Everyone seems to believe America is becoming more polarized.  The right and left increasingly live in different states, and watch different news shows.  In my home state (Wisconsin) neighbors and even family members have stopped talking to each other.  There’s a loss of collegiality in Congress.  The list could go on and on.

I’m not sure why this is happening, but my hunch is that it partly reflects the fact that the GOP is becoming less utilitarian (but why?), and it might also partly reflect the increasing ethnic diversity in America.  But ethnic diversity isn’t the only issue (certainly not in Wisconsin.)  I’ll address the role of utilitarianism in another post—but the bottom line is that Romney’s a utilitarian trying to run as an ideologue, and failing miserably.

In this post I’d like to point out that I’m an exception, I’ve become less polarized over time.  I don’t have strong feelings about either party.  But that’s not because I’m wishy-washy (are you listening Morgan?) but rather because I’m an American.  If I was a European I’d be incredibly polarized, much more than Paul Krugman.  (Yes, I’m misusing the term ‘polarized’ but you know what I mean.)

Here’s the European right:

After the second world war the far-right was taboo in much of Europe. As memories of the war fade, Europe’s far-right parties have adopted the welfare aspirations of the centre-left and flavoured them with protectionism and nationalism. Their increasing popularity suggests that this recipe will go down well””unless mainstream parties find ways to calm voters’ pressing anxieties over culture, identity and Europe’s way of life.

There are items on that list that would appeal to someone like Paul Krugman (although of course he’d nonetheless be repulsed by their overall message.  Indeed he’s one of the few bloggers to warn about recent trends in Hungary.)  But there’s nothing much there to appeal to a pragmatic libertarian like me.  It’s all big government; statism, protectionism, nationalism, xenophobia, cultural conservatism, etc.—especially in Eastern Europe (less so in Holland.)

The US really needs the sort of parliamentary system they have in Europe.  We need three parties; the Social Democrats, the Free Democrats and the Christian Democrats.    We are missing a socially liberal and economically conservative party like the Free Democrats.  Or like the center-right parties than now govern Sweden.

If we had such a party then we could make Mitt Romney its leader.  And he could run on what he actually believes.  And I’d have a home.  And they’d often be the swing party in coalition governments, keeping the two extremes in line.

PS.  I’m well aware that the center-right parties in Europe are in many respects to the left of our Democrats.  But the point is that these parties are gradually pushing their countries toward lower MTRs, vouchers in education, privatization, etc, etc.  Don’t just look at levels, look at the direction of change they favor.

PPS.   Saturos sent me this statement from John Barrdear:

In other words, I read this speech as evidence that Kocherlakota’s underlying philosophy remains unchanged, but his perception of the problems to which he needs to apply that philosophy has changed.  That doesn’t make him a leopard changing it’s spots, that makes him principled, intelligent and open minded.

I completely agree; if people read my Kocherlakota post as saying something different, then I probably worded it poorly.  BTW, I was an inflation hawk in the 1970s, and my underlying philosophy remains unchanged.

The Fed seems to be far less dysfunctional than just a few months ago.  Did this guy play a role?

On Thursday July 12, Federal Reserve Chairman Ben Bernanke called or met with Treasury Secretary Timothy Geithner, a senior Republican senator, Bank of Canada Gov. Mark Carney and Princeton University economics professor Harvey Rosen. He also met with Carl Robinson.

In fact, Mr. Robinson, the managing partner of Vantage Leadership Consulting, a Chicago strategic talent-management firm, has been a frequent visitor to the Fed chairman’s office this summer.

Though Mr. Bernanke’s schedule is generally crammed full of gatherings with staff, other policy makers and prominent figures in academe and finance, the Fed chief met four times with Mr. Robinson between May 9 and July 20, according to Mr. Bernanke’s monthly calendars of appointments, obtained through public-records requests. He also met twice with the Fed chairman in 2011.

A 58-year-old licensed psychologist, Mr. Robinson specializes in helping companies foster leadership, both in working with firms to select leaders and through executive coaching, according to the Vantage website.

.   .   .

While his work varies with each organization, Mr. Robinson said three decades in the business have underscored a few basic principles.

“We spend a lot of time trying to help people understand organizations don’t function like individuals,” he said. Workplace politics and an employee’s reputation, for example, can play a part in company dynamics.

And Mr. Robinson emphasized the importance of getting the right people in charge.

“Leaders cast long shadows,” he said. “You cannot overestimate the impact of a leader.”

Amen.

HT:  Marcus Nunes

This post title is borrowed from a recent article in The Economist:

IMAGINE that the world’s best specialists in a particular disease have convened to study a serious and intractable case. They offer competing diagnoses and treatments. Yet preying on their minds is a discomfiting fact: nothing they have done has worked, and they don’t know why. That sums up the atmosphere at the annual economic symposium in Jackson Hole, Wyoming, convened by the Federal Reserve Bank of Kansas City and attended by central bankers and economists from around the world*. Near the end Donald Kohn, who retired in 2010 after 40 years with the Fed, asked: “What’s holding the economy back [despite] such accommodative monetary policy for so long?” There was no lack of theories. But, as Mr Kohn admitted, none is entirely satisfying.

I’d like to solve the mystery that perplexed the greatest minds of monetary economics.  Money has been ultra-tight since mid-2008.

The real mystery of Jackson Hole is why the greatest minds in monetary economics fail to recognize this fact.  Milton Friedman understood.  Ben Bernanke explained in 2003 that neither interest rates nor the money supply were reliable policy indicators, and ultimately only NGDP growth and inflation could tell you whether money was easy or tight.  By those indicators (averaged) money’s the tightest since Herbert Hoover administration.

I’d like to offer a conjecture.  If the monetary economists understood that monetary policy since mid-2008 had been ultra-tight, they would have a very different view as to what sort of policy is appropriate today.

Lots of economists have offered rebuttals to the market monetarist claim that easier money would help right now.  For instance, George Selgin and Eli Dourado offered critiques of the sticky wage explanation for persistently high unemployment.  But I’ve yet to see a single economist take on my claim that money’s been very tight.  I don’t expect economists to take what I say all that seriously, but I do expect them to notice when Bernanke blatantly contradicts his 2003 definition of the stance of monetary policy, with no justification provided.  This issue is far more important than whether his recent policy is inconsistent with his advice to Japan, and yet he has not been asked about the contradiction.  Even worse, almost all economists accept the definition offered by the political Bernanke, not the academic Bernanke.  Which do you think more likely represents his actual views?

PS. Some commenters asked me about the Dourado post.  I addressed the plausibility of sticky wages here, and in numerous other posts in reply to Tyler Cowen and George Selgin.  I’d also point out that there is lots of cutting-edge research that tells us that the “common sense” approach to the wage stickiness hypothesis is not reliable.  By common sense I mean; “Come on, wouldn’t the unemployed have cut their wage demands by now.”  Yes, they would have, but that doesn’t solve the problem.  This is partly (but not exclusively) for reasons discussed in this recent Ryan Avent post.

Update:  Saturos directed me to an excellent Bryan Caplan post on wage stickiness.

Lars Christensen and Michael Darda sent me the following:

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank should hold the main interest rate near zero until unemployment falls below 5.5 percent, marking the first time he has linked policy to a specific economic goal.

“As long as the FOMC is continuing to satisfy its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent,” Kocherlakota said today in a speech in Ironwood, Michigan, referring to the policy-setting Federal Open Market Committee.

The FOMC announced a new round of quantitative easing last week to spur growth and job creation, while forecasting that the benchmark interest rate will stay at a record low through at least mid-2015. As recently as May, the Minneapolis Fed chief said the central bank may need to begin an exit from record stimulus as early as year-end.

Kocherlakota embraced a proposal by Chicago Fed President Charles Evans to calibrate monetary policy based on specific economic goals. Evans advocates holding to near-zero rates until the jobless rate falls below 7 percent or inflation reaches 3 percent.

“My thinking has been greatly influenced by his,” Kocherlakota said, referring to Evans. “By increasing monetary accommodation, the Committee can better meet its employment mandate while still satisfying its price-stability mandate,” Kocherlakota said to business and community leaders at Gogebic Community College.

Begin Exit

“It’s an appropriate time to start thinking about when to begin the process of reversing the level of accommodation,” Kocherlakota said on May 9. “Six to nine months down the road, we should be thinking about initiating our exit strategy.”

Today, Kocherlakota said that under his proposal the central bank may not raise rates for “four or more years.”

“The FOMC can provide more current stimulus if people believe that liftoff will be triggered by a lower unemployment rate,” he said.

Speaking to reporters after his speech, Kocherlakota said his policy view shifted in recent months because of a variety of factors, including a diminished inflation threat. During the past two to three months, he’s seen “more downward pressure” on prices, he said.

‘Not Structural’

Also, recent research indicates “much of what’s going on with the unemployment rate is not structural,” suggesting that the Fed has more room to bolster growth without stoking inflation, he said.

Kocherlakota said he would have voted in favor of the FOMC’s decision to roll out a new round of stimulus last week, His policy proposal would help “enhance” the effects of the current easing measures in place, he said.

Reactions:

1.  Do miracles happen?  Has the last 10 days been a dream?

2.  Can a hawk suddenly move to the left of Charles Evans?

3.  Did Kocherlakota notice what happened recently to John Roberts’ reputation inside the beltway?

4.  Does Richard Fisher feel like Scalia?

5.  Is it possible that market monetarism played some small role in all this?  Or do we have an inflated sense of our importance? (Don’t answer that, let’s just enjoy the news.)

PS.  Once again; EMPLOYMENT IS A LOUSY TARGET.  But employment plus inflation is a fair proxy for NGDP.  Still, I’d feel much safer with NGDP, and no mention of employment or output gaps.  It’s likely that in 3 or 4 years I’ll be to the right of Kocherlakota, teamed up with George Selgin.

PPS.  If you are confused by the post title, it’s an inside joke.

PPPS.  I hope the next time some reporter questions Bernanke’s “credibility” at a press conference, he cops an attitude and borrows a line from John Wayne/Robert DeNiro/Clint Eastwood/Arnold Schwarzenegger, etc.  He’s got pretty much the entire Fed in his back pocket right now.

Here’s James Bullard, President of the St. Louis Fed.

The Fed’s target is 2 per cent, so critics can say the Fed has not met this part of the mandate. When unemployment is above the natural rate, they say, inflation should be above the inflation target, not below.

I disagree. So does the economic literature. Here is my account of where we are: the US economy was hit by a large shock in 2008 and 2009. This lowered output and employment far below historical trend levels while reducing inflation substantially below 2 per cent. The question is: how do we expect these variables to return to their long-run or targeted values under monetary policy? That is, should the adjustment path be relatively smooth, or should we expect some overshooting?

So the U.S. was hit by a “large shock.”  And what kind of shock was this?  Bullard doesn’t say, but surely we can infer it was a demand shock.  After all, both prices and employment fell in late 2008 and early 2009, a supply shock would be inflationary.

Now the flaw in his argument becomes clear; Bullard is talking about demand shocks as if they are some sort of external shock, which has nothing to do with Fed policy.  In fact the Fed’s job, indeed its only important job, is precisely to control AD.

I’m sure that some will argue that the Fed isn’t able to offset demand shocks in the sort run.  That’s not true, as almost any severe drop in current NGDP will be associated with a large fall in future expected NGDP; one, two, and three years out into the future.  And of course that’s exactly what happened in late 2008, expectations of future NGDP plummeted, causing asset prices and current NGDP to plunge.  The Fed most certainly can control NGDP expectations one, two, and three years out.  Indeed when I presented a futures targeting paper at the New York Fed in the late 1980s, they basically said “Thanks, but not thanks, we can control inflation expectations just fine, without any help from the futures markets.”  And if the Fed had prevented NGDP expectations one, two, and three years out from plunging sharply, then current NGDP growth in late 2008 would have fallen much less sharply.

It’s now four years after the disastrous Fed policy of 2008, and the Fed is finally waking up to the fact that there’s a serious AD problem. Obviously if there is a serious AD problem today, then ipso facto the need for more AD was far greater back in late 2008 and early 2009. Make no mistake about it, the recent QE3 announcement was the Fed admitting that “we were wrong in late 2008 and early 2009, and the market monetarists were right.”  But Bullard still doesn’t recognize this reality.  He talks as if the US was hit by some sort of mysterious demand shock in late 2008, which was beyond the Fed’s control.  And he defends their refusal to quickly boost inflation and employment up to Fed targets by arguing that these problems need to sort themselves out naturally, at a measured pace:

Evidence, for example a 2007 paper by Frank Smets and Raf Wouters, suggests that it is reasonable to believe that output, employment and inflation will return to their long-run or targeted values slowly and steadily. In the jargon, we refer to this type of convergence as “monotonic”: a shock knocks the variables off their long-run values but they gradually return, without overshooting on the other side. Wild dynamics would be disconcerting.

I presume by “wild dynamics” he means a rapid fall in the unemployment rate with a modest and temporary overshoot of inflation.

Given this type of adjustment, it is clear the Fed could be “missing on both sides of its mandate” during the entire time it takes the economy to return to normal, even when the monetary policy is sound. In fact, missing on both sides of the mandate is exactly what one would expect under an appropriate monetary policy. Furthermore, the literature suggests that the adjustment times are quite long, possibly many years.

To argue against monotonic convergence now would imply that when unemployment is above the natural rate, monetary policy should aim for inflation above the Fed’s 2 per cent target. On the face of it, this does not make sense: the US has experienced periods when both inflation and unemployment have been above desirable levels. In the 1970s this phenomenon was labelled stagflation. Monetary policy has been regarded as poor during that period.

I’m not even going to respond to this argument.  If you can’t see the flaw, then you shouldn’t be reading this blog.

OK, OK, I’ll channel Milton Friedman:

To argue for monotonic convergence now would imply that when unemployment is above the natural rate, monetary policy should aim for inflation below the Fed’s 2 per cent target. On the face of it, this does not make sense: the US has experienced periods when both inflation and employment have been below desirable levels. In the 1930s this phenomenon was labelled “The Great Depression.”  Monetary policy has been regarded as poor during that period.

I can’t even imagine what Ben Bernanke thinks when he listened to his colleagues’ thought process as they make hugely consequential decisions that determine the fate of the world economy.

Lars Svensson was right; we need professors:

Monetary policy is a complicated area. Therefore, I think it is important that those who sit on the Executive Board has a good knowledge of macroeconomics, monetary policy and even financial stability – it may well be more professors of the Executive Board.

Bullard continues:

The financial crisis and the housing collapse probably did some permanent damage. The US growth rate is probably at about the potential growth rate given the situation, not far below as critics have suggested.

So now the problem is supply-side?  What happened to the great demand shock of 2008-09?  Did we recover from that?  If so, when?

If Bullard reads this I’m sure he’ll think I’m an arrogant, elitist jerk. And he’d be right.  I believe that only highly skilled monetary economists (people like Bernanke, Woodford, Svensson, McCallum, Taylor, Mishkin, Krugman, Mankiw, etc,) should serve on the Fed board. I also think the 7 member board should vote on monetary policy; the regional Fed banks play no useful role.  Bullard has some great personal qualities, such as being unusually open-minded for a policymaker.  He’s not an arrogant jerk like me; he’s willing to have conversations with bloggers.  So put him on the Supreme Court.  After all, if we have non-monetary economists determining monetary policy, why can’t we have non-lawyers evaluating legal matters?  I’m serious.

HT:  Nicolas Goetzmann

PS.  Bill Woolsey has a good post on the path of nominal final sales, which came up in my recent exchange with George Selgin.  There’s also a post that clearly explains how Ron Paul and the modern gold bugs differ from the Austrian tradition.