When I was young, you’d still see stock prices such as 47 1/4 and 38 5/8. That was a throwback to the pre-computer age, when prices were calculated as a fraction of a dollar. Now everything from stock prices to T-bill yields is expressed in decimals, aka basis points.

I’ve been arguing that the Fed should join the computer age, setting the fed funds target once a day at the median vote of the FOMC. Every working day, each FOMC voting member would email in their preferred policy rate, to the nearest basis point, and that day’s policy rate would be set at the median vote. No more agonizing between quarter point and half point changes.

Under this system we would not see the sort of clown show experienced yesterday at the New York Fed.

When will the Fed join the 21st century?

PS.  Market monetarism, market environmentalism, it’s all good.

Consider the following claims:

1. The Fed has tightened policy over the past few years.

2. The likely Fed rate cut in July shows that they made a mistake in raising rates last year.

3. The fact that unemployment has fallen to lower levels than anticipated provides further evidence that the Fed erred in raising rates.

4. The Fed should do a full 50 basis point cut in July, not a measly 25 basis point cut.

I believe the fourth claim (the “conclusion”) is true, but I don’t get to this place via the same path as many “doves”. I do not accept the first three claims (the “premises”).

1. Monetary policy has actually eased since Trump was elected, as evidenced by a significant speed-up in NGDP growth.

2. A rate cut in July does not show that the previous rate increases were mistaken (although they may have been mistaken for other reasons.) Interest rates should go up and down with changes in the equilibrium rate, and there is abundant evidence that the equilibrium interest rate did indeed rise in 2017-18, and that this rate is now falling. The Fed should probably not be targeting interest rates at all, but if they insist on doing so then it’s appropriate to raise and lower the interest rate target along with changes in the equilibrium rate.

3. The 100 basis point fall in the unemployment rate over the past couple of years is not evidence that money was too tight a year or two ago. Unemployment fell in the late 1960s, and no one in their right mind would say money was too tight in the late 60s.

Some argue against any rate cut on the grounds that the economy is booming, and in the past the Fed did not generally cut rates when the economy was strong. Perhaps we don’t need to ease policy right now, but even in that case I’d advocate an interest rate cut, because the Fed needs to cut rates just to keep the stance of monetary policy at its current level.

But I’d go even further. The fact that inflation has been mostly running below 2%, and is expected to continue running below 2%, suggests the need for the Fed to “get ahead of the curve” with a greater than expected monetary easing. That’s why I favor a 50 basis point cut.

BTW, I don’t favor inflation targeting, but if the Fed is going to adopt a symmetrical 2% PCE inflation target, then they need to produce that inflation rate, on average.

PS. Don’t say, “The 1960s were different, because today there is no inflation problem”. That’s my point. The unemployment rate isn’t the number to look at; it’s the low inflation today that tells us that money has been a bit too tight.

The GOP campaigned on a promise to repeal Obamacare. The Dems promised to save the program. First the GOP reneged on their promise to repeal Obamacare (even after seizing the House, Senate and Presidency), and now both parties have joined forces to remove the best part of Obamacare, and the only part of the program that was supported by Republican economists:

The Cadillac tax is one of the most important tools we have to control health care cost growth in the private sector. Repealing it will drive up health care costs while adding more than $1.2 trillion to the debt over the next two decades.”

The tax has been delayed twice. But the overwhelming vote in the House — 419 to 6, with only three Democrats opposed — increased the likelihood that it never does. Indeed, the debate on the House floor was striking, with one Democrat after another denouncing the provision as if Democrats had nothing to do with its creation.

It’s hard to overstate just how bad this news is. It suggests that both parties are completely abandoning any interest in sensible economic reforms. It suggests that the SALT caps in the 2017 tax reform may also be repealed at some point in the future. There is no appetite to reform health care, which has been one of the biggest factors limiting real wage growth for average Americans in recent decades.

I hope this can be stopped in the Senate, but given the vote margin I’m not optimistic.

And let’s not hear any more happy talk about GOP “deregulation”. If this goes through (with GOP support), then Republican promises to make America more efficient through deregulation will prove hollow.

PS. This post explains the downside of repealing the Cadillac tax.

Consider the following story:

A couple of progressives were sitting in a Starbucks in Seattle, lamenting the state of public policy.  The government was raising enough revenue to address many social problems, but the vast majority of domestic spending went to middle class entitlements.  Another big chunk of spending went to the bloated military budget.  Much of the small foreign aid budget went toward our military allies, not the global poor.

Bill the businessman overheard this conversation and was touched by their lament.  Bill suggested an idea:  “How about if I impose a private tax on every single operating system for PCs, and then consult experts on effective philanthropy.  I’ll give the money where it will do the most good.”

Bill then talked his friend Warren into imposing a tax on all financial transactions, and also donate the funds to charity.  The idea spread rapidly.  Mark put a tax on social media advertising, which raised vast amounts of money.  Jeff imposed a private tax on internet retail transactions, while Larry and Sergey put a tax on search advertising.

The progressives said that’s all very nice, but the money is still far too small to address “unmet needs”.  And yet they kept losing elections to populist candidates that promised to spend the money on the sorts of things that made average voters feel more comfortable, such as middle class entitlements, and also programs that made America seem like a Great Power, such as the defense budget and military aid to Israel, Egypt and Pakistan.

Then the progressives decided that if you can’t beat them, join them. Because they could not get Americans to vote for candidates who favored helping the less fortunate, the progressives decided they’d start favoring policies that helped the middle class, programs that ignored the needs homeless Americans and hungry Africans.

The progressives decided to advocate expanding federal health care programs from the poor and elderly to the broader population, at such a huge cost that it would absorb most of the revenue that could be potentially be raised with higher taxes.  In addition, they decided that all Americans should pay taxes to pay off the debts of the relatively well off minority that graduate from college.

Thus the 21st century saw a very unusual phenomenon. Billionaires became bleeding heart progressives, donating hundreds of billions of dollars to the world’s neediest people.  The progressives became power hungry politicians, grasping for votes wherever they could find them.

Of course that’s just a story.  You’ll have to read the news media to find out what’s really going on in America.

Here’s David French, writing in the National Review:

I believe Ilhan Omar is a toxic presence in American politics. Her critiques are deeply misguided. But she should temper her critiques because they’re wrong, not because she’s an immigrant. . . .

The near-total silence (at least so far) from GOP leaders is deeply dispiriting. Do they not understand the message the leader of their party is sending — especially to America’s nonwhite citizens? Do they not understand that racial malice as a political strategy isn’t just an ultimately losing proposition but also deeply divisive, picking at the scabs of America’s deepest political, cultural, and spiritual wounds?

Later French suggests that they do understand, but are cowards:

There are many GOP leaders who, quite frankly, understand that they criticize even the president’s racist speech at their own peril. The grassroots have spoken. Loyalty to the president must be absolute, or one risks a primary challenge. Yet individual voters have responsibilities as well, and they must understand that extraordinary loyalty to a malicious man broadcasts their own disdain for their fellow citizens. . . .

Trump is fully employing malice as a political strategy. It’s not clever. It’s not shrewd. It’s destructive and wrong. The fact that so few Republicans can muster enough courage to state this obvious truth speaks to a sad reality — the rot extends far beyond 1600 Pennsylvania Avenue.

I pray that the Republican Party is a vast collection of cowards.  The alternative is too horrible to contemplate.