There’s something wrong with my car

Last week, I brought my new car back to the dealer. It’s not working properly. Here’s how I explained the problem to the dealer:

When I merge onto the freeway, I have trouble getting the car up to 65mph. I tapped on the brake pedal 9 times, and still no luck. The car doesn’t accelerate to 65mph. There must be something wrong with my car.

The dealer gave me a funny look, and made up some phony excuse about how tapping the brake pedal might have prevented the car from reaching the desired speed.

I continue to receive comments telling me that the Fed lacks the ability to get inflation up to 2%. The Fed has raised interest rates 9 times since 2015, each time with the goal of reducing inflation. And now, in 2019, they still haven’t got inflation up to 2%. There must be something wrong with the Fed’s inflation raising mechanism.


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17 Responses to “There’s something wrong with my car”

  1. Gravatar of Garrett Garrett
    21. May 2019 at 13:45

    Maybe tap the brake one more time, just to be sure.

  2. Gravatar of KempN KempN
    21. May 2019 at 14:50

    To continue the analogy, perhaps you are tapping your break because your forward estimate of the “speed” distribution is fat tailed and exhibits extreme positive-skewness, and you have been tapping it out of risk aversion. Hence your preference of avoiding an unanticipated upward jolt is preventing you from reaching your desired rate of travel.

  3. Gravatar of dtoh dtoh
    21. May 2019 at 15:02

    Have you tried letting your wife drive? You could even start a blog critiquing her driving.

  4. Gravatar of Benjamin Cole Benjamin Cole
    21. May 2019 at 15:58

    Solution: adjust the carburetor so that only a little gas enters the cylinders. You may take a very long time to get to 65 miles per hour, if ever, but I think you can stop tapping the brakes.

  5. Gravatar of Lorenzo from Oz Lorenzo from Oz
    21. May 2019 at 16:12

    Clearly your car needs a new expectations regime … 🙂

  6. Gravatar of Paul Paul
    21. May 2019 at 21:15

    You can’t accelerate the car because you’re not even the one driving – you’re in the back seat telling the driver what to do.

    The Fed can’t control the rate of inflation because it doesn’t control the supply and demand for money – both are endogenous.

  7. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    21. May 2019 at 23:10

    I heard GTR is already tuned for race circuit at shipping stage

  8. Gravatar of bill bill
    22. May 2019 at 02:20

    The driver(s).

  9. Gravatar of Matthias Görgens Matthias Görgens
    22. May 2019 at 04:40

    Paul, how does that explain how the rate of inflation in the US has been so suspiciously close to 2% ever since they started getting serious about targeting inflation in the 1980s?

    Did the endogenous money supply suddenly change?

  10. Gravatar of BC BC
    22. May 2019 at 06:44

    Nevertheless, Scott, you are aging and automotive technology has changed over the years. We can’t rule out that the cause may be changing demographics and technology. I won’t deny that tapping on the brakes might have had some effect. There’s probably a variety of contributing factors.

    Signed,
    A Very Serious Person

  11. Gravatar of Brian Donohue Brian Donohue
    22. May 2019 at 07:19

    Matthias,

    CPI has increased at a 1.51% annual rate over the past seven years. The Fed claims to have a 2% PCE target (PCE is a bit lower than CPI). Pretty consistent pattern of missing on the low side.

    Treasury yields have fallen by about 0.25% at all but the shortest maturities this year, and TIPs spreads are below 1.9% across the entire curve now.

    Next move is a tap on the accelerator, maybe even this summer.

  12. Gravatar of bill bill
    22. May 2019 at 16:46

    I like the analogy of a driver stepping on his brake all the time and wondering why he’s not getting up to his target speed. I’d like to extend the analogy beyond just thinking about the car. Let’s look at this driver. The driver (which could be the Fed, or it could be the economic consensus which the Fed is trying to adhere to) has kept pushing on the brakes for 10+ years. About 2 years of slamming on the brakes and being surprised that the car skidded out of control. And 9 years of mildly giving gas and lately using the brakes, yet never getting to the target speed. What kind of driver is this? The driver has had access to this blog the entire time. Many of the people at the Fed and other economists read this, yet they still can’t push just a little harder on the gas and leave the brake alone for just a little while. They’ve constantly had access to the pricing of 5 year inflation breakeven rates, yet touch the brakes again when just a little gas would have finally done the trick. This is my one concern with telling the Fed to enter into unlimited futures contracts. They are likely to end up covered in gasoline and immolate the car. I totally agree that NGDPLT should be their target (4%, 4.5%, 5%, all would be good numbers. And I like the bumpers idea too). I also think that a futures market would be a great source of information for the driver. I think some buying/selling of futures by the Fed could be a good tool. But I think they can use other tools too. We need an NGDP futures market because the futures prices would still be a good signal. But I shudder to think of the Fed entering into a large number of futures on the upper end of the NGDP bumpers only to find out that they needed to enter into twice as many (but didn’t) and we have say 6% or 7% NGDP growth and just when we need to be tapping on the brakes (to pull that 7% back down to 4%-5%), the Fed pays out a ton of fresh cash due to its futures positions. I’m less concerned with the Fed entering into a ton of contracts based on 3% NGDPLT because if they are wrong, the cash payouts would be a good stimulus and work to get us back of the 3% minimum. I know the plan is to buy/sell enough futures contracts that we never miss, but if the Swiss central bank can falter on maintaining a currency peg, the Fed can miss on NGDP.

  13. Gravatar of Doug M Doug M
    22. May 2019 at 21:22

    You are making the mistake of believing that the Fed is honest in its statements.

    While the Fed may say that 2% is the desired target, and that this target should be the central tendency or long-term average. All of their behavior says that 2% is an upper bound. They are hitting the breaks because they don’t want to bust the limits.

  14. Gravatar of Patrick R Sullivan Patrick R Sullivan
    23. May 2019 at 06:07

    The always entertaining Timothy Taylor on micro v macro;

    http://conversableeconomist.blogspot.com/2019/05/origins-of-microeconomics-and.html

    ———-quote———-
    Varian points to a somewhat obscure economist P. de Wolff as the first to use “microeconomic” and “macroeconomic” in 1941. Varian writes:

    The earliest published reference that explicitly uses the term ‘microeconomics’ that I have been able to locate is de Wolff (1941). De Wolff, a colleague of Tinbergen at the Netherlands Statistical Institute, was well aware of the macrodynamic modelling efforts of Frisch, and may have been inspired to extend Frisch’s use of ‘micro-dynamics’ to the more general expression of ‘microeconomics’. De Wolff’s note is concerned with what we now call the ‘aggregation problem’ – how to move from the theory of the individual consuming unit to the behaviour of aggregate consumption. … He [de Wolff] is quite clear about the distinction between micro- and macroeconomics:

    “The concept of income elasticity of demand has been used with two entirely different meanings: a micro- and macro-economic one. The micro-economic interpretation refers to the relation between income and outlay on a certain commodity for a single person or family. The macro-economic interpretation is derived from the corresponding relation between total income and total outlay for a large group of persons or families (social strata, nations, etc.) [emphasis in original].”

    In Varian’s telling, the terms of macroeconomics start popping up in academic journals and even some lesser-used textbooks in the 1940s, are in widespread use by the mid-1950s, and first appear in Paul Samuelson’s canonical intro economics textbook in the 1958 edition.
    ——–endquote———

  15. Gravatar of Brian Donohue Brian Donohue
    23. May 2019 at 07:15

    TIPS spreads continue to tumble, now 1.8%. Market calling BS on Fed’s commitment to 2% inflation.

  16. Gravatar of ssumner ssumner
    23. May 2019 at 09:20

    Doug, You said:

    “You are making the mistake of believing that the Fed is honest in its statements.”

    Read my post again, your comment has nothing to do with what I posted.

    I’m attacking idiots (mostly outside the Fed) who don’t believe the Fed is capable of raising inflation to 2%. Their secret intentions are an entirely different issue.

  17. Gravatar of Jeff Jeff
    27. May 2019 at 05:04

    Like any good bunch of bureaucrats, the Fed would like to achieve good results, but that concern takes a back seat to the number one concern of all bureaucrats, which is to avoid accountability. If the Fed were to take Scott’s advice and start cutting rates now, it would be an implicit admission that the Fed thinks good monetary policy can avoid a recession. From
    there it’s only a short step to conclude that they could have avoided the last one, too.

    Can’t have that. No way.

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