Archive for May 2022

 
 

Beckworth and Ireland on NGDPLT

David Beckworth’s recent interview of Peter Ireland is one of his very best podcasts—highly recommended. In this excerpt, Ireland is discussing how a policy of NGDPLT would have done better in 2021:

Ireland: You just draw a target path for the level of nominal GDP, and you base the target path in the fourth quarter of 2019. What you see is that throughout 2020, and even on into early 2021, the economy was still in a big hole.

Ireland: So you could say, wow, compared to a Taylor rule, which is focused on growth rates, even though we’re having inflation that’s above 2%, that’s just putting us back to where everybody thought they would be when implicit or explicit nominal contracts were signed, when decisions were made before the pandemic. But with that kind of target, the nominal GDP goes back to the target path in the fourth quarter of 2021. In that case, what the strategy tells you is you should be all the way back to neutral. The thing is that… I’m willing to forgive some of this, but at a minimum, a consistent strategy like that would’ve dictated an earlier start to normalization. By not making reference to the target path all along, they got caught in a very difficult situation, too, because it became clear then later on in the year that inflation was going to be a problem. But the way the Fed operates, you have to prepare markets, and you have to prepare the political system. Actually, I was worried, late last year, that what they were going to do out of fear of the political system is just hope they could get away with not even talking about anything. They had that thing, we’re not even talking about talking about this. They were-

Beckworth: Right.

Ireland: … going to try and do that until the middle of this year. That would’ve been a total disaster. But the point is that they weren’t set up to make the transition they needed to from extraordinary ease to the beginning of normalization fast enough. They would’ve been able to do it… David, you could have maintained a consistent viewpoint, and I think you did by saying like, look, I’m looking at this target path. My strategy is nominal GDP level targeting, and then you could have said as the year wore on, “well, look, my forecasts were wrong, but my strategy remains in place, and now the strategy dictates an earlier start to lift off. But that’s simply because the economy is doing so much better than I expected, coupled with the fact that the price increases seem more persistent and broad-based than I expected.”

Beckworth: Yeah, I agree with that completely. In fact, mentioning Jason Furman, he actually took my rule that I developed in a paper I did on nominal GDP targeting, and he told me in an interview last year about midway through said, “Well, David, your rule would imply the Fed needs to raise rates right now.” I was a little reluctant to embrace that implication, but he was right. I think part of it also is… for me at least, is I was doing too much looking in the rear view mirror analysis, like, well, nominal GDP still a little bit below, it’s getting close. I think what I suffered from was more… I needed to be more forward looking. What’s the forecast of nominal GDP?

This is what so many pundits miss. Having the correct regime in place makes monetary policy more effective. In 2021, a regime of NGDPLT would have helped in two distinct ways:

1. As Peter Ireland suggests, it would have made it easier to quickly raise rates without spooking the markets with an unexpected change in policy. The Fed could have stated that a stable NGDP is the policy, and rates need to adjust as appropriate to keep NGDP stable.

2. More importantly, even if the Fed were a bit late in raising rates, financial markets would have pushed longer-term rates higher in anticipation of the future Fed rate increases required to stabilize NGDP along a 4% growth path.

In 2021, I naively assumed that the Fed was serious about FAIT, and that it was sort of similar to NGDPLT. Late in the year, the financial markets gradually realized that the Fed was not serious, and hence did not push rates high enough to slow NGDP growth as we approached the trend line.

Some thoughts on inflation

Ramesh Ponnuru offers some advice to the GOP in Bloomberg:

Republicans Can Extend Their Midterm Inflation Advantage

Rising prices will help the GOP in November. Supporting monetary tightening, pursuing smart tariff and regulatory policies and restraining Democratic spending would help even more.

These are good ideas, but Ponnuru is calling on the GOP to repudiate the economic policies favored by Donald Trump, which were easy money as far as the eye can see, recklessly expansionary fiscal stimulus, and dumb tariff polices. Given that the modern GOP is little more than a Donald Trump personality cult, that seems unlikely.

I have another (albeit even more unrealistic) idea, remove the oil export sanctions on Iran:

Iran has capacity to double oil exports if there’s sufficient demand, a top official said, even as a deal on the country’s nuclear program that could pave the way for the lifting of sanctions remain elusive.

Iran will “exert maximum effort to recoup its crude oil market share and revive its customers,” Mohsen Khojastehmehr, managing director of the National Iranian Oil Co., told reporters Saturday in Tehran.

Even by the standards of US foreign policy, allowing oil exports from Russia but not Iran stands out as particularly absurd. Yes, Iran sponsors terrorism. But Russia literally invaded a European country of 40 million people. And Iran is supposed to be the bigger threat? Our sanctions policies (including Europe) have actually helped Putin (and hurt Ukraine) by driving energy prices much higher. In fairness, we have supplied Ukraine with weapons—Trump would have made them dig up some dirt on Hunter Biden before doing so.

You might wonder if my suggestions are consistent with my previous claim that the Fed is 100% responsible for any excess inflation, which is roughly any inflation caused by NGDP growth above 3% or 4%. Think of it this way. For any given NGDP growth rate, reducing supply-side constraints would have the effect of shifting growth toward RGDP and away from inflation.

Alternatively, you can think of supply-side reforms as reducing the Fed’s preferred rate of inflation for 2022. So while the Fed ultimately controls the rate of inflation, supply-side reforms can help at the margin. They can make the Fed target a lower inflation rate.

PS. You might think that I’m being a bit harsh describing the GOP as a Trump personality cult. After all, the GOP still includes moderate people like Elise Stefanik. It’s true that Stefanik was a moderate, and indeed opposed many of Trump’s policies. But that was then. Now, the 3rd ranking member of the GOP House caucus is pretending to be a wild-eyed conspiracy nut to please her voters:

I’m occasionally called a pedophile by commenters, and I always wondered where that specific insult came from. Now I know. It means they think I’m opposed to starving innocent babies.

PPS. So who is actually depriving America’s babies of milk? The usual statist grifters like Trump and Biden, and the various businessmen that who support trade barriers on milk from other countries. Oh, and Elise Stefanik:

In January 2022, following Stefanik’s advocacy, a USMCA dispute settlement panel ruled in favor of the United States that Canada is breaching its commitments under the USMCA by unfairly administering dairy tariff-rate quotas in a way that harms American dairy farmers. 

“New York Farm Bureau appreciates Rep. Stefanik’s outreach on behalf of dairy farmers in her district and across the state.

(Yes, that’s regular milk, but we also have trade barriers on infant formula.)

Rate hikes do not represent “tightening”

Yahoo recently described the views of Fed Governor Christopher Waller and St. Louis Fed president James Bullard:

Fed Governor Christopher Waller and St. Louis Fed Bank President James Bullard argued that critics don’t take enough account of the tightening of financial conditions that the Fed engineered even before it began raising interest rates in March.

“Credible forward guidance means market interest rates have increased substantially in advance of tangible Fed action,” Bullard said in remarks prepared for a conference organized by the Hoover Institution at Stanford University. “This provides another definition of ‘behind the curve,’ and the Fed is not as far behind based on this definition.”

Waller, who was previously head of research at the St. Louis Fed, made a similar point, arguing that a shift in Fed rhetoric led investors in financial markets to start pricing in rate increases in September, leading to a rise in 2-year Treasury yields that he estimated were equivalent to two quarter-point rate increases by the central bank.

I recall Fed officials making the same sort of claims in the 1970s. But higher rates don’t necessarily represent tighter money. Over the past year, higher interest rates partly reflect higher inflation expectations, and perhaps to some extent a stronger economy. The same sort of confusion occurred in the 1970s.

The Fed still has not come to grips with their policy failure—although in fairness, the Fed’s critics also misunderstand the fundamental problem. I see very few people on either side of the debate pointing out that the Fed has abandoned average inflation targeting. That’s the key policy failure, not the delayed rate increase.

Why they hate us, part 2

In a recent post, I argued that the Chinese public has turned against the US. I also suggested that this change in attitude was largely due to our behavior. Many commenters found my claim to be preposterous.

Tyler Cowen recently linked to an NBER study by Haichao FanYichuan HuLixin Tang & Shang-Jin Wei with this abstract:

The US trade war against China in 2018–2019 can either enhance or diminish the US soft power in China, depending on whether it is recognized as legitimate by Chinese citizens. We study how the viewership of US movies—an important element of the US soft power—is affected by the trade war, utilizing variations across Chinese cities in the exposure to the Trump tariffs. We find a significant reduction in US movie revenue in regions more exposed to the Trump tariffs, but no corresponding reduction in the consumption of non-US movies. This is corroborated by a decline in online search for US movies, US tourist destinations, and US branded sports shoes. The aversion to US movies appears to persist at least to 2021. The effect is somewhat milder for more affluent people.

PS. Matt Yglesias directed me to this survey:

That’s far from a majority, but still . . .

No deep state in Trump’s second term

Trump supporters insist that Donald Trump will appoint nothing by but loyalists in his second term, no more “deep state” officials preventing Trump from achieving his desired policies. (But why didn’t Trump do that the first time around?)

Of course the deep state does not actually exist. But in the Trump administration there were normal government officials doing their job. One such example was Mark Esper:

Esper describes an administration completely overtaken by concerns about Trump’s reelection campaign, with every decision tethered to that objective. He writes that he could have resigned, and weighed the idea several times, but that he believed the president was surrounded by so many yes men and people whispering dangerous ideas to him that a loyalist would have been put in Esper’s place. The real act of service, he decided, was staying in his post to ensure that such things did not come to pass.

One such idea emerged from Trump, who was unhappy about the constant flow of drugs across the southern border, during summer 2020. Trump asked Esper at least twice if the military could “shoot missiles into Mexico to destroy the drug labs.”

“They don’t have control of their own country,” Esper recounts Trump saying.

When Esper raised various objections, Trump said that “we could just shoot some Patriot missiles and take out the labs, quietly,” adding that “no one would know it was us.” Trump said he would just say that the United States had not conducted the strike, Esper recounts, writing that he would have thought it was a joke had he not been staring Trump in the face.

There are several more such examples. Read the whole thing.

PS. People claimed I was engaging in hyperbole when I suggested that Trump had the mentality of a 4th grader. But the Patriot missile example Esper cites is exactly the sort of thinking you’d expect from a 4th grader.

PPS. One silver lining about living in a banana republic is that politics becomes a continual source of amusement:

Supreme Court justice Clarence Thomas warned that the Court can’t be “bullied” in comments at a judicial conference in Atlanta on Friday.

“We are becoming addicted to wanting particular outcomes, not living with the outcomes we don’t like,” Thomas said, according to Reuters.

This from a man whose wife was part of the vast right wing conspiracy to overturn the 2020 elections, because she didn’t like the outcome. A man who failed to recuse himself from a case that involved his wife.