Archive for August 2012


An outbreak of mass sanity

It’s starting to feel like October 2011, when there was a wave of high profile endorsements of NGDPLT.   Several Fed officials have recently spoken favorably of NGDP targeting, just endorsed it, and now Michael Woodford has done so as well.  He’s probably the world’s leading macroeconomist.

Hours later Saturos sent me a link from the WSJ:

JACKSON HOLE, Wyo.-A key Federal Reserve official said Friday he sees potential value in charging banks to park reserves on the central bank’s balance sheet.

In an interview with Dow Jones Newswires on the sidelines of the Federal Reserve Bank of Kansas City’s research conference in Jackson Hole, Wyo., St. Louis Fed President James Bullard says he sees potential benefit from imposing negative interest rates on the excess reserves banks currently park at the Fed.

Banks are now currently paid 25 basis points to keep money at the Fed. Even at such a negligible level, banks have parked massive amounts of cash at the central bank that could be put to work in the economy.

“I’m becoming more sympathetic” to the idea a new avenue of monetary policy stimulus could involve the Fed moving into “negative territory,” Mr. Bullard said. From the current level, “you could go to minus 25 or minus 50 (basis points). That gives it more punch” than simply cutting the level to zero, he said.

If negative rates were put in place, “it would definitely change the calculus for the banks,” Mr. Bullard said. The official noted “support has waxed and waned” inside the Fed for this action, but “now that other countries have tried negative rates, I think we could do that as well.”

Wow, where are Fed people suddenly getting all these great ideas?  Maybe from that 2009 New York Fed report that discussed the option of negative IOR.  And guess who they cited as first publishing an article discussing the idea.  Also note that Woodford mentioned David Beckworth, so we know he’s familiar with market monetarism.

To get serious for a moment, Bullard doesn’t even have a vote on the issue, as it’s a Board decision.  There’s debate about whether the Fed has the authority, but they showed in 2008 that they can get really creative.  I’m told that the new FDIC fee plan is already a tax on ERs (someone should double-check), so lowering IOR to zero would effectively create a negative IOR.  Also, does anyone know if the FDIC fee applies to that part of reserves that are vault cash?

I’d still vastly prefer a higher NGDP target over negative IOR.


Lars Christensen sent me the latest from Jackson Hole:

An  alternative  that  I  believe  should  be  equally  easy  to  explain  to  the  general public,  but  that  would  preserve  more  of  the  advantages  of  the  adjusted  price-level  target path, would be a criterion based on a nominal GDP target path, as proposed by  Romer  (2011)  among  others.      Under  this  proposal,  the  FOMC  would  pledge  to maintain the funds rate target at its lower bound as long as nominal GDP remains below a deterministic target path, representing the path that the FOMC would have kept it on (or near) if the interest-rate lower bound had not constrained policy since
 late  2008.  Once  nominal  GDP  again  reaches  the  level  of  this  path,  it  will  be  appropriate to raise nominal interest rates, to the level necessary to maintain a steady growth rate of nominal GDP thereafter.

.  .  .

Essentially,  the nominal GDP target path represents a compromise between the aspiration  to  choose  a  target  that  would  achieve  an  ideal  equilibrium  if  correctly understood and the need to pick a target that can be widely understood and can be implemented in a way that allows for verification of the central bank’s pursuit of its alleged  target,  in  the  spirit  of  Milton  Friedman’s  celebrated  proposal  of  a  constant growth rate for a monetary aggregate.  Indeed, it can be viewed as a modern version of Friedman’s “k-percent rule” proposal, in which the variable that Friedman actually cared  about  stabilizing  (the  growth  rate  of  nominal  income)  replaces  the  monetary aggregate that he proposed as a better proximate target, on the ground that the Fed had  much  more  direct  control  over  the  money  supply.   On  the  one  hand,  the  Fed’s ability to directly control broad monetary aggregates (the ones more directly related to  nominal  income  in  the  way  that  Friedman  assumed)  can  no  longer  be  taken  for granted, under current conditions; and on the other hand, modern methods of forecast targeting make a commitment to the pursuit of a target defined in terms of variables that  are  not  under  the  short-run  control  of  the  central  bank  more  credible.  Under these circumstances,  a  case  can  be  made  that  a  nominal  GDP  target  path  would remain true to Friedman’s fundamental concerns.

That’s right.  NGDPLT is the natural progression of Milton Friedman’s monetarism.  Updated for the 21st century.

PS.  Lars also has a post.

Was money easy or tight during the Great Depression?

Joe Gagnon (and Michael Darda) sent me a paper from the Dallas Fed written by William White:

The central banks of the advanced market economies (AME’s) have embarked upon one of the greatest economic experiments of all time”ultra easy monetary policy. In the aftermath of the economic and financial crisis which began in the summer of 2007, they lowered policy rates effectively to the zero lower bound (ZLB). In addition, they took various actions which not only caused their balance sheets to swell enormously, but also increased the riskiness of the assets they chose to purchase. Their actions also had the effect of putting downward pressure on their exchange rates against the currencies of Emerging Market Economies (EME’s). Since virtually all  EME’s tended to resist this pressure, their foreign exchange reserves rose to record levels, helping to lower long term rates in AME’s as well. Moreover, domestic monetary conditions in  the EMEs were eased as well. The size and global scope of these discretionary policies makes  them historically unprecedented. Even during the Great Depression of the 1930’s, policy rates  and longer term rates in the most affected countries (like the US) were never reduced to such  low levels .

There’s plenty to object to in White’s call for tighter money, but I’d like to focus on a peculiar trend in macroeconomics, the bizarre equation of “ultra-easy money” with low interest rates and a bloated monetary base.  Until 2008 the standard view of macroeconomists was that money was ultra-tight during the 1930s, despite the very low rates and the bloated Fed balance sheet.  White is clearly familiar with the stylized facts of the Depression, and almost undoubtedly has read Friedman and Schwartz’s explanation of why money was very tight.  But he seems to reject that claim.  In his view money was easy during the Depression (low rates) and is even easier today. 

Why has the Friedman and Schwartz view been rejected by White?  And why was it rejected by John Cochrane, who made a similar claim a few weeks back?  And why has it been rejected by Bernanke, who endorsed the F&S view as recently as 2003?  Bernanke also claims current policy is accommodative, despite the slowest growth in M*V over the past 4 years since Herbert Hoover was President.  You can explain away Bernanke’s comments, as he’s a government official.  But why have roughly 99% of macroeconomists completely flip-flopped from 2008, when money was almost universally viewed as being ultra-tight during the 1930s?  So much so that Friedman and Schwartz’s interpretation had worked it’s way into undergraduate textbooks.  Why do they now think low rates and a bloated base mean easy money?

If the profession as a whole is unable to understand the highly contractionary nature of current policy, is it any surprise that they are having trouble coming up with remedies for our current demand shortfall?

BTW,  Joe Gagnon had similar objections, and allowed me to reprint some comments from his email:

Milton Friedman warned against confusing the level of interest rates with the stance of monetary policy.  Friedman pointed to the growth rate of M2 as the ultimate indicator of monetary policy, but I think his closest modern heirs (and I) would prefer the growth rate of nominal GDP.  Keeping nominal GDP on a steady growth track is the best we can hope from monetary policy.  Nominal GDP growth has trended downward since the 1980s and is low right now.  I conclude that monetary policy is somewhat too tight.

The trend decline in the real interest rate is driven by an aging population (less demand for capital) in advanced economies plus the massive wall of official capital flowing out of the developing economies.  Both of these tend to drive down the equilibrium real rate of interest in the advanced economies.

In previous posts I’ve also argued that long term real rates are on a downward trend due to demographics and high East Asian savings rates.

PS.  Lars Christensen has a very good post showing that the central bank of New Zealand has essentially endorsed the (unfortunately named) “Sumner Critique.”  They aim to prevent fiscal policy from impacting AD.  He also links to  Nick Rowe paper on this topic published back in the 1990s.

PPS.  Mark Sadowski sent a link showing that has officially endorsed NGDP targeting.  The momentum builds.

PPPS.  An unrepentent Christopher Balding has replied to my demolition of the “50 percent of Beijing apartments are vacant” story.  He repeats the absurd claim that 50% of Beijing apartments are empty.   Just stop to think for a moment, there are 20 million people in Beijing–does he think there’s enough housing for 40 million?  People need to use common sense.  His evidence?  Some unnamed people looked in a few windows at night to see if the lights were on.  Well there you are!!  Beijing has 20 million people, but there is enough housing for 40 million.  As I type this it is 9:30pm in Beijing.  I’m in a big apartment complex with about 700 units.  In a typical west-side Beijing neighborhood.   I can look out the window and see other buildings in the same complex.  About half the lights are on.  So is Balding right?  The owner tells me that the complex is virtually 100% occupied.  But what would she know, she’s only lived in the area for 50 years.

His evidence that China has a high cost of living (which goes against common sense, and every published study of PPP that I have ever seen), relies partly on inspecting a few grocery items in Shenzhen.  That’s right, the Shenzhan that is China’s most important SEZ.  The one that’s probably the richest city in mainland China.  I’m sure if he lived in Palo Alto he’d tell us that the US had a high cost of living.  I see that commenters have poked lots of other holes in his post. 

Unlike Balding, I’ve never shopped at a Chinese Carrefour (a French chain), rather I go to supermarkets where ordinary Chinese shop.  And with a few exceptions (such as dairy) the prices in China are lower.  Commenters “Nick” and “Sean” provide the goods.

Balding also claimed this:

Despite all evidence to the contrary, Prof. Sumner is saying as an economy, there is no bad investment in China

When bloggers make up those sorts of fibs it tells you pretty much all you need to know about their veracity.

Is China a Hayekian success story?

And now moving on from the ridiculous to the sublime. . . .  I am currently reading a brand new book on “How China Became Capitalist,” written by Ronald Coase and Ning Wang.  Coase on China!  Isn’t that pretty much the dictionary definition of “self-recommending?”

The authors set the stage by discussing policy attitudes at the time Mao died in 1976.  They emphasize two points:

1.  There was a sharp move away from ideology, partly in reaction to the chaos of the Cultural Revolution.  The new motto was “seek truth from facts.”

2.  At the same time policymakers couldn’t even imagine any non-socialist paths for China.  Capitalism was out of the question.  The goal was a more effective socialism.  This may seem odd given the messed up state of China’s economy, and the subsequent reforms.  But those problems were attributed to the Great Leap Forward and the Cultural Revolution, which were seen (accurately) as deviations from Stalinist orthodoxy.  The Soviet economy was still seen as a success story in 1976, as they had industrialized rapidly and beaten the formidable German army. 

The focus of the leadership was on the crown jewels of the Chinese economy; the big state-owned enterprises.  The goal was to make them more efficient, partly by reorganization, partly by importing Western technology and ideas.

The initial reforms were timid; they did not allow the SOEs to set wages or prices, or lay off workers.  And the results were predictably disappointing, although a bit of progress was made (partly by rehabilitating all the technical experts who had been ostracized and exiled during the Cultural Revolution.)  But Wang and Coase focus elsewhere, on what they called the “marginal revolutions.”  These were the changes that occurred at the margins of society, in the backward areas where the Chinese leadership was not focused.  The leadership had a sort of laissez-faire attitude toward these marginal areas, letting those groups experiment as long as they didn’t adopt capitalist practices.

Wang and Coase emphasize 4 marginal areas of the Chinese economy:

1.  The very backward farm sector, which had low productivity under the Maoist system of communes.

2.  Rural organizations such as township governance units.  These were the groups that implemented the insane GLF policies such as encouraging farmers to set up steel mills.

3.  Twenty million unemployed youth in the cities, who had just returned from the countryside (where they had been sent during the Cultural Revolution.)

4.  The coastal areas in southeast China, which were relatively underdeveloped in industry, partly due to fear of a Taiwanese invasion.

In these four areas the Chinese government was willing to tolerate some experimentation, but no capitalism.  But capitalism is what they got.  These marginal groups continually overstepped the boundaries of what the Chinese government was willing to allow.  Sometimes they went to jail.  Sometimes the Chinese government later allowed the experiment to continue.  This gave the central government a sort of “deniability” if things went wrong.  They could say the innovations had been illegal, and shut them down.

People often praise the Chinese government for their “wise reforms.”  Sorry, but these reforms were not implemented by the Chinese government, they were implemented by the Chinese people, at great personal risk.  The government grudgingly OKed them much later.  The only exception was the 4 SEZs of southeast China, which did provide some legal protection for foreign firms.  But even there the foreign investments started before there was any legal protections.  Hong Kong was investing in Guangdong as early as 1978, before the SEZs were set up in 1980. 

The most interesting case was the “township enterprises,” which were supposed to be “collectives.”   In the end it turned out that they were overwhelming private firms; entrepreneurs put on a “red hat” so that they wouldn’t seem like capitalists.  Deng Xiaoping was amazed by their success in the 1980s, when small manufacturing firms sprouted up all across the countryside.  Deng had focused on fixing the SOEs, and didn’t expect much of anything from the rural sector.

The unemployed urban youth were allowed to become self-employed, but they naturally overstepped that boundary and started hiring (i.e. “exploiting”) lots of workers.  Eventually this was allowed, but as late as 1992 Deng had to intervene to protect a particularly successful seller of watermelon seed snacks from going to jail for the crime or running a business.

Coase and Wang didn’t exactly call China a Hayekian success story, but that seems to be their message.  Thirty years after reforms began in 1978, China’s economy was about 70% private enterprise and 30% SOE.  That 70% was created in classic Hayekian fashion, with spontaneous experiments all across China, especially among the poorest and more marginalized sectors of society.  By 1988 those marginalized groups had often moved ahead of their richer neighbors, who worked in the urban SOEs.

I’m only half way through the book.  Eventually the urban sector bounced back, and raced ahead of the countryside.  I believe in the second half of the book they explain how SOEs were allowed to set wages and prices, lay off workers, issue stock, make foreign investments, etc.  So the 30% that is still communist is rapidly evolving toward capitalism.  I’ll do another post when I finish the book.

I just saw that the city of Hangzhou is going to have a Hong Kong firm run it’s subway system.  They’ll make money by setting up large shopping centers along the way.  I can’t even imagine a city like New York doing something so capitalistic.  Can you?

More to come . . .

PS.  Obviously Hayek would not approve of the soft budget constraint on the big SOEs.

For the record . . .

Morgan Warstler sent me a list of economists supporting Mitt Romney for President.  For some reason my name is on the list—presumably a prank on someone’s part.  I can’t imagine why anyone would care who I support for President, but for the record I have not endorsed anyone.  My endorsement will occur the first Monday in November.

Update:  I should emphasize I am not accusing the Romney campaign of deception.  This obviously doesn’t help them.  They contacted me today and told me that I had replied affirmatively to a call for support.  Don’t know how that happened—perhaps something to do with the “out of office” automatic reply?  They removed my name.