Archive for September 2013


What if I were on the FOMC?

Of course it would never happen, but it’s worth thinking about.  I might say something like this:

But current monetary policy is typically thought to affect the macroeconomy with a one- to two-year lag. This means that we should always judge the appropriateness of current monetary policy in terms of what it implies for the future evolution of inflation and employment. Along those lines, after its most recent meeting, the FOMC announced that it expects that inflation will remain below 2 percent over the medium term and that unemployment will decline only gradually. These forecasts imply that the Committee is failing to provide sufficient stimulus to the economy.

To achieve its goals, the FOMC has taken some historically unprecedented monetary policy actions in recent years. But the U.S. economy is recovering from the largest adverse shock in 80 years””and a historically unprecedented shock should lead to a historically unprecedented monetary policy response. Indeed, the FOMC’s own forecasts suggest that it should be providing more stimulus to the economy, not less.

Or I might present a set of PowerPoint slides that suggest the Fed should target private sector forecasts of the goal variables.  Or I might say this:

.  .  .  the data show that over the past few years inflation has been below the FOMC’s target of 2 percent. It’s expected to remain below desirable levels for years to come. These low levels of inflation show that the FOMC has a lot of room to provide much needed stimulus to the labor market.

.  .  .

With goal-oriented policy, communications and actions work together in a powerful fashion. Communications tell the public where the FOMC is taking the economy. Then, every subsequent action gives the public confidence that the Committee is willing and able to take the economy in that direction. Actions and communications operate together to destroy the dangerous perception of monetary policy ineffectiveness.

.  .  . 

Under a goal-oriented approach to policy, the FOMC would view a “gradual decline” in the unemployment rate as being undesirably slow, given that the medium-term outlook for inflation is so low. Hence, the Committee’s outlook would trigger a decision to provide more monetary stimulus.

And let’s not forget about the need to cut the IOR:

The central bank, he said, should do whatever it takes to drive U.S. unemployment lower, although not necessarily by buying even more bonds. For instance, it could lower the interest rate it charges banks to keep their excess reserves at the Fed, he said.

What matters is not the specific “tactic,” he said, but the overall strategy.

“What the committee chose to do in September was fully consistent with everything that had been communicated,” Kocherlakota told reporters after his talk. But what has been communicated, he said, is insufficient, as is the level of stimulus the Fed is providing the economy.

Yes, I’ll never be on the FOMC.  But at least my views are now represented.  That was not true in February 2009, when I began blogging.

HT  Vaidas Urba, Saturos.

Who is the Milton Friedman of today?

I agree with every single word of this Tyler Cowen Youtube.

BTW, who was the Tyler Cowen of 40 years ago?  Was there anyone?

HT:  Daniel J.

Why no layoffs?

Six weeks ago I did a post on the puzzling fall in unemployment claims:

The new claims for unemployment this week was a shockingly low 320,000, bringing the 4 week average down to 332,000 335,000, which is the lowest since October 2007.  This graph shows the ratio of the 4 weeks average to US population (times 1000 to make it easier to read.)

Screen Shot 2013-08-15 at 10.28.55 AM

The most recent week on the graph is at about 1.1, but today’s figures are at 1.049 1.058, if they were added. This means the ratio of new claims to pop is roughly back to the boom levels of 1999-2000 and 2006-07.   And yet the other indicators (total jobs, unemployment rate, etc), remain deeply depressed.

I’m not going to redraw the graph, but with today’s numbers (308,000 on the 4 week average) we have fallen below the 0.1% level, meaning that fewer than 1/1000ths of Americans now file for unemployment comp each week.  That’s not just boom conditions, it’s peak of boom conditions.  The only other times this occurred since 1969 (when unemployment was 3.5%) were just a few weeks at the peak of the 2000 tech boom and a few weeks at the peak of the 2006 housing boom.  In other words, the puzzle is now even greater than 6 weeks ago, as the unemployment rate is still at recession levels (7.3%.)  Something very weird is going on in the labor markets.

I don’t have any good ideas.  Perhaps employers are reluctant to add workers for some reason (Obamacare?) and instead work them overtime more.  Then when demand falls instead of laying off workers, they cut overtime.  But I don’t recall the average workweek numbers being all that unusual.

My hunch is that these new numbers portend further declines in the unemployment rate in the months ahead.  Which is also a puzzle given that RGDP growth is about 2% in recent years.

PS.  Part of the difference from 2000 is the lower LFPR, but even so, the current figures are shockingly low for a period of 7.3% unemployment

PPS.  A Bentley student named Zachary Musso asked me to be interviewed on the Macro Tourist Hour, which he also participates in.  Here is the link:

Unfortunately I am no good with technology, so you’ll only hear the audio from me. 

PPPS.  I was on panel at the Blouin Creative Leadership Conference in NYC on Tuesday.  Perhaps there’ll be a link somewhere.  One panelist said inflation was actually 7%.

I’ll try to get caught up with comments later.


Monetary policy is a really big deal

Tyler Cowen is surprised by the size of the various emerging market reactions to the non-taper:

Pay special heed to quantitative magnitudes.  For how long are we delaying the taper?  One or two months?  How much is the taper anyway, relative to the stock of relevant financial assets?  Taking $10 to $15 billion off of $85 billion a month in purchases, when the asset stocks are in the trillions?  Woo hoo.

.  .  .

I’ll say it again: none of you understand what is going on here, and neither do I.  I am not seeing enough admission of this basic fact.

I certainly admit to not understanding the specific market reactions that he points to, but don’t really agree with the larger point he is making.

Monetary policy drives NGDP; nothing else really matters.  But people care about real variables, not nominal variables.  So how important is NGDP anyway?  It turns out that in the short and medium term it’s really, really important, even in real terms.  In the long run not so much.

Tyler might respond that even though monetary policy is important, the specific action taken by the Fed was so trivial that it’s hard to see why markets would have responded so strongly. But he misses the larger point.  The Fed’s action was a SURPRISE.  In the world of central banking surprises are actually pretty rate. Normally the Fed telegraphs what it is likely to do.  But even that doesn’t fully explain why surprises matter so much.

The real reason why surprises are so important is that they cause market participants to revise their expectations of the future path of policy. Yes, the 10 or 15 billion a month is no big deal. But the future path of policy is a very big deal. It’s like someone who finds out that their spouse is lying over something trivial. Not important right? Or does it lead one to wonder if they are lying about other things too?

The markets went into Wednesday thinking the Fed was determined to taper for Larry Summers-type reasons.  Fear of a big balance sheet.  At the end of the day the markets realized that the Fed was serious about letting the data drive policy. That’s not just a different policy; it’s a completely different policy regime. And it will have important implications for when and under what conditions the Fed will start raising rates.

So yes, most of us can’t explain why the rupee did this or that on a given day. But who ever claimed they could?  On the other hand the US stock market reaction makes perfect sense.

PS.  Not much time for blogging over the next few days.

PPS. Tyler’s post has the following title:

Model this taper and show your work, if only verbally 

Thank God he allows verbal answers, I used to hate it when the professor would ask for math.

Update:  I had a brain freeze yesterday when I endorsed the FDP.  I completely forgot about the AfD, which is anti-euro but pro-EU.  In other words, it’s one of the few rational political parties in all of Europe. Given how close the AfD came to the 5% threshold, my error was very unfortunate.  I offer my abject apology.

What’s good for Germany is good for the world

Matt Yglesias expresses a widely held view:

6. A “grand coalition” is probably better for the world: The main German parties do not have America-style sharp ideological disagreements on economics issues, but an SPD entry into government would probably add to the current pressures on German firms to raise wages. Higher German wages and a more rapidly unraveling of German’s low-wage export-driven growth strategy would be in the interests of German wage-earners, but also of other people around the world. Higher German earnings would lead to more demand for foreign-made goods and services and also create more opportunities for French or Spanish workers to compete for jobs on the basis of pay.

I have several problems with this argument.  First of all, I see no evidence that Germany’s current account surplus is in any way related to its wages.  The Nordic economies plus the Netherlands and Switzerland have large CA surpluses, indeed generally much larger than Germany, on a per capita basis.  These are the economies most similar to Germany.  But they don’t have low wage policies.  Second, unless I am mistaken, wages are not particularly low in the key German export industries like autos and machines (someone please correct me if this is wrong.)  Germany has a large CA surplus for the same reason that other countries do, they save a lot relative to their investment levels.

Germany’s labor reforms of the early 2000s were an amazing success.  Many people think they failed, and point to the large number of very low paid jobs in Germany.  This is a common logical error, forgetting that all policies fail if the criterion is a problem-free world.  The only valid way of measuring the success of a policy is to compare it to the alternative.  Before the labor reforms Germany had very high unemployment. It no longer does, despite the severe global recession.  That’s all you need to know.  The German government has an extensive welfare state with lots of wage subsidies, so the low wage workers in Germany are not starving.  Alternatively, who has a brighter future; Germany with 7.7% youth unemployment, or Greece with 62% youth unemployment?

Some might argue that the ECB’s tight money policy is good for Germany but not good for the eurozone. Not so, in the long run Germany would have been better off with a faster rate of NGDP growth in the eurozone. German banks and German taxpayers will eventually absorb huge losses from defaults in southern Europe.  The problem is not going away, and it is clear that tight money caused great damage to the entire eurozone.

But let’s not destroy the one success story in the eurozone.  A healthy Germany supplies more tourists to Greece and Spain, and buys more luxury goods from Italy.

It’s not a zero sum game.  If every country tried to make its economy as healthy as possible, with no concern for the rest of the world, we’d be much better off.  In other words, a world of 200 Switzerlands would be a far happier place than the current world we live in.  Indeed countries that (correctly) look out for their own welfare are led by a sort of “invisible hand” to do policies that also are in the best interest of the global economy.

Exceptions?  The only one I can think of is carbon taxes.

The real problem is that most countries don’t know what’s in their own interest. Greece doesn’t understand that it’s in Greece’s interest to privatize and deregulate.  Germany doesn’t know that faster NGDP growth in the eurozone is in Germany’s interest. officially endorses the Free Democrats in tomorrow’s election. If only America had a parliamentary system where the swing party was always a socially liberal and fiscally conservative group. I could actually vote for someone without holding my nose.

I need to remember to wear my yellow shirt tomorrow.

Update:  Commenter mbka adds the following information:

This low German wage thing is a bit absurd because it’s not even true. Look at these Eurostat data from 2010,_all_employees_%28excluding_apprentices%29_2010.png&filetimestamp=20130410120200

Germany’s median hourly wages, amongst others, beat the following countries: Netherlands, Sweden, France, Austria, UK, Italy, and Spain, never mind a long list of much poorer countries.

(And this as well.)

My sense is that the labor reforms allowed for some low wage jobs for low skilled workers in the service sector, topped off with wage subsidies.  I think that’s a good system.  However the “export powerhouse” German firms use highly skilled workers and pay good wages.