Archive for November 2013


I beg you all to stop talking about German inflation

Everyone who reads blogs knows that a person’s IQ immediately drops by 15 points as soon as they start talking about politics.  (Make that 20 if the post contains the word “lie.”)  Something similar occurs with Germany and inflation. Here are the facts:

1.  The German inflation rate should have no bearing on ECB policy, just as the Wisconsin inflation rate has no bearing on Fed policy.

2.  If the German inflation rate were relevant to ECB policy, then the ECB policy should be more expansionary because German inflation is below target.

3.  Germans are not inflation-phobic because of the 1920-23 hyperinflation; almost no one alive today remembers the hyperinflation.  On the other hand a few very old Germans do recall how the deflation of 1929-33 put Hitler in power.  The Swiss people (who are mostly ethnic Germans) did not have a hyperinflation and are equally inflation-phobic.  It’s an ethnic German thing, not a 1920 memory.

There’s no longer a deutschmark, and thus German inflation doesn’t matter.  If inflation mattered at all (it doesn’t, only NGDP growth matters), then the inflation rate that mattered would be the eurozone inflation rate.  The mere fact that the press discusses German inflation might lead some Germans to believe there is an issue there, that they have some sort of debatable point to make.  Not so, the German views on inflation are completely insane, with no shred of rationality, no redeeming logic at all.  So let’s stop talking about the subject as if there’s a valid issue at stake.  When uncle Fred claims he’s Napoleon Bonaparte, you discuss whether to put him in an asylum, not whether he used the right strategy at Waterloo.  So stop talking about German inflation.

On the other hand the Germans are completely right about their fiscal policy and CA surplus, and the rest of the world is crazy.

PS.  Tyler Cowen has a new post that criticizes the Summers-Krugman argument on negative real interest rates:

I cannot, however, agree with the central arguments about negative real interest rates, and the necessity for negative natural rates of interest (there are a variety of interlocking claims here, so do read them for yourself.  I am not sure any brief summary can quite reproduce the arguments, which are also not fully clear).

Because Tyler also linked to my recent post in the opening paragraph, some readers might assume we differed on real interest rates.  We don’t–I agree that negative real interest rates on Treasury securities are not the issue. The Keynesians have it all wrong.

Tyler also suggests that the Summers-Krugman thesis supports his views on the Great Stagnation.  I think there is some truth to that.  I’ve certainly been supportive of the stagnation thesis.  But I’d add that there is a big difference been stagnating productivity and high unemployment.  I have argued that the current high unemployment rate reflects both demand deficiency and adverse shifts in AS due to things like extended unemployment compensation.  As demand gradually recovers and unemployment compensation is cut back to a maximum of 26 weeks I expect unemployment to continue falling back to the natural rate.

I strongly disagree with this.

The velocity effect on currency balances, from inflation, just isn’t that strong.  At persistent negative rates of return we are much more likely to see an interdependence of AS and AD and some kind of cascading collapse of both.  Or maybe it is simply better to say the framework has broken down than to try to squeeze one’s own predictions out of that set up.

Zimbabwe shows that it’s dangerous to mix real and nominal factors when modeling GDP.  (Or America in the 1970s if you want a more pertinent example.) The stagnation story is about real interest rates. Nominal rates can be as high as the Fed wants, and velocity is highly sensitive to changes in nominal rates.  To summarize:

X factors -> RGDP stagnation -> low real interest rates

Tight money -> slow NGDP growth -> high unemployment and low nominal i-rates

Don’t mix them up.


Focus on NGDP expectations, not interest rates

I was asked to comment on a Paul Krugman column that discusses a speech by Larry Summers. Summers made two important points:

1.  In the future we may repeatedly bump up against the zero rate boundary.

2.  Monetary policy has not been expansionary in recent decades, despite a downward trend in interest rates.  We know this because an expansionary policy would raise inflation, but inflation has actually been trending downwards.

Readers of this blog know that market monetarists have been emphasizing these points for quite some time.  Good to see Keynesians saying the same thing.

Krugman comments:

2. An economy that needs bubbles?

We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate.

So you might be tempted to say that monetary policy has consistently been too loose. After all, haven’t low interest rates been encouraging repeated bubbles?

But as Larry emphasizes, there’s a big problem with the claim that monetary policy has been too loose: where’s the inflation? Where has the overheated economy been visible?

So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest. And this hasn’t just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.

I strongly disagree with this.  Bubbles have nothing to do with recent macro history; indeed I doubt that the concept is even useful in macroeconomics.  And we need to stop obsessing about low interest rates.  Instead we should adopt a stabilization policy that is not inhibited by the zero bound.  The best solution is to end the Keynesian policy of targeting interest rates, and shift to a variable that doesn’t have a zero bound.  I’d prefer NGDP futures prices, but there are lots of other possible intermediate targets with no zero bound. McCallum has suggested the monetary base.  Others have mentioned exchange rates.  We could target the price of zinc–keep actual zinc prices close to the Wicksellian equilibrium zinc price.

One objection is that a policy of NGDP targeting, level targeting, might require the Fed to buy up the entire stock of government debt, and then some additional assets as well.  I doubt that, although it’s obviously possible, especially if the NGDP growth target was set too low.  But Keynesians draw the wrong conclusion from the zero bound.  They suggest that the choice is between fiscal stimulus and economic stagnation at zero interest rates.  In fact, the actual debate should be whether we are better off with a higher NGDP target, or a bloated monetary base with the current NGDP target, or economic stagnation as we fall short of the NGDP target.  Discussion of interest rates is simply a distraction; NGDP targeting is the real issue.  With a 5% NGDP growth target, level targeting, we will be fine.  Unemployment will be at the natural rate.  If NGDP grows at 5% it doesn’t matter whether interest rates on T-bills are stuck at 0%.  We don’t need fiscal stimulus.  And we don’t need private sector bubbles.

Summers is certainly moving in the right direction.  He recognizes that the downward trend in real rates over the past 30 years is not easy money.  He recognizes that this trend creates problems for traditional New Keynesian policies such as the Taylor Rule.  But he still doesn’t understand where we need to go. Market monetarists still have a lot of work to do.

HT:  Erik and Martin

Things Thomas Sargent supposedly said

I am aware that things often get lost in translation.  But for what it’s worth, Saturos sent me a Tyler Durden post that cites some Thomas Sargent comments translated from a German interview:

“The countries with declining prices is troubled countries like Greece. They must make their price competitiveness, they have lost in recent years, again. This requires falling wages and rising productivity. As a result, unit labor costs go back, and the company may cut prices. This is not a dangerous deflation, but part of the necessary correction so that these countries are internationally competitive again, “Sargent said in an interview:
Never reason from a deflation.  And read George Selgin.


In addition, there are, according Sargent “historically no reason to fear deflation.”

Ummm, 1929-33.

On the contrary: “We all benefit when technological progress lowers the prices, such as computers,” said Sargent.

Is Greece’s high tech sector booming today?

That central banks pursue an inflation rate of around two percent, according to Sargent is because they consider it their job to “make bad debt good debt”. Of an inflation governments benefited with high debt.

Fisher effect?

Sargent: “Inflation is a major redistribution machine, which reduces the real debt burden for the benefit of creditors and devalued the assets of the creditors.” To prevent this, according to Sargent, the reintroduction of the gold standard would be possible, “I would not necessarily say that it would be the best solution, but it would not be foolish.”

Eurozone inflation is 0.7%.  Long term eurozone debt contracts reflect an expectation of 2% inflation.

Owners of Greek debt are getting screwed, but by disinflation contributing to default, not higher than expected inflation.

Please let me know if (as I suspect) Sargent was mistranslated.

Where does America rank in terms of top rate?

Taxes are fiendishly complex, so this post might have some errors.  I’m trying to see where America ranks in terms of “top income tax rate.”  Just to be clear, I am not including wage taxes, or corporate income taxes.  Nor am I interested in the maximum MTR associated with benefit and deduction phaseouts.  You’d have to be a rocket scientist to figure all of those out.  I’d like to rank countries according to the MTR as one’s income goes out towards infinity.  I believe the top 6 countries are:

1.  Aruba  58.95%

2.  Sweden  56.6%

3.  Denmark  56.4 55.6%

4.  Netherlands  52%

5.  Spain  52%

6.  US  51.4%  (but only in California.)

[Sources here and here]

Our top rate in a typical state is about 48%, which is roughly 10th in the world.  The top federal income tax rate is 43.4% (39.6% plus the 3.8% medical income tax.)  I got the California number by assuming their 13.3% top rate was deductible against the 39.6% federal rate, but not the 3.8%.

Update:  Mark Sadowski points out that California also trails Belgium and Portugal.

Update#2:  Steve points out that with the Pease phaseout California’s top rate is actually 52.6%, still number 6, but trailing Portugal and Belgium, not Netherlands and Spain.

Canada seems to have a top rate of 54.75% in Quebec, but only about 45% in a typical province, and about 42% in populous Ontario.  Their top federal rate is 29%.  (I assumed local taxes are not deductible at the Federal level, otherwise their rates would be lower.)  Progressives want Canada’s health care regime.  I want their banking system, military, and income tax regime.  And their sound public finances.  Oil-rich conservative Alberta’s top rate is 39%, versus 43.4% in oil-rich conservative Texas.

Recently a lot of zombie ideas have been resurrected by progressives (and even some conservatives.)  These include 75% tax rates, much higher minimum wages, and guaranteed annual incomes.  I realize that lots of people are worried about inequality.  But there are sensible ways to address the issue (i.e. wage subsidies.) Let’s not shoot ourselves in the foot.  There’s a reason that Aruba is the only country in the world with a top rate above 57%.

PS.  The New York Times did a story on the Swiss referendum on a proposal that would pay every Swiss couple $67,ooo/year to do . . . nothing at all.  Just for existing.  They left the impression that it was a good idea. How did they accomplish that seemingly miraculous task?  Simple, they “forget” to mention the size of the guaranteed annual income.

PPS.  I have a better idea for the Swiss.  Instead of giving $33,500 to each Swiss adult, at a total cost of $200,000,000,000, why not give $50/year to each human adult?

Regarding the minimum wage, here is some data for Western Europe:

There are nine countries with a minimum wage (Belgium, Netherlands, Britain, Ireland, France, Spain, Portugal, Greece, Luxembourg).  Their unemployment rates range from 5.9% in Luxembourg to 27.6% in Greece.  The median country is France with 11.1% unemployment.

There are nine countries with no minimum wage (Iceland, Norway, Sweden, Finland, Denmark, Austria, Germany, Italy, Switzerland.)  Five of the nine have a lower unemployment rate than Luxembourg, the best of the other group.  The median country is Iceland, with a 5.5% unemployment rate. The biggest country in Europe is Germany.  No minimum wage and 5.2% unemployment.

Still want to raise our minimum wage to $10?  Germany used to have really high unemployment.  Then they did labor reforms to allow more low wage jobs, combined with subsidies for low wage workers.  Now they don’t have high unemployment.

Still want to raise our minimum wage to $10?

Beware of framing effects

In a recent post I discussed how the government was extorting money from big bankers.  Many commenters thought I was sympathizing with bankers, or implying they had not violated laws.  Actually, I assume bankers do violate lots of laws, as do all big businesses.  It’s impossible to operate a big business in America without violating some of the more than 1,000,000 government regulations at the federal level alone (and no, that number is not hyperbole.)

I think part of the problem is that in America we’ve developed the view that “victims” are not bad people. God help anyone who “blames the victims.” Actually victims are like everyone else, some good and some bad.  Indeed victims are probably slightly worse than average, as people who behave poorly are often easier to victimize.

Noah Smith has a post that I think illustrates the problem with framing effects.  Here’s an excerpt:

There’s a strong instinct to abdicate that responsibility – to look at things like global warming, poverty, environmental destruction, human misery in all its forms and say “God will take care of that.” For some people it’s not God, but “the free market”, or “evolution”, or “history”. But even if you believe in those things, you don’t really know that they’ll make everything right, any more than God knows whether a hidden SuperGod is guiding all of His actions.

The truth is, whether you like it or not, it’s all on you. The responsibility for those weaker than yourself is not on God’s or the free market’s or history’s or evolution’s head, it’s on your head. So think hard about what you’re going to do with all your power.

You might be fooled by framing effects into assuming that Noah is making a political point.  More specifically, a liberal political point.  But read the passage again and replace free market, evolution and history with “government.”  Notice that the meaning is essentially the same.  He’s actually making a claim about personal responsibility.

I implore readers to try to look past framing effects when reading my posts.  Hopefully it will allow us to avoid fruitless debates in the comment section.