The weekend is a good time for some wacky posts:

1.  That giant sucking sound you hear . . .

. . . is Americans inhaling marijuana smoke, and sucking lots of jobs back to America.  Tyler Cowen directed me to this article:

For the first time ever, many of the farmers who supply Mexican drug cartels have stopped planting marijuana, reports the Washington Post. “It’s not worth it anymore,” said Rodrigo Silla, a lifelong cannabis farmer from central Mexico. “I wish the Americans would stop with this legalization.”

Facing stiff competition from pot grown legally and illegally north of the border, the price for a kilogram of Mexican schwag has plummeted by 75 percent, from $100 to $25, the Post reports:

Farmers in the storied “Golden Triangle” region of Mexico’s Sinaloa state, which has produced the country’s most notorious gangsters and biggest marijuana harvests, say they are no longer planting the crop…increasingly, they’re unable to compete with US marijuana growers. With cannabis legalized or allowed for medical use in 20 US states and the District of Columbia, more and more of the American market is supplied with highly potent marijuana grown in American garages and converted warehouses””some licensed, others not.

2.  The evils of antidisentanglementarianism

Tyler Cowen linked to a post pointing out that American death rates from sleepers becoming entangled in bedsheets has soared from 327 in 2000 to 717 in 2009. And let’s not forget that these deaths are merely the tip of the iceberg.  When I get entangled in sheets I tend to have nightmares of powerlessness, where I cannot move my limbs.  I see a Paul Krugman post trashing market monetarism, but am unable to lift my fingers to the keyboard to respond.  As an aside, I believe about 90% of all negative and positive utility in life occurs during dreams, as the feelings tend to be more intense than during waking hours.  (We forget most dreams.) It is only the bigotry of awake people (who control the printing presses) that privileges waking life.  All sorts of negative metaphors are associated with sleep.

Although I’m normally a libertarian, clearly there is a need for regulations promoting Teflon-coated bedsheets.  And the people who oppose regulations aimed at reducing entanglement, call them the purveyors of antidisentanglementarianism, are truly evil.

3.  Dumb and dumber

TravisV directed me to this good Brad DeLong post:

Remember: in the winter of 2008-2009, every single major New York bank-with the exception of Goldman Sachs and perhaps J.P. Morgan Chase-was insolvent if marked to market: the only value their equity and option holders had came off of the fumes from expected government bailouts that were supposed not to enrich bankers and bank shareholders but keep the economy from collapsing, and on expectations of future reflationary policies that would push asset prices up above their winter 2008-9 values.

For Geithner to after the winter of 2008-9 to talk about the major New York banks as anything other than dumb, lumbering giants that had failed to understand the consequences of their own leverage, the risks they were running, or even what the factor loadings on the securities they held in their portfolios were-that suggests a substantial disconnect from reality indeed…

They were bankrupt in the winter of 2008-9. The accepted principle for dealing with a financial crisis is the “Bagehot Rule”: (a) lend freely to solvent but illiquid institutions (b) at a penalty rate so their executives and shareholders do not profit from the moral hazard they created, and (c) shut down insolvent institutions so executives and shareholders in the future do not think they will escape the consequences of the moral hazard they created.

It appears from Geithner that Summers was just trying to follow what had been the standard playbook since the 1870s. What did Geithner think he was doing?

Yes, commercial banks were dumb, but Washington policymakers were even dumber.  As DeLong himself has argued, an important duty of the Fed is to inject enough money into the system so that NGDP growth doesn’t tank.  A monetary policy (in 2008) leading to 5% expected NGDP growth for 2008-09 would have been expansionary enough to keep most of those balance sheets in the black. What should we do with the banking system if the Fed perversely lets NGDP collapse?  I honestly don’t know—perhaps DeLong is correct.  Or perhaps if that were the Fed’s only choice (allowed under law) then they would have rescued the banks by stabilizing NGDP expectations. Obviously saving Main Street wasn’t enough of a motivation.

4.  Lars Von Trier — A director with teeth

I recently saw the new Lars Von Trier film.  It made more sense after reading this WSJ article on Danish attitudes toward dissection:

“There seem to be cultural differences,” said Richard Vari, biologist at the Smithsonian’s National Museum of Natural History in Washington, D.C. In the U.S., a public dissection of a large mammal “would cause a major uproar.”

Some museums don’t do any public dissections; others, such as the North Carolina Museum of Natural Sciences, do dissections on smaller animals such as fish and reptiles.

Denmark’s philosophy isn’t always well received.

Last month, officials at the Copenhagen Zoo attracted international attention for killing a healthy giraffe, known as Marius. Officials said Marius was killed due to the risk of inbreeding and “to keep up a healthy giraffe population,” a spokesperson said.

The animal was later dissected in front of a group that included children.

.  .  .

Museums in Denmark have done public dissections for years, on animals ranging from snakes to tigers.

Bo Skaarup, director of the Aarhus Natural History Museum, said, “one can well see something particularly Danish” in the fascination with dissection. “We accept that nature can be rough….we do not want to hide.“

And this:

About a week before Ms. Solberg attended the dissection in Copenhagen for her birthday, another wolf was dissected at the Natural History Museum in Aarhus. There, biologist Pernille Mølgaard dissected the animal in front of an audience mostly composed of elementary-school-aged children.

She started her presentation with a basic introduction. When finished with formalities, she asked, “shall we now take a look at what is in the wolf?” The audience enthusiastically responded with a collective “yes.”

The group gave out an “oooh” as she opened the abdominal region, pulling out organs. “This part, looking a bit like a medister sausage, is the bowel,” Ms. Mølgaard said.

She then opened the stomach, which contained evidence that the wolf had snacked on a smaller animal. Some students sipped from juice boxes as she worked.

.  .  .

“It is something natural they are showing us,” said Lars Solberg, Ms. Solberg’s father, of the autopsy he attended with his family in Copenhagen.

That dissection in Copenhagen wasn’t a place for the overly modest. At one point, Mr. Johansson, the zoologist, opened the hind legs and started talking about the wolf’s reproductive capabilities. “Now we can see it is a he,” Mr. Johansson said.

Later, one of Mr. Johansson’s colleagues put the pink and fur-less skull over his hand and then walked among the crowd so audience members could feel its teeth.

Emphasis added.  I just got off the phone with Lars Christensen and I hope to visit Denmark this summer.  I can hardly wait.

5.  The end of the world:

What’s so funny about the end of the world?  Nothing.  What’s funny is that no one cares.

“I am finding it increasingly plausible that existential risk is the biggest moral issue in the world, even if it hasn’t gone mainstream yet,” Bostrom told Ross Andersen recently in an amazing profile in Aeon. Bostrom, along with Hawking, is an advisor to the recently-established Centre for the Study of Existential Risk at Cambridge University, and to Tegmark’s new analogous group in Cambridge, Massachusetts, the Future of Life Institute, which has a launch event later this month. Existential risks, as Tegmark describes them, are things that are “not just a little bit bad, like a parking ticket, but really bad. Things that could really mess up or wipe out human civilization.”

The single existential risk that Tegmark worries about most is unfriendly artificial intelligence. That is, when computers are able to start improving themselves, there will be a rapid increase in their capacities, and then, Tegmark says, it’s very difficult to predict what will happen.

Tegmark told Lex Berko at Motherboard earlier this year, “I would guess there’s about a 60 percent chance that I’m not going to die of old age, but from some kind of human-caused calamity. Which would suggest that I should spend a significant portion of my time actually worrying about this. We should in society, too.”

Have a nice day . . . there aren’t many left.

Or something like that.  As we all know, Krugman likes to brag that he doesn’t read any conservatives, as they have nothing interesting to say.  But that doesn’t prevent him from being dismayed by their lack of intellectual honesty. Here Krugman discusses Allan Meltzer’s repeated warnings that inflation is coming:

Tests in economics don’t get more decisive; this is where you’re supposed to say, “OK, I was wrong, and here’s why”.

Not a chance. And the thing is, Meltzer isn’t alone. Can you think of any prominent figure on that side of the debate who has been willing to modify his beliefs in the face of overwhelming evidence?

Here’s Steve Williamson, who changed his mind about inflation:

Back in days of yore, my concern was that we could indeed get higher inflation. How? I had thought that the Fed had the ability to control inflation, but when push came to shove, they wouldn’t do it. Once people caught on to that idea, we could get on a high-inflation path that was self-sustaining. Of course, since I said that, I’ve continued to work on these problems, and stuff has been happening. In particular, we’re not seeing that high-inflation path.

And here’s an article discussing Arthur Laffer:

And in June of 2009, he penned an op-ed warning excessive quantitative easing would inevitably lead to higher inflation and interest rates.

…we haven’t ever seen anything like this in the U.S. To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits …Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn’t a pretty picture.

Obviously, nothing like that happened.

In an interview with Business Insider from his office in Tennessee, Laffer admitted that he was wrong. The old maxim that dictates increasing the availability of cash through lower interest rates will lead to higher prices, he said, may need to be reexamined.

I frequently meet conservatives who have changed their minds, and I frequently meet conservatives who have not changed their minds.  I also meet Keynesians who didn’t change their minds about market monetarism after the famous 2013 “test.”  In any case, don’t take this as a jab at Krugman; given that he doesn’t read any conservatives he can hardly be faulted for not knowing what they are saying.

Enough fun and games, now let’s focus on the much more important question: whither monetarism?  (That’s the first time in my life I typed the word ‘whither’ and probably the last.  I just don’t like that word.)

There have been lots of good critiques of Meltzer’s op ed, including friendly fire from monetarists like Marcus Nunes and Bob McTeer.  Brad DeLong provides some not so friendly fire.  I’d like to focus on what I see as the big problems, and the resulting implications for monetarism:

1.  Meltzer confuses the monetary base with high-powered money.  High-powered money is base money with a lower yield that T-bills.  The recent injections of money by the Fed are mostly interest-bearing reserves, and hence are not high-powered money.  So contrary to the claim of Meltzer, the Fed is not monetizing the debt.  And that means that all previous cases of monetizing the debt have no bearing on the eventually outcome of QE1, QE2, and QE3.

2.  There is no such thing as long and variable lags.  Monetary policy affects assets prices like stocks and TIPS spreads immediately.  Effects on the broader economy show up very quickly after asset prices change.  A huge literature on long and variable lags grew up based on a fundamental misconception, that interest rates and/or the money supply are useful indicators of the stance of monetary policy. They aren’t.

3.  The low interest rates of recent years represent the effects of a tight money policy by the Fed, not easy money (as Meltzer seems to imply in the op ed.) Milton Friedman understood this.  So did Ben Bernanke (back in 2003, not today.)

On the third point, Keynesians make the same mistake.  Here’s Menzie Chinn discussing the fiscal multiplier:

When output is contracting due to some aggregate demand shock, there is likely to be a lot of slack, such that a Keynesian model is more apt than a Classical model. In addition, monetary policy is likely to be accommodative.

Chinn, Meltzer and about 99% of other economists seem to believe that monetary policy has been accommodative since about 2008.  Ben Bernanke agrees.  But the Ben Bernanke of 2003 would not have agreed:

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman (in his eleventh proposition) and by Allan Meltzer, nominal interest rates are not good indicators of the stance of policy, as a high nominal interest rate can indicate either monetary tightness or ease, depending on the state of inflation expectations. Indeed, confusing low nominal interest rates with monetary ease was the source of major problems in the 1930s, and it has perhaps been a problem in Japan in recent years as well. The real short-term interest rate, another candidate measure of policy stance, is also imperfect, because it mixes monetary and real influences, such as the rate of productivity growth.   .   .   .

Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation. On this criterion it appears that modern central bankers have taken Milton Friedman’s advice to heart.

I believe old monetarism is effectively dead. The monetarists (including Allan Meltzer) made enormous contributions to our understanding of monetary policy. But their model has reached a dead end. I implore bright young grad students with an interest in monetary economics to take a look at market monetarism. Since 2008 we’ve been more accurate in our predictions than any other school of thought. We have a coherent model that incorporates rational expectations and efficient markets. Our views on policy lags do not conflict with market indicators. We understand the difference between the monetary base and high-powered money. We understand the difference between temporary and permanent monetary injections. We understand the importance of interest on reserves. We have a model that can explain market responses to QE and forward guidance surprises. We can explain the price level, not (like NKs) merely the rate of inflation.

What we don’t have is jobs at elite institutions.  So if you are a bright young academic you have a golden opportunity to lead the movement—to become the next Milton Friedman.  What’s stopping you?

We see one article after another demonstrate that the stylized facts simply don’t support NK sticky price models. This AER paper by Bils, Klenow and Malin is a recent example.  On the other hand models that rely on NGDP shocks and sticky wages are very unlikely to be falsified.  Don’t you want to base your research agenda on a rock solid assumption?  NGDP shocks cause demand-side business cycles.  Period.  End of story.

Matt Yglesias directed me to this report on government efficiency:

Yglesias pointed out that both the blue state and the red state economic model can be efficient, citing the relatively high rankings of Texas and Massachusetts. Do you notice anything else about the most efficient states?

Check out this list:

States with no income tax:

• Alaska
• Florida
• Nevada
• South Dakota
• Texas
• Washington
• Wyoming

States with nearly no income tax:

• Tennessee
• New Hampshire

All seven of the states with no income tax score at or near the top of the list of government efficiency by state.  (#1, 2, 3, 4, 7, 8, 11) Coincidence?  One must always remember that the human brain notices interesting patterns and discards the far more numerous non-interesting patterns, which is why claims made on the basis of 95% confidence intervals are often quite misleading.

Then I wondered whether the report had a strong conservative bias. That’s possible, but the bottom part of the report (#41 to #51, is dominated by a bunch of conservative southern states (including Tennessee.) Is there any explanation for Massachusetts? It does have a flat rate income tax with a much lower top rate than places like New York and California.  Again, this could be a coincidence, but I do find it interesting.

Perhaps states that must rely on sales and property taxes are somehow more accountable to voters. After all, those taxes are fairly widely shared (‘regressive’ would be the term used by progressives.) Does this put more pressure on governments to deliver, as compared to places like New York and California, which can play around with large state income tax revenues from a tiny percentage of upper income taxpayers?  Taxpayers that may stay put despite a poor ROI, because they find their states attractive in lifestyle terms?

The rich might care about theatre and restaurants, but the middle class is voting with their feet. Here’s an article discussing the real estate market in one city in one of the tax free states:

Houston had more new-home starts last year than the entire state of California . . .

Houston builders could be building and selling 50,000 new homes in 2014, but a shortage of labor and quality lots is suppressing the local construction industry somewhat.

Developers are responding to the need for more lots by creating new communities, such as Pomona, which was recently started by Ross Perot Jr.’s Hillwood company in Manvel, south of Houston.

Burns’ survey of the best-selling master planned communities in the nation shows that 10 of the top 25 are in Houston. “This is the capital of suburban master planned communities in the country,” he says.

Burns projects that Houston’s annual new-home starts will increase about 13 percent annually over the next three years, peaking at 50,000 starts in 2016.

One more reason to suspect the recession was never about unemployed construction workers.  It was falling NGDP.  We can’t even find enough construction workers and yet the consensus in Washington DC (Democrats and some Republicans) is that we need to renew the “emergency” unemployment compensation program.  Meanwhile Janet Yellen thinks we need to taper to prevent overheating.  I don’t know who’s right, but I suspect that within about 12 months it will be clear.

BTW, a few days ago Toyota decided to move from LA to Dallas, taking thousands of jobs.  LA will be fine, but it will need to reinvent itself the way NYC did.

Mark Sadowski left the following comment:

6) Financial Sector Bailout Costs to Government.

The best source for data on this is the IMF Fiscal Monitor. See Table 1.6 on Page 9:

http://www.imf.org/external/pubs/ft/fm/2014/01/pdf/fm1401.pdf

Another source of data is Eurostat:

http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/excessive_deficit/supplementary_tables_financial_turmoil

The following is a list of countries’ financial sector bailout cost as a percent of GDP and the proportion that has been paid back (percent). All data comes from the IMF except for the data for Portugal and Denmark which comes from Eurostat.

Country-Cost-PaidBack
U.S.””””4.5-106.7
Germany-12.5″”15.2
U.K.””-10.3″”20.4
Spain””-7.7″”40.3
Nether.-18.7″”75.9
Belgium””7.5″”42.7
Greece””30.9″”22.0
Portugal-10.7″”-0.7
Denmark””6.0″”41.7
Ireland-40.1″”17.2
Slovenia-12.0″”-0.0
Cyprus””10.9″”-0.0

Note that the cost of the U.S. bailout of the financial sector was far less than Germany, the U.K. or the peripheral members of the Euro Area. Moreover the U.S. bailouts have been paid back with interest, whereas apart from the Netherlands none of the E.U. members have recovered more than half of the cost of bailing out their respective financial sectors. This to me is evidence that the U.S. financial sector has probably fully recovered, whereas the various troubled European financial sectors almost certainly have not.

One last point, and I think this is very important. Note that although the UK financial sector has performed very poorly, recall that in terms of NGDP growth, the UK has outperformed nearly all of the countries in the Euro Area. So a poor performing financial sector is not at all as pivotal as Tony Yates seems to think. So once again I think the causality goes from NGDP to the financial sector and not the other way around.

I’m no expert in this area, so I’d appreciate any comments that might explain the surprising figures, such as the fact that Greek and Spanish banks have repaid more of their bailout costs than German banks.  Did fiscal transfers help the Greek banks?  Also, does this undercut the argument that the US banking crisis was the cause of the global recession? (An argument I always found unpersuasive.)

PS.  Very sorry to hear about Gary Becker.  He was the most brilliant teacher I ever had.  And perhaps the most influential microeconomist of the past 50 years.

What is the effect of the end of extended unemployment benefits (which reduced the maximum from 73 weeks to 26 weeks?)  Unfortunately, it is too soon to tell. Indeed we may never really know.

The two jobs surveys have very different results for the first 4 months of 2014. The household survey shows total employment up by 1,083,000, versus 1,374,000 for all of 2013. That’s clearly an improved pace.  Unfortunately the much more reliable payroll survey does not show a significant upswing, with monthly job growth running at 214,000 vs. 194,000 in 2013.  Of course the April numbers represented a significant improvement in the trend, and perhaps the winter numbers were impacted by the weather.  In my view we need three of four more months to get a good sense of 2014.  Indeed it might not be until some time in 2015 (when the final revisions come in) that we get the full picture.  Right now it’s wait and see.

My best guess is that both sides of the debate will eventually be shown to be partly correct.  When unemployment insurance ended in North Carolina last year the unemployment rate fell relatively sharply.  This probably represented a combination of more jobs created and fewer unemployed due to discouraged workers completely abandoning the job search.  But the data is maddeningly imprecise.  Let’s revisit this in three months.

PS.  We are very rapidly approaching a “5 point something” unemployment rate, which in my view will have important psychological effects, regardless of what you think about the unemployment rate vs. labor force participation rate debate.  The fact that long term bond yields are still quite low provides further support for a claim I’ve been making for years—low interest rates will be the “new normal” in the 21st century.

PPS.  Some sticky-wage skeptics ask why wages wouldn’t adjust in the long run, bringing unemployment back to the natural rate.  I’d like to point out that unemployment has fallen from 10% to 6.3% (the Fed estimates the natural rate is 5.6%.)  This despite record low NGDP growth during the recovery.  Instead of questioning the sticky wage model, people should ask why the Fed allowed such sluggish NGDP growth during the recovery, thus needlessly prolonging the painful adjustment process.

PPPS. A few weeks back I provided this forecast of today’s jobs numbers, my first ever unemployment rate prediction:

Bonus forecast–the unemployment rate will fall several ticks in April.

Yes, I should have said what I really thought—that the fall would be surprisingly large.  (Based on the North Carolina pattern.)  Still, I hope all my readers bought stock options right before today’s announcement. 🙂