Archive for October 2014


Matt Yglesias’ recent posts

Why do I like Matt Yglesias’s posts?  Consider 5 done in the past few days:

Car dealers are awful. It’s time to kill the dumb laws that keep them in business.

BTW, Has anyone asked Warren Buffett if he plans to advocate ending the horrible laws that protect car dealers from competition?  (Like those car dealers he just bought.)  Or whether he intends to support the dealers so he can accumulate even more billions of dollars by ripping off ordinary Americans?  He seems more honest and idealistic than the average Ukrainian oligarch, but it’d be nice to know for sure.  And don’t even ask about the “free market loving” GOP.

DC’s streetcar isn’t even running and it’s already making buses slower

But streetcars look neat . . . kinda European.

Amazon is doing the world a favor by crushing book publishers

I really, really, really dislike publishers.

Democrats are using Ferguson to drive black turnout. But they’re in charge in Missouri.

Surely the Dems would not incite racial fears for selfish electoral reasons?

Obama’s latest plan to boost the economy? Bring back subprime mortgages

After the 2008 crisis just about everyone on the left blamed it on “deregulation.”  (Wait, if banking was deregulated then why did I have to sign 20 consumer protection forms every time I refinanced in the early 2000s?)  I pointed out that the regulators also missed the crisis, so what makes us think they would do any better the second time around?  My liberal friends replied that we now know the evils flowing from unrestrained lending to people who couldn’t possibly repay their mortgages.  But that seemed like too low a bar to me, closing the barn door after the horse had left.

Sure, now it’s obvious that subprime loans were a disaster.  But if the banks had known that in 2004-06 they obviously wouldn’t have made those bad loans, and they would have also refrained from investing in MBSs MSEs.  Yes, regulators have learned their lesson, but so have banks!  Banks are also tightening up on their standards.  So I ask again, what makes us think regulators could do any better next time? And isn’t it setting an excessively low bar to merely have regulators prevent an exact repeat of what went wrong in the 2006 housing bubble?  Anybody could do that!

Well I should have saved my breath, for as Yglesias points out the bar might have been set way too low, but the regulators still couldn’t clear it.  While banks have tightened their standards, regulators have returned to encouraging subprime mortgages.  And this occurred under a supposedly pre-regulation pro-regulation liberal Democratic president.  If regulation doesn’t work now, how is it supposed to work under the next GOP president?  Maybe Paul Krugman can tell us.

Krugman mocks conservatives who predicted inflation, and still insist the real problem is easy money.  And rightly so.  But I’d say the same about any liberal blogger who still thinks “deregulation” was the cause of the 2006 bubble.  If they haven’t learned by now that our regulators are utterly incompetent, then they never will.  Those progressives should be mocked in exactly the same way Krugman mocks conservatives who still insist the Fed’s “easy money” policy will soon create inflation.

PS.  I like the way defined the new policy:  “Insanity defined.”

PPS.  I wish Kevin Drum the best.  I’ve never met him, but based on his writing he seems like a great guy.

Bayesian updating

Here are some interesting articles that I ran across.  First one from the Economist on the real (actual) minimum wage—zero:

Perhaps not coincidentally, the number of unpaid internships has grown just as hiring has become riskier, pricier and more complex. In recent years anti-discrimination and unfair-dismissal rules have been tightened, and minimum wages raised, in many rich countries. The growing cost of benefits such as pensions, health care and maternity leave makes employees more expensive. Interns have therefore become an appealing alternative.

I’ve recently argued that CEOs should be paid far more than they were paid in the 1960s, because their jobs are much more consequential.  Here’s evidence that they are not overpaid:

So, if the shares rise on an executive’s death, that means he was overpaid; if they fall, he was not. By this measure only 42% of the bosses studied were overpaid; furthermore, those with the most eye-popping rewards were found to be giving the best value for money, as measured by the share-price slump when they passed away.

The study also reckons that of the increase in value that results from a firm hiring an executive, he gets 71% and the shareholders therefore get 29%. In the sense that investors at least get some positive reward from the relationship, executives as a whole are not overpaid.

Followers of Mr Piketty are unlikely to be convinced. They would say that even when bosses add more value than the amount by which their pay exceeds the average, they are still overpaid because the average is itself excessive; and that it is inherently indecent for bosses to get such a big share of the gains from their relationship with their firms.

Yeah, they would say that, wouldn’t they?

Recently I did a long post at Econlog saying education wasn’t very important (at the margin in developed countries) and that spending more money wouldn’t have much impact.  I did point to one strong counterargument, a study showed that having a single good teacher at a young age can substantially impact a person’s life outcome.  I found that result quite surprising, but now it looks false:

Estimates that adjust for changes in students’ prior achievement find evidence of moderate bias in VA scores, in the middle of the range suggested by Rothstein (2009). The association between VA and long-run outcomes is not robust and quite sensitive to controls.

Also check out Bryan Caplan’s excellent post on the dubious merits of compulsory attendance laws.

Update:  Tyler Cowen cites a study that conflicts with my prior belief.  But is it scalable? And does it go beyond improving test scores, to improving life outcomes?

I’ve also argued that most anomaly studies in finance are merely data mining, and hence are essentially worthless.  Look at the last sentence in this abstract:

Hundreds of papers and hundreds of factors attempt to explain the cross-section of expected returns. Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e.g., a t-ratio greater than 2.0. However, what hurdle should be used for current research? Our paper introduces a multiple testing framework and provides a time series of historical significance cutoffs from the first empirical tests in 1967 to today. Our new method allows for correlation among the tests as well as missing data. We also project forward 20 years assuming the rate of factor production remains similar to the experience of the last few years. The estimation of our model suggests that a newly discovered factor needs to clear a much higher hurdle, with a t-ratio greater than 3.0. Echoing a recent disturbing conclusion in the medical literature, we argue that most claimed research findings in financial economics are likely false.

I’m skeptical of proposals to “regulate” the financial system.  Here’s one example:

“DON’T bail out the big banks on Wall Street another time,” thundered Richard Durbin, an American senator, “Once in a political lifetime is enough!” His amendment to the Dodd-Frank financial reform of 2010 capped the fees banks can charge merchants to process debit-card transactions, on the grounds that banks were gouging businesses and their customers. But the limits on “interchange fees”, as the financial jargon has it, have not worked out as planned. They have resulted, by one calculation, in the transfer of between $1 billion and $3 billion annually from poor households to big retailers and their shareholders. These were not the beneficiaries Mr Durbin had in mind when the amendment came into effect three years ago this week.  .  .  .

Meanwhile the banks, which are in even worse shape, have tried to make up for the lost revenue with higher charges for other things, including monthly fees for having a debit card, or even a current account. In 2009 banks provided 76% of America’s current accounts free of charge; last year the figure was only 38%. The higher charges in turn, have pushed 1m Americans out of the formal financial system””not the result Mr Durbin was aiming for.

I predicted that Hollande’s socialist policies would fail, and he’d do a U-turn just like Mitterrand:

The new team is engineering a shift in economic policy not unlike that under Mitterrand, who made a sharp U-turn in 1983, also after two years in office. Like Mitterrand, Mr Hollande has so far spent most of his time making matters worse. Having declared during his campaign that the “world of finance” was his enemy, and promised his 75% top tax rate, Mr Hollande increased taxes by €30 billion ($40 billion) in his first year. He reversed some of Mr Sarkozy’s popular work-friendly policies, such as tax-free overtime. He sent out mixed messages to foreign investors and entrepreneurs. He failed to curb public spending. And he brought in new rules that choked growth in sectors such as construction.

On Mr Hollande’s watch, the overall tax take grew from 43.7% of GDP in 2011 to 46% in 2013. Annual income growth in 2012-14 has averaged a mere 0.4%. Unemployment, which Mr Hollande had promised to bring down, edged up to over 10%. Confidence collapsed, investment was put on hold, and many of the rich left for Brussels or London. To take but one example of the damage Mr Hollande has wrought, new rent-control rules designed by Ms Duflot (who refused to serve under Mr Valls because she considered him too right-wing) have battered the construction industry. In the two years to January 2014, new housing starts fell by nearly a quarter.

Now the government has gone into reverse. It has embraced a business-friendly mix of policies in a bid to revive the private sector. This may stop short of what the economy needs to get back on its feet, but it contains a decent dose of common sense. In 2015 a cut in the hefty social charges paid by employers will come into full effect, in an attempt to encourage hiring. Savings of €21 billion will be squeezed out of public spending, including €9.5 billion from the social-security system. Perhaps most symbolic of all, the 75% top tax rate, set up initially as a temporary two-year measure, will be quietly allowed to die.

If the Piketty/Krugman soak the rich policies won’t work under a socialist government in France, when and where will they work?

In other posts, I’ve expressed concern over eco-terrorists (think unibomber) who believe the world is overpopulated. Soon they’ll have a weapon:

Nearly 50 cities, mostly in America and Europe, are now home to groups of biohackers or amateur laboratories where they can meet and experiment. Besides Open Wetlab, these include Biocurious in Sunnyvale, California, Genspace in New York and La Paillasse in Paris. The number of biohackers around the world is anybody’s guess, but the movement’s main online-mailing list boasts nearly 4,000 members and is growing rapidly.

What drives the movement is the belief that “biology is technology” (to quote the title of a book by Rob Carlson, a DIYbio pioneer): that DNA is a form of software that can be manipulated to design biological processes and devices. But some people worry that amateur laboratories could create killer bugs or provide training for bio terrorists. For the moment, at least, such fears seem premature.

For the moment . . .

Someday I’ll change my mind, and stop being so dismissive of new theories that challenge my prior beliefs.  But not today.

HT:  Tyler Cowen

The problem with procyclical inflation

Here’s Charles Evans in the WSJ:

“We’ve averaged well under that 2% mark for the past six-and-a-half years,” Mr. Evans said. “With a symmetric inflation target, one could imagine moderately above-target inflation for a limited time as simply the flip side of our recent inflation experience-and hardly an event that would impose great costs on the economy.”

There’s no doubt in my mind that a policy of letting inflation run a bit above target during the next boom will not cause great hardship during the next boom

But a policy of running inflation below target when unemployment is high and above target when it is low makes the business cycle much worse, and does impose great hardship.  Some conclusions:

1.  A procyclical inflation policy violates the dual mandate.

2.  NGDP targeting would lead to countercyclical inflation (a good thing).  As Nick Rowe likes to say, you want to make it so that the public’s stupid belief that inflation is bad . . . is true.  Good supply-side policies would become anti-inflation policies.

3.  Discussions of “what should the Fed do now?” are meaningless and incoherent, unless embedded in a clearly specified long run policy regime, as are discussions of whether QE “increases inequality.”

Charles Evans is actually one of the best people at the Fed.  Then there is the other Charles:

Federal Reserve Bank of Philadelphia President Charles Plosser said Friday that inflation levels that have fallen persistently short of where the central bank wants them to be are not a significant issue to him right now.

It’s true that inflation levels are “a little bit low” relative to the Fed’s desire to have price pressures hit 2%, Mr. Plosser said at an appearance in New York. But, “for the most part, I’m not too concerned about that,” he said.

What he doesn’t say is that the reason the Fed has failed is partly due to the fact that he’s consistently been pressuring them to be more contractionary, even as they were already far too contractionary to hit their dual mandate. So Plosser’s telling us that the Fed is not doing its job, partly due to his consistently bad advice, but he doesn’t much care.

Fortunately, market monetarist ideas are gradually seeping into the media.  A few days ago we saw this at the Financial Times, now it’s Bloomberg’s turn:

Based on the gap between yields of government notes and TIPS, traders have scaled back estimates for average inflation through 2019 by a half-percentage point since June to 1.52 percent, Fed data compiled by Bloomberg show.

.  .  .

With the Fed’s preferred measure averaging 0.34 percentage point less than CPI in that span, traders are signaling prices based on that gauge may rise as little as 1.18 percent. Through August, the personal consumption expenditures deflator has fallen short of the Fed’s 2 percent goal for 28 straight months.

Fed officials “need to be paying attention to that because there’s a collective wisdom element to the TIPS market,” Mitchell Stapley, the chief investment officer for Cincinnati-based ClearArc Capital, which manages $7 billion, said in an Oct. 8 telephone interview.

Layoffs reach the lowest level EVER

A few weeks ago I pointed out that new claims for unemployment (4 week average) as a share of total employment had reached the lowest level since April 2000.  I predicted it would soon beat that record.  Now it has; they are at the lowest level ever.  Here’s what we know (or at least I suspect) about the new economy:

1.  Low interest rates are the new normal.

2.  Low layoffs are the new normal.

3.  High stock prices are the new normal.

4.  Greater income inequality is the new normal.

5.  Fewer people moving between states is the new normal.

6.  Slow RGDP growth is the new normal, probably due to both slower employment growth and lower productivity growth.

7.  The Great Moderation is back after a one year hiatus (mid-2008 to mid-2009).  This expansion may last a record 10 plus years, but will still be a lousy expansion.  Don’t call it the Great Moderation, call it the Mediocre Moderation.  Mediocre labor markets are the new normal.

8.  Just as overall economic growth reflects deep institutional realities, the quality of macro policy reflects the quality of institutions doing macro teaching and research.  A small country like Canada can easily outperform a big region like the eurozone, if its macroeconomists (Laidler, Rowe, Carney, etc.) are better informed about the realities of monetary economics and AD than those macroeconomists of the eurozone, who don’t even seem too sure of what AD is.  But these differences are not carved in stone—Germany was ahead of the English-speaking world in their understanding of monetary economics during the 1970s.  As the issues change, the relative strength of each country changes.

Update:  The Nikkei Asian Review has published a phone interview of me.  I’m told this is a major Japanese paper.

Did QE worsen inequality? That’s not even a question

When people ask whether QE worsened inequality they think they are asking a coherent question. But that merely shows how poorly most people understand monetary economics.

Let’s ask a different question:  Did Obama’s appointment of Ben Bernanke increase inequality? Any sensible listener would ask: “Compared to what?”  After all, most models are roughly linear, at least for very small changes (I’m rusty at math, so tell me if that is wrong.)  In other words, whatever impact monetary policy has on inequality, the impact of picking Bernanke over a more dovish alternative (Romer) would have been the opposite of Obama picking Bernanke over a more hawkish alternative (Summers.)   I can’t imagine anyone being able to make sense of the question “did Bernanke increase inequality” without knowing the counterfactual Fed chair.  And of course the same is true for Fed policies, is the counterfactual more or less contractionary than the actual policy?

Now some people will say; “the obvious implication is that the counterfactual was no QE, and that this was a more contractionary alternative.”  This is very likely how people think about it, but of course that assumption is wrong.  My preferred policy would have been far more expansionary, and hence would have involved far less QE.  Let’s break this down into 2 questions:

Does monetary stimulus increase inequality?

Does delivering monetary stimulus via QE affect inequality more than some other method?

I’ll take the second question first.  Suppose Bernanke did not do QE, but rather some equally effective stimulus method.  Perhaps slightly raising the inflation target, or going to level targeting. Would that make any difference for inequality?  I hope it’s obvious that it would not.  The mechanics of QE are totally uninteresting.  You are just swapping one Federal government interest bearing liability (reserves) for another federal government interest bearing liability (T-bonds.)  Any “Cantillon effects” are trivial.  I hope I don’t have to explain to people that this “money” did not “go into the stock market”:

a.  The money went into bank reserves, or currency.

b.  Money never goes into markets; there is no giant safe on Wall Street storing all the money invested in stocks.  Money goes through markets.  You buy, someone else sells.

If there were no QE, but equally fast NGDP growth produced by a higher inflation target, stocks would have done equally well.  Indeed stocks responded more strongly to forward guidance than QE3 in late 2012.

So now we can rephrase the QE question: “Did Bernanke’s monetary policy since 2009 worsen inequality?”  Now it’s much easier to see that we need a counterfactual.  You might prefer to describe that policy as 1.5% inflation, or perhaps 4% NGDP growth (my choice.)  Either way it’s a fairly contractionary policy.  And it’s no longer “obvious” what the counterfactual is, would it be 3% or 5% NGDP growth?  In my view 5% growth would have helped the unemployed and the rich more than the middle class with stable jobs (say teachers.)  So that has mixed effects on inequality, indeed so ambiguous that it’s probably not worth even thinking about, as the effect would be trivial compared to the net gain to America from a stronger economy.

If you think the alternative to QE was a more contractionary policy, say 3% NGDP growth, then it would hurt the rich and poor more than the middle class.  In order to favor that policy you’d have to hate the rich so much that you be willing to impoverish millions of poor people to screw the rich. But even someone who hates the rich as much as Paul Krugman favors QE.

Sorry, but “does QE increase inequality?” is a really, truly moronic question.  I apologize for wasting your time.

PS.  Here’s Buttonwood at the Economist:

This is at the heart of the matter. Even if the Fed does not increase rates next year, it will surely take a big economic shock to make it resume QE. The markets have relied on the central banks for so long, like a small child holding his dad’s hand when learning to ride the bike. It is time to let go of the hand now, but there will be a few bumps and bruises along the way.

This is truly a horrible metaphor, and helps explain how the developed world got so far off course. Taken literally, the counterfactual to “using monetary policy” is barter. Obviously that’s not what people mean when they say it’s time to stop using monetary policy.  Buttonwood probably means that we are propping up the economy with an excessively expansionary monetary policy.  But of course that’s confusing the tools (fed funds targets, the monetary base, etc.) with the actual policy itself (1.5% inflation, 4% NGDP growth, etc.)

By 2007 almost no serious economist in America believed that money was “easy” in the early 1930s, despite ultra-low interest rates and massive QE.  And now almost all serious economists believe monetary policy has been “easy” in recent years precisely because of ultra-low rates and massive QE.  This fact is appalling.  The intellectual decline in mainstream macroeconomics since 2007 is stunning–nothing like this regression has happened since the early 1970s, or perhaps the late 1930s.  And this time the worst mistakes are being made by those on the right.

By the way, the right metaphor is not training wheels, but rather which way do you want to steer the bicycle?  No serious pundit is advocating walking.