NGDP growth and interest rates

NGDP growth in Q1 came in at 3.8%, a bit less than expected. As a result, bond yields declined. Indeed NGDP growth has been slowing ever since hitting a peak of 7.6% in 2018:Q2.

One word of caution. Due to the government shutdown this data is likely to be revised—statisticians were missing some trade data. The 0.6% GDP inflation rate seems a bit odd, perhaps it will also be revised. Year-over-year data is probably more reliable.

The media focuses on RGDP, which came in higher than expected, but it’s NGDP that drives interest rates in the long run.

Commenters keep telling me that money is too tight, but I see 5.1% NGDP growth over the past 4 quarters. Don’t assume that rising interest rates imply tight money.

The RGDP growth was strong, which is good news for supply-siders. There is a caveat however, some experts say the internals were somewhat weaker, with growth being distorted by transitory factors. Time will tell.

PCE inflation was only 1.7% year-over-year. That’s a problem, and perhaps that signals that money is a bit too tight, but since unemployment is below the Fed’s estimate of the natural rate it’s a fairly small problem.

I expect NGDP growth to continue slowing over time, but given my recent track record no one should take my predictions very seriously. Overall, I think the Fed’s doing a very good job at the moment, but the regime still has serious flaws that may show up if the economy is hit by a shock.

I also see the recent strength as one more nail in the “long and variable lags” theory. In December, forecasters widely anticipated a slowdown in the economy. Then the Fed issued some dovish comments and the asset markets immediately perked up. By March the underlying economic data was also showing increased strength. Monetary policy affects the economy within a month or two. Without the Fed policy adjustment in January, the first quarter would have been weaker.

PS. In other news, Bloomberg reports:

The U.S. and China have agreed on a currency provision in their potential trade agreement, Treasury Secretary Steven Mnuchin said in February. Bloomberg News reported earlier that the U.S. was asking China to keep the value of the yuan stable to neutralize any effort to soften the blow of U.S. tariffs.

China won’t engage in currency depreciation that “harms other countries,” Xi said on Friday, adding the yuan will be kept at a “reasonable, equilibrium level,” and the market will play a bigger role in setting the exchange rate.

Well okay!!

I suspect the Chinese know exactly how Trump retaliated against North Korea when they failed to live up to their promise to denuclearize.

The Bloomberg article was accompanied by perhaps the funniest headline of the year:

China’s Xi Signals Approval for Trump’s Trade War Demand

Trump demands reasonable, equilibrium exchange rates that don’t harm other countries!!

PPS. Who would have expected the most devastating takedown of modern conservatism to be penned by the author of Liberal Fascism?

Whether you call it the party line, right-wing political correctness, or simply a desire to cater to the president’s fragile ego, it’s simply not acceptable to publicly criticize Trump on the right. Prominent religious leaders feel compelled to dismiss Trump’s sordid sexual history. Passionate constitutionalists simply shrug or celebrate Trump’s words and deeds, no matter how contrary they may be to constitutional principles. You have to gush about his genius when there’s little discernible wisdom in what he does, and you must marvel at his courage when there’s none to be seen. Credit for Trump’s wins is all his; blame for his losses is all somebody else’s. . . .

Indeed, the demand that everyone see the emperor’s new clothes is so powerful that criticizing — or even being inconvenient to — the president’s preferred messaging is seen not only as a kind of treason but as proof that the critic isn’t really a conservative at all.

And people wonder why I call it a cult.

Three questions

I haven’t studied philosophy, but from the outside it mostly seems to revolve around three basic issues:

Reality (ontology)

Values (ethics and aesthetics)

Knowledge (epistemology)

Here are three basic questions, one from each field:

A. Why is there something rather than nothing?

B. Is it better that there is something rather than nothing?

C. Can we answer questions #1 and #2? If so, how?

I don’t think we can answer any of these questions with any degree of confidence, which is why it’s so hard to make progress in philosophy. If we had answers to these three basic questions it would provide a framework for answering many smaller questions. Perhaps everything else would sort of fall into place.

Some would argue that the answer to the second question is clearly “yes”. I’m inclined to agree, but most people would be hard pressed to explain why. If you said the answer is clearly yes because “blah blah blah”, then the blah blah blah would at least implicitly provide a theory of value, say utilitarianism or Christianity. But philosophers don’t agree on any given theory of value. And don’t say “well all the plausible theories imply that it’s better that there is something rather than nothing.” No they don’t. Here’s Thoreau:

The mass of men lead lives of quiet desperation.

He may well be correct.

I’m sure that no one cares about my musings on philosophy. But what about social science? In “The Great Danes” I argued there were three basic social science questions, about ethics, causality and knowledge:

What is a good society? (ethics)

What policies are best able to deliver a good society? (economics)

How do we determine which policies are best, when people disagree? (politics)

My answers to the questions of ethics, economics, and politics were:

Utilitarianism (Denmark)

Neoliberalism (Singapore)

Democracy (Switzerland)

It seems to me that social scientists too often consider only one or two of the three basic questions. So let’s finally get to monetary policy:

A. What macro outcome is best?

B. What monetary target is most likely to achieve that goal?

C. How do we know where to set the policy instruments?

My answer to the first question is, “unemployment near the natural rate and slow but steady growth in per capita nominal income.” You might add another goal, say, “Every little girl getting a pony for Christmas”, but I’m limiting outcomes to variables plausibly impacted by monetary policy.

For the second question I’d say, “4% NGDP targeting, or something closely related”.

For the third question I’d say, “A policy setting where the market expects NGDP growth to be equal to the target growth rate.”

Did I miss anything?

Do Donald Trump and Bryan Caplan have the same goal (for immigration)?

I’ve recently been wracking my brain trying to figure out what Trump is trying to do with immigration policy. Last year he was close to a deal on funding the border wall (combined with DACA reforms), and then suddenly walked away from the deal. His government shutdown to force construction of the wall was doomed from the start. He’s cut aid to Central American that was intended to reduce immigration from that area. (Yes, the wall and the foreign aid may not be that effective, but that’s true of EVERYTHING the government does. You think the war on drugs is “effective”? Does that stop the government from attempting it?)

Here’s Janan Ganesh in the Financial Times:

It is in Mr Trump’s interest to major on immigration in 2020, and perhaps even run a single-issue campaign. For that, the subject has to be of immediate, living concern to voters. The worst thing he could do before then is fulfil his promise to bring immigration under control.

It is perverse, I know, that a president could make so little progress on his number-one priority during four years in office, only to be rewarded for it. Ever since he was elected, his enemies have waited for his inevitable failure to “deliver” for his voters, who would then see through him and come sheepishly back to the political mainstream. The non-materialisation of his wall against Mexico felt like the cue for such a mass epiphany.

But this always assumed that Mr Trump is judged as conventional politicians are judged. In fact, populists do not live and die by their record. They live on a sense of rolling crisis.

When George Bush was unable to keep America safe from terrorism in 2001, it made him even more popular. In 2004, voters decided that we’d be better off with a tough guy like Bush than a French speaking “wimp” like John Kerry.

Trump is ignorant about public policy, but he has excellent political instincts. He realizes that an immigration crisis in 2020 makes it more likely that he’ll be re-elected.

I’m amused by alt-right types who put their faith in Trump. They told me that it doesn’t matter that he’s a scoundrel, because he has the right views on the issues. As the following graph shows, it does matter that Trump is a scoundrel:

March 2019 is the 9/11 of the Trump presidency. It’s the point where he’s failing so badly that his supporters will come to believe that only he can fix the problem.

Janan Ganesh puts it much better than I can:

This is what distinguishes the populist from the ideologue, for whom the ultimate goal is actual change through government policy. Mr Miller is an ideologue. Mr Trump is a populist. The first man’s interest is in reduced immigration. The second man’s interest, whether he knows it or not, is in a national mood of immigration crisis circa autumn 2020. If even he cannot control the borders — voters might think — then perhaps the system is rigged after all. The swamp thwarted me in fixing immigration, he will say to them. Now give me a mandate to finish the job. You need only imagine what finishing the job might entail to see what an unpleasant election awaits us.

And people keep asking me why I obsess about character, and not “the issues”. Heraclitus figured this out 2500 years ago; character is destiny.

Impeach him

When Mueller concluded his report, many of my commenters seemed to believe Trump’s claim that the report “totally exonerated” him. They claimed I was refusing to accept reality when I suggested that, while the report was clearly good news for Trump, I’d reserve final judgment until the details were made public.

Then when the NYT reported that Mueller officials hinted that report was far more negative than implied by Barr, they said it was “fake news”.

Now the report has been released and its clear that Trump lied and Barr exaggerated. Indeed the report is far worse than even I expected. The report specifically states that it does not exonerate Trump, and lists 11 examples of possible obstruction of justice. You can quibble about a few of these, but there’s more than enough here to justify impeachment. While there is zero chance the Senate would vote to convict, the House should nonetheless impeach Trump.

Even worse, it shows Trump repeatedly asking his subordinates to ignore the rule of law, and then get saved by the decision of his subordinates to ignore his requests.

I was also mocked for my continued belief that Trump colluded with Russia in an attempt to stop Hillary.  In fact, Trump and his supporters lie when they claim the report showed “no collusion“:

In fact, in his report, Mr. Mueller explicitly stated that his conclusions were not about collusion, “which is not a specific offense or theory of liability found in the United States code.”

The Mueller report found numerous examples of Trump people engaging in collusion-like activities with Russia, just as I claimed, although they could not prove that this collusion rose to the level of a crime.  Yes, it is not illegal to encourage other governments to put out dirt on your opponent. But it’s still collusion and it’s still a scandal.

So I’ll take this report as a “total exoneration” of my previous views on Trump.

Of course Trump lied about his Russian connections during the campaign, and now it seems clear that his favorable attitude toward Putin during the campaign was at least party linked to his ongoing attempts to do business deals with Moscow.  At least Warren Harding’s corruption was not treasonous.

And even Trump has come around to my view of the report.  After earlier claiming that the report totally exonerated him, he now says it is full of negative information.  The only difference is that I claim the negative information is true and he says it’s false.

It was also nice to see official confirmation that Sarah Sanders is a liar.  I already knew this, but now she’s admitted it under oath.  She just makes stuff up out of thin air.  And now she’s lying about her lies.

Just as Trump benefited from the fact that many of his advisors refused to carry out his requests to obstruct justice, he also benefited from the reluctance of the Russians to conspire with Trump officials who reached out to them.  It seems Putin’s a lot smarter than Trump.

I suspect the other continuing investigations of Trump will uncover lots more dirt.  If you think of Trump as an individual government worker, with a certain “valued added”, then he’s clearly the worst president in US history.  Obviously that doesn’t mean his administration is the most unsuccessful, indeed it’s not even in the bottom third.  But as an individual actor, he’s the worst.

PS.  Congress would have an easier time getting Trump’s tax returns if the alternative was conviction for obstruction of justice.

PPS.  I suspect that Nixon’s obstruction of justice seems worse to most people because Nixon was far smarter than Trump.

Now is the time to reform the Fed (don’t blow it)

In today’s political environment it is very difficult to get reform measures through Congress. The Democrats control the House, while the GOP controls the Senate and the Presidency. And yet, today is a perfect time for Congress to reform monetary policy.

During the Great Recession, we learned that the current monetary regime is highly flawed and that reforms are desperately needed. Unfortunately, there was no political consensus in favor of reform at that time, as the GOP and Democrats were deeply split on monetary policy. The GOP thought the Fed was doing too much, whereas the Democrats opposed any attempt to restrain the Fed from further stimulus.

Today is very different, as there is no longer a large gap between the views of the two parties. Both parties seem to favor reforms that would make a recession less likely. The GOP has changed the most, becoming much more dovish after the election of Trump. You might argue that this change is not sincere, and that the GOP will revert back if the next President is a Democrat. But politics is the art of making a silk purse from a sow’s ear.

So today is one of those rare times when a Fed reform measure would be politically feasible. Even better, the Fed is doing a major rethink of policy at its June conference in Chicago, and one could imagine them asking Congress for legislative changes after the meeting. I’ve already offered many proposals for policy reforms (such as NGDP level targeting). Today I’ll suggest a few more useful reforms.

One of the reasons for the policy failure of 2009-13 was that Fed officials were reluctant to do enough stimulus to achieve the desired rate of growth in aggregate demand. This reluctance may have been linked to fear of future losses on its portfolio of Treasury securities.  And one can also imagine a scenario where the Fed would run out of risk-free Treasuries and MBSs to purchase.

The Fed needs to make sure it has enough “ammunition” to hit its policy target. Therefore the Fed might go to Congress with the following memo:

We believe that current policy tools would be inadequate in the next recession, given the likelihood that rates will fall to the zero bound.
Here are two options for Congress to consider, to assure that monetary policy remains appropriately stimulative during the next recession:

Option A: Raise the inflation target to 3%

Option B: Allow the Fed to save enough of its profits to build up a “war chest” of $250 billion dollars; to be used to cover possible loses from future QE programs. In fact, future QE programs are likely to be highly profitable (as during the Great Recession), but there is always a slight risk of losses. By having a war chest, the Fed would have confidence to do the amount of QE required to hit its Congressional mandate of stable prices and high employment.

In addition, the Fed should be authorized to buy a much wider range of securities when the economy is at the zero bound, with the provision that the non-Treasury portion of their portfolio be sold off within a year of exiting the zero bound.

You might notice that I’ve used a “framing” trick of the sort often employed when you want political leaders to make a certain choice.  I’ve given two options, where the second is clearly superior and also less politically controversial. Not many politicians would wish to vote for higher inflation, whereas most voters don’t even know that the Fed earns vast profits that are turned over to the Treasury.

Having the Fed hold on to those profits until they reach a certain threshold is likely to be relatively uncontroversial, as it’s just an accounting issue.  Note that the Fed’s balance sheet is already effectively a part of the Federal government consolidated balance sheet, so this reform does not in any way deny money to the Treasury in such a way as to necessitate higher taxes.  So I believe Congress would choose option B, which is also my preference.

Of course there are many other options; in a previous post I suggested that the Fed balance sheet could be merged with the Treasury balance sheet, which would remove what Bernanke called the “costs and risks” of a more aggressive approach to QE. Today’s proposals are perhaps a bit more politically feasible, as the Fed keeps its separate balance sheet and merely holds onto a certain sum to cover possible losses from QE.  Once the war chest is established, profits continue to be turned over to the Treasury.

It is very unusual to have the stars line up in a way where one could conceive of Congress passing useful reforms to monetary policy, reforms that would make another recession less likely and the recovery much swifter if it did occur.  It would be a tragedy if we let this once in a generation opportunity slip by.  If the next recession occurs under a Democratic President, I very much doubt whether the GOP would accept a reform package to make monetary policy more effective.  They certainly would not have supported such a package when Obama was President. But the Dems would support this package, knowing they might need it in 2021.

PS.  Over at Econlog, I provide an overview of what the Fed should be thinking about as they try to reform monetary policy this summer.