Nice guys finish in the middle of the pack

Here’s a thought: Was Ben Bernanke the most powerful “nice guy” in all of world history?  Not all powerful people are as egotistical as Trump, or as ruthless as Nixon, but as far as I can tell nice mild-mannered college profs are almost never put in positions of great power.  The world really is a pretty brutal place.

There is much to say about Bernanke’s memoir, so I’m splitting this up between TMI and Econlog.  And I’ll skip the banking crisis, which is where Bernanke focuses most of his narrative.  Eric Posner says he was authorized to bail out both Bear Stearns and Lehman.  George Selgin says he lacked authorization (at least on Bagehotian grounds) for bailing out either bank. Bernanke says he was authorized to bail out Bear Stearns, but not Lehman.  And I’m not qualified to have an opinion.  So I’ll focus on monetary policy, something I do know a little bit about.

There is one big mystery that us policy nerds wanted answered in the memoir, and I did not find an answer.  This is from a paper by Lawrence Ball, a highly respected macroeconomist:

The analysis starts with a puzzle about Ben Bernanke. From 2000 to 2003, when Bernanke was an economics professor and then a Fed Governor (but not yet Chair), he wrote and spoke extensively about monetary policy at the zero bound. He suggested policies for Japan, where interest rates were near zero at the time, and he discussed what the Fed should do if U.S. interest rates fell near zero and further stimulus were needed. In these early writings, Bernanke advocated a number of aggressive policies, including targets for long-term interest rates, depreciation of the currency, an inflation target of 3-4%, and a money-financed fiscal expansion. Yet, since the U.S. hit the zero bound in December 2008, the Bernanke Fed has eschewed the policies that Bernanke once supported and taken more cautious actions–primarily, announcements about future federal funds rates and purchases of long-term Treasury securities (without targets for long-term interest rates).

A number of economists have noted the difference between recent Fed policies and Bernanke’s earlier views– usually critically. In discussing one of Bernanke’s early writings on the zero bound, Christina Romer says “My reaction to it was, ‘I wish Ben would read this again’” (quoted in Klein [2011]).

Paul Krugman (2011b) asks “why Ben Bernanke 2011 isn’t taking the advice of Ben Bernanke 2000.” In criticizing Fed policy, Joseph Gagnon echoes Bernanke’s criticism of the Bank of Japan: “It’s really ironic. It’s a self-induced paralysis” (quoted in Miller, 2011).

That’s also my view, and I think it misses an even bigger issue, level targeting. Bernanke recommended the BOJ consider level targeting to make up for previously falling short of the inflation target. Level targeting can be seen as the justification for a higher inflation target in Japan, one of Bernanke’s ideas that Ball did mention.

I have a hard time believing that Bernanke is not aware of this paper, which contains lots of fascinating information, and the view out there that his views moderated after he became Fed chair.  But he doesn’t really give us an answer in the memoir, particularly for the 2003 meeting that Ball insists was pivotal:

Sections IV-VI review the broader evolution of Bernanke’s views. I find that they changed abruptly in June 2003, while Bernanke was a Fed Governor. On June 24, the FOMC heard a briefing on policy at the zero bound prepared by the Board’s Division of Monetary Affairs and presented by its director, Vincent Reinhart. The policy options that Reinhart emphasized are close to those that the Fed has actually implemented since 2008; Reinhart either ignored or briefly dismissed the more aggressive policies that Bernanke had previously advocated.

In the discussion that followed the briefing, Bernanke joined other FOMC members in agreeing with most of Reinhart’s analysis.

Shortly after the meeting, Bernanke began writing papers that took positions very close to Reinhart’s–some with Reinhart as a coauthor. Clearly, the analysis of the Fed staff in 2003 was critical in changing Bernanke’s views about the zero bound.

At first glance, Bernanke’s sharp change in views is surprising. In 2003, he was a renowned macroeconomist who had studied the zero-bound problem extensively and expressed strong views about it. Yet he quickly accepted a different set of views when Reinhart presented them.

Why did the positions of the Fed staff influence Bernanke so strongly?

This question is difficult to answer, as we can’t observe Bernanke’s thought processes. Yet we can develop hypotheses based on research by social psychologists, who study group decisionmaking.

Based on this research, Section VII suggests two factors that may help explain Bernanke’s behavior. The first possible factor is “groupthink” at the FOMC, a tendency of Committee members to accept a perceived majority view rather than raise alternatives that might be unpopular.

The second is Ben Bernanke’s personality, which is typically described as “quiet,” “modest,” and “shy”– traits that might make him unlikely to question others’ views.

As I general rule, I feel somewhat uncomfortable looking for psychological explanations.  And in the end I’m going to defend Bernanke, or at least 80% defend him from the charge that he caved in to the FedBorg.  But first I’d like to push ahead with this line of thought.

What are we to make of the fact that Bernanke’s memoir doesn’t explain this 2003 turnabout?  One possibility is that he’s embarrassed, and would just as soon cover up what happened.  But I don’t think that is correct.  The memoir is often brutally honest, and there are cases where he blames himself for things that (in my view) he should have blamed others.  He’s too hard on himself.  Furthermore, I believe that a close reading of the text provides a more nuanced interpretation of what when on.

Here’s my reading:

1.  Bernanke came to the Fed with lots of ideas about how policy could be improved. He also had lots of ideas about the appropriate policy process—which he thought should be more collegial, less dictatorial than under Volcker and Greenspan—more like a college committee.

2.  Bernanke quickly found out that the Fed is a very powerful institution, with a life of its own.  And it’s embedded in a difficult and highly complex policy environment in Washington.

3.  Bernanke felt that policy was most effective if credible, and that meant you needed to avoid lots of close 6 to 5 votes.  You wanted enough support so that the markets would believe the Fed would carry through with its policies.

4.  In this difficult environment, Bernanke decided to pick his battles, and focus on implementing as many reforms as he could, given the political constraints.  BTW, in a book of very few revelations, the biggest comes near the very end, where he talks about the struggle to implement QE3.  There was intense pressure within the Fed to “taper”. Bernanke had to use all his political skills to keep it going throughout 2013. And where does Bernanke say this pushback came from?  Not Fisher, not Plosser, but rather the Obama appointees, Stein and Powell!  In the end they were team players that went along, but he knew he could only push them so hard.  If you don’t think Bernanke faced intense political pressure, just think about the fact that even the Obama appointees were highly skeptical of his monetary stimulus.  (Even weirder, the people he could rely on (Rick Mishkin, Don Kohn, etc.) were typically Bush appointees.)

5.  Bernanke decided to focus first on fixing the financial system, which was a mistake in my view.  The Fed (and Bernanke) sort of assumed that rescuing the banking system would rescue the macroeconomy.  By March 2009 they discovered that that assumption was wrong.  And it wasn’t just because of the rising unemployment, which is a lagging indicator.  Stocks kept plunging lower and lower, reaching levels that suggested fear of an outright depression.  And they are not a lagging indicator.  The recession was far worse than expected.  The big stock rally did not occur after banking was saved, it occurred after the Fed turned its attention to monetary stimulus, in March 2009 (i.e. QE1).  BTW, Bernanke mentions stock prices a lot in the memoir, which reminds me of my narrative of the Great Depression.

6.  In addition to implementing his academic research on the importance of saving the banking system, he also implemented some of his monetary research.  Most notably, he did QE and then he got the Fed to adopt an explicit 2% inflation target (a bit higher than some wanted.)  He got the Fed to try to reduce long term bond yields, by buying long-term bonds.  Then he got the Fed to commit to low rates for a long period.  And then low rates until the economy improved, and then QE that was open-ended, until the economy improved.  That’s a lot, and I wouldn’t blame Bernanke for being exasperated by critics like Ball, Krugman and yours truly.

7.  But . . . you knew there was a but.  He didn’t adopt the more controversial ideas, such as a higher inflation number, or level targeting, or NGDP target (perhaps combined with level targeting).  It would have been really hard to sell these controversial ideas to the Fed, they would have been highly controversial in Congress, and he didn’t want a badly split Fed implementing a policy that required credibility.  A policy that the markets would have to trust the Fed to persevere with.  Unfortunately, those more controversial ideas were the most effective options, indeed one reason they were so controversial is that they are quite powerful.

It might help if I put my views on Bernanke into perspective.  Here’s how I would grade some major central banks, and central bankers:

A:  Reserve Bank of Australia (with an easy test)

B:  Bernanke, Draghi, Carney, Kuroda

C:  Fed under Bernanke

D:  Pre-Kuroda BOJ, the ECB under Draghi

E.  Trichet, and ECB under Trichet

You might notice that in some cases I grade central bank heads higher than the institution they lead.  Bernanke was working very hard on the inside to push the Fed in a more dovish direction.  I’m not sure those of us on the outside appreciate how difficult his job was.  Ditto for Draghi.

Am I getting soft?  Hell no!  I’m just as critical of the Fed as before.  If they had been more supportive of Bernanke, policy would have been more expansionary.

Do I have any evidence to justify being such a softy regarding Bernanke?  First of all, I’m not that soft.  I regard his memoir as having fallen short in its monetary policy analysis.  He needed to point out more forcefully that the Fed should have done more. He admits to some mistakes, such as not easing policy in September 2008, but he should have said the policy regime was not up to the task of what needed to be done in 2008-09.  So I think being at the Fed did change him somewhat.  A Professor Bernanke looking at the Fed from the outside could have written a better narrative of what went wrong with monetary policy, and almost certainly would have had views similar to many of us who favored more “Rooseveltian resolve”.  But if I am grading him on the actual job he did, under the circumstances, I have to say that he worked really hard, and got an institution that was as stubborn as an old mule to do far more than the ECB, or some other central banks.

And finally, I have one powerful piece of evidence for giving Bernanke somewhat of a break.  No one can doubt the views of Janet Yellen.  She has always been extremely worried about unemployment.  She’s sided with the doves.  And yet now some consider her a hawk, given her recent statements on the likely increase in interest rates.  A theory that the FedBorg did some sort of mysterious brain transplant on Bernanke might be just barely credible.  But two consecutive brain transplants?  Much more likely the Fed is far more inertial than we on the outside tend to assume.

If Bernanke was not able to implement an appropriately stimulative policy, with all his vast qualifications as a Depression scholar, and his reputation as a dove on Japan, then we need to stop looking for perfect Fed chairmen and start thinking about a policy regime that makes massive and persistent demand shortfalls less likely.  A regime that makes the Chairman’s job as easy as in Australia.  I believe that regime is NGDP, level targeting.  But it will only happen AFTER the economics profession as a whole reaches a consensus that this is a sensible policy.  At Econlog I have some further thoughts on that issue, and on the memoir as a whole.

This post from a few years ago (based on a Marcus Nunes post) examines the Ball hypothesis in more detail.

Bernie’s Nordic fantasy

Progressives like to point out (correctly) that the GOP tax plans are sheer fantasy. But as I often point out, talking politics immediately lowers your IQ by 25 points. And I’m afraid that when progressives start talking about Bernie Sanders they completely lose touch with reality.  They say, “He’s not really a socialist, he just favors the Scandinavian economic model.”  But they don’t seem to know any thing about that model.

Let’s look at taxes, for instance.  Here are the top rates on income (plus payroll) taxes:

Screen Shot 2015-10-31 at 4.45.39 PM

And then here’s an indicator of progressivity:

Screen Shot 2015-10-31 at 4.46.01 PMIn Denmark the top rate kicks in at 1.2 times average income.  In the US that would be around $60,000.

And then there are the VATs:

Denmark collects about 9.6 percent of GDP through the VAT, Norway collects about 7.8 percent, and Sweden collections about 9 percent of GDP. All three countries have VAT rates of 25 percent. The United States does not have a national sales tax or VAT. Instead, states levy sales taxes. The average rate across the country is about 7 percent. The much lower rate only collects about 2 percent of U.S. GDP in revenue.

Bernie Sanders says he doesn’t want to raise taxes on the middle class, rather he wants the rich to pay more.  Later he grudgingly concedes the middle class would pay a higher payroll tax for the nationalized heath care, but still doesn’t mention the 25% VAT.  Nor does Bernie mention that the Scandinavian countries have far lower corporate tax rates than America:
Screen Shot 2015-10-31 at 4.51.58 PMNor does he mention this:

Finally, it is worth noting that the only Scandinavian country with an estate or inheritance tax is Denmark.

So the only way to finance a Nordic economic model is with massive (and regressive) taxes on the middle class, because that’s where the money is.

What about those 90% tax rates from the Eisenhower era, that you often read about? There’s a reason the Nordics don’t use that policy, they collected very little revenue.

And I haven’t even mentioned that the Nordic countries are really big on privatization and deregulation.  How often do you hear progressives calling for those things?  When was the last time you heard a progressive advocating Sweden’s 100% nationawide school voucher program?

And it’s even worse.  Sanders doesn’t tell us whether he likes the Swedish model of 1990, or the Swedish model of today?  I’m pretty sure that back in 1990 he was telling people that he loved the Swedish model.  But that model failed, leading Sweden into economic crisis.  It responded by dramatically downsizing its government relative to 1990 (admittedly it’s still very big in absolute terms.)  But I never hear the Sanders supporters telling us whether they like the 1990 socialist Sweden, or the 2015 neoliberal version?  Ditto for Denmark.

And they never tell us how this European social welfare state is supposed to work in a big diverse continent like the US, when it doesn’t even work in a big diverse continent like Europe (especially not in Eastern and Southern Europe.)  Matt Yglesias says that places like Sicily are poor and dysfunctional because they have a bad culture.  I don’t know if that’s right, but let’s say the progressives are right to “blame the victims” of poverty in Europe.  Can we really be confident that our many diverse cultures are so superior to Sicily and Greece and Naples and Bulgaria and Romania?  Can we be sure that the poor Hispanics of East LA, the poor Native Americans of western South Dakota, the poor African Americans of Detroit and the poor whites of West Virginia have Nordic-style cultures, and not southern and/or Eastern European-type cultures. Seriously? The Latin American country that tried the high tax model is Brazil.  Does the US ethnic makeup remind you more of Brazil or Denmark?

Sorry, but I can’t take seriously anything progressives write about Sanders.  Those on the left are correct in ridiculing the tax ideas of Trump, and even the tax plans of the more “serious” GOP candidates do not raise enough revenue.  I get that.  But when evaluating their own side of the spectrum they lose all touch with reality. Here’s Paul Krugman:

So now we have candidates proposing “wildly unaffordable” tax cuts. Can we start by noting that this isn’t a bipartisan phenomenon, that it’s not true that everyone does it? Hillary Clinton isn’t proposing wildly unaffordable stuff; Bernie Sanders hasn’t offered details about how he’d pay for single-payer, but you can be sure that he would propose something.

Seriously?  Sanders says he wants a Scandinavian style welfare state, without raising taxes on the middle class?  And we are supposed to treat that seriously? Then the left wonders why working class blacks and Hispanics are not flocking to Sanders.  Maybe those minorities are smarter than then these puzzled pundits assume.  Maybe a Hispanic family with two people each making $30,000 to $35,000 doesn’t want to face a 60% income tax, plus a 25% VAT.  Maybe they moved from some place like Brazil, and know what happens to all that money once a non-Nordic government gets their hands on it.  Maybe they’d rather spend their own money.  Someone should go into working class black and Hispanic neighborhoods, with all the data on income and sales tax rates in Denmark, and ask people if they also want to pay those rates.  You might be surprised by what you find.

Congratulations to the Bentley Fed Challenge team

1.  I’m starting the feel sorry for Harvard.  Once again Bentley’s Fed Challenge team advanced to the National competition, where they will face fearsome competition like Princeton (featuring Evan Soltas.)   The Boston regionals are always tough.  Harvard finished second, and the competition included other top schools like Dartmouth and Boston College.  Congratulations to the team members:

Kathryn Mastromarino ‘16

Alice Lin ‘17

Michael Liotti ‘16

Sal Visali ‘16

Dan Reeves ‘15

Matt Zeglen ‘17

Amanda Pine ‘16

Aizhan Uzakova ‘15

Michael Acampora ‘17

Brian Levine ‘16

And congratulations also to the coaches Aaron Jackson and David Gulley, who do an outstanding job every year.  The team has advanced to the finals in 4 of the past 6 years, winning it all in 2012.

2.  In other news, here’s Caroline Baum:

One group of economists, known as market monetarists, has advocated implementing a nominal GDP target, which comports with the Fed’s dual mandate of full employment and stable prices. An NGDP target — real GDP plus inflation — incorporates both mandates, with employment serving as a proxy for real GDP.

At times, the balance between growth and inflation would be less than ideal, but advocates believe over time an NGDP target would produce smoother results than the current operating procedure, whatever that is.

Central bankers are always in search of the holy grail: something that would enable them to keep the economy on a glide path. They had high hopes for inflation targeting, which was widely viewed as both an end in itself (stable prices) and a means to an end (full employment), as former Fed Chairman Ben Bernanke liked to say.

Yet inflation targeting has its shortfalls. For example, technological innovation tends to raise real GDP and lower inflation. Under an inflation-targeting regime, the central bank would lower interest rates, which is exactly the wrong prescription. With an NGDP target, policy makers would avoid that mistake.

3.  The wrong kind of Austrian economics:

An Austrian 85-year-old cut up into tiny pieces almost a million euros ($1.1 million) in an apparent attempt to spite her heirs, authorities said Thursday.

Like the US, Europe has some truly bizarre public policies.  For instance, a European billionaire is not allowed to give away his fortune to a worthy cause like fighting poverty in Africa, he must give at least 50% to his spoiled children.  This granny tried to get around the rules by converting her million dollar fortune into currency, and shredding the money. (BTW, when you destroy currency you are effectively donating money to the national government–not sure exactly how that works in the eurozone.) She should have burned the cash and scattered the ashes in the ocean, as the National Bank of Austria has said it will replace the shredded money, and the undeserving brats will get their inheritance.  Pathetic.  No wonder Thomas Piketty is so obsessed with inherited wealth.  What the heck is wrong with Europe?

HT:  James Alexander

Why the Fed will raise rates

Of course the headline number is the 271,000 payroll jobs created last month.  But the real reason the Fed is likely to raise rates in December (barring some unforeseen shock in the November jobs report, or international crisis) is the wage number:

Screen Shot 2015-11-06 at 9.40.45 AMWith the October figures, year-over-year wage growth has risen to 2.5% (actually 2.48%). It does look like we are finally getting some faster wage growth.

Of course you also see lots of zigzagging.  Nonetheless, I think the October data makes it likely that the underlying trend has finally moved above the roughly 2% rut we’d been in since 2009.  Perhaps 2.4% is a reasonable guesstimate.  That’s still less than the pre-recession wage trend line (around 3.5%), but I don’t expect us to get back to that rate of growth in wages.  My hunch is that 2.5% to 3.0% will be the new normal, over the next 5 years.

Right now I’m a bit puzzled by the TIPS spreads.  They’ve moved up slightly in recent weeks, but the 5-year spread (1.32%) still seems somewhat inconsistent with the underlying trend wage data, which suggests 1.5% to 2.0% inflation.

I seem to recall that Yellen is very interested in the wage data, which is why I think the Fed will raise rates in December. Rising wage growth suggests we are back at the natural rate of unemployment.  The rising wage growth also makes it slightly more likely that the Fed is on target for 2% trend inflation, although the TIPS spread suggest otherwise.  I can’t reconcile those two numbers, unless the TIPS market is pricing in another recession in the next 5 or 10 years, during which time inflation would slow once again.

If there is no recession in the next 5 years, then the current TIPS spread of 1.32% seems implausibly low, given rising trend wage growth.  Perhaps some of the mystery is explained by a liquidity premium on conventional bonds, depressing TIPS prices and raising yields closer to conventional bond yields.  Or maybe October’s wage growth was a fluke.

To conclude in my typical wishy-washy way, I still don’t see a compelling case for a rate increase in December, but I also don’t see much evidence that it would do significant harm to the economy.  The recent data makes it a close call.  The Fed’s real problem now is not next month’s fed funds target, it’s that it lacks a long run strategy for monetary policy.  It still has not learned how to operate in a low NGDP growth environment—and better come up with a plan before the next recession.

PS.  No, the U6 unemployment rate (9.8%) is not horrible.  It was 9.7% in October 2004, 15 months before the housing boom peaked.  In was 9.7% in July 1996, almost half way through the Clinton boom.  It’s not a great number, but it’s not horrible.

Screen Shot 2015-11-06 at 9.45.32 AM

In other news, China’s bear market in stocks is officially over, as shares have risen more than 20% from August lows.  There are lots of reports that the consumer sector in China is red hot:

More than 1m Chinese will go on a cruise holiday this year — nearly five times as many as in 2012 — a statistic that has whipped the global industry into a record expansion of ship orders and a collective decision to sail the world’s largest and most luxurious mega-vessels eastward.

The government also announced that the Hong Kong and Shenzhen markets will be linked later this year.  The RGDP growth target for 2015 to 2020 was just announced at 6.5%.  Apocalypse later?

Lateral thinking

Over at Econlog a few weeks ago I did a post entitled “How I Think.”  I was reminded of that post when reading commenter theories on the poor health outcomes of American whites aged 45-54.  In the post, I said that when evaluating Alan Greenspan’s performance, you don’t want to focus on Greenspan; you want to focus on how other central bankers did during this period (about as well.)  When thinking about China’s growth prospects you don’t want to focus on everything you know about China (too complicated), but rather look at other East Asian countries.  And when deciding whether the gold inflows to Spain (1500-1650) were a resource curse that hurt long-term growth, you want to look at other Mediterranean regions that did not received big gold inflows.

Here’s the graph:

Screen Shot 2015-11-05 at 2.22.21 PMPeople were providing answers that seemed to miss the big picture. The graph shows two surprising results, the poor performance of middle-aged white health after 2000, and the excellent performance of Hispanic health after 2000.  In America, Hispanics tend to be disproportionately low income/working class, the group that has been hit hardest by recent economic trends. They were also especially likely (before ObamaCare) to lack health insurance.  And yet their health is significantly better than the health of French and German citizens, in the same age group.

I have no theories at all—I don’t even know if the data are accurate.  But if I was going to come up with a theory, I sure as hell would make sure it explained the sudden and massive divergence in White/Hispanic health outcomes.  If it didn’t, I’d have zero confidence that my theory was correct.

Paul Krugman has promised us an explanation in a future post.  Let’s see what he comes up with.

PS.  I don’t know about you, but to me that graph undercuts some of the recent anti-immigration hysteria.  If Hispanics are actually so inferior, so likely to degrade our precious “Anglo” civilization, how come they have such superior health outcomes?  In rich countries like America, don’t poor health outcomes often reflect poor lifestyle choices?  Just asking.

Update:  Commenter Mike Scally linked to an Andrew Gelman post that says the US data is biased about 5% upward due to compositional effects (the 45-54 age group is getting slightly older, due to boomers passing through).  So instead of rising slightly, US white (middle aged) death rates at a given age have been essentially flat. Of course other death rates fell about 30%, so there’s still a pretty big mystery.