Archive for August 2020


What would core PCE futures price targeting look like?

Here’s a conjecture. Core PCE futures targeting would look a lot like NGDP targeting. Not NGDP futures targeting, rather it would look like a monetary policy that stabilized current NGDP. In other words, a lot of the volatility of core PCE inflation is due to NGDP volatility, with NGDP impacting core PCE with a lag. Alternatively, stabilizing NGDP growth would provide quite stable core inflation, indeed even more stable core inflation than what we had during the “Great Moderation”, a period when the Fed was actually trying to stabilize inflation.

Just eyeballing the graph, it looks to me like core PCE inflation (blue line) typically starts falling about a year after NGDP growth (red line) begins to decline. (Focus on the NGDP slowdowns of 1979-80, 1990-91, 2000-01, and 2007-08.)

Think of core PCE as the part of the price level mostly made up of sticky prices, or alternatively those prices that are closely linked to wage costs. Thus wage costs do not determine oil or food prices in the short run, but do heavily influence the price of haircuts and restaurant meals.

[Note: There is a slight flaw in measured core inflation, as even the core includes some energy prices, which indirectly impact other production costs. Thus oil shocks slightly impact even core inflation, albeit much less than they impact headline inflation.]

When there is a tight money policy, both output and commodity prices immediately fall. Sticky goods prices (and wages) are not immediately affected.

A number of researchers have pointed out that monetary policy should try to stabilize the stickiest prices. That might be core inflation, or (as Greg Mankiw and Ricardo Reis argued) wage inflation. But that’s not easy to do, as sticky wages and prices respond slowly. It’s like trying to steer an ocean liner where the ship takes 15 minutes to respond after moving the steering wheel.

Thus you want to target the thing that is closely linked to future values of the sticky index that you are trying to target. That might be a futures contract linked to the core PCE, but it also might be current NGDP.

Of course even current NGDP is hard to control, which is why I’ve called for assistance from NGDP futures markets, notably my “guardrails” approach. But at least NGDP responds much more quickly than core inflation, and hence is a better target for avoiding short run instability. In mid-2008, there was an obvious NGDP problem, but no obvious core inflation problem. Keynesians rely on Phillips curve models to solve this problem, but NGDP is more reliable.

The (supposed) downside of targeting NGDP is that it allows a bit more variation in long run core inflation, even if it’s more stabilizing for the economy at cyclical frequencies. That “downside” is actually a feature not a bug, as George Selgin demonstrated in Less Than Zero. But even if it were a bug, it’s likely that the benefits of greater cyclical core inflation stability vastly exceed the downside of slightly bigger variations in the long run trend rate of core inflation, even if New Keynesian models are correct that PCE core inflation is the appropriate monetary policy target.

You want stable core inflation? Target per capita NGDP growth.

PS. This post does not apply to the Covid-19 economy. For that, you’d want to target NGDP at least 12 months forward, maybe 24 months.

PPS. I could have written the same post, replacing core inflation with wage inflation (blue line). It also lags behind NGDP growth (red line):

Recent articles

1. We have decided to punish the victims of Chinese repression:

Hong Kong will formally challenge a US demand that it changes the way it labels its exports as the city grapples with the international fallout from Beijing’s imposition of a tough national security law on the territory.

The territory’s government said that new US rules — which require that products exported from Hong Kong to the US are labelled “Made in China” — breached World Trade Organization rules and that it “will take action” as a result. . . .

“US’s new rule on origin marking of Hong Kong products disregards Hong Kong’s status as a separate WTO member and violates WTO rules,” a spokesperson for Hong Kong’s commerce and economic development bureau said in this week.

In contrast, Britain is trying to help Hong Kong residents by allowing them the freedom to move to the UK.

2. Florida police are a bunch of perverts, who like to secretly watch videotapes of grandma getting a massage:

New York lawyer Joseph Tacopina, who said he represents at least 31 individuals who were taped despite receiving only legitimate massages at Orchids of Asia Day Spa, filed a class-action lawsuit in April 2019 and has been battering the surveillance actions of the authorities for more than a year. The Kraft victories have likely strengthened future class-action suits in the case, not to mention general precedent in similar cases.

“It’s a nightmare,” Tacopina told CNN last year. “It’s as if they put a camera in a bathroom and recorded people going to the bathroom. These people — ranging from 40-year-old males to 75-year-old females — [were] in a state of undress [and] getting massages. Nothing more. Legitimate massages, and wound up on a video tape that is perilously close to being put out into the public domain.”

Here are two ways that you know that the government is trying to take away your freedom:

“We are just trying to stop sex trafficing.”

“We are just trying to protect the little children.”

3. America’s doing such a great job with Covid-19 that we thought it was a good time to tell Germany how to run its affairs:

A letter sent by three US senators warning the owner of a port on the Baltic Sea of “crushing legal and economic sanctions” if it continued to provide “significant goods, services, and support” for the controversial Nord Stream 2 gas pipeline has caused outrage in Germany.

God I hope that America will someday have to pay a price for all this bullying.

4. The following is the global story of the past decade. Everything else, including Covid-19, pales in comparison:

Both Mr Modi and Mr Erdogan also aspire to be leaders of a global faith community. Digital renderings of the new temple in Ayodhya were beamed on to a giant billboard in Times Square in New York, presumably as an inspiration to expatriate Indians. Mr Erdogan has claimed that the “resurrection of the Hagia Sophia” represents the “will of Muslims all over the world”.

For two such important nations to turn their backs on secularism and liberal values is significant in itself. But the changes in India and Turkey are also part of a broader global story of the rise of identity politics at the expense of liberal universalism. This is a story that, in different ways, is also playing out in China, Russia, the US and Europe. It is closely linked to the rise of strongman leaders, who claim to be protectors of a faith, a nation or a chosen ethnic group, or some fusion of all three.

5. David Levey pointed me to a demolition of John Rawls, written by Michael Huemer:

John Rawls was far and away the most influential political philosopher of the last century. For one limited measure, try searching for “John Rawls” on Google scholar. You’ll get about 16,000 hits since 2019. He was not only widely discussed but very well respected, and he acquired many followers. Even people outside philosophy have heard of him. So he clearly had some skill in a very high degree.

Whatever that skill was, though, it wasn’t skill at reasoning. Every important step in his case for his main theory is obviously fallacious and confused.

Read the whole thing. The first time I heard about Rawls’ minimax principle I assumed I must be misunderstanding the idea. No serious philosopher would propose such an obviously flawed ethical principle. And yet, according to Huemer that’s exactly what Rawls did. Read the whole thing.

6. This Matt Yglesias tweet made me smile:

Trump wants to have things both ways:

In a tweet, Trump said members of “the deep state” at the FDA are making it hard for drug companies to “get people in order to test the vaccines and therapeutics” and “obviously” want to delay progress until after Nov. 3, Election Day.

I’m “innoculated” for this particular conspiracy theory as my wife used to work on developing vaccines and knows how long the process takes.

I favor abolishing the FDA. Trump won’t do that because it would be highly unpopular. Instead he conflates “normal bureaucratic inertia that costs many lives and has been going on for decades” with “deep state”, in order to impress his QAnon readers. BTW, Trump appointed the head of the FDA—presumably he is also a part of the deep state.

7. The WaPo has an often hilarious article discussing how Trump’s sister views the President:

Maryanne Trump Barry was serving as a federal judge when she heard her brother, President Trump, suggest on Fox News, “maybe I’ll have to put her at the border” amid a wave of refugees entering the United States. At the time, children were being separated from their parents and put in cramped quarters while court hearings dragged on.

“All he wants to do is appeal to his base,” Barry said in a conversation secretly recorded by her niece, Mary L. Trump. “He has no principles. None. None. And his base, I mean my God, if you were a religious person, you want to help people. Not do this.”

Barry, 83, was aghast at how her 74-year-old brother operated as president. “His goddamned tweet and lying, oh my God,” she said. “I’m talking too freely, but you know. The change of stories. The lack of preparation. The lying. Holy shit.”

I feel that I have a lot in common with Trump’s sister.

Read the whole thing, especially the part where Trump is incredulous that his sister doesn’t watch Fox News.

8. Back in late October 2008, Gallup polled Americans on how they viewed the economy. Only 5% rated the economy good or excellent.

Today, the economy is in even worse shape, and thus you might expect an even lower number to view conditions in a positive light. Even if voters don’t view the economy as poor (after all, stocks are doing well) it’s hard to see how anyone would view the economy as better than “fair”. And yet, Gallup reports that 28% now view the economy as good or excellent.

I have a theory about this. Americans have developed a new way of thinking. Back in 2008, voters would answer the question based on actual economic conditions. Today, the thought process is more complex. Voters start by asking who is the president. The current president is Trump. Then they ask whether they like Trump. If they do, then they conclude that the economy must be in good or excellent condition.

Evidence for this claim comes from the fact that another news story reports that Republicans overwhelming view the economy as good:

Almost 70% of Republicans said the national economy is “good” and that U.S. handling of the coronavirus is “going well,” with over half — 57% — saying that the number of U.S. deaths from the pandemic, which now number over 175,000, has been “acceptable.” About two-thirds of Republican respondents said the Covid-19 death count is lower than reported.

Further evidence for my claim comes from their views on Covid-19. Republicans believe the actual death rate is less than reported, even though it is actually more than reported, because believing it is less than reported is good for Trump. They don’t believe the US has done a poor job even though it obviously has (see graph below), because that belief would make Trump look bad.

This is why Trump has a good chance to win. In the past, voters punished the incumbent president when the country was doing poorly. Notably, it made no difference whether or not the president caused the country to be doing poorly (and almost always he had not.) All that mattered was the state of the country.

Today however, Trump supporters live in an epistemic bubble, and hence might well re-elect Trump based on false beliefs about reality. That’s good for the GOP!!

The good news for Dems is that there’s no evidence that Trump’s popularity is transferable to others. Even though Trump is objectively one of the most despicable humans that ever lived, a man with virtually no positive qualities and even hated by his sister, his supporters often adore the man. Look at their faces at campaign rallies. Another politician with exactly the same views would not engender the same degree of support. Thus the Trump Show ends in January 2025.

Questioning beliefs, questioning motives

People are often unwilling to accept the fact that other people believe what they claim they believe. In some cases that makes sense, as when analyzing political speeches or statements by attorneys. On the other hand, it seems pretty implausible that a blogger would devote thousands of hours to making passionate arguments for political/economic positions that they do not hold, without being paid for doing so. Why would they do that?

I’ve noticed that some commenters (often conservatives) cannot accept that I actually favor the policies that I say I favor. If I say I favor eliminating residential zoning rules, they are incredulous. They say something to the effect; “You live in Mission Viejo, so obviously you must support anti-apartment zoning laws.” If tomorrow I moved into a high-rise luxury condo, they’d say “Obviously you must now support anti-single family zoning rules.” They cannot conceive that one might have a principled objection to inefficient government regulations that slow economic growth and reduce aggregate welfare. A belief that the market should determine the allocation of resources. A belief that goes beyond crude self-interest.

Similarly, if I say I favor vastly increased immigration, they are incredulous. Surely I must understand (in their view) that such and such an ethnic group is inferior. I must be too politically correct to admit to this fact.

Another group (often progressives) accepts that I really do hold neoliberal policy views, but refuse to accept my stated (utilitarian) motives. “Surely you must be lying when you claim to believe that a higher minimum wage would actually hurt the poor. Surely you don’t believe that eliminating taxes on capital income or inheritance would help working class Americans.” They think I have some other unstated (selfish) motive. And yet not only do I believe these things, I can assure you that there are many serious academic studies that make the same sort of claims.

These cynical commenters on both the left and the right believe that they are reducing my status, but their attacks boomerang. The conservatives who insist that I must be hiding the fact that I am a selfish bigot, are actually revealing their own selfishness, their own bigotry. They are like the punk who gets caught shoplifting and then tells people that “everyone does it”. They can’t imagine other people having a different value system from their own. I’d favor eliminating residential zoning even if it reduced my property value. (It wouldn’t—indeed my house would be far more valuable in a dense city like LA.)

My policy views do not reflect my self-interest. I favor reducing Social Security and Medicare even though I’m about to turn 65. I favor switching from an income to a consumption tax even though I’ll soon retire. And it’s not just me; it’s obvious to me that the vast majority of the bloggers I read do sincerely believe the things they write.

I recall a few years back someone suggested that Bryan Caplan didn’t truly favor open borders. Imagine going through life with so little understanding of one’s fellow human beings. So little imagination. An inability to put oneself into another person’s shoes.

When people question my motives for supporting neoliberalism, they are revealing their ignorance of economics, a field that’s full of counterintuitive ideas. Common sense suggests that the person who pays the tax bears the burden, but that’s not always true. Common sense suggests that price gouging hurts consumers, but that’s not true. Common sense suggests that imports hurt an economy, but that’s not true. Common sense suggests that mandating higher benefits for Uber drivers helps Uber drivers, but that’s not true. Common sense suggests than banning fees for using ATMs will help bank customers, but that’s not true. I could go on and on.

So before you conservatives question my beliefs and before you progressives question my motives, take a deep breath. You might be revealing something about yourself that is better left hidden.

Trump’s happy for Laura

Here’s the WaPo:

Laura Loomer, a right-wing activist known for headline-grabbing stunts after getting kicked off social media platforms, won a Florida GOP primary on Tuesday — and then was quickly congratulated by her district’s most famous official resident.

President Trump, whose Mar-a-Lago estate is in Loomer’s district, retweeted at least four posts about her win and tweeted himself, “Great going Laura. You have a great chance against a Pelosi puppet!”

Trump’s public support for a candidate who once called herself a #ProudIslamophobe, has called Muslims “savages,” and has contributed to conspiracy theory site Infowars drew quick backlash from critics.

And here’s a few of her tweets:

HT: Sam Bowman

(Feel free to put your irrelevant “whataboutisms” into the comment section, where I can ignore them.)

NIMBYs take over the GOP

Christian Britschgi directed me to an August 2018 WSJ article, describing HUD secretary Ben Carson’s views on housing deregulation:

“I want to encourage the development of mixed-income multifamily dwellings all over the place,” Mr. Carson said. He hopes to have a new rule in place by the fall.

The secretary pointed to Los Angeles as an example of how zoning rules stymie housing development. He said a large majority of the city’s parcels of land are eligible only for single-family home development, not larger projects that could house more people and help moderate price growth. “Of course you’re going to have skyrocketing prices that no one can afford,” he said.

Now we are in an election year, and the GOP wants to win votes by promising that affluent suburbanites won’t be faced with “those people” moving into their neighborhoods. The WSJ has a new editorial, penned by Ben Carson and Donald J. Trump:

The crime and chaos in Democrat-run cities have gotten so bad that liberals are even getting out of Manhattan’s Upper West Side. Rather than rethink their destructive policies, the left wants to make sure there is no escape. The plan is to remake the suburbs in their image so they resemble the dysfunctional cities they now govern. As usual, anyone who dares tell the truth about what the left is doing is smeared as a racist.

We won’t allow this to happen. That’s why we stopped the last administration’s radical social-engineering project that would have transformed the suburbs from the top down. We reversed an Obama-Biden regulation that would have empowered the Department of Housing and Urban Development to abolish single-family zoning, compel the construction of high-density “stack and pack” apartment buildings in residential neighborhoods, and forcibly transform neighborhoods across America so they look and feel the way far-left ideologues and technocratic bureaucrats think they should.


1. Jack Kemp is rolling over in his grave. His inclusive vision for the GOP is officially dead.

2. Ben Carson must really want to keep his job. This is more like a hostage letter than an editorial.

3. The argument that Trump is a “deregulation” president has become a joke. Yes, he’s made it easier for energy companies to poison our rivers and air, but in the really important areas like housing, trade, and immigration he’s made regulations even worse. If there’s an argument for Trumponomics, it’s certainly not deregulation.

PS. I do enjoy when Trump admits the truth about MAGA:

The crime and chaos in Democrat-run cities have gotten so bad . . .

Almost all of America’s cities are run by Democrats, so Trump’s saying that much of America has become full of worsening crime and chaos. At least we won’t have live through tiresome claims that Trump has Made America Great Again.