Archive for November 2017


El-Erian at the Fed?

The Wall Street Journal has a new piece discussing rumors that Mohamed El-Erian might be chosen for the position of vice chair of the Board of Governors:

In recent years, Mr. El-Erian has voiced somewhat hawkish critiques of the Fed’s policy stance, including decisions to hold interest rates at ultralow levels despite signaling plans to raise them. In recent months, he has suggested that the Fed’s inflation target of 2% might be too high given structural forces holding down consumer prices.

A few comments:

1.  We now know that those who offered hawkish critiques of Fed policy a few years ago were wrong.  Inflation has continued to undershoot the Fed’s target.

2.  When “structural forces” hold down inflation, they do so by boosting RGDP growth.  There is no other way by which structural forces can hold down (GDP deflator) inflation.  None.  RGDP growth has actually been at unusually low levels over the past decade.  Thus we now know that structural forces are not holding down inflation.  It was slow NGDP growth.  Those who think otherwise are confusing microeconomic factors (Amazon, China, etc.) with macroeconomic factors.  Yes, Amazon and China hold down specific prices, but only by boosting GDP growth.  And this mistake cannot be excused by pointing to mismeasurement of inflation.  Maybe tech is causing actual inflation to be lower than measured inflation, but the puzzle being discussed is why measured inflation is so low.

Confusion over these sorts of basic macro issues is exactly why we need to appoint world class experts on monetary economics to the Fed.  People like El-Erian tend to assume that a tighter monetary policy would allow the Fed to have a higher path of interest rates going forward.  In truth a tighter monetary policy would result in slower growth and a lower path of the natural rate of interest over time.  (See Trichet, ECB.)  If the Fed didn’t realize this and persevered with their plan to raise rates, they would create a depression.  I’m not predicting a depression because I don’t expect the Fed to do this, just pointing to the logical consequence of this sort of mistaken reasoning.

Higher interest rates should not be a goal of monetary policy, but if it is a goal then you get there by making monetary policy more expansionary, and boosting the trend rate of NGDP growth.

PS.  I have a cameo role in a new MRU video.

PPS.  I was interviewed for this piece in the Commercial Observer.

HT:  Patrick Horan, Vaidas Urba

Ideologies follow the tribe

Here we have conservatives defending a guy who molests teens:

A group of 53 Alabama pastors signed onto a letter pledging their support for alleged child molester and Senate candidate Roy Moore.

Update:  The Newsweek story may be fake news, as elsewhere it’s reported the letter was from months ago.

And here we have a conservative at the National Review who is uneasy with left wing attempts to censor art:

HBO is at this moment streaming Hacksaw Ridge, a film by Mel Gibson, who in 2011 pleaded no contest to a charge of battery against an ex-girlfriend who had alleged that he had assaulted her so viciously that she was left with a black eye and two broken teeth. HBO has no policy, as far as I know, against distributing movies starring Christian Slater, who once served 59 days in jail after pleading no contest to assaulting a girlfriend. The films of Harvey Weinstein, Kevin Spacey, and Roman Polanski remain ubiquitous. Hollywood history is rife with personalities who have done much worse things than C.K. and whose films have not been subsequently suppressed.

So what’s going on?  Weren’t conservative pastors supposed to be the sort of people who condemn this type of behavior?  And isn’t it people on the left who used to strongly defend artists from censorship?  (Corporate or government)

Here’s one possibility.  Conservatism is moving away from religion and toward the cult of the strong.  Conservatives take increasingly pleasure in mocking the left as a bunch of sensitive snowflakes.  Sexual harassment is seen as a “feminist” issue.  Conservatives are increasing drawn to “alpha male” leaders, even if they have a history of abusing women.  When I was younger, that sort of man (Kennedy, Clinton, etc.) was usually thought more likely to be a Democrat.  Republicans were seen as nerdy types.  Now a major GOP presidential candidate brags about the size of his . . . er . . .  “hands” during a debate, and a Senate GOP candidate brandishes guns at campaign rallies.  A House candidates assaults a reporter, and is still elected.

On the left it’s a different set of issues.  The left once liked intellectual types who were unconventional, and didn’t want to live according to boring suburban morality.  Now people like Woody Allen and Louis CK are reframed as powerful white men who take advantage of less powerful women.  It’s a point I make repeatedly—there are no fixed definitions of left and right; ideologies evolve over time, and will continue do so in the future.  Who knows, maybe liberals will once again embrace eugenics.

You might say that the 53 pastors are not representative of conservatism, and the liberals who want to ban films are not representative of the left.  Maybe so.  But I recall just a few years ago hearing about a fuss over Halloween costumes at Yale, and thinking it one of the most bizarre stories I had ever read.  Now (just a few years later) hysteria about “cultural appropriation” is widespread on the left, and indeed is being taught in public schools all across the country.

Never assume that just because something seems outlandish it won’t eventually become conventional wisdom.  And history shows that it’s the outlandish ideas on the left that are most likely to persist.  The right generally loses these cultural battles, at least in the long run.  Which ought to cause some soul searching on the right.

Congratulations to the TPP Eleven

The world is still getting better, even as America gets worse:

Danang (Vietnam) (AFP) – Ministers from 11 Asia-Pacific countries agreed Saturday to press ahead with a major trade deal without the United States, as the world’s largest economy seeks to go it alone under President Donald Trump’s “America First” policy.

Virginia Postrel points out that the new aluminum tariffs Trump just imposed will hurt US manufacturing but help the Russian economy.

All our intelligence services say that Russia meddled in the election.  We know that Russia meddles in the elections of lots of other countries.  But Trump says he believes Putin is telling the truth.  Russia is innocent.

Ever since George Wallace, I’ve had my doubts about the political judgment of Alabama residents.  But I always assumed that they knew their Bible stories.  So this raised an eyebrow:

State auditor Jim Ziegler is willing to admit the charges are true, but he doesn’t care. He cited the Biblical story of Mary and Joseph — “Mary was a teenager and Joseph was an adult carpenter. They became parents of Jesus”— and concluded, “There’s just nothing immoral or illegal here. Maybe just a little bit unusual.”

When I saw that Louis C.K.’s new film is being withdrawn, I was going to sarcastically ask if next we’ll be banning Woody Allen films.  But already did so–without the sarcasm:

As reports of firings and film cancellations have rolled through my newsfeed and into my inbox over the past few weeks, so too have invitations to screenings of Wonder Wheel, Allen’s latest film, which closed the New York Film Festival in October and is scheduled to open in theaters on December 1.

For now, Wonder Wheel remains untouched on the release schedule. If it stays there, I’ll be less convinced that Hollywood is ready to really deal with its demons, and more certain that money is still the loudest voice at the table.

HT:  Alex Tabarrok

FT bond market bleg

Since my previous post was a bit of a fiasco (I seem to have mixed up Canada and the UK on the mortgage interest deduction), let me set this up as a question, so I don’t have two stupid posts in a row.  Here’s today FT:

Republicans’ proposal to slash corporate tax rate to 20 per cent helped spur a rally in Treasuries last week. The expectation was that lower corporate taxes would jolt economic growth and prompt policymakers to step up the pace of their monetary tightening.

But the Senate’s proposal to delay a headline corporate tax cut until 2019 appeared to be driving a reversal in the rally on Friday.

I’m doubly confused.  First of all, when something like economic growth (or inflation) causes interest rates to change, it’s not because it causes policymakers to adjust monetary policy.  Economic growth, inflation, and other macro variables have a direct impact on interest rates.  They would cause a change in interest rates even if the Fed did not exist, and indeed did cause changes in interest rates before the Fed was created (in 1913.)

But that’s not my main source of confusion.  Reading this piece I couldn’t tell whether the FT was talking about bond prices or bond yields.  I had to check the bond yield graph to figure out that it had to be bond prices, as yields fell last week and rose today:

So bond prices rose last week and fell today, as yields and prices move in the opposite direction.  Just as they said.  But then I don’t get the FT claim that Treasuries (prices) rallied last week on expectations of faster economic growth.  Am I having my second brain freeze in a row?  Am I just as mixed up as my undergraduate students occasionally were at Bentley?

PS.  Check out this trailer, especially the final line.  Where can I see this film?  I’m getting bored with Woody Allen films, and would like to see one produced by someone else.


Which country abolished the home mortgage deduction in 2001?

Update:  Commenter Brent pointed out that this post seems to be based on an error on my part.  Canada did not abolish the home mortgage deduction in 2001.  My apologies.  (I got this information from someone who may have confused Canada with the UK.)

The pink in line is Canada and the blue line is the US.

The proposed bill would only take away the deduction for the top 5% of US mortgages.

PS.  Our media has an ironclad rule that the middle class must always be described in glowing terms, or treated as victims.  Thus if they are talking about things that benefit the top 5%, this group is called “rich”.  After all, the government never does anything good for the middle class, only the rich.

But if they take away a benefit from the top 5%, suddenly that group is called the “middle class” and we are all supposed to shed tears for their suffering:

The 429-page GOP tax plan, called the “Tax Cuts and Jobs Act” was revealed on Thursday and is being billed as a boon for hard-working middle class Americans.

But Republicans have proposed paring down popular homeownership incentives, which would likely affect millennials and millions of people living in high-cost housing markets.

The tax plan cuts the $1 million limit for the home-mortgage-interest deduction in half. The deduction allows homeowners to write off the interest they pay on home loans, effectively reducing their taxable income. The bill would apply to new home purchases and make it so homeowners can only deduct interest payments on up to $500,000 worth of home loans.

In previous generations, that may have been a typical mortgage amount for a first-time homebuyer, but today’s young people are different. Millennials are “skipping starter homes,” Zillow CEO Spencer Rascoff said, and moving straight to the $1 million range when its time to buy their first house. . . .

“Eliminating or nullifying the tax incentives for homeownership puts home values and middle-class homeowners at risk, and from a cursory examination, this legislation appears to do just that,” William E. Brown, president of the National Association of Realtors (NAR), said in a statement.

So sad!