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 Yahoo.com:

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. 🙂

Robert Gordon on reasoning from a price change

One common theme that runs through both my blogging and my academic research is that economists need to avoid “reasoning from a price change”.

Matt Yglesias directed me to an old Robert Gordon paper that criticizes modern New Keynesian DSGE models. Gordon also emphasizes the need to avoid reasoning from a price change:

An explanation was needed to reconcile the dominant role of demand shocks as the explanation of the Great Contraction of 1929‐33 in the same model as would explain the positive correlation of inflation and unemployment in 1974‐75. Once recognized, that explanation became obvious. Just as the output and price of corn or wheat could be positively or negatively correlated depending on the importance of micro demand or supply shocks, so aggregate output and the rate of inflation could be positively or negatively correlated, depending on the relative importance of aggregate demand or supply shocks.

Gordon worries that a failure to distinguish between different types of inflation has handicapped modern DSGE models:

The supply side of the toy model and of most DSGE models is likewise handicapped by including in the inflation equation only expectations of future inflation and the current value of the output or employment gap (some versions substitute marginal cost, but this does not help, see Gordon 2009 and the references cited there). The key elements of the 1978‐era demand‐supply synthesis missing from modern macro are the basic distinction between expectation formation and the sources of backward‐looking behavior through staggered overlapping contracts, and the absence of any treatment of supply shocks. The supply side of modern DSGE models contains no element that explains why inflation and unemployment are sometimes negatively and sometimes positively correlated, which is not surprising since efforts to simulate dynamic responses in such models have been limited thus far to monetary policy shocks, not supply shocks.

If you have an inflation model that relies on output gaps, then you are implicitly treating all inflation as demand-side. Note that Gordon wants to go back to 1978-era AS/AD models, and so do I.

Here he provides a bit more detailed critique:

Likewise there are three problems with the aggregate supply equation based in the NKPC. First, the reliance on purely forward‐looking expectations is contradicted both by facts and by the underlying logic of the 1978‐era Phillips Curve with the intrinsic backward‐looking behavior based on staggered wage and price contracts and a web of producer‐supplier relations extending back into the input‐output table. Second, the NKPC equation contains no terms to represent the impact of supply shocks directly on the inflation rate and indirectly on real output, depending on the nature of the policy response. Thus the NKPC approach has no explanation of why the inflation rate is sometimes negatively and sometimes positively correlated with the unemployment rate, a fact evident in Figures 1 and 2 above. Third, the NKPC does not recognize that prices are both flexible and sticky at the same time; the basis of the Gordon‐Phelps supply‐shock models discussed above is to combine flexible auction‐market prices in the shocked oil market with sticky prices in the remaining non‐oil sector of the economy. The implied macroeconomic externality when adverse supply shocks cause recessions is particularly missing from the NKPC, from the toy model, and apparently from the rest of modern business‐cycle macroeconomics.

I’m no expert on NK models, so please tell me if I’m missing something.

Will Canada soon pass the US?

It sure looks that way:

Perhaps Canada has fewer Republicans.