Frank McCormick sent me a couple of interesting NYT columns.  First one on inflation:

The Fed, in a break from its historic focus on suppressing inflation, has tried since the financial crisis to keep prices rising about 2 percent a year. Some Fed officials cite the slower pace of inflation as a reason, alongside reducing unemployment, to continue the central bank’s stimulus campaign.

Critics, including Professor Rogoff, say the Fed is being much too meek.

This makes me want to pull my hair out.  The Fed adopts a policy that it expects to produce 2% inflation. The policy fails, inflation comes in below 2%.  And Fed officials respond by saying we ought to continue the same failed policy!?!?!?!  Can someone explain that to me?  Even worse, the Fed officials that disagree want an even lower inflation rate!

I’ll give Rogoff credit; at least he understands that policy needs to be more expansionary.  But 6% inflation is also a horrible idea.  We shouldn’t target inflation at all.  If we had targeted NGDP growth at 5% over the past 4 years we’d be out of recession by now and inflation would have averaged about 2%.  Is that too much to ask of the Fed?  Apparently so.

Here’s the second article, by Robert Shiller:

But the [EMH] theory is commonly thought, at least by enthusiasts, to imply much more. Notably, it has been argued that regular movements in the markets reflect a wisdom that transcends the best understanding of even the top professionals, and that it is hopeless for an ordinary mortal, even with a lifetime of work and preparation, to question pricing. Market prices are esteemed as if they were oracles.

This view grew to dominate much professional thinking in economics, and its implications are dangerous. It is a substantial reason for the economic crisis we have been stuck in for the past five years, for it led authorities in the United States and elsewhere to be complacent about asset mispricing, about growing leverage in financial markets and about the instability of the global system. In fact, markets are not perfect, and really need regulation, much more than Professor Fama’s theories would allow.

This makes absolutely no sense at all.  If the implication is that we need regulation because banks take too much risk, then even Fama would agree.  The banking market is distorted by government-created moral hazard, and hence banks will take too much risk if they behave in the interests of their shareholders.  But that has nothing to do with the EMH.

If Shiller is claiming that we need more regulation because banks will become irrationally exuberant about MBSs, and hold too many in their portfolio because they don’t understands they are irrationally priced, and that $90,000/year Federal bureaucrats need to visit the Wall Street banks and tell million dollar a year bankers that they are making irrational and foolish decisions, well then . . . I’m speechless.

Perhaps Shiller is assuming that the relevant federal regulatory agency is composed of 100 John Paulsons. But can you attract those people on Federal pay scales?  Isn’t it more likely we end up with the bozos at the SEC who missed the Madoff scandal, even after they were told about it, because they didn’t understand that theory predicts that Madoff’s consistently high and stable returns were almost impossible?  Oh wait, that would imply regulators need to rely more heavily on the EMH.

Nick Rowe has a great new post on transmission mechanisms.  Here’s the concluding portion, but you should read the entire thing for context:

This is from The Economist:

Over time Hong Kong has adapted to some of the peg’s constraints. Its exchange rate may be rigid, but its other prices and wages are remarkably flexible. During the financial crisis, even senior civil servants took a pay cut. This flexibility allows the economy to adjust quickly to cyclical ups and downs without the help of an independent monetary policy.

Prices, particularly for property, do sometimes take on a life of their own. But a more flexible exchange rate is not enough by itself to prevent asset-price booms: Singapore’s house prices have also soared despite its strengthening currency.

Can we learn anything from these examples?  I’d say nothing definitive, but they do add a couple data points to several interesting questions:

1.  Are the New Keynesians right that wage flexibility makes depressions worse?

2.  Are the Austrians right that easy money leads to asset prices bubbles.

My view before reading the article was no and no.  After reading the article I hold the same view, but with an epsilon more confidence.

PS.   Strictly speaking the NK wage flexibility thesis requires an unanchored price level, and HK has a dollar peg.  I’d respond that all price levels are anchored in some way.

Of course average isn’t dumb, it’s average.  But I smiled when I heard that line in a film a few years back. As far as most intellectuals are concerned, people with an IQ of 100 are dumb.  And for this reason they are often completely clueless about the country they live in.  They simply don’t know what average people are like. Exhibit A:

It turns out that there is about as strong a correlation between scores on the science comprehension scale and identifying with the Tea Party as there is between scores on the science comprehension scale and Conservrepub.

Except that it has the opposite sign: that is, identifying with the Tea Party correlates positively (r = 0.05, p = 0.05) with scores on the science comprehension measure:

Again, the relationship is trivially small, and can’t possibly be contributing in any way to the ferocious conflicts over decision-relevant science that we are experiencing.

I’ve got to confess, though, I found this result surprising. As I pushed the button to run the analysis on my computer, I fully expected I’d be shown a modest negative correlation between identifying with the Tea Party and science comprehension.

But then again, I don’t know a single person who identifies with the Tea Party.  All my impressions come from watching cable tv — & I don’t watch Fox News very often — and reading the “paper” (New York Times daily, plus a variety of politics-focused internet sites like Huffington Post & Politico).

I’m a little embarrassed, but mainly I’m just glad that I no longer hold this particular mistaken view.

I apologize for picking on Dan Kahan, because he seems like a good guy.  And he’s no worse than the typical Yale academic.  But he really should be embarrassed. How could an academic expect people who identify with the Tea Party to be below average in any sort of intelligence/education metric? It boggles the mind.

Average people pay little attention to public affairs.  Following public policy is not normal behavior; it’s what smart people do.  People like to talk about how popular Fox News is, but compare its ratings to professional wrestling, or some other non-intellectual show.  You will be surprised by how few people watch Fox.  The only reason the Tea Party didn’t do better is that the group included those who merely sympathize–if you took actual members the score would have been far higher.

Elsewhere he talks about issues like global warming.  Now I happen to accept the global warming hypothesis, and favor carbon taxes.  But my blog is full of really smart commenters who disagree with me, and it’s not because they are uninformed.  They often know more than I do.  As an analogy, you can do 100 academic studies showing there are innate differences between the thinking of boys and girls, virtually from birth, and you will still never convince a smart feminist of that fact.  You can do 100 scientific studies showing that food additives are not dangerous, and you will never convince a smart natural foods nut of that fact.  The problem is not that these people are dumb, it’s that they don’t see the facts the same way as you might.  In any very complex and hard to measure area, people will gravitate toward the hypothesis that they would rather believe.  In my view the scientific evidence suggests a roughly 95% confidence that global warming is real and man-made, gender differences in thinking are innate, and food additives are pretty safe.  But that’s still not 100%.

PS.  Raise your hand if you thought of Pauline Kael when he said this:

But then again, I don’t know a single person who identifies with the Tea Party.

I can’t even imagine living such a sheltered life.  I know dozens of people on each sides of the spectrum, maybe hundreds.  I had lunch with a socialist today.

PPS.  Notice that the Tea Party does better by having lots more slightly above average people and lots fewer dumb people. That’s my point—uneducated people tend not to follow public issues.  There are no Tea Party supporters in the 20/21 categories, where Kahan hangs out.

HT:  Steve

Here’s Victor David Hanson:

Strip away the veneer of Silicon Valley, and it is mostly a paradox. Almost nothing is what it is professed to be. Ostensibly, communities like Menlo Park and Palo Alto are elite enclaves, where power couples can easily make $300,000 to $700,000 a year as mid-level dot.com managers.

But often these 1 percenter communities are façades of sorts. Beneath veneers of high-end living, there are lives of quiet 1-percent desperation. With new federal and California tax hikes, aggregate income-tax rates on dot.commers can easily exceed 50 percent of their gross income. And hip California 1 percenters do not enjoy superb roads and schools or a low-crime state in exchange for forking over half their income.

Housing gobbles much of the rest of their pay. A 1,300-square-foot cottage in Mountain View or Atherton can easily sell for $1.5 million, leaving the owners paying $5,000 to $6,000 on their mortgage and another $1,500 to $2,000 in property taxes each month. Add in the de rigueur Mercedes, BMW, or Lexus and the private-school tuition, and the apparently affluent turn out to have not all that much disposable income. A visitor from Mars might look at their relatively tiny houses, frenzied go-getter lifestyle, and leased BMWs, and deem them no better off materially than middle-class state employees three hours away in supposedly dismal Merced, who earn 20 percent as much, but live in a home twice as large, with only 10 percent of the monthly mortgage and tax costs.

.  .  .

In the South Bay counties, Democratic registration outnumbers Republican often 2 to 1. If liberals like Barbara Boxer, Dianne Feinstein, and Nancy Pelosi did not represent the Bay Area, others like them would have to be invented. Yet, most Northern California liberal politics are abstractions that apparently provide some sort of psychological compensation for otherwise living lives that are illiberal to the core.

Take K-12 schools. Currently, there is a stampede to enroll students in upscale private academies “” often at $30,000 a year. That seems strange, when local public high schools like Menlo-Atherton, Woodside, and Palo Alto were traditionally among the highest-ranked campuses in an otherwise dismal state public-school system.

But things have changed “” or at least are perceived to have changed. About 25 percent of the Silicon Valley population is now Hispanic, representing a huge influx of service employees “” to work in hotels and restaurants, as nannies and housecleaners, in landscaping and construction “” and their presence has expanded beyond the old barrios of San Jose and Redwood City.

The result is that Silicon Valley liberals are apparently worried about the public schools, given that second-generation Hispanics are perceived to be disproportionately represented in statistics on gang activity, illegitimacy, and high-school dropout rates. In crude terms, would a Google executive really wish his child’s hard-driving college-prep curriculum or enlightened social calendar altered somewhat to accommodate second-language teenagers whose parents recently arrived illegally from Oaxaca?

Something similar happened in the Deep South in the 1960s, when court-mandated integration brought black students into formerly all-white enclaves, spurring a white flight to private academies. Upscale hip whites and Asians in Northern California, of course, do not have southern twangs and in theory are multiculturalists to the core. But they are no more invested in a truly diverse public-school experience for their children than southern separatists of the past.

When I suggest to my Silicon Valley friends that their fixation on academic achievement is misplaced and that the academic peer and institutional pressure that my own children might have lost out on by going to the almost exclusively Mexican and Mexican-American public schools of southern Fresno County was balanced by the “life experiences” of dealing with those of all classes, races, and attitudes, they think I am unhinged. Diversity, in other words, is a cosmic ideal of voting for Barack Obama, not a cross that a Stanford-bound kindergartener must bear in the here and now.

I see exactly the same thing in my town (Newton MA), which is very wealthy and very liberal.  But I don’t see the contradiction that Hanson seems to see.  Suppose you loved your children, and also thought inequality was a huge problem.  Then it would make sense to do everything possible to get your kids into elite schools.  After all, if inequality is a huge problem then your kids will suffer greatly if they end up with a lower than average income.

I don’t think inequality is a big problem (although I do think it is a problem.)  As a result I don’t share the obsession of most of my neighbors in getting my child into an elite university.  In my view happiness depends on your personality, not whether you make $70,000 or $700,000 per year.  There are happy people and grouchy people.  Getting a better job isn’t going to change that.

So the real problem with liberals is not that they are hypocrites, it’s that they are too materialistic.  But that’s also the real problem with moderates and conservatives.

By the way, the same thing occurs in higher education.  The people who run our universities are overwhelmingly left-of-center.  And yet they are engaged in the process of corporatizing universities, into a sort of mirror image of the highly inegalitarian set-up of the corporate sector.  More elite professors with outrageous pay packages, and more adjuncts making low pay.  Less in the middle.  They aren’t forced to do this; they are choosing to remake the American university system.

This is why progressives will fail to make a significant dent in inequality.  Because they (wrongly) think inequality is so important, they will (as individuals) fight hard against any truly egalitarian policies, as it would hurt their kids or their career, even as they vote egalitarian.  If we could somehow convince liberals that inequality isn’t as important as they think it is, if we could convince them to share Hanson and my attitude toward inequality, then we might finally be able to make some headway against the problem.  And it is a problem.  We need to convince parents that it’s not important that their kids get into the best schools. We need to convince administrators that it’s not important that their university moves up in the “rankings.”

PS.  The example in the third paragraph is just one more example of why the “inequality” data used by progressives is so worthless.  We already know that they use income, whereas they should be using consumption.  But even when we use consumption data it’s distorted by huge differences in the cost of living.  And these differences are both time-varying, and biased against the rich.  Someone from a 100 years ago who arrived here in a time machine and who drove past a lower middle class Hispanic home in Merced, and then a $1.5 million 1300 sq. foot home in Palo Alto, would be flabbergasted by the claim that there are huge inequalities in modern America.

PS.  I realize that rich people are happier, on average, but correlation doesn’t . . .

Look at the sad fate of lottery winners.