Archive for July 2016


Trump to the GOP: Thanks for the nomination, see ya later

Hot off the press:

Donald Trump reversed himself on a major policy plank Wednesday as he told reporters he now backs a $10-an-hour federal minimum wage, breaking with years of Republican orthodoxy and his party’s own platform.

“The minimum wage has to go up,” he said at a tumultuous news conference, saying it should go up to $10 from $7.25. He did say that “states should really call the shot,” but “at the same time, people have to be taken care of.”

Asked if he meant the federal minimum wage has to go up to $10 in a followup question, Trump indicated yes. “Federal,” he clarified.

Gee, I wonder what other GOP ideas he’ll drop, now that he has the nomination.

I’ll say this, if Trump is elected we can look forward to 4 years of nonstop comedy. The Onion will become the newspaper of record.  If you don’t believe me, check out this Trump press conference.  

PS.  My sister (who knows many more words than I do), recently taught me another:


Putin’s pawn

Where’s Joe McCarthy when we need him?

There are numerous reports from respectable publications that Trump’s inner circle has been infiltrated by supporters of Vladimir Putin:

MOSCOW—Excited by Donald Trump’s pledge to promote “easing of tensions and improved relations with Russia,” the Kremlin establishment earlier this month invited Trump adviser Carter Page to speak before graduating students of the New Economic School. Page did not disappoint. In his remarks, Page condemned current American policy for its “often-hypocritical focus on democratization, inequality, corruption and regime change.” When a Russian student asked Page whether he really believed that American society was liberal and democratic, Trump’s adviser grinned and delivered a line that might have come from Vladimir Putin himself. “I surround the word ‘liberal’ with quotes,” he said. ”I tend to agree with you that it’s not always as liberal as it may seem,” he said. “I’m with you.”

It was thus perfectly in keeping with Trump campaign’s entente with the Kremlin that last week Trump aides reportedly watered down the new Republican platform on Russia, removing language that called for giving weapons to Ukraine to fight Russian and rebel forces. Page, an energy expert, has close ties to Russian business and relationships with executives at Gazprom, the giant state-run gas company. Trump campaign chairman Paul Manafort has worked as a lobbyist for former Ukraine’s former Russia-aligned president, Viktor Yanukovych.

Putin is arguably the most dangerous person in the world today.  His willingness to conquer neighboring countries and annex territory is something we haven’t seen since the heyday of Hitler and Saddam.  Wars occur when there is ambiguity as to how countries will respond to aggression.  If Bush had made it 100% clear that he would have responded forcefully to Saddam’s aggression in 1990, there would have been no Gulf War in 1991.  If he had made it 100% clear that he would not respond, there would have been no Gulf War in 1991. Instead, he left our response ambiguous, and Saddam guessed wrong.  Bush spoke softly and carried a big stick. The rest is history.

Trump’s policy is to create ambiguity as to how the US will respond to a Russian invasion of a NATO member.  Almost every day the Trump campaign comes out with another test balloon, right out of the Kremlin playbook.  A month ago Trump supported Brexit.  A couple days ago he suggested that he might restrict Frenchmen and Germans from visiting America.  Yesterday it was a threat to withdraw from the WTO:

Donald Trump suggested on Sunday that the US could pull out of the World Trade Organisation and said the EU had been created largely to compete against the US in international trade.

In an interview with NBC, the Republican presidential candidate said the US might withdraw from the WTO if his plans to use tariffs to bring factories back from Mexico were challenged.

Mr Trump also repeated his controversial suggestion that the US might not fulfil its commitments to defend Nato allies under attack if they did not do more to boost defence spending.

When I read Ezra Klein’s piece providing 14 reasons why Trump was unfit to be President (only 14? Klein is slipping) I couldn’t help thinking about how almost all of these also applied to Hitler.  Of course as usual, I am referring to Adolf Hitler, not “Hitler”, so don’t accuse me of comparing Trump to “Hitler”, the mass murderer. There were a few of the 14 that did not apply to Adolf Hitler, candidate in German democratic elections.  And in those few cases, Trump actually looks worse than Hitler.  For instance, Hitler was actually fairly knowledgeable about military and foreign affairs, whereas Trump seems like someone who’s never read a newspaper. Remember that Tiananmen “riot”?  Because Trump is so ignorant, he must rely on his advisors, who are Putin supporters.  Thus unlike Hitler, Trump is just a pawn of the Russians.

Trump and Putin, no scratch that, Trump advisors and Putin (Trump’s too dumb to have his own views) share a common interest in blowing up the western alliance, constructed over decades to prevent a repeat of WWII.  They thrive on chaos. They saw how the President of Turkey gained vast new powers as a result of chaos, and hope to do the same.

People talk about how “the establishment” hates Trump.  But there are other establishments, and I’m afraid “the establishment” is no match for the establishment releasing embarrassing information on Hillary right before the convention.  Putin very, very much wants Trump to win, and he plays very dirty. There are even claims that Putin orchestrated terrorist attacks in Russia to gain more power.  I have no idea if they are true, but it’s certainly the sort of thing he would do.

The press needs to stop asking stupid questions about whether Trump’s wife plagiarized a few lines in a speech (which helps Trump by making it seem he’s a normal candidate, and that this trivia is the sort of reason he should not be elected) and instead start asking his aides the following question:

Are you now, or have you ever been, a supporter of Vladimir Putin?

PS. If I were Hillary’s media people, I’d focus 100% of my TV ads between now and the election on the theme of Trump being Putin’s pawn. It may not be true, but just the fact that it’s possibly true provides the strongest argument against electing Trump. As I said before, a world where it might or might not be true is far more dangerous than either certainty.  And that’s the world we currently live in.

PPS.  In fairness to Trumpistas, if this story is true, Trump will have a right to say, “I told you so.”

PPPS.  Nixon would have destroyed Trump on this Russian influence issue.  C’mon Hillary, show your inner Nixon.

Danyzn on NGDP futures targeting

Quick follow-up to my previous post.  Here’s commenter Danyzn, with an excellent analogy:

Here’s an analogy which may be helpful. Think of the Fed not as a counterparty at all, but as a kind of Walrasian auctioneer whose job is to clear the market for orange futures. Unlike a normal auctioneer, it does so not by adjusting the price (that is pegged) but by planting and destroying orange trees (over which it has a monopoly).

Update:  Absolutezero gets it too:

For normal markets, entities trade for a few reasons: to profit from price changes, to hedge (to prevent losses), to set prices, and to provide dealer function for entities wishing to enter and exit the market.

Over at Econlog, one commenter said he thought with the NGDP futures market, he would profit when the Fed made a mistake, and he seemed to think that’s weird. And it is, if one thinks about it in terms of a normal market. But the NGDP futures market is not like a normal market. As you said, the “price” is already set. The goal is not to reduce price inefficiency, but inefficiency in Fed behavior.

So, in a sense, to abuse a term from topology, this is like the “dual” of a normal market, where many things are inverted. Thinking this way, it’s actually natural to conclude that lack of trading is a sign things are working.

As for risk premia, I wonder what Antti Ilmanen (author of Expected Returns, Wiley, 2011) would think of this. I agree with you, though, that the lack of such a market today is telling.

NGDP futures targeting: Putting the Fear of God into the FOMC

When people come at NGDP futures targeting from a financial markets angle, they get hopelessly confused.  For instance, they worry about a potential lack of trading in NGDP contracts, whereas they should see that as a sign of success.

Today I’d like to suggest a different way of thinking about NGDP futures targeting.  In my view, the Fed can already do a perfectly adequate job of NGDP level targeting, even without tacking on futures markets.  So then why tack on the futures markets?  The answer is simple, they did not do a good job of maintaining NGDP stability during 2008-09, and NGDP futures targeting would force them to do so.

Go back to the 1990-2007 period, when NGDP rose at a pretty steady rate of around 5%/year.  And that was accomplished even without targeting NGDP.  Had they been targeting NGDP instead of inflation in the late 1990s, money would have been slightly tighter, making the resulting boom a bit milder, and (probably) also moderating the already very mild 2001 recession.  They did extremely well, and if they’d actually tried to target NGDP they could have done even better.

What about 2008-09?  It wasn’t just one mistake, it was several.  They focused on inflation, which was high in mid-2008, not NGDP growth that which was slowing sharply.  They focused on (high) past inflation, not TIPS spreads that showed falling inflation expectations late in 2008.  They focused on rescuing banking, not maintaining adequate AD.  (Indeed Bernanke basically admitted this failing (in his memoir) for the specific September 2008 meeting.)  They were squeamish about using unconventional policy instruments aggressively enough (although rates didn’t even hit zero until December 2008).

Obviously if there had been a NGDP futures policy in effect in late 2008, I would have been selling NGDP futures short like crazy.  Lots of other people would have as well, and the Fed would have been exposed to massive losses.

At this point many people get confused, assuming this is how I think things would have actually played out.  Not likely. The Fed would have been terrified of losing a boatload on money on bad NGDP bets.  Imagine explaining to Congress that you screwed up monetary policy so badly that you created a Great Recession, and to top it off you lost zillions of taxpayer funds.  It wouldn’t happen that way.

Instead, the real purpose of NGDP futures markets is to put the Fear of God into the FOMC.  They force it to do what it was already quite capable of doing, but held back due to either ignorance or fear of aggressive use of unconventional instruments.  Ironically, with a 5% NGDP target in 2008, level targeting, we would never had hit the zero bound, and we would never have had to rely on unconventional tools.  But even if we did, the Fed would have done “whatever it takes” to keep NGDP expectations on target.

Because I think the Fear of God would have made the Fed do what it should have done in any case, I think it’s quite possible that there would be little trading of NGDP futures contracts.  But I don’t care, because that “little trading” would be a sign of success.

PS.  Think of this as a variation of Lars Christensen’s famous “Chuck Norris effect”.  In this case Chuck is in the FOMC conference room in 2008, standing right behind Bernanke.  He whispers the following in Ben’s ear:

In your heart, what policy do you think is most likely to provide on-target aggregate demand in 2009?  The weak plan your staff prepared, or the aggressive steps you recommended to the Japanese back in 1999?  Keep in mind that I have a club in my hand, and plan to beat you all senseless if two things happen:

1.  Your plans fails to provide on target NGDP expectations.

2.  The market ends up being right and you end up being wrong.

OK Ben, deep down what do you think the Fed needs to do to provide 5% NGDP growth in 2009?

I want FOMC members to quake in their boots, and adopt a policy stance that roughly balances the short and long positions.  If that “balance” occurs with zero trades, that’s fine with me.  Indeed I hope they are such cowards that they refuse to take a stand, and meekly adjust the base until the long and short positions are balanced.  But if they want to take a bold stand  . . . well let’s just say I hope it works out better than when they overruled market forecasts, and predicted 4 rate increases in 2016!

PPS.  An update to Noah Smith’s recent post provides a great example of how thinking about this market from a finance angle throws people off.  Smith says:

Sumner seems to have thought very little about how markets actually become efficient. Scott, you need price discovery.

That’s not what NGDP futures targeting is all about.  It’s not price discovery, the price is pegged at 5%, it’s monetary instrument setting discovery.  I would recommend Noah look at Bernanke and Woodford’s 1997 JMCB paper, which makes it very clear that for this futures targeting approach to work it must be about forecasting the instrument setting that is appropriate, not about price discovery.  (I wonder if John Cochrane has also “thought really little about how markets become efficient”.)

Here’s an analogy.  The old international gold standard was not about the “discovery” of the proper nominal price of gold; it was about the discovery of the monetary base that would result in equilibrium occurring at the target price of gold.

And please don’t anyone tell me that the gold standard did not provide macro stability–I know that.  But it did stabilize gold prices, and NGDP targeting would stabilize NGDP expectations.  And (unlike stable gold prices) that’s a really good thing.  With stable NGDP expectations we will no longer have events like 2008-09.

If Noah Smith wants to seriously challenge the policy he needs to provide a plausible argument for large and time varying risk premia in the NGDP futures markets.  So far, no one’s been able to do that.  But that’s the sine qua non of any criticism.  Otherwise, I simply don’t care.  Manipulation? Who are the victims?  And did this occur under Bretton Woods?

And if it didn’t work, worst case is I get rich. Now that doesn’t sound so bad, does it?

HT: Foosion

Roger Farmer on NGDP targeting

Marcus Nunes directed me to a very interesting post by Roger Farmer (written right after the Brexit vote.) Farmer suggests that the Bank of England needs to do whatever it takes to prevent uncertainty from depressing aggregate demand. Indeed it should consider buying shares in an index fund, if necessary.  He then provides a comment from Thomas Hutcheson:

“This is fine so far as it goes, but we should deal as well with the policy response of the ECB and the Fed, as well. Whatever long term damage may occur from slightly less free trade (including investment to trade) cannot be prevented by central banks, but they can prevent the damage that comes from uncertainty about the future course of NGDP. It is expectations about that they should seek to stabilize.”

Farmer replies to Hutcheson as follows:

I am in broad agreement with the proposal to stabilize expectations of future NGDP growth and, in the simple models that guide my thinking, stabilizing asset price growth and stabilizing expectations of NGDP growth amount to the same thing. The question is: how to achieve that goal?

If central banks simply substitute NGDP targeting for inflation targeting, and if they continue to try to achieve their objective by adjusting short term interest rates, not much will have been achieved. Scott Sumner has proposed instead, that central banks should trade NGDP futures. Robert Shiller goes further and advocates that national governments finance their borrowing requirements by issuing equity-like instruments that pay a trillionth of GDP: Shiller calls these ‘trills‘. I wholeheartedly endorse both of these proposals. Creating a market for nominal GDP futures, and actively trading trills for Tbills would have much the same effect as stabilizing asset price growth.

Needless to say, I’m very pleased to see that Farmer is receptive to NGDP futures targeting.  We both have a longstanding interest in the relationship between asset prices and macroeconomic stability, which perhaps puts us a bit on the fringe of the mainstream.  But Farmer is much better known than I am (he teaches at UCLA) so any support from him is very welcome.

I did find the next paragraph a bit confusing:

I differ from Scott in one important respect. Whereas Scott sees NGDP targeting as a substitute for inflation targeting, for me, it is a complement. Central banks should set interest rates to target inflation, and they should set the growth rate of some other object, be it asset prices, NGDP futures, or the price path for trills, to target the unemployment rate.

I’d need to know more, but here’s my initial reaction.  Normally economists think that you need two independent tools to hit two distinct policy targets.  Farmer would probably say that his plan contemplates two tools (interest rates and NGDP futures.)  But I see basically only one tool.  The Fed would presumably use standard monetary policies (open market operations, interest on reserves, etc.) to affect both interest rates and NGDP futures.  Can slightly different monetary tools have two independent impacts?  Buying T-bonds and stocks, for instance?  Maybe, but I’m an old school monetarist in the sense that I believe it’s the liability side of the balance sheet that really matters, not the asset side.  So unless I’m missing something, I’m skeptical of Farmer’s claim.

I should add that I am assuming this is a sort of business cycle argument.  I take it as a given that monetary policy doesn’t affect the long run trend rate of unemployment, and hence you cannot choose independent long run targets for inflation and unemployment.  (At least without other tools, beyonds monetary policy.)

PS.  Off topic, I greatly enjoyed Tyler Cowen’s recent interview at the IEA.  There was virtually nothing with which I disagree.  That’s not to say I could make the same arguments; he’s a much better social scientist than I am.  I just point this out because I have a habit of mostly responding to posts I disagree with, and so if you want to see where our views agree, that interview is a great example.  (Covers the Great Stagnation, Brexit, negative rates, education, a bit on Trump, and a few other topics.)

PPS.  Zachary David responded to my recent post on NGDP futures:

In true Sumnerian fashion, he begins with an off-hand remark about how I ignored/didn’t read his proposal. Any long time follower of his, like me, knows that this is Sumner’s standard opening move for responding to all criticisms of NGDP targeting. I’ve read it all; it’s still goofy. (though not as goofy as the time he called Arctic Monkeys a one-hit wonder)

I was giving him the benefit of the doubt.  If he actually read that paper, and then still wrote his deeply misleading post, then that’s much worse.

Let’s start here:

He wonders why NGDP futures would be such a good idea, given that the private sector hasn’t already created such a market. Perhaps that’s because the private sector is not legally allowed to do monetary policy.

Oof. This is embarrassing. Sumner attempts to imply that we haven’t seen a private sector futures contract linked to NGDP because it would necessarily “do monetary policy” which the private sector cannot. It’s a gross non sequitur and completely ignores my point. In the main piece, you’ll see that there are no fundamental or market structure issues preventing the creation of an NGDP futures contract. I use the unpopularity of the former unemployment-linked contracts as an analogous example of why his market might have problems gaining traction. Dressing up a futures contract as “monetary policy” does not make it any less of a futures contract.

The only thing embarrassing is David’s failure to understand what I wrote.  I never said an NGDP futures market would necessarily do monetary policy, I said that would be the logical motivation for creating such a contract.  If the private sector is not doing monetary policy, why would it want to create such a market?  Yes, there are no barriers to creating such a market.  Indeed I created one.  So what’s the point?

As far as not gaining traction, why would I care?  If monetary policy stabilizes the price of NGDP futures, it really doesn’t matter whether there is any trading at all.  I explained all this in the paper that he insists he read, but somehow didn’t understand.  If David’s too lazy to read the entire paper, he can try the section entitled “What if No One Trades”, which begins on page 18 and goes all the way through page 21.  Don’t you think it’s a bit silly to read that entire section, and then whine that Sumner doesn’t realize that no one might trade his contracts?

The rest of his response is more of the same.  He quotes me, and then misrepresents what I said.  Perhaps the funniest example is where he claims I was advocating a gold price peg:

. . . did an economist really just extol the virtues of gold standard pegging?

Um, no.  Why do you ask?

HT:  Dilip,  James Elizondo