Lael Brainard on monetary policy and employment

Joe Weisenthal directed me to a recent speech by Lael Brainard. Here’s one excerpt:

The new framework calls for monetary policy to seek to eliminate shortfalls of employment from its maximum level, in contrast to the previous approach that called for policy to minimize deviations when employment is too high as well as too low. The new framework also defines the maximum level of employment as a broad-based and inclusive goal assessed through a wide range of indicators.

Some pundits regard this as a significant change, perhaps indicating that the Fed will stop being so mean to workers looking for jobs. While I don’t oppose the change, I don’t see much difference from previous policy.

This is a really complicated issue with lots of moving parts and lots of subtle distinctions. So here are some of the tools I will work with:

  1. The Plucking model. The business cycle is mostly (not entirely) shortfalls from full employment, not symmetrical deviations around a natural rate of unemployment.
  2. The Natural Rate Hypothesis predicts that (for positive inflation rates) employment does not depend on the average rate of inflation. In the long run, workers adjust to changes in the expected rate of inflation, and hence money is roughly super-neutral in the long run.
  3. The Fed erred in raising rates 9 times during 2015-18, as it relied too heavily on highly flawed Phillips Curve models of the economy. As a result, inflation has averaged less than 2% over the past decade.
  4. The Fed recently switched to average inflation targeting (AIT), which will cause inflation to average roughly 2% in the years ahead.
  5. Under AIT, there is no such thing as hawks and doves.

If you combine the first two points, then the implication is that a Fed policy that minimizes shortfalls in employment is basically the same as a Fed policy that minimizes deviations in employment. After all, the only long run equilibrium in the labor market is full employment, according to the natural rate hypothesis.

[Note: A permanent and unchanging 40% unemployment rate caused by a $35/hour minimum wage is “full employment” as defined by macroeconomists]

The existence of a 2% AIT means we’ve moved beyond hawks and doves; all future disputes will be about fluctuations in inflation and employment, not the average rate of inflation.

That doesn’t mean there is nothing new at the Fed:

For nearly four decades, monetary policy was guided by a strong presumption that accommodation should be reduced preemptively when the unemployment rate nears its normal rate in anticipation that high inflation would otherwise soon follow. But changes in economic relationships over the past decade have led trend inflation to run persistently somewhat below target and inflation to be relatively insensitive to resource utilization. With these changes, our new monetary policy framework recognizes that removing accommodation preemptively as headline unemployment reaches low levels in anticipation of inflationary pressures that may not materialize may result in an unwarranted loss of opportunity for many Americans. It may curtail progress for racial and ethnic groups that have faced systemic challenges in the labor force, which is particularly salient in light of recent research indicating that additional labor market tightening is especially beneficial for these groups when it occurs in already tight labor markets, compared with earlier in the labor market cycle.33 Instead, the shortfalls approach means that the labor market will be able to continue to improve absent high inflationary pressures or an unmooring of inflation expectations to the upside.

The phrase “changes in economic relationships” is a polite way of saying the Fed screwed up in 2015-18 and tightened too soon because they relied on flawed Phillips Curve “economic relationships”. They learned a lesson and promise not to do so again. But despite all the woke window dressing about jobs for minorities, this isn’t really about jobs at all, it’s about achieving their target. The mistake made during 2015-18 was a mistake whether you focus on employment shortfalls or employment deviations.

So what does the Fed’s dual mandate mean today? Roughly this:

We promise to deliver 2% PCE inflation on average, and allow modest fluctuations around that average only to the extent that those fluctuations reduce employment shortfalls. As a practical matter, reducing employment shortfalls means keeping employment close to the natural rate, which implies also reducing employment deviations.

AIT really is new—and an improvement. The increased awareness of the unreliability of Phillips Curve models really is new—and an improvement.

The talk about employment is just a bunch of pretty words. Not that there’s anything wrong with pretty words, if they help to provide political cover for AIT and moving on from Phillips Curve models.

Middlebrow science

When I studied economics at Chicago in the 1970s, I was taught that the FDA was a highly flawed institution, which was structured in such a way as to avoid errors of commission at all costs and not worry so much about errors of omission, even if 100 times more consequential. That’s the system, and we’ve known it for 50 years. The current vaccine fiasco was entirely predictable. This isn’t “Monday morning quarterbacking”.

I presume that FDA officials are decent people, but they are embedded in a bureaucracy that operates with a really bad set of incentives. The solution is not to replace one FDA bureaucrat with another, it’s to take government out the the process of deciding what vaccines are acceptable, who gets them first, and at what price.

Alex Tabarrok recently posted some excellent comments on the vaccine fiasco. Here’s Sure:

The likelihood ratios for RCTs and approval mechanisms are powerful. But we are talking thousands of deaths per day. The odds that these tests will remotely alter management decisions is nil. It is malpractice to delay life saving treatment on tests exceedingly unlikely to change management decisions.

And remember the UK is not seeing horrid outcomes for doing this for a while now. A lot of theoretical failure mechanisms are now off the table.

Science is wholly about building a reliable model that accurately predicts future outcomes of current actions. While doing the actual experiment is the gold standard for knowledge acquisition, it is not the only option and in cases like this pandemic is not sufficiently better than past data to merit waiting.

As far as the regulators. I work with some of them directly. They are not overburdened to anywhere near the degree that the frontline clinicians have been hit. When I ask them to explain their cost benefit calculations, they have none. Not I cannot follow them. Not I disagree with them. They have done not an iota of math to justify their course of action.

Sorry, but I believe in evidence based medicine, not eminence based medicine. If you as a regulator cannot explain to me in technical terms the math behind your decision process, even if only back of the envelope, you are not worth putting in charge.

Approve all the vaccines, FDF, fractional dosing trials, and first dose followed by variolation trials should all be done now.

Here’s Tom Meadowcroft:

Scientific researchers search for the truth. Medical clinicians use limited data balance cost and benefits in the face of uncertainty to save the most lives.

When searching for the truth, it is important to have high standards of statistical significance, integrity, and patience, because credibility and a reputation for integrity is everything. Every academic knows that a retracted paper or an accusation of playing fast and loose with statistics can be the death knell for a career. As a result it is prudent to be very certain before publishing. Public health officials, particularly those in charge of approving vaccines, dread the possibility that a vaccine that will be given to millions of healthy people, often children, to prevent diseases where death is rare, which could harbor some flaw that causes a hundred avoidable deaths; they seek the highest standards of proof of safety and efficacy before approving such a vaccine.

But a pandemic is not a search for truth, and a COVID vaccine administered in the midst of a pandemic is very different than a measles vaccine administered to 2-year-olds. The pandemic makes these decisions for FDF or for vaccine approvals into clinical decisions, where health professionals should be balancing the certain benefit of reducing the thousands of daily deaths against the uncertain cost of the possibilities of harmful side-effects and uncertain details of efficacy (when does immunity kick in, how long does it last, how valuable is a booster) that additional months of testing and trials would reveal more clearly.

Public health researchers, academics for the most part, lack the ability (and courage) to make the sort of cost/benefit analysis with necessarily limited data that clinical physicians make every day in examination rooms. Any good clinician, faced with the citizenry of a country as their patient, would have opted for FDF, the AZ vaccine, and quite likely reduced doses by the start of the year. Because we are stuck with academics and administrators as our decision makes, unable to see beyond their usual routine of searching for the truth and protecting their reputations, thousands more will die.

PS. For those of you who think we are doing fine and that Israel is an outlier, you need to add the Navajo Nation to the list of outliers:

The COVID vaccine rollout in the Navajo Nation has been highly successful, already surpassing its original goal to have administered 100,000 shots by the end of February. It’s an impressive number, given that there are an estimated 175,000 people living in the Navajo Nation. . .

As of Feb. 11, the IHS says, a total of 113,345 COVID vaccinations had been administered in the Navajo area. 

Ricardo Reis on debt sustainability

David Beckworth has an excellent podcast where he interviews Ricardo Reis. Here Reis discusses four options for paying for government debt (and by implication government spending):

What is Fiscal Sustainability and Why is it Important?

Reis: Look, there’s a simple flow constraint, which is, in order to pay for the current debt, and particularly the interest that’s due on it both principal and interest, you can only do one of four things. You can either issue more debt. You can either default on the debt and say, “Forget it, I’m not paying.” Or you can collect fiscal surpluses, more taxes than revenue, say, or finally, you can inflate away some of that debt that is have enough inflation so that even though you pay nominally in real terms you do less.

Notice that while only the third option mentions “tax”, all four of these involve taxes. Pilling up debt means higher future taxes. Default is like a tax on bondholders. Inflation is obviously a tax on moneyholders (and bondholders if the inflation unanticipated, or if nominal interest is taxed.)

Here’s a discussion of debt sustainability:

In the end, the debt has to be held by someone, and that person is either consuming, buying debt, or having income. That’s just a constraint. Well, at best, we can see the debt to GDP of the US going up to, I don’t know, 300% of GDP, which is the total assets in the US net are roughly 300% of GDP. Maybe that could increase but it can’t increase that much more. Well, with an R minus G of 2%, and with 300% debt, then you end up with a 6% persistent deficit that you potentially could run. . . .

Again, this is in the absolute limit, David. We all have no firms, no capital stock, all we do is put in the debt, and we have a 6%. Indeed, I actually argue that 5% is a better number. Well, what is the CBO projections before 2020 for the deficits in the US all the way to 2050, 5% already. So, all of whatever bubble R minus G, R minus N existed, we already spent it in the last 10 years. So there’s nothing new about this in R minus M that says, “Oh, now in 2021, I can completely reconfigure the government and exploit my R minus M revenues.” 

I’ve made a similar argument. The fact that the interest rate on Treasury debt (R) is below the marginal product of capital (M) is certainly nice for the federal government. The recent decline in risk free interest rates is sort of analogous to a family that had a big debt it could not pay, and then found a box of exactly that much money hidden in the cellar of their house. The money would allow them to pay the existing debt, but is not a good argument for running up even further debts.

Speaking of Reis, I noticed this tweet:

While I understand the point he’s making in this thread (13 entries), I don’t agree. Supply-side economics is simply EC101. If you tax something, you reduce the quantity of the thing being taxed. Reis correctly points out that the term ‘supply-sider’ was applied to a group that made some wildly unrealistic predictions about tax cuts back in the 1980s, but the underlying model was completely uncontroversial among economists.

In contrast, the MMT textbook that I recently read (by Mitchell, Wray, and Watts) represents an almost complete rejection of mainstream macroeconomics. It’s not that they have a sound model that they take too far, they have a completely unconventional (and false in my view) model of the economy, and occasionally make a few predictions that happen to be accurate in a sort of “broken clock is right twice a day” sense.

My hunch is that if mainstream economists like Reis were to become fully immersed in MMT (something I strongly recommend they not waste time doing!!) they’d be horrified by what they saw. It’s wrong, but in a completely different way from how certain 1980s supply-siders (not all) were wrong.

We did much worse than Obamacare

Tyler Cowen has a post on various topics. This caught my eye:

Perhaps two things I was right about, but still not recognized as correct are: 1) post-2012 or so (but not earlier), unemployment was fundamentally a re-matching problem, and would not have been helped much by nominal decisions by the Fed, and 2) we could have done much better than Obamacare and no I don’t mean single payer.

Obviously I disagree about the post-2012 period, but I’d like to focus on Obamacare. Tyler’s right that we could have done much better, but he doesn’t mention that we’ve actually done much worse. But wait, didn’t we end up with Obamacare?

In fact, the most valuable part of Obamacare was the so-called “Cadillac tax” on health insurance, which would have gradually phased out the massive tax subsidy to health care, perhaps the most important single factor driving up costs and driving down living standards for working class Americans. It was phased out during the Trump administration, perhaps his single most destructive policy decision.

I recall that this Obamacare provision was touted by Democratic policy wonks as a huge gain in efficiency, and they were right. So why does hardly anyone even talk about the fact that we’ve ended up with a much worse system than Obamacare?

The answer is simple. We are now polarized into two tribes—Democrats and Republicans. Both tribes conspired to screw the public in order to bail out the bloated health care industry, and thus neither tribe wants to talk about this shameful act.

Don’t let the media tell you what the important issues are. The important issues are not cancel culture, GameStop, or even monetary policy. They are 400,000 in prison for drug crimes, 40,000 needless deaths from kidney shortages, US support for mass murder in Yemen, and lots of other stuff you hardly even see mentioned on twitter.

PS. People wonder what I mean by utilitarianism. Ponder this quote:

Speaking to KDTVWashington County Republican Party chair Dave Ball said: “We did not send him there to vote his conscience. We did not send him there to do the right thing, whatever he said he was doing. We sent him there to represent us, and we feel very strongly that he did not represent us.”

Yes, there are people who don’t care about maximizing aggregate welfare. They care about maximizing aggregate GOP welfare.

PPS. Make that GOP male welfare.

Understanding middlebrow

I’ll get to the NYT eventually, but first let’s look at the middlebrow sector of the film industry. And by the way, middlebrow is not the middle of the population, it’s roughly the 90th to the 99th percentile. Highbrow is the top 1%. And then there’s rest—Kardashians, professional wrestling, etc.

This is from American Splendor:

Mattress Guy 1: So how smart is she?
Mattress Guy 2: I don’t know. I guess she’s about average.
Mattress Guy 1: Average? Average is dumb!”

[BTW, nothing wrong with being dumb. I’m not dumb about movies, but I’m dumb about plenty of other things. I used to get Cs in French class—do you know how hard that was to do in the 1960s? And then there’s my “computer skills”.]

I often check out middlebrow TV entertainment on Netflix, and almost always give up after a few episodes. Last year it was The Queen’s Gambit and Borgen, but there are 100s of other examples one could cite. These series are generally not bad—they often have decent acting and OK screenplay’s—but no one would say they are works of art. No one will re-watch them in the 22nd century, the way we now re-watch classic films from the 1920s and 1930s.

One possibility is that middlebrow meets two appetites, the thirst for stories and the itch to be exposed to something new, such as the world of chess or European parliamentary politics. The soap opera aspects are sort of like sugar to help the medicine go down.

There’s no point in bemoaning the fact that Netflix offerings are uninspired or that the Academy Awards usually ignores the best films. That’s not their audience! That’s not to say there haven’t been great films with wide appeal, but the whole point of the Academy Awards is to reward the picture with the biggest appeal to the 90% to 99% audience, not the bottom 90% or the top 1%. (And no, Parasite winning last year doesn’t prove me wrong—Burning winning would have proved me wrong.)

A company like Netflix can’t become big and rich by appealing to the audience that likes films directed by Tarkovsky and Hou Hsiao-shien. And do you really expect the Academy to give out Best Picture awards in a way that implicitly acknowledges that most Hollywood directors are not in fact “artists”, and the makes the TV viewers at home feel dumb?

The NYT has 7.5 million subscribers, mostly progressives in the 90-99% range. These people feel very smart, and they are in fact smarter than 90% of the population. So there’s no point bemoaning the fact that the NYT is not about to tell it’s readers that, “Actually, we provide middlebrow news analysis, and if you want brilliant inspired analysis you need to read blogs like SlateStarCodex.”

Yes, the NYT story is awful in all the ways that are currently being discussed by its critics, but the fundamental problem is inescapable. Any time a powerful middlebrow entity (which wrongly thinks it’s highbrow) evaluates an actual highbrow entity, you will end up with a mixture of resentment and incomprehension. This case is no different. It’s just how things work.

Scott Alexander should view this story as a badge of honor. “My insights are so subtle that even the NYT was in over its head trying to figure me out.” I have no doubt that if the NYT tried to evaluate my blog they’d get it right. My stuff is not over their heads. My posts are relentlessly middlebrow in everything other than monetary policy.

But at least I know highbrow when I read it.

PS. Off topic:

Number of Trump impeachments: 2

All other presidents: 2

Senators from his own party that voted to convict: 8

All other presidents: zero