Vox.com did a fairly long article on my views on monetary policy, and market monetarism more generally.  I´m traveling so I´ve only quickly read it once, but I thought it worth linking to.  I was also told that on Sunday the big Frankfurt newspaper (FAZ) may do a piece on me.  Let me know if you see anything.

I´d like to thank Timothy Lee for taking the time to research this topic, and also interview me.  It looks like an excellent piece.

PS.  I see that Tyler Cowen linked to my Kansas tax post.  Rereading the post I realize my claim about a 25% rise in Kansas GDP was too strong.  Tax avoidance might fall, and there are the lower tax rates to consider (which were cut by fairly similar amounts.)  But I stand by the gist of my argument.

Update:  I’m told the FAZ story was delayed.

What a first half!  We don’t have a GDP report for the second quarter, but all indications are that first half RGDP growth will come in around 0.00%.  Meanwhile, it’s the best half year for jobs since late 1999.  When you break things down further, the first quarter was typical of recent years, coming in at 569,000 jobs.  Was that held back by winter weather?  I’m not sure, but the second quarter was unusually strong, coming in at 816,000 jobs.  Wage growth is still running at 2%, so the economy shows no sign of overheating.  Some thoughts:

1.  This is the natural rate hypothesis in action.  Even though NGDP growth remains slow, and indeed is getting slower, wage moderation does eventually allow the labor market to heal.  And no, it’s not about discouraged workers leaving the labor force.  Recent job growth is far above labor force growth, which is now very slow due to boomers retiring.  Indeed if you take the slowing labor force growth into account, then the job growth was actually far, far better in the first half of 2014 than during the housing boom, and even better than 1999.

2.  The jobs speed-up may have something to do with the extended unemployment benefits ending at the beginning of the year.  But the excess job growth is only a few 100,000s, so there is no sign yet that the extended benefits had a major impact on the unemployment rate.  That was my assumption all along, and although the data isn’t strong enough to draw any firm conclusions, I see no reason to change my prior that the recession was mostly about demand, with some modest supply-side factors such as extended UI and 40% higher minimum wages.

3.  The Fed has a big NGDP problem.  It’s becoming increasingly clear that when the labor market recovers, RGDP growth will be very slow, maybe 1.2%.  Add in about 1.8% on the GDP deflator, and 3% NGDP growth looks like the new normal, assuming the Fed intends to stick with 2% PCE inflation targeting.  Bill Woolsey wins!!  Here’s the problem.  The Fed wants to do both of these things:

a.  Continue targeting inflation at 2%.

b.  Continuing to use interest rates as the instrument of policy.

But it won’t work.  At 3% trend NGDP growth, nominal interest rates will fall to zero in every single recession going forward.  The Fed will be spinning their wheels just when monetary stimulus is most needed.  At some point they will need a new policy instrument/target.  Lars Christensen has a very good post discussing a clever idea by Bennett McCallum, but in my view this idea works better for small countries than for the US, which is likely to follow the global business cycle.  NGDP futures anyone?  Level targeting?

4.  Unemployment is likely to fall to the natural rate (estimated by the Fed at 5.6%) quite quickly. There will be a debate about what to do next.  It will be the wrong debate.  The debate needs to be about where the Fed wants to go in the long run.  First figure out where you want to go in the long run, then adjust your short run policy as needed.  Otherwise the blogosphere debate will be like a bunch of drunken frat boys arguing about which street to take, when they can’t even agree on which bar they are going to.

Not much blogging over the next few weeks—happy 4th!

Update:  The US population age 16 to 64 is growing at about 0.4% per year, and will slow further. In the first half payroll employment rose at an annual rate of more than 2%, and the household survey was up 2.26%.  I beg you not to mention “discouraged workers.”  That’s the old story, not what’s going on now.

BTW, 3% may well be an overestimate of trend NGDP growth, if current productivity trends hold up.

Here’s Thomas Piketty on the US financial crisis (page 297):

In my view, there is absolutely no doubt that the increase of inequality in United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.

Where does one begin?

1.  In my view there is plenty of doubt as to whether inequality contributed to the crisis, partly because Europe is much more equal, and had an even worse financial crisis.  In fairness, he did say “contributed,” but my real complaints lie elsewhere.

2.  Why would stable real wages lead to more debt?  More specifically, why would it “inevitably” lead to more debt?  If my wages were stagnant I certainly wouldn’t react by taking on more debt, rather I’d borrow more if I expected my income to rise.  Is there a theory here?

3.  Correct me if I am wrong, but I thought the extra saving injected into the US economy came from the poor Chinese, not “well-to-do” Americans.  Why weren’t the Chinese “inevitably” forced to go into debt?  They were much poorer than Americans.  Yet they saved 50% of their incomes.  Some of this was forced by the government, but nowhere near all of the savings was forced.

4.  Experts say that the risks taken by the banks had little to do with deregulation, that subprime lending and mortgage-backed securities were legal well before “deregulation.”  Lehman wasn’t even a commercial bank.  And wasn’t US banking among the most heavily regulated industries in the world, even after the “deregulation” of the 1980s and 1990s?

5.  Why would “unscrupulous banks” lend on “increasingly generous terms?”  Why no discussion of how the government encouraged banks to lend money to low income people?  In Piketty it’s almost always the evil capitalists, never the well-meaning government bureaucrats.

A few pages later:

The familiar mobility argument is powerful, so powerful that it is often impossible to verify. But in the US case, government data allow us to measure the evolution of wage inequality with mobility taken into account: we can compute average wages at the individual level over long periods of time (ten, twenty, or thirty years). And what we find is that the increase in wage inequality is identical in all cases no matter what reference we choose. In other words, workers at McDonald’s or in Detroit’s auto plants do not spend a year of their lives as top managers of the large US firms, any more than professors at the University of Chicago or middle managers from California do.  One may have felt this intuitively, but it is always better to measure systematically wherever possible.

But at some point in their lives 73% of Americans do reach the top 20% of incomes.  Piketty doesn’t mention that fact.  Yes, most Americans don’t become corporate CEOs, is anyone surprised by that?

Piketty continues (p. 308):

We are free to imagine an ideal society in which all other tasks are almost totally automated and each individual has as much freedom as possible to pursue the goods of education, culture, and health for the benefit of herself and others. Everyone would be by turns teacher or student, writer or reader, actor or spectator, doctor or patient.

That might be ideal for a college professor, for most of the men that I have met during my life that sort of society would be a dystopia.

I love this comment on the very next page:

From 1980 to 1990, under the presidents Ronald Reagan and George H.W. Bush, the federal minimum wage remained stuck at $3.35, which led to a significant decrease in purchasing power when inflation is factored in. It then rose to $5.25 under Bill Clinton in the 1990s and was frozen at that level under George W. Bush before being increased several times by Barack Obama after 2008.

Oh, is that really what happened?  Or is that a very artful attempt at disguising what really happened. The following statement is even truer; see which one more accurately conveys what happened:

President George H.W. Bush increased the minimum wage from $3.35 per hour to $4.25 per hour. Bill Clinton increased the minimum wage from $4.25 per hour to $5.15 per hour. George W. Bush increased the minimum wage in three steps from $5.15 per hour to $7.25 per hour. The first two increases occurred while he was president; the third while Obama was president. Pres. Obama tried and failed to increase the minimum wage.

I wonder if Piketty has something against the GOP?  Of course the average reader of Piketty’s book knows nothing about these details, and takes his information at face value. 

On the very next page Piketty discusses the minimum wage in Germany.  But he forgets to point out that the 2004 labor reforms allowed for a large increase in low-wage German jobs, and that after these reforms the German unemployment rate plummeted while French unemployment increased. Isn’t that evidence important?

Three pages later Piketty provides a balanced discussion of the economic research on the effects of minimum wage laws.  He cites the Card and Krueger study, but no other.  I guess there haven’t been any empirical studies showing minimum wage laws reduce employment, or that they lead to discrimination, or that they reduce fringe benefits.

On pages 330-31 he points out that US corporate managers are now paid far higher salaries than Japanese corporate managers.  He then claims it is “naive” to assert that the pay might reflect productivity.  No mention of the fact that while the Nikkei is up 2 fold since 1982, the Dow is up 20 fold.  I don’t know about you, but I’d rather be a shareholder in US firms getting ripped off by the outrageous pay packages of the American CEOs, rather than invest in Japanese firms with their low paid CEOs.  You get what you pay for.

All that in 40 pages.  And this is pretty much how things go throughout the entire book.  In later posts I’ll pick up after page 331.  Just remember if you read the book that the information is not reliable.  Instead there is a constant left wing bias in facts, interpretation, evidence cited, etc. When he discusses outside sources like Kuznets he does not accurately convey their opinions.  The book has lots of good research, but it is not something that can be completely trusted.  Credulous readers are likely to get a very biased view of the US economy. Over at Econlog I soon do a post discussing Piketty’s views on size of government.

This post is a sort of bleg, as national income accounting is not my area.  One reason that I was surprised by the 2.9% fall in Q1 RGDP is that the other indicators had looked pretty good.  For instance manufacturing (the main component of industrial production) was strong in the first quarter, rising at more than a 2% annual rate.  So I decided to check the BEA GDP data to see if services were the problem in Q1.  Nope, services grew.

Then I noticed that the BEA data is expenditure based, not output based, so I tried to back out manufacturing output in 5 steps.  I looked at the contribution to the total change in RGDP from:

1.  Goods sold to consumers   (+.04%)

2.  Equipment sold to firms  (-0.16%)

3.  Change in inventories  (-1.70%)

4.  Export of goods  (-1.12%)

5.  Import of goods  (-0.25%)

I had thought that these 5 categories would add up to the change in manufacturing from the IP series, but it doesn’t even come close.  Indeed it adds up to minus 3.19%, more than explaining the entire 2.9% drop in RGDP.  It was a collapse in goods production.

And yet the manufacturing component of the monthly IP data series was up at more than a 2% rate in Q1.  All the other cyclical indicators such as monthly payrolls were also strong.  The privately estimated PMI index averaged above 50 (showing growth.)  So lots of goods were produced, but they weren’t sold to consumers nor were they sold to producers, nor were they exported, nor were they put into inventories.  So where did this goods output go?

My comment section has recently gone quiet, and I’m loving it.  Before explaining why, let’s consider this comment from Ryan Avent:

This misreading begins with its assessment of the stance of monetary policy; in the BIS’s view low interest rates are indicative of loose monetary policy. My colleague seconds this view, writing that central banks are determined to “keep monetary policy as loose as possible for as long as possible”. But this doesn’t add up. It suggests, for one thing, that monetary policy was remarkably loose during the Depression and extremely tight during the inflations of the 1970s, which we know is not true. It ignores, for another, that central banks have not remotely used all the tools at their disposal.

Remember the old Mad magazine “Spy vs. Spy?”  Reading Free Exchange sometimes makes me think “The Economist vs. The Economist.” Obviously I agree with Ryan the Economist, but what’s more interesting to me is that I can’t get the conventional wisdom to change its mind on this issue, even though I’ve won every argument.  On other issues I can force a debate.  Take monetary offset. I’ve had lots of debates on this issue, and people have presented me with very good arguments against my point of view.  Arguments that I find hard to refute.  It’s an open question.  In contrast, the conventional wisdom continues to plod ahead with the view that money has been easy over the past 6 years, despite the fact that when I challenge anyone on this issue their arguments collapse almost immediately.  No one has ever put even the slightest resistance to my demolition of the “low interest rates implies easy money” argument.  And I’ve debated dozens of economists.  But I can’t budge the conventional wisdom by one inch.  It’s rock solid.

One response is that it doesn’t matter what we call it, it’s just a question of semantics.  But it does matter, as the people who insisted that money was easy have been wrong about the effects of monetary policy.  Many of them argued we needed tighter money to help savers.  They applauded the fact that the sensible Germans stopped the ECB from going headlong into “easy money” like the British and Americans.  They applauded the eurozone interest rate increases of 2011, even though we explained that tight money leads to LOWER interest rates in the long run.  Well now the long run is here, and the German dominated ECB has just driven interest rates into negative territory. How’s that hawkish German policy working for those thrifty housewives in Stuttgart?

Of course being wrong about everything doesn’t stop them from making the same claims over and over again.  Here’s Ryan, sensibly directing his frustration against the BIS so that things can remain civil at The Economist:

Of course, it is grimly amusing to recall that the BIS wanted tighter policy in 2011 to fend off inflation. Had it pushed for more expansionary policy then in order to get a faster recovery despite””or even because of””the risk of inflationary pressures, then the case for higher rates now would be open and shut (assuming rates had not already begun rising). Though it wishes to cast itself as rising above short-termism in macroeconomic policy, it is strangely blind to the risk that excessively tight policy in the short run might lead to interest rates that are lower for longer than would otherwise be the case.

Now about that quiet comment section.  A few years ago I had near constant debates on two fronts. Exhausting debates.  On the left I faced one commenter after another ridiculing the idea that monetary policy could be stimulative at zero rates.  Ridiculing the notion that the “expectations fairy” could help the Japanese economy.  When the 2% inflation target fairy sent the yen sharply lower, and Japanese stocks sharply higher, and NGDP higher, and RGDP higher, and inflation higher, and unemployment to the lowest level in 16 years, it became a lot harder to ridicule my views.  Even fanatics don’t like to appear absurd, and making liquidity trap arguments in 2014 looks absurd. The monetary offset criticism has also died down, although it’s still a bit more of an open question than the liquidity trap nonsense.  But the failure of Krugman’s 2013 “test” certainly helped our cause.

On the right I was hammered by people who claimed my policies were hurting savers.  I tried to patiently explain that in the long run monetary stimulus was the best way to help savers, the best way to boost nominal and real interest rates.  I pointed out that tighter money would simply cause a double dip recession, as in the US in 1937 and Japan in 2001, and that it would lead to lower rates in the lower run.  The ECB ignored this advice in 2011, had their double dip recession, and German savers are now paying the price.

So there’s really nothing much left to debate.  My comment section has become a snoozefest. Maybe I should be like Krugman, and shift over to the inequality issue.  Like me, he was also proved right about everything, or at least that’s what we both claim.  🙂

PS. Speaking of The Economist, this is a fascinating article.  If we must have governments, why can’t they all be like the Estonian government?  As my commenter Lorenzo says, small is beautiful.