Monday, January 23, 2017

Chinese Tidbit

From the WSJ moneybeat blog:
China’s central bank extended support on Friday to a group of unnamed but large banks...  the People’s Bank of China extended a longer-term but temporary liquidity facility... Details on the facility were typically vague. In recent weeks it has also injected record amounts of cash. 
The move gives banks some breathing room for now, just as interbank liquidity stresses escalate. The new facility, analysts from ANZ say, doesn’t require banks to post collateral like other facilities typically do. And it makes it easier for them to reach a key regulatory barometer that monitors banks’ liquidity risk in cases of stress in the short term. A helping hand can lighten another burden–but not for long.
"Interbank liquidity stresses" and central bank long term "loans" without collateral are not a good sign. An escalating war on capital flight is not a good sign either.

Tuesday, January 10, 2017

Bruni on Rule of Law in Regulation

I found Frank Bruni's opinion piece in the Sunday New York Times noteworthy on the whole question of rule of law in regulation:
Hillary Clinton as New York City mayor?

Imagine the fun:  City building inspectors start to show up daily at Trump Tower, where they find a wobbly beam here, a missing smoke detector there, outdated wiring all over the place. City health inspectors fan out through Trump’s hotels, writing citations for clogged drains in the kitchens and expired milk in the minibars. 
The potholes near his properties go unfilled. Those neighborhoods are the last to be plowed. There’s a problem with the flow of water to his Bronx golf course, whose greens are suddenly brown. And the Russian Consulate keeps experiencing power failures. It’s the darnedest thing. Clinton vows to look into it, just as soon as she returns from the Hamptons.

..His [Trump's] hometown is her fief. She’s the boss of him whenever he’s in the Big Apple, and he’s in the Big Apple a whole lot.

...I’m fantasizing, yes, but with a glimmer of encouragement....there are so many scores she could settle, so many ways she could meddle. ...above all there’d be the torturing of Trump...The city’s Mexican Day Parade would be rerouted, from Madison Avenue over to Fifth, right past Trump Tower. A new city zoning experiment would locate detention centers in the strangest places. And in the city’s libraries, “The Art of the Deal” would be impossible to find, while upfront, on vivid display, there’d be copies galore of “It Takes a Village” and “Hard Choices.”
There is no indication that Bruni is kidding, that any of this would be both monstrously illegal, unethical, and a disaster for New York, and no disclaimer from his editors.

As far as I can tell, Bruni is a middle of the road Democrat, and a fan of large-government regulation.  (Like the rest of the Times, Bruni seems currently in full-tilt Trump Derangement Syndrome, with 11 out of his 14 columns since the election criticizing Trump, rather than policy, so if he's really a free-market deregulator, let me know.)

So how fascinating that Bruni -- and his Times editors -- seem to think it so natural that regulation and public services they admire -- building inspectors, muncipal water and power, zoning, even the public library -- should naturally be bent, far beyond legal limits, to partisan political service. Building inspections are used to punish political enemies, but we're supposed to trust that the IRS, Obamacare, EPA, FDA, NLRB, and Dodd-Frank are not?  Or is it just that illegal abuse of power is just fine and normal in the hands of their friends?

And how deeply naive. Really?

Monday, January 9, 2017

Leaders vs followers?

The Jan 9 Wall Street Journal had this nice graph, accompanying an article by Josh Zumbrun, "Top Economists Grapple with Public Disdain for Initiatives they Championed"

The question is this: Should we understand politicians as assembling coalitions of voters with fixed policy preferences? Or should we instead regard politicians as leaders, who give voice to general dissatisfaction, and their followers picking up ideas?

Most political analysis takes the former view. People are mad about China, the TPP, immigrants, or whatever, and Trump comes along, listens, and represents these preferences, and wins. Easy models of political preference put preexisting policy views on a line, and then think about where leaders choose to place themselves.

The article echoed the common view too
Surveys from the Pew Research Center have documented dwindling support for free trade. In 2014, 60% of Democratic voters and 55% of Republican voters supported such trade agreements. In an October survey, however, support among Democrats had fallen to 56% and support among Republicans had nose-dived to 24%.
I'm coming to a different view. Yes, people are unhappy. But the average American is busy with a real life, and doesn't think a whole lot about cause and effect in public policy. How many have read NAFTA or the TPP, or have any idea what's inside?  How many have thought about automation vs. regulation vs. trade as the source of industrial decline?

It seems to me the ideas come from the leader, giving voice to their voter's frustrations. Policy views then become general signals of team allegiance. Witness how many Trump supporters, interviewed, supported him despite not because of policy stances.

And witness the graph. How could it possibly be that in two years, opinions on the value of free trade among Republicans dropped by half, while virtually unchanged among Democrats? Surely, this is not a change of view independent of candidates, that Mr. Trump was just quicker to recognize. Surely, this represents the opposite -- candidates, especially Mr. Trump but also many of the others, denounce trade, and followers follow.

The good news is that ideas held lightly and as a badge of support can more easily change.   And other leaders can channel the same discontents to more profitable analysis of our country's problems.

Monday, December 19, 2016

Electoral College

Source: Real Clear Politics
The electoral college is back in the news, with Democrats suddenly discovering it's a terrible idea.

I wrote at length in defense of the college in a previous post. I wrote just before the 2012 election so I can credibly claim that my view is not a sudden discovery motivated by partisan feeling.

I don't want to repeat the whole post, though I'm still proud of it and hope I can send some traffic there.

Short version: The electoral college forces candidates to attract geographically dispersed support. Moving a swing state from 45% to 55% is much more important than moving a solid blue or solid red state from 75% to 85%.

This is vital. Our country is already polarized, and that polarization is reflected in geography.  See the map. A set of rules that encourages further polarization would be a disaster. American democracy failed miserably once. 700,000 people died and government of the people, by the people, and for the people nearly did perish from the earth. Things like this don't happen again only when people think they can, and vice versa.

In a pure popular vote contest, after candidates and parties adapt their positions and coalitions of support, we are likely to see whole swaths of the country with 70, 80, 90% or more majorities of one or the other party -- and even greater demonization of the other side. Fill in the gaps what happens next.

The deep point: When you set up rules for anything, there is a tension between measurement and incentives. Once people show up at the polls on election day, there is a strong case that "each vote should count the same." But if you do that, the incentives, and hence the outcomes will be much worse.

Thursday, December 15, 2016

National Fellows at Hoover

How would you like to work at Hoover for a year, focusing on research with no teaching or other responsibilities, and soaking up the intellectual climate of Hoover and Stanford? If you are an economist roughly 3-10 years post PhD, doing research with some policy relevance that would benefit from a year here, this could be for you.

More information and application form here.


Monday, December 12, 2016

New Paper

A draft of a new paper is up on my webpage, "Michelson-Morley, Occam and Fisher: The Radical Implications of Stable Inflation at Near-Zero Interest Rates." This combines some talks I had given with the first title, and a much improved version of "does raising interest rates raise or lower inflation?"

Abstract:
The long period of quiet inflation at near-zero interest rates, with large quantitative easing, suggests that core monetary doctrines are wrong. It suggests that inflation can be stable and determinate under a nominal interest rate peg, and that arbitrary amounts of interest-paying reserves are not inflationary. Of the known alternatives, only the new-Keynesian model merged with the fiscal theory of the price level is consistent with this simple interpretation of the facts.
I explore two implications of this conclusion. First, what happens if central banks raise interest rates? Inflation stability suggests that higher nominal interest rates will result in higher long-run inflation. But can higher interest rates temporarily reduce inflation? Yes, but only by a novel mechanism that depends crucially on fiscal policy. Second, what are the implications for the stance of monetary policy and the urgency to “normalize?” Inflation stability implies that low-interest rate monetary policy is, perhaps unintentionally, benign, producing a stable Friedman-optimal quantity of money, that a large interest-paying balance sheet can be maintained indefinitely. However, with long run stability it might not be wise for central bankers to exploit a temporary negative inflation effect.
The fiscal anchoring required by this interpretation of the data responds to discount rates, however, and may not be as strong as it appears.

Saturday, December 10, 2016

Trump Taxes Two

Source: Wall Street Journal
"President-elect Donald Trump owns a helicopter in Scotland.
To be more precise, he has a revocable trust that owns 99% of a Delaware limited liability company that owns 99% of another Delaware LLC that owns a Scottish limited company that owns another Scottish company that owns the 26-year-old Sikorsky S-76B helicopter, emblazoned with a red “TRUMP” on the side of its fuselage."
So write Jean Eaglesham, Mark Maremont, and Lisa Schwartz in the Wall Street Journal

"WTF?" wonders the incredulous reader. Why does Mr. Trump structure his finances with such mind-boggling complexity, to say nothing of astronomic legal costs? The article is pretty thin on explaining the logic of all this.

You can see the Journal writers struggling for a narrative. Is this about Mr. Trump's "conflict of interest" issues? Is this something nefarious about Mr. Trump, efforts to hide something? (You can be sure earnest investigative reporters at the Times will be beating both drums for the next four years. And just as sure that nobody will pay much attention unless they can tempt Mr. Trump into saying something stupid about it all.)

Let me suggest a productive narrative. Mrs. Clinton's email saga laid bare for all of us to see the financial arrangements of prominent public figures -- "charitable foundations" to funnel money around, all "legal." In my view, rightly felt disgust at that look into our political system had a lot to do with the election. Mr. Trump's financial arrangements lay bare for all of us to see the financial arrangements of the super-wealthy in this country, also massively complex, perfectly "legal," and smelling equally of last week's fish. The right response is equal disgust at the obscene tax code and crony capitalist system that produces this mess.  Mitt Romney's taxes were 550 pages long, and he only had investments, not operating companies! Fellow peasants, get out your pitchforks!

Thursday, December 8, 2016

Growth full oped

Source: Wall Street Journal

On November 7 I wrote "Don't believe the economic pessimists," an oped about growth in the Wall Street Journal. Now that 30 days have passed, I can post the whole thing here. pdf here (my webpage).

Don't Believe the Economic Pessimists

No matter who wins Tuesday’s presidential election, now ought to be the time that policy makers in Washington come together to tackle America’s greatest economic problem: sclerotic growth. The recession ended more than seven years ago. Unemployment has returned to normal levels. Yet gross domestic product is rising at half its postwar average rate. Achieving better growth is possible, but it will require deep structural reforms.

The policy worthies have said for eight years: stimulus today, structural reform tomorrow. Now it’s tomorrow, but novel excuses for stimulus keep coming. “Secular stagnation” or “hysteresis” account for slow growth. Prosperity demands more borrowing and spending—even on bridges to nowhere—or deliberate inflation or negative interest rates. Others advocate surrender. More growth is impossible. Accept and manage mediocrity.

But for those willing to recognize the simple lessons of history, slow growth is not hard to diagnose or to cure. The U.S. economy suffers from complex, arbitrary and politicized regulation. The ridiculous tax system and badly structured social programs discourage work and investment. Even internet giants are now running to Washington for regulatory favors.

If you think robust growth is impossible, consider a serious growth-oriented policy program—one that could even satisfy many of the left’s desires.

The next crisis?

Where will the next crisis come from?  Every crisis starts with a pile of debt that can't be paid back, and shady accounting to hide that debt. When one big one goes under, everybody starts to question the shady deals they've invested in, the extend-and-pretend game ends, heretofore simple rolling over of short term debt suddenly ends, and the run starts. Governments bail out. Really big crises happen when governments run out of bailout power or will and you have a sovereign debt crisis or inflation. Governments bail out by borrowing, but if people won't lend the government money to bail out, either default or inflation must follow.  Reinhart and Rogoff describe a frequent "quiet period" between financial crisis and sovereign crisis. So far we have just had quiet.

So, where around the world is there a lot of debt that might not be paid back and really shady accounting? Well, duh, China, right?

So if I have to dream up a nightmare scenario it goes something like this: A pile of debt in China is found wanting. China's government takes desperate steps -- huge bailouts, sell its pile of treasuries, force people to buy worthless assets, print up lots of money, but prop up its value by stopping people from taking currency abroad, and so forth.

Wednesday, December 7, 2016

Balance sheet balance

The Fed has a huge "balance sheet" -- It owns about $3 trillion of government bonds and mortgage backed securities, which it finances by issuing about $1 trillion of cash and $2 trillion of reserves -- interest-bearing accounts that banks have at the Fed. Is this a problem? Should the Fed trim the balance sheet going forward?

On Tuesday Dec 6, I participated on a panel at Hoover's Washington offices to discuss the book "Central Bank Governance And Oversight Reform" with very distinguished colleagues, Michael Bordo, Charles Plosser, John Taylor, and Kevin Warsh. We're not afraid to disagree with each other on panels -- there's no "Hoover view" one has to hew to, so I learned a lot and I think we came to some agreement on this issue in particular.

Saturday, December 3, 2016

Carrier Commentary

When Paul Krugman, Larry Summers,  Sarah Palin, and the Wall Street Journal all agree on something -- that presidential deal-making and strong-arming over plant location is a terrible idea -- it's worth paying attention to.

I think Tyler Cowen did the best job of describing what's wrong with the deal, interviewed on NPR. (Transcript, Highlights and audio link).

(This is an impressive radio interview. I long to be able to express something that quickly clearly and coherently on radio. Tyler must have really prepared hard for it.)
INSKEEP: Don Evans says this is a way for the president-elect to send a strong message to workers and to corporations about what his priorities are. What's wrong with that?

TYLER COWEN: We're supposed to live under a republic of the rule of law. Not the rule of man. This deal is completely non-transparent. And the notion that every major American company has to negotiate person-to-person with the president over Twitter is going to make all business decisions politicized.

Wednesday, November 30, 2016

A Better Choice

Roll up your shirtsleeves, financial economists. As reported by Elizabeth Dexheimer at Bloomberg, Rep. Jeb Hensarling is “interested in working on a 2.0 version,”  of his financial choice act, the blueprint for reforming Dodd-Frank. “Advice and counsel is welcome."

The core of the choice act is simple. Large banks must fund themselves with more capital and less debt. It strives for a very simple measure of capital adequacy in place of complex Basel rules, by using a simple leverage ratio. And it has a clever carrot in place of the stick. Banks with enough capital are exempt from a swath of Dodd-Frank regulation.

Market based alternatives to a leverage ratio

The most important question, I think, is how, and whether, to improve on the leverage ratio with simple, transparent  measure of capital adequacy. Keep in mind, the purpose is not to determine a minimum capital level at which a bank is resolved, closed down, bailed out, etc. The purpose is a minimal capital ratio at which a bank is so systemically safe that it can be exempt from a lot of regulation.

The "right" answer remains, in my view, the pure one: 100% equity plus long term debt to fund risky investments, and short term liabilities entirely backed by treasuries or reserves (various essays here). But, though I still think it's eminently practical, it's not on the current agenda, and our task is to come up with something better than a leverage ratio for the time being.

Here are my thoughts. This post is an invitation to critique and improve.

Market values. First, we should use the market value of equity and other assets, not the book value. Risk weights are complicated and open to games, and no asset-by-asset system captures correlations between assets. Value at risk does, but people trust the correlations in those models even less than they trust risk weights. Accounting values pretend assets are worth more than they really are, except when accounting values force marks to market that are illiquid or "temporarily impaired."

Market values solve these problems neatly. If the assets are unfairly marked to market, equity analysts know that and assign a higher value to the equity. If assets are negatively correlated so the sum is worth more than the parts, equity analysts now that and assign a higher value to the equity.

Tuesday, November 29, 2016

Central Bank Governance Meeting

I'll be part of "Central Bank Governance and Oversight Reform: A Panel Discussion" at the Hoover Institution Washington DC offices, Tuesday Dec 6, 2016 10:00-12:00. The panelists will be  Michael Bordo, John Cochrane, Charles Plosser, John Taylor, and Kevin Warsh.

The occasion will be in honor of the book (cover at left), though knowing this panel I doubt we will keep to the subject and instead enjoy a thorough debate on central bank and monetary policy issues. The format will be very short presentations, followed by lively Q&A and discussion.

If you're interested in attending, follow this link to rsvp.


Update
Discussion now available online, embed below, link here

Wednesday, November 23, 2016

Exceptionalism

For Thanksgiving, I offer a rumination.

Last month, the Hoover Institution's fall retreat was organized around the theme of American Exceptionalism. See here for podcasts of talks from the stars -- really good. I talked about the nexus between economics, rule of law, regulation, and exceptionalism.

This was before the election, but two themes strike me as especially important still.

First: America needs rule of law, regular order, a partisan truce, even more than it needs my particular free-market policy preferences.

If Republicans overturn Obamacare in their first 100 days, with no Democratic votes; if President Trump picks up his phone and pen, undoes 8 years of Obama in the first day, and starts writing his own; and sends the agencies after his critics and enemies, we are headed for disaster.  Future president Elizabeth Warren, or President Malia Obama with Vice President Chelsea Clinton, will just do the same. There is an anectdotal story of early 20th century Chicago mayors, who alternated between German and Irish. Each one's first act in office would be to overturn the ban on whiskey (beer), and impose a ban on beer (whiskey). (Too good a story to check the facts!) Let's not do that.

Second, we must not become a country where you can't afford to lose an election. The criminalization of politics has already gone too far. If you can't afford to lose an election -- if losing or supporting the losing party or speaking out on policy issues that lose gains you the tender attentions of the FBI, the IRS, the DOJ, the NLRB, and the EPA, if you lose your job and your business -- then people in power will fight to the end not to lose that power. Though I'm no fan of the Clinton foundation shenanigans, the noises coming out of the Trump transition not to push that issue are hopeful. Losing an election, a 95% reduction in speaking fees, and the public attention that investigative journalists can bring are enough. Putin can't retire and stay out of jail -- or alive.

A last thought for Thanksgiving. The Pilgrims were all illegal immigrants -- violating their charter from the English King, and the natives' longstanding ban on white settlement. Thank the Wampanoag's tolerant attitude for your turkey.


Economics, Rule of Law, and American Exceptionalism
(Talk given at Hoover retreat October 2016) 

To be a conservative — or, in my case an empirical, pax-americana, rule-of-law, constitutionalist conservative libertarian — is pretty much by definition to believe that America is “exceptional” — and that she is perpetually in danger of losing that precious characteristic. Exceptionalism is not natural or inborn, but must be understood, cherished, maintained, and renewed each generation — and her garden is always perilously unattended.

Friday, November 18, 2016

How to raise house prices and inequality

From Chris Kirkham in today's Wall Street Journal, department of you can't make this stuff up:
Nearly two-thirds of Los Angeles voters last week approved a citywide affordable-housing requirement.... 
The rule requires that up to 25% of units in rental properties and up to 40% in for-sale projects meet affordability guidelines. Alternatively, developers can pay a fee to the city.
New York City and Seattle passed similar requirements earlier this year. 
The Los Angeles initiative goes a step further, however. It also sets wage standards for the projects. 
Developers must pay construction wages on par with those required for public-works projects, hire 30% of the workforce from within city limits, set aside 10% of jobs for certain disadvantaged workers living within 5 miles of the project and ensure 60% of workers have experience on par with graduates of a union apprenticeship program. 
The mandates could double the hourly wage for some construction trades compared with state median wages. The pay for a carpenter, for example, could rise to $55.77 an hour from $26.16, according to an economic analysis sponsored by opponents of the initiative.
I wonder what that will do to the cost of housing? Notice also that by restricting who can do construction jobs and forcing up wages, there will be lots of new unemployment among lower-skilled or new entrants to construction, often a first step up the ladder for less educated people.
... some developers will be less affected by the change. Those who build primarily affordable housing, using government subsidies, already must pay higher wages. Developers of large high-rise projects, meantime, often use union work crews.
The measure was backed in part by the Los Angeles County Federation of Labor, a union group,
A union group delighted to eliminate low-wage competition. Let them eat tacos?
“There’s a huge shortage of housing in L.A., and a huge shortage of low-income housing,” he [Shawn Evenhaim, chief executive of Los Angeles developer California Home Builders] said. “They took that problem and made it worse.”
Left out of the article, and a big question I have if anyone knows the answer: who gets "affordable" or "below market rate" housing. Rather obviously more people want subsidized housing than can get it. So who wins the lottery?

"Affordable" housing is parceled out by income limits. So what happens if you get a better job? Are you kicked out of your house? That sounds like a great recipe for perpetuating income inequality. What happens if you get a job offer somewhere far away? Can you trade one "affordable" house for another? I bet not. One more nail in the coffin of advancement.

More deeply, if these things work the way I suspect, there is a long waiting list and a lottery. Once in, you're in so long as you don't get more income. Thus, they entrench and benefit people who have been in one place a long time. And the people really hurt by "affordable" housing -- which restricts supply and raises costs of all other housing -- are newcomers, especially low-income newcomers who would like to come for better jobs. And new businesses who would like to hire ambitious low-income newcomers and give them better incomes.

So the effects are not just to raise house prices -- they are to increase inequality, reduce opportunity, especially for low skill and low income people, and reduce the economic vitality of the region.

Thursday, November 17, 2016

Yglesias discovers rule of law

Matt Yglesias (HT Marginal Revolution) writes well of the danger facing America in the era of the regulatory state.
Those who support the regime will receive favorable treatment from regulators, and those who oppose it will not. Because businesses do business with each other, the network becomes self-reinforcing. Regime-friendly banks receive a light regulatory touch while their rivals are crushed. In exchange, they offer friendly lending terms to regime-friendly businesses while choking capital to rivals. Such a system, once in place, is extremely difficult to dislodge precisely because, unlike a fascist or communist regime, it is glued together by no ideology beyond basic human greed, insecurity, and love of family.
He's talking about the Trump administration.  Matt, where have you been these last 8 years? Well, better late then ever, but wow those partisan glasses make the mirror hard to see. (I might add that this is exactly how fascist and communist regimes work in reality. Ideology is easy to find.)

Update for Fire Man (I try not to endlessly push my previous work.) The Rule of Law in the Regulatory State

Update 2. A little less snarky. Still, the danger is real. Will Republicans, now in power, say thank you very much, pick up the phone and pen, and do unto D like D did unto R? Or will they be the ones to undo tit-for-tat, shove-it-down-their-throats policy, and reestablish executive restraint at least by custom if not by statute? That will take losing or delaying some policy fights, and foregoing the delicious irony of revenge. President elect Trump did threaten to use the IRS against political enemies. Let us hope that like much else was campaign rhetoric. Will the repeal and replace Obamacare happen strictly along party lines in 100 days -- and then be overturned itself by President Warren or Chelsea Clinton? Or will they take the time and effort to get a significant Democratic buy in? Time will tell.

I did not mean to say that the worry is unfounded, only that it goes back a ways in US politics,  and the  fight would now be oh so easier if people like Yglesias had kept true to principle while their policy priorities were being shoved down people's throats, and their political antagonists were the victims of the politicized regulatory state.

Good commentary from Glenn Greenwald on the Inspector-Renault quality of this outrage.

Monday, November 14, 2016

No 100 days. Please

Dear President-Elect Trump:

The media and punditocracy are full of speculation about your "100 day" program. It sounds like you and your team might actually be preparing for one. Don't do it. Please.

I know, every new president wants to repeat Franklin Roosevelt’s hundred days: a flurry of new legislation, executive orders and agencies, dramatically changing the country (for better or worse) and cementing his (or her, someday) place in history.

It's not the time, and you're not that president. You can only achieve a similar place in history with the opposite course.

It’s not 1932. We’re not in a national political and economic emergency. Our country does not need a massive dose of new laws, new regulations, new policies, and new agencies. It has lots of laws, regulations, and agencies that aren’t working.  

The task for our time is to fix the dysfunction, soothe the polarization, get the sensible compromises passed, and clean up the administration of government. Tax reform.  Regulatory reform. Entitlement reform. Immigration reform. Criminal-justice reform.  Fix health insurance. Fix Dodd-Frank. There are straightforward, bipartisan workable if not perfect answers to most of these long-standing messes that have been torpedoed by absolutists on one side or another.  Read the Paul Ryan "better way" plan, detailed and prepackaged. If you really think you can do better, work from that basis. You don't have to write a word of new proposals yourself. The more something is someone else's idea, the easier it is to get it passed.

Find a deal. Get it done. Quietly, behind the scenes. Let your opponents in both parties have a face-saving way to help you. Don't try to shove things down people's throats, either legislators or voters. That’s what great politicians do.

Sunday, November 6, 2016

Don't Believe the Economic Pessimists

Source: Wall Street Journal
No matter who wins Tuesday’s presidential election, now ought to be the time that policy makers in Washington come together to tackle America’s greatest economic problem: sclerotic growth. The recession ended more than seven years ago. Unemployment has returned to normal levels. Yet gross domestic product is rising at half its postwar average rate. Achieving better growth is possible, but it will require deep structural reforms.

The policy worthies have said for eight years: stimulus today, structural reform tomorrow. Now it’s tomorrow, but novel excuses for stimulus keep coming...

Keep reading here, the Wall Street Journal Oped. I'll post the whole thing in 30 days as usual.

Somehow the WSJ thinks anyone is interested in growth and serious policy on the eve of the election. Or maybe they were just tired of Trump vs. Clinton and needed to fill space.  At any rate, it might give you a little reprieve from the election coverage.

Tuesday, November 1, 2016

Yellen Questions

Fed chair Janet Yellen gave a remarkable speech at a Fed conference in Boston. I have long wanted to ask her, "what are the questions most on your mind that you would like academics to answer?" That's pretty much the speech.

Some commenters characterized this speech as searching for reasons to keep interest rates low forever. One can see the logic of this charge. However, the arguments are thoughtful and honest. If she's right, she's right.

The last, and I think most important and revealing point, first:

1. Inflation
"My fourth question goes to the heart of monetary policy: What determines inflation?"
"Inflation is characterized by an underlying trend that has been essentially constant since the mid-1990s; .... Theory and evidence suggest that this trend is strongly influenced by inflation expectations that, in turn, depend on monetary policy....The anchoring of inflation expectations...does not, however, prevent actual inflation from fluctuating from year to year in response to the temporary influence of movements in energy prices and other disturbances. In addition, inflation will tend to run above or below its underlying trend to the extent that resource utilization--which may serve as an indicator of firms' marginal costs--is persistently high or low."
I think this paragraph nicely and clearly summarizes the current Fed view of inflation. Inflation comes from expectations of inflation. Those expectations are "anchored" somehow, so small bursts of or disinflation will melt away. On top of that the Phillips cure -- the correlation between inflation and unemployment or output -- is causal, from output to inflation, and pushes inflation up or down, but again only temporarily.

What a remarkable view this is. There is no nominal anchor. Compare it, say, to Milton Friedman's MV=PY, the fiscal theory's view that inflation depends on the balance of government debt to taxes that soak up the debt, the gold standard, or John Taylor's rule. In the Yellen-Fed view, "expectations" are the only nominal anchor.

Monday, October 24, 2016

A Behavioral new-Keynesian Model

Here are comments on Xavier Gabaix' "A Behavioral new-Keynesian model." Xavier presented at the October 21 NBER Economic Fluctuations and growth meeting, and I was the discussant. Slides here

Short summary: It's a really important paper. I think it's too important to be true.

Gabaix' irrationality fixes the pathologies of the standard model by making a stable model unstable, and hence locally determinate. Gabaix' irrationality parameter M in [0,1] can thus substitute for the usual Taylor principle that interest rates move more than one for one with inflation.