Archive for August 2020


The (PCE) price level will be 135.207 in January 2030

Or at least it better be.

Powell says there’s no strict mathematical formula; but it’s pretty obvious to me that the markets and pundits are going to hold the Fed accountable. People think in terms of decades, and this policy was announced in 2020. Thus markets will naturally see this a commitment for inflation to average 2% over the 2020s. Since the PCE price level was 110.917 in January of this year, it needs to be close to 135 in January 2030. A slight miss would not be a problem, but a big miss (say average inflation outside the 1.8% to 2.2% range) would be seen as a policy failure. The Fed would lose credibility.

I also have a post on the speech over at Econlog.

Be careful what you wish for

Suppose that in early February a crystal ball told you that the US economy was about to be locked down for a month to prevent a big outbreak of Covid-19. That time would be used to implement an aggressive policy of test/trace/isolate plus widespread mask wearing. With just a few dozen cases, it would be possible to isolate all the infected, as in places like New Zealand. You might think the one month lockdown was good news.

Now suppose instead that your crystal ball suggested that there would be a 5-year lockdown. Now your reaction might be fear. “Wow, that would only happen if the epidemic really got out of control.”

Now let’s switch to monetary policy. Suppose the Covid epidemic causes the Fed to temporarily slash rates to zero. You might think this was good news, monetary stimulus to offset the decline in nominal spending.

Now suppose instead that you saw this Bloomberg headline:

Fed Seen Holding Rates at Zero for Five Years in New Policy

The new approach could be unveiled as soon as next month.

How do you react? I worry that this means the economy is likely to be very weak for the next 5 years—not at all what I hoped for.

Now suppose you have been calling for level targeting and the Fed instead opts for “average inflation targeting”. Also assume the market reacts to the Fed’s announcement with market inflation forecasts of well below 2% for as far as the eye can see. Does that make you optimistic?

I do think that average inflation targeting would be a tiny step forward. But it’s also far more discretionary than level targeting, and hence it depends much more on implementation. Unlike with price level targeting, we don’t know how it will work.

Unfortunately, if the policy lacks credibility it’s not of much use. So I expect any gains from the policy to be small. The good news is that it’s one step toward price level targeting, and price level targeting would be a step toward NGDP level targeting.

I agree with much of the GOP platform

The GOP decided to stick with their 2016 platform in 2020:

When Republicans read the platform their party is using for the 2020 campaign, they may be surprised to see that it is full of condemnations of the sitting president.

“The survival of the internet as we know it is at risk,” the platform reads. “Its gravest peril originates in the White House, the current occupant of which has launched a campaign, both at home and internationally, to subjugate it to agents of government.”

That’s true; look how they are going after TikTok and WeChat!

The warning about speech online is one of more than three dozen unflattering references to either the “current president,” “current chief executive,” “current administration,” people “currently in control” of policy, or the “current occupant” of the White House that appear in the Republican platform. Adopted at the party’s 2016 convention, it has been carried over through 2024 after the executive committee of the Republican National Committee on Wednesday chose not to adopt a new platform for 2020.

The platform censures the “current” president — who in 2016 was, of course, Barack Obama — and his administration for, among other things, imposing “a social and cultural revolution,” causing a “huge increase in the national debt” and damaging relationships with international partners.

I agree. The current president has run up by far the largest peacetime budget deficits and trashed our relations with foreign countries. (He also increased our trade deficit.)

Seriously, Trump is the platform. Issues no longer matter; it’s a personality cult. If issues mattered, Jeff Sessions would be the GOP nominee in Alabama.

I occasionally get commenters telling me, “but you agree with Trump on the issues; you just don’t like his personality”. So let’s look at the important issues, and count the number where I agree with Trump.

1. The war on drugs

2. Support for authoritarian nationalism

3. Switching to a consumption tax

4. International trade

5. Immigration

6. Cadillac tax on health insurance

7. Residential zoning

8. Occupational licensing

9. School choice

10. Carbon taxes

11. Big budget deficits

12. Monetary policy

13. Allowing the sale of kidneys

14. Increasing military spending

15. Reforming Social Security and Medicare

16. Abortion rights

17. Sanctions on Iran and Cuba

I agree with the Trump administration on school choice, and I agree with both Trump and Obama on occupational licensing. I disagree with Trump on all the other 15 issues, and in 10 cases (#1, #2, #4, #5, #7, #10, #12, #14, #16, #17) I’m even further from Trump than I am from the Dems. In 4 others (#6, #11, #13 , #15) I’m equally far from both. On consumption taxes I’m closer to Trump. So no, it’s not a question of me agreeing with Trump but not liking his personality. BTW, I also reject the idea that bigotry, dishonesty and corruption are mere “personality quirks”.

Here’s the most important “issue” to me: I want to make the US into a country where people don’t care who is president, a place like Switzerland. The more people care who is president (as in Venezuela) the worse off the country is.

It does make sense for the GOP to stick with the 2016 promises, as Trump has yet to repeal Obamacare, build the wall, reduce the trade deficit, reduce illegal immigration, expel the illegals, rescue the coal industry, bring back manufacturing jobs, and deliver 4% RGDP growth. But maybe this will all happen in the second term.

PS. To be clear, when I say I agree with Trump and Obama on occupational licensing, I mean I agree with their recommendations that states reduce these requirements. I would actually go much further, eliminating all occupational licensing laws. Similarly, I’d completely abolish the public school system.

PPS. I saw this headline this morning:

RNC Naturalization Ceremony Sparks Uproar: ‘This Ceremony Is Not About Worshiping a President

The pre-taped ceremony featured 5 citizenship applicants from disparate backgrounds, with their oaths of citizenship officiated by acting Secretary of Homeland Security Chad Wolf, as Donald Trump watched. Afterward, Wolf effusively praised Trump and the newly inducted citizens were encouraged to do the same.

It appears to be a wholly unprecedented politicization of the naturalization ceremony. No president has ever used such a ceremony as a campaign event, according to the New York Times. And complicating matters further, two weeks ago the Government Accountability Office determined that Wolf is breaking the law by continuing to act as the head of DHS because he was never lawfully appointed.

Of course the ceremony is about worshipping the president! Does the reporter think we are Denmark? We live in a banana republic—it’s long past time for people to get used to that fact.

PPPS. Here’s another example, this time from the left.

The Fed hasn’t done much monetary stimulus this year

It doesn’t much matter how you measure monetary stimulus, the Fed hasn’t done much of it during 2020:

1. They cut rates by 150 basis points. That’s very little compared other recessions. Some would argue they could not cut rates further. I disagree, but even so that just means they haven’t done much stimulus because they cannot do much stimulus.

2. The monetary base is about $4.75 trillion. That’s up less that 20% from the summer of 2014. NGDP grew by more than 20% between mid-2014 and 2020:Q1. Thus in relative terms the base is not particularly large.

3. The monetary base is up about $1.3 trillion from February. That’s the same increase as from September 2008 to February 2010 (i.e. QE1) and it’s smaller than the increase during QE3. And of course NGDP was far smaller back in 2008. You can certainly argue that $1.3 trillion is “a lot”, but in relative terms the Fed’s basically done less than during two of the three QE programs during the Great Recession.

4. Using the Bernanke criteria, monetary policy has been contractionary (due to disinflation and falling NGDP.)

You can certainly argue the Fed’s done lots of “other stuff”, such a bail out the bond market and facilitate the provision of credit. But “other stuff” is not monetary policy. If you look strictly at monetary policy as usually defined (interest rates and the money supply) the Fed has not done all that much.

Fiscal stimulus actually has been unprecedented (for peacetime), even as a share of GDP. Far more expansionary than anything the supposedly “socialist” Obama could have imagined in 2009, and all done with a GOP president and senate.

So why does almost everyone assume that monetary policy has been highly expansionary? Because they don’t actually pay attention to what the Fed does. Deep down they don’t think the monetary base matters, and hence they assume based on media accounts that the Fed must have injected vast quantities of base money into the economy. As an analogy, no one paid attention when growth in the monetary base came to a screeching halt during August 2007 to May 2008, because people don’t care about the base. But then these same people will tell you that QE is evidence of easy money. Sigh . . .

Back during the Great Recession, the Fed bought most of the budget deficit. (I hate to use the term ‘monetized’ because with IOR the Fed no longer actually monetizes debt, except for the portion bought with currency.) This time around, the Fed is only buying up a modest portion of this years $3.7 trillion budget deficit, much less than half. Unless I’m mistaken, that’s not the impression people have, because it’s not the impression the media is providing.

So why doesn’t the Fed do much more? Maybe because they think we are in a good place, with adequate AD given the fact that people are reluctant to shop. But then why do Fed officials keep asking for fiscal stimulus? Why not do more monetary stimulus?

The Fed never really answered that question during the early 2010s, and they are again refusing to answer the question. The first time around it was exasperating. Today it’s even more exasperating. Will the press ever demand that the Fed ANSWER THE QUESTION?

PS. And why has the Fed been reducing the base in recent months?

Why I dine outside

I’ve switched to dining outside at restaurants. This story from South Korea helps to explain why:

After a woman with the coronavirus visited a Starbucks cafe north of Seoul this month, more than two dozen patrons tested positive days later. But the four face mask-wearing employees escaped infection.

The Aug. 8 outbreak in the South Korean city of Paju is another example of how rapidly the SARS-CoV-2 virus can spread in confined, indoor spaces — as well as ways to minimize transmission. With health authorities around the world still debating the evidence around face masks, the 27-person cluster linked to the air-conditioned coffee outlet adds more support for their mandatory use to help limit the spread of the Covid-19-causing virus.

When I go inside a restaurant or store, I wear a mask. You can’t eat with a mask on, so I eat outside.

PS. Overall, South Korea has a fairly low rate of infection. Thus there’s a good chance that all 27 of those Starbucks patrons got infected at the same place and the same time. And yet not one of the 4 employees got infected.