Archive for September 2022


Time to pay the piper? (part 2)

Over at Econlog, I have a post entitled “Time to pay the piper?“, which looks at the cost of recent monetary policy. That cost actually doesn’t concern me too much, as from the perspective of the consolidated government balance sheet it’s mostly a wash. (That’s not to deny that QE went overboard. In retrospect, policy was clearly too stimulative.)

My bigger concern is fiscal policy. While I failed to correctly predict the upsurge in inflation, I nonetheless did oppose the Covid fiscal stimulus, albeit for other reasons. Here’s what I said in 2020:

With the seemingly endless stimulus now coming out of Washington, it’s time to revisit the question of whether deficits matter. In recent weeks, I’ve seen lots of pundits say that government spending is virtually costless, as interest rates are close to zero. There are two flaws with this argument.

In other posts I pointed out that if you run up a large national debt at the zero lower bound, then you expose your country to the risk of ballooning financing costs if interest rates rise to more normal levels. I did not actually expect rates to rise as much as they have, but then I didn’t expect the Fed to abandon average inflation targeting and start running highly inflationary monetary policies. And yet even though I didn’t expect much higher interest rates, I did not believe that fiscal stimulus was worth the risk.

When I spoke of “future tax liabilities”, I got a lot of pushback from people suggesting that we would never need to repay our national debt. That’s true in a sense, but very misleading. Even if we never actually repay the debt, it still must be serviced. Because of rising interest rates, we’ll have to pay higher (distortionary) taxes in future years to pay interest on the reckless fiscal stimulus of the Trump/Biden administrations. The UK is facing the same issue.

It was possible to view the fiscal stimulus during the Great Recession as a one time thing. We usually don’t have recessions that large. But then Covid comes along and we get a far bigger stimulus. Again, we are told it’s a one time thing. Then a massive bailout of student loans, and a promise we’ll never, ever do anything like that again. UK taxpayers are being told they must now bail out energy consumers, And today we’re told that hurricane Ian will be the most costly ever. Doesn’t it seem like governments are more and more willing to write massive checks whenever people are even slightly inconvenienced? If so, is it any surprise that markets are pricing in higher real interest rates going forward? Our deficit projections are unreliable.

PS. I’ve been asked about the recent market turmoil in the UK, but I don’t have any good answers. The rise in the UK’s real interest rate may partly reflect the recent stimulus announcement. But as many have pointed out, that would normally lead to currency appreciation. Furthermore, real rates have risen sharply in the US, so it seems that global factors are also a factor.

Market indicators continue to show very little default risk for UK public debt, so that doesn’t seem to be the issue. A more plausible risk is the BoE being pressured to monetize the debt. But inflation spreads did not rise during the period when the pound plunged. And the pound seemed to rally on monetary stimulus. So I’m at a loss to explain the situation.

I had a very negative view of Boris Johnson, who promoted a foolish Brexit policy and ran large budget deficits. But while Brexit tended to depreciate the pound, that factor was already priced in before the recent market turmoil. I’ll take a wait and see attitude on Truss, who seems likely to continue the UK’s overly expansionary fiscal policy. To her credit, she does have a number of excellent pro-growth policy initiatives in areas such as housing, investment, and immigration. Let’s see what she is actually able to deliver.

There’s that f-word again

I get a lot of pushback from commenters suggesting that I don’t know anything about fascism. That may be true, but Timothy Snyder is one of the world’s leading experts on the subject and he also views Putin as fascist. Now Timothy Garton Ash says the same thing.

The two Timothys understand that in the past the term “fascist” has been overused (as has “communist”). Here’s Ash:

For many years I shared the reluctance of other scholars and analysts to use the word fascism in the present tense. A polymorphous phenomenon even in its heyday in the 1930s, fascism subsequently suffered from an excess of definition. To cry “fascist!” suggested a lazy equation with Adolf Hitler, total war and the Holocaust. The far left further devalued the term by hurling it around to denounce everyone from capitalist bosses to mildly disciplinarian schoolteachers.


There is, however, a serious contender for this label: Vladimir Putin’s Russia. So many of the historical features of fascism can be found there. The state-organised cult of a single leader. The cultivation of a deep sense of historical resentment. Indoctrination of youth and demonisation of the enemy. The propaganda of the big lie — in Putin’s case, that Ukrainians are fascists. An ideology of domination by one Volk over others: for Putin, Ukrainians don’t really exist, they are just a variant of Russians. An aesthetic of martial machismo and heroic slaughter — recall the Russian president’s praise of the brigade responsible for the atrocities in Bucha. Above all, the practice of fierce repression at home and genocidal violence abroad.

People tell me that Putin is not the same as Hitler. Well, yeah. Or he’s not the same as Franco. Yes, he’s more fascist than Franco.

Dornbusch overshooting in Japan

In Rudi Dornbusch’s exchange rate model, a tight money policy causes a currency to appreciate sharply, overshooting its long run equilibrium value. From that point on, it is expected to gradually depreciate over time.

Recent trends in the dollar/yen exchange rate provide an almost textbook example of Dornbusch overshooting. This graph is from Bloomberg:

The 10-year nominal bond yield differential is even more striking, more than 300 basis points. Because of the interest parity condition, that means the yen is expected to appreciate by more than 3%/year over the next decade. And because monetary policy has little effect on the long run expected real exchange rate, a tight money policy in the US that causes higher interest rates must force the spot dollar much higher, so that it can be expected to fall back to something closer to its long run equilibrium over time.

Note that “never reason from a price change” still applies. If a country sees its interest rates rising merely due to higher inflation expectations (not tight money), then there is no reason for its currency to appreciate in the spot market. For example, look at countries like Turkey and Argentina. This is presumably why the FT graph shows the real interest rate differential.

A more timely example might be the UK, where rising bond yields triggered by an announced tax cut (seen as recklessly expansionary) were associated with a depreciating pound. I’m often critical of the “fiscal theory of the price level” (in the US context), but the recent market reactions to Truss’s policy initiative do match that model.

Bloomberg also reports that the Japanese government is trying to prevent yen appreciation. depreciation:

Japan intervened to prop up the yen for the first time since 1998, after its central bank sparked further declines in the currency by sticking with ultra-low interest rates as its global peers hiked.

The yen rose as much as 2.5% against the dollar, pulling back sharply from the lows of the day when it had breached a key psychological level of 145, as top currency official Masato Kanda said Thursday the government was taking “decisive action.”

This seems misguided. Every time that Japan shows any sign of breaking out of the low inflation trap, the Japanese government does something to push the yen higher. What are they afraid of?

PS. A graph showing the nominal interest rate differential and the exchange rate would look quite similar. What would a NeoFisherian make of such a graph?

Feminism and the perils of blogging

The internet doesn’t do nuance.

Early on in my blogging career, I discovered that many people are poor readers. And they tend to misread posts in a very specific way. Let’s say you make a very specific point about X. A reader will note that people who believe X often also believe Y, Z and 100 other things. Thus assume it’s only logical that you must also be advocating Y, Z and a 100 other things.

This sort of mood affiliation reaches comical proportions in my comment section, where Trumpistas assume that because I hate Trump, I must also subscribe to dozens of left wing views that I in fact reject. I am now at peace with that fact and have come to view this as a source of amusement.

Back in 2005, Larry Summers got into hot water for some rather unexceptional statements about the lack of women in science. His critics claimed that Summers had argued that men were superior to women at science, which is not what he claimed. (Even Harvard faculty struggle with nuance.). Based on that misinterpretation, Summers was viewed as hostile to feminism.

Now Bryan Caplan says, “Don’t be a feminist.” Because I believe that Summers was treated unfairly, I am somewhat inclined to support Caplan’s position. And feminists also support lots of other political positions that I oppose.

But in the end I reject the anti-feminist label. And the reason is simple—I look at things from a global perspective. And from a global perspective there is one gender issue of overriding importance in the 21st century—the war against women’s rights by right-wing authoritarian nationalists.

Putin is the most famous example of a misognynist leader, but a backlash against women’s rights is gaining strength in many other places, including China, India and indeed most lower and middle income countries. This is often combined with a cult of masculinity and a contempt for “sissy boys”, trans people, and anyone else who doesn’t fit the traditional mold of gender difference. To be fair, this is much less of an issue in rich countries, but even here you see conservatives trying to ban abortion and mocking gay politicians like Pete Buttigieg. In some European countries it’s even worse.

Contra Caplan, at the global level you very much should identify as a feminist. So perhaps I could say I’m an American anti-feminist and a global feminist? I’d rather just avoid tribal labels entirely.

In recent years, many on the right have been attracted to Putin’s anti-woke rhetoric. One theme is that the nationalist right is masculine and strong, while the woke left is a bunch of sissy boys. But the war in Ukraine upends that framing (just as WWII undercut the American admirers of fascism and the Hitler-Stalin Pact undermined American communists.) The Ukrainian soldiers fighting back against Putin sure don’t look like sissies.

Love him or hate him, Jordon Peterson is generally an extremely effective debater. But the recent Russian setback in Ukraine seems to have put him out of sorts—I don’t ever recall seeing a grouchier intellectual interviewed by a major network. At times his attempt to sound cynical comes across as so over the top as to be almost comical. Judge for yourself. (Tip to Peterson: If you aren’t using your trademark humor, you’re losing.)

In the interview, Peterson starts right off by saying that Putin is nothing like Hitler and Stalin, and then immediately pivots to the claim the there’s more than a bit of Hitler in us all. Well, we do share 99% of DNA with chimps, so . . .

But then how is Putin nothing like Hitler? They both invaded a neighboring country, annexing a portion of that country. Later, they both decided they wanted the entire country. They both invaded multiple European countries. They both wanted to recreate a grand empire. They both headed fascist personality cults. And yet while (according to Peterson) there’s a fair bit of Hitler in all of us, somehow Putin is nothing like Hitler? As for Stalin, he was an authoritarian Russian dictator that massacred lots of Ukrainians in 1933. So again, nothing like Putin.

To his credit, Peterson does not support the Russian invasion. But he sure goes out of his way to make excuses for Russia. Here’s David French in The Atlantic, with two embedded quotes of Peterson:

I want to focus on a specific claim by Peterson—that Russia has not only gone to war to protect itself from what he describes as Western degeneracy, but that our alleged degeneracy robs the West of the moral high ground in the conflict. Here’s a key quote:

“And are we degenerate in a profoundly threatening manner? I think the answer to that may well be yes. The idea that we are ensconced in a culture war has become a rhetorical commonplace. How serious is that war? Is it serious enough to increase the probability that Russia, say, will be motivated to invade and potentially incapacitate Ukraine merely to keep the pathological West out of that country, which is a key part of the historically Russian sphere of influence?”

And what is this degeneracy? Peterson talks about radical gender ideology, the nomination of Ketanji Brown Jackson (yes, really), and her reluctance to define a “woman” during her confirmation hearings. Here’s more Peterson:

“The culture war in the West is real, and culture is losing. And Russia is part of the West. And the culture war is now truly part of why we have a war, and it’s a real war. And it is certainly the case that we do not therefore have all the moral high ground, for some part of the reasons that [political scientist John] Mearsheimer details, and for these reasons of insanity. In fact, how much of it we have at all is something rightly subject to the most serious debate.”

In Putin’s Russia, rape is a minor issue as long as it’s within the family:

In 2018, the government statistics agency recorded a total of 8,300 women killed. That works out at 22 a day. Contrast that with the UK rate of one woman murdered every three days.

Like in Britain, NGOs say the majority of those happened in the home. The official number for domestic violence murders for 2018 was just 253.

Most European countries, especially given a widely reported increase in domestic violence during the pandemic, are toughening their laws. Russia is going the other way.

In 2017 Russia decriminalised first instance domestic battery, meaning anything which doesn’t end up in hospital is classified as an administrative offence. There is no specific category for violence by a relative. The penalty is the same as being punched by a stranger on the street.

Of course rape outside the family is taboo, as for people on the far right there is no worse fate than being a cuckold.

But Peterson thinks the real problem is flaky Westerners having trouble defining the term “woman”.

I would encourage Bryan Caplan to look beyond America, and ask himself whether he wants to be seen (unfairly) as part of the global anti-feminist crusade.

Not a workaholic, but persistent

I retired today.

I’d like to thank the people at Mercatus, which has been by far the best job I ever had. Special thanks to program director David Beckworth, who is doing a great job. Also my program manager Pat Horan and my first manager Ben Klutsey, who were both a big help. And I should thank Tyler Cowen for encouraging me to come to Mercatus, as well as Ken Duda for providing generous funding to support my research on monetary reform. Despite a major setback in late 2021, I believe we are gradually making progress.

I plan to remain active promoting my ideas, and will continue my two blogs. I had hoped to restructure this blog, but that will take more time than I anticipated. I have a new book on monetary policy coming out this fall. The book has already been written and is current going through the editorial process. It will be different from my previous books:

1. It will only be available online.

2. It will be free.

3. It will be published in installments.

4. It will be continually revised over time, a living book.

5. It will be a sort of collaborative effort with my readers. The goal is to get feedback, and respond to that feedback in the book itself. Maybe I’ll let one of you contribute.

Not sure anyone is interested, but a brief reminiscence on my work life:

I’ve worked almost continually from roughly age 13. I had no social life as a teen, so when I was not in prison — err, I mean when I was not in school — I was working. In retrospect, I would have been better off reading books. (I coulda been an intellectual!) I had a newspaper route for 2 1/2 years, and I did a lot of other jobs, including cutting grass, raking leaves and shoveling snow for many of my neighbors. I also helped people move. I painted houses and even one apartment building. A bit of construction too. I graduated from high school a semester early and worked in a canning factory.

All through college I had a work-study job, and the same in grad school. Almost zero financial aid. I am quite jealous when I read about the financial aid that modern PhD students get. I was living below the poverty line (millennials would be horrified by my consumption bundle), and could have easily qualified for food stamps. (I actually went to the government office on Chicago’s south side, and then decided I didn’t really belong there.)

After grad school I worked a summer at the AMA, and then was unemployed for a semester (the only time I was unemployed after age 13.) I taught a semester at UW-Eau Claire, and then a year at St. Bonaventure. I was just drifting though life, sort of aimlessly. Then I taught for 33 years at Bentley, before working the past 7 years at Mercatus. While at Bentley, I had two brief overseas teaching gigs, in the UK and Australia.

I’ve never had any career ambitions, but I’ve had enough intellectual ambition to produce a reasonable amount of research. In retrospect, my biggest mistakes in life were decisions to do things for money—being a landlord in Boston and writing a principles of economics textbook. I’m retiring so that when (if?) I get to 80 I don’t look back and wish I’d retired sooner. If I had not taken the Mercatus job, my plan was to retire from Bentley at age 62. I’ll be 67 this month, and have aged more in 5 years than in the previous 30.

PS. Rereading this post makes my life seem bleak. I actually did develop a sort of social life once I got into my 20s. Not sure what Frank Capra would make of my life . . .