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that the whole discussion of the Phillips curve be removed from my books on the grounds that the idea is hopelessly out-of-date.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.

Films of 2024: Q2

I did a trip to Tyler Cowen’s #1 travel destination (southern Utah plus the North Rim.) In my view, the best travel destination is the one you do at the perfect time in your life. Read Conrad’s story “Youth”.

In recent months I reread a few novels by Nabakov (Pale Fire and Ada), and got more out of them than when I was younger. Over the past few summers, I’ve reread Conrad, Stevenson and Hawthorne. (I’m a sucker for 19th century Anglo-American novelists.) My project for this summer is to read (or reread) Melville. I’ve now finished Typee, Omoo and Mardi. Typee was Melville’s only financial success, which is odd given that Omoo has a similar style and is extremely entertaining.

I’m not surprised that Mardi sold poorly, as it is difficult to read. It begins as a continuation of Omoo, then a couple hundred pages in begins to resemble Gulliver’s Travels. Half way through the book, Melville begins a long allegory on global politics circa 1848 (a pivotal year, and the year he wrote the novel.) Then he switches to some thoughts on philosophy and religion, and even seems to respond to critiques of a novel that hasn’t even been published yet. He complained about people who wished his novel (presumably Mardi) had more unity. (He guessed right about the critics.) At times, he seems to be trying to emulate classics like Don Quixote and The Divine Comedy. He put everything he had into this fascinating, flawed epic.

Two years later he wrote another sprawling, ambitious masterwork; this one a smashing artistic success (and with more unity), but once again a financial failure.

Lincoln read Melville. See if the following (referring to slavery in the American south) reminds you of Lincoln’s Second Inaugural:

“Pray heaven! cried Yoomy, “they may yet find a way to loose their bonds without one drop of blood. But hear me, Oro! were there no other way, and should their masters not relent, all honest hearts must cheer this tribe of Hamo on; though they cut their chains with blades thrice edged, and gory to the haft! ‘Tis right to fight for freedom, whoever be the thrall.”

“These South savannahs may yet prove battle-fields,” said Mohi, gloomily, as we retraced our steps.”

Don’t take this as a recommendation for Mardi. I’m glad I read it, but most won’t like it. Start with Typee and Omoo.

2024:Q2 films

Newer Films:

About Dry Grasses (Turkey, CC) 3.9 This is my favorite film directed by Ceylan, and that’s high praise. At times it feels like a long Russian novel. Engrossing from beginning to end, despite its 3¼ hour length. This one also could have been entitled “Evil Does Not Exist”.

Evil Does Not Exist (Japan) 3.7 This is turning out to be an outstanding year for Japanese films. As is so often the case with films from Asia, it begs to be seen on the big screen. Hard to summarize—imagine if Apichatpong Weerasethakul had directed Local Hero. Warning—his films always start slow, and build to a strong second half.

The Thief Collector (US) 3.6 This documentary on a pair of art thieves is extremely enjoyable, despite a somewhat clumsy execution in places. Surprising revelations keep popping up throughout its 100-minute running time.

Hit Man (US) 3.5 Highly entertaining due to its killer plot. So why not a higher rating? I was disappointed that Linklater did so little with the plot—much of the execution (not all) is fairly bland. Where’s the style? As a comedy, it’s only OK. As film noir, it’s nowhere near as intense as Body Heat. It’s sort of Soderbergh-lite. And yet more people will like this one than any other film on my list, because of the great plot.

Falling Leaves (Finland) 3.4 A characteristic Kaurismaki film. Like Wes Anderson, his films have a certain look and a sly sense of humor. Like Ozu, he makes the same film over and over again.

In Restless Dreams: The Music of Paul Simon (US) 3.2 I like the music of Paul Simon, but not quite enough to sit through a 4-hour documentary. I fast forwarded through some of the recent interviews (which were kind of bland), but did enjoy some of the history. A highlight was the inspiring 1987 concert in Zimbabwe, which had the most integrated audience I’ve ever seen. Memories of a world where it was possible to be optimistic.

The Broken Ice (China) 3.2 A few decades ago, I would have been more impressed by this film, which is roughly in the style of Jia Zhangke. Now it seems a bit derivative.

Coup de Chance (France) 3.0 Full of tastefully done scenes filmed by Vittorio Storaro, but somewhat inert and lifeless. For a major director, Woody Allen has surprisingly little feel for the art of cinema—a fact that is usually covered up by his clever dialogue. Working in French he seems out of his comfort zone (or is it the subtitles?) The dialogue seems less sharp, more predictable. Indeed the whole film seems a bit derivative, a blander version of Crimes and Misdemeanors or Match Point.

Challengers (US) 2.6 Drove 30 minutes to the theater. Sat through 15 minutes of commercials and 15 more of loud in-your-face trailers. Then within 60 seconds I knew I had picked the wrong film. Unpleasant characters, phony “Hollywood” dialogue and a really annoying musical soundtrack.

Older Films:

Identification of a Woman (Italy, 1982, CC) 3.8 Critics often point out various flaws in Antonioni films, but I’d rather focus what he does so well. He’s one of those directors that appeal to serious film buffs because the visuals are so brilliantly constructed. (Tarkovsky, Ozu, Kairostami, Hou Hsiao-hsien, and Wes Anderson are some other examples.)

Beyond the Visible: Hilma af Klint (Germany, 2019, CC) 3.6 When thinking about the most overlooked female artist, Artemesia Gentileschi often comes to mind. This documentary makes a persuasive case for Hilma af Klint. To my eyes, her most appealing works are not the large scale abstractions, rather it’s the small Klee-like gems that stand out. Don’t assume that if you have seen a half dozen of her most famous works that you have any conception of her overall career.

State and Main (US, 2000, CC) 3.6 Not quite top level Mamet, but consistently entertaining and full of great actors. Rebecca Pidgeon is especially outstanding, overshadowing even the great Philip Hoffman.

Where the Sidewalk Ends (US, 1950, CC) 3.6 One ranking I saw (Flickchart) suggested that 1950 featured 9 of the top 24 1950s film noirs. This falls a bit short of the 1950 classics (Sunset Boulevard, In a Lonely Place, Asphalt Jungle, Night and the City, Gun Crazy), but it’s still quite satisfying.

Memories of Underdevelopment (Cuba, 1968, CC) 3.5 Surprisingly complex and ambiguous for a film made in communist Cuba. For me, the most interesting aspect was how it portrayed a self-centered European intellectual living in a tropical third world country. The film can be read in more than one way (a point missed by some critics). I believe the director is more sympathetic to the protagonist than one might assume.

You Were Like a Wild Chrysanthemum (Japan, 1955, CC) 3.5 Chishu Ryu is one of my favorite actors, but he has a fairly small role. Very nice cinematography. Recommended for fans of nostalgia.

Dry Summer (Turkey, 1964, CC) 3.5 I wasn’t sure I wanted to see a 50-year old Turkish film about farmers fighting over water rights. I did. There’s a reason Scorsese put this surprisingly entertaining film on his global cinema list.

Summer of Sam (US, 1999, CC) 3.5 The effective use of the album “Who’s Next” on the soundtrack brought back memories of the 1970s. They weren’t the best band of that era, but The Who were perhaps the most characteristic in terms of how guitar based rock music evolved in the late 1960s and early 1970s—before punk blew it all away. This Spike Lee film nicely captures that turning point. A painless history lesson for those too young to recall the NYC of 1977.

Clouds of Sils Maria (Swiss/French, 2014, CC) 3.5 Very good acting and good enough screenplay (even if some of the themes seem a bit warmed over.)

Once Upon a Time in America (US/Italy, 1984, CC) 3.4 How does one rate this glorious sprawling mess? The good, the bad and the ugly? Leone clearly put his heart into this nearly 4-hour spaghetti Godfather, and there are some marvelous sequences. In the end, however, it doesn’t really work. It lacks the baroque style of his classic westerns (with the music being especially disappointing in this film.) And it’s not quite serious or intelligent enough to bear comparison with Coppola’s masterpieces. And yet, just when you’ve given up, there’s a scene to pull you right back in. Leone’s particularly good at filming the actor’s eyes.

Following (UK, 1998, CC) 3.4 I had thought Momento was Christopher Nolan’s first film, but this engrossing low budget ($6000!!) B&W noir came even earlier. While watching the film, I thought about how it was more entertaining than Oppenheimer, despite vastly lower production quality. It’s like the difference between a little B&W etching by Rembrandt, Goya, or Durer and an overstuffed baroque history painting full of color.

While the technique of film as voyeurism has been used more effectively by directors such as Hitchcock, it’s hard for any even half way competent director to go wrong with this sort of film. The only thing that prevents an even higher rating is a vague sense in the end that I’d seen it all before.

Up (US, 1999, CC) 3.4 A forgettable piece of fluff, but the sort of highly entertaining film that Hollywood is very good at producing.

The Boys From Fengkuei (Taiwan, 1983, CC) 3.4 A transitional film between Hou Hsiao-hsien’s early commercial work and his mature style.

Nocturama (France, 2017, CC) 3.3 A pure exercise in style, with no real attempt to grapple with ideas. That may be a good thing, as when films do try to address political topics they tend to end up at the shallow end of the pool. The rather clinical approach to an intrinsically dramatic situation (terrorists planting bombs) makes for fairly easy viewing, at least for those cineastes that are not bored by this sort of minimalism. Not for those who want a clear-cut “story”.

Casting Blossoms to the Sky (Japan, 2012, CC) 3.4 Obayashi’s crude but emotionally powerful antiwar film tries to do too much. But it does feature some of his stunning cinematography. A bit too long and not for everyone.

Here Comes Mr. Jordan (US, 1941, CC) 3.3 The first of a number of films with a similar theme—someone sent back to Earth from Heaven. It’s nowhere near as good as A Matter of Life and Death, but it’s pleasant entertainment.

Double Suicide (Japan, 1969, CC) 3.3 Interesting plot but a bit too melodramatic for my taste. The artsy black and white cinematography is often striking, but not particularly creative.

5 Centimeters Per Second (Japan, 2007, CC) 3.3 Same director as The Garden of Words (see below). The animation is a bit softer and more painterly, less CGI. The first episode is excellent; then it fades a bit in the next two.

Superior (US, 2021, CC) 3.3 You can see why the film was compared to the work of David Lynch and Brian De Palma, but the comparisons also allow you to see what makes Lynch so special—surrealism is hard to do in a convincing way. This would especially appeal to fans of DePalma’s early films. Criterion Channel also has a 15-minute short film with the same identical twin actresses, done 6 years earlier. Worth checking out after the feature presentation.

The Mother and the Whore (France, 1973, CC) 3.2 Is there any actor that looks more French than Jean-Pierre Leaud? He spends much of the 3:40 run time sitting in cafes aimlessly discussing philosophy and relationships. This film is so French it seems almost like a parody of the French New Wave.

Woman (Japan, 1948, CC) 3.2 Full of the desperation one often sees in postwar film noir (and of course Japan was in much more desperate straits than America.) The first 50 minutes drag somewhat, but the final 15 are pretty intense.

The Garden of Words (Japan, 2013, CC) 3.2 The story is not very interesting, but the animation is stunning. Only 46 minutes.

One Way Street (US, 1950, CC) 3.2 Critics view 1950 as the peak of American noir, a year full of classic films. This is not one of them. There’s a long romantic idyll sandwiched in between standard noir opening and closing scenes, which is an odd mix. But I enjoyed the scenes when the couple escaped to a village on Mexico’s Pacific coast. And the film does star James Mason. Worth seeing if you are a noir fan.

Girls of the Night (Japan, 1961, CC) 3.1 The film’s heart is in the right place, as it shows the cruelty of Japan’s decision to ban prostitution. But there’s too much moralizing, and the story never really comes to life.

Born to be Bad (US, 1950, CC) 3.1 Nicholas Ray is a good director, but (except for Robert Ryan) he is working with some mediocre actors in this film. In Hollywood, evil men tend to be violent while evil women are manipulative. This is the latter.

A Night of Knowing Nothing (India, 2021, CC) 3.0 While the experimental style is not very effective, it does contain a powerful critique of India’s slide toward authoritarian nationalism. Viewing this film makes one very pessimistic about India’s future. But as with China, any nation of 1.4 billion people contains many different realities. India seems to have much more political freedom than China, but much less social freedom.

Running Scared (US, 2006, CC) 3.0 The film starts out strong, with scenes of almost frenetic energy. But in the end you feel the film is less than a sum of its parts, as the scenarios become less and less plausible. It’s the film equivalent of turning the amp up to 11 for two straight hours.

Auto Focus (US, 2002, CC) 2.9 I didn’t find Paul Schrader’s interpretation of Bob Crane’s life to be particularly interesting. I suppose it’s possible that Crane’s life was in fact quite uninteresting. More likely, the life presented here is not the life that Crane actually led. Film is seductive, and I find that I have to fight against the urge to assume that what I am watching is what really happened. There’s nothing more false than a “true story”. Who knows, perhaps Crane had “A Wonderful Life”.

Hogan’s Heroes debuted in 1965, when I was 10. I sometimes wonder how my life would have been different if I had read a few more books instead of watching TV after the school day ended.

Bad Lieutenant (US, 1992, CC) 2.9 The first half was OK, but overall it was too heavy handed and clumsy to be taken seriously as tragedy, and too boring to enjoy as campy entertainment. Another Catholic film that wrestles with themes of sin and redemption? I think I’ll pass.

Full Moon in New York (HK/US, 1989, CC) 2.8 This Stanley Kwan film is very uneven. It seems like Hong Kong directors have difficulty making a convincing film when they are removed from their homeland.

An Autumn’s Tale (HK/US, 1987, CC) 2.5 Chow Yun-fat’s talent is wasted in a romcom that doesn’t have much comedy or romance.

Deal of the Century (US, 1983, CC) 2.3 Friedkin made some good films in the 1970s, but like Coppola he ran out of steam in the 1980s. And comedy doesn’t seem to be his forte.

Farewell China (HK/US, 1990, CC) 3.0/1.5 New York City as a cartoonish dystopia seen through the eyes of Chinese immigrants. Taken at face value it’s a complete mess—say a 1.5 star film. But the film is so bad it ends up being fairly entertaining in a campy sort of way. You definitely need to be in the right frame of mind for this one.