Alex Jutca has a new blog on monetary economics.  In one post he discusses a lunch he had with Greg Mankiw:

One of the salient characteristics you first note about Professor Mankiw is that he’s unfailingly polite and measured. He responded that he very much agreed with Bernanke’s policy decisions over his tenure, and went so far as to call him a “hero” a la Roger Lowenstein. He laughed that he was one of President Bush’s three finalists to replace Alan Greenspan, remarking that he didn’t even know it at the time. Bernanke’s stewardship of the economy during the financial crisis is evidence that he was the right man for the job, he said.

I once had lunch with Mankiw and noticed the same personality characteristics.

It looks like a good blog—I like his views on monetary policy.

Here is Izabella Kaminska of the FT:

Robots, automation and technology may not be responsible for all the deflation experienced in Japan since 2000, but if they play a role “” any role “” is it really fair to call this deflation? Is there perhaps a difference between good deflation and bad deflation that we should now be differentiating?

Yes there is.  Indeed there’s a pretty large literature distinguishing between good and bad deflation (George Selgin, David Beckworth, and many others.)

Now what macroeconomic variable would allow us to distinguish between good and bad deflation?

Just one more reason to stop talking about inflation.  Kaminska continues:

Our crisis was very much Japan’s reflation opportunity. Yes a fair bit of the pick-up in inflation came from energy and food, but one does have to wonder if there is a bit of a whack-a-mole situation going on here. In other words, if Japan truly succeeds at reducing deflation (a.k.a importing inflation from abroad) then to what degree will this just resend deflation back abroad?

The sensible policy would be for all countries (with demand shortfalls) to depreciate their currencies at the same time.  Not against other currencies, but against goods and services.  It’s not a zero sum game.

HT:  Daniel Sherry

PS.  For new readers, the answer is NGDP.

We all know that little kids will often blurt out an uncomfortable truth, which is not supposed to be spoken in polite society.  Stock markets also tend to mention the unmentionable:

Governor Masaaki Shirakawa expanded the Bank of Japan‘s assets by 50 percent, introduced an inflation target and safeguarded his nation’s banking system from shocks. Yet when he announced he was leaving three weeks early, stocks soared to a four-year high.

I suppose that’s not a very polite way to send him off, but markets can’t help telling the truth.  This discouraged me:

Shirakawa, a career BOJ bureaucrat who trained in economics at the University of Chicago, wasn’t supposed to become governor. Originally picked for deputy, he was a compromise after two candidates failed to get parliamentary approval.

At a press conference on April 9, 2008, his first day on the job, Shirakawa warned that too much short-term stimulus could hurt long-term growth. At a press conference yesterday, he said the government and BOJ need to have discipline.

.  .  .

Not Shoboi

Shirakawa bristled at unfavorable comparisons with the Fed, chiding a reporter in 2011 for characterizing the BOJ’s efforts as “shoboi,” meaning lame or shabby.

“I want to strongly say that none of the policy board members, including me, think it’s shoboi,” Shirakawa said at a press conference in March of that year. He also repeatedly stressed that the BOJ’s balance sheet, currently at 163.5 trillion yen, is larger than the Fed’s as a share of the economy.

I also went to the University of Chicago.  We were taught that when money is very tight, as in the 1930s, the Fed’s balance sheet will be very large as a share of GDP.  And when money is very easy, as during the German hyperinflation, the balance sheet will be small as a share of GDP. Indeed I seem to recall that the German Reichbank’s balance sheet fell to less than 1% of GDP in late 1923.

I know I’m just repeating myself over and over again, but the people running the world economy really do not know what they are doing. I don’t think they are making precisely the mistakes that Paul Krugman thinks they are making, but he’s right that they are in way over their heads.  And that’s true even if my policy views are 100% wrong.  Sure, a hawk my have a valid reason for disagreeing with me.  But to claim policy was expansionary with a bogus argument about the size of the balance sheet as a share of GDP, reveals a lack of understanding of the basic principles of monetary economics.

PS.  I recall a story, perhaps apocryphal, about a stock that soared in price each time the CEO was hospitalized with heart problems, and then plunged when he recovered.  Was it St. Joe Paper?  Perhaps someone else heard the story.

PPS.  Tyler Cowen says (in the European context) that the problem is interest groups, not stupidity.  I disagree.  I’ve talked to lots of people at all levels.  I’ve read all sorts of things written by economists, pundits, reporters, policymakers, etc.  I see no evidence that people understand what’s going on.  Some interest groups may believe they benefit from tight money, but they are almost certainly wrong.  (They seem to think low interest rates imply easy money.) Indeed I often hear economists claim they would be hurt by monetary stimulus, and they are in the same interest group as I am!  I’d benefit from easier money, just as I was hurt by the tight money of 2008-09.  The key here is the non-zero sum nature of monetary stimulus during mass unemployment.  The ECB could boost RGDP growth significantly while keeping inflation around 2% or 3%.  That would help both the employed and the unemployed, workers and capitalists, rich and poor, governments and private sectors, as there’d be a bigger pie to share.  Taxpayers would benefit big time.  It would even help holders of government bonds on the periphery.  Perhaps people who depend entirely on income from longer term German government bonds would be hurt.  I’d guess that’s less than 1/2% of the eurozone population.

On the other hand I agree with Tyler’s more recent post claiming the US labor market has structural problems.  Unlike Tyler, I think more AD could help fix those structural problems (by pushing Congress to lower maximum UI from 73 weeks to 26 weeks).  Tyler’s right that the big problem is among the young.  The fact that we are thinking of again boosting the minimum wage boggles the mind.  The recent rise in youth unemployment can NOT be fully explained by the recession.

Here’s why the market reaction was underwhelming:

The unemployment rate drop to 7.7 percent along with 236,000 new jobs renewed chatter that the Federal Reserve might call an early end to its liquidity party and what that would mean for the five-year bull market run.

So instead of a major rally, Wall Street saw tepid buying, likely held back by the guessing game of how much longer the central bank will keep printing money if the economy continues showing improvement.

The markets want a big jobs number, but without much of a fall in the headline unemployment rate.  Instead they’d like to see people coming back into the labor force.  Why?  Because the big jobs number means a growing economy, and the longer unemployment stays above 6.5% the longer the Fed refrains from further tightening.

Here’s Louis Woodhill in Forbes:

So, how is this QE3 thing working for us?

During three months of QE3, 4Q2012, nominal GDP (NGDP), which is precisely the variable that QE3 is supposed to stimulate, hit a wall.  Annualized NGDP growth slowed sharply, falling from 5.78% in 3Q2012 to only 0.46% in 4Q2012.  This was the lowest quarterly NGDP growth rate since the recession ended in 2Q2009.

Strike one.

The growth of total employment, which was 526,000 during 3Q2012, fell to 331,000 in 4Q2012.

Strike two.

Let me remind readers that I much prefer NGDPLT to QE3, but I did predict that QE3 would have a very small but positive impact on growth, certainly enough to offset fiscal contraction.  The evidence so far suggests that there is no reason to reject that prediction.  Let’s start with Woodhill’s jobs numbers, which are incorrect.  Job growth was larger during the 4th quarter than the 3rd quarter.  Indeed the five months since QE3 have seen the creation of an average of 196,200 jobs per month.  During the preceding 5 months the average monthly increase was only 133,600.  I certainly don’t view that acceleration as being statistically significant, but if Woodhill thinks jobs are the right measure, will he will now change his mind and declare QE3 a success?  Here’s the link in case anyone wants to check my math.

The GDP number was very low in the fourth quarter, but recall that NGDI is a much more accurate estimate of NGDP, than NGDP itself. And the NGDI number won’t be announced for a few more weeks. I’ll go on record predicting it will show much higher growth than the NGDP estimate.  The biggest and most important components of NGDP are total wages and salaries, plus profits.  The jobs numbers suggest total wages are growing (and indeed 4th quarter wage data is already in, and confirms that fact.)  Profits in Q4 would have to be horrible to offset the wage gains.

I don’t think macro data tells us very much about QE.  Even my previous post says little more than “no reason to move away from my theory-based prior of a zero multiplier.”   You really need to look at market reactions to QE rumors, where the data is overwhelming clear to anyone who pays the slightest attention to the financial markets.  But if people insist on using macro data, they need to get it right.

Woodhill has done some great work on the folly of interest on reserves. But monetary policy is very complex and I believe he puts too much weight on that single factor.

PS.  Lars Christensen recently commented on my Canadian AS shock post.  Here’s my reply:

Lars,  Just to be clear, I claimed it was BOTH a supply shock and a demand shock.  I relied on Nick’s claim that core inflation was stable, in which case both curves shifted left.  I also relied on introspection.  It defies common sense that unemployed auto workers in Ontario would be immediately rehired as construction workers in Vancouver—it takes a while to move and to be retrained.

I did blame the BOC for also allowing a negative demand shock, which increased unemployment.

The fact that a drop in demand for Canadian exports SEEMS like a demand shock is Keynesian reasoning–mixing micro and macro perspectives. It might be true, but in this case the evidence suggests that Canadian AS declined—presumably for reallocation reasons.

BTW, I believe the same applies to the US.  Under NGDP targeting we would have had stagflation in 2008-10; perhaps 1% RGDP growth and 4% inflation.