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A decade later

I began this blog 10 years ago today, although my crusade to change monetary policy first began in the fall of 2008. In my first blog post I laid out my goals:

A blog is not the place for a lengthy dissertation, and so here I’ll merely list three views that underlie my unusual take on the current recession:

Premise 1: The only coherent way of characterizing monetary policy as being either too”easy” or “tight” is relative to the policy stance expected to achieve the central bank’s goals.

Premise 2: “Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.”

Premise 3: After mid-2008, and especially in early October, the expected growth in the price level and nominal GDP fell increasingly far below the Fed’s implicit target.

In plain English, the first premise means the Fed should adopt the policy stance most likely to achieve its goals.  It is a point forcefully advocated by Lars Svensson, who Paul Krugman recently cited as an expert on the role of expectations in monetary policy.  The second is a quotation from Mishkin’s best selling monetary economics text (p. 607), i.e. it’s what we have been teaching our students.  And I have encountered few if any economists who disagree with my third assumption.  Indeed, if this were not so, why would Bernanke be calling for fiscal expansion?

The logical implication of these three premises is that the Fed has the ability to boost nominal growth expectations, and if they let those expectations fall far below target (as they did last fall) the subsequent recession (depression?) is their fault.  Why does almost no one else see things that way?  That’s what I’d like to explore.

So where do we stand today? To me, it looks like one of those glass half full/half empty situations. I see lots of good things and lots of room for further progress. Let’s start with the good—changes that are in line with what I was discussing in early 2009:

1. After a steep recession in 2008 and early 2009, the growth rate of nominal GDP has been reasonably steady over the past 9.5 years. I expect this to continue.

2. There is greatly increased interest in NGDP targeting, as well as level targeting.

3. There is a greater awareness of the fact that the Fed is not out of “ammunition” once rates hit zero.

4. There is greater awareness of how asset prices provide useful information on the stance of monetary policy.

5. There is greater awareness of the importance of not reasoning from a price change.

6. There is greater awareness that monetary offset must be considered when thinking about economic shocks.

7. There is greater awareness that money was too tight in 2008.

8. There is greater awareness that the Fed should not have begun paying positive IOR in October 2008.

9. There is greater awareness that central banks can pay negative interest on bank reserves.

10. There is greater awareness of the importance of forward guidance.

Now let’s think about where we’ve fallen short:

1. NGDP growth was far too low during the years after 2009.

2. The Fed has not formally adopted NGDP targeting and/or level targeting.

3. We still don’t have a highly liquid NGDP futures markets (such as my “guardrails” proposal.

4. The profession still has not embraced the belief that tight money caused the big drop in NGDP during 2008-09.

5. There is still too much of a tendency to equate low rates and/or QE with easy money.

6. There is still too much faith in fiscal policy, too little awareness of monetary offset.

7. The forward guidance we do have is not as “data dependent” as it should be.

This is my 3882nd post and I’ve read almost all of the 160,270 comments. I don’t know how many total hits (WordPress is now so complicated I can’t really use it effectively.) But I’d guess close to 10 million hits, as I’ve averaged several thousand per day (trending lower over time.) The biggest day I recall was about 39,000 hits. Probably 10,000 unneeded commas.

All good times must end and the golden age of economics blogging is certainly over. But I’ll keep going. The next three years will be more interesting than the past three years because something unusual will definitely happen to the macro economy. Either our first successful soft landing (my guess), high inflation, or recession.

Thanks for your support.

A perfect choice

Trump is rumored to be considering Herman Cain for a position on the Federal Reserve Board. For a number of reasons, this would be Trump’s single most perfect nomination.

Cain has an ultra-hawkish position on monetary policy:

In Kansas City, Cain was known as an inflation hawk who was constantly lobbying for higher interest rates. Even during his presidential run in 2011 — when the unemployment rate sat near 9 percent, and inflation was virtually nonexistent — Cain argued that the central bank must raise interest rates to protect the value of the currency, and leave job creation to the job creators.

Trump is an ultra-dovish person, at least while he is President. That makes Cain perfect, as Trump often nominates people with diametrically opposed views on the key policy questions.

You might argue that Cain is corrupt and will do Trump’s bidding. But that would also make him perfect for the job.

Cain has other qualifications as well. Like Trump, Cain is “not a reader”. Reading can interfere with one’s understanding of monetary policy, better to leave reading to the staff.

Cain was also responsible for my all-time favorite campaign commercial, involving a cigarette.

Unfortunately, his nomination may be tripped up by some minor sexual scandals:

He was then asked, “Have you ever been accused, sir, in your life of harassment by a woman?”

He breathed audibly, glared at the reporter and stayed silent for several seconds. After the question was repeated three times, he responded by asking the reporter, “Have you ever been accused of sexual harassment?”

PS. I wonder how long it takes for someone who doesn’t realize this post is a spoof to rake me over the coals for not being politically correct. There are times I wish I lived in France, where a top official who doesn’t read is considered a bigger scandal than smoking in a campaign commercial.

PPS. Off topic, I wonder if this would allow me to monetize my blog.

PPPS. The new wage growth numbers (up 3.2%, yoy) continue to impress—still no sign of a slowdown in the economy.

What about the TIPS spread?

I’ve recently been asked about why I don’t put more weight on the TIPS spread, as compared to 3 to 5 years ago.  I still consider the TIPS spread a useful indicator, but there are a bunch of reasons why I talk about it less frequently:

1.  The TIPS spread does have a few biases, which need to be taken into account.  One is the lag in the adjustment of inflation-indexed bonds to CPI inflation.  In the short run, fluctuations in CPI inflation are caused by oil price fluctuations.  This causes the TIPS spread to change in the same direction as the level of oil prices, without changing the actual expected rate of inflation at all.  It’s an artifact of the lags, and this phenomenon has recently depressed the spread.

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2. I’ve known about the preceding issue for quite some time, and always took it into account when making comments.  But I’ve more recently become convinced that the risk premium is also an issue.  It seems likely that the TIPS spread slightly understates the expected rate of CPI inflation, due to the fact that conventional bonds are viewed as more liquid, and thus offer a slighter lower expected yield.  I don’t think this is a big issue, but it might bias the result by a couple tenths of a percent.

3.  On the other hand, the Fed is targeting PCE inflation, which runs about 0.3% below the CPI inflation used to adjust TIPS returns.  So the biases cut both ways.

A few years ago the problem with monetary policy was obvious.  Actual PCE inflation had been running substantially below target, and the TIP spreads were also well below the target.  In addition, unemployment was too high.

Today, unemployment is below the estimated natural rate, actual inflation has run roughly on target, and the TIPS spreads show only a small problem (at least when you adjust for the recent plunge in oil prices.)  Furthermore, wage inflation is up to 3%, as compared to 2% a few years ago, indicating increased long run support for a core inflation rate at close to 2%.  I suspect wage inflation will rise a bit more.

That’s not to say I’m completely sanguine about the situation.  While the consensus of private sectors forecasters is for 2.1% PCE inflation going forward, I believe that there’s at least a 25% chance that we still haven’t gotten inflation up to 2%, and that the TIPS spreads are correct.  So it’s something I’ll be watching.  But don’t put too much weight on the next few months inflation numbers, as the recent oil price plunge will surely lower the rate for a while.  (Back in July, the 12-month PCE inflation rate was running at 2.36%, whereas the actual underlying rate of PCE inflation was never that high–it was due to rising oil prices.)

Overall, I still believe monetary policy is roughly on target regarding inflation.  But if the data proves otherwise over the next 24 months, I’ll change my view.


A follow-up post on nationalism

A quick point about my previous post.  I regret saying this:

Perhaps Brooks is not familiar with how the term ‘nationalism’ has actually been used over the past 100 years.  It’s all about zero-sum thinking, us vs. them.

Obviously David Brooks knows more history than I do.  I should have said something like:

I wish Brooks had put more weight on how the term ‘nationalism’ has actually been used over the past 100 years.  It’s all about zero-sum thinking, us vs. them.

I really hate nationalism.  And yet while I don’t agree with what I see as his attempt to put a positive spin on the term, it was clearly well-intentioned on his part.  So I apologize for the dismissive way I made my point.

HT:  Christian List


Are the tax cuts affecting growth?

Probably, but it’s too soon to say.  Here is some (annualized) data on RGDP and NGDP growth:

2009:Q4 to 2016:Q4:  NGDP growth averaged 3.8%, RGDP growth averaged 2.1%

2016:Q4 to 2018:Q1:  NGDP growth averaged 4.5%, RGDP growth averaged 2.4%

2018:Q1 to 2018:Q2:  NGDP growth was 7.4%, RGDP growth was 4.1%


1.  Monetary policy has recently become more expansionary, especially in 2018:Q2.  This would be expected to modestly boost RGDP growth, and it did.  But NGDP growth has no effect on long-term trend RGDP growth.

2. There is a small amount of evidence that RGDP growth picked up after 2016, but it’s really only in the last three months where we seem to see significant effects from Trump policies—especially the corporate tax cut.  (I’m not interested in the demand side effects of other tax cuts, which are offset by monetary policy over any significant period of time.) But it’s still not completely clear if this growth surge is any different from 2014-15.

In my view, about 1/2 of the 0.3% initial boost to growth was due to deregulation, and the rest was due to easier monetary policy.

This year I expect a bigger growth surge due to the tax cut.  I predict an extra 1% of RGDP growth, and I also predict this growth burst will fall off sharply in subsequent years, so that the long run effect will be RGDP about 2% higher than otherwise, at most. But 2% more RGDP is a lot–well worth doing. (Here I’m referring to actual RGDP, the tax bill might slightly distort the figures by changing the way corporations report the location of economic activity.  We’ll know that occurred if Ireland’s GDP takes a hit.)

I have not factored in a major (and persistent) international trade war, as I still consider that outcome to be unlikely.

BTW, the 7.4% NGDP growth in Q2 is not likely to be sustained, according to the Hypermind prediction market (which shows 4.6%).   Ditto for real GDP growth.  I recall that RGDP growth averaged over 5% during the second and third quarters of 2014, but that was not sustained.

PS.  Earlier GDP figures were revised downwards, so the NGDP growth under the previous year’s Hypermind market was actually 4.6%, not 4.8%.  Of course the payoffs depend solely on the initial announcement.

PPS.  The employment situation is of course much less impressive.  Job growth has not increased under Trump, despite the fantastic claims of some in the media:

Trump’s policies have produced the best of all economic worlds — surging growth and employment, with little inflation and a rising dollar.

That’s simply not true:

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