Archive for May 2016

 
 

Why not both?

Later this afternoon, I will have a post over at Econlog, explaining why monetizing the US debt would quickly lead to hyperinflation.  In the meantime, the Brookings Institute plans to do a conference on negative IOR.  (Of course they didn’t invite the guy who invented the concept, and successfully predicted its impact on asset prices.)

Here’s the description of the conference:

In just one reminder of the extraordinary moment in economic history in which we are living, the central banks of the eurozone, as well as Japan, Switzerland, Denmark, and Sweden, have pushed their lending rates below zero — banks actually have to pay a fee to deposit money at the central bank. In some major countries, Germany and Japan among them, investors pay a fee to lend to the government instead of collecting interest. Once a fantasy of a few academic economists, negative interest rates are now seen as a tool available to monetary policymakers at times of very low inflation. But they remain controversial: are negative rates a prudent and potent response to today’s lackluster economy? Or do they squeeze bank profits and hurt lending, confuse investors and consumers, and smack of desperation?  (Emphasis added)

Why not both?  And why not both for QE as well?

And why do economists keep putting the cart before the horse?  First you need a credible policy target.  Then you figure out the best tools.  A strategy that relies on the tools to create credibility is likely to produce both the good and the bad effects described above.

In contrast, a promise to do “whatever it takes” to achieve 4% NGDPLT would not require negative IOR, and would require very little QE.  Central banks are so shy that they end up making things really hard for themselves, by trying to take the “easy way out”.  (I’m actually a bit sympathetic, as that describes my adolescence.)

HT:  Patrick Horan

PS.  Just joking about being “not invited”—I believe it’s open to those who register.

Kocherlakota edges ever closer to market monetarism

TravisV directed me to Narayana Kocherlakota’s newest Bloomberg essay:

What drove this increase in inequality? It wasn’t the result of the Fed propping up housing or stock markets, which declined sharply from 2007 to 2010. Rather, it seems that the poor would have been better off if the Fed had done more to support asset prices — and particularly home prices. In other words, inequality rose because monetary policy was too tight, not because it was too easy.

There are two ways to read this.  If Kocherlakota means the Fed should target house prices, then I obviously disagree.  I think a more plausible reading is that Kocherlakota thinks money was too tight during 2007-10, and that excessive tightness had many side effects including declining asset prices.

Of course that’s “the real problem is nominal” story I’ve been peddling since 2009.  In early 2009, most people thought I was crazy.  Money was clearly “extraordinary accommodative” or so I was told.  And even if if was tight, the fall in home prices was “obviously due to factors unrelated to tight money”.  And now we have a former member of the FOMC espousing a very market monetarist view of the Great Recession.

We’re winning.

 

David Beckworth will be joining the Mercatus Center

I’m very pleased to be able to announce that David Beckworth will be joining us full time.  He will be a senior research fellow at the Program on Monetary Policy.

Most of you probably already know that David has been blogging at Macro and other Market Musings, which might well have been the first market monetarist blog.  He also put together Boom and Bust Banking:  The Causes and Cures of the Great Recession, another important market monetarist document.  And he’s done some excellent research on recent monetary issues, such as the implications of the Fed becoming a “monetary superpower”.  He is now doing a series of podcasts where he interviews top monetary economists.  David has also written lots of op eds with Ramesh Ponnuru of the National Review.  And he’s also a great guy, much more polite than me.  I’m thrilled that he was willing to give up a tenured position to join our group.

PS.  There’s a new video out promoting my new book on the Great Depression.

PPS.  I have a new post over at Econlog.

Trump calls his fans “crazy”

After Trump called for defaulting on US Treasury bonds, I suggested that the idea was crazy.  But the Trumpistas in the comment section dutifully fell in line, seriously asserting that Trump’s plan made a lot of sense. Now the joke’s on them, as yesterday Trump called the idea “crazy”?

Donald Trump on Monday said it was “crazy” to think he would try to negotiate his way out of full repayment of government bonds — despite what he suggested last week

It is a crazy idea, as I indicated.  And I think we can all agree that people advocating crazy ideas should not be elected president.  And of course Trump did advocate this crazy idea.

If you hate Trump, there is no need to be discouraged by his apparent move toward sanity on the national debt.  That’s because for every move toward sanity, there is an equal and opposite move toward insanity.  Call it the Trump Law of the Conservation of Insanity.  Now he advocates buying back the debt.  And how will he do that?  By issuing more debt!

Trump started out his answer by claiming that he never intended to offer creditors an actual haircut, but instead to have the government purchase a large amount of debt in the event of a crash in US debt prices. But whether that would work is questionable, as the government would need to somehow finance that debt purchase with other debt, as noted by The New York Times’ Binyamin Appelbaum.

And if that didn’t do the job, Trump said we could always adopt the Zimbabwe solution:

But then Trump made an interesting point: One of the ways in which government debt is very different from privately held debt is that governments that control their own currencies, such as the US government and the US dollar, have the power to print money at will.

The Federal Reserve, through its open-market operations of buying and selling US Treasury debt, has the ability to increase the overall monetary base — it can print money. Indeed, through programs like quantitative easing, it has done so somewhat extensively during the past several years.

Printing money to relieve the national debt, however, would probably be disastrous. It would most likely precipitate a huge amount of inflation, causing prices to rise very quickly and wreaking havoc on the economy.

(Notice that I still do blog on monetary issues.)  So if you are a Trump hater like me, there is no need to worry about him “moving toward sanity” as the election approaches.  For each recantation, there will be a new outrage.  And each time his supporters will look ever sillier, as their own leader calls them “crazy”.

PS.  Meanwhile “libertarian” Peter Thiel is supporting the most un-libertarian candidate imaginable.

PPS.  And Ron Paul is supporting Ron Unz in the California Senate race.  Here are some of Unz’s “libertarian” views, from his campaign platform:

Economics Nobel Laureate Joseph Stiglitz has describes America as having a government “Of the One Percent, By the One Percent, and For the One Percent,” and I agree with him.

We need to return to having a government run for the interests of the American people rather than owned and controlled by financial manipulators.

As a U.S. Senator I would oppose future bailouts and support Bernie Sander’s call for a Tobin Tax on financial transactions to reduce Wall Street speculation.

And here’s more:

Minimum wage laws are far easier to enforce than immigration laws, and very stiff penalties for repeated violations, even including prison sentences, would ensure almost total compliance.

Once the magnetic lure of American jobs disappears, traditional immigration enforcement measures will become much more effective and future illegal immigration will be reduced to very low levels.

By sharply reducing legal immigration and enormously reducing future illegal immigration, the economic prospects and quality of life for most existing Americans will be greatly improved, including for both legal and illegal immigrants currently living here.

So the first and most important step in solving our immigration problems is a large hike in the national minimum wage.

That’s right, opposition to even legal immigration is now a “libertarian” position. Minimum wage laws kills jobs?  Yes they do, and that’s why we need them!!  And notice he wants a “large” hike; gotta be sure to kill lots of jobs. And here’s another libertarian idea; let’s make college “free”:

I recently organized a slate of candidates, headlined by Ralph Nader, to run for the Harvard Board of Overseers on a platform demanding that Harvard immediately abolish college tuition. If we are successful in achieving this goal, then other very wealthy elite universities such as Yale, Princeton, and Stanford would probably soon follow. Once our most elite national colleges have eliminated tuition, there will be enormous political pressure on the much larger number of public colleges and universities to focus as strongly as possible on reducing their tuition.

We wouldn’t want future Harvard grads to actually have to repay college loans. That would be cruel.  It’s not just Trump, the entire Republican Party seems to be going insane. Joe Stiglitz and Ralph Nader are the new GOP heroes.  If Trump wins, there will be many more Ron Unz’s in the future.

Life expectancy puzzles

For the past 100 years, life expectancy in the US has been on a relentless upward march.  It was 69 when I was born in 1955.  In 1994 it was 75.7.  In 1998 it was 76.7.  In 2002 it was 77.0. In 2006 it was 77.8.  In 2010 it was 78.7.  That’s when Obamacare was passed.  In 2014 it was just 78.8.  That’s the smallest 4-year increase since annual data began (in 1970).

I actually don’t think that’s a very good argument against Obamacare.  But supporters of Obamacare often used arguments that were equally lame, such as the claim that life expectancy in the US is lower than in Western Europe.  Yes, but what does that mean?

To give you an idea of just how misleading life expectancy data can be, consider the case of Hawaii.  This source suggests that Asians in Hawaii live shorter lives than Asians in any other state, in some cases by a wide margin.  (Note Asian life expectancy data is only available for 28 states.)  OK, but how about Hispanics?  Again, life expectancy for Hispanics is lowest in Hawaii, of all the states with data (again 28 states.)  There is no data for blacks in Hawaii.  By now you must have concluded that Hawaii is some sort of hellhole with horrible life expectancies.  And controlling for race it is.  But Hawaii is also the state with the highest overall life expectancy in the entire US.

How is that even possible?  One answer is that whites do fairly well in Hawaii.  But whites are a minority in that tropical paradise.  The real reason is even more bizarre.  Both Hispanics and Asians have inexplicably long life expectancies in the US.

Let’s go back to Obamacare, which was going to improve health by eliminating the problem of people with without health insurance.  The group that is far and away the least likely to have health insurance is Hispanics.  They also have an obesity problem. And yet their life expectancy is 81.8, compared to 79.0 for whites.  Why?  I have no idea. But again, it suggests that health insurance isn’t the issue, something else is going on.

Asians are the biggest group in Hawaii, and they have a mind-boggling 86.5 life expectancy in the US, which is higher than even the richest countries in East Asia (Japan tops out at 84).  And yet Asians in America have a higher poverty rate than whites.  Even if it’s genetic, that doesn’t explain the comparison with East Asia.  Nor does diet.

Once again the state level data might help.  The two longest-lived Asian groups are in New Jersey and Massachusetts, both over 89 years. And it’s pretty clear what’s special about these two states—they both have a lot of recent immigrants who are highly educated and work in high tech (like my wife, who is from China, works in biotech, and will basically live forever, assuming cryonics is perfected within 40 years.)  It’s not surprising that the well-educated live longer, that’s also true of whites.  But nationally there are also plenty of Asians that don’t work in high-tech, so the overall life expectancy is still pretty hard to explain.

So Hawaii is the absolutely worst place for Asians and Hispanics.  But there are so many Asians in Hawaii, and their life expectancy is so mindbogglingly long, that it pushes Hawaii to number one among US states, the very highest life expectancy.  A good example of the need for control variables.

African-Americans present another puzzle.  The black/white gap was 6 years in the early 1980s.  By the late 1980s it had widened to 7 years, and was still 7 years in 1994. No reason for optimism, right?  But then it started shrinking steadily, and was down to 3.8 years by 2010.  As we know, total life expectancy in the US then leveled off, as did white life expectancy.  But black life expectancy kept rising, and the gap is now (in 2014) only 3.4, less than half the gap of 20 years ago.  The gap is still shrinking. Why? I have no idea.  The falling murder rate is one factor, but hardly seems important enough to explain the whole story.  Meanwhile the poor/rich gap is widening among whites, and blacks have some of the same socio-economic problems as poor whites. (Here’s where the Oxy/heroin epidemic may play a role for whites.)

Denmark has the shortest life expectancy in Western Europe.  Diet?  Lots of Danes who moved to the US became Mormons, who adopted their strong communitarian culture.  So Utah has good social indicators, just like Denmark.  Except life expectancy. Whereas Denmark is unusually low for Western Europe, Utah is relatively high for the US.  Another mystery.

My conclusion?  We don’t understand life expectancy very well.  (Commenters: Before giving me your “theory” of Hispanics or Asians, ask yourself if you expected these numbers, before seeing them.)

PS.  After I wrote this I noticed that Alex Tabarrok has a new post on this topic.  His data set stops at 2010, and hence he doesn’t pick-up the leveling off of life expectancy after Obamacare was passed.

PPS.  There are different sources for international life expectancy data, and they do not all agree.