Archive for February 2017


What would happen if the Fed set a (positive) interest rate floor?

Caroline Baum has an interesting article on a new book written by DiMartino Booth, who worked at the Fed from 2006 to (I think) 2015:

The Fed regularly publishes a summary of economic conditions in the 12 federal reserve districts, but when real-world information contradicts the Fed’s econometric model, the model wins. DiMartino Booth provided Fisher with real-time information — not seasonally adjusted, to the consternation of the staff — gleaned from an array of market sources and data sets.

Fisher, with his background in business, finance and government, earned a reputation as a maverick inside the Fed. He dissented from the FOMC statement five times in 2008, twice in 2011 and twice again in 2014, in all cases favoring less monetary accommodation or earlier rate hikes than the consensus view.

Fisher retired at the end of 2014; DiMartino Booth followed shortly after, once she realized her real “mission” is to educate the public about the inner workings of the Fed. “Fed Up” succeeds in doing just that. . . .

One of her suggestions made me laugh out loud. The Fed should ship the Ph.D. economists back to academia and use the money saved to hire some crack bank supervisors at competitive salaries for the Fed’s “Sup & Reg departments,” traditionally a second-tier job at the Fed.

A few comments:

1.  In retrospect, it’s clear that all of the Fisher votes cited above were in error. Indeed in my view that’s not even debatable.  The fact that it is debated tells us that we need to reform Fed policy is such a way that clearly mistaken votes are no longer debatable.  Chad Reese and I have a letter just published in The Hill that discusses this issue.

2.  You generally don’t want to rely on non-seasonally adjusted data, which might signal a huge “boom” in December.

3.  Over the past three decades, the Fed has relied far more heavily on academic economists than in the past.  During this period, Fed policy has become vastly more stable than in the prior 70 years, whether you rely on inflation or NGDP growth as your indicator.

The author advocates greater diversity at the Fed: specifically, more staffers with actual business experience and fewer ivory-tower types. She would like to see an increased focus on systemic risk. And she wants Congress to release the Fed from its dual mandate — stable prices and maximum employment — so it can focus solely on price stability. . . .

Where I [Caroline Baum] would challenge DiMartino Booth is on her recommendation that the Fed normalize the overnight rate and pledge never to breach the 2% floor again so as not to punish savers.

I have not read her book and I may be misinterpreting the comment about a 2% floor.  But if the floor refers to interest rates, then I’d say the proposal is either absolutely horrible or mindbogglingly insane.  Let’s start with the best case, absolutely horrible:

1.  One way to make sure interest rates never again fell below 2% is to raise the inflation target to 10%.  That’s a horrible idea, and since it would probably punish savers I don’t think that’s what the quote refers to.

2.  If the inflation target is kept at 2%, then a 2% interest rate floor would be non-credible, because it would be impossible for the Fed to achieve.  But trying to achieve it could easily cause another Great Depression.  A mindbogglingly bad idea. This is why you don’t want non-PhDs making monetary policy.  Indeed, even the brief April to October 2008 2% interest rate floor proved to be disastrous.

PS.  Vaidas Urba sent me another post that comments on the same book.  Looks like a very good blog.

PPS.  The case for the Fed increasing its interest rate target is growing stronger by the day.  Some of the new data looks quite strong for both prices and output. Continued talk of fiscal stimulus is starting to look kind of silly.  For the first time since I started blogging, I see the monetary policy risks as being balanced, instead of skewed to the downside.

PPPS.   Many commenters are unaware of my current views on NGDP targeting.  I currently favor the “guardrails” approach, which is not susceptible to the market manipulation problem.  Nor would lack of trading be a problem.  My attempt to create a small NGDP prediction market is not to be confused with this policy proposal.  I have a new article in the Journal of Macroeconomics that explains my current views on a wide range of monetary policy rule issues.

PPPPS.  A zero percent interest rate floor would be less bad than 2%, as the Fed has the option of QE.

PPPPPS.  For those who don’t have access to the JM article, the basic idea is as follows.  The Fed sets a 4% NGDP target path, level targeting.  If the economy is currently on target, the Fed commits to take a short position against any NGDP futures trader going long at 5% NGDP growth, and the Fed takes a long position on any NGDP futures traders who go short at 3% NGDP growth.  Thus the Fed might be exposed to loses if the actual NGDP growth rate is outside the 3% to 5% guardrails.  The losses could be large if, ex ante, it’s clear to traders that NGDP growth will be far too high, or too low.

The Fed monitors the trades.  It still has 100% discretion over monetary policy, with the proviso that it be willing to commit to the NGDP positions described above. This is much like Bretton Woods or a gold standard (where they committed to exchange money for gold, instead of NGDP contracts), and no more susceptible to market manipulation than those regimes.  Indeed less so, as the “band” is (effectively) wider than under the gold standard. The Fed can and should ignore a single large trader, who might be engaged in market manipulation.  If it sees lots of traders all going long or short, and if the Fed’s potential losses become too large, it may want to take corrective action.

Even if I were wrong about manipulation, competition among potential manipulators would keep expected NGDP growth in the 3% to 5% range (as the second manipulator could offset the first, and earn larger profits by going the opposite direction).

Here’s another metaphor.  The 3% and 5% guardrails serve the same purpose as the beeping sound when trucks are backing up, and get too close to hitting something.

The basic idea here is to allow me, Scott Sumner, to get filthy rich if the Fed screws up the way they did in 2008.  Since I’m a fatalist who never expects to get filthy rich, I would not expect the Fed to screw up under my proposed guardrails regime. I hope I’m wrong!!


Attention iPredict donors

A couple of years ago I raised funds for two NGDP prediction markets, Hypermind and iPredict.  The money for Hypermind all came from Valve CEO Gabe Newell. A larger amount of money was raised for iPredict, from about 15 people. Unfortunately, iPredict had to end its experiment after a brief run. For the past year I’ve being making inquiries about a refund, and it’s finally paid off.  Here is the information we received from iPredict:

Here is how the donors can go about requesting a refund.

They should contact Iain Devon, Viclink Senior Account Manager, at Their donation has been held in NZ$ and will be refunded at the current USD/NZD exchange rate, which means they may receive less than their original donation due to change in exchange rates (assuming the donor wants to be refunded in US$). They should provide the details of the initial donation made, including date and value. Refunds will be issued via international bank transfer, so they should also be prepared to provide their bank account information.

I want to thank the people at Wellington Victoria University in Wellington, New Zealand.  Their willingness to return the funds further cements New Zealand’s reputation as one of the least corrupt countries on Earth. If you forgot how much you donated, you might check your old emails to me.  I believe all the donors emailed me and informed me of their intentions.  I also probably have that info, if you need it.

During the period after iPredict failed, I vowed not to try to raise additional funds until the issue of refunds could be resolved.  Now that a resolution seems imminent, it’s time to think about future plans for NGDP prediction markets.  My inclination would be to go back to Hypermind, but with a bigger donation this time. I also feel like the annual market is the most macroeconomically useful, even though it is a long time to wait for a payoff.  (Say a 2018:Q1 over 2017:Q1 contract).  I believe we already have about $10,000 to work with, which is double what the annual market had back in 2015.  More money could be raised. With Trump in office, there might be some interesting policy shocks which could impact the market (although it’s also quite possible that NGDP expectations are not greatly affected—either result would be interesting.)  I’m also open to other markets, if someone has a suggestion.

PS.  Thanks to my colleague Ben Klutsey for working with the iPredict people to arrange this refund.

Who will control Trump?

This caught my eye:

During that sit-down, on Nov. 29, Mr. Cohn briefed Mr. Trump on what he regarded as the chief hurdle to expanding the economy, according to people who were briefed on the discussion: a stronger dollar, which would undermine efforts to create jobs.

Mr. Cohn also argued that the bold infrastructure projects that Mr. Trump envisioned would need private-industry partners, those people said, in order to avoid weighing down the government with costs.

That got Mr. Trump’s attention.

The president-elect turned to the other people in the room — his son-in-law, Jared Kushner; his chief strategist, Stephen K. Bannon; his chief of staff, Reince Priebus; and Steven T. Mnuchin, his campaign’s chief fund-raiser and Mr. Trump’s nominee to be Treasury secretary — surprised that his infrastructure ideas had such a potential downside.

“Is this true?” Mr. Trump asked the group, according to those people. Heads nodded. “Why did I have to wait to have this guy tell me?” he demanded.

.  .  .

Mr. Cohn collaborates frequently with Mr. Kushner, who is now a senior adviser to Mr. Trump. Along with Mr. Kushner and his wife, Ivanka Trump, Mr. Cohn recently helped persuade the president not to pursue an executive order that would have rolled back rights for gay, lesbian, bisexual and transgender people.

On domestic policy, I see a battle between the “bad guys” like Bannon, Miller and Navarro, who want to “let Trump be Trump”, and the “good guys” like Cohn and Kushner, who want Trump to be more like an ordinary Republican.

Things look worse in foreign policy:

President Donald Trump intervened at the last moment to deny Rex Tillerson his pick to be deputy secretary of state — former deputy national security adviser Elliott Abrams.

The president overruled his secretary of state — following meeting with Tillerson, Abrams and son-in-law Jared Kushner — after reading news reports about their meeting, which included references to Abrams’ criticisms of Trump during last year’s presidential campaign, according to people familiar with the decision. Though his staff was aware of Abrams’ statements, the president was not — until he read news reports about their meeting earlier this week.

.  .  .

One Republican senator worried that foreign leaders look to a secretary of state to have a strong personal relationship with the president — and this is not the way to show the strength of that relationship.

“Now everybody knows he doesn’t have any juice with Trump,” said the GOP strategist. “He can’t even get his own people in.”

And please don’t embarrass yourself by telling me that Abrams is a bad guy.  I know that.  It’s the process, stupid!  Any competent foreign policy expert is going to have said bad things about Trump during the campaign.  If they didn’t, then they obviously are not competent.

PS.  Here’s something useful that Trump could do—reduce the amount of paperwork required to comply with FATCA:

Screen Shot 2017-02-10 at 12.40.08 PMThe numbers are still low in absolute terms, but the trend is not in the right direction.

Films I saw in 2016

Here’s my annual lists of films I saw at the theatre (I don’t watch them on TV.)  I saw a very interesting series of Seijun Suzuki films at Harvard.  He inspired people like Quentin Tarantino.  “Branded to Kill” is probably the one to see if you are a Tarantino fan.

2016 Films

Dekalog 3/4/5/6/7/8/9/10 (Poland, 1989) 3.9 A series of 10 one hour made for TV Polish films by Krzysztof Kieslowski, often regarded as one of the greatest film series of all time. I saw the extended versions of #5 and #6, “A Short Film About Killing” and “A Short Film About Love”. I liked this even better than the more polished films he made after coming to the West (Red, White, Blue, etc.)

The Asphalt Jungle (US, 1950) 3.9 A near perfect film noir, directed by John Huston. Features a very young and radiant Marilyn Monroe. And the legendary Sterling Hayden.

The Wailing (Korea) 3.9 A near perfect horror film. Great films are usually outstanding for reasons unrelated to the specific genre they fall into. Think how Vertigo (thriller), 2001 (sci-fi), Apocalypse Now (war), The Shining (horror), etc., transcend their genre. (And yes, The Shining doesn’t quite belong with the other three, but you get my point.) The Wailing isn’t as original as these films, or even as original as the Korean horror film Oldboy, but it steals from the best and puts it all together brilliantly.

In a Lonely Place (US, 1950) 3.8 My all-time favorite film noir. People talk about Bogart and Bergman, or Bogart and Bacall, but Gloria Graham and Bogart are perfect in this film. They seem to be acting on a different plane of reality from everyone else. Or maybe they don’t seem to be acting at all. Heartbreaking.

Happy Hour (Japan) 3.8 A five and a half hour film about four Japanese women who are in their late 30s, just the point where disillusionment with life is setting in. The director gave a talk afterwards. One of the actresses (who won an award at Locarno) was sitting in the same row as me.)  What if the 2 hour film is a giant mistake?  Maybe all films should either be an hour (short stories) or 5 hours (novels).

Mountains May Depart (China) 3.8   Loved this film. A very intelligent and emotionally powerful vision from Zhangke Jia. I don’t know if it’s his best, but it’s certainly my favorite. Reminded me a bit of the Taiwanese film Three Times, in the effective way it used pop music in a film encompassing three periods of time.

The Handmaiden (Korea) 3.7 A return to form by Park Chan-wook. Not as original as Oldboy, but otherwise a beautifully made film.

The Forbidden Room (Canada) 3.7   This one really should be seen on the big screen. Strongly influenced by silent film, but otherwise kind of indescribable. This is the sort of film that differentiates cinema from TV.

Eyes Wide Shut (US, 1999) 3.6 Kubrick’s final film seems slightly better the second time around, maybe because I was paying more attention to the style than the story. He slipped a bit late in his career, but not very much. (I love the last word of his final film.) Unfortunately it was screened in digital, which looks awful.

Cemetery of Splendour (Thai) 3.6 Made by perhaps the most interesting director in the world today, but I found it more difficult to follow than his other films, maybe because it referred to political/cultural events in Thailand on which I am not well informed.

Hunt for the Wilderpeople (New Zealand) 3.6 Very nicely done, especially the two lead actors, as well as one other who appeared early in the film.

Arrival (US) 3.6 Basically a 2-hour plea to reject the politics of Donald Trump. The aliens seemed like a mix of octopus and elephant, while their spaceship seemed like a giant whale. All three animals have a reputation as being quite intelligent. A very moving film, although two hours later you might feel like you were conned.

Our Little Sister (Japan) 3.6 Koreeda has great ability to see the good in different types of people. This is a beautiful understated film, very skillfully made. You don’t leave feeling like you’ve been emotionally beaten with a rubber hose (which is how I feel after the typical Hollywood tearjerker.) This sort of film almost makes me want to move to Japan—but I’m too dumb to learn foreign languages. My brain is wired for visual images, a trait that seems . . . well, sort of Japanese.

Moonlight (U.S.) 3.6  I didn’t like this quite as much as I expected, given the reviews, but on the other hand I found it more likable than I expected. Easier to watch.

The Wasted Times (Chinese) 3.5 This was panned by the critics, and there are certainly flaws. But I enjoyed the film, which was strikingly shot. Zhang Ziyi was superb, and still looks quite young. The director is much better at creating individual scenes than an overall coherent film.

Embrace of the Serpent (Colombia) 3.5 Engrossing Amazon adventure story, influenced by Apocalypse Now, 2001 A Space Odyssey, etc.

Love and Friendship (US/British) 3.5 I’m not the biggest Jane Austin fan (stories about society go over my head), but Whit Stillman did a very nice job with this lesser known novella.

City of Gold (US) 3.4 A very enjoyable documentary about the food critic for the LA Times, who ends up carrying the film.

Only Yesterday. (Japan) 3.4 An animated film from 1991 that was finally released in the US.

Hieronymus Bosch, Touched By the Devil (Dutch) 3.4 Interesting documentary about a painter that is hard to see in real life, especially the all-important tiny details. For that alone the film was worthwhile. I’m not sure if Bosch is viewed as a surrealist, but if he is then he is surely the greatest painter in that genre.

Stage Sisters (China) 3.4 A beautifully restored print of a classic Chinese film from 1964. Interesting as a historical document, and for what it (implicitly) tells us about the Cultural Revolution that followed (when the film was banned.)

Tianyun Mountain (China) 3.4 A 1980 film by the same director as Stage Sisters. As a pair, they form a fascinating history of China from the 1930s to 1980. From turmoil to a happy (revolutionary) ending in the first film, and then from the happy post-revolution period to the nightmares of 1958-76, to a somber recovery in the second film.

Kaili Blues (China) 3.3 The first film made by a director from the Miao minority in China. It brought back pleasant memories of my trip through China in 1994, and it showed a lot of technical sophistication. But in the end it seemed a bit too similar to other “art films” made by East Asian directors (and also Sokurov.) Still it showed a lot of promise and I look forward to the director’s next film.

Night Train to Munich (Britain, 1940) 3.3 An enjoyable Carol Reed film that is reminiscent of Hitchcock’s “The Lady Vanishes”. Made before WWII got really serious, and it shows.

The Fall of the House of Usher (French) 3.3 A 1927 silent film by Epstein, shown with a shorter film.

Killer’s Kiss/Fear of Desire. (US) 3.3 Kubrick’s first two films, and the only ones I had never seen before.

Dying of the Light/Out of Print (US) 3.2 Two documentaries on the sad decline of film, which is rapidly being replaced by digital.

Francofonia (Russian/French) 3.2 A documentary on the Louvre, by the Russian director Sokurov. The documentary actually had relatively little to say about the Louvre itself, and instead focused on the collaboration between a German officer and the director of the Louvre, in trying to save French art during WWII. In the end the film was too ambitious, trying to do too many things, but Sokurov is always worth watching.

Manchester-by-the-Sea (US) 3.2 I’m not a big fan of this sort of Hollywood actor-driven film, but I do like Casey Affleck, and enjoyed seeing places that I’m familiar with visiting.

Hail Caesar! (US) 3.1 Scene by scene it was well directed, but somehow fell flat. The Coen brothers need to think about what made their early films so successful.

Jason Bourne (US) 3.0   Skillfully directed, but by now I’ve lost interest in the plot. Too many ridiculous car chases. The first Bourne film was a sort of breakthrough, which influenced the Bond series. They should have quit while they were ahead. Still a reasonably suspenseful 2 hours—not a bad film.

Café Society (US) 3.0   Scene by scene it was well directed, but somehow fell flat. Woody Allen needs to think about what made his early films so successful.

Searching for Mr. Right, Pt. 2 (China) 3.0 Thank God it had nothing to do with Pt. 1, which I missed! A Chinese romcom that was sort of entertaining, and sort of interesting in a sociological sense (which is often the case with Chinese films, given the pace of cultural change). As is often the case, lots of the puns were lost in translation. After speaking with my wife, I realized the film was actually much wittier than it seemed to this westerner.

Miss Hokusai (Japan) 2.7 Watching this uninspired animated film just made me want to look at Hokusai art instead.

The Crimson Kimono (US, 1959) 1.5 A film noir with an awful screenplay and wooden acting. I guess the interracial romance was considered shocking in 1959, and they didn’t see a need to do anything more.

Mermaid (Chinese) 1.5 I missed a lot of the humor, which involved hard to translate Chinese puns. But even so, I doubt I would have liked it.

Seijun Suzuki Festival:

Gates of Flesh (Japan, 1964) 3.7 I’m stunned that Japan was making films like this in 1964. Hollywood? Not so much, even today.

Ziguernerweisen (Japan, 1980) 3.7   Voted best Japanese film of the 1980s, by the Japanese film critics. Makes Taisho era Japan seem mysterious and seductive.

Branded to Kill (Japan, 1967) 3.6 Finally, a cult movie worthy of the name. Imagine if Tarantino and a French New Wave director had collaborated on a black and white 1967 Japanese film about hired killers.

Story of a Prostitute (Japan, 1965) 3.5 Same actress as Gates of Flesh, and equally riveting performance. Sukuzi has a great eye.

Carmen From Kawachi (Japan, 1966) 3.4  The final film in his “flesh trilogy” about prostitutes with a passion for life.

Pistol Opera (Japan, 2001) 3.4 Hard to make sense of, but it contains some great visual images.

Kagero-Za (Japan, 1981) 3.4 The second film in the Taisho trilogy. Also very mysterious, but I was tired when I saw this, and 140 minutes is a long time when there’s no clear plot. I hope to see it again.

Tokyo Drifter (Japan, 1966)  3.4  A breakthrough film in terms of style.

Tales of Sadness and Sorrow (Japan, 1977) 3.1 Kind of disappointing compared to other Suzuki films, but still somewhat interesting.

Favorite comment of the year (by Anon/portly).  Great Radiohead and Bjork recommendations.

PS.  Quietus named this CD by Arabrot the best album of the year.  It’s good!  So why are there zero reviews on Amazon?  I also listened to a lot of Steve Earle this year.

Poster for Branded to Kill:

Screen Shot 2017-02-12 at 10.44.31 AM


Some thoughts on the cost problem

Scott Alexander has a post on the rapidly rising costs in areas like health, education and subway construction.  As usual, it’s excellent.  He considers many different theories, and does not find any of them to be all that persuasive.

I certainly don’t claim to have all the answers, but I do feel that much of the problem reflects the fact that governments often cover the cost of services in those three areas.  This leads producers to spend more than the socially optimal amount on these products.  I’m going to provide some examples, but before doing so recall that economic theory predicts that costs in those areas should be wildly excessive.  If the government paid 90% of the cost of any car you bought, and that didn’t lead to lots more people buying Porsches and Ferraris, then we’d have a major puzzle on our hands.

Scott mentions that private for-profit hospitals are also quite expensive.  But even there, costs are largely paid for by the government.  Close to half of all health care spending is directly paid for by the government (Medicare, Medicaid, Veterans, government employees, etc.) and a large share of the rest is indirectly paid for by taxpayers because health insurance is not just income tax free, but also payroll tax free.  I’d be stunned if health care spending had not soared in recent decades.

A sizable share of my health care spending has been unneeded, and I’m fairly healthy.  I met one person in their 80s who had a normal cold and went to see the doctor. They said it was probably just a normal cold, but let’s put you in the hospital overnight and do some tests, just in case.  There was nothing wrong, and the bill the next day was something in the $5000 to $10,000 range, I forget the exact amount.  This must happen all the time.  No way would they have opted for those services if Medicare weren’t picking up the tab.

Just to be clear, I don’t think any monocausal explanation is enough.  Governments also pay for health care in other countries, and the costs are far lower.  It’s likely the interaction of the US government picking up much of the tab, plus insurance regulations, plus American-style litigation, plus powerful provider lobbies that prevent European-style cost controls, etc., etc., lead to our unusually high cost structure.  So don’t take this as a screed against “socialized medicine.”  I’m making a narrower point, that a country where the government picks up most of the costs, and doesn’t have effective regulations to hold down spending, is likely to end up with very expensive medicine.

To be fair, there is evidence from veterinary medicine that demand for pet care has also soared, and that suggests people are becoming more risk averse, even for their pets.  But there is also evidence cutting the other way.  Plastic surgery has not seen costs skyrocket. (Both are medical fields where people tend to pay out of pocket.)

I started working at Bentley in 1982, teaching 4 courses a semester.  When I retired in 2015, I was making 7 times as much in nominal terms (nearly 3 times as much in real terms), and I was teaching 2 courses per semester. Thus I was being paid 14 times more per class (nearly 6 times as much in real terms).  No wonder higher education costs have soared!  (Even salaries for new hires have risen sharply in real terms.) Interestingly, the size of the student body at Bentley didn’t change noticeably over that period (about 4000 undergrads.)  But the physical size of the school rose dramatically, with many new buildings full of much fancier equipment.  Right now they are building a new hockey arena.  There are more non-teaching employees.  You can debate whether living standards for Americans have risen over time, but there’s no doubt that living standards for Americans age 18-22 have risen over time—by a lot.

As far as elementary school, my daughter had 2, 3, and once even 4 teachers in her classroom, with about 18 students.  We had one teacher for 30 students when I was young.  (I’m told classes are even bigger in Japan, and they don’t have janitors in their schools.  The students must mop the floors.  I love Japan!)

There are also lots more rules and regulations.  By the end of my career, I felt almost like I was spending as much time teaching 2 classes as I used to spend teaching 4.  Many of these rules were well intentioned, but in the end I really don’t think they led to students learning any more than back in 1982.  I wonder if Dodd/Frank is now making small town banking a frustrating profession in the way that earlier regs made medicine and teaching increasing frustrating professions.

People say this is a disease of the service sector.  But I don’t see skyrocketing prices in restaurants, dry clearers, barbers and lots of other service industries where people pay out of pocket.

The same is true of construction.  Scott estimates that NYC subways cost 20 times as much as in 1900, even adjusting for inflation.  The real cost of other types of construction (such as new homes), has risen far less.  Again, people pay for homes out of pocket, but government pays for subways.  Do I even need to mention the cost of weapons system like the F-35?

To summarize, the case of pet medicine shows that costs can rise rapidly even when people pay out of pocket.  But the biggest and most important examples of cost inflation are in precisely those industries where government picks up a major part of the tab–health, education, and government procurement of complex products.  And excessive cost inflation is exactly what economic theory predicts will happen when governments heavily subsidize an activity, without adequate cost regulations.  Just as excessive risk taking is exactly what economic theory predicts will happen if government insures bank deposits, without adequate risk regulations.  Let’s not be surprised if the things that happen, are exactly what the textbooks predict would happen. Even FDR predicted that deposit insurance would lead to reckless behavior by banks, and he (reluctantly) signed the bill into law.