Archive for December 2014


America’s industrial boom (what is it telling us?)

Over the past few years I’ve done a few posts on an underreported story, the fact that industrial production (IP) has been rising much faster than RGDP during the recovery.  Early on I argued that this was evidence that a cyclical recovery was actually occurring, and that this refuted those who argued otherwise by pointing to the low LFPR.  (It also suggests that tight money, not re-allocation out of housing, caused the recession.) Recently the industrial recovery has gained momentum, so much so that it can no longer be brushed aside.  Before discussing what it means, consider that IP was up 1.3% in November, and is up nearly 6% since August 2013.  By comparison IP only rose by a total of about 9% during the entire period from the 2000 peak to the 2007 peak. The level is still mediocre, but the momentum is undeniable.  The new IP figures seem to confirm the strong November employment data; the economy is now recovering at a faster rate.

Screen Shot 2014-12-15 at 10.34.05 AMSo what does the IP boom tell us?  First let’s recall that IP includes mostly manufacturing, but also mining and utilities.  I prefer the IP aggregate, because when people wring their hands about the loss of “muscular” jobs in manufacturing for men without a college education, it’s clear they are concerned about blue collar jobs in general, including coal mining, oil drilling, etc.  In any case, the manufacturing data are quite similar.

First some international comparisons.  In the US, IP is up more that 73% in the past 25 years. In Japan it fell by 1.5%.  Some of that is population, but not all. After all, Japan’s population is higher than it was 25 years ago, and America’s has risen by roughly 30%, not 73%.  America industrializes as Japan de-industrializes. Germany reunified 25 years ago, which might affect the data, but their IP is up only about 30% since 1991.  France is up only 9% in 25 years. (The 35-hour workweek?).   Britain is similar to Japan, down by about 1%.  (Falling North Sea oil output?) Italy is down 11.2% in 25 years.  (Berlusconi spending too much time at orgies?) It’s the US that stands out as an industrial power, at least if the data is correct. (I suspect it is not—too much hedonics?)

So what’s wrong with American manufacturing?  Jobs, jobs, and jobs.  In recent decades we’ve been losing jobs at a rapid rate.

And why have we been losing jobs at a rapid rate?  Some people point to imports from China.  But the recent IP data suggests that’s not the problem.  We are an industrial juggernaut.  The problem is quite simple:

It’s the PRODUCTIVITY, stupid.

Agriculture went through this in the late 19th century and early 20th century.  And now it’s manufacturing’s turn.

Update:  US capacity utilization pushed above 80% in November, roughly the rate during the 2005-07 boom.  We need more service sector jobs.

Update#2:  I erred in saying the manufacturing numbers were similar.  I was lulled by the fact that they have also been rising rapidly in the past year.  But commenter allen pointed out that manufacturing has only just regained the 2007 peak, and that oil and gas output (part of mining) have grown much faster.

HT:  am

A distant echo of the big bang

Before beginning, I’d like to announce that Gabe Newell (CEO of Valve) has generously funded the next year of Hypermind’s NGDP futures market, and I hope to announce some new contracts (including the exciting 2014:4 to 2015:4 contract) in the next week or so.  I also plan to start posting daily NGDP futures prices, as soon as I can figure out how to get a link to that market.  I hope to get iPredict’s NGDP futures market fully funded by January.

The recent news has been dominated by the sharp fall in TIPS spreads.  In the US, 5-year inflation expectations are down to 1.25% and the 10-year TIPS spread is 1.68%.  Does this mean money is way too tight?  Not necessarily, but it does suggest that money was way too tight back in early 2010 and mid-2011.

Recall that I often say, “inflation doesn’t matter, only NGDP matters.” Back in early 2010 and mid-2011, CPI inflation briefly rose above 2%.  Europe also experienced above target inflation at about this time.  Many observers misinterpreted this data, believing it had implications for the proper stance of monetary policy, whereas in fact NGDP is the variable that matters.

So if NGDP was so low, why was inflation above target?  If there is anything we know about Phillips curve models it is that they are consistently unreliable.  In early 2010 and mid-2011 there was a big increase in global commodity prices, driven by fast growth in places like China. This had no bearing on US NGDP or monetary policy.  The underlying demand conditions were quite weak in both the US and Europe.  In recent months the commodity boom is unwinding, and lower headline inflation is showing up.  But this does not necessarily mean money is too tight in the US (although it quite likely is a bit too tight to hit the Fed’s dual mandate over the next 5 or 10 years.)  Instead, the recent deflation is a distinct echo of the actual NGDP “deflation” (and why is there still no word for falling NGDP!!) that occurred in the early part of this decade.  That’s when money was much too tight, but supply disruptions in the Middle East and Chinese demand temporarily inflated oil prices, helping to disguise the deflationary pressures.  Now it is showing up.

This all makes the hawks look ridiculous today.  Indeed they have not one but two big problems:

1.  The hawks fought against monetary stimulus in 2010 and 2011, arguing that we needed to focus like a laser on 2% inflation.  OK, but 5-year inflation expectations are now 1.25%, even lower in Europe.  What do the hawks say today?

2.  The hawks are uncomfortable with low interest rates, and have developed dubious ad hoc “theories” that low rates will create asset market bubbles and financial instability.  But how do we get higher rates?  The hawks ignored the wisdom of Milton Friedman (that ultra-low interest rates mean money has been tight) and the Germans got the ECB to raise rates twice in 2011. The result is exactly as Friedman would have predicted.  The US is about a year away from exiting the zero bound, whereas the eurozone is 5 or 10 years away, at best.  The German plan backfired.

Hawkishness was the superior monetary model in the 1970s, but has since degenerated into an atavistic set of urges:  No inflation!  Higher interest rates! (As if those two goals are compatible.) It’s very sad, and perhaps a blessing in disguise that Friedman is not here to seen his ideas being abandoned by the right wing of the profession.

PS.  Did I forget to mention that the misleading TIPS spreads are just one more reason why we need a Federal Reserve-funded NGDP futures market?  If the government won’t fund this nearly perfect example of a “public good,” with a benefit/cost ratio of more than 100,000 to 1, who will?  Not the Austrians.  Not the Keynesians.  Not the New Classicals.  Not the RBC economists. Only the MMs are stepping up to the plate to make it happen.

PPS.  Oh, and where are all the people who said in mid-2013 that Bernanke’s tapering comments caused much higher bond yields, proving that only QE was holding down yields?  QE ended many months ago, and rates keep falling lower and lower.  The market is financing our still large budget deficits at 2.74% on the 30-year bonds.  Is that the “liquidity effect?”  Is that “Cantillon effects?”  Don’t be silly.

Update on how to donate to iPredict

Update:  I received this information, which may help answer some donor queries:

The U.S. Friends of Victoria University of Wellington, Inc. (“US Friends”) is an approved 501(c)(3) charity incorporated in 1995 as a supporting organization of Victoria University. US Friends is required by applicable law to maintain its independence regarding the causes it supports.  However, US Friends will consider and be responsive to the wishes of contributors who have indicated any preference with respect to the application of their donated funds, where consistent with its charitable purposes.

The Directors have determined that in principle the NGDP project is consistent with the charitable purposes of US Friends.

AFAIK, this is the standard approach of any charitable organization.

I’ve been so busy at school I lost track of the donation process for the NGDP futures market.  In addition there were some bureaucratic errors on the other end, and hence many donors were not contacted about where to send the money, while others had their donation go through.  My apologies.  Below is the information necessary to complete your donation (and please note the email address for queries:

U.S. Friends of Victoria University of Wellington Inc. (“US Friends”) is an independent U.S. non-profit organization with tax exempt status under section 501(c)(3) of the U.S. Internal Revenue Code. It was established to provide support for the work of the University using donations received from U.S. residents and taxpayers. US Friends performs a crucial role in raising funds from alumni of Victoria and other supporters based in the United States.

Board of Directors of the US Friends:
Yvonne Y.F. Chan (President)
Alexander Blades (Secretary)
James Genever (Treasurer)
Peter Bryant
Professor Roger Clark
Mark Cook
Gerald Hensley
Fleur Knowsley
Erica McLean

U.S. taxpayers’ donations to the US Friends are tax deductible in the United States of America to the full extent permitted by the Internal Revenue Service under applicable law and can be sent as follows:

Payment by check in US dollars:

Payable to the U.S. Friends of Victoria University of Wellington Inc.
Please provide also a short letter including your name and address mentioning “donation for VUW iPredict NGDP project” and do not forget to enclose it with your check so we can thank you and send you a formal tax receipt.

Send to:
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US Friends of Victoria University of Wellington
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Electronic payments:

US Friends can receive US Dollar payments via wire, SWIFT, direct payment from your internet banking (ACH) or PayPal (including credit/debit card transactions).

For these options, please email to to request further instructions. Please mention in the email text “donation for VUW iPredict NGDP project” and preferred payment method. We will also need your name and address so we can thank you and mail you a formal tax receipt.

Any questions :
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In the US phone James Genever +1-646-596-7343 or in NZ Shelagh Murray Executive Director of the Development Office and Foundation at Victoria University + 64-4-463-5991.

Chris Rock gives new meaning to “creative destruction,” and Ezra Klein responds

I’m afraid that I don’t know much about Chris Rock.  I stopped watching TV decades ago and don’t keep up with pop culture.  Most of my readers will find this interview to be too liberal (as I do), but you can’t deny that he’s an interesting thinker, and has some provocative observations.  One of my favorites was when he compared being a rich black man in America to the Bill Murray role in Lost in Translation.

Ezra Klein also enjoyed the Rock interview, but he criticized Rock’s claim that Obama should have let the economy drop sharply in early 2009 (no bailouts or stimulus), so that the GOP would have owned the fiasco, and then later in 2009 Obama could come in and rescue the economy.  I’m going to slightly disagree with both Rock and Klein, but not quite in the way you might expect. Before doing so let me point out that Ezra Klein may well be the most talented reporter in America, and I was honored to make a recent list of “must read” bloggers he mentioned.  However even there I’d respectfully disagree.  I’m probably a bit more moderate and pragmatic that Bryan Caplan, but he’s someone liberals need to read more than me, even if they are annoyed.  He should replace me on the list.  Robin Hanson too.

Here’s Klein discussing Rock:

The big problem with this idea “” which I’ve heard other liberals propose in the past “” is it’s morally odious: it would have meant putting millions of Americans through harrowing pain in order to help Obama out politically. If a GM lets a team flatline the team loses a few games. If the president lets the country’s financial sector flatline millions of people’s lives are destroyed.

But the other problem with this idea is it would have be a political disaster for any president, including Obama, who tried it.

Those are fine arguments, and I mostly agree.  But consider the following historical analogy. Between July and October 1932, the economy finally began recovering.  Then a relapse occurred, partly due to Hoover’s incompetence.  In a campaign speech Hoover indicated that we were almost forced off gold early in the year, and that only his adroit leadership had saved the gold standard. Of course that made the markets doubt the future stability of the gold standard, especially with FDR leading in the race for president.

FDR was never willing to commit to staying on the gold standard, despite it being part of the Democratic platform in 1932.  Unfortunately, fixed exchange rate regimes are one area where (for better or worse) governments have to lie.  If they even hint that they might consider devaluation, markets will lose confidence in the currency and attack the peg.  FDR should have either lied and said he’d stay on gold, or announce he planned to devalue, which would have immediately forced a devaluation.  The uncertainty from October 1932 to March 1933 created a run on the dollar and then a collapse of the banking system during the long interregnum.  In the last days of the Hoover administration, the President tried to put together a bank holiday plan and asked for FDR’s cooperation (i.e. commitment to continue the policy.)  FDR would not cooperate.  This is not to exonerate Hoover; he should have done the bank holiday anyway.  He was a very incompetent president, despite being perhaps the most competent person to ever be elected president.  There must be a lesson in there somewhere for the “great man” theory of history.

Then FDR took office, and immediately saved the day with a bank holiday.  But that was not enough to spur a recovery, so 6 weeks later he devalued the dollar.  Now FDR was the hero.  Then he implemented lots of Hoover’s ideas in his New Deal–mostly bad ideas, like the cartelization of industry and artificially high wages.

FDR’s sabotage (if that’s what it was–which is of course debatable) occurred before he took office. So it’s not exactly what Rock proposed.  But given how much liberals revere FDR, I could not help thinking of this episode when reading Klein’s piece.  So in a sense I agree with Klein, and that’s why I believe FDR should have avoided ambiguity over the dollar.  Don’t do something that hurts the economy, in the hope that the later political implications will allow you to become a hero by saving it.  It’s like a three bumper shot in billiards, theoretically possible, but highly unlikely.  And that means unethical.

Now for my contrarian view.  I don’t think Obama could have sabotaged the economy, even if he had tried. Unlike FDR, he had little control over monetary policy in the short run.  If during the campaign he had promised to put a hawk in charge of the Fed, his promise would have been laughed at.  All he had was fiscal policy, and you all know about my views on monetary offset. Indeed I think an Obama attempt to sabotage the economy via austerity might have actually helped.  Here’s the argument:

1.  Depression scholar Ben Bernanke had no intention to preside over another Great Depression. While he preferred that fiscal policymakers would share the burden, he was prepared to go it alone if necessary.

2.  Some of the suggestions Bernanke gave Japan in the early 2000s (like level targeting of prices, or focusing on NGDP) would have probably been more effective than the actual monetary and fiscal stimulus combined.  Would he have pulled out a nuclear option like level targeting?  I can’t be sure, but I’d say that without fiscal stimulus there is at least a 25% chance the recovery would have been faster due to strong monetary stimulus, and perhaps a 40% chance it would have been about the same.  And yes, that means there’s a non-negligible probability that I am wrong about monetary offset, as I’ve always acknowledged.

I don’t expect this argument to change the minds of any Keynesians, and I’m not sure I’m entirely convinced myself.  But I do believe we overrate the ability of any one person, even the president, to boost the economy.  And that also means we also overrate their ability to hurt the economy.

I don’t believe that President Obama understands economics well enough to be qualified to sabotage the economy, or save it.

PS.  Check out David Henderson’s excellent piece on police brutality, and also Adam Ozimek’s great post.

Financial Times: Low rates don’t mean easy money

There are days where everything seems hopeless.  I still find that 98% of the pundits I read don’t even understand that low rates don’t mean easy money.  People still think that “austerity” is somehow determining the growth rate of NGDP.  Yesterday NPR had an especially clueless discussion of the relative performance of the US and Eurozone, which merely served to reinforce the (false) priors of their mostly affluent liberal audience.

And then once and a while there is a tiny ray of hope:

Macroeconomic measures are caught in a deadlock between the conservative instincts of Germany and the expansionary needs of everyone else. To illustrate this incoherence the Bundesbank on Friday downgraded forecasts of German growth at the same time as its president complained that money was too loose.

Monetary policy provides the best key to understanding the variegated global picture. The central banks of the US, UK and Japan all adopted easier policies and were rewarded with an upturn. Given weak wage growth and a lack of fiscal support, such stimulus ought to continue.

Europe is an unhappy exception. Despite German misgivings, low interest rates are no evidence that money is too loose: nominal GDP growth stutters along at less than 3 per cent, a clear sign that the stance is much too tight. In recent years the ECB twice made the mistake of raising rates too soon, and thereby punished Europe with a deeper recession and a worse fiscal crisis. If its president Mario Draghi cannot ease policy further, the consequences will be just as serious. 

By the way, remember those people who told us that the eurozone’s problems were all “structural,” and that NGDP growth wasn’t a problem?  That was when the PIIGS were plunging lower and Germany was growing fast.  Doesn’t that logically mean that if the PIIGS start recovering then the eurozone will grow faster?  In contrast, if a lack of NGDP growth is the problem, faster growth in the PIIGS will be offset by slower growth elsewhere.  Keep those two hypotheses in mind as you read this:

“THE world cannot afford a European lost decade,” says Jacob Lew, America’s treasury secretary. The latest European figures were uninspiring. In the third quarter the euro zone grew by just 0.6% at an annualised rate. This sluggishness was not primarily due to the countries hit hardest by the crisis””Greece’s economy grew faster than any other euro-zone country, and Spain and Ireland are recovering. Rather, it is the core countries that are exhausted””and few more so than the biggest, Germany. It grew by just 0.1% in the third quarter, after contracting by the same amount in the previous three months.

Just to be clear, Europe does have plenty of structural problems.  That’s why they are 30% poorer than the US.  But that doesn’t mean that slow NGDP growth is not also a problem.

PS.  I’ve recently been sent many papers to read and comment on.  Right now I am overwhelmed with work, but promise to get to them when the semester ends.

PPS.  The original version of the post erroneously stated that Martin Wolf wrote the article.  My mistake.