Noah Smith recently argued that it’s too soon to declare success in the Fed’s anti-inflation policy. I agree. But I disagree with this part of his post:

Jason Furman, an economist I respect a lot, is worried nevertheless. He wrote a recent article at Project Syndicate entitled “America’s wage price persistence must be stopped”. He argues that even if wages are failing to keep pace with consumer prices, the fact that workers are getting raises is still exerting some amount of upward pressure on prices, and therefore the Fed must keep raising rates until wages stop growing.

But I am not convinced. Above and beyond the econometric evidence that wages are not a big contributor to modern inflations, focusing on curbing wage growth seems to misunderstand why inflation is bad in the first place.

Falling real wages are the main reason people are upset about inflation in the first place — since their pay can’t keep up with consumer price hikes, they’re seeing their purchasing power erode. We want to see real wages rise, not fall. If the Fed targets wages when setting interest rate policy, there’s the possibility that they’ll go too far — that they’ll keep pushing wages down even after consumer prices have already been tamed.

Instead, I think the prudent policy is to simply target consumer prices themselves, without thinking about wages.

I agree with Furman that wage grow must slow, but I’d frame the argument slightly differently. The Fed has a dual mandate to control inflation and employment. As a practical matter, that means allowing some variation in inflation, particularly during periods of supply shocks. Focus on stabilizing demand side inflation.

Oddly, it turns out that wages are probably a better indicator of demand-side inflation than is inflation itself. Thus if wages are growing at 6%, that’s a pretty good indication that monetary policy has been too expansionary (with the qualification that wages are sticky and can be slow to adjust when demand slows.) And that’s true even if there were no causal impact of wages on prices.

Smith says that the public cares about inflation because they perceive it impacting their real wages. It’s true that this is why the public cares about inflation, but it’s a lousy reason. The claim that inflation directly reduces living standards is actually only true for supply-side inflation. When aggregate demand shifts to the right, real output (and hence real national income) actually rises in the short run. When people complain about inflation, they are assuming that the phenomenon is unrelated to changes in their own nominal income. They are (mostly) complaining about supply shocks.

Fortunately, the Fed doesn’t target inflation for the reason the public worries about inflation, rather they have two other motivations for trying to achieve low and stable inflation:

1. To reduce the welfare cost of inflation.

2. To reduce the amount of macroeconomic instability.

Both of those goals are better achieved with a low and stable rate of nominal wage growth than with a low and stable rate of inflation. This is related to the argument for NGDP targeting—stable wage inflation is likely to produce a more stable path of NGDP than is stable price inflation.

The public is hopelessly confused on this issue, because they don’t understand the distinction between supply and demand driven inflation. The Fed controls demand-side inflation, and the public was certainly not pleased when the Fed suddenly reduced inflation to zero in 2009. We had a severe recession.

The type of inflation that severely pinches living standards (mostly food and energy inflation caused by supply reductions) is exactly the type of inflation the Fed can’t do much about. If we actually tried to please the public and completely end inflation, we’d be back in the 2009 economy. And then they’d be angry about unemployment.

Get nominal wage growth down to 3% or 3.5% and call it a day. Inflation won’t be exactly 2%, but it’ll be close enough.

PS. Smith linked to this amusing Joe Weisenthal tweet:

Don’t you love it when the fact checkers are even further from the “truth” than the people they criticize? I don’t know how many times I’ve seen fact checkers label something false that was actually true. Somewhere, Richard Rorty must be smiling. There is no concept more widely misunderstood by human beings than “truth”.

And when is Elon Musk going to buy Twitter and stop this nonsense?

PPS. Which person on the internet would you most trust to adjudicate a disputed truth claim? I think Smith and Furman are both pretty good on that score—but only when they agree with me.

🙂

. . . Trump is playing 4-D chess.

I see some puzzlement in the media as to why Trump keeps endorsing such lousy candidates.

After losing the 2020 election, Trump immediately began planning his comeback (as I predicted.) The first step was to assure that the Dems took the Senate. Trump intervened in the two runoff races in Georgia, and at a minimum this cost Purdue his seat. With the Dems in total control of Congress and the Presidency, Biden soon became unpopular.

Now Trump’s trying to insure that the Dems hold at least the Senate in this fall’s midterms. Needless to say that is not an easy task, especially given all of the problems we face. But FiveThirtyEight claims the Dems are favored in the Senate. That’s an astounding indication of Trump’s ability to disrupt the natural course of events with some truly horrific endorsements. (Normally, the GOP would easily take the Senate in 2022.)

Politics is like a pendulum. When one party gets control of everything, it gives the out of power party the advantage in presidential races. The last thing Trump wants is a GOP Congress passing national abortion bans that get vetoed by Biden in the summer of 2024. That would force Trump to either come out as pro-choice (which he OBVIOUSLY is), or else take a public stand that would give swing voters a reason to vote for Biden.

Trump is an idiot, but he understands politics better than lots of very smart pundits. There’s a method to his madness.

PS. Trump probably intended for this FBI raid to occur, as it will help him politically. If he didn’t want the raid, he would have turned over the documents voluntarily. Don’t underestimate Trump, he’s not playing checkers.

Eighteen months after leaving office, I don’t recall continuing to see 3 or 4 Gerald Ford stories a day in the media. But Trump is not a Ford-like mediocrity, he’s special. The news media is now like one of those TV black comedies (say Better Call Saul), except it’s real life:

An apparel company known for inflammatory apparel championing the Second Amendment and Donald Trump has been fined after the Federal Trade Commission found the company falsely claimed its imported apparel is made in the U.S.

Utah-based Lions Not Sheep and its owner, SeanWhalen, were slapped with a $211,335 fine last week after the FTC found the company removed “Made in China” tags, replacing them with fake “Made in the USA” labels, according to a FTC news release.

Or how about this:

President Donald Trump once told a top adviser that he wanted “totally loyal” generals like the ones who had served Adolf Hitler — unaware that some of Hitler’s generals had tried to assassinate the Nazi leader several times, according to a new book about the Trump presidency.

Trump complained to John Kelly, then his chief of staff and a retired Marine Corps general, “why can’t you be like the German generals?” according to “The Divider: Trump in the White House, 2017-2021” by journalists Peter Baker and Susan Glasser.

When Kelly asked which generals he meant, Trump replied: “The German generals in World War II.”

It’s absurd when people compare Trump to Hitler. The German Führer had much more loyal generals.

Or how about this:

Trump had been bothered by a picture he saw of the teenaged children of Kleefisch and state Supreme Court Justice Brian Hagedorn attending prom together, the Milwaukee Journal Sentinel reported. Hagedorn is a conservative who sided with the court’s liberals on various 2020 election-related cases.

So let me get this straight. Trump hates the former Republican lieutenant governor because her children once went to a prom with the children of a conservative judge who failed to rule his way on an election case? I always knew Trumpism was a personality cult, but this is a North Korean level of paranoia.

And this:

“Here’s some reporting from the book’s later years — White House residence staff periodically found papers had clogged a toilet, leaving staff believing Trump had flushed material he’d ripped into pieces.”

And this from the Donald himself:

After all these years, Trump has now come around to my view. When the Donald and I look at America, we see exactly the same thing:

When even the toilets are all clogged up, then you know you are not in a first world country.

I look forward to 6 1/2 more years of this reality TV show.

PS. So I see that lots of Republicans now wish to defund the (federal) police. But they wish to do so for totally different reasons from those of the left. The left wants to defund the police because the police abuse people in the left political coalition. In contrast, the right wants to defund the police because the police abuse people in the right political coalition.

China gets a lot of criticism for its bullying of other countries. But in many ways, the US is even worse. China tends to bully by threatening to do less trade when foreigners say things they don’t like. Everyone from Australian government to the NBA has been on the receiving end of Chinese government threats. But in the end, it’s possible to ignore those threats. Australians continue to criticize China. NBA players still have the freedom to criticize China (if they are willing to give up a bit of money.)

The US bullying is even worse. The US basically demands that other countries do what we say. Here’s a recent example:

Washington, D.C. — The Commodity Futures Trading Commission’s Division of Market Oversight (DMO) today announced it is withdrawing CFTC Letter No. 14-130 effective immediately. When DMO issued the letter on October 29, 2014, it took a no-action position with respect to the operation of a not-for-profit market for certain event contracts and the offering of such contracts to U.S. persons by Victoria University of Wellington, New Zealand without registration as a designated contract market, foreign board of trade, or swap execution facility, and without registration of its operators. [See CFTC Press Release No. 7047-14]

DMO has determined that Victoria University has not operated its market in compliance with the terms of the letter and as a result has withdrawn it. As stated in the withdrawal letter issued today, to the extent that Victoria University is operating any contract market in a manner consistent with each of the terms and conditions provided in CFTC Letter 14-130, all related and remaining listed contracts and positions comprising all associated open interest in such market should be closed out and/or liquidated no later than 11:59 p.m. (EDT) on February 15, 2023. [See CFTC Letter No. 22-08]          

Prediction markets are one of the few useful innovations to come out of the financial industry in recent years. We need many more of them. (Rajiv Sethi has a good post on this.)

It would be a terrible mistake for the US government to shut down a US firm operating prediction markets. Demanding that a New Zealand market cease operation is even worse. What right do we have to tell the Kiwis how to run their economy?

The US routinely forces foreign governments to bend to our will by threatening to shut them out of the global banking system. As bad as China’s bullying is (and it’s very bad), the Chinese have nowhere near this much power. I cannot even imagine the CCP demanding that New Zealand shut down this market.

PS. The FT has a good article explaining how fools in Washington and Beijing are blundering toward what could end up being a catastrophic war.

PPS. And then there’s Russia, which is a far worse bully than either China or the US. The world seems determined to replay the first half of the 20th century. Remember a decade ago when all sort of so-called intellectuals were complaining about globalization? Welcome to the world of nationalism.

There’s some recent speculation that the new British leader might opt for NGDP targeting:

Andrew Bailey would be told to abandon the Bank of England’s 2pc inflation target under a radical plan to reform its mandate and boost the economy.

Mr Bailey, the Bank’s Governor, may be ordered to target nominal GDP in future – the size of the economy in cash terms – instead of seeking to keep inflation at 2pc, under plans being floated by allies of the Tory leadership frontrunner Liz Truss.

That might be good news, but as always the devil is in the details. I’ve always said that 90% of the benefit of shifting to NGDPLT comes from the level targeting part of the policy regime, and 10% comes from the NGDP part. Thus it is essential, and I mean essential, that any NGDP targeting regime involve level targeting.

For instance, NGDP growth rate targeting might not have prevented the Great Recession, whereas NGDPLT would have turned the Great Recession into (at most) a brief and very mild recession. Level targeting is that important.

If anyone listening out there has the ear of the new UK government, I implore you to emphasize the importance of the level targeting part of the NGDPLT regime.

Nonetheless, even a move to NGDP growth rate targeting could be considered good news, if it means were are gradually moving toward the ultimate goal of NGDPLT.