Kling reviews Sumner’s latest book

I review The Money Illusion. I conclude on a skeptical note:

Would an NGDP futures market provide a reliable guide for discretionary monetary policy? That seems like an empirical question. But my guess is that if NGDP can be accurately forecast by speculators, then the market NGDP forecast can already be extracted from the above-mentioned indicators.

An assertion that you made a better forecast of NGDP than the Fed did in 2007, even if that assertion is true, does not prove your case. If I were a market monetarist, articulating an NGDP forecasting algorithm derived from market indicators, and demonstrating its reliability through a variety of historical episodes, would be high on my research agenda.

Inflation watch

From last week’s GDP release.

Current-dollar GDP increased 7.8 percent at an annual rate, or $432.5 billion, in the third quarter to a level of $23.17 trillion. In the second quarter, GDP increased 13.4 percent, or $702.8 billion

If Scott Sumner has converted you to following nominal GDP, then this is looking inflationary. Indeed, Scott himself says,

My only fear is that we might overshoot. NGDP growth was at an annual rate of 7.8% in the third quarter, which is fine when recovering from a recession. But we wouldn’t want growth to continue at that clip going forward. The Fed needs to bring NGDP growth down to a level of roughly 4%, to insure it can meet its FAIT objectives for the 2020s. The TIPS spreads have me a bit worried.

FAIT stands for flexible average inflation targeting.

Tyler Cowen continues to have faith (even more than Scott!) that the Fed has the will and the means to stop inflation in its tracks. As you know, I take the contrary position.

Scott Sumner vs. Monetarists

Scott Sumner writes,

Yes, market monetarism is not exactly the same as old-style monetarism, which is why it needs a new label. But I do believe that it is closer to monetarism than to other competing schools of thought.

He is responding to a review by George Selgin of Sumner’s recent book.

To me, the most important difference between Sumner and the monetarists that were prominent when I was studying economics concerns the issue of rules vs. discretion. Milton Friedman was adamant that the monetary authority should follow a rule. I would characterize Sumner’s guidance to the monetary authorities as “Do something expansionary when the market indicators suggest that future nominal GDP will fall below target, and do something contractionary when the indicators suggest the opposite.” But which market indicators, using what formula? And what is the exact dose of expansion or contraction indicated for a given discrepancy between the market forecast and the target? Sumner’s guidance is nowhere near as precise as the guidance that the rule-oriented monetarists would have provided. His market monetarism seems to allow a great deal of room for discretion, and the old-fashioned monetarists equated discretion with mischief.

Scott Sumner’s new book

On p. 33, he writes,

it’s far easier to understand inflation and deflation if we think in terms of explaining changes in the value of money than if we try to imagine the factors that would be changing the prices of each and every good, service, and asset in the economy.

During much of the Great Inflation [1966-1981, in his telling], people did try to explain the problem by searching for factors that were pushing up specific wages and prices. Indeed, in a sense the Great Inflation was caused by this misconception.

As I see it, we are seeing the same misconception this year. But on his blog, Sumner seems to disagree. He is willing to buy into the theory that we are facing transitory supply shocks in a few sectors. I think the main reason he goes with this story is that trust in the forecasting ability of financial markets is part of his worldview. But financial markets got it wrong during the Great Inflation, also.

I have just started the book. I am sure I will have more to say about it at a later date.

Pent-up inflation

Scott Sumner writes,

There are many reasons why higher wages might not be the optimal way to address a labor shortage. One problem is downward wage stickiness after the economy returns to normal

There is an assumption that “normal” means that you can hire all the workers you want at the same wage rate you were used to paying.

My view: the government has showered the economy with paper wealth, raising the ratio of dollar wealth to wages and prices. The way this will resolve itself is for wages and prices to rise. Firms are in denial about this for now. So inflation remains pent up. I think that prices will rise first, as firms realize that they can make price increases stick and in fact they have to raise prices to ration demand, because they cannot hire enough workers to meet demand at current price levels. Then wages will rise as workers realize they have to seek higher pay in order to keep up with the cost of living. Workers are certainly in a frisky mood, with many quitting and others contemplating doing so.

As I see it, the economy is groping toward a new higher equilibrium price level. The financial markets, and Scott, disagree with me on that.

The nominal GDP indicator

Scott Sumner writes,

In general, those who claim inflation is too high have a preference for a tighter monetary policy, and vice versa. But fast NGDP growth is a much better indicator of whether the economy is overheating.

Later in his post, Sumner writes,

We don’t need easy money or tight money; we need stable money. That’s why I didn’t believe the low inflation of 2019 was a problem and it’s also why I don’t think the high inflation of 2021 is a problem. Inflation is not a reliable policy indicator.

I gather that Scott believes we have stable money now. Even though NGDP in the first quarter grew at an 11 percent annual rate. I assume that this qualifies as “fast” by Scott’s standards, but it is just one quarter.

In the past, Scott has said that his preferred indicator is future growth in NGDP. But nobody knows what that is. We have to rely on forecasts. For example, the Congressional Budget Office has a forecast for NGDP growth over the next several years, and it looks pretty benign. But even in the short term, NGDP is notoriously difficult to forecast.

I would be the last (or maybe next-to-last) person to defend using measured inflation as a reliable indicator. But it’s not like there is a reliable indicator sitting out there like the proverbial $20 bill on the sidewalk, waiting to be picked up.

The top 150 intellectuals, selected competitively

We held the Fantasy Intellectual Teams draft on Saturday. 10 owners competed. The owners came from the readership of this blog, and they themselves are not public figures in any way. The intellectuals they chose are shown below in the order they were selected. Because one owner arrived well after the draft had begun, the order in which teams picked was a bit mixed up.

Scoring for this season, which starts April 1 and ends June 30, is based on three categories:

(M) memes. These are phrases that are associated with a certain intellectual. For example, Black Swan is associated with Taleb (pick 31). If during the season the term Black Swan is used in at least three prominent places (well-known podcast or blog, newspaper, new book), that scores one M for Taleb. No more than one M per season for each catch-phrase. Richard Dawkins, who coined the term “meme,” was not chosen, although picking him would have guaranteed his owner at least one meme point.

(B) bets. An intellectual scores a B by expressing a belief in quantitative probabilistic terms. Oddly enough, Annie Duke, who would be credited with a meme if the phrase “Thinking in Bets” were to appear three times during the season, was not selected, either.

(S) steel-manning. The intellectual presents a point of view with which he or she disagrees in a way that someone who holds that point of view would consider to be representative. It is the opposite of straw-manning. I believe that Peter Thiel (pick 70) coined the term, or at least popularized it, and his owner is all but certain to pick up an M point. S’s are most likely to be earned by bloggers and podcasters and least likely to be earned by tweets or political speeches. They are more likely to be earned by centrists than by hard-core Red or Blue team members.

Tyler Cowen (pick 2) is a solid three-category player. He sometimes states beliefs in terms of probabilities, he tries to steel-man (although at times he can be too terse to earn a point), and he has meme candidates, such as Great Stagnation or “mood affiliation.”

Scott Alexander (pick 4) is likely to be a monster in the S and B categories.

I think that for next season I would add a category (R), for summarizing the research on two (or more) sides of a controversial issue. I would score one R for every 2 examples. I don’t want to give away an R to someone who just looks at research on a single topic during the season. Adding the (R) category would make Tyler and Scott even stronger candidates.

I will note that I thought that about a third of the picks reflected mood affiliation, and I would not have chosen them. I don’t want to pick on any owner in particular, but I’ll just say that I don’t think politicians will score points, and I will not be rooting for whoever took Oren Cass. By the end of this season, all of the picks will have track records, and those should inform owners who compete in a follow-up season.

I would caution the reader not to pay too much attention to relative ranking within this list. If there had been ten drafts, with ten different sets of owners, the average order would represent a consensus rank. But with only one iteration, the results reflect individual idiosyncrasies. In your comments, I am not interested in what picks you don’t like or what picks you think should have gone higher. I am interested in suggestions for intellectuals who seem likely to earn at least 3 points but who were not chosen.

Much as I poor-mouth my connections, I can brag by saying that in recent years I have had lunch and/or exchanged text messages with pick numbers 2, 5, 13, 32, 37, 38, 42, 95, 97, 132, and 147. I have met several others in person, but not recently. I believe that a social graph of the picks would show Tyler Cowen (2) and Marc Andreessen (97) as having the most dense connections with other picks.

Continue reading

Scott S. on my inflation views

Scott Sumner writes,

I do think the Fed is more agile, but the decisive factor is that the Fed is much stronger. If you want a metaphor. . .imagine I’m driving my car and my 6-year old daughter pushes the steering wheel to try to change direction. I’d simply push back more strongly.

Read the whole thing.

Also, you should read Scott’s post on bond market vigilantes.

The 1990s were a successful period for monetary policy. . .We can infer from stable 2% inflation that the actual interest rate stayed pretty close to the natural interest rate during the 1990s.

Scott is fond of saying “Never reason from a price change.” In Fantasy Intellectual Teams, if other players use that, his owner will score M points.

The way I understand this maxim is that prices are an endogenous variable that can be affected by many things. So you cannot safely draw inferences from a price change without knowing more about what went on.

If we generalize the rule to say that you cannot safely draw inferences from changes to endogenous variables, then Scott violates his own rule promiscuously. Take the quoted passage, for example. Can we safely infer that because inflation was stable that the interest rate stayed pretty close to the natural rate?

It sounds like Scott is providing an explanation for the low inflation of the 1990s, based on a concept called the “natural rate of interest.” But the natural rate of interest is something that we cannot observe. It plays a role in macroeconomics that is analogous to the role played by “systemic racism” in Critical Race Theory.

For Scott to convince me of monetary dominance, I would like to see him reason from an observable definition of loose money or tight money. Saying that an episode of slow growth in nominal GDP proves that monetary policy was tight is convincing to someone who already believes in monetary dominance, but not to a skeptic.

A few more remarks:

1. I think of inflation as determined by the behavior of paper wealth relative to real output. If wealth grows rapidly and persistently relative to real output, then eventually consumer prices will increase markedly. The sort of deficit spending we have undertaken in 2020 and 2021 has added a lot to paper wealth and nothing to output. So watch out.

2. I think that most of the time neither fiscal policy nor monetary policy has much effect on paper wealth.

3. My story for Japan is that before the government started creating lots of paper wealth, a lot of paper wealth got destroyed in the collapse of Japanese real estate and equity prices. So Japanese consumers were not flooded with wealth on net.

4. I think that the government can monetize a fair amount of debt and get away with it, as long as it looks as though it will collect enough future taxes to pay off bondholders. It’s when the government has no choice but to monetize that things get ugly. And it’s up to bond investors to calculate when the government is going to have no choice, and to try to sell their holdings before that perception becomes widespread. That is the sort of sovereign debt crisis that you really don’t want to go through.

Accounting for stimulus checks

Scott Sumner writes,

April saw by far the largest increase in personal income ever seen in America. That’s not normal for a month that is likely to end up being the absolute trough of the 2020 depression. And saying it’s “not normal” during a depression is an epic understatement.

In freshman macroeconomics, the letter Y often is used to stand for GDP and for national income, interchangeably. In the national income accounts, they are arrived at separately. Nominal GDP is measured as the purchases of goods and services at market prices. Nominal income is the payments received by workers and investors. Any difference between these two measured is labeled as a statistical discrepancy.

Personal income includes transfer payments, which are checks written by the government–Social Security, or unemployment compensation, or this year’s stimulus checks. Transfer payments are not part of national income, because they are not earned from the sale of goods and services. If you counted transfer payments in national income, the “statistical discrepancy” would get out of hand.

All of these flows are measured at annual rates. If you get a $1000 stimulus check in April, then at an annual rate that is $12,000. And some of us did not even get our checks until May. So the second quarter (April, May, and June) is going to see a whopping increase in personal income.

Some households will spend their stimulus checks right away, but many households will not. There’s only so much spending you can do with all the stores closed. In the national income accounts, there will be a big increase in personal savings. This will not be matched by investment; instead it will be matched by government dis-saving, a larger government deficit.

Suppose that households were to spend all of their income in the second quarter. Meanwhile, 20 percent are unemployed, so output should be down by a lot. Nominal spending up and real output down means that prices have to rise.

As I see it, the price rise was delayed by the fact that households did a lot of saving. Eventually, as they spend their stimulus checks, we will see the impact on prices.

Consider an extreme case. Suppose that textbook Y is $1. That is, we produce $1 of output and receive $1 in income. Next, the government writes a total of $99 in stimulus checks to households. Now households have $100 in personal income, and the government has a $99 deficit. When households spend their $100 on the output, the price of output will go up. Income will also go up, which means people can spend still more. The process only stops when the government engages in saving by running a surplus. That surplus cuts into personal income, reducing spending.

General update, May 4

Many interesting links from Tyler Cowen yesterday.

1. Stephen M. Hedrick wrote in 2004,

Perhaps we should not assume that each and every disease can be controlled by vaccination. Considering the biological invention that has been directed toward thwarting T cell responses and antibody reactions, the possibility exists that for some agents, the acquired immune system is not up to the task. Other avenues of treatment might be more efficacious, but in a more fatalistic vein, one might conclude that the most effective means of controlling disease, as it has always been, is public sanitation, vector control, and education. A parasite can’t replicate in a host to which it has no access. It is antithetical to biomedical science as practiced in western countries, but technology may not be the answer to most of the world’s infectious diseases.

2. David Goldhill sounds like me.

3. Dhal M. Dave and others write concerning shelter in place orders (SIPOs),

using daily state-level measures of social mobility from SafeGraph, Inc., we document that statewide SIPOs were associated with a 5 to 10 percent increase (relative to the pre-treatment period) in the share of the population that sheltered in place completely on anygiven day. This treatment-control differential increases during the first week following SIPO adoption and then remains constant or slightly declines. Next, turning to COVID-19, difference-in-differences estimates show that the adoption of a SIPO had little effect on COVID-19 cases during the five (5) days following its enactment, corresponding to the median incubation period. However, after the incubation period, and intensifying rapidly three weeks or more after the policy’s adoption, SIPO adoption is associated with an up to 43.7 percent decline in COVID-19 cases. Approximately 3 to 4 weeks following SIPO adoption, this corresponds to approximately 2,510 fewer cumulative COVID-19 cases for the average SIPO-adopting state. Evidence from event study analyses is consistent with common pre-treatment trends. . .While statewide SIPOs were negatively related to coronavirus-related deaths, but estimated mortality effects were imprecisely estimated.

My guess is that if they could have shown that government restrictions lower death rates, they would have shouted it from the rooftops.

4. CNBC reports,

data released from the country’s central bank and a leading Swedish think tank show that the economy will be just as badly hit as its European neighbors, if not worse.

Pointer from Scott Sumner. I agree with Scott that this is no surprise.

Lin and Meissner find

Job losses have been no higher in US states that implemented “stay-at-home” during the Covid-19 pandemic than in states that did not have “stayat-home”.

Pointer from John Alcorn.

Most of the change in behavior comes from individual decisions. At the margin, the government restrictions are probably stupid. They keep hospitals from performing helpful procedures on non-virus patients. They restrict access to beaches and parks, when it is likely that fresh air is a good thing nowadays. They impose the greatest change in behavior on the young people with the lowest risk. And they do not have a visible effect on death rates–probably because the people who are at risk and have choices about behavior are already doing what they can to minimize their exposure to the virus.

5. Russ Roberts says that we need to let the price system work in the market for masks.

Markets are failing in America because we’re not letting them work. It’s not a market failure. It’s a policy failure.

. . .You get more stuff when you let the price go up. We should use prices in a crisis, not just in normal times.

6. Bryan Caplan writes,

Populists notwithstanding, there is nothing “dishonorable” about raising prices to eliminate shortages. If governments or customers refuse to see this great truth, there is nothing dishonorable about raising prices in less-visible ways. Businesspeople, you do not merely have a right to “gouge.” As long as shortages persist, gouging is the right thing to do. Gouge is good!

His point is that business owners themselves are too reticent about raising prices.

7. J. Feliz-Cardoso and others write,

The EuroMOMO network monitors weekly all-cause age-specific excess mortality in countries in Europe through a standardised approach.

Can one find anything comparable here? The authors recalculate excess mortality using their own methods. They seem to find that it is concentrated among those over age 65, especially men.