"The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds."
- John Maynard Keynes
December 18, 2014
December 8, 2014
November Jobs Report
November had the largest increase in non-farm payroll employment since January 2012, at 321,000 jobs added. October had a respectable 243,000 added after being revised up from 214,000. The labor market has been gradually picking up pace; the 12 moving average of job growth has been the highest of the recovery for the past few months.
The unemployment rate, at 5.8% didn't change, but that's more a sign of people being encouraged enough to look for work. The unemployment rate for whites is 4.9%, for Hispanics 6.6%, and for blacks 11.1% (higher now still than the overall rate was at the bottom of the Great Recession).
The unemployment rate, at 5.8% didn't change, but that's more a sign of people being encouraged enough to look for work. The unemployment rate for whites is 4.9%, for Hispanics 6.6%, and for blacks 11.1% (higher now still than the overall rate was at the bottom of the Great Recession).
December 1, 2014
Scott Sumner on Finance and Monetary Economics
I'm often frustrated by the conflation of finance and monetary economics. I understand its occurrence in the lay-public (not hating, just saying), but most economists themselves fall into this trap. It occurs because the signaling mechanism central banks use is short term interest rates, but they could theoretically pick anything. Where interest rates are used, policy is still just about changing the money supply to target a nominal variable. The conflation presents all sorts of cognitive problems, such as thinking the “real problem” is the the financial system, so monetary policy can’t work, to thinking monetary policy is used up because interest rates are at 0%.
Anyway, here is Bently economist Scott Sumner on just how baseless this conflation is:
Anyway, here is Bently economist Scott Sumner on just how baseless this conflation is:
"…monetary policy consists of changing the supply of cash relative to demand. The nominal size of the entire banking system and all its components; capital, loans, reserves, deposits, etc., is determined endogenously, just like the nominal size of the plastic surgery industry, or nominal size of the ice cream industry. Normally, a permanent 20% increase in the [monetary] base[1] would be expected to increase the nominal size of the banking, plastic surgery, and ice cream industries by 20%. But other things are often not equal.
Banking is only special a few cases. For instance, government regulation of banks might create a large and time varying demand for base money. Or the public may hoard cash because they fear a banking collapse. Otherwise, banking is of no interest to monetary economics. If the Fed abolished reserve requirements, insured bank deposits, and targeted NGDP growth expectations at 5%, then you might as well drop banking out of monetary textbooks."
November 15, 2014
Second-hand Clothing Donations
In the rich world, much of the clothes donated to local charities or thrift stores are actually sent to poor countries. I recently came across a paper that attempts to look at the effects of this on the domestic garment industries of recipient countries. This ties into the larger debate on in-kind aid, from food to Tom’s shoes. But I will not address that here. In general, the consensus in both theory and empirical studies seems to be that just giving money to the poor is best, conditional cash transfer programs do well too. So generally, just give money and let adults make their own decisions.
But, there is a functional purpose of donating still usable but unwanted clothing, it increases the efficiency of resource use, despite looking worse on GDP figures. And Second Hand Clothes (SHC) are only charity for the organization that receives them in the rich world. That charity then bears the transactions cost of gathering and sorting through the clothes. They take the best clothes to donate, or in the case of thrift stores, sell. The rest is given to a for-profit exporter, who must bear the transactions cost of gathering, and sorting the clothes and finding buyers abroad. The clothes are bought by importers in poor countries and sold on local markets. This means the clothes are only sold in developing economies if they can compete on price with other options. Anyway, the author finds:
This is important because garment production has repeatedly been a step on the development ladder for poor countries, such as China and Bangladesh[1]. The logic being that hobbling domestic garment industries in poor countries can block their path to development. The author uses an instrumental regression technique to estimate the effect of SHC on domestic garment production and employment. When done correctly, the technique isolates the effects on the local garment industry to only SHC imports. For example, controlling for the effect of cheap imports from China.
However, this is not a per-se finding of net harm[2]. First, as the author plainly states, the paper looks only at the effect on the domestic garment industry, not the net effect on employment and income. Importers and sellers of SHC create local jobs that are not considered in the paper. The paper mentions that the garment industries are a very small proportion of GDP in the countries examined. This fact, and that the author found data on employment levels, leads me to believe he is looking at formal sector employment only. Most garment workers are in the informal sector, which the state fails to reliably measure. The result would be that the paper misses the majority of the garment industry. The paper also looks at the period 1980 – 2000, during which time local garment industries were declining and growth stagnating; a correlation that supports concerns of a blocked development path. The cut off just misses the recent impressive economic growth in many areas of Sub-Saharan Africa. This growth has occurred despite increasing SHC imports.
And then there is this statement in the paper that any economist knows to be true:
Ah! So it’s maybe harmful only if the receiving country has terrible economic policy. Sub-Saharan African countries have made a lot of progress in opening up their economies in the past couple decades, a process mostly missed by the paper’s time horizon. Either way, should we really not reduce waste in the rich world and benefit poor consumers because of that? And could a country possibly develop anyway with bad economic policy and more expensive clothing that benefits relatively better off producers?
That reminds me of the Import Substitution Industrialization (ISI) policies of Latin America in the latter half of the 20th century. Their intent was to replace foreign imports with domestic production to develop domestic manufacturing. This was accomplished through import tariffs and quotas that made foreign products more expensive and less available. The result was that domestic consumers paid more for lower quality. This benefited manufacturers with cozy relationships to policy makers at the expense of poorer domestic consumers. They were a failure and ended with a debt crisis. It’s true that Latin America experienced growth under the policies, higher than it experienced for almost two decades after ditching them. But it’s also true that a hangover is caused by drinking the night before[3].
At the same time, Latin America was being passed economically by East Asia, which developed through export led industrialization and relative openness to foreign goods. This, I think, is key. East Asia developed by producing cheap garments (and many other cheap labor intensive goods) by exporting them to the world market, rather than producing for domestic consumption. There is a lot of competition right now for cheap garment exports, and Africa generally has large logistic obstacles relative to East Asia. But their best strategy is to have more open economies and produce what they have a comparative advantage in. And let consumers benefit from increased purchasing power if imported goods are cheaper and better[4].
This is an intuitive result, it would be quite contrarian if it were the case that the world would be better off with rich consumers being more wasteful, and poor consumers facing higher prices.
But, there is a functional purpose of donating still usable but unwanted clothing, it increases the efficiency of resource use, despite looking worse on GDP figures. And Second Hand Clothes (SHC) are only charity for the organization that receives them in the rich world. That charity then bears the transactions cost of gathering and sorting through the clothes. They take the best clothes to donate, or in the case of thrift stores, sell. The rest is given to a for-profit exporter, who must bear the transactions cost of gathering, and sorting the clothes and finding buyers abroad. The clothes are bought by importers in poor countries and sold on local markets. This means the clothes are only sold in developing economies if they can compete on price with other options. Anyway, the author finds:
"used-clothing imports are found to have a negative impact on apparel and textile production in Africa, explaining roughly 40% of the decline in African apparel production and roughly 50% of the decline in apparel employment."
This is important because garment production has repeatedly been a step on the development ladder for poor countries, such as China and Bangladesh[1]. The logic being that hobbling domestic garment industries in poor countries can block their path to development. The author uses an instrumental regression technique to estimate the effect of SHC on domestic garment production and employment. When done correctly, the technique isolates the effects on the local garment industry to only SHC imports. For example, controlling for the effect of cheap imports from China.
However, this is not a per-se finding of net harm[2]. First, as the author plainly states, the paper looks only at the effect on the domestic garment industry, not the net effect on employment and income. Importers and sellers of SHC create local jobs that are not considered in the paper. The paper mentions that the garment industries are a very small proportion of GDP in the countries examined. This fact, and that the author found data on employment levels, leads me to believe he is looking at formal sector employment only. Most garment workers are in the informal sector, which the state fails to reliably measure. The result would be that the paper misses the majority of the garment industry. The paper also looks at the period 1980 – 2000, during which time local garment industries were declining and growth stagnating; a correlation that supports concerns of a blocked development path. The cut off just misses the recent impressive economic growth in many areas of Sub-Saharan Africa. This growth has occurred despite increasing SHC imports.
And then there is this statement in the paper that any economist knows to be true:
"In an open economy...the used-clothing imports will not affect domestic production, as domestic production is based on comparative advantage…and worldwide, rather than domestic, demand"
Ah! So it’s maybe harmful only if the receiving country has terrible economic policy. Sub-Saharan African countries have made a lot of progress in opening up their economies in the past couple decades, a process mostly missed by the paper’s time horizon. Either way, should we really not reduce waste in the rich world and benefit poor consumers because of that? And could a country possibly develop anyway with bad economic policy and more expensive clothing that benefits relatively better off producers?
That reminds me of the Import Substitution Industrialization (ISI) policies of Latin America in the latter half of the 20th century. Their intent was to replace foreign imports with domestic production to develop domestic manufacturing. This was accomplished through import tariffs and quotas that made foreign products more expensive and less available. The result was that domestic consumers paid more for lower quality. This benefited manufacturers with cozy relationships to policy makers at the expense of poorer domestic consumers. They were a failure and ended with a debt crisis. It’s true that Latin America experienced growth under the policies, higher than it experienced for almost two decades after ditching them. But it’s also true that a hangover is caused by drinking the night before[3].
At the same time, Latin America was being passed economically by East Asia, which developed through export led industrialization and relative openness to foreign goods. This, I think, is key. East Asia developed by producing cheap garments (and many other cheap labor intensive goods) by exporting them to the world market, rather than producing for domestic consumption. There is a lot of competition right now for cheap garment exports, and Africa generally has large logistic obstacles relative to East Asia. But their best strategy is to have more open economies and produce what they have a comparative advantage in. And let consumers benefit from increased purchasing power if imported goods are cheaper and better[4].
This is an intuitive result, it would be quite contrarian if it were the case that the world would be better off with rich consumers being more wasteful, and poor consumers facing higher prices.
November 10, 2014
Some Basic Macro and Monetary Econ
My mind has been a tempest of monetary economics lately; I can't figure out why my views aren't consensus, despite being built on basic theory. Many economists have a rigidly old Keynesian view that monetary policy, and QE in particular, is all about interest rates (it isn’t), that it is ineffective once rates are down to 0 (it isn’t), and that QE is only about reducing longer term interest rates (it isn’t, and downward pressure on longer term interest rates is merely a second order effect that is very weak at best).
So here’s what should have and can still be done to prevent current unnecessarily tight monetary policy from dragging down growth. Central banks can follow the example of Sweden, and put a negative interest rate on excess reserves[1], to force that money out into the economy. Because, as has been understood since John Locke, money locked in a vault is the same as if it had been burned, it effectively doesn't exist. Right now the Fed pays banks for keeping money with the Fed, the result is that money is pulled out of the economy to earn a no-risk return for doing nothing, rather than be invested. Doing so would make policies like QE more effective, thus needing less of it.
But wouldn't this cause inflation? Let’s hope so. Nominal GDP growth (which is real GDP growth and inflation) is too low[2]. Higher NGDP growth in a recession, and its recovery, means faster labor market recovery, lower real debt burdens, and higher investment as the real return on sitting on piles of cash falls. And if the inflation part gets too high? Great, now the Fed can go back to normal and increase interest rates to keep it from going too high. That’s exactly what we want, no more zero lower bound. That will help savers who currently get 0.1ish% on their savings and lose in real terms given that inflation is above 0.1%.
What if that doesn’t work? It may surprise you, and in fact probably surprise most economists, that there are "fool-proof" methods for escaping the zero lower bound. The best is printing money to buy foreign bonds and assets, thus driving down the exchange rate. With fiat money, there is literally no limit to how far down a central bank can push the exchange rate[3]. This will necessarily create domestic inflation, thus NGDP growth, as each individual dollar loses purchasing power on the world market. In fact any successful monetary stimulus would cause exchange rate depreciation and higher domestic inflation, even the old Keynesian lower long term interest rates junk.
But isn’t that a ~beggar thy neighbor policy~? No, and if you’re an economist and thought that find a new field to suck at. Economics is not a zero sum game. The faster recovery caused by these policies would mean a richer country for whoever does them. While exports would be cheaper, a richer country will consume more goods, and no country makes all the goods it consumes by itself. That means more imports and more global demand[4].
What if everyone does it? Does the world just stand still? No, it would mean a worldwide expansion of the money supply, which will increase worldwide NGDP and lead to the benefits mentioned above. This occurred in the Great Depression: as the monetary strait-jacket of the gold standard dragged the world economy down, country after country abandoned it, and their currencies immediately depreciated. In each country recovery set in shortly after, with numerous countries experiencing currency depreciation at the same time.
Aren't I just asking for run-away inflation? No, inflation depends on the money supply, if you double the money supply permanently, the price level will double in the long run; in the short run interest rates fall. Inflation never “runs away”, or becomes detached from monetary expansion. In normal times I’m as much for keeping inflation relatively low and stable as anyone else. And one reason to want higher inflation now is so that central bank interest rates can go above zero and once again be used to stabilize the economy rather than these unconventional policies. In good times too much inflation is usually the problem, in these times it’s too little. What I’m for is the optimal amount.
Please please ask me about any of this if you don't understand or are skeptical, and I'll be able to answer. There's a lot of foundation that I didn't want to spend pages and pages building from scratch.
October 31, 2014
Freedom's Battle Once Begun: 58th Anniversary of the 1956 Hungarian Revolution
So I'm pretty bad at getting posts out on actual anniversaries, but alright at remembering sometime around the actual date I'm looking for.
Anyway, not long after WWII Hungary became part of the communist bloc. In an election after WWII the communists won 17% of the vote. But the allies let Stalin impose communism on Eastern Europe, “behind the back of the nation” as the official Hungarian history likes to say. Hungary’s communist government[1] was widely considered to be the harshest outside of the Soviet Union; the Hungarian leader, Mátyás Rákosi, was derisively referred to as “Stalin’s best pupil”.
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| Preach |
Meanwhile, the ÁVH officers in the state radio building, plainly outnumbered[2] called on the Hungarian military for help. The military showed up, refused to attack the crowd, and soon joined/armed the protesters. This was not a uniform phenomenon: command and control disintegrated, many units sat out the conflict, some fought the rebels, and others joined them. But the military did not intentionally fire on unarmed civilians as the ÁVH did.
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| I like this picture because of the people going about their day in the background |
Anyway, back to chronological order. Other protesters in front of the parliament building were again fired on by the ÁVH, by this time the crowd could return fire. Overnight Soviet forces crossed into Hungary to put down the protests. Hungarians put up barricades and were even able to capture some Soviet tanks and canon. By the end of the day the protests were a full rebellion, and had spread throughout the country. The leadership fled to the Soviet Union.
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| Move along, nothing to see here but a dead commie |
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Rebels continued to battle Soviet troops, making frequent use of Molotov cocktails against Soviet armor, as well as captured artillery pieces. The rebels buried their own, while Soviets and Hungarian Communists[3] were left out in the street in disrespect. To cut down on the stench, lye was dumped on the bodies, highlighting the dead in the black and white photographs taken during the conflict.
The communist party installed new leaders from its moderate wing. They tried to regain control of the military and called for a cease-fire of all parties. By October 28th a ceasefire took hold, and Soviet forces withdrew from Budapest. The government released political prisoners, announced it was withdrawing from the Warsaw Pact, and declared neutrality. The ÁVH was disbanded, though in some areas they had to be disarmed by force. The general strike was scheduled to end, and by and large revolutionary councils decided to back the new government, or at least to wait and see before fighting it. The execution of suspected communists continued throughout the rebellion, including the days of the ceasefire[4].
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| Celebrating the ceasefire by a captured tank |
On November 3rd, a Hungarian delegation met with a Soviet delegation to negotiate the withdraw of remaining Soviet forces in Hungary. The meeting was a trap and the delegation was arrested. Soviet reinforcements poured into Hungary. The outnumbered Hungarian military and rebels again fought the Soviets in running street battles. This time there were no known instances of the army fighting against rebels. By the end of November 4th the Hungarian government and organized military resistance had fallen apart. The civilians-turned-rebels held out in some areas until November 11th. For the second time in just over 10 years, Budapest lay in ruin. It is estimated that more than 2,500 Hungarian combatants were killed, and around 3,000 civilians. 722 Soviet troops were killed.
The Hungarian freedom fighters had no hope of winning against Soviet communism, and they had to have known that. But Hungarian history is full of unsuccessful rebellions that arose as matters of principle rather than sure victory. These men and women fought and died rather than acquiesce to injustice, and they won 20 days of freedom for it. As Ronald Reagan put it, they “gave the lie to communism's claims to represent the people”.
The communists returned to power, but the former leaders remained in exile, and their replacements were moderates. In Hungary it is referred to as the era of “goulash”, or soft, communism. The economy began to grow somewhat, and the typical backdoors and corruption of a just-for-show communist state allowed circumvention of rigid ideology. Not a single image or statue of Stalin was replaced. So to Hungarians the rebellion had a practical benefit as well: it toppled a government and brought about a less bad one.
JFK did a better job eulogizing the 1956 revolution on its first anniversary:
"No other day since nations were first instituted... has shown more conclusively, to oppressed and oppressor alike, the utter, inevitable futility of despotic rule. No other day has shown more clearly the eternal unquenchability of man’s desire to be free, whatever the odds against success, whatever the sacrifice required of him.
…the world may rightfully ask whether we who enjoy the greatest quantity of freedom do not appreciate its quality the least
…So long as the memory…burns within our minds, let us hear no more about the prestige of the Soviet system or the advantages of the Soviet way.
…the very students in whom the false Gods of Communism had been thoroughly and repeatedly dinned were the first to fight for a liberty they had never known. Workers wooed by the pledge of a ruling proletariat preferred a hero’s grave to a seat on the oppressor’s council.
...We all know, in the words of Byron, as he fought and fell for Greek freedom in the rain at Missolonghi, that:
'Freedom’s battle, once begun
Bequeathed by bleeding sire to son
Tho baffled oft, is ever won.'[5]"
October 11, 2014
The World's Reaction to Ebola
People from all over the world have left behind lives of relative comfort and safety in the fight to stop the largest Ebola outbreak in history. But the governments of the rich world have not followed their example. Also here is a good video to watch.
The graphic below shows how unprecedented the current outbreak has been. It quickly infected, and killed, more people than in the rest of recorded history. That it was the largest outbreak ever was know months ago, not long after it started in March. For background: Africa is the 2nd largest continent, the current outbreak is taking place in a region of the world, West Africa, that has never dealt with Ebola before. The closest previous outbreak was at least 1300 miles away.
Despite it being obvious this is the largest outbreak ever a while ago, it was only last month that the US announced it was going to help. As NPR has been reporting, what aid the US has offered - training of health workers and building of hospitals - has been making slow progress so far, and not for no reason.
So why wasn't this started sooner? The scale was obvious. This is not charity, as the fact that an Ebola infected man made it to the US, and a Spanish nurse caught Ebola from a patient shows. The outbreak is centered on three of West Africa's poorest countries. It is in the interest of those with a greater ability to pay to help stop the spread, because if they don't, Ebola will spread, do more damage to more people in more places and cost more money to stop.
My initial feeling was that the slow response could only be down to three things: a callous indifference, inexcusable ignorance, or incompetence. But because it is a problem the whole world should be involved in to keep Ebola from spreading in the world, indifference is only possible with ignorance. And there is no way that US officials, and their rich country counterparts, weren't aware of the situation.
It is true that Ebola, having killed over 4000 so far, is rather low on the list of diseases killing West Africans. But the world need only give the disease time to potentially become a major contender. Given the high fatality, and danger posed to health care workers, and that there are too few of them in the region to begin with, the detrimental effect on health systems is large. The most efficient way to prevent a larger disaster was to act aggressively in the early stages a while back. Don't be incompetent; helping isn't charity[1], this is basic.
The graphic below shows how unprecedented the current outbreak has been. It quickly infected, and killed, more people than in the rest of recorded history. That it was the largest outbreak ever was know months ago, not long after it started in March. For background: Africa is the 2nd largest continent, the current outbreak is taking place in a region of the world, West Africa, that has never dealt with Ebola before. The closest previous outbreak was at least 1300 miles away.
Despite it being obvious this is the largest outbreak ever a while ago, it was only last month that the US announced it was going to help. As NPR has been reporting, what aid the US has offered - training of health workers and building of hospitals - has been making slow progress so far, and not for no reason.
So why wasn't this started sooner? The scale was obvious. This is not charity, as the fact that an Ebola infected man made it to the US, and a Spanish nurse caught Ebola from a patient shows. The outbreak is centered on three of West Africa's poorest countries. It is in the interest of those with a greater ability to pay to help stop the spread, because if they don't, Ebola will spread, do more damage to more people in more places and cost more money to stop.
My initial feeling was that the slow response could only be down to three things: a callous indifference, inexcusable ignorance, or incompetence. But because it is a problem the whole world should be involved in to keep Ebola from spreading in the world, indifference is only possible with ignorance. And there is no way that US officials, and their rich country counterparts, weren't aware of the situation.
It is true that Ebola, having killed over 4000 so far, is rather low on the list of diseases killing West Africans. But the world need only give the disease time to potentially become a major contender. Given the high fatality, and danger posed to health care workers, and that there are too few of them in the region to begin with, the detrimental effect on health systems is large. The most efficient way to prevent a larger disaster was to act aggressively in the early stages a while back. Don't be incompetent; helping isn't charity[1], this is basic.
October 5, 2014
August/September Jobs Report
Why not make this a bi-monthly doodle? The August jobs report was initially terrible given the trend, but was adjusted to less terrible. The September jobs report was ok but adjusted to even better, as in 180,000 jobs added in August, and 248,000 in September. The 12 month moving average continues to get better, at 222,000 per month it is the best since the economy started adding jobs again.
The New York Times has a doodle about sampling error in the jobs report that is worth looking at. Yes there is error, especially in the initial report, which is why watching the adjustments is important.
The New York Times has a doodle about sampling error in the jobs report that is worth looking at. Yes there is error, especially in the initial report, which is why watching the adjustments is important.
September 29, 2014
Economist Quotes
What has happened to us in this country? If we study our own history we find that we have always been ready to receive the unfortunates from other countries. And though this may seem a generous gesture on our part, we have profited a thousand fold by what they have brought us.
- Eleanor Roosevelt, 1939
September 19, 2014
Prohibition
During prohibition, alcohol remained decriminalized in Maryland. The state never passed a law making alcohol illegal. Free state lessons from the past.
September 13, 2014
August 14, 2014
Just Can't Help It
But for all the disappointment about Obama[1], four presidents in a row have initiated their own airstrikes in Iraq, two have played a role in a transition of power. George W. Bush accomplished that by invading Iraq with around 150,000 U.S. troops in just its initial March to April 2003 stage, the majority in a multinational collation[2].
Recently Iraqi Prime Minister Nuri al-Maliki stepped down, against his own stated will. The U.S. was involved in airstrikes in Iraq but not against the government; it did publicly claim to be withholding further involvement until new leadership was in power. And publicly supported his now successor, appointed by the Kurdish President, whose people's effectively autonomous government has a long standing relationship with the U.S.
Many things, including a drop in Iranian support, led to Maliki's privately forced removal from power, and two things are never fully the same, but still. Two presidents have played a role in a transition of power in Iraq, one path didn't involve the death of 3,500 U.S. soldiers and over 100,000 Iraqi civilians while we were there. The other transition involved limited airstrikes, some special forces I assume, influence on allies, foreign relations, etc. The situation is full of death still, but still.
I'm not saying I agree with anything that's happened ever that I haven't already endorsed yet,
I'm just sayin.
Recently Iraqi Prime Minister Nuri al-Maliki stepped down, against his own stated will. The U.S. was involved in airstrikes in Iraq but not against the government; it did publicly claim to be withholding further involvement until new leadership was in power. And publicly supported his now successor, appointed by the Kurdish President, whose people's effectively autonomous government has a long standing relationship with the U.S.
Many things, including a drop in Iranian support, led to Maliki's privately forced removal from power, and two things are never fully the same, but still. Two presidents have played a role in a transition of power in Iraq, one path didn't involve the death of 3,500 U.S. soldiers and over 100,000 Iraqi civilians while we were there. The other transition involved limited airstrikes, some special forces I assume, influence on allies, foreign relations, etc. The situation is full of death still, but still.
I'm not saying I agree with anything that's happened ever that I haven't already endorsed yet,
I'm just sayin.
August 12, 2014
Russia Introduces Sanctions on Russia
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As is well known in economics, a tariff on imports has the same effect on a nation’s economy as taxing its own exports. Similarly, banning imports will do as much harm as banning exports. The United States will be essentially unharmed; Europe will suffer a bit more, though the value of its now banned exports amounts to a rounding error in terms of EU GDP. Some countries closer to Russia, such as Poland and Finland, will suffer proportionally more. But the Russian people will suffer the most. Russian households spend about 31% of their annual expenditures on food, which is high even for a middle income country. Some of the harm, to both Russians and their former suppliers, will be abated by the fact that the supply of food is inelastic in the short run, you can’t ungrow it. Russia will need to find other suppliers, who will divert food to Russia, the banned countries will have to find other buyers, and divert food from Russia, and to an extent it will wash out. But there will be some delay, and in the short run (the ban only lasts a year) Europe is likely to face lower food prices, and Russia higher food prices. Way to show the West. Choice and quality will likely also suffer.
Punching itself in the dick comes at a bad time for Russia[1]: GDP growth has stalled and inflation, which will likely be made worse now, has risen to above 7%. Russia is selling the self-imposed supply shock as a boon to Russian producers, as if Import Substitution worked wonders in Latin America[2] and didn’t end with a painful debt crisis[3]. This is seriously dumb. What’s next? Putin tries to hold his breath like a bratty child until people give in to him?
I would feel bad and stop making fun of how dumb Russian policy is if Putin didn’t have an approval rating above 80%. Well, I do feel bad for the other 20%; I’m very sorry that these people have to live with or near such awful people. It is important to differentiate, for example I would hope that during the G.W. Bush years foreigners who disliked what the US did[4] realized that a slight minority, at least, disliked what the US did too.
August 2, 2014
July Jobs Report
Pretty decent: 209,000 jobs added, previous months revised up a little bit. Unemployment and participation rates were little changed though. But this is the sixth straight month of 200,000 plus job growth. And the 12 month moving average of monthly job growth is the highest now than at any point since the economy stopped losing jobs.
July 23, 2014
Nelson Mandela's Birthday (was recently)
And ya'll revolutionaries better take note because by and large you aren't shit compared to him. I'll go ahead and say he was the greatest human alive at the same time as me so far. South Africa had a horrible government. It's shameful that its institutionalized racism lasted so long, but that's true of a lot of places.
Anyway, Mandela and others wanted to break the subjugation they were under, by any means necessary. The ANC initially used only peaceful methods of resistance, but Mandela co-founded an armed wing of the ANC after police fired into crowds protesting outside a police station. The militant wing began a sabotage and hit-and-run campaign that got Mandela thrown in prison for 27 years. He could have gotten out earlier with an offer of release if he renounced the use of violence against the apartheid state. He refused.
Upon his release, and the democratic reforms, for which many people within the establishment deserve some credit, he saw that the goals of the ANC could be most effectively accomplished through peaceful participation in the reformed system. For him "by any means necessary" was better described as "by the most effective means necessary". A war torn and divided country would not accomplish his goals, regardless of if it gave him power. It's similar to the lesson I was going for about that loser Gavrilo Princip: bringing down the ~system sounds cool and all, but if you actually want to accomplish something, that childish daydream is worse than useless.
Fortunately for the entire world Mandela was too smart for that distraction. His message was unity, opposed to the division wrought by South Africa's previous governments. He instructed his fellow revolutionaries that education was their "most powerful weapon". And that was no metaphor. Once he came to power he did the most beneficial and powerful thing he could with it: he gave it up in a democratic transition, establishing a precedent with the full moral weight of his character behind it.
South Africa definitely isn't perfect (neither was Mandela, but we're all human), his successors largely terrible, and income inequality between the races hasn't diminished. But for a one term president who was in a cell for 27 years his accomplishments are amazing. And he left behind institutions that have preserved a constitutional democracy that is better than it was before him.
Compare that with chumps like Chavez, Castro, Qaddafi, Mugabe especially, and countless other small minded wannabe dictators who seemed to have struggled to come to power because they disliked that someone else had it. They aren't shit compared to him, and they didn't accomplish shit compared to him.
July 9, 2014
Conservatism Leads in Circles, by Which I Mean Nowhere
If conservatives want to stop the recent influx of child migrants from Central America, who have a good case for being refugees from a conflict zone (why else would a child trek thousands of miles from home unaccompanied and at great risk?), they should probably stop the drug war.
Just saying.
Just saying.
July 3, 2014
June Jobs Report
The latest job report is good news. 288 thousand jobs were added, and the previous two months were revised up by a total of 29,000. The unemployment rate fell to 6.1%; and labor force participation remained steady, indicating that the fall was not due to workers leaving the labor market.
"In the case of an individual firm or industry producing a homogeneous product we can speak legitimately, if we wish, of increases or decreases of output. But when we are aggregating the activities of all firms, we cannot speak accurately except in terms of quantities of employment"
Oh, and the monetary value of output, or nominal GDP, but he gets to that as well.
This makes the past few months a strong showing job growth wise, despite a negative growth estimate for 1st quarter real GDP. But then employment figures are probably the better guide to current conditions. As Keynes said in the General Theory:
"In the case of an individual firm or industry producing a homogeneous product we can speak legitimately, if we wish, of increases or decreases of output. But when we are aggregating the activities of all firms, we cannot speak accurately except in terms of quantities of employment"
Oh, and the monetary value of output, or nominal GDP, but he gets to that as well.
July 2, 2014
WWI (cont)
In making sure I wasn't just making shit up in my previous post I came across a quote that Otto von Bismark is alleged to have said:
"If there is ever another war in Europe, it will come out of some damned silly thing in the Balkans."
"If there is ever another war in Europe, it will come out of some damned silly thing in the Balkans."
June 28, 2014
Happy WWI Centennial
100 years ago today some nobody, named Gavrilo Princip, assassinated Archduke Franz Ferdinand, heir to the thrones of Austria and Hungary. Princip was an ~anarchist dedicated to “destroy the present system through terrorism”, a poor shot, and a failure at pretty much everything he had previously attempted in life. He was, however, a useful tool for Serbian military intelligence. Despite already being an independent nation in an alliance with Russia, Serbia (or at least many of its military leaders) in its own wider territorial ambitions, sought to antagonize and destabilize Austria-Hungary as a matter of policy.
Ferdinand knew that Austria-Hungary was in a tenuous position: ethnic Austrians and Hungarians were the only people with political power, despite being less than 50% of the population in an empire of around 10 major ethnic groups. The dualist system could not last, and Ferdinand saw the greater distribution of power into a federation of states as the only salvation, which he called the United States of Great Austria. He went far enough as to have a map drawn up, shown below. Interestingly, the map did not include Bosnia, then part of Austria-Hungary, perhaps indicating his willingness to cede land that was more trouble to hold than it was worth to him. I’m really just guessing at that part though.
His feelings towards the potential for war in the Balkans were summed up in a dinner toast he once gave:
“To peace. What would we get out of war with Serbia? We’d lose the lives of young men and we’d spend money better used elsewhere. And what would we gain for Heaven’s sake? A few plum trees, some pastures full of goat droppings, and a bunch of rebellious killers[1].”
But reform within the system was not part of Princip’s world-view. When it became public that Ferdinand would visit Sarajevo, Princip and his co-conspirators were equipped with bombs, guns, and suicide pills from Serbian military intelligence. A bomb was thrown at Ferdinand’s car, and missed. Ferdinand stubbornly carried on with the schedule of his visit. Later in the day, and by complete chance, his car would make a wrong turn onto the street that Princip happened to be on, probably sulking about having failed yet again at something he set out to do. He was close enough to actually hit his target, while also missing a few times and hitting Ferdinand’s wife Sophie.
Ferdinand's last words to his wife were “Sophie, Sophie, don’t die, stay alive for the children.” Neither of them were able to, and tens of millions of others would die as well. WWI led to the Russian Revolution, which led to millions of deaths and suffering in Russia itself under communist rule. The stupid structure of the peace treaty ending WWI led to WWII, which led to the Cold War. And the Cold War did a good job of subjugating a great many peoples’ aspirations for self-rule and freedom.
Now the realities of the time suggest many of these events might have happened anyway. And the events that the assassination led to were made much more devastating by the incompetence of many people. But it’s a useful lesson that one asshole who dreamed of destroying "the system" ended up killing a reformist (relative to the time) proponent of peace, thus turning him into a symbol for war, and leading to well over 10 million deaths in WWI alone. What would we get out of war indeed. What would we get out of dim witted chumps who think "bringing down the system" is a legitimate solution to our problems.
Ferdinand knew that Austria-Hungary was in a tenuous position: ethnic Austrians and Hungarians were the only people with political power, despite being less than 50% of the population in an empire of around 10 major ethnic groups. The dualist system could not last, and Ferdinand saw the greater distribution of power into a federation of states as the only salvation, which he called the United States of Great Austria. He went far enough as to have a map drawn up, shown below. Interestingly, the map did not include Bosnia, then part of Austria-Hungary, perhaps indicating his willingness to cede land that was more trouble to hold than it was worth to him. I’m really just guessing at that part though.
His feelings towards the potential for war in the Balkans were summed up in a dinner toast he once gave:
“To peace. What would we get out of war with Serbia? We’d lose the lives of young men and we’d spend money better used elsewhere. And what would we gain for Heaven’s sake? A few plum trees, some pastures full of goat droppings, and a bunch of rebellious killers[1].”
But reform within the system was not part of Princip’s world-view. When it became public that Ferdinand would visit Sarajevo, Princip and his co-conspirators were equipped with bombs, guns, and suicide pills from Serbian military intelligence. A bomb was thrown at Ferdinand’s car, and missed. Ferdinand stubbornly carried on with the schedule of his visit. Later in the day, and by complete chance, his car would make a wrong turn onto the street that Princip happened to be on, probably sulking about having failed yet again at something he set out to do. He was close enough to actually hit his target, while also missing a few times and hitting Ferdinand’s wife Sophie.
Ferdinand's last words to his wife were “Sophie, Sophie, don’t die, stay alive for the children.” Neither of them were able to, and tens of millions of others would die as well. WWI led to the Russian Revolution, which led to millions of deaths and suffering in Russia itself under communist rule. The stupid structure of the peace treaty ending WWI led to WWII, which led to the Cold War. And the Cold War did a good job of subjugating a great many peoples’ aspirations for self-rule and freedom.
Now the realities of the time suggest many of these events might have happened anyway. And the events that the assassination led to were made much more devastating by the incompetence of many people. But it’s a useful lesson that one asshole who dreamed of destroying "the system" ended up killing a reformist (relative to the time) proponent of peace, thus turning him into a symbol for war, and leading to well over 10 million deaths in WWI alone. What would we get out of war indeed. What would we get out of dim witted chumps who think "bringing down the system" is a legitimate solution to our problems.
June 10, 2014
Is Increasing the Money Supply Deflationary?
Is that even a question? Yes, it turns out; but a stupid one. I have never ever encountered an argument that increasing the supply of money, such as through QE, is deflationary, until I came across arguments from Stephen Williamson, a vice-president at the St. Louis Fed, that QE and zero nominal interest rates are deflationary.
Now when it comes to interest rates one should never reason from a price change. If conditions are so bad in the economy that the interest rate that would equalize savings with investment is negative, then yes, a 0% nominal interest rate target is contractionary, and potentially deflationary. And in order for nominal interest rates to be near zero in the long run there must be deflation, because the long run real return on investments, even safe ones, is positive. But that does not mean lowering interest rates causes the deflation. In order for people to frequently cart around umbrellas in the long run, there must be frequent rain.
Anyway, on to the dumber part: towards the end of last year Williamson made the argument, according to a mathematical model he drew up, that increasing the money supply would be per se deflationary. How? Here’s how he puts it without math:
Ignoring risk, (which he spells out but I’m cutting down for space)
In finance that’s another way of saying the price decreases when supply increases (higher rate of return reduces the net price savers pay for the investment).
What!? How? Why? How? How does one even make that leap? That’s just an equation of what it would take for an increase in money supply to be offset by an increase in money demand. It’s not economic reasoning at all; it’s what would happen if a calculator tried to be an economist.
Money is unique among assets, its value is 1 over the price level, or the value of goods and services it can be traded for. If you increase the supply of money without changing the value of goods or services it can be traded for, then the value of a unit of money must go down (inflation) proportionate to the increase in supply; it’s the monetary system that has value, not the specific quantity of money.
Why would individuals require deflation to hold extra money as Williamson says will happen, and how would that occur? In the simple model, as Professor Nick Rowe points out, the “quantity of money demanded is a positive function of the price level and a negative function of the expected rate of inflation.” As in the more inflation the more money one needs to perform the same transactions. The more expected inflation, the less money one wants to hold because it will lose its value faster. Williamson seems to be assuming that the price level can’t respond, so only deflationary expectations can cause adjustment.
Here’s how it really works: in the long run the price level increases by the same proportion as the money supply (inflation) and people require/demand more cash to perform the same transactions. The value, or price, of money falls, and the quantity demanded increases.
Now when it comes to interest rates one should never reason from a price change. If conditions are so bad in the economy that the interest rate that would equalize savings with investment is negative, then yes, a 0% nominal interest rate target is contractionary, and potentially deflationary. And in order for nominal interest rates to be near zero in the long run there must be deflation, because the long run real return on investments, even safe ones, is positive. But that does not mean lowering interest rates causes the deflation. In order for people to frequently cart around umbrellas in the long run, there must be frequent rain.
Anyway, on to the dumber part: towards the end of last year Williamson made the argument, according to a mathematical model he drew up, that increasing the money supply would be per se deflationary. How? Here’s how he puts it without math:
Savers who hold assets care about the rates of return…different assets have different rates of return. Risk can explain some of that…[the] other factor is liquidity.
We can all understand that currency is more liquid than T-bills, in the sense that no one accepts T-bills in retail transactions, but currency is widely accepted. However… T-bills could be more liquid than currency in particular uses. For example …use as collateral in overnight repurchase agreements.
Ignoring risk, (which he spells out but I’m cutting down for space)
if the rate of return on asset A is higher than…asset B, then part or all of the explanation for this is that asset A is less liquid...In other words, the two assets can carry liquidity premia…with the liquidity premia on asset B being higher.
Given demand, an increase in the supply of available assets will cause the rates of return on all assets to go up, so as to induce savers to hold those assets.
In finance that’s another way of saying the price decreases when supply increases (higher rate of return reduces the net price savers pay for the investment).
A conventional open market purchase is basically a swap of money for short-term government debt. Under conventional conditions, the rate of return on short-term government debt is higher than the rate of return on money (the nominal interest rate is positive)
Given that currency and U.S. Federal debt is considered essentially risk free that should be entirely due to different liquidity premia, with cash being more liquid.
think about what happens in a liquidity trap… where the rates of return on money and short-term government debt are the same. The nominal interest rate is zero. Further, the rate of return on both of these assets is equal to minus the inflation rate.
Thus…the liquidity premia on money and short-term government debt are the same, and positive.
What happens if there is an increase in the aggregate stock of liquid assets…? This will in general reduce liquidity premia on all assets, including money and short term debt.
Think supply and demand, given a demand for liquidity, more supply means a lower price for it.
Since the liquidity payoffs on money and short-term government debt have gone down, in order to induce asset-holders to hold the money and the short-term government debt, the rates of return on money and short-term government debt must go up. That is, the inflation rate must go down. Going in the other direction, a reduction in the aggregate stock of liquid assets makes the inflation rate go up.
What!? How? Why? How? How does one even make that leap? That’s just an equation of what it would take for an increase in money supply to be offset by an increase in money demand. It’s not economic reasoning at all; it’s what would happen if a calculator tried to be an economist.
Money is unique among assets, its value is 1 over the price level, or the value of goods and services it can be traded for. If you increase the supply of money without changing the value of goods or services it can be traded for, then the value of a unit of money must go down (inflation) proportionate to the increase in supply; it’s the monetary system that has value, not the specific quantity of money.
Why would individuals require deflation to hold extra money as Williamson says will happen, and how would that occur? In the simple model, as Professor Nick Rowe points out, the “quantity of money demanded is a positive function of the price level and a negative function of the expected rate of inflation.” As in the more inflation the more money one needs to perform the same transactions. The more expected inflation, the less money one wants to hold because it will lose its value faster. Williamson seems to be assuming that the price level can’t respond, so only deflationary expectations can cause adjustment.
Here’s how it really works: in the long run the price level increases by the same proportion as the money supply (inflation) and people require/demand more cash to perform the same transactions. The value, or price, of money falls, and the quantity demanded increases.
And in the short run? Individuals aren’t required to hold that extra money, they don’t want to hold it, they value its liquidity relatively less because there is more of it. But society as a whole must hold the extra money, because no one’s gonna destroy it. So people spend the money to get rid of it, without needing to be any better off wealth wise. They may spend the money by investing it for example, or banks by loaning it. Nominal interest rates may fall as it's easier to borrow. Demand increases, but in the long run prices adjust and nothing has changed but the price level.
Also here’s a graph showing money supply growth and inflation from 1960 - 2000 produced by Marcus Nunes using Robert Barrow's 2008 macroeconomics textbook. Guess it’s just a mistaken correlation huh.
Also here’s a graph showing money supply growth and inflation from 1960 - 2000 produced by Marcus Nunes using Robert Barrow's 2008 macroeconomics textbook. Guess it’s just a mistaken correlation huh.
June 6, 2014
So Much for the Zero Lower Bound
The Zero Lower Bound (ZLB) is a bullshit concept in economics whereby it's argued that nominal interest rates cannot go below zero. That’s why the Great Recession has been as bad as it is: the Fed reduced its target interest rate “as much as it could”, eventually down to near zero[1]. But economic conditions were / are so bad that it wasn’t enough, and we’ve been experiencing low growth ever since. One way to get around it while still keeping interest rates from going negative in nominal terms (they’ve been negative in real terms for years) is through expansion of the money supply, or QE. An expansion of the money supply leads to higher inflation, which is a good thing in current conditions because it causes wages and prices to adjust faster, real debt burdens to be lower, and even lower negative real interest rates.
Another way to do it is to just not subscribe to the idea that there even is a lower bound. Why does there have to be? Idk, I guess it’s not how things normally work in finance. But that’s a stupid reason to suffer through a recession that's worse than it has to be. Thankfully the European Central Bank (ECB), the central bank for the Euro zone, has finally gotten around to breaking the ZLB, and has set interest rates for banks holding reserves at the ECB to -0.1%. This is a very timid decrease, and probably isn’t nearly enough, but hopefully it’s just a start. Charging banks for holding reserves at the central bank will make banks more likely to lend out the reserves as they attempt to profit maximize. This means the effective money supply is larger, and it could increase the velocity of money, or the amount that is transacted per unit of time. Both these effects will increase inflation, which in these conditions will lead to a faster recovery.
I think I still like old fashioned adjustment of the money supply better; you don’t need to mess around with financial indicators. A doubling of the money supply will double prices (which are nominal, so it will not cause everything to have twice the real cost to acquire) in the long run per se. And because humans can conceptualize the future, an expected increase in the price level in the long run has an effect today. Interest rates? Who cares? Just keep the growth path of nominal GDP or prices stable. But negative interest on reserves would make QE more effective in the short run because less of the new money will be kept sitting in vaults or on a spreadsheet entry[2]. The ECB has mostly been too little too late, but this latest move is progress. A little less too little, a little less too late.
Another way to do it is to just not subscribe to the idea that there even is a lower bound. Why does there have to be? Idk, I guess it’s not how things normally work in finance. But that’s a stupid reason to suffer through a recession that's worse than it has to be. Thankfully the European Central Bank (ECB), the central bank for the Euro zone, has finally gotten around to breaking the ZLB, and has set interest rates for banks holding reserves at the ECB to -0.1%. This is a very timid decrease, and probably isn’t nearly enough, but hopefully it’s just a start. Charging banks for holding reserves at the central bank will make banks more likely to lend out the reserves as they attempt to profit maximize. This means the effective money supply is larger, and it could increase the velocity of money, or the amount that is transacted per unit of time. Both these effects will increase inflation, which in these conditions will lead to a faster recovery.
I think I still like old fashioned adjustment of the money supply better; you don’t need to mess around with financial indicators. A doubling of the money supply will double prices (which are nominal, so it will not cause everything to have twice the real cost to acquire) in the long run per se. And because humans can conceptualize the future, an expected increase in the price level in the long run has an effect today. Interest rates? Who cares? Just keep the growth path of nominal GDP or prices stable. But negative interest on reserves would make QE more effective in the short run because less of the new money will be kept sitting in vaults or on a spreadsheet entry[2]. The ECB has mostly been too little too late, but this latest move is progress. A little less too little, a little less too late.
June 4, 2014
Negative 1st Quarter Growth
Not exactly breaking news, but the Bureau of Economic Analysis (BEA)’s 2nd estimate for 1st quarter 2014 real GDP growth was downgraded to an annualized rate of -1%, from its initial estimate of 0.1% growth. GDP grew at an ok 2.6% in the 4th quarter of 2013. This is the first negative quarterly growth figure since the 1st quarter of 2011.
Even though U.S. GDP is higher today than before the Great Recession, growth does not entail staying in the same place. Typically after a recession the economy generally recovers back to its trend growth, or to where it would have been if you project GDP growth forward from before a recession, as if there was none. As shown in the graph below, U.S. GDP growth has been trending positive at about the same rate as before the recession; but none of the gap has been closed between where we are and where we would have been if pre-recession trends continued. Negative 1st quarter growth takes us even further from that.
Good thing the Fed has been regularly tapering its stimulus to keep the economy from over-heating, we almost had positive growth in the 1st quarter. Now it’s likely to just be a blip, with positive 2nd quarter growth. But still, the Fed seems to think that no progress in closing the gap between where we are and might have been is grounds to withdraw its monetary stimulus. Why? There’s obviously no sign of overheating, inflation is lower now than before the recession, and unemployment is still elevated. It’s like hitting your breaks now because a deer might jump out in front of you at some point in the future. And it screws over the unemployed.
May 29, 2014
Unemployment Indicators / Back in Action
I have completed a long task, and have time for this once again. I used to always have the monthly unemployment stats, so let's start with that. Here is the U.S. monthly net job growth data plus some other employment indicators:
Above is the rate at which the economy is adding jobs each month; in red is the revision from the initial data from previous months. It appears to be less variable, but not really show much improvement. A 12 month moving average shows the last 12 months to be the best since early 2012 (not shown, just trust me).
Below is the employment-population ratio, which is the percentage of the population over 16 that is employed:
It appears to show pretty slight improvement since the Great Recession bottomed out. However, due to an aging population, the ratio was bound to decrease over time as baby-boomers retire. Other indicators show a slightly better but still poor recovery. Below are indicators of long term unemployment.
Above is a graph of long term unemployment. As you can see the improvement has been small. Roughly speaking, the proportion of unemployed over 26 weeks needs to fall around 60%, or 25 percentage points, from its peak to have recovered its pre-recession level. It has fallen less than 20%1.
Additionally, here are the figures for mean and median weeks unemployed:
Both show, as does long term unemployment, that only a minority of the return to pre-recession levels has occurred. But nothing ever stands still in economics; there's no going back to where you were, just striving for the optimal situation in the future. Still, can anyone say "Great Stagnation"?
Above is the rate at which the economy is adding jobs each month; in red is the revision from the initial data from previous months. It appears to be less variable, but not really show much improvement. A 12 month moving average shows the last 12 months to be the best since early 2012 (not shown, just trust me).
Below is the employment-population ratio, which is the percentage of the population over 16 that is employed:
It appears to show pretty slight improvement since the Great Recession bottomed out. However, due to an aging population, the ratio was bound to decrease over time as baby-boomers retire. Other indicators show a slightly better but still poor recovery. Below are indicators of long term unemployment.
Above is a graph of long term unemployment. As you can see the improvement has been small. Roughly speaking, the proportion of unemployed over 26 weeks needs to fall around 60%, or 25 percentage points, from its peak to have recovered its pre-recession level. It has fallen less than 20%1.
Additionally, here are the figures for mean and median weeks unemployed:
Both show, as does long term unemployment, that only a minority of the return to pre-recession levels has occurred. But nothing ever stands still in economics; there's no going back to where you were, just striving for the optimal situation in the future. Still, can anyone say "Great Stagnation"?
February 4, 2014
Thank you for Your Service
This is what needs to be said about Ben Bernanke. Based on his academic record, he was the best possible person for the job. Most people don't realize this. A scholar of the Great Depression, with generally correct opinions, just happened to be Fed chairperson for the biggest crisis since the Great Depression.
But under Bernanke's chairmanship, Fed policy has been tame and disappointing relative to his academic record. However, he is just one person, in an institution designed to prevent any one person from having too much power. The structure of the Fed does an good job of representing the consensus in economics, which has been too timid. Yet today we have an unprecedented Fed policy that, while not the best it could be, was fairly radical for an institution that changes slowly over time.
In a way I am reminded of Fredrick Douglas eulogizing Lincoln (I know this situation pales in comparison to Lincoln, but still):
In a way I am reminded of Fredrick Douglas eulogizing Lincoln (I know this situation pales in comparison to Lincoln, but still):
"Viewed from the genuine abolition ground, Mr. Lincoln seemed tardy, cold, dull, and indifferent; but measuring him by the sentiment of his country, a sentiment he was bound as a statesman to consult, he was swift, zealous, radical, and determined."
February 2, 2014
Does Policy Matter?
Continuing on from my previous post, I started 2013 with a prediction that it would be a better year than 2012, but that if the Fiscal Cliff occurred it would not. A sizable portion of the Fiscal Cliff did happen, but 2013 was not much different from 2012. In September 2012, I spoke positively about the Fed starting its third round of Quantitative Easing (QE), and, at least by job growth and available GDP figures, things haven’t exactly taken off. One conclusion is that fiscal spending levels and the stance of monetary policy don’t matter. That would mean that the basic models of classical economics were 100% correct, Laissez Faire is always the optimal policy, and why have we been wasting paper on new textbooks? That’s basically the consensus that made the Great Depression worse.
The other (correct) explanation, is that fiscal and monetary policy have been canceling each other out. In the beginning of the recession we had more expansionary fiscal policy. Monetary policy, on the other hand, is looser today than it was at the start, when stimulus measures were in even greater need. Short term interest rates didn’t drop to around 0% until the end of 2008, nearly a year after the recession began. The first two rounds of QE were for fixed amounts that were too small to get their intended results (the current round is supposed to go on until policy goals are reached).
The point is that fiscal and monetary policy have essentially pulled in opposite directions, making it look somewhat like neither have mattered. But don’t you believe it.
The other (correct) explanation, is that fiscal and monetary policy have been canceling each other out. In the beginning of the recession we had more expansionary fiscal policy. Monetary policy, on the other hand, is looser today than it was at the start, when stimulus measures were in even greater need. Short term interest rates didn’t drop to around 0% until the end of 2008, nearly a year after the recession began. The first two rounds of QE were for fixed amounts that were too small to get their intended results (the current round is supposed to go on until policy goals are reached).
The point is that fiscal and monetary policy have essentially pulled in opposite directions, making it look somewhat like neither have mattered. But don’t you believe it.
February 1, 2014
December Jobs Report
So I took a long pause from posting here but now I’ll do more I guess. Anyway, the December Jobs Report: a terrible 74,000 jobs added. It could be an anomaly, the previous two months were above 200,000, and revised upwards in the December report. In other bad news the unemployment rate dropped from 7 to 6.7% due to people dropping out of the labor market. However, the unemployment rate has dropped significantly from when the Fed started its monetary stimulus program and is now slowing down the rate at which it buys bonds with money it creates. Maybe I’ll go into detail about that later.
At the start of 2013 I had a post called “This Year Should be Better”. Was it? The stock market had well above average returns, which if you want to assume that’s completely rational, it means there’s an expectation of increasing profits due to higher expected future growth. Annual GDP growth figures aren’t out yet (that I could find), but the year in job growth is less generous to 2013. The average monthly job growth for 2012 was 183,000; in 2013 it was 182,000.
So by that metric I was wrong, but like any clever (wannabe)economist, I laid out conditions that limited my prediction. I said that it would be a worse year if the fiscal cliff was allowed to happen. And a large part of it did in fact happen: taxes went up on January 1st, and budget cuts went into effect in March. The full force of the fiscal cliff was expected, by the CBO, to cause negative growth for the first half of 2013. Instead we had growth similar to the previous year. Part of this is due to the total fiscal contraction being smaller than what the CBO forecasted using “current policy” as a guide.
But we’ve also had expansionary monetary policy as described above. That we had a sizable fiscal contraction and essentially no slowdown in growth points to an offsetting factor that I would argue is monetary stimulus. The flipside of this is that, if we somehow had a significant fiscal stimulus, people would expect (rightly I think) that the positive effects would be offset, to some degree, by less monetary stimulus at whichever pace Fed goals are reached.
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