Why the Fed Should Rethink Its 2%/Year No-Lookback Inflation Target

Posted on by Brad DeLong

Conference call today at 9:00 PDT/noon EDT on why the Federal Reserve would be very smart to abandon its 2%/year no-lookback inflation target for a less destructive policy framework. The call is to be moderated Shawn Sebastian. Then Josh Bivens will summarize his short whitepaper: “Is 2% Too Low? Rethinking the Fed’s Arbitrary Inflation Target to Avoid Another Great Recession” http://www.epi.org/publication/is-2-percent-too-low/. Jason Furman will talk about the evidence for the fall in the equilibrium Wicksellian neutral rate of interest and the implications of that for optimal monetary policy. I come next. Joe Stiglitz wraps up. And then questions from reporters.

My task is to set out what the arguments on the other side are—and why we do not find them convincing:

I hear four arguments for not changing the 2%/year inflation target, even though pursuing that target found us in a situation where monetary policy was greatly hobbled in its ability to manage the economy for a solid decade. And, as best as I can evaluate them, all four of these arguments seem to me to be wrong. They are:

  1. The Federal Reserve, even at the zero lower bound, has powerful tools sufficient to carry out its stabilization policy tasks (Cf.: Mankiw and Weinzierl (2011) https://scholar.harvard.edu/files/mankiw/files/exploration_of_optimal.pdf), so moving away from 2%/year as a target is not necessary. The response is: This leaves begging the questions of why, then, employment has been so low over the past decade, and why production is still so low relative to our circa-2007 expectations.

  2. The problem is not the 2%/year target but rather pressure on the Federal Reserve: pressure from substantial numbers of economists and politicians practicing bad economics and motivated partisan reasoning. (As an example, somebody sent me a video clip this week of the very smart Marvin Goodfriend half a decade ago, arguing that faster recovery required the Fed to hit the economy on the head with a brick to make people more confident in its willingness to fight inflation http://www.bradford-delong.com/2017/06/on-the-negative-information-revealed-by-marvin-goodfriends-i-dont-teach-is-lm.html.) The response is: This ignores the Fed’s long institutional history of being willing to ignore outside pressure as it performs its standard monetary policy task of judging what appropriate interest rates are. Pressure only mattered when we got into “non-standard” monetary policies, which we needed to do only because the low inflation target had caused us to hit the zero lower bound.

  3. At 2%/year, inflation is non-salient: nobody worries about it. A higher inflation rate would bring shifting expectations of inflation back into the mix, distract people and firms from their proper task of calculating real costs and benefits to worry about monetary policy, and make monetary policy management more complicated. The response is: But right now people and firms are “distracted” by the high likelihood of depressions that last longer than five years. That is a much bigger distraction than worrying about whether inflation will be 4%/year of 5%/year. And right now the zero lower bound makes monetary policy management much more complicated than it was back in the 1990s when the impact of Fed policy on inflation expectations was in the mix.

  4. The Federal Reserve needs to maintain its credibility, and if it were to even once change the target inflation rate, its commitment to any target inflation rate would have no credibility. The response is: But the credibility you want to have is credibility that you will follow appropriate policies to successfully stabilize the economy—not credibility that you will mindlessly pursue a destructive policy because you think it somehow wrong to acknowledge that the considerations that led you to adopt it in the first place were wrong or have changed. As my friend Daniel Davies puts it in his One-Minute MBA Course: “Is a credible reputation as an idiot a kind of credible reputation one really wants to have?” http://crookedtimber.org/2006/11/29/reputations-are-made-of/

Over to you, Joe…

“Populism” or “Neo-Fascism”?: Rectification of Names Blogging

Posted on by Brad DeLong

The highlight of last week’s JEF-APARC Conference at Stanford https://www.jef.or.jp for me was getting to sit next to Frank Fukuyama https://fukuyama.stanford.edu, whom I had never met before.

Frank is a former Deputy Director of Policy planning at the State Department, author of the extremely good books on political order The Origins of Political Order: From Prehuman Times to the French Revolution http://amzn.to/2sEt4AI and Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy http://amzn.to/2sU0WZP, and a very sharp guy.

He has also been smart and lucky enough to have a truly singular achievement in his career. Prince Otto von Bismarck said that the highest excellence of a statesman “is to hear God’s footsteps marching through history, and to try and catch on to His coattails as He marches past…” For an intellectual, there is an equivalent and analogous excellence: to recognize what the powerful historical forces of the next generation will be, to grab onto their coattails, and so write an article that provides an incisive and valuable interpretive framework that makes sense not of the generation past so much as of the generation to come.

John Maynard Keynes, I think, accomplished this in 1919 with his Economic Consequences of the Peace http://amzn.to/2sTZdn7. George Orwell’s Road http://amzn.to/2sgiUZO and Homage http://amzn.to/2s4RK8h, I think, accomplished this in the mid-1930s. George Kennan’s “Long Telegram”—published as “Sources of Soviet Conduct” http://nsarchive.gwu.edu/coldwar/documents/episode-1/kennan.htm certainly ccomplished this in 1946. Perhaps Karl Polanyi accomplished this with his brilliant but annoyingly flawed 1944 The Great Transformation http://amzn.to/2rMsPDq. I really cannot think of anybody else.

And, of course, Frank Fukuyama accomplished this with his 1989 article: “The End of History?” http://www.wesjones.com/eoh.htm. (If you doubt that, go read the brilliant Ralf Dahrendorf’s brutal commentary on Fukuyama in his Reflections on the Revolution in Europe http://amzn.to/2sTXfTE: Fukuyama definitely struck a powerful nerve, and Dahrendorf’s animus springs not from Fukuyama’s shortcomings but rather from his insights.)

This is, for an intellectual, something that requires extreme luck and extreme intelligence. It is a righteously awesome accomplishment. And Frank Fukuyama did it.

I spent my time sitting next to Frank attempting to irritate him with respect to what he and many others call “populism”, for I do not like to hear it called “populism”.

The original American populists were reality-based small farmers and others, who accurately saw railroad monopolies, agricultural price deflation, and high interest rates as crippling their ability to lead the good life. They sought policies—sensible, rational policies in the main—to neutralize these three historical forces. They were not Volkisch nativists distracted from a politics that would have made their lives better by the shiny gewgaws of ethnic hatred and nativism The rise of those forces—of Jim Crowe and the renewed and anti-Catholic Ku Klux Klan and so forth—were not the expression of but rather the breaking of populism in America.

The post-WWII Latin American populists were also people who correctly thought that their ability to lead the good life was being sharply hindered by a system rigged against him. The problem with post-WWII Latin American populism was that the policies that it was offered by its political leaders were—while materially beneficial for the base in the short run—economic disasters in the long: price controls, fiscal expansion ending in unsustainable that burdens, and high tariffs were especially poisonous and false remedies because it could look, for the first five or so years, before they crash came, like they were working.

But what is going on today, whatever it is properly called, is not offering sensible policies people oppressed by monopolies and by a creditor friendly and unemployment causing monetary system. It is not even offering them policy cures that are apparently efficacious in the short run even though disastrous in the long. What Lech and Jarosław Kaczyński, Viktor Orban, Marine Le Pen, Teresa May, and Donald Trump have to offer is (a) redistribution of wealth to family and friends, (b) a further upward leap in income and wealth inequality via cutbacks in social insurance programs coupled with further erosion of progressive taxation, and, most of all, (c) the permission to hate people who look different from you—plus permission to hate rootless cosmopolites who are, somehow, against all principles of natural justice, both doing better than you and offering you insufficient respect.

That is neither the post-WWII Latin American nor the pre-WWI North American form of “populism”. I do not think we are well served by naming it such.

What should we name it instead?

There is an obvious candidate, after all.

When Fukuyama wrote his “The End of History?”—note the question mark at the end—his principal aims were twofold:

  1. To advance a Hegelian, or a Kojeveian reinterpretation of Hegelianism, as pointing out that history was ultimately driven by the evolution of ideas of what a good society would be like and consequent attempts to realize them: through Republican, Imperial, Christian, feudal, Renaissance, Enlightenment, rule of law, democratic, socialist, and fascist formulations, the world’s conceptions of a good society unfold and develop.

  2. To point out that it now appears—or appeared in 1989—that this Hegelian process of conceptual development had come to an end with the liberal democratic capitalist state and economy: private property rights and market exchange guaranteed by a government controlled by one person-one vote now had no serious challengers, and so this process of historical development—what Fukuyama called History-with-a-capital-H—had come to an end.

Most of Fukuyama’s “The End of History” is concerned with the crashing and burning of the idea that the Marxist diagnosis that private property was an inescapably poisoned institution implemented by a Leninist cadre that then set up a Stalinist command economy offered a possible way forward toward a good and free society of associated producers—an alternative to the system that was the reinforcing institutional triad of liberalism, democracy, and capitalism. But there was another challenger for much of the twentieth century: fascism. In Fukuyama’s words:

[Fascism] saw the political weakness, materialism, anomie, and lack of community of the West as fundamental contradictions in liberal societies that could only be resolved by a strong state that forged a new ‘people’ on the basis of national exclusiveness… [an] organized ultra nationalist movement with universalistic pretensions… with regard to the movement’s belief in its right to rule other people…

And, in Fukuyama’s judgment, fascism:

was destroyed as a living ideology by World War II. This was a defeat, of course, on a very material level, but it amounted to a defeat of the idea as well…

But is the current International—that of Kaczyński, Orban, Le Pen, May, and Trump—usefully conceptualized as “fascist”. Perhaps we should say “neo-fascist”, to be politically correct. It certainly believes in the right of its Volkisch core to rule other people within the boundaries of the nation state—or to expel them. It certainly believes that international politics is overwhelmingly a zero-sum contest with winners and losers. It has negative tolerance for rootless cosmopolites and others who see an international community of win-win interactions. A strong leader and a strong state who will tell people what to do? Check. An ethnic nation of blood-and-soil rather than an elected nation of those who choose to live within its boundaries and pledge their allegiance to it? Check. Denunciations of lack of community, anomie, and weakness? Check. The only things missing are (a) denunciations of materialism, and (b) commitments to imperial expansion.

Fukuyama made it clear last week that he greatly prefers “populism” to “neo-fascism” as a term describing what is going on. A fascist movement, he wrote back in 1989, has to be expansionist rather than simply seeking the advantage of the Volkisch national community. There have to be:

universalistic pretensions… with regard to the movement’s belief in its right to rule other people. Hence Imperial Japan would qualify as fascist while former strongman Stoessner’s Paraguay or Pinochet’s Chile would not…

And this test is one that Kaczyński, Orban, Le Pen, May, and Trump’s International fails.

But is Fukuyama right? I am unconvinced. I suspect that calling the movement “populist”—whether with reference either to the pre-WWI United States or post-WWII Latin America—misleads it. I suspect that conceptualizing it as “neo-fascist” might well lead to insights…

Must- and Should-Reads: June 7, 2017

Posted on by Brad DeLong

Interesting Reads:

Is growing inequality hurting our economies?

Posted on by Ed Paisley

The debate over the legitimacy of powerful elites seizing a bigger share of the national income and wealth pie year after year has been gaining prominence in the public conversation. Mark Zuckerberg himself—one of the wealthiest men in the world—remarked that “today, we have a level of wealth inequality that hurts everyone” during his recent speech at Harvard University after receiving an honorary degree.

Researchers and scholars have also begun to clearly break the recurrent classic dichotomy between equity and efficiency pervading conventional economic theory, which led to the neglect of distributional issues for many decades. More broadly, the idea that the understanding of economic inequality “assists our understanding of various fields of economics”1 is now put at the forefront. A clear example of this paradigm change is the realization that transmission mechanisms of monetary policy may be substantially affected by distribution considerations.2

The recent 2007–2008 collapse of the global financial system naturally acted as a catalyst for growing concerns around the increasing dispersion of economic resources within most advanced economies. Subsequently, the landmark book by Thomas Piketty, Capital in the Twenty-First Century, underlined very clearly the risk of the rising importance of inherited intergenerational advantages in transforming our societies into patrimonial capitalistic economies dominated by wealthy dynasties. Yet the main argument of the book rests on how wealth inequality evolution over time may be affected by macroeconomic circumstances—namely by the difference between the average return to capital and the rate of growth of the economy.3 The reverse direction of inquiry—how macroeconomic performance may be affected by the extent of inequality—rests instead outside the scope of Piketty’s analysis and modeling.

A review on the inequality-macroeconomics nexus

The idea that inequality may be one of the factors affecting macroeconomic performance and financial stability is the object of inquiry of a chapter that I wrote in the newly published book After Piketty: The Agenda for Economics and Inequality.4

In fact, the investigation of the (fairly complex) relationship between inequality and economic growth has been featured prominently in the empirical literature on inequality, with disparate findings and hypotheses pointing in different directions. Theoretically speaking, this should be expected, as, on the one hand, income and wealth dispersion stemming from differences in effort, productivity, and risk attitude are a fundamental prerequisite for investment and innovation incentives. On the other hand, high levels of economic inequality can, through a variety of channels—consumption, investment in physical and human capital, or rent-seeking behavior—negatively affect economic growth.

As more and more reliable data became available to researchers, the subject has fallen again under active empirical scrutiny. In fact, a growing body of empirical evidence is now suggesting that the idea that a fairer distribution of economic resources damages economic growth is clearly not supported by the available data.5

Why would economic growth benefit from a fairer distribution of resources?

Economic theory provides different anchors as to why the so-called equity-efficiency trade-off may fall apart.

First, if most of the dispersion of economic outcomes of individuals results from inequality of opportunities—in other words, from circumstances outside their own control such as family background, race, and gender—the potential and aspirations of individuals can be constrained, the allocation of resources may be distorted as economic opportunities are not necessarily given to the most talented but to individuals with predetermined circumstances, and economic growth may in turn be weakened.

Second, high levels of income and wealth inequality, in combination with imperfection of both capital and insurance markets, may be detrimental to the level of economic activity as only those who inherit sufficiently high wealth may be able to pay the fixed cost of entrepreneurial activity or education, becoming more productive and better-paid skilled workers.6 This is detrimental, as education may be precluded to people with the highest possible marginal gain from education and if we believe that entrepreneurial skills are randomly distributed and not themselves acquired dynastically in house/firm.

Third, investments in productive capital and risky activities themselves can also be discouraged by highly unequal distribution of resources as a result of increasing rent-seeking behavior and other expropriation actions, which can be undertaken by the government or relatively poor or rich people alike (depending on the specific political economy model we have in mind). In particular, the expropriation may be perpetrated by wealthy elites even in our modern advanced economies via “subverting legal, political and regulatory institutions to work in their favour,” further increasing their level of wealth.7

But does wealth inequality really promote rent-seeking behavior? A recent work by Bonica and Rosenthal documented the U.S. campaign contributions of the Forbes 400 wealthiest individuals between 1982 and 2012. Their figures imply an average individual donation of $10,000 for each $1 million increase in wealth—presumably a relatively easy achievement for a billionaire.8 The high degree of political activism of wealthy Americans also features in research by Page, Bartels, and Seawright showing that almost half of very wealthy respondents of a survey conducted in the metropolitan area of Chicago made at least one contact with a congressional office within the previous six months of the interview. Moreover, about half of the contacts that could be coded “acknowledged a focus on fairly narrow economic self-interest.”9 Unsurprisingly, the latter does not always coincide with the overall general interest. In line with this framework, a recent work by Bagchi and Svejnar documented a negative relationship between wealth inequality and economic growth in those countries where the extent of wealth inequality is mainly ascribed to “political connections”.10

Going beyond economic growth

Economic growth is certainly one important aspect of macroeconomic performance. However, other features of the growth process and macroeconomic performance may be relevant too. For instance, the volatility of the growth path, the sustainability of economic growth, the resilience of the economy to a shock, the duration of economic recessions, and the incidence of financial imbalance and instability can all be very important characteristics of macroeconomic performance that are worth exploring. These issues are treated in turn below.

Is inequality leading to volatile aggregate performance and to short-lived growth?

Research by the IMF certainly does not reject these hypotheses. On the one hand, countries with higher income inequality appear not to be able to sustain GDP growth for long once it started.11 On the other hand, 70 percent of changes in U.S. consumption during the decade from 2003 to 2013 was found to be associated to the behavior of individuals in the top decile of the income distribution.12 Indeed, these numbers suggest, as remarked by Robert Frank, that “America’s dependence on the rich plus great volatility among the rich equals a more volatile America.”13 The influential work by Mian and Sufi suggested instead that poorer U.S. households (highly leveraged and with high marginal propensity to consume) took the largest hit from the drop in post-2007 U.S. house prices and therefore were responsible for the large drop in aggregate consumption and subsequent employment losses.14 At a first glance, the two ideas may appear at odds with each other but they can perhaps be reconciled if seen as different sides of the same inequality coin.

Are recessions in more unequal countries deeper and do they last longer?

Support for the idea that income inequality can retard full economic recovery following recessions is found in studies for the case of the United States, both at the aggregate level and at a state level.15 In addition, an earlier cross-country study by Rodrik highlighted how countries with greater social cleavages and weaker institutions experienced the sharpest drops in GDP growth from 1975 to the late 1980s (a highly turbulent period from the macroeconomic point of view)—the idea being that policies implemented in response to an external shock usually carry substantial distributional implications, while the latent social conflict and high social division (“along the lines of wealth, ethnic identity, geographical region or other divisions”) that permeates the economy may delay their implementation and lead to “macroeconomic mismanagement.” It is reasonable to assume that each independent group would seek to bargain a lower burden of a negative shock and the share of resources devoted to counterproductive rent-seeking activities increases.16 As a result, the magnitude of the collapse of growth due to external shocks can be higher, and the resilience of the economy to external shocks can be damaged.

Is inequality leading to financial instability or the accumulation of financial imbalances?

A number of theoretical considerations have been put forward to suggest that the degree of inequality can have a direct effect on aggregate savings and consumption and on both demand for and a supply of credit. Relative income and spending comparisons may, for instance, have important influence on what people spend their money on, how much they save, and even how much debt they accumulate.

Empirical findings are so far controversial: Research based on aggregate data and cross-country analysis emphasize positive correlations between inequality, household overconsumption, and indebtedness, whereas the evidence based on microdata appears less consistent and supportive of this hypothesis. Similarly, little evidence was found in support of the idea that rising inequality may increase the probability of a financial crises to occur.17 Yet further investigation of the alleged relationship between inequality and private debt becomes particularly relevant, as the latest crisis was largely the result of the burst of a debt-financed housing and consumption bubble that involved the private sector of the economy.

Growing inequality does not benefit the macroeconomy

After surveying a growing body of new and old evidence on inequality and the macroeconomy, one would easily conclude that increasing income and wealth inequality appear to be sanding the wheels of economic growth, making the ride bumpier, with short ups and deep downs, and potentially increasing the risk of a fatal crash. This may generate an instrumental justification for effective coordinated actions by governments to reduce income and wealth inequality that goes beyond classic concerns about distributional equity and fairness.

At the same time, as I recalled in the chapter from which this article draws on, “no relationships have been robustly demonstrated without qualification.” Furthermore, because establishing a causal relationship even when the empirical association is confirmed is an extremely tricky business, it is imperative to conduct fresh empirical research, also outside the United States, to corroborate some of the empirical findings discussed above, test new hypotheses, and enrich our scientific knowledge to better inform policies. Most importantly, the understanding of the determinants of economic inequality is fundamental to substantiate, case by case, the inevitable contingent nature of the relationship between aggregate performances and inequality. This would caution everyone from the adoption of a new generic consensus on the detrimental effects of inequality on economic stability that “is as likely to mislead as the old one was.”18

If anything, we can now confidently stop justifying increasing inequalities in income and wealth on mere economic grounds.

Reducing inequality, the constraints on substantial freedom and opportunities of individuals, will not frustrate, but possibly will enhance the path of economic prosperity and stability; it is a gain that every democratic society must strive for.

Salvatore Morelli is a visiting scholar at the Institute for New Economic Thinking at the Oxford Martin School, University of Oxford, and associate member of Nuffield College at Oxford as well as a research associate at the Center for the Study of Economics and Finance (CSEF).

On the Negative Information Revealed by Marvin Goodfriend’s “I Don’t Teach IS-LM”

Posted on by Brad DeLong

The smart and snarky Sam Bell wants to taunt me into rising to his bait by twittering https://twitter.com/sam_a_bell/status/872116967070732288 a quote from likely Fed nominee Marvin Goodfriend: “I don’t teach IS-LM”. He succeeds. Here is the quote:

TOM KEENE: But, Marvin, with, you know, basic IS-LM and theory and all that stuff you teach in Economics 101, aren’t we going to see a dampening of GDP if we see a restrictive Fed?

MARVIN GOODFRIEND: By the way, I don’t teach IS-LM. But what I would say is this…

And here is the tape:

March 23, 2012: https://www.youtube.com/watch?v=emvSYwUnWyI&ab_channel=Bloomberg

Let me start by analyzing “I don’t teach IS-LM”. And let me preface this by saying that Marvin Goodfried is a very sharp and honest economist. But I believe that whenever anybody says “I don’t teach IS-LM” they are one of:

  1. Making completely implausible and wrong claims about how the economy works.
  2. Being lazy and/or stupid.
  3. Declaring a tribal affiliation to a particular Carnegie-Mellon tradition of macroeconomic analysis that the late Rudi Dornbusch described to me and others as “Jim Tobin with original errors”, and that I think has shed a lot more heat than light on real issues.

Let us start with (1), and let us start with Irving Fisher’s monetarism: the quantity of money demanded in the economy is given by the equation:

Md = PY/V

where M is the quantity of money demanded, P is the price level, Y is the level of production, and V is the velocity of money—the value of transactions that having $1 in the bank or in cash as money can support, in the sense of manufacturing the needed trust so that the transactions will go through.

If you believe that that velocity of money is fixed by the institutions of the banking system and the technology supporting transactions, then you do not have to teach IS-LM. You have reached a full stop, and have the monetarist conclusion that the total nominal spending in the economy—prices times quantities produced—is equal to a constant times the economy’s money stock, with the constant of proportionality chaining slowly over time as the institutions of the banking system and the technology supporting transactions slowly changes.

That is meaning (1) of “I don’t teach IS-LM”: I do not need to teach it because it is not important in determining how much spending there is the economy. That is implausible and wrong. Here is the graph of velocity since 1960—the thing that is supposed to be on a smooth and steady time trend if “I don’t teach IS-LM” is a sensible thing to say:

Velocity of M2 Money Stock FRED St Louis Fed

Even before the 1990s any model assuming an unproblematic relationship between the money stock and total spending was badly awry, although not as badly awry as it has been since.

Now let’s move on to (2)—lazy and/or stupid. The graph above tells you that if you want to forecast—or even retrospectively explain—the relationship between the money stock and the level of spending, you need a model of what the determinants of the fluctuations of velocity we see are. If we draw a graph with the level of spending on the horizontal axis and some sufficient statistics for the determinants of velocity on the vertical axis, the path traced out by our equation:

Md = PY/V

is conventionally called “the LM curve”. But you then need to know where on the LM curve the economy will be—you need another curve. And that other curve is conventionally called “the IS curve”.

To claim that you do not teach IS-LM is to implicitly claim that you do not need to figure out where on the LM curve the economy will be. That is something it is only possible to say if you are being lazy, or stupid.

The third meaning of “I don’t teach IS-LM” is that it is a CMU-school tribal indentification marker, and has no purpose beyond that—no intellectual purpose.

So, yes, the fact that Marvin Goodfriend would go on Tom Keene’s surveillance and say “I don’t teach IS-LM” makes me think a good deal less of him. I do, however, interpret that claim as a declaration of tribal allegiance to CMU-school macro. I do not interpret it as a claim that you don’t need a model of the determinants of fluctuations in velocity. I do not interpret it as a claim that there are no fluctuations in velocity large enough to worry about.

What worries me more, however, is what comes next:

GOODFRIEND: There is no way that this recovery can proceed with any degree of confidence unless the Fed makes sure that inflation does not move up. So I think the risks are exactly reversed from the way the Fed chairman discusses this. He has to make the public understand that any whiff of doubt about the Fed’s ability and willingness to stabilize inflation is going to put a crimp into the public’s willingness to take positions and commitments over the next two or three years that would produce genuine growth. And so I would just take it, and turn it on its head, and not put the question as you did to me, but reverse it.

The risks of allowing any latitude in inflation expectations to build dup, or any doubt about the Fed’s willingness to do what it takes to keep inflation down, is to me the most likely risk in preventing this recovery from getting any traction…

Do notice that Marvin Goodfriend is, here, thinking in terms of an IS-LM model. When he says “any whiff of doubt about the Fed’s ability and willingness to stabilize inflation is going to put a crimp into the public’s willingness to take positions and commitments… is to me the most likely risk in preventing this recovery from getting any traction…”, he is saying: “any whiff of doubt about the Fed’s ability and willingness to keep inflation low will cause a large leftward shift in the IS curve that will prevent this recovery from getting any traction…” He does not do more than gesture at an expectational mechanism for this leftward shift in the IS curve that he wants the Federal Reserve to take action to head off. But it is what he fears.

And, of course, Goodfriend was wrong: a continuation of Bernanke’s extraordinary easing policies was not going raise “any whiff of doubt about the Fed’s ability and willingness to stabilize inflation”.

Here we have a market-based measure of inflation expectations—the ten-year breakeven inflation rate since 2010: that inflation rate over the forthcoming ten years that would, at each date, have made investments in conventional Ten-Year U.S. Treasury bonds and investments in Ten-Year Inflation-Protected Securities (TIPS) equally profitable. The vertical blue line marks March 23, 2012: the date of Marvin Goodfriend’s interview. The point that Marvin was hammering home again and again on March 23, 2012 was that the Federal Reserve needed to rapidly start shrinking its balance sheet and raising interest rates lest inflation expectations break out to the upside.

The Federal Reserve ignored Marvin Goodfriend.

And Marvin Goodfriend was wrong. The shift to a tighter, more restrictive policy he demanded then was not necessary to prevent an upside breakout of inflation expectations.

In fact, the Federal Reserve’s persistent problem since has been that expectations of—and actual outcomes for—inflation have been well below rather than above the Federal Reserve’s targets.

I would very much like to hear Marvin Goodfriend explain why he misjudged the situation in the spring of 2012, and how he has updated his view of the economy and of optimal monetary policy since.

JOLTS Day Graphs: April 2017 Report Edition

Posted on by Nick Bunker

Every month the U.S. Bureau of Labor Statistics releases data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS. Today, the BLS released the latest data for April 2017. This report doesn’t get as much attention as the monthly Employment Situation Report, but it contains useful information about the state of the U.S. labor market. Below are a few key graphs using data from the report.

The quits rate declined slightly to 2.1 percent, but that’s familiar territory for the statistic. It’s been 2.1 percent in 10 of the past 12 months.

The number of unemployed workers per job opening declined in April to 1.17, the second lowest ratio on record.

The vacancy yield, a measure of how readily a job opening turns into a hire, fell quite a bit to 0.84 in April from 0.92 in March.

The relationship between job openings and the unemployment rate hasn’t returned to its pre-recession form, due to the shift in the relationship for long-term unemployed workers.

Must-Read: Sarah Kliff: Nevada’s legislature just passed a radical plan to let anybody sign up for Medicaid

Posted on by Brad DeLong

Must-Read: Sarah Kliff: Nevada’s legislature just passed a radical plan to let anybody sign up for Medicaid: “Nevada’s bill… just four pages… would allow any state resident… to buy into the state Medicaid program… under the name the Nevada Care Plan… https://www.vox.com/policy-and-politics/2017/6/6/15731622/nevada-medicaid-for-all

…Michael Sprinkle…. Under his bill, people who qualify for tax credits under the Affordable Care Act would be able to use those credits to buy Medicaid coverage instead. People who don’t qualify for anything would be able to use their own money to do the same. The plan would likely sell on Nevada’s health insurance marketplace, making it a public option to compete against the private health insurance plans also selling there. The buy-in coverage would be pretty much identical to the coverage traditional Medicaid provides…. Democrats explored the possibility of a Medicare buy-in during the health care debate in 2009 and 2010. The buy-in option was relatively narrow, only allowing Americans over 55 to participate in the program. Those under the age threshold would still be limited to private health insurance plans. Early versions of the Affordable Care Act included the buy-in provision. But the Senate was forced to drop the Medicare buy-in from its bill when it couldn’t get the entire caucus behind the idea. Health industries fought aggressively against the idea, which could disadvantage insurers by cutting into their market share…

Should-Read: Olivia P. Judson: The energy expansions of evolution

Posted on by Brad DeLong

Should-Read: Olivia P. Judson: The energy expansions of evolution: “The history of the life–Earth system can be divided into five ‘energetic’ epochs… https://www.nature.com/articles/s41559-017-0138

…geochemical… sunlight, oxygen, flesh and fire…. Oxygen, flesh, and fire are all consequences of evolutionary events. Since no category of energy source has disappeared, this has, over time, resulted in an expanding realm of the sources of energy available to living organisms and a concomitant increase in the diversity and complexity of ecosystems. These energy expansions have also mediated the transformation of key aspects of the planetary environment…. Using energy as a lens… illuminates patterns in the entwined histories of life and Earth, and may also provide a framework for considering the potential trajectories of life–planet systems elsewhere…. These expansions are consequences of events in the evolution of life, and they have mediated the transformation of the planet from an anoxic world that could support only microbial life, to one that boasts the rich geology and diversity of life present today. Here, I review these energy expansions…

Should-Read: Henry Farrell: The Strange Death of Anglo-American Liberalism

Posted on by Brad DeLong

Should-Read: Henry Farrell: The Strange Death of Anglo-American Liberalism: “The Financial Times… committed to free markets, but with a undertone that they had to have decent outcomes… http://crookedtimber.org/2017/05/31/the-strange-death-of-anglo-american-liberalism/

…Pro concerted action to solve international problems such as global warming. Very much in favor of Europe’s role in helping to cement democracy in Eastern Europe and always ready to deplore backsliding and corruption. Broadly in favor of small-l liberalism with respect to… dubious authoritarian tendencies…. Economic inequality was always a dicey set of issues for a newspaper whose financial model depended in part on the “How to Spend It” supplement…. But… a reasonably well-defined possibility-space of vaguely-left liberal to vaguely-right liberal positions, triangulating between European and UK perspectives, from which FT writers (and readers) could draw.

That has all changed…. Gideon Rachman[‘s]… anger shading into grief…. Not [his] attack on Trump… or… the terms of… Brexit deal, which FT writers have been banging on about for all the obvious reasons since the vote happened. It’s Merkel’s “unfair” suggestion that Trump’s America and May’s Britain are the same kind of problem, states that Europe simply can’t rely on any more. Dealing with the Brexit whiplash is bad enough, without the Germans rubbing salt and grit into the wounds…. Europhile British liberals don’t have much of a place to go these days, apart from the Liberal Democrats (but I repeat myself). It’s hard to see how the UK will return to liberalism in the foreseeable future…. The current standard bearers of liberalism have French names–Macron and Trudeau–and run second or third ranked powers…. Unless things change again, there won’t be much space left for… ‘decent’ market liberalism…. I suspect that the newspaper will gradual change to reflect this. If I’m right in this prediction, and if, as I suspect, it will be replaced by worse things, I’ll be sorry to see it go…

Should-Read: Laura Panza and Jeffrey G. Williamson: Australian Squatters, Convicts, and Capitalists: Dividing Up a Fast-Growing Frontier Pie 1821-1871

Posted on by Brad DeLong

Should-Read: Laura Panza and Jeffrey G. Williamson: Australian Squatters, Convicts, and Capitalists: Dividing Up a Fast-Growing Frontier Pie 1821-1871: “Compared with its nineteenth century competitors, Australian GDP per worker grew exceptionally fast… http://www.nber.org/papers/w23416

…about twice that of the US and three times that of Britain…. Using a novel data set we offer new evidence supporting unambiguously the view that, in sharp contrast with US, Australia underwent a revolutionary levelling in incomes between the 1820s and the 1870s. This assessment is based on our annual estimates of functional shares in the form of land rents, convict incomes, free unskilled incomes, free skill premiums, British imperial transfers and a capitalist residual…