ABC News jumped on the recent Colorado tragedy and immediately blamed the Tea Party:

ABC News has suggested that James Holmes — the suspect in today’s shooting in Aurora, Colorado — may have a connection to the Tea Party.

Later they had to apologize:

“An earlier ABC News broadcast report suggested that a Jim Holmes of a Colorado Tea Party organization might be the suspect, but that report was incorrect,” ABC News said in a statement. “ABC News and Brian Ross apologize for the mistake, and for disseminating that information before it was properly vetted.”

Certainly an easy mistake to make.  After all, you wouldn’t expect there to be two people in America with such an uncommon name as James Holmes.  And wouldn’t you expect an anti-big government group full of older middle class people to try to popularize its cause by shooting up a private sector movie theatre in a conservative part of America.  Makes sense to me!

Reminds me of when Paul Krugman jumped on the earlier Tucson shooting, implying the conservatives were somehow encouraging a climate of violence.

I think there’s a deeper problem here.  Progressives see their ideology as being somehow more rational.  Perhaps in some ways it is (although I’d argue not in all ways.)  Then they assume those on the other side must somehow reflect dark irrational forces.  Again, there are people like that on the right.  But here’s what can happen when you start thinking that way.  Tyler Cowen is probably the most reasonable, moderate, open-minded, thoughtful thinker on the right.  The sort of voice that open-minded people on the left should welcome.   He writes a column in the NYT that has a very balanced view of the issue of health care, coming out for a mixed public/private system.  Saying there are no easy answers, etc.  Then Aaron Carroll responds with a ridiculous post that accuses Cowen of making all sorts of claims that he never made.  Pure fabrication.  Perhaps Carroll assumed the worst because Tyler is on the “other team.”  Anyone who read Tyler’s column and the Carroll post, would immediately see that it was completely inaccurate, not even close. That is anyone who doesn’t view the world through politically-tinted glasses.  Thus Paul Krugman and Brad DeLong both linked approvingly to the Carroll post.  This is really really sad to see.  Especially because these two individuals are so brilliant, so talented at blogging.  Krugman’s recently had great posts on everything from the Fed to the euro to noise in restaurants.  But when it comes to politics he becomes completely unhinged.

Off topic:  Here’s something the American left and right should be able to agree on:

Impoverished North Korea is gearing up to experiment with agricultural and economic reforms after young leader Kim Jong-un and his powerful uncle purged the country’s top general for opposing change, a source with ties to both Pyongyang and Beijing said.

Not just good news, but a story that could well end up being far more important that the US election campaign.  Let’s hope it’s true.

The euro project is about as far removed from a “spontaneous order” as you can get.  It was dreamed up by unelected bureaucrats in countries like France, and rammed down the throats of the European public.  It artificially fixes the exchange rate between countries with vastly different economic structures and a high level of wage rigidity due to extremely interventionist labor laws.  Free market supporters like Milton Friedman and Margaret Thatcher correctly predicted that it would lead to massive problems.

And now we’ve reached the point where even publications that are generally sympathetic to the European project admit:

Any fair reckoning of the euro must therefore judge it to have been a failure.

So it must be time for libertarians everywhere to gloat, right?  Unfortunately, all I seem to see is libertarians claiming the euro is not the problem.  Both Daniel Mitchell of the Cato Institute and John Cochrane cite the following statement by Pascal Salin with approval:

Contrary to what is claimed daily in the media by politicians and many economists, there is no “euro crisis.” The single currency doesn’t have to be “saved” or else explode.

Mitchell says the real problem is big government.  I also favor smaller government, but that doesn’t make big government the cause of every economic problem.  If the Spanish and Greek governments shrank enough to balance their budgets, they’d still have 24% unemployment, if not more.  Their economies are hopelessly uncompetitive at the current exchange rate.  Milton Friedman understood that.  What in the world has happened to the modern libertarian movement?  If we can’t gloat over the failure of the euro-project, what can we gloat over?

PS.  I don’t even know whether Mitchell or Cochrane self-identify as libertarians.  I’m using the term loosely to designate people who clearly have pro-free market views.

One common worry about NGDP futures markets is that no one would be interested in trading the contracts.  After all, if there was interest then why wouldn’t someone already have created such a market?

In fact, the lack of interest in NGDP futures would actually improve the efficiency of an NGDP targeting regime.  If lots of people wanted to hedge against NGDP risk, then a futures price might be biased, it might not reflect the expected future level of NGDP.  In other words, it might include a risk premium.

But the bigger problem with these critics is that they haven’t bothered to even read the proposals.  The plan is to have the Fed subsidize futures trading, at a level high enough to create a relatively efficient market.

Robin Hanson makes a similar point (when criticizing Casey Mulligan):

No, a market can single-task, with no other function than prediction, and no other trader motive than selfish financial profit, if someone who wants the info will pay to subsidize the market. It is only when you want people to answer your question for free that you’ll have to piggyback on their having some other reason to trade.

Of course there’s no guarantee that your willingness to pay for some info exceeds other folks’ cost to supply that info. Supply and demand curves need not intersect at a positive quantity. But that’s hardly a failure of an info exchange mechanism.

Later Robin criticizes Snowberg, Wolfers, and Zitzewitz on much the same grounds:

Noise traders are traders who subsidize your market for free, for reasons of their own, such as risk-hedging, idiocy, etc. If you fail to attract noise traders, you fail to get their free subsidy. But you can still offer to directly pay for your info, by subsidizing the market, as the Microsoft sentence in the quote indicates. Similarly, if employees find executive questions uninteresting, that just means they won’t answer such questions as freely in their spare time. But that hardly means firms can’t pay employees to address key firm questions. Here we are only talking about a “failure” of prediction markets to mooch stuff for free!

Given the cost of business cycles can run into the trillions of dollars, I don’t see any problem with the Fed spending a few millions, or even tens of millions, to insure interest in an NGDP futures market.

Michael Sankowski says the following:

Economically useful contracts apply to every possible futures contract design. If the contracts aren’t economically useful, nobody trades them. This means the Central Bank does not get private sector forecasts from NGDP level futures.

Michael still doesn’t seem willing to actually read the proposals; otherwise he would have known that the market would be subsidized, so there is zero risk of no one trading the contracts.  If no one else trades, I will, and I’ll gladly walk away pocketing the entire multi-million dollar subsidy.

Later he repeats the claim that Goldman Sachs would walk off with $500 billion despite the fact that the Fed could easily set up the market in such a way that it never took a net long or short position.  I think people might find it more useful to think of this as a “prediction market” rather than a “futures market.”  The point is to have the public predict the monetary policy instrument setting that is most likely to result in on target NGDP growth.  There are many ways of doing this, some allow the Fed to take a position (if it sees market inefficiency) and others work more automatically, setting the instrument at the point where the public’s net long and short positions exactly balance out.  It’s entirely up to the Fed how much risk it wants to take.  I could easily visualize a small prediction market, in the millions of dollars, not billions.   Studies suggest that even smaller prediction markets (in the thousands of dollars) can be highly efficient.

Here’s another common misconception about prediction markets, this time from Free Exchange:

FOR over a year, the prediction market site Intrade offered a contract on whether the Supreme Court would rule the Obamacare’s individual mandate unconstitutional by the end of 2012. For most of its life, the contract traded below $5; the collective wisdom of the market suggested the mandate would stand. In late March, however, a surge of public scepticism about the Court’s tolerance for the mandate led to an impressive jump in the price. By the eve of the Court’s ruling, the market put the odds that it would be struck down at nearly 80%. Then the fateful day arrived””and on word that Chief Justice Roberts voted to uphold the mandate as a tax the contract instantly plummeted to near zero. So much for the wisdom of the markets, right?

Not quite, says a new NBER working paper by Erik Snowberg, Justin Wolfers, and Eric Zitzewitz. Their research sets out to show how prediction markets can provide the best available estimates of future events and figures. Yet while the paper argues strongly for the utility of markets, it also offers plenty of reason to treat their conclusions cautiously.

.   .   .

In what ways do prediction markets fail? The paper provides some discouraging answers. First, they struggle when there is a high degree of insider information. On the question, “Will the mandate be struck down”, for instance, only the Chief Justice himself could say for sure, and so the market was likely to be wrong. There must be information to aggregate.

The market didn’t “fail” at all, the 80% forecast was probably the optimal forecast.  And it’s not true that the traders had no information—the questions asked by the conservatives made many people think they were leaning toward rejecting the individual mandate.  And they were leaning that way!  Kennedy was almost universally viewed as the swing vote, and even he ruled against Obamacare.  What few people expected was a last minute change of heart by Roberts.  Sure, there was always some uncertainty, that’s what 80% means.  That’s why the market didn’t price in a 100% chance of the law being overturned.  (Robin Hanson makes a similar argument.)

Consider the following analogy:  Two prediction markets are set up to predict the toss of the coin before the next Super Bowl.  One says 50% odds of heads and the other says 58% odds of heads.  Then the coin is tossed, and it’s heads.  Which market “failed?”  I’d say the market with the 58% forecast.  They made a bad forecast and simply got lucky.  I find people are way too mesmerized by predictive success.  The important issue is whether a market delivers an optimal forecast, not whether it turns out to be correct in any single case.

Some people argue that the housing crash caused the Great Recession.  Others think it was tight money, which led to a big fall in NGDP.  So what would happen if housing started growing again, contributing positively to RGDP growth?  Market monetarists like me say it wouldn’t help, unless NGDP began rising more rapidly.

I am seeing increasing reports of a housing recovery (here and here) with housing starts up sharply in recent months.  I look forward to seeing the second quarter NGDP and RGDP numbers.  I fear that if the NGDP number is disappointing, then RGDP will also disappoint.  The culprit will be some other sector this time, not housing, and probably not autos.

We’ll find out next week.

Off topic:  Matt Yglesias asked if I agreed that the GDP deflator was a better inflation target than the PCE (or CPI.)  I do.

This is from the NYT:

FRANKFURT “” The International Monetary Fund, warning of “a sizable risk” that some euro zone countries could suffer a debilitating decline in prices, called on Wednesday for the European Central Bank to pump money into the region’s economy by buying huge volumes of government bonds.  .   .   .

Richard Barwell, an economist at the Royal Bank of Scotland, doubted that the central bank would follow the monetary fund’s advice without evidence of deflation throughout the euro zone. “I think they would view it as being counterproductive,” he said. “It would be alleviating all pressure on policy makers to solve the underlying cause of the problem.”

In the old days doctors usually did more harm than good.  They’d prescribe some sort of quack medicine with dangerous side effects.  Then when the patient got even worse, they’d up the dosage.

In late 2008 the ECB inflicted an extremely tight monetary policy on the eurozone, which has been maintained ever since.  This turned what would have been a modest debt crisis centered in Greece into the greatest debt crisis in world history.  And it’s going to get even worse.  Then the ECB decided the real problem wasn’t falling NGDP, but rather irresponsible governments that refused to balance their budgets.  So they decided to put pressure on these governments with a tight money policy.  Even if the afflicted countries did substantial fiscal reforms (as in Portugal, for instance) the deeper drop in NGDP tended to slow the progress toward a balanced budget.  This convinced the ECB that the deadbeats were slacking off in their resolve to make painful cuts, and thus another round of tight money was called for.

The beatings will continue until morale improves . . . er, I mean the tight money will continue until budgets are balanced.

PS.  There’s another journalist endorsing NGDP targeting, someone with the initials L.S. at Free Exchange:

There is a point here. Why elect politicians to govern the country when the key levers of economic control lie elsewhere? It was the same question asked on Greek squares last month. Liberal Democrats keen to oust Lords from Britain’s Parliament must ponder if it’s worth the bother, when a King down the river holds more power than the lot of them.  .  .  .

At present there is a pretence that the Bank of England’s only target is inflation. Everyone knows this is false: the Bank is pursuing a loose monetary policy to help growth. The Bank should be explicit about this. Rather than keep apologising to the Chancellor for overshooting, the Governor should have a mandate to target GDP too. Nominal GDP targeting would be better than the current charade. The credibility of the Bank and the government would be best served by an official change.

I like the term ‘charade.’  It’s becoming increasingly clear that inflation targeting was a mistake, and that Bennett McCallum was right all along.  NGDP targeting is the logical policy, as it best reflects the actual goal of policymakers around the world.  Let’s end this charade.