Tyler Cowen on housing bubbles and NGDP targeting

In my book entitled The Money Illusion, I argued that the housing bubble of 2003-06 was not the cause of the Great Recession, partly because there was no housing bubble. Instead, the real problem was nominal—a tight money policy drove NGDP growth from 5% to negative 3%.

In a recent podcast with Pradumnya Prasad, Tyler suggests (around the 55 minute mark) that he’s changed his mind on the events leading up to the Great Recession, and no longer believes there was a nationwide housing bubble.

Tyler instead points to problems in the shadow banking system, which in my view were mostly (not entirely) a symptom of the recession, not a cause. Prasad then discusses the view that Fed policy caused the Great Recession (a view held only by me and a tiny number of other market monetarists.) If one insists on talking about interest rates, then one might say that the Fed held rates above equilibrium during 2008, as the housing slump sharply reduced the equilibrium interest rate. Banking problems post-Lehman were mostly an effect of that tight money policy, which sharply reduce asset values.

Tyler suggests that he supports NGDP targeting, but doesn’t think it fits all situations. I don’t find his reasoning to be persuasive, but of course it’s hard to make subtle points in an interview format. If I had to defend his general view, I’d make the following sort of argument:

It’s useful to differentiate between a NGDP targeting regime, and NGDP as a short-term guidepost when the central bank is trying to achieve some other objective. Thus while a regime of 4% NGDP growth may be optimal, if the previous year has seen 0% or 8% NGDP growth, and the central bank doesn’t have a 4% NGDP target, then it may or may not not be optimal to suddenly shift to 4% NGDP growth.

Overall, I was pleased to see Prasad mention the hypothesis that the Fed caused the 2008-09 recession. It makes me feel that we might be making a bit of headway in getting our ideas out into the broader community.

Generation gaps

Back around 1989, I drew my father’s attention to a $40,000 Infiniti automobile, which passed us on the highway. My dad (a WWII vet) couldn’t even comprehend how the Japanese could sell a car at that price point. He associated Japan with cheap stuff. (He died a year later.)

I had a similar feeling when I saw this FT headline:

Vietnamese electric-car maker worth more than Ford or GM after US listing

Lossmaking VinFast’s market capitalisation tops $85bn following New York debut

When I was first old enough to notice cars, GM was a colossus, controlling roughly 50% of the US car market. It was our most dominant company—our Apple. Vietnam was regarded (wrongly) as a tiny country full of primitive people who lived in the jungle. If in 1965 you’d showed the average American this headline from 2023 their jaw would have dropped.

[They would also have assumed the communists lost the war. And they’d wonder what an “electric-car” was. Perhaps in a sense the communists did lose the war, after winning the battle.]

As I get older, I’m increasing aware that every generation lives in a different world. This tweet caught my eye:

I presume that Yglesias is more in tune with what’s currently “creepy and weird”, but I actually liked this film. It does have some uncomfortable moments (a 12-year old girl exposed to some pretty intense violence), but I’ve seen enough similar examples that it no longer fazes me. Remember Taxi Driver? Why not make this sort of film today?

On these sorts of subjective questions, I try to maintain both an inside view and an outside view. Each generation will have standards that seem appalling to the subsequent generation. In many cases, such as slavery, the views of the newer generation tend to prevail in the long run. In other cases, the reforms are later reversed. Thus the Victorians probably saw themselves as progressives, who rose above the more lascivious culture of Georgian-period England. Later generations saw the Victorians as foolish prudes—sexual reactionaries.

As I came of age, young people were increasingly mocking the censorship of the 1950s, a time when Hollywood showed married couples sleeping in separate twin beds. By the 1970s, “anything goes” was viewed as the hip position. Now younger people often decry a lack of censorship in the old. Where will things be in 50 years? I have no idea.

So my inside view is that Yglesias is wrong—Léon is a perfectly respectable film. (If I were Trump, I’d say the film is “perfect”.) My outside view is that Yglesias is probably correct and I’m probably wrong. That’s based on two factors:

1. No one can evaluate their own values in an objective fashion.

2. “The arc of history is long and it bends toward justice.” In other words, the Whig view of history is correct. The younger generation generally has superior views of what is right.

The inside/outside dichotomy relates the the efficient markets hypothesis. Each person should form a view as to the value of a given asset, say Bitcoin. Each person should also recognize that the market view is probably superior to their (inside) view. But that knowledge should not cause individuals to abandon their inside view. If the public blindly accepted the market view, then people would no longer contribute the local views required to form an efficient market in the first place. Thus, in a well functioning system people should hold both views—their own view based on their personal information set and a dispassionate understanding that the consensus view is usually superior.

I disagree with Yglesias about Léon, but I also believe that he’s probably correct. I’m probably just a creepy and weird old boomer.

PS. It’s rated at 74% by critics at Rotten Tomatoes. The general audience is especially creepy and weird, coming in at 95%. I suppose only a boomer would be unhip enough to frequent Rotten Tomatoes.

PPS. I wrote this post a couple week ago. Yesterday I was reading Chateaubriand’s Memoirs, and came across this (from Google):

Paul Auster called this memoir “The best autobiography ever written.”

Where is HL Mencken when we need him?

A few years back, I finally ascended to a stage of enlightenment that Mencken reached at a much younger age. Politics is such a grotesque combination of stupidity and malice that the only way to stay sane is to treat it as a carnival of fools.

The recent competition between the GOP and Dems as to which party can more effectively commit suicide provides a rich source of amusement for those of us who find laughter the only appropriate response to American politics.

This NYT headline provides a nice example:

Why Republicans Could Impeach a Liberal Judge Before She’s Heard a Case

A few observations:

1. Wisconsin is the most purple state in the union, indeed it was the deciding state in both the 2016 and 2020 elections. Statewide races for governor and senator are razor close. And yet the GOP managed to recently lose a Supreme Court race by no less than 11 points, through a misguided attempt to ban abortion. Instead of accepting their defeat, they have channeled Bertolt Brecht and decided to impeach the voters.

2. The “excuse” is that the new justice should recuse herself, as she had previously expressed an opinion on the abortion issue. Of course no one believes that; the GOP isn’t trying to impeach GOP justices that ruled on issues for which they had previously expressed an opinion:

As at the U.S. Supreme Court, recusal decisions are left to the Wisconsin justices themselves. In years past, conservative justices have argued that personal views they had previously stated did not mean they were required to recuse themselves from relevant cases.

For example, Justice Brian Hagedorn once compared homosexuality to bestiality, called Planned Parenthood “a wicked organization” and wrote that “Christianity is the correct religion, and that insofar as others contradict it, they are wrong.” He has said those statements would not warrant his recusal on cases about abortion, gay rights or religion.

3. President Biden must be praying each night before he goes to bed that the GOP will succeed. It’s not that Trump cannot win without Wisconsin, but the margin of error becomes much smaller.

4. In the end, I have to assume that at least one GOP senator will break ranks, and vote against impeachment. But the Wisconsin GOP is facing another problem. The new justice threatens not just to overturn the abortion law (a law that GOP politicians don’t really care about, and just pretend to support to attract religious voters), she is also likely to overturn the gerrymandered map that gives the GOP a 2/3 senate majority, in a state where voters are split 50-50.

Either way, the Wisconsin GOP loses. Of course, we all know what Trump wants to happen. Will he come to the defense of that radical left-wing Wisconsin justice?

PS. And don’t think the Dems won’t respond in kind. Look for them to promote the extremely unpopular woke agenda during 2024. Each side is trying its best to commit suicide. Which one is better at self destruction? I don’t have an answer, but the spectacle will be great fun to watch.

We’ve never had a soft landing

The media often discusses previous “soft landings” experienced by the US, citing examples such as the rate increases of 1994. Don’t believe them. Interest rates are not the economy. The US economy has never had a soft landing (although other countries have them–for instance the UK in the early 2000s.)

There’s only one sensible definition of soft landing:

Soft Landing: The labor market fully recovers from the previous recession and low inflation growth continues for at least three years.

There was one occasion (beginning in February 1966), where the labor market was fully recovered for nearly 4 years, but inflation did not stay low. The landing was so soft that we never actually landed the plane. The Fed was like a skittish fighter pilot that never touches the deck of the carrier.

Will this be our first soft landing? Who knows? The macroeconomy is basically impossible to predict. I suspect that July 2018 to July 2021 would have been America’s first soft landing, if not for Covid. (Sorry Trump, you don’t get credit for “If only”!! But Jay Powell gets two shots at it.)

Unemployment fell to 3.6% in March 2022. If it’s still in the 3.4% to 4.0% range in March 2025, and inflation is back to roughly 2%, then I’d call that a soft landing. A year ago that seemed less than a 50-50 proposition (based on history). Now that we are already 17 months into this period, perhaps the odds are up to 50-50. In other words, I have no idea.

PS. The slow growth in August’s average hourly wages makes a soft landing a tiny bit more likely.

Starry eyed policymakers

Here’s Wikipedia:

Powell noted that the natural rate of interest needed to be considered in relation to the “natural rate of unemployment” (which Powell noted is often referred to as “u-star”, written u*) and the inflation objective (“pi-star”, written Π*). Powell then went on to note that the conventional approach to economic policy making was that “policymakers should navigate by these stars”. However, he said, although navigating by the stars can sound straightforward, in practice “guiding policy by the stars … has been quite challenging of late because our best estimates of the location of the stars have been changing significantly”. Powell reviewed the history of attempts to estimate the location of the “stars” over a 40-year period 1960–2000 and noted that over time, there had been significant revisions of estimates of the positions of the stars.

We should not look for the (r and U) stars to guide us to a happier future, rather we should look for the (NGDP) futures to guide us to happier stars.

In other words, we don’t know the level of r*. We don’t know the level of U*. But we do know an appropriate level for expected NGDP growth.

Interest rates are not the issue. Right now, NGDP is growing too fast. Get NGDP expectations right, and r and U will move to their natural rates.