Odd notes

1.  Look how Newsweek puts things in perspective:

The bombardment was preceded by a large-scale Kurdish operation against Isis in northern Iraq, which saw 5,000 Kurdish fighters, supported by US-led coalition airstrikes, sweep around Mosul to recapture an area larger than the size of Andorra, Liechtenstein and San Marino combined.

That large, eh?

2.  This surprised me:

Ms Schneider reckons that more than half of the world’s feed crops will soon be eaten by Chinese pigs.

And some more information:

As a result, land use is changing drastically on the other side of the world. In Brazil, more than 25m hectares of land—parts of which were once Amazon rainforest—are being used to cultivate soy (Chinese companies have not signed up to the “soy roundtable”, a voluntary association, the members of which agree not to buy soyabeans from newly deforested land). Entire species of plants and trees are being sacrificed to fatten China’s pigs. Argentina has chopped down thousands of hectares of forest and shifted its traditional cattle-breeding to remote areas to make way for soyabeans. Since 1990 the Argentine acreage given over to that crop has quadrupled: the country exports almost all of its whole soyabeans—around 8m tonnes—to China. In some areas farmers harvest two or three crops a year, using herbicides that have been linked to birth defects and increased cancer rates.

3.  In China, small cities are more densely populated than large cities:

Screen Shot 2015-02-08 at 5.47.28 PM

4.  Here’s something you probably didn’t know about Edgar Allen Poe:

Poe’s mind was by no means commonplace. In the last year of his life he wrote a prose poem, Eureka, which would have established this fact beyond doubt—if it had not been so full of intuitive insight that neither his contemporaries nor subsequent generations, at least until the late twentieth century, could make any sense of it. Its very brilliance made it an object of ridicule, an instance of affectation and delusion, and so it is regarded to this day among readers and critics who are not at all abreast of contemporary physics. Eureka describes the origins of the universe in a single particle, from which “radiated” the atoms of which all matter is made. Minute dissimilarities of size and distribution among these atoms meant that the effects of gravity caused them to accumulate as matter, forming the physical universe.

This by itself would be a startling anticipation of modern cosmology, if Poe had not also drawn striking conclusions from it, for example that space and “duration” are one thing, that there might be stars that emit no light, that there is a repulsive force that in some degree counteracts the force of gravity, that there could be any number of universes with different laws simultaneous with ours, that our universe might collapse to its original state and another universe erupt from the particle it would have become, that our present universe may be one in a series.

All this is perfectly sound as observation, hypothesis, or speculation by the lights of science in the twenty-first century. And of course Poe had neither evidence nor authority for any of it. It was the product, he said, of a kind of aesthetic reasoning—therefore, he insisted, a poem. He was absolutely sincere about the truth of the account he had made of cosmic origins, and he was ridiculed for his sincerity. Eureka is important because it indicates the scale and the seriousness of Poe’s thinking, and its remarkable integrity. It demonstrates his use of his aesthetic sense as a particularly rigorous method of inquiry.

5.  In a review of a book on disappearing religions, I found this:

In a Detroit supermarket Russell experiences one of the most moving moments in a book that is often tinged with sadness. As he roams the aisles, Russell notices voices speaking a language that echoes with the sounds of Arabic or Hebrew, though it is neither: it is Aramaic. “Amid the Muzak and synthetic fruit drinks in a suburban American store, I was hearing the language of Christ.” The people speaking it are Assyrian Christians from northern Iraq, the descendants of the legendary Church of the East. Its followers—some of whom (the Chaldeans) today answer to Rome—once claimed a tenth of all Christians among its flock. Their missionaries brought Christianity to China in 635. When Mel Gibson brought out his film version of the life of Christ, the Assyrians were among the few people in the world who could follow its Aramaic dialogue without the benefit of subtitles.

During the modern era, many Assyrian Christians settled in the city of Mosul, Iraq’s second largest. In June, the jihadist army that would soon rename itself “Islamic State” captured the city, setting off an exodus of Iraqi Christians that could well mean the end of yet another ancient religious presence in the Middle East. There are already more speakers of Aramaic in metropolitan Detroit (around a hundred thousand) than in Baghdad; the head of the Assyrian Christians, Patriarch Mar Dinkha IV, lives in Chicago. In the Midwest, they have their churches, clubs, restaurants, and newspapers. There is some comfort in the thought that they have found safety, and that in some degree their culture will endure. But this is small consolation for the loss of an entire world.

6.  My favorite Indian film is The World of Apu (1959.)  This story about an Indian bride who marries a wedding guest reminds me of the film.

7.  Why is this called a “head transplant” and not a body transplant?  And what does that say about our concept of personal identity?

8.  This is rather surprising:

Britain has prized the ideal of economically mixed neighbourhoods since the 19th century. Poverty and disadvantage are intensified when poor people cluster, runs the argument; conversely, the rich are unfairly helped when they are surrounded by other rich people. Social mixing ought to help the poor. It sounds self-evident—and colours planning regulations that ensure much social and affordable housing is dotted among more expensive private homes. Yet “there is absolutely no serious evidence to support this,” says Paul Cheshire, a professor of economic geography at the London School of Economics (LSE).

And there is new evidence to suggest it is wrong. Researchers at Duke University in America followed over 1,600 children from age five to age 12 in England and Wales. They found that poor boys living in largely well-to-do neighbourhoods were the most likely to engage in anti-social behaviour, from lying and swearing to such petty misdemeanours as fighting, shoplifting and vandalism, according to a commonly used measure of problem behaviour. Misbehaviour starts very young (see chart 1) and intensifies as they grow older. Poor boys in the poorest neighbourhoods were the least likely to run into trouble. For rich kids, the opposite is true: those living in poor areas are more likely to misbehave.

9.  Fight Islamic fundamentalism–put them in charge of the government:

Hardliners have long railed against “Westoxification” (the title of a book by Jalal Al-e Ahmad, published in 1962), yet in their daily lives they are now surrounded by Western consumer goods, computer games, beauty ideals, gender roles and many other influences. Iranian culture has not disappeared, but the traditional society envisaged by the fathers of the revolution is receding ever further.

The most visible shift is in public infrastructure. Tehran, the capital, is a tangle of new tunnels, bridges, overpasses, elevated roads and pedestrian walkways. Shiny towers rise in large numbers, despite the sanctions. Screens at bus stops display schedules in real time. Jack Straw, a former British foreign minister and a regular visitor, says that “Tehran looks and feels these days more like Madrid and Athens than Mumbai or Cairo.”

.  .  .

Iran is the modern world’s first and only constitutional theocracy. It is also one of the least religious countries in the Middle East. Islam plays a smaller role in public life today than it did a decade ago. The daughter of a high cleric contends that “religious belief is mostly gone. Faith has been replaced by disgust.” Whereas secular Arab leaders suppressed Islam for decades and thus created a rallying point for political grievances, in Iran the opposite happened.

Long and variable leads (a reply to Tony Yates)

Tony Yates expresses shock that someone calling himself a market monetarist could reject Milton Friedman’s famous “long and variable lags” claim about monetary policy.

I have great respect for Friedman, but when I did my research on monetary policy in the interwar years (which is the period where it is easiest to clearly identify monetary shocks) I wasn’t able to find significant lags.   The monthly WPI and industrial production indices seemed to move almost immediately and sharply after monetary shocks.  If NGDP data had been available, it would have also responded quickly.

Even worse, I found that Friedman and Schwartz had misidentified monetary shocks by focusing on the monetary aggregates, which often moved ahead of or behind the actual shock.  Thus the devaluation that occurred in April 1933 led to expectations of future money growth, and these expectations led to an immediate surge in prices and output. That’s what led me to coin the “long and variable leads” phrase.  I thought it would be obvious to people that I know that classical theories of causation don’t really allow for cause to follow effect.  Rather that it is actually expectations of future money growth that caused the near term NGDP growth surge.  I used a bit of poetic license to drive the point home.

Later I learned that Woodford and Eggertsson were doing similar research from a New Keynesian perspective.  Here’s Yates:

Sumner cites Woodford and Krugman as commenting on the potency of expectations, and uses this in support of his thesis that changing expectations changing things refutes the long and variable lags thesis.  But I am quite sure neither of them believe any such thing.  Estimated versions of Woodford’s model (for example, the original Rotemberg-Woodford model) behave just like my account above.  And Krugman is a firm believer in sticky prices, talking interchangeably between IS/LM and New Keynesian models.  Which behave just as I’ve explained above.

The only model I know where monetary policy has its entire effect instantaneously is the flexible price rational expectations monetary model.  And in this case there is no point in monetary stabilisation policy at all.  Money has no short-run effects on output.  Optimal policy in this model is to set rates at zero permanently, obeying the Friedman Rule.  If there are real frictions in this model, like financial frictions, there will still be a role for fiscal stabilisation, however.

I’m sure these mix-ups would get ironed out if MaMos stopped blogging and chucking words about, and got down to building and simulating quantitative models.  Talking of which….

Lots of problems here:

1.  Obviously I’m a believer in sticky wage/price models, and hence do not believe that monetary policy has an instantaneous effect on all prices (although it does instantly impact the prices of commodities traded in auction-style markets.)  So Yates has mischaracterized my views.

2.  When Woodford’s coauthor Gauti Eggertsson tried to apply their approach to the Great Depression, he read a great deal of my empirical work, and seemed to like it. Eggertsson’s 2008 AER paper on monetary policy expectations in 1933 cites three of my empirical studies.  That doesn’t mean he agrees with all my views, but he didn’t seem to find them ridiculous. And in 1993 I published a paper arguing that temporary currency injections would not be inflationary, 5 years before Krugman published “It’s Baaack . . .”

3.  I can’t speak for all market monetarists, but I’m extremely skeptical of the VAR modeling approach discussed by Yates.  The early attempts at VAR models produced a “price puzzle,” which meant that tight money seemed to “cause” higher inflation.  I remember thinking “Yeah, what do you expect when you use interest rates as an indicator of the stance of monetary policy.”  Yes, some of these problems have been “fixed”, but I’m not impressed by the fact that 99% of the economics profession seemed to think monetary policy was “easy” during 2008-09.

In my view economists should forget about “building and simulating quantitative models” of the macroeconomy, which are then used for policy determination. Instead we need to encourage the government to create and subsidize trading in NGDP futures markets (more precisely prediction markets) and then use 12-month forward NGDP futures prices as the indicator of the stance of policy, and even better the intermediate target of policy.  It’s a scandal that these markets have not been created and subsidized, and it’s a scandal that the famous macroeconomists out there have not loudly insisted that it needs to be done.

If and when we get out of the Stone Age and have highly liquid NGDP and RGDP futures markets, then it would be much easier to explain my views on leads and lags. In that world a change in NGDP futures prices, not a change in the fed funds rate, represents a change in monetary policy. To be more specific:

I predict that whenever the 12-month forward NGDP futures prices starts falling significantly, near term NGDP would fall at about the same time, or soon after.  For instance, if we had had a NGDP futures market in 2008, then during the second half of the year you would have seen a sharp fall in 12 month forward NGDP futures.  At roughly the same time or soon afterwards current NGDP would have been falling. In contrast, if the Fed had moved aggressively enough to prevent 12-month forward NGDP prices from falling, then near term NGDP in late 2008 would have been far more stable.  I think that’s roughly consistent with Woodford’s view, although we may differ slightly on the lag between a change in 12-month forward NGDP expectations and a change in actual NGDP.  (Nor would he necessarily accept my views on the potency of monetary policy in 2008.)

PS.  The post also speculates on my views on fiscal policy.  Just to be clear, I oppose attempts to force a balanced budget.

PPS.  Yates’s blog is entitled “Longandvariable.”  Not the specific post, the entire blog. He just needs to add “leads.”

PPPS.  Yates refers to me as a “MaMoist.”  I guess that’s better than being a Maoist, like that faction in the Greek party Syriza.  You know, the party so many on the left now seem enamored with.  The one that has a bunch of MPs that idolize history’s greatest mass murderer.

HT:  Marcus Nunes

 

It turns out that the US was never at the zero bound

Matt Yglesias has a very interesting new post:

Something really weird is happening in Europe. Interest rates on a range of debt — mostly government bonds from countries like Denmark, Switzerland, and Germany but also corporate bonds from Nestlé and, briefly, Shell — have gone negative. And not just negative in fancy inflation-adjusted terms like US government debt. It’s just negative. As in you give the German government some euros, and over time the German government gives you back less money than you gave it.

In my experience, ordinary people are not especially excited about this. But among finance and economic types, I promise you that it’s a huge deal — the economics equivalent of stumbling into a huge scientific discovery entirely by accident.

Indeed, the interest rate situation in Europe is so strange that until quite recently, it was thought to be entirely impossible. There was a lot of economic theory built around the problem of the Zero Lower Bound — the impossibility of sustained negative interest rates. Some economists wanted to eliminate paper money to eliminate the lower bound problem. Paul Krugman wrote a lot of columns about it. One of them said “the zero lower bound isn’t a theory, it’s a fact, and it’s a fact that we’ve been facing for five years now.”

And yet it seems the impossible has happened.

If I wanted to quibble I’d say Yglesias slightly exaggerates the element of surprise here. Some of us knew that US T-bill yields fell a couple of basis points below zero around 1939-40.  But on the bigger issue he’s right.  I never would have expected negative 0.75% nominal interest rates.  In retrospect, I underestimated the cost of storing large quantities of cash.  I’d guess it’s much higher than 100 years ago, when banks routinely dealt with large quantities of gold, and currency notes with denominations as large as $100,000.

And most other economists were even further off base.  Indeed back in 2009 I used the cost of storing cash as an argument in favor of negative IOR, and some Keynesians disagreed with me.  They said negative IOR would merely cause ERs to transform into safety deposit boxes full of currency.  I said the American public didn’t want to store trillions of dollars in currency and coins.  There’d be at least a modest hot potato effect.

As Matt points out, the key takeaway is that the US was never at the zero bound:

The big one is that central banks, including the United States’, may want to consider being bolder with their interest rate moves. For years now, the Federal Reserve’s position has been that it “can’t” cut interest rates any lower because of the zero bound. Instead, it’s tried various things around communications and quantitative easing. But maybe interest rates could go lower? Unlike the European Central Bank, the Federal Reserve pays a small positive interest rate on excess reserves. Fed officials normally say this doesn’t make a difference in practice, but it looks like negative rates on excess reserves may be the key to negative bond rates.

It’s no longer an issue of “just 25 basis points.”  German 5-year bond yields are currently negative, which is considerably lower than the 0.60% that they bottomed out at in America.  If we were never at the zero bound, then the foes of market monetarism have pretty much lost their only good argument for fiscal stimulus.

Now for the curve ball.  I am not saying the Fed should have tried to replicate the negative 5-year bond yields of Germany.  I view negative long term bond yields not as an expansionary monetary policy, but rather as a sign of failure.  Never reason from a bond yield.  A truly expansionary monetary policy might well have raised long-term bond yields.  My claim is different.  I’m saying that for those who do think nominal interest rates are a good indicator of the stance of monetary policy, it’s now clear that the Fed could have cut rates much more sharply.

But that’s not why I believe the Fed was never out of ammunition.  I relied on an entirely different reasoning process.  I noticed that Ben Bernanke never once suggested that the Fed had run out of paper and green ink.

The dog that did not bark

Tyler Cowen has a new post offering opinions on a wide range of issues.  In many cases I agree with his views.  For instance, this one:

5. We are still in the great stagnation, for the most part.  But with nominal gdp well, well above its pre-crash peak, it is not demand-based “secular stagnation.”  It just isn’t, I don’t know how else to put it.  And the liquidity trap is still irrelevant and has been since about 2009.

The reasoning used is not very persuasive.  Could you imagine him making that argument in late 1982, when NGDP was above the pre-recession peak?  But Tyler’s conclusion seems sound.

However I take issue with this claim:

4. During the upward phase of the recovery, monetary policy just doesn’t matter that much.

I can’t even imagine what a model would look like where that claim was true.  To see why it is not true, compare the post mid-2009 recoveries in the US and Europe. If monetary policy in the US and Europe did not matter very much during the recovery, then the tightening of monetary policy in mid-2011 in the eurozone ought to have had little effect.  What does it look like to you?

Screen Shot 2015-02-25 at 8.32.42 AM

I think the problem here is that the US recovery looks fairly smooth, and also disappointing, despite various actions by the Fed.  It’s tempting to conclude that Fed policy didn’t matter very much.  But all you have to do is to look across the pond and you’ll see that it mattered a great deal.

PS.  I’m not sure why the Fred’s eurozone RGDP data is not updated.  I believe there’s been a very anemic recovery in the past year.

Update:  Marcus Nunes has updated the graph.  David Beckworth also has a post, which takes a deeper look at the US/eurozone divergence.

Beware of income inequality data

A few years back I got so exasperated reading a Journal of Economic Perspectives piece on income inequality (by Emmanuel Saez and Peter Diamond) that I did a post calling it “propaganda.”  I probably shouldn’t have used that term, but I was reminded of my frustration when reading a very good Alphaville post by Cardiff Garcia:

The issue of whether US inequality has climbed since the recession of 2008 has been relitigated this week. A short analysis by Stephen Rose claimed that income inequality had actually fallen, assigning the credit to public policy.

David Leonhardt of the New York Times discussed Rose’s findings, followed by further analyses and critiques from Ben Walsh and Nick Bunker. I’ll present the findings first before adding my own thoughts at the end.

Mainly in response to the heavily cited claim by Emmanuel Saez that 95 per cent of the income gains in this recovery have gone to the top 1 per cent of earners, Rose emphasizes a couple of broad points.

There are two problems with the 95% claim, one has already been discussed by David Henderson, while the other is often overlooked.  David pointed out that when evaluating income equality you want to remove cyclical effects, as it’s a long term problem.  It’s not unusual for the share of income going to the rich to fall during recessions (as capital gains plunge), and then rise during expansions.  It would make more sense to compare 2014 to a year with similar unemployment, say 2004.

The less often discussed problem is that talking about shares of growth can be very misleading, especially when growth is slow. I’m going to give an extreme example, just to make the point more obvious.

Suppose nominal income and the CPI rose at roughly the same rate between 2004 and 2014.  In that case real income would be roughly unchanged.  But let’s also suppose it wasn’t completely unchanged, just roughly unchanged. More specifically, assume real income rose from $15,000,000,000,000 to $15,000,000,010,000.  That is, real income rose by $10,000.

Let’s suppose that in 2004 Ray Lopez worked at a car wash in LA, making $10,000/year.  In 2014 he had two car wash jobs, and was working much harder. Assume his real income had risen to $18,000.

Now here’s my question:  Is it accurate to say that between 2004 and 2014, 80% of the entire the gain in real income for the United States of America went to Ray Lopez, car washer in LA?  You’re damn right it’s accurate!  And I’m willing to assume that the cited claim by Saez is also accurate.

But there’s another question that goes beyond accuracy; is it misleading?  To me it’s obviously misleading to say that one car washer in LA received 80% of all the real income gains in America, even if my hypothetical data were true. That’s because one could say the same thing about his cousin, if she had gone from doing one house cleaning job to two, with the same $8000 gain in real income.  Indeed I would have earned more than 100% of all real income gains, as my real income rose by more than $10,000 over that decade.  Any time an aggregate doesn’t change very much, but there are significant changes to the components within that aggregate, there are lots of ways of slicing up the data to create misleading impressions. Presenting data that way may not be propoganda, but it certainly does more to confuse than enlighten.