Central banks should ignore people like Trump and May
In recent months, right wing nationalists such as Donald Trump and Theresa May have criticized the low interest rate policies of the major central banks. This may reflect the fact that a core part of their political support comes from grouchy old people, who are frustrated by the low interest rates earned on their savings accounts. Saturos sent me the following:
Mark Carney said on Friday that he would not “take instruction” from politicians after Theresa May warned that there had been “bad side effects” due to Bank of England policies.
In comments which risk an unprecedented clash between the Governor of the Bank of England and the Prime Minister, Mr Carney said that “it can be difficult sometimes if there are political comments on our policies”.
His remarks come just days after Mrs May used her speech to the Conservative conference to criticise the Bank over quantitative easing and ultra-low interest rates.
Carney explained the distinction between tactics and goals:
“The objectives are what are set by the politicians. The policies are done by technocrats. We are not going to take instruction on our policies from the political side.”
The UK government quite properly sets the objectives (such as the inflation target) and then leaves the tactics up to the BoE, which is independent of the government. A few hours later the May government retreated like a dog with its tail between its legs. Here’s the FT:
Theresa May’s allies have tried to cool speculation about tensions with Mark Carney, insisting the prime minister would be delighted if the Bank of England governor decided to serve his full eight-year term until 2021. . . .
Mrs May’s comments caused concern at the Treasury and the BoE because theyappeared to suggest the government wanted to set monetary policy, although Treasury insiders say this was a misunderstanding and stemmed from naive drafting of Mrs May’s speech.
Philip Hammond said he hoped the governor would remain in Threadneedle St until 2021 to act as a stabilising influence as Britain leaves the EU. One Treasury insider said: “Nobody inside Number 10 seemed to get how her words might be interpreted.” Mr Hammond wants to dampen pre-Brexit concern in the City of London and did not welcome Mrs May’s intervention.
But the prime minister is said by her aides to be fully supportive of the governor.
That’s more like it. (Her aides seem only slightly more competent than Trump’s. OK, I’m just kidding–May is 1000 times better than Trump.)
PS. In another FT article I saw this:
In these circumstances, it is hardly a surprise that investors are marking down the UK’s economic prospects by selling its currency. The government says it will not provide a running commentary on Brexit ahead of next year’s negotiations with the rest of the EU. But the faster that Mrs May’s government provides some clarity about exactly what it is aiming at the better.
Over at Econlog I’ve done a number of posts discussing whether this major “uncertainty shock” will cause a recession in the UK. In my initial post I suggested that the shock would hit RGDP harder than unemployment. I’m sticking with that prediction for now, but will keep an open mind. I believe that sharp increases in unemployment are usually due to demand (i.e. monetary) shocks, and that real shocks cause pain spread out over a longer period of time, affecting GDP more than employment (unless the real shock is specifically directed at the labor market, such as a higher minimum wage.) I believe the fall in the pound is signaling slower long-term British growth, but I still doubt whether we will see a sharp rise in the UK unemployment rate in the next 6 months.
PPS. I’m allowed to make bigoted statements about grouchy old people, because I am one.
Tags:
16. October 2016 at 10:08
@ssumner – “I believe that sharp increases in unemployment are usually due to demand (i.e. monetary) shocks, and that real shocks cause pain spread out over a longer period of time, affecting GDP more than employment (unless the real shock is specifically directed at the labor market, such as a higher minimum wage.) ”
Professor: how do you classify a shock to a financial system, such as a systematic failure of banks due to nationwide bank runs? Is this a real or monetary shock? If you answer a monetary shock, I think I see why you’re confused about economics.
16. October 2016 at 10:32
“grouchy old people, who are frustrated by the low interest rates earned on their savings accounts.”
Again and again Sumner reveals that central bank is exploitative. It benefits some at the expense of others (but of course he doesn’t understand that this is only on the short run, as it harms everyone in the long run).
“I’m allowed to make bigoted statements about grouchy old people, because I am one.
No, sorry, that disclaimer is clearly nothing but a hollow platitude whose only purpose is to make it seem like that bigoted statement above is somehow excusable. It isn’t. And you are not in the same group a the one you referred to. You referred to an economic group, those who are living on interest earned on their savings, and yet you want to make it seem like you just referred to a demographic (age) group of which you belong.
But you are not living on interest on your savings. You gain a psychological utility from inflation, since your intellectual investment, your career, your income, is based on there being a continued ” credibility” of central banks. Without central banks, “monetarism” does not exist. THIS is the ultimate reason you attack people who, and ideas that, are defending against central bank tyranny.
16. October 2016 at 12:07
Hi Scott,
I’ve got a couple of grouchy old people in my life who believe that low interest rates and QE are depressing the value of their life savings. I don’t argue with them, because I love them, life is short, and one never really gets very far with conversations like this around the dinner table, but still I don’t agree with them.
Ceteris paribus, lower interest rates and more QE mean higher bond and asset prices. If you invested in bonds and stocks before the shock in 08, then Fed policy has kept the value of those investments higher than they would have been had the Fed pursued a(n even) tighter monetary policy.
Now if you are a *young* person, then bonds and stocks are pricier the longer the Fed waits to raise interest rates etc, and “interest rates are low” really does mean that returns are low, because you’re investing today, not cashing out today like your grandparents.
Am I wrong? And does this story change much if you assume that money has been much tighter than commonly believed?
16. October 2016 at 12:46
right wing nationalists such as Donald Trump and Theresa May have criticized the low interest rate policies of the major central banks.
The real Theresa May is a financial-sector apparatchik turned MP. She’s bourgeois born and bred, an issue of local grammar schools and Oxbridge, has spent her entire life in the Thames Valley, and favors RP dulcets. She’s a sadly lonely woman, having a husband but no first degree relations at all and apparently no second degree relations (or, at least, none under 90). Her most eccentric feature is attending Church of England communion and her affections for stupidly expensive shoes. She’s long been associated with the trimmer/squish wing of the Conservative Party, rather like David Cameron. To date, she’s been notable for her wretched performance at the task of riot control and occasionally tangling with the courts over the sillier applications of ‘human rights law’. And, of course, she went along with David Cameron’s plan to keep Britain subject to the bureaucratic pilonidal cyst in Brussels (all the better to chow down on some more aspirant Rotherham dwellers). How much Pakistani colonization do you have to countenance before people quit calling you a ‘right-wing nationalist’?
16. October 2016 at 13:27
Grouchy old Robert Hall has a different take;
file:///C:/Users/user/Downloads/Robert-E-Hall.pdf
—————quote————-
… the working-age population declined sufficiently to cut real GDP by 2.5 percent relative to its trend, between 2008 and 2014. The decline was the result of (1) smaller cohorts of young people passing their 16th birthdays, (2) lower net immigration, and (3) higher mortality rates.
… a decline of participation in the labor force accounted for a decline of about three percent in real GDP after 2008, relative to trend. This decline is non-cyclical, as the earlier regression found essentially no systematic relation between unemployment and participation (contrary to the beliefs of Okun and many macroeconomists today). Prior to the financial crisis in 2008, recessions only slightly depressed participation—unemployment
rose by almost the same amount that employment fell. With higher unemployment, participation was discouraged by the added time needed to find a job. But wealth and income fall in recessions. The loss induces more people to seek and take jobs, and so is a force that
raises participation. In previous recessions, the two forces approximately offset each other.
….it seems likely that some force specific to the post-crisis years depressed participation.
Table 3 provides some information useful in trying to understand the decline in participation.
It shows participation rates for people aged 25 through 54, broken down by family income. Between 2004 and 2007, years when the labor market was unaffected by the crisis, small declines in participation, averaging 0.8 percentage points, occurred in all four categories of family income. Between 2007 and 2013, participation rose among members of the poorest quarter of families, fell just a bit in families in the second quartile, and fell by 2.5 percentage points in the upper half, the third and fourth quartiles.
Essentially all of the decline in participation occurred in families with higher incomes. This finding points away from the hypothesis that the decline in participation represented marginalization of poorer families from the labor market.
Table 4 investigates how people spent the time freed up by reduced work and job search. It compares time allocations in 2014 to 2007. Market work, including job search, fell by 1.6 hours per week for men and by 1.4 hours for women. The two categories with increases
were personal care and leisure, which includes a large amount of TV and other video-based entertainment, especially for men. The decline in hours devoted to other activities included a decline in housework for women. Basically, time use shifted toward enjoyment and away
for work-type and investment activities. There was no substitution from market work to either non-market work or investment in human and household capital.
An important fact for interpreting the post-crisis decline in participation is that the joint movements of participation and unemployment from 2008 to 2016 have been almost exactly uncorrelated.
————–endquote—————-
16. October 2016 at 18:20
People like Scott are good people. I mean like, they try, heart in the right place &c. But I think about how Trump wants to try to get along with Russia, while Hillary Clinton clearly wants to provoke them over a small matter like Islam vs Islam in Syria. I mean, like, the Russians liberated Auschwitz. How bad can they be? We made it through the cold war with them. They’re just people, they like soup and comedy films. We can get along with them 100%. Donald Trump is the peace candidate. Let’s just try to get along. https://economicsophisms.com/2016/10/16/the-russians-ended-the-holocaust/
16. October 2016 at 19:07
Jacob:
“Ceteris paribus, lower interest rates and more QE mean higher bond and asset prices.”
The rise in bond prices only accrues to the existing owners of bonds, whereas the fall in interest payments is experienced by all future bond buyers. Not only that, but the rise in bond prices are prices new bond buyers have to pay, and they earn lower income.
It is not a wash.
16. October 2016 at 21:06
As a grumpy (nearly) older man, with cash savings, I prefer the low inflation environment of today (on purely selfish grounds) to the high inflation periods of before. Yes interest rates were higher, but overall they did not compensate for the real fall in value. It seems to me that the thing that older people should fear most is unanticipated inflation, not deflation.
Also AD, what are RP Dulcets? Even google doesn’t give me an answer?
The one piece of May’s philosophy I do like is the Joseph Chamberlain approach – which is that first and foremost government should be competent and local. So focus on picking up the trash, fixing potholes, making the town center a nice place and so on. Making life nicer I think is a suitable goal for Government.
16. October 2016 at 21:25
OT – thanks Patrick R. Sullivan, good find, saved for my file.
OT–if you want to see how incompetent Sumner is (a brain fart I’m sure) go to the end of the comments in the last post “A slightly off-center perspective on monetary problems. The Fed has lots of credibility; will they use it wisely?” and note Sumner forgets that a rise in consumer expenditure (or Investment, Govt Spending, fall in Taxes, Net Exports) will cause the downward sloping IS curve to shift outwards to the right, increasing Y(national income) and I (interest rates), all things being equal. This is Econ 101 folks. And if money is neutral this downward sloping IS curve is vertical. I promised I would refrain from publicizing this mental lapse by Sumner…and I did, for a few minutes. We all make mistakes in haste; Sumner just happens to be constantly hasty.
17. October 2016 at 04:25
Dr. Sunmer,
What is interesting about your statement that unemployment tends to rise less due to RGDP supply shocks as opposed to demand shocks is that our perspectives came up with very similar estimates for the effect on unemployment. My model doesn’t distinguish between types of shocks.
Your guess was that UK unemployment would increase .5%. My model predicted .55%, based on reactions in liquid asset markets.
It seems to be the case that unemployment increases very much in proportion to the drop in GDP, or perhaps better to say, in proportion to the expected drop in GDP?
For example, during the Great Recession, RGDP fell a cumulative 5.1%, from Q4 in ’07 through Q2 of ’09, according to revisions on this BEA webpage:
http://www.bea.gov/faq/index.cfm?faq_id=1004
Also, during the Great Depression, the best numbers I could find had GDP falling 26.6%, with an unemployment rate peaking at around 25%.
There are other examples. It would seem unemployment is easy to forecast, given a specified drop in GDP due to a shock.
17. October 2016 at 04:28
I should say that I make a slight adjustment to the simple proportional relationship above, to account for the fact that unemployment can’t exceed 100%. I have the rate hyperbolically approach 100%
17. October 2016 at 05:13
what are RP Dulcets?
“Received pronunciation”. It’s the high-class way of speaking, although there are “posh” accents that have more of a gentry signature. It’s supposedly in decline in Britain in favor of Estuary English, which is seen as a compromise between RP and Cockney and is supposedly now preferred for those in sales positions. Not sure whether Princess Anne’s voice qualifies as RP or posh, but her daughter definitely speaks Estuary English (in contrast to her cousins, who favor RP). I think Harold Wilson was about the only British prime minister in the last 80 years who had a distinctly regional way of speaking, though Gordon Brown had a bit of a burr.
17. October 2016 at 05:35
Ray, Not funny, hence no response.
Jacob, I mostly agree, but I’d differentiate between low rates and QE. Low rates do hurt many old people–QE does not. Without QE rates might well be even lower, closer to European levels.
Art, You might want to occasionally keep up with what’s going on in the UK today, not just what the current British leader was in the past. Trump used to praise the Clintons and dismiss their scandals as unimportant–is that still his view? People change.
PJ. You said:
“I mean, like, the Russians liberated Auschwitz. How bad can they be?”
I’m going to give you the benefit of the doubt, and assume you know that it was JOSEPH STALIN that liberated Auschwitz. Surely you jest.
Patrick, Different take on what? His views seem plausible, but they don’t relate to this post.
Ray, You said:
Sumner forgets that a rise in consumer expenditure (or Investment, Govt Spending, fall in Taxes, Net Exports) will cause the downward sloping IS curve to shift outwards to the right, increasing Y(national income) and I (interest rates), all things being equal. This is Econ 101 folks.”
“Yes, if money is not neutral.” The IS-lM model assumes that money is not neutral. If you use it, you are also making that assumption.
Antischiff, What happens to unemployment if GDP does not change?
17. October 2016 at 07:03
Dr. Sumner,
You asked:
“Antischiff, What happens to unemployment if GDP does not change?”
If there’s no change in GDP or expectations of GDP, then unemployment is not predicted to decrease. However, with sufficient economic growth unemployment can fall in absence of a shock, hyperbolically down to the lower limit in the model which would be the natural rate.
My model’s really simple right now and only formulated to predict what happens in response to negative GDP shocks, but it’s perhaps a decent start. I’ve been thinking about things like whether the natural rate can be flexible, even absent relevant policy changes that could affect employment in secular sense.
17. October 2016 at 09:14
Art, You might want to occasionally keep up with what’s going on in the UK today, not just what the current British leader was in the past.
It might occur to you that people’s dispositions are pretty fixed by the time they’re 60 years old, unless they’re getting senile.
She’s not demonstrably in the business of sabotaging Brexit, which Tyler Cowen desperately wants he to do. Too bad.
17. October 2016 at 10:21
Brexit update:
http://www.businessinsider.com/brexit-vote-regret-leave-margin-victory-2016-10?r=UK&IR=T
17. October 2016 at 12:41
You lost, Tom. Suck it up.
17. October 2016 at 15:54
@ssumner – ““Yes, if money is not neutral.” The IS-lM model assumes that money is not neutral. If you use it, you are also making that assumption.” – that contradicts what you said (I think) about a vertical IS curve, not downward sloping, when money is neutral. Anyway, thank you for the pointer. I’m taking AD, AS shifting rather than moving along the curves. These shifts being due to ‘animal spirits’ rather than money supply changes. Hence, when FDR did his fireside chats, it was this that caused the curves to shift rather than devaluation of gold in 1933/34. Let’s move on..
18. October 2016 at 10:27
AntiSchiff, If there is no growth, why wouldn’t unemployment rise? (As Okun’s Law predicts.)
Art, People don’t change? If so, then obviously you are wrong about what May was like in the past, as she’s clearly a statist and a nationalist today.
And does Trump still think Bill and Hillary are great people?
Ray, Of course you want to “move on”, as you clearly don’t know the difference between IS and AS. I guess to you it’s just one letter. No big deal, right?
ROFL
18. October 2016 at 10:55
Dr. Sumner,
I must apologize. I was sloppy in my response. I meant to write that if GDP growth didn’t change, there’d be no change in unemployment, but that’s not correct either.
I suppose there are situations in which GDP could be more or less constant without a drop in unemployment. That would be if, for example, there’s a falling working age population, but productivity growth makes up for it.
But, generally, I will have to make the model more sophisticated to account for more possibilities.
18. October 2016 at 10:56
Dr. Sumner,
Originally, my model was merely meant to be a portfolio stress tester, but it makes sense to try to make it more realistic. I see I have a ways to go toward that end.
18. October 2016 at 18:19
Antischiff, No need to apologize, if only certain of my other commenters were so polite.
19. October 2016 at 21:31
The UK for your guide raised minimum wage in April this year (I.e. Pre referendum).