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Edward Nelson on Milton Friedman

While I’m only 275 pages into Ed Nelson’s big 2 volume set entitled “Milton Friedman & Economic Debate in the United States”, I can already say that it’s one of my favorite books on macroeconomics.

One issue that has frequently puzzled me is how to interpret causality in the Phillips Curve relationship. I have always interpreted Friedman’s natural rate model as one where causality went from inflation to output. More specifically, if inflation is higher than expected, then unemployment will be lower than the natural rate, and vice versa (perhaps due to sticky nominal wages.)

Keynesians usually seem to interpret causality in the opposite direction, low unemployment causes high inflation, and vice versa. And today, that seems to be the most widely accepted interpretation. Nelson (p. 273) quotes Friedman offering an interpretation that is consistent with my view:

There was, however, a crucial difference between Fisher’s analysis and Phillips’s, between the truth of 1926 and the error of 1958, which had to do with the direction of causation. Fisher took the rate of change of prices to be the independent variable that set the process going.

But Nelson also cites other statements by Friedman that are consistent with the Keynesian interpretation. He then suggests:

Friedman was also clear that both inflation and unemployment were endogenous variables. That being the case, neither a story based on causation from unemployment to inflation nor a story based on causation from inflation to unemployment can be accepted as a comprehensive description of the Phillips Curve relationship.

You probably know what I’m going to say. What’s really going on is that both inflation and unemployment are affected by NGDP shocks. When NGDP rises faster than expected, it increases inflation and reduces unemployment. When NGDP rises slower than expected, inflation tends to fall and unemployment rises. But what does Nelson say? How does he reconcile various statements by Friedman that seem inconsistent?

The answer offered here is that Friedman’s perspective was that, although inflation and output were jointly determined, the former variable could in large measure be usefully regarded as the driver of the relationship because inflation is a nominal variable and hence ultimately policy determined. Fluctuations in output (in relation to potential) would not occur if the private sector’s expectations of nominal variables corresponded continuously to the actual paths.

I really like this explanation. In Chapter 1 of my book coming out in July, I discuss the tricky issue of causality in macroeconomics. In the end, I conclude that statements about causal relationships should be judged on their usefulness. Thus it’s useful to say that monetary policy caused the Great Recession if another plausible setting of monetary policy instruments would have prevented the Great Recession, but not otherwise.

While Friedman is my favorite macroeconomist, I don’t believe that he got everything right. Like most people of his generation, he focused a lot of attention on inflation. And yet in many cases, his analysis makes more sense if you substitute NGDP growth for inflation. Thus his claim that a slowdown in inflation almost always results in higher unemployment would be more accurate if applied to a slowdown in NGDP growth. After all, inflation can slow due to a positive supply shock.

I’ve recently discovered another Ed Nelson paper on whether it makes sense to think in terms of “nominal shocks”, and will have more to say on this issue in a future post.

PS. Friedman’s quote is referring to a 1926 paper by Fisher that first developed the so-called “Phillips Curve”. It was rediscovered by Phillips in 1958, who gave it a Keynesian interpretation. Both Friedman and I prefer Fisher’s interpretation.

“Which laboratory is responsible matters little”

Back in 2014, there was a vigorous debate over gain-of-function (GoF) research. Prestigious journals published articles showing that this research is extremely dangerous, and probably should not be allowed:

First, from the calculations in two in-depth pandemic risk analyses (79), there is a substantial probability that a pandemic with over a 100-million fatalities could be seeded from an undetected lab-acquired infection (LAI), if a single infected lab worker spreads infection as he moves about in the community. From the Klotz (2014) analysis, there is about a 1–30% probability, depending on assumptions, that, once infected, the lab worker will seed a pandemic. This large probability spread arises from varying the average number of people infected by an infected person between 1.4 and 3.0 (R0, in standard epidemiology notation), varying the details of commutes to and from work on public transportation, and whether infected acquaintances are quarantined before spreading infection. The Merler (2013) study, based on a computer-generated population grid of size and varying density of the Netherlands, supports our concern over a lab escape not being detected until it is too late: “there is a non-negligible probability (5–15%), strongly dependent on reproduction number and probability of developing clinical symptoms, that the escape event is not detected at all.”

These concerns were not completely ignored. The US stopped funding gain-of-function research in 2014. However, the moratorium was lifted in 2017.

Former NYT reporter Donald McNeil says there have already been serious lab leaks:

Despite constantly rising biosafety levels, viruses we already know to be lethal, from smallpox to SARS, have repeatedly broken loose by accident.

Most leaks infect or kill just a few people before they are stopped by isolation and/or vaccination. But not all: scientists now believe that the H1N1 seasonal flu that killed thousands every year from 1977 to 2009 was influenza research gone feral. The strain first appeared in eastern Russia in 1977 and its genes were initially identical to a 1950 strain; that could have happened only if it had been in a freezer for 27 years. It also initially behaved as if it had been deliberately attenuated, or weakened. So scientists suspect it was a Russian effort to make a vaccine against a possible return of the 1918 flu. And then, they theorize, the vaccine virus, insufficiently weakened, began spreading.

Even worse, these sorts of lab accidents are fairly common. This is from a 2015 comment on a research paper:

The 1977 H1N1 virus caused a global epidemic, and as Rozo and Gronvall themselves concluded, it originated in a microbiology laboratory and its release was unintentional. Which laboratory is responsible matters little in the GoF debate.

Rozo and Gronvall also stated that, “in 1977, influenza research was performed without modern biosafety regulations and protective equipment, making the lab accident hypothesis much less relevant to the modern GoF debate.” However, the current record of containment of high-consequence pathogens is hardly reassuring.

My review of 11 relevant events (2) found that escapes of high-consequence pathogens causing community infections typically occur from state-of-the-art laboratories, including six outbreaks of severe acute respiratory syndrome and one of foot-and-mouth disease since 2003. [Emphasis added]

Tyler Cowen argues that proof of the Chinese lab leak theory would be a big blow to the prestige of the Chinese government. (Not for me, I already had an extremely low opinion of the CCP.) I think Tyler is right, but Thomas Frank argues that the biggest effect would be to discredit the global scientific establishment:

The last global disaster, the financial crisis of 2008, smashed people’s trust in the institutions of capitalism, in the myths of free trade and the New Economy, and eventually in the elites who ran both American political parties. . . .

Now here we are in the waning days of Disastrous Global Crisis #2. Covid is of course worse by many orders of magnitude than the mortgage meltdown — it has killed millions and ruined lives and disrupted the world economy far more extensively. Should it turn out that scientists and experts and NGOs, etc. are villains rather than heroes of this story, we may very well see the expert-worshiping values of modern liberalism go up in a fireball of public anger.

It isn’t just that we were doing the same sort of dangerous research as the Chinese, we were actually funding the Wuhan lab. But it gets worse. Another former NYT science reporter (these guys get cancelled pretty often) suggests that the global community of virologists have been less than completely honest with the public. Here’s Nicholas Wade:

By this criterion, the signatories of the Lancet letter were behaving as poor scientists: They were assuring the public of facts they could not know for sure were true.

It later turned out that the Lancet letter had been organized and drafted by Peter Daszak, president of the EcoHealth Alliance of New York. Daszak’s organization funded coronavirus research at the Wuhan Institute of Virology. If the SARS2 virus had indeed escaped from research he funded, Daszak would be potentially culpable. This acute conflict of interest was not declared to the Lancet’s readers. To the contrary, the letter concluded, “We declare no competing interests.”

Virologists like Daszak had much at stake in the assigning of blame for the pandemic. For 20 years, mostly beneath the public’s attention, they had been playing a dangerous game. In their laboratories they routinely created viruses more dangerous than those that exist in nature. They argued that they could do so safely, and that by getting ahead of nature they could predict and prevent natural “spillovers,” the cross-over of viruses from an animal host to people. If SARS2 had indeed escaped from such a laboratory experiment, a savage blowback could be expected, and the storm of public indignation would affect virologists everywhere, not just in China. “It would shatter the scientific edifice top to bottom,” an MIT Technology Review editor, Antonio Regalado, said in March 2020.

In 2008, I became disillusioned with the field of macroeconomics. In my view, macroeconomists caused the Great Recession by not emphasizing that at each an every point in time the Fed needed to set monetary policy at a position expected to lead to on target growth in aggregate demand. When economists inside and outside central banks failed to correctly diagnose the problem in 2008, policy became highly contractionary and the global economy collapsed.

The scientific establishment needs to avoid doing research that could lead to the death of 100 million people. It’s that simple. And this is true regardless of whether of not Covid came from a Wuhan lab.

The scandal is not the fact that Covid came from a lab (which we don’t know yet, but seems doubtful), the real scandal (if there is one) is that Covid could have come from a lab. That in itself would be totally unacceptable. Some people would probably be reassured by this:

Shi breathed a sigh of relief when the results came back: none of the sequences matched those of the viruses her team had sampled from bat caves. “That really took a load off my mind,” she says. “I had not slept a wink for days.”

Her lack of sleep makes me even more nervous. Is this research really that dangerous?

On the other hand, most evidence still points toward a natural origin for the Covid-19 virus. If Covid-19 is eventually found in nature, it will be a huge black eye for the US and a huge PR coup for China.

PS. Our regulators are probably far too risk averse when it comes to nuclear power, and nowhere near risk averse enough when it comes to virus research.

Mark Carney on NGDP targeting

David Beckworth has a new podcast where he interviews Mark Carney, former head of the Bank of England (and previously the Bank of Canada.) This caught my eye:

Carney: Last point if I may, what we did in lieu of moving to nominal GDP targeting, it was a reasonably healthy debate about it, which is what we wanted, was the remit is the way the UK talks about the mandate, the equivalent of that five-year in Canada. The chancellor sends a letter to the Bank of England Governor, the committee and says, this is how we interpret that inflation target or the inflation targeting framework. And what George Osborne, who was Chancellor then did his letter said, don’t forget about the flexibility and flexible inflation targeting. Don’t forget that you can stretch out the time over which you return to target from above or below.

Carney: And that turned out to be, it’s not nominal GDP targeting, but it moves you along the continuum towards that. And it’s also last point, is incredibly important because one thing that is a bit missed is that throughout the post-great recession or post-financial crisis period, the Fed and the ECB, they’re all in divine coincidence territory. So in other words, inflation is below target and there’s an output gap. And so both of those aspects pushed in the same direction for looser policy. Whereas the Bank of England quite frequently had inflation above target because of exchange rate pass through, and a big output gap. And so we needed to have a trade off. And when you get into trade off territory that’s where you need that flexibility. And that challenge is going to sound pretty familiar to people around the world.

Give that man a mug!!

This may be a bit hard to follow, as it comes in the midst of a long conversation. So here’s a bit of context. Before joining the Bank of England, Carney had made some statements at least mildly supportive of the concept of NGDP targeting. At the same time, most central banks are pretty locked into the inflation targeting approach to policy. Carney is saying that Britain’s Chancellor of the Exchequer (who gives the BOE its mandate) was sort of winking and nodding in the direction of NGDP targeting, without actually proposing the policy. There was a tacit understanding that macro outcomes would be better if the “flexible” part of flexible inflation targeting was interpreted in such a way that there might be a period of a few years when policy was expansionary despite an inflation overshoot because NGDP growth had been much more subdued than inflation.

It’s also useful to compare this statement with St Louis Fed President Jim Bullard’s recent remarks that flexible average inflation targeting moves policy in the direction of NGDPLT. Central bankers seem to increasingly understand the appeal of NGDPLT, but they are not ready to formally adopt the policy.

Recent articles

1. I don’t post on Israel/Palestine because I find the issue to be incredibly boring and unimportant. I also find 90% of the articles on the subject to be either stupid or uninteresting. The only pundit who seems to share my view is Matt Yglesias, who has an excellent post on why he also finds the topic to be grossly over-reported.

2. Here’s

Currently, nearly 48% (about 159.2 million) of the U.S. population has received at least one dose, while 37.8% (about 125.5 million) is fully vaccinated. 

When broken down by demographic group, however, there are clear disparities. For example, among the vaccinated population, 61% are white while just 17% are Hispanic/Latino and 12% are Black.

But here’s what Yahoo doesn’t tell you. Among the vaccinated population, barely 2% are Jewish.

Think about it.

3. This made me smile:

To conduct the audit, Arizona Senate Republicans brought in a private Florida-based company, Cyber Ninjas, whose founder and CEO, Doug Logan, has pushed false claims of fraud in the 2020 election.

Read the whole thing, it’s hilarious

4. I see stories like this almost everyday:

The mysterious London public relations agency sent its pitch simultaneously to social media influencers in France and Germany: Claim that Pfizer’s COVID-19 vaccine is deadly and that regulators and the mainstream media are covering it up, the message read, and earn thousands of euros in easy money in exchange.

The claim is false. The purported agency, Fazze, has a website and describes itself as an “influencer marketing platform” connecting bloggers and advertisers. But when some of the influencers tried to find out who was running Fazze, the ephemeral trail appeared to lead to Russia.

Wait, I thought China was the big bad enemy?

5. And this:

Two European airlines had to cancel flights to Moscow after Russian authorities failed to approve new routes that avoided Belarus’s airspace in response to Minsk’s interception of a passenger jet. . . . “The Russian reaction is absolutely incomprehensible to us,” Austria’s Foreign Ministry was quoted as saying by Reuters on Thursday.

Incomprehensible? Not to anyone paying attention to Russia.

6. In a recent post, I mentioned that the US was becoming a more puritanical society. I was surprised that this claim was seen as controversial. It might help to take the view of someone from outside of the US:

It won’t be the first time Macron and his government have presented a different read on social campaigns that have taken the U.S. by storm. Although the MeToo movement made some ripples in France, Macron criticized it, saying he didn’t want a “society where every man/woman interaction is suspected of domination,” adding that he didn’t want to live in a “puritanical society.”

What would give Macron the silly idea that the US has gone off the deep end on this issue? Here is the NYT, in a hard hitting story about Bill Gates failing to get the dinner companion he was looking for:

In 2006, for example, he attended a presentation by a female Microsoft employee. Mr. Gates, who at the time was the company’s chairman, left the meeting and immediately emailed the woman to ask her out to dinner, according to two people familiar with the exchange.

“If this makes you uncomfortable, pretend it never happened,” Mr. Gates wrote in an email, according to a person who read it to The New York Times.

The woman was indeed uncomfortable, the two people said. She decided to pretend it had never happened.

No doubt this will have NYT readers clutching their pearls. I kept reading, looking for how her career was derailed after rebuffing Gates. Nothing.

7. A nice summary of the infrastructure debate:

President Biden wanted to spend $2.25 trillion we don’t have on projects we don’t need. Republicans countered by saying they weren’t willing to spend more than $568 billion we don’t have on projects we don’t need. President Biden, desiring to show he was willing to compromise, offered to spend $1.7 trillion we don’t have on projects we don’t need.

Now the latest is that Republicans have agreed to spend “close to $1 trillion” we don’t have on projects we don’t need. Whereas Biden hinted that he would agree to raising taxes on corporations and people who earn more than $400,000 a year to pay for part of his plan, a key provision of the Republican proposal is that taxes won’t be raised on anyone to pay for it, thus absolutely ensuring we won’t have the money to pay for their infrastructure projects we don’t need.

It is easy to say that this is just politics, but I can’t help but feeling that everyone inside the Beltway has gone nuts. 

Yup, fiscal policymaking is reaching a new low almost every year..

8. Today, China became a bit less repressive:

Chinese authorities expand two-child policy to allow each couple to have three children as the country tries to cope with an ageing population

On one level this is good. But even a three child limit is both stupid and immoral. China is trying too boost its birth rate. If the CCP feels it must control every aspect of people’s lives, a 30 child limit would achieve its population goals much better than a 3 child limit.

9. This caught my eye:

The Trump administration tried during the trade war to persuade China to renounce subsidies for its exporters, which include cheap land for factories and huge loans to manufacturers at below-market interest rates. The Biden administration plans extensive subsidies as well, but those are aimed mostly at research and development, a category of subsidies that seldom violates international trade rules.

Isn’t that convenient. “Trade rules” ban the sort of subsidies that China provides, but allow the sort of subsidies that we engage in. Bonus points for any commenter who is able to justify our hypocrisy using economic theory.

10. Back in February 2020, Trump was lavishing praise on the CCP for their handling of Covid. Biden was not so naive:

Yglesias on intellectual conformity

Here’s Matt Yglesias:

But in economics, which I do know well, I think it’s a big issue. If someone tweets something you agree with, it is easy to bless it with an RT or a little heart. To take issue with it is to start a fight. And conversely, it’s much more pleasant to do a tweet that is greeted with lots of RTs and little hearts rather than one that starts fights. So I know from talking to econ PhD-havers that almost everyone is disproportionately avoiding statements they believe to be locally unpopular in their community. There is just more disagreement and dissension than you would know unless you took the time to reach out to people and speak to them in a more relaxed way.

I am an exception. I don’t mind taking unpopular stands on economic issues. As you know, for instance, I believe the fiscal stimulus was a waste of money (except the portion that was valid relief for economic distress.) Most economists disagree with me on this point.

I wonder if the problem is twitter. If I did twitter then maybe I’d feel more pressure to conform. The nice thing about blogging is that I’m sort of on an island, not interacting with others on a daily basis.

I’m certainly not saying that everyone on twitter is shying away from unpopular opinions—I don’t believe that. And I’m not saying that I would be particularly happy to offer highly unpopular opinions on religion, race, sex, gender, etc. etc. On the other hand, I don’t have much of interest to say on those topics, and hence I would rarely blog on those subjects even if I were not shy of controversy. But economics? I just say what I think. Nobody ever got canceled for opposing minimum wage laws. On politics, I trash both the nationalist right and the woke left. Even on race and religion and gender I’m willing to offer unpopular opinions if the issue is one of economics. Thus very little of the large income differences between races and religions and genders is due to discrimination—it’s mostly productivity.

PS. I wrote this yesterday, but I often wait a while before posting my thoughts. Today, Tyler Cowen commented on the same Yglesias post. This caught my eye:

The broader question of course is what we can do to limit these problems.  More pseudonymous tweeters and writers?  More grumpy old people who don’t care so much about their reputations?  More who write for Substack?  Other?

I think it’s fair to say I fall into the grumpy old man category. I couldn’t care less if I get “cancelled.” In fact, my original plan was to retire in 2017.

PPS. By waiting to post you can get scooped, but you also can often have second thoughts and thus avoid posting something stupid. Yes, there’s even worse stuff in my discard bin. 🙂