Archive for October 2012


On second thought . . .

The web site Real Clear Politics  lists a bunch of state poll results, mostly for 23 battleground states.  If you don’t weight by population, the average swing toward Romney (compared to 2008) was 6.8%, not enough to overcome the fact that McCain lost by 7.3%.  But here’s what really struck me:

1.  The Electoral College had a strong Democratic tilt in 2008, as best we can tell (it’s harder to estimate in lop-sided elections.)  If you adjust each state evenly, the popular vote would have had to move 9.6% in McCain’s direction for him to eke out a EC victory.  That would have given him a 2.4% popular vote margin, which is quite unusual.  So that explains most of the mystery in the previous post.

There were 4 states with unusually large Romney swings from the McCain election to the current RCP state poll consensus:

Missouri (+11.1%), Wisconsin (+11.6%), Michigan (+12.5%), and Indiana (+13.5%).  That makes sense, as the Midwest is less polarized then other parts of the US, with more open-minded voters, or more voters who are open-minded, or both.  I’d guess that in Mississippi you could guess how 90% of people will vote by just looking at them.  So this should be great news for Romney—he’s picking up most strongly in the parts of the country where he most needs to do better than McCain, the Midwest.  Except for one state.  If you had to name one state that was most similar in terms of industrial mix to the 4 states mentioned above, it would be Ohio.  And in Ohio Obama only won by 4.6% in 2008.  Easy pickings for Romney.  But for some strange reason Romney is only doing 2.3% better than in the McCain election.  Given me any explanation you want, and I can blow it out of the water by pointing to Romney’s huge gains Indiana and Michigan.

The election really does come down to one state.  And because of Ohio the Democratic EC tilt this year may actually be larger than the already huge 2.3% of 2008.  Romney should consider running commercials saying he’ll move the national capitol to Dayton, or Toledo, so it’ll be more centrally located.

Oh wait, he still doesn’t have Virginia wrapped up . . .

PS.  I still don’t think the South can explain the big EC imbalance.  Consider the 12 Midwestern states.  As things stand now Romney will win 6 and Obama will win 6.  But all of Romney’s wins will be double-digit, and only one of Obama’s wins will be double digits.  It’s bad luck for Romney that in the Midwest all 5 of the single-digit states seem likely to break for Obama.  It’s odd to win 6 of 12 states in a region, and not win a single one by a margin of less than 10%.  Even in the South Romney’s likely to win lots of vote-rich states by narrow margins (Florida, Virginia, North Carolina.)

What am I missing?

There’s something peculiar about the election polls.  The swing state in almost all the plausible scenarios is Ohio, where Obama has a 2.3% lead in the RCP average of state polls.  Romney leads the RCP average of national polls by 1.0%, implying a massive 3.3% Democratic tilt in the electoral college.  By comparison the EC tilted about 0.5% GOP in 2000 and about 0.3% Democratic in 2004.

Don’t get me wrong, I do understand how that sort of margin is mathematically possible; Romney could win lots of safe states by huge margins, and Obama could win even more states by narrower margins.  But I’m not seeing state level polls that are consistent with such a big EC tilt to the Dems.  Take the 4 big states; California, Texas, NY, and Florida.  Obama will win two by big margins and Romney will win one by a big margin.  Romney will probably win Florida by a narrow margin.  The rest of the country has more states that Romney will win big, but I don’t see any evidence that the overall EC tilt is more than 1% Democratic. What am I missing?

And why does Nate Silver give Obama a 71% chance of winning the popular vote, when his own average of national polls show the race tied?  Why does Silver think the national polls are wrong?

I predict that if someone took all the state polls, for all 50 states, the aggregate would be substantially more pro-Obama than the national polls.  Is there a difference in methodology?  If so, which are more reliable?

It seems to me that either the national polls are biased, or the state polls are biased, or else there’s a far bigger chance of Romney winning the popular vote and losing in the EC than people like Silver currently believe.  In 2000 I said the Electoral College should be abolished, and my GOP friends were horrified.  I wonder how they’ll feel in a couple weeks.

PS.  I suppose one possibility is that if Romney were to rise to plus 3.0 in the national polls, the gains would come disproportionately in the swing states, where he is advertising heavily.  But still . . .

A few comments on fiat money

Nick Rowe has a very good post on the observational equivalence of fundamental and bubble theories of money.  I think he’s right.  I’d like to discuss a few tangential issues that have come up:

1.  It’s doubtful that a central bank could promise to go bankrupt by burning bonds.  The Fed is viewed as an arm of the Federal Government, even more so than the GSEs.  And everyone knew the GSEs were backed by the Treasury.  If the Fed burns a trillion in T-bonds, there is no effect on the consolidated Federal balance sheet (as the loss to the Fed is exactly offset by the gain to the Treasury.)

2.  It’s very hard to discriminate between theories of the value of fiat money such as “network effects”, and “expectation of future real backing” and “can be used to pay taxes.”  All are true, and if you remove any one of the three the others will be enough to give fiat money purchasing power.

3.  The political reality in the US is that the public does regard currency as a Federal Government liability (but not as a Fed liability.)  Most people assume that if a technological development suddenly made currency obsolete, the currency stock would be cashed in for something of value, like gold or bonds.  And they’d probably be right (obviously about bonds, not gold.)

3.  My preferred way of thinking about the value of fiat money is that a combination medium of account/exchange has great convenience value.  This gives a currency stock a value of roughly 1% to 2% of GDP.  The actual ratio is higher than 2% in most countries, as additional currency is held for purposes of tax evasion.  Network effects assure that there is likely to be a single dominant medium of account/exchange, and recently this has been monopolized by governments.  The US federal government is the Ebay of the US currency market.  It doesn’t ban bitcoins, but (like Ebay) it doesn’t quake in its boots about the competition.

And I agree with Josh Hendrickson that the existence of a very small probability of currency becoming technologically obsolete each year is not enough to dislodge currency from its dominant role as the medium of exchange (and facilitator of tax cheating), as the convenience factor is so powerful.  Think of domestic currencies that continued to be widely used in Latin America despite decades of high inflation that fell just short of hyperinflation.  For the same reason that people will pay a service charge to use ATMs, they accept a 1% or 2% loss in purchasing power between the time that they receive a currency note and the time they spend it a few weeks later.  The probability of currency losing its dominant position in facilitating exchange during any given year is much smaller than ATM fees and purchasing power loss costs, which we know with 100% certainty that consumers are willing to accept.

There’s no need for a special theory of why fiat money has purchasing power.  It has purchasing power for the same reason that wallets have value—it makes shopping more convenient.

Some have argued that destroying the central bank balance sheet is a credible way to inflate.  But as I pointed out in this post, it’s easier for the central bank to simply say it plans to inflate.

Gov. Romney > President Obama > candidate Romney

I was going to do a post on this, but I see that Tyler Cowen and E. J. Dionne have beaten me to it.

BTW,  A good arb possibility is opening up.  Put $500 dollars on Obama to win the election on Intrade (roughly 60-40) and put $500 on Romney to win a plurality of the votes on Iowa Electronic Markets, also roughly 40-60.  There’s roughly a 10% chance you’ll win both bets. Worst case is that you win one bet and lose the other.  It’s a wash. Very unlikely that Obama will win a plurality and lose in the electoral college.

For some odd reason the electoral college favored the GOP in 2000, then favored the Dems in 2004 (if the vote had been tied Kerry would have won, if I’m not mistaken.) And again favors the Dems this year.

(The “odd” reason the electoral college flipped is probably a state that’s high in the middle and round on each end.)

The RGDP number was 2% and the NGDP number was 5%.  Don’t believe either number.  The RGDP was skewed by a 13% jump in defense.  Obviously that didn’t happen, it was “accounting issues” (cue up the conspiracy nuts.)  RGDP rose 1.5%.

And when NGDI is announced next month it’ll probably be around 3.5%.   NGDI is a better forecast of actual NGDP than is the first estimate of NGDP itself.

PS.  Disclaimer; I’m not to blame if you lose your political bet.  I’m assuming anyone reading this blog is a grown-up.

PPS.  Let’s see if I’m influential enough to move the IEM price.

The next step

On September 13th I argued that with QE3 the Fed took two important “baby steps” toward a sound monetary regime.  Their promise to keep policy expansionary well into the recovery was an incremental move toward level targeting.  And their switch from a fixed QE to an open-ended policy was a tiny step toward “targeting the forecast.”  But very tiny.  An actual targeting the forecast policy would call for the Fed to do enough QE to raise NGDP growth expectations up to the desired level.  Of course that’s easier said than done.  The Fed certainly isn’t going to adopt the NGDP futures market approach any time soon (although such a market will almost certainly be an important part of policy in the second half of the 21st century.)  And given the problem of “multiple equilibria,” it’s very hard for the Fed economists to come up with a reasonable estimate of the amount of QE that would be likely to get the job done right now.

I’m going to propose a compromise between the current policy of $40 billion bond purchases each month, and a radical policy of immediately targeting the forecast.  Have the Fed start QE3 at $40 billion per month, and then increase their purchases at a rate of 20% each month, until they have achieved their policy goal (of equating predicted nominal growth with desired nominal growth.)

Obviously 20% looks like a number plucked out of thin air.  That begs the question of why not 0% or 100%?  The problem with zero percent increases is that they may be too small.  Even three years of QE3 will add less than $1.5 trillion to the Fed balance sheet.  And in the absence of other initiatives like level targeting, no one has any idea whether that would be enough to achieve their objectives in a reasonable time frame.

So why not increase the monthly purchases by 100% per month?  As that king learned in the old story of the chessboard, 100% growth rates rapidly lead to extremely large quantities.  And the Fed would be starting out with $40 billion, not a single grain of wheat.  The Fed is still attached to the “wait and see” approach, where they do some easing and then look at the result in terms of various market and output indicators.  So they want to see a few months worth of  data before making radical adjustments.

And this is the beauty of the 20% monthly increase proposal.  At first the QE builds rather slowly:  $40 billion, $48 billion, $57.6 billion . . . .

But before too long the amounts would become quite large.  The Fed would no longer have to worry that even three years of QE might not be enough.  Believe me, it would be plenty large. I haven’t even worked out the numbers, but I think purchases would increase more than 8-fold each year.  Fortunately, as David Beckworth recently showed, the Fed has barely made a dent in the T-securities market.  And of course all those MBSs issued by the GSEs are also de facto Treasury securities.

Better yet, the “shock and awe” of this proposal would allow the Fed to quickly achieve Svensson’s “target the forecast” equilibrium.

I don’t actually expect the Fed to adopt this 20% growth rate proposal.  It’s too radical.  But for God’s sake make it higher than 0%!  Does anyone seriously believe that if the Fed is struggling to find a way to provide enough demand stimulus; that 0% is superior to a 1% or 2% monthly increase?