbols but only piecemeal further reform.

Here’s how The Economist recently defined wisdom:

The assessors scored participants’ responses on a scale of one to three. This attempted to capture the degree to which they discussed what psychologists consider five crucial aspects of wise reasoning: willingness to seek opportunities to resolve conflict; willingness to search for compromise; recognition of the limits of personal knowledge; awareness that more than one perspective on a problem can exist; and appreciation of the fact that things may get worse before they get better.

This got me thinking about the brilliant stars of the econ blogosphere.  Which ones are wise?  And which ones are merely brilliant?

Tyler Cowen recently linked to a 3 year old interview with Peter Singer that he called one of his “favorite outputs.”  That’s enough recommendation for me.  And indeed the interview was dazzling, but partly in the way that the brilliance of a top NBA team is most obvious when in runs all over a weaker team playing on the road and exhausted from 4 games in 5 nights.  (For those who don’t follow the NBA, playoff games are often “ugly,” as both defenses try really hard.  The athletic greatness of players is often most apparent in regular season games.)

Peter Singer is a brilliant philosopher–one of the world’s best advocates of utilitarianism.  And yet in this exchange Tyler Cowen seemed to play the role of the philosopher, whereas Singer seemed more like the stereotypical economist.  To use another basketball analogy—Singer played the role of the Washington Generals.

See if you share my stereotypes:  Economists are monomaniacally focused on maximizing aggregate utility.  We view the marginal utility of income as declining as income rises, and thus believe that transferring money from the rich to the poor will increase total welfare, unless the disincentives effects of those transfers are too high.  That was pretty much Singer.  Philosophers are wise men who understand that “more than one perspective on a problem can exist.”  They like to play with ideas, probe an issue from many different directions.  That was Tyler Cowen.

The interview addressed a recent book by Singer, where he called for people in affluent countries to give more money to charity, even suggesting some percentages based on income levels.  Tyler started the interview by agreeing with Singer about the value of charity:

Let me first stress: I agree with most of what’s in your book; I think we all could give more and should give more. It would be good for other people and it would be good for ourselves. But let me start off the dialogue by mentioning a few points where I don’t completely agree with you. One thing that struck me about the book was some of the omissions.

Then Tyler started to play around with the implications of utilitarianism.  For instance, what changes would actually most help the poor:

If I ask myself, historically, what has been the most successful anti-poverty program in the last century, I look at Communist China, and I would say that the reforms, starting in the late 1970s, have taken at least 300M-400M people, and probably more, and taken them from extreme poverty, perhaps starvation, to a situation where a lot of them live quite well or at least have some kind of tolerable lower middle class existence. I think that property rights and institutional reforms are the key to fighting poverty. China during that period, the aid it received didn’t matter much. It doesn’t mean we shouldn’t give aid, I’m all for aid, but isn’t the big leveraged investment here changing and improving institutions and not giving money?

And then there’s this:

For instance, in my view, what is by far the best anti-poverty program, the only one that’s really been shown to work, and that’s what’s called “immigration”. I don’t even see the word “immigration” in your book’s index. So why don’t we spend a lot more resources allowing immigration, supporting immigration, lobbying for immigration? This raises people’s incomes very dramatically, it’s sustainable, for the most part it’s also good for us. Why not make that the centerpiece of an anti-poverty platform?

And this:

You mentioned Paul Collier. I found his book very interesting. One argument he makes–I would say I’m not, myself, convinced but I’m curious to hear what you think–is that we could do the world a great deal of good by selective military interventions. So take the case of Darfur. A large number of people are suffering, dying. Collier says, or implies, or at least opens the possibility, that we, the United States, the UN, whoever, should just move in and in military terms do something about this. It is again a topic that is not prominent in your book, but it seems that if it can work it’s highly leveraged, more leveraged than giving away money. I’m curious as to your views on that.

And this:

Let’s say I’m an 18 year old and I’m in college, and I’ve read your book and I’m more or less convinced by it, and I say to you “well what I’ve decided to do is I’m going to have a career in the cell phone industry because I see that cell phones are revolutionizing Africa and making many people much better off. I’m not going to give a dime to poverty but I’m going to work my hardest to become a millionaire by making cheaper and better cell phones.” What do you say to me? .  .  .  Am I a better person than someone who’s earned $40K/year and every year given 15% of it away to the poor in India?

Tyler also played around with the implications of utilitarianism in a number of clever ways.  In one section he mentioned the option of increasing the tax deduction on charitable contributions, so long as they went to anti-poverty type charities.  Singer agreed, and Tyler responded:

So, in other words, you favor a kind of tax cut as a way to help the world’s poor. That, in this country, if targeted properly, tax policy, in essence cutting the taxes of rich people, is one of the very best ways to help the world’s poor. Would you sign on to that?

He also presented some hypothetical scenarios where human nature seems to conflict with utilitarianism:

What I see in your book is a tendency to say something like “people, whether we like it or not, will be more committed to their own life projects than to giving money to others and we need to work within that constraint”. I think we would both agree with that, but when we get to the deeper human nature, or do you feel it represents a human imperfection? If we could somehow question of “do we in fact like that fact?”, is that a fact you’re comfortable with about human nature? If we could imagine an alternative world, where people were, say, only 30% as committed to their personal projects as are the people we know, say the world is more like, in some ways, an ant colony, people are committed to the greater good of the species. Would that be a positive change in human nature or a negative change?

And this:

Let’s say genetic engineering is possible, which is now not so far off on the major scale, and your daughter were having a daughter, and she asked you “daddy, should I program my daughter so that she’s willing to sell her baby and take the money and send it to Haitians to save ten babies in Haiti”. Would you recommend to her “yes, you should program the genes of your baby so she’s that way”?

I exaggerated a bit at the beginning when I said Singer came across more as the economist.  Tyler did use economic concepts to probe some flaws in Singer’s reasoning:

I’m a big fan of what I call zero overhead giving, that is I send monetary transfers to poor people, maybe I’ve met them on my travels, by Western Union. I don’t follow up, I don’t monitor, there’s no tax deduction, there’s no overhead, it’s just money from me to them. What do you think of that as a way of giving?  .   .   .  Keep in mind, you’re a Preference Utilitarian. That doesn’t mean public goods can’t be more valuable, but the tendency of a Preference Utilitiarian should be to just give people resources and let them do what they want, no?

And marginal analysis:

Let me ask you a question about animal welfare. I have been very influenced by a lot of what you’ve written, but I’m also not a pure vegetarian by any means, and when it comes to morality, for instance, my view is that it’s perfectly fine to eat fish.  .  .   .  My tendency is to think that fish are ruled by a Malthusian model, and being eaten by another fish has to be painful. Maybe it’s over quickly, but having your organs burst as you’re pulled up out of the water is probably also pretty quick. I would again think that in marginal terms it doesn’t matter, but I’m more struck by the fact that it’s not your first instinct to view the question in marginal terms. You view us as active agents and ask “are we behaving in some manner which is moral, and you’re imposing a non-Utilitarian theory on our behavior.

Read the whole thing.  I’ve left out Singer’s responses.  There are certainly not unintelligent, he’s a very bright philosopher.  Yet I was struck by the fact that he didn’t seem to have previously given any thought to many of the issues raised by Tyler.  You might argue that philosophers are concerned with broad principles, not the messy details of implementation.  But Singer is very concerned with the issue of how best to implement utilitarianism.  Tyler’s questions were exactly the sort of thought experiments that philosophers wrestle with all the time.  It also got me wondering about all sorts of side issues:

1.  I’d love to see the American public polled on whether they’d prefer our current foreign aid budget be replaced with an equally costly policy of having military cargo planes fly over rural areas of developing countries, dropping lots of $1 Federal Reserve Notes.  Would Americans view it as a crackpot scheme, likely to put money in the hands of those not truly needy?  Or do they have a cynical view that most foreign aid enriches the corrupt governing elites of developing countries?  I honestly don’t know.

2.  Following up on the “cell phone entrepreneur as utilitarian hero” theme, what about  the recently deceased painter Thomas Kinkade?  (He produced lots of pretty, light-filled paintings that were universally dismissed by those with more sophisticated taste.)  Should the aesthetic elite swallow their pride, and hail him as a hero who brought great joy to the homes of millions of ordinary people?  Are liberal utilitarians both income egalitarians and aesthetic snobs?

There was a recent discussion of “labels” in the blogosphere.  I consider myself to be a utilitarian in much the same way I am a libertarian.  I don’t start out reasoning: “I’m a libertarian, and hence I must believe X.”  Rather I notice that many of my beliefs put me in the libertarian camp.  Similarly, I notice that in most of the disputes pitting utilitarianism with deontological approaches (such as the view that organ sales are disgusting, or taxation is theft) I end up in the utilitarian camp.

It seems to me that most criticism of utilitarianism is flawed in one of two ways:

1.  Some critics will complain that utilitarianism sanctions behavior X, which is obviously morally revolting.  Thus I was quite proud to find out yesterday that Jeremy Bentham wrote a defense of homosexuality at a time when the punishment for sodomy was hanging.  In my view, utilitarianism is the direction of history, the evolution of our moral sensibilities that occurs with greater education and exposure to diversity of lifestyles.  I wish I had Bentham’s courage.

2.  Some critics will take advantage of our lack of imagination; pitting the acute suffering of one person against small benefits to millions.  It’s easier to empathize with the acute suffering, and yet in our everyday life (flu vaccines, driving 65MPH), we often trade off a few lives to make things a bit more comfortable for the rest of us.  An even more egregious example occurs when people say “Suppose horrible situation X result in higher aggregate utility.  Would you favor horrible situation X.”   They usually pick an example that would not in fact increase aggregate utility.  They then try to get you to say you approve of horrible situation X, so that in their blog they can say “Sumner supports horrible situation X, he must be a really bad man.”  But if you ask why X would be so bad, all they can say is “consider the suffering.”  Exactly.

No need to be ashamed to call yourself a utilitarian.  But it doesn’t really answer any questions, it’s merely a label that describes where some people tend to end up.

I was recently reminded of Steve Waldman’s extremely fertile mind when I reread an old post on technology that Tyler Cowen also likes.  As you will see, I am much less impressed by Steve’s post-Keynesianism, but even in a post I don’t much like there is one brilliant idea.  Here’s Steve:

I am not neutral between the economic schools I’ve identified for a love-fest. Although I dislike binding myself with labels, I lean post-Keynesian. I agree with many critics that monetary policy alone is unlikely to be effective, and my gut inclination is not at all favorable to monetary policy as an instrument. I think overreliance on monetary policy, especially during the so-called Great Moderation, played a key role in the development of socially destructive inequality and economically catastrophic patterns of aggregate investment.

I’m not quite sure what it means to be “not at all favorable to monetary policy as an instrument,” but I suspect I wouldn’t like any of the possible interpretations.  To me, the most natural interpretation of that phrase is that Steve Waldman favors a barter economy.  But I very much doubt that’s what he had in mind.  Other possible interpretations are that Steve favors a monetary system, probably even a central bank, but doesn’t want the central bank to “do monetary policy.”  But what does that mean?  Hold the short term rate constant?  That could easily lead to hyperinflation or hyperdeflation in the long run, policies Waldman presumably opposes.  Keep the monetary base fixed?  Waldman is a post-Keynesian, not an right-wing monetarist.  A few paragraphs later his policy preferences come into focus:

The incremental cost of trying a bit more monetary policy seems small to me by comparison. I don’t think it’s likely to work, but I am heartened at least that the variant proposed by the market monetarists is much less toxic than the mainstream dogma that, de jure or de facto, prizes price stability above all things. I’m still skeptical, but NGDP path targeting represents a huge improvement over inflation targeting as a monetary policy rule. I’d be willing to give it a try. In exchange, I’d like to try to persuade monetarists of good will to agree to limits on what constitutes legitimate monetary policy, and to assent to a coherent and non-corrupt fiscal lever as a backstop.

This sets up a wager that both sides should smugly accept. The market monetarists should be glad to accept the fiscal backstop, despite theoretical objections, because they should be sure that it will not need to be used. I can put up with one last big monetary push. I expect it won’t work, but it will automatically open the door to policy that I’m pretty sure will work. In either case, whichever side is wrong will be glad to have taken the bet.

This sounds pretty market monetarist to me, and I’d be happy to do that bet, especially if the back-up was a coherent and non-corrupt fiscal policy.  I presume Steve means simple old-fashioned monetary policy, with none of the bells and whistles added since 2008.  No Fed purchases of dodgy assets, no interest on reserves.  Just straightforward swaps of cash for bonds.  I’m all for that.

So what would happen if we did Steve’s proposal?  The answer is simple.  We’d never, ever, use fiscal stimulus, as the demand for base money is relatively low in an economy with a 5% NGDP target, level targeting.  Especially if the base money pays no interest.  I’d guess that this deal would force the Fed to cut the monetary base by roughly 60% over the next year in order to hit its NGDP target.

Sure anything is theoretically possible.  It’s possible people might want to hold 100% of GDP in the form of cash in an economy where NGDP is trending upwards at 5% a year.  And it’s theoretically possible I’ll win the Nobel Prize in economics.

If we could truly finance all of government by borrowing at zero per cent interest, I’m all on board for aggressive tax cuts and a bigger national debt.

There are actually two reasons why I love Steve’s idea.  First, I like the money first approach.  I’ve always argued we should rely on monetary policy unless the Fed runs out of ammunition.  But more importantly, I’d love to see Keynesians sign on to this idea, as it would force people to think about just what it means to run out of ammunition.  And that would make them realize just how far we are from running out of ammunition.  And that would make them realize what an outrage it is that the Fed refuses to act despite not having even come close to running out of ammunition.

PS.  My first remarks might seem to some to represent exactly the sort of sarcastic, cheap shot, egotistical point scoring that Steve was earnestly (and correctly) arguing against.  Not so.  I swear to God I have no idea what people mean by being “opposed to using monetary policy” (unless they want to abolish the Fed.)  And I have a hunch that my policy differences with the mainstream have a lot to do with the fact that most people seem to think the phrase “not relying on monetary policy” has some sort of coherent meaning.  Perhaps that’s because I see monetary policy as being solely responsible for driving the nominal economy, the only question is which direction you steer.  Whereas post-Keynesians (and many others) don’t seem to have any model of the nominal economy at all.  For them, the current price level can only be explained in terms of the previous price level—it’s a historical datum.

PPS.  My previous post discussed Tyler Cowen’s suggestion that our universities seem like a complete mess.  In a perfect world Steve Waldman (a grad student at Kentucky) would be getting dozens of unsolicited job offers solely on the basis of the post I linked to first.  Great programs would be constructed by hiring great minds.  Alas, that’s not how things work.