Tuesday, September 27, 2011

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?

Thursday, September 22, 2011

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.

Wednesday, September 21, 2011

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!

Tuesday, September 20, 2011

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.

Friday, September 16, 2011

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.

Monday, September 12, 2011

What are universities good for?

Universities produce four basic things for their customers:

  1. A Consumptive knowledge good (things we enjoy learning about).
  2. A Productive knowledge good (Human capital in the traditional sense of boosting our skills as workers).
  3. Social capital (in the sense that we gain lots of productive social interactions and contacts in our university experience).
  4. A signal of our existing stock of human capital (this is not developing new human capital - think of our transcript as a stamp on our foreheads showing the world how smart we are, not what we learned).

Breaking these down, I think it's remarkably difficult to say a university education is worthwhile for most individuals but for point 4. And obviously signalling is a good reason for individuals only given an inefficient collective equilibrium. There are much cheaper ways to send signals.

Points 1 and 2 are legitimate reasons to go to college, but I don't see how they'd justify the expense in many cases. Recently, I read someone arguing that college should also be understood in the context of point 3, but that seems way off base to me.

Universities are not somehow unique in their ability to create that social capital. You get all the same sort of things in work environments, sports and hobby clubs, religion, you name it. You can get much of the same by working with other students even in non-traditional classes.

Granted, it's a different way of thinking, but that's exactly the point. All of those social interactions can provide equivalent or better opportunities for social capital development (I'd argue for better, because they generally are truly collaborative, voluntary interactions, often across large peer and non peer groups).

And best of all, they're largely efficient, market-based interactions rather than an ungodly expensive university experience that saddles the kid with a lifetime of debt and a bunch of nonsensical ivory tower hokum.

Point blank, I certainly made great friends in college and grad school, and learned how to interact with them. However, I think I would have made great friends and learned how to interact with them in a world where most people don't go to college but, say, do extended apprenticeships or go to work in a factory. I also made great friends and developed relationships being a young, 20-something professional working with lots of other young, 20-something professionals and lots of older, more experienced folks too.

One final note. This is especially true with non-peer groups and diversity. University experiences with this seem uniformly bad (in my observations as a teacher and a student there). I learned a lot more about class, race and gender/sexuality relations (at least in the positive sense of developing relationships and working with folks of other races and backgrounds) by working, following my interests, volunteering than through anything I did at school.

Friday, September 9, 2011

Payroll tax cuts in the Obama Jobs Plan

I don’t see any wisdom in another payroll tax cut. Perhaps I’m too unsophisticated to see the way around these obvious problems I see everyone collectively ignoring:
* It further balloons the structural deficit, bringing what was once described with unintentional hilarity as a “long-term” problem and is now described as a “medium-term problem that much closer to term.
* It creates further inevitable fighting over whether it’ll become permanent.
* By virtue of being temporary, it loses a big chunk of its supposed stimulative oomph.
* It sets up yet another ridiculous political fight, whereby, at their most sensible, the Republicans would argue for a cut on the business side, and then be pilloried by Democrats for turning a tax cut on “workers” into a tax cut on businesses”.
* Even notwithstanding all of those show-stopping problems, it’s extremely doubtful to me that the empirics are on its side. It won’t help employ “millions” of currently unemployed workers. Certainly not in the current monetary policy environment.
* Bonus: consider where the labor market is really slack. Unemployment among highly skilled workers is about 5% and among low skilled workers is something like 15%. Over the last few years, we’ve driven up the minimum wage by over 20%, and the looming effects of the Obamacare legislation are projecting to add another 50-75% on top again over the next couple years. In that context, I don’t see how anyone can think a 2% reduction in the payroll tax, obtained at great expense in terms of regulatory, political, and long-term economic costs, makes any sense at all. It's pissing in the wind at the absolute best. I should also note that was by far the best proposal in his speech last night.

More on the ideal monetary regime

Building on my previous post, I see two major components to Scott Sumner's ideal monetary regime, and I think the emphasis is largely on the wrong one. That is, yes, NGDP targeting is maybe/probably better than inflation targeting, but it's still a system where political appointees take a swag at the target. Saying the actual target doesn't matter is not an ok answer.

That's why the futures market is such a great idea. With an NGDP futures market, it's automatic and self-correcting. We can't screw it up.

Put another way, the monetary crisis since 2008 hasn't been due to inflation targeting. It's been due to missing the inflation target. Human error. Replacing inflation targets with NGDP targets doesn't get us very far if we're still relying on an extremely fallible set of people to make the decisions.

Beyond that, while we really don't know what the hell we're doing when it comes to inflation targeting, there's at least pretty substantial research (and more here)on the question of what the target should be. Which is, you know, a better start than "the actual target doesn't matter".

Thursday, September 8, 2011

Everyone loves NGDP Targeting

One question I'd like settled before the Fed (as a collection of interested parties)- rather than a notional futures market - engages in NGDP targeting is how to set the target. Without hand-waving, can anyone reasonably say why a 6% target is the right target and not 7%? How's about 10%? I mean, if we want more growth, why not?!

It's not hard to see where this would go. Replace all the above-mentioned political hand-wringing about multipliers and GM with political pressuring for "just a little bit more" income and jobs. That could be a hell of a Pandora to let out of the box in any case... but especially if our theory of target-setting is essentially taking a swag.

Sunday, September 4, 2011

Zero Marginal Product Workers?

Tyler Cowen note the zero marginal product worker idea (and here) is "gaining wider currency" with an article from the Richmond Fed, which effectively seems to be saying 'See! These workers are unemployable, so easing monetary policy via the Fed won't help!'.

I confess, this disturbs me because I don't think the ZMP idea makes much sense for several obvious reasons.

First, it seems targeted to describing unemployment in skilled workers, but the lion's share of unemployment is amongst unskilled workers (estimates are running at 5% unemployment for experienced skilled workers, about 10% for new graduates and 13-15% for unskilled workers if I remember correctly).

Second, the whole idea of MP of labor is tied to marginal cost of labor. In English, workers are hired not based on what they produce alone but what it costs to get that production. And costs, especially for the unskilled workers, have increased dramatically, with effective minimum wages estimated to reach over $13/hr as the health care law is phased in.

Thus, it seems like the lion's share of unemployment can be explained by the obvious elephant in the room, lack of demand, coupled with a greatly increased marginal cost for hiring cheaper workers.

At the very least, it puts paid to this argument from the Fed. If the Fed can raise demand, it will make it more profitable for companies to hire workers, and decrease the relative costs of doing so. Hiring is always a relative calculation, and right now costs are relatively high and benefits aren't obvious since companies aren't exactly swimming in work.

Anecdotal to this, I do see structural problems, but I don't know if this or any comprehensive theory describes it well yet.

  • I see lots of comments from the unemployed but highly skilled blaming HR departments and I think there's some truth to that. On the other hand, that also looks like something that could easily be pushed by the wayside if there were a truly high demand out there. If companies had projects to work on, they'd hire.
  • I think we underestimate just how many skilled workers for private companies effectively work exclusively on government contracts. These are not entrepreneurial businesses in the sense we think of as economists. Our basic model is that a company develops and idea and then sells it. A car company, for instance, hires designers to build a car, and employs workers to build it. It's a speculative venture, and when (and if) the business takes off, more employees are hired. A privately held bureaucratic business that wins long term contracts from the government doesn't do this.  They employ a few people to get the work along with a core group of people, but there's not really cause for much additional hiring if they don't win a contract.
  • Similarly, the requirements put on companies working closely with governments are often onerous with respect to who they hire.