Archive for July 2024


Memories of the Ford Administration

On September 5, 1975, Lynette “Squeaky” Fromme attempted to assassinate Gerald Ford, but was stopped by a Secret service agent as she was pulling the trigger.

On September 22, 1975, Sara Jane Moore, shot at Ford and missed his head by a few inches.

Neither of these assassination attempts were major news stories, at least to the extent you might expect. Both events were quickly forgotten, and did not impact the upcoming campaign for president. They occurred during a time of very low intensity in politics, and (perhaps more importantly) during a period of much worse political violence. These are very different times—much less physically violent and much more verbally violent. This explains why yesterday felt like a much more shocking event than the two attempts on Ford.

Looking at the 1963-81 period more broadly, one notices a high rate of assassinations or attempted assassinations: Kennedy (1963), Malcolm X (1965), Martin Luther King (1968), Bobby Kennedy (1968), George Wallace (1972), Ford (1975, twice), Reagan (1981.) Since then, the US political scene has been relatively peaceful—not much different from Europe. That’s actually kind of odd, given our well known reputation for having a violent gun culture and overheated rhetoric.

Most of the 1963-81 period was not politically polarized, with the partial exception of 1968, when Vietnam and race riots somewhat divided the country. Polarization doesn’t seem to cause violence.

Soon after the recent assassination attempt, a commenter was already blaming me for the outrage. (I couldn’t help wondering why this commenter uses the sort of reckless rhetoric that he condemns, when he is attacking the Dems.)

Fortunately, there is no evidence that reckless words leads to violence. But people are going to believe what they want to believe, despite the lack of empirical evidence. No evidence that porn causes sexual assault? That won’t stop people from believing the theory. Ditto for violent films and crime, and 100 other hot button issues. People believe what they want to believe.

Assassination attempts shock our sensibilities. We don’t wish to believe that they are random occurrences, so we seek out any possible explanation that makes sense. Sometimes, there is no explanation.

PS. Ford won New Jersey, Illinois, and California, and yet lost the 1976 election.

PPS. Who knew this?

PPPS. Yes, the two 1975 assassination attempts did achieve headline status in the NYT. But look how little interest there was a few days after even the second attempt in 17 days. It was headlines news on September 23rd, but by the 26th a crucial revelation (that federal agents tried to help the assassin buy her firearm) was treated as a minor news story, less important than the ongoing investigation of Patty Hearst:

Are AD shocks hard to identify?

Tyler Cowen directed me to a Greg Mankiw essay on inflation:

And as a textbook author, I sometimes get the suggestion that the whole discussion of the Phillips curve be removed from my books on the grounds that the idea is hopelessly out-of-date. By contrast, my own thinking is closer to that of George Akerlof (2002), who in his Nobel prize lecture called the Phillips curve “probably the single most important macroeconomic relationship.”

I have a hypothesis about the source of this disconnect. In the original paper by Phillips (1958) and the famous follow-up by Samuelson and Solow (1960), the Phillips curve was presented as an unconditional relationship—a negative correlation between inflation and unemployment. Some periods, most notably the 1960s, do exhibit a simple downward-sloping scatterplot of points. But that unconditional relationship is long gone. Using data for the past several decades, the scatterplot of inflation and unemployment is now a cloud of points.

My perspective, however, is that the Phillips curve is best considered a conditional relationship. If you think (as most economists do) that monetary shocks—or aggregate-demand shocks more generally—push inflation and unemployment in opposite directions in the short run, then there is a short-run Phillips curve. But this downward-sloping curve is conditional on what shock is hitting the economy.

Mankiw understands the problems with the traditional Phillips Curve, but would like to keep the basic concept, always keeping in mind the distinction between supply and demand shocks. My preference would be to mostly remove inflation from macroeconomics, and instead directly focus on the relationship between nominal GDP shocks and unemployment.

Mankiw identifies one problem with the traditional Keynesian approach:

Whenever inflation moves away from the Fed target, as it dramatically did in 2022, observers are tempted to attribute the change to a shock to aggregate supply or aggregate demand. That might provide some clue as to how transitory the change is likely to be and how much corrective action the central bank needs to take. The problem is that because we don’t know the natural rate of unemployment with much precision, it is hard to disentangle supply and demand. That is true even with the benefit of hindsight, but the task is even more formidable in real time when data are preliminary and incomplete. And it is in real time that policymakers need to respond. . . .

The 2022 inflation surge is a case in point. Even now, I don’t think we can say for sure what happened. The surge could have resulted from pandemic-related interruptions in supply chains. It could have resulted from excess demand, as the 3.6 percent rate unemployment rate was plausibly below the NAIRU, which may well have been altered by the pandemic experience as workers rethought their relationship with the labor market.

From an NGDP perspective, we know exactly what happened. Although there were supply problems in 2022, those have resolved over time. The cumulative excess 11% NGDP growth over the past 4 1/4 years fully explains the excess 9% in PCE inflation. It was essentially all demand side for the period as a whole, despite a portion of the 2021-22 inflation being supply side.

In contrast, if you look at unemployment as a way of ascertaining whether the economy is experiencing excess inflation, you run into exactly the problem identified by Mankiw, we don’t know what the natural rate of unemployment is at any given moment in time—even retrospectively.

To be clear, I am not saying the Phillips Curve model is wrong, at least in the sophisticated version preferred by Mankiw. Rather it is not useful to policymakers.

Mankiw is correct that inflation caused by demand shocks is associated with movements in unemployment that correspond to the basic logic of the Phillips Curve. It is quite plausible that there was a period of time during 2022-23 when unemployment was below the natural rate. The real problem is that it is not a useful tool for policymakers—they are better off trying to stabilize NGDP growth at 4% and avoid trying to guesstimate the natural rate of unemployment.

For similar reasons, I’d prefer the Fed try to stabilize NGDP futures contract prices along a 4% growth path, and not try to guesstimate the natural rate of interest, which is just as unobservable as the natural rate of unemployment.

PS. A few weeks back, Michael Sandifer developed a Chatbot trained on my money illusion blog posts from 2009-24. Eventually, I plan to do something with this, but I have not gotten around to it yet. If you scroll way down in the right column of this blog, you’ll find the link. If I’m hit by a truck, this Chatbot will take over my commentary on current events and do future movie reviews. (Let’s hope it doesn’t endorse Trump!) I guess that means I’m roughly 5% or 10% immortal.

Shout it from the rooftops

There are times when it’s cruel to be kind.

At some point in the not too distant future, the quality of my blogging will drop below a certain threshold. (Maybe it already has.) At that point, I hope my best commenters will tell me so. You won’t be doing me any favors by hiding my senility from me—it would merely cause me to suffer even more from the indignities of old age, and to lose whatever meager reputation I might have once had.

I see reports that top Dems are suggesting that conversations about Biden’s obvious incapacity to govern be kept private. Maybe that will work, but I doubt it. If you care about Biden’s long-term interests, you will go public with your misgivings. Despite Biden’s claims that he’s staying in the race, I still believe that a large enough critical mass of Democrats could nudge him out.

Ordinary Democrats also have an important role to play. Next time you are contacted by a pollster, don’t blow them off. Take the poll and indicate that you would support Trump over Biden, but any other Democrat over Trump. Would that be lying? Probably, but in this case it’s your patriotic duty to lie, in the same way as if you were called upon by the secret police when hiding refugees in your basement.

Yes, Harris would probably lose, but at least it would no longer be a humiliating defeat. She could campaign on the (truthful) argument that Trump is clearly too old and senile to be president. Wouldn’t that be ironic?

PS. Soviet commenters Sara/Ricardo/Edward have already informed me of my senility. But given that their combined IQ is below that of a turnip, I don’t put a great deal of weight on their opinion.

PPS. How about George Clooney? He looks presidential. Or how about the first Congressional Democrat to have the guts to publicly say that the emperor had no clothes?

Silly season

1. Does Elon wish to kill me?

All legal American residents should be allowed to vote.

2. This is our relatively sane candidate:

And you guys scoff when I say America’s become a banana republic.

Macro: The real subject is nominal

Happy 4th of July to everyone—especially to my stepfather, who earned a Purple Heart in Okinawa.

Consider the following two definitions of macroeconomics:

1. Macro is the study of aggregate economic variables, including inflation, real output, unemployment, interest rates and exchange rates.

2. Macro studies the effects of the market for the medium of account, in a world of nominal contracts.

The first definition is more conventional, but I find the second to be more useful. Before explaining why, consider the following analogy:

Suppose the global oil market has a monopoly supplier of barrels. Each barrel is exactly 42 gallons. Now suppose the barrel company becomes more erratic. During one month the barrels are only 40 gallons. Another month they are 45 gallons. The size moves around according to a random walk.

If all oil were traded in spot markets, then that would be a mild inconvenience, but nothing more. Prices per barrel would adjust to reflect changes in the size of barrels. Price per gallon would be unaffected.

If oil was also traded in futures markets, and continued to be priced per barrel, then fluctuating barrel size would cause major problems for the oil majors. They would hire a bunch of experts to study the monopoly supplier of barrels, trying to forecast whether the next batch would be larger or smaller than the current batch of barrels.

Part II: A monetary economy

In a simple barter economy, it’s not clear that macro would even exist, at least in its present sense. Economics would be the study of a bunch of individual markets, focusing on the relative prices of each good. At best, there would be a field called “growth theory”, which would contain a small portion of modern macro.

Now let’s consider switching from barter to an economy where silver is the medium of account. The term numeraire is often used for medium of account; it is the good in terms of which all other prices are measured. Because the current price of silver is just under a dollar per gram, I’ll assume that this country uses grams of silver as the measuring stick of value. One gram of silver is a “dollar”. Silver is the medium of account; dollar is the unit of account.

Is that enough to create a need for macroeconomics? It depends. If people did not suffer from money illusion, they presumably wouldn’t care at all about “inflation”. All people would care about is real or relative prices, which are not directly impacted by the choice of the medium of account. I suppose you could create the field of macro to satisfy the curiosity of some oddball that cares about the “cost of living”, aka the “price level”, in terms of silver. But most rational people simply would not care.

But if you add money illusion, then everything changes. People stop thinking in terms of relative prices, and instead focus on nominal prices—i.e., prices measured in terms of silver. The discovery of a massive silver hoard at Potosi would cause nominal prices to rise significantly—voters would become upset about “inflation” (meaning depreciation in the relative price of silver.)

Money illusion also causes people to negotiate long-term labor contracts in nominal terms. Now shocks to the silver market don’t just affect the “price level”, they cause cycles in employment and output. And the existence of long-term nominal financial contracts means that silver market shocks also causing financial turmoil. As a result, silver market shocks lead to both changes in the overall level of real income and the redistribution of existing income. Suddenly, unstable nominal variables are a BFD.

In one sense, silver is not that important—just one good out of tens of thousands that are traded in the economy. But if silver is one side of each of the billions of transactions that take place each year, it becomes very important. Thus while in a real sense silver would be a tiny fraction of the economy, in a nominal sense it would be 50% of GDP. Half of the entire economy!

Without money illusion and nominal contracts, no one would pay much attention to silver, despite it representing one side of almost every transaction. But if there are lots of contracts written in silver terms, and if the silver market is subject to “shocks”, then people would care a great deal about what’s happening to the nominal (silver) economy.

That’s why I believe that macro is basically a study of the implications of changes in the value of the medium of account in an economy with long-term contracts that are denominated in nominal terms.

And if it isn’t, it should be.