We want our politicians to be good liars

OK, assume the worst intentions (which I don't, but for the sake of argument) it's still better to have a competent liar than an honest fool.

• Party R holds the true belief but the voting public holds the false belief. Party R must lie to win the election and implement their true belief.
• Party D holds the false belief and is in power. They have steadfastly refused to question their false belief to their own and their country's great detriment.

Following this log a D victory ensures no monetary expansion. Not only do they philosophically not believe in it, the public doesn't support it and their key constituencies would be especially hurt by too much inflation if the policy fails. An R victory gets a higher likelihood of the right policy. An R campaign of honesty gets us a higher likelihood of a the wrong policy, because, again, it is extremely unpopular and poorly understood.

And, by the way, counld someone write an entertaining account for us of what one of those monthly Obama-Bernanke meetings sounds like?

John Taylor: Abandon the employment goal to reach it

Scott Sumner posted on John Taylor's piece in Bloomberg the other day, and thinks it says Taylor is calling for tight money. I just re-read Taylor's piece, and I don't think he's arguing for a cut in inflation targeting or tight money.

Why has the Fed gone cuckoo over interest rates? I mean, they’re doing crazy stuff to further lower them!

It's because they are focused on employment! To the detriment of hitting their price stability target. Because they’re totally locked in on the wrong concept to the exclusion of all else. Why? because our basic economic theory, the sort we teach and learn in econ 101, and that even most non-economists intuitively understand, is that low interest rates lead to more borrowing which leads to more employment.

Taylor is saying this pursuit of the the unemployment mandate, to the exclusion of everything else, is counterproductive to reducing unemployment.

Why Bernanke and co don’t understand low rates aren’t the solution to this kind of problem, I don’t understand, but I do understand the situation when I view it from that perspective.

Not will low rates not work in this situation, they focus and background conditions cause the Fed to ignore price stability and allow deflation. Which, of course, kills employment.

By abandoning the employment goal, the Fed gets to stop caring about interest rates and focus on the price level. Which will help the now unstated employment goal.

It's elegant, ingenious, and it might actually be right.

Will Obama be the 2012 Democratic Nominee?

Ann Althouse surveys articles talking about this and says:

I'm sorry, I can't see the Democratic Party thriving by ousting Obama. What chaos! And Hillary would have to compete in the primaries. Presumably, other Democrats — those characters who are otherwise waiting for 2016 — would jump into the fray. (But who are those other Democrats? What is the next wave of presidential-seeming Democrats?) I think it would be an awful mess if he were publicly hounded into withdrawing.
If some powerful alliance of liberals really wanted Obama to withdraw, they would — I imagine — be operating in private. It would be handled in a way that would preserve Obama's ability to come forward and present his withdrawal in a very grand and lofty style, as a matter of his own decision and not out of desperation and for highly altruistic reasons.

I agree that the Democrats wouldn't stand a chance by challenging him, but I don't see any logic to some secret cabal operating in private. Suppose he resigns or chooses not to run. What on earth does his Democratic successor run on? The successor can't do much to change policy over the next year, and the economy sucks. Nobody wants to step up and own that.

So why do we see media outlets talking about this like it might happen? Because non-stories are popular. Up next, Pete Rose should be in the Hall of Fame!

What should the Fed do?

Is it treasonous to believe what might be the right policy in the abstract would be the wrong policy in practice?

* Can the Fed be trusted to get things right on its own? With 2008-present as evidence, even though I favor targeting a higher NGDP rate instead of 2% inflation, I see a real possibility for them to botch it badly, and for things to get out of control.

* The Fed ultimately relies on its credibility and the expectations of the larger public to act to do this, and memories of the 70s and 80s inflations scare the hell out of people. The real and perceived actions of the Fed in 2008 to present don't add to its credibility.

* If we have a President who fundamentally misunderstands economics but nonetheless holds a lot of both hard and soft power, he could cause a lot of really bad things to happen. Another year of this would suck, but the current situation doesn't portend riots, bloodshed, wide-spread class warfare, constitutional crises, or government defaults.

In short, lots of "very bad things" could happen if the Fed acts in a significant way, and having them not happen depends on lots of people with differently aligned interests all acting in concert. In an election year.

Obama's grasp of economics and social graces

From Althouse, we apparently the President's first words to former economic adviser Christina Romer were:

""It’s clear monetary policy has shot its wad" is what Obama said to her before even "hello."

Stay classy, Barack! Worse, as an economist, she was clearly right and Obama (and the Larry Summers faction of economists he sided with on monetary policy) was plain old wrong, and have made things much worse following their mistaken beliefs.


While the language is bad the bigger problem is that Obama was meeting one of the world's foremost scholars of monetary (and fiscal) policy and immediately dismissing one of her primary findings.

It'd be like meeting Einstein and the first words out of your mouth are "relativity is bullshit".

Are we truly indifferent between inflation options?

A standard experiment for seeing if people suffer from money illusion is to ask them whether they’d prefer a nominal wage increase with higher inflation or a nominal wage cut with lower inflation in the manner of Kahneman and Thaler’s surveys. Right?

When respondents prefer the nominal wage+inflation hike, it’s cited as evidence of peoples' irrationality. For instance a typical survey question asked:

"A company is making a small profit. It is located in a community experiencing a recession with substantial unemployment [but no inflationland inflation of 12%]. The company decides to [decrease wages and salaries 7%lincrease salaries only 5%] this year.”

Respondents considered the wage decrease worse than the wage increase, although after adjusting for inflation they're equivalent. In a world where Y=C, then they’re equivalent. But in a world where Y=C-S, and we can generate a better than inflation return on S, it’s better to have the nominal wage hike.

Simple math. I earn $1000 this year and save $100 of it. The other $900 is consumption. I’m offered Kahneman’s choice for next year.

• If I choose a 7% cut + 0% inflation, I earn $930 and spend $900. If I’d had the $100 of savings invested in TIPS at a .07% plus inflation, I end the year with $130 in the bank which is about 14% of my annual expenditures.
• If I choose a 5% raise with 12% inflation, I earn $1,050 and consume $1,008, so I can add another $42 to my savings. That $100 of savings invested in TIPS at .07% plus inflation yields $112, so I end the year with $154 in the bank which is about 15% of my annual expenditures.

IE, the two choices are *NOT* equivalent in real terms and workers are right to prefer the nominal wage increase+inflation option. It's a small difference here, but we're only talking about a 1 year change and a tiny investment return above inflation. As you project it out over longer periods, you get a better real return in the inflation adjusted situation.

Libertarians and Pricing

Noapinion (via the Money Illusion) thinks more liberty means annoying prices on everything.I think the key misunderstanding is found here:

Intuitively, this makes a lot of sense: if the government can come and confiscate your stuff, or tell you what to do with it, you don’t feel very free at all. But libertarians tend to take this basic concept to its maximal extent; the more things are brought within the cash nexus, the more free we become. No limits, no exceptions. A direct implication is that the more government functions we can privatize, the more free we will be.

First, a libertarian would stop at the first sentence. That’s freedom of contract and property. But nothing about the freedom of property or contract requires you to monetize everything, and in fact such a requirement would diminish freedom.

Second, although it does not follow that bringing everything into the “cash nexus” is optimal, the real problem we have here is that Noah really misunderstands the Economist’s argument here, which is for traditional contractual relationships and property rights in health care, not overzealous itemized billing.

The big irony, of course, is that the most obvious caricatures of “monetized everything” seem to spring out of heavily regulated and government run industries, which divorce the consumer more than usual from choice and direct payment for services. Hospitals charging $20 per aspirin, for instance, isn’t a libertarian or market outcome, it’s a regulatory outcome.

Put simply, pricing exists under every system. Libertarians argue for maximal contract and property rights, which will generally lead to efficient pricing. And nickel and diming everyone to death is generally not very efficient unless you’re severely restricted in your alternatives as a producer and your consumers are likely severely restricted in their alternatives to coming to you.

A “progressive” society has increased incentives to nickel and dime over a “libertarian” society, because the former is subject to many more non-market price distortions that need to be compensated for in order to turn a profit.