Archive for September 2021


Trevor Chow on machetes and scalpels

Trevor Chow has a long post that provides one of the best summaries of macroeconomics that I have ever read. Highly recommended. Another great post demystifies the money creation process—essential reading for helping people recover from MMT.

Here I’d like to respond to a different Chow post, however, one that looks at the following question:

Can monetary policy control the path of nominal GDP? I have no idea anymore and am wildly confused, so this is an attempt to tell a few just-so stories and see how they land.

Disclaimer: This is wildly wildly wildly speculative, especially story E.

Chow presents 5 options, one of which expresses my preferred view:

Story C

1. The Fed is the monopoly supplier of base money

2.The value of base money is defined as its the purchasing power/exchange rate

3. The Fed can set the value of base money in terms of assets i.e. 1/price of assets

4. The Fed can set the price of assets

5. NGDP depends on the price of assets

6. The Fed can set nGDP

This is a Market Monetarist story and it adds some details to the Old Monetarist hot potato story. Empirically, the entire literature on the Quantity Theory (think McCandless and Weber etc.) suggests that central banks can control nominal quantities.

Then Chow challenges the theory:

But Trevor, central banks don’t actually do this. I have no doubt that if a central bank went about buying everything it could get its hands on by printing money, their prices would get bid up. But the fact that a massive increase in base money would raise nominal quantities does not mean central banks can control nGDP on a meaningful level under its ordinary practices. The ability to wield a machete is no evidence that one can utilise a scalpel.

This is a question I frequently get asked, and I have two related responses:

1. Massive increases in the monetary base (Japan, Switzerland, etc.) are not policies I am trying to get enacted; rather they are policies that I am trying to avoid. The thought experiment about a “whatever it takes” approach to money creation is aimed at convincing skeptics that monetary policy is capable of raising nominal aggregates as high as you like. I hope and believe that my preferred policy would result in less base money creation than actual real world central banks have generated in developed countries.

My claim confuses people because they assume that if we’ve done X% money creation and fallen short of our nominal targets, then we’d have to do more than an X% increase to hit the target. Actually, the demand for base money as a share of GDP is inversely related to the trend rate of NGDP growth. A commitment to do whatever it takes to achieve higher NGDP growth rates actually allows us to do less than otherwise, if credible.

2. Chow would probably say he understands all of that, but still is concerned about the machete/scalpel issue. How do we calibrate the whatever it takes approach? How do we avoid overshooting? How do we make policy a scalpel, not a machete?

The key is to target a variable that responds in real time to monetary policy. That might be an asset price. For instance, the Singapore central bank targets exchange rates. They set the exchange rate at the level expected to lead to macroeconomic equilibrium. No one worries about a zero lower bound for exchange rates. In a perfect world, I’d have the Fed target NGDP futures prices.

In the imperfect world that we live in, I’d have the Fed target its internal forecast of NGDP or the price level, and then construct a real time internal forecast that is a weighted average of asset market prices and model-based forecasts. And that’s roughly what the Fed actually does, at least when policy isn’t hamstrung by an unwillingness to do “whatever it takes”. Fed VP Richard Clarida recently stated that his forecasts combine market and non-market forecasts:

Market- and survey-based estimates of expected inflation are correlated, but, again, when there is divergence between the two, I place at least as much weight on the survey evidence as on the market-derived estimates.

Thus imagine a forecast that is 50% TIPS spreads and 50% model-based inflation forecasts. That hybrid forecast will respond in real time to changes in monetary policy. Do whatever it takes to keep that forecast on target.

PS. If you are having trouble understanding how the Bank of Japan can achieve much higher inflation, it helps to use the following two questions to pinpoint where your skepticism lies:

  1. Do you believe the Bank of Japan would be unable to peg the yen at 1000yen/US$, as compared to the current 110 rate?
  2. Or do you believe that an exchange rate of 1000 yen to the dollar would fail to create lots of inflation?

And if central banks are unable to peg nominal exchange rates, then how did Bretton Woods work?

PPS. Actually, the machete/scalpel issue is a much bigger problem for fiscal policy, which comes in huge discrete chunks despite wide disagreement as to the size (or stability) of the fiscal multiplier.

HT: Basil Halperin


Clarida, Richard.  “Models, Markets, and Monetary Policy.”  In Strategies for Monetary Policy.  Edited by John Cochrane and John Taylor.  2020.  Hoover Institute Press.

The Claremont Institute

More and more often I have trouble distinguishing between actual news articles and parodies of political extremists. Here’s an actual article discussing the head of the Claremont Institute:

For conservatives to win this regime contest, Klingenstein noted, they cannot just fight in the political arena.

Instead, they will have to engage in areas of culturalism, which he said is not a Republican strong suit.

“It contradicts their ruling philosophy,” he said. “They’re heavily influenced by the libertarians who say, ‘Look, how you live is not my business. Whether you go to church or what you learn, you just live your way, but let me live my way.'”

Of the current leaders in the GOP, Klingenstein pointed out a few who might lead conservatives in the cultural theatre of war.

Sens. Josh Hawley, a Missouri Republican, and Tom Cotton, an Arkansas Republican, were labeled as “moving in the direction” of understanding this is a culture war. . . .

If the Republican primary were next month, he would go for former President Donald Trump, he said.

So the problem is those evil libertarians who believe you should be able to live the way you wish. My first reaction was “What the hell happened to the Claremont Institute?” So I googled Claremont Institute, and the second link was an article entitled “What the Hell Happened to the Claremont Institute?” It’s full of nuggets like this one:

Eastman, who had reportedly spent the day before in the Oval Office arguing to Vice President Mike Pence that he had authority to intervene in the counting of the Electoral College vote, ended with an impassioned plea for Pence to allow state legislators to look into these matters, so that “we get to the bottom of it, and the American people know whether we have control of the direction of our government or not.” Eastman became very animated, pumping his fists and yelling:

“We no longer live in a self-governing republic if we can’t get the answer to this question! This is bigger than President Trump! It is the very essence of our republican form of government, and it has to be done! And anybody that is not willing to stand up to do it does not deserve to be in the office! It is that simple!”

He’s on the Claremont Institute board of directors. And this:

In 2019, Claremont welcomed as a Lincoln Fellow the conspiracist and “king of fake news” Jack Michael Posobiec III. Posobiec, already well known as a promoter of the Pizzagate hoax and the Seth Rich conspiracy theory, was then working as a correspondent and host for the One America News Network (OANN), which became one of the major promoters of false claims about the 2020 election. 

And this:

And among the latest crop of Lincoln Fellows is Charlie Kirk, the founder of the right-wing youth-mobilizing group Turning Point USA. Kirk bragged about sending “80+ buses full of patriots to DC to fight” for Trump on January 6. After his slimy “Falkirk Center,” co-founded with Jerry Falwell Jr., imploded, Kirk was ousted from Liberty University. The Claremont Institute has welcomed him with open arms.

And this:

Ellmers’s essay—topped by a stock-art photo of a boxer wrapping his hands for a fight—begins by characterizing his enemy, which, it turns out, consists of the majority of the country: “Most people living in the United States today—certainly more than half—are not Americans in any meaningful sense of the term.” The people he has in mind are the ones who voted for Joe Biden (“the senile figurehead of a party that stands for mob violence, ruthless censorship, and racial grievances, not to mention bureaucratic despotism”). The real and “authentic” Americans are, “by and large,” the 74 million people who voted for Trump—“the vast numbers of heartland voters who still call themselves Americans.”

In the past, Claremont’s programs produced first rate intellectuals like Ross Douthat. This is just sad.

And there’s lots more—read the whole thing.

PS. Here’s the guy that Claremont thinks embodies the wisdom of our founding fathers, reacting to death threats against GOP officials who told the truth about the election:

In the wake of the January 2 phone call, Raffensperger said his wife had received death threats.

Sources told The Daily Beast that Trump was briefed several times about the threats but was unmoved and even made light of it.

“There was this one time I heard [Trump] suggest they might be exaggerating the kind of threats they were getting,” a former senior administration official told the outlet. “But more often, he’d make fun of them and say they were bad people who were getting what they deserved.”

Another person close to Trump told The Daily Beast that Trump had said that if the officials wanted the threats to end, they simply had to grant him his wish.

Trump also heaped praise on those making the threats, calling them “my people,” the source told The Daily Beast.

As I keep saying, Trump has no good qualities. Cruel, cowardly, stupid, dishonest, selfish, corrupt—the list goes on and on.

Jailers and inmates

This is weird at first glance, and even weirder when you start to think about it:

In California’s state prisons, a federal judge could order all correctional employees and inmate firefighters to be vaccinated under a class-action lawsuit. In mid-July, 41% of correctional officers statewide had at least one dose of a vaccine, compared to 75% of inmates. 

I’m racking my brain for an explanation of this gap. Perhaps corrections officers are less educated than average, and vaccination rates are lower among that group. But are inmates well educated? Being a corrections officer is a dangerous job, and I’d guess that they are more macho than the average person. But are inmates just a bunch of “sissies”? People increasingly argue that getting vaccinated is a socially conscious act, as it protects others from Covid. OK, but are inmates especially socially conscious?


The global war on sissies

Here’s Brazil’s president:

One day after announcing he had tested positive for coronavirus Jair Bolsonaro has come under fire for allegedly using homophobic language to mock the use of face masks.

The Folha de São Paulo, a leading broadsheet, claimed Brazil’s far-right leader had baited presidential staff who were using protective masks, claiming such equipment was “coisa de viado” (a homophobic slur that roughly translates as “for fairies”).

And here’s modern China:

The Chinese government banned what it called “sissy men” from television Thursday and directed broadcasters to serve the people of China with “revolutionary culture.”

The change to eliminate what China calls effeminate men from the national spotlight comes as President Xi Jinping leads a government campaign to tighten control over society at large in China and reinforce official views on morality.

And here’s what’s going on in Russia:

One group that has been organising such bullying campaigns is Male State, which describes its ideology as “national patriarchy”. It was founded by Vladislav Pozdnyakov, a bodybuilder, in 2016. In 2018 he was convicted on a charge of inciting hatred of women; his group had harassed many of them individually. A year later Mr Pozdnyakov fled to Poland.

Exile, however, has not stopped him from revving up his angry male fans. Male State says it opposes Russia’s current leaders for being too pro-women.

And back in the USA:

Fox’s Tucker Carlson, the most important nationalist voice in America, seemed to sympathize with the gender politics of Taliban-supporting Afghans. “They don’t hate their own masculinity,” he said shortly after the fall of Kabul. “They don’t think it’s toxic. They like the patriarchy. Some of their women like it too. So now they’re getting it all back. So maybe it’s possible that we failed in Afghanistan because the entire neoliberal program is grotesque.” (By “neoliberalism” he seems to mean social liberalism, not austerity economics.) . . .

“We’ve come across a lot of content that’s U.S.-based extreme far-right websites saying how good the Taliban victory is, and why it’s good for their cause,” said Adam Hadley, director of Tech Against Terrorism, a U.N.-supported project that monitors extremists online. One neo-Nazi website, which I won’t link to, has a tract hailing the Taliban victory in part for showing that a small band of armed fundamentalists can defeat the American empire.

As for the rest of the pro-Taliban right, the Proud Boys and incels and MAGA splinter factions, some of them are probably just trolling. But as groups like QAnon and the civil war-hungry Boogaloo Bois show, a movement can seem absurd and still be a source of real radicalization. 

Rational centrists >>>> woke people >>>> pro-Taliban right


My new book (entitled The Money Illusion) can now be ordered online. My intended audience for the book is mostly younger people that are studying macroeconomics. While I welcome older readers, for a couple of reasons many of them won’t be persuaded by my arguments:

First, I don’t fit neatly into any of the tribes out there. Right-wingers won’t like the fact that I blame the Great Recession on tight money policies of the sort advocated by conservatives. Progressives won’t like the fact that I blame the Great Recession on government policy (the Fed), not the “inherent instability of capitalism”. They won’t like my dismissal of fiscal policy, or my claim that unemployment compensation boosts unemployment. I didn’t write this book to win friends.

A second problem is that my views are pretty contrarian. I reject the conventional way of looking at monetary policy, which focuses on central bank control of interest rates. Instead, I argue that what really matters is central bank policies that influence the supply and demand for base money. I deny the existence of asset price bubbles.

So I’m looking to convince people who haven’t yet adopted a tribe, who still have an open mind about how the world works. Those are often younger people.

George Selgin wrote a nice review of the book for Barron’s. At one point he noted that I hadn’t given much attention to the case for NGDP targeting:

The Money Illusion is more than a restatement of the tenets of Market Monetarism because it also looks at sundry other monetary economics topics, albeit always from Sumner’s distinct point of view, and because it includes Sumner’s account of his own intellectual journey. But by pursuing these other agendas, it sacrifices the advantage of a narrower scope, and correspondingly sharper focus. The case for NGDP targeting is among the casualties of this approach: Arguments for it may be the warp of the book. But too often they disappear behind its weft. 

While I do make a forceful case for NGDP targeting, that’s certainly not the main focus of the book, and not the focus of what I’ve been doing for the past 13 years. So what has been my focus? On policy questions I’ve emphasized three points:

1. Level targeting of a nominal aggregate. Commit to return to the previous trend line after a nominal shock.

2. Target the market forecast. Set policy at a position where the market expects success.

3. A “whatever it takes” monetary policy. The central bank should do as much as necessary to hit its target, and should not rely on fiscal stimulus. Failure is not an acceptable outcome.

To me, these are the core ideas of market monetarism.

Another theme of my blogging has been “never reason from a price change”. Interest rates do not tell us anything about the stance of monetary policy. This is also a monetarist idea.

Obviously there’s much more in the book. I tried to write the sort of book that I would have enjoyed reading at age 20. I hope you enjoy it and I welcome your feedback.

PS. Over at Econlog I have some additional thoughts on the book.

PPS. I originally intended to write the book using the breezy informal style of my blog posts, but was strongly dissuaded by reviewers. (I kept one page of that style as an example for readers that never saw my blogging.) Chapter 1 was originally entitled “The Autistic Economist”—you can image how that went over in this woke era! On a serious note, I do thank a number of reviewers for making the book better, for preventing me from repeatedly embarrassing myself.

PPPS. I have a Mercatus working paper coming out this fall that presents economists like Paul Krugman and Ben Bernanke in a more favorable light than this book. There’s no direct contradiction, just a focus on the positive contributions in my new working paper.