Me on me on Yglesias

On Monday, April 29, 2013, at 9:30 AM Matthew Yglesias wrote

"I think there's no question that the announcement of QE3 and the Evans rule has proved less potent than I'd hoped it would be and less potent than I'd thought it would be at the time."

He went on to argue that QE3 and the Evans rule worked OK.  

On April 29, 2013 at 07:33 AM

I wrote a comment on Brad DeLong's blog in which I made a confident prediction

predict the those who argue that monetary policy is effective at the zero lower bound would
a) claim that QE4 is a success
b) claim that the failure of QE4 does not provide evidence that they are wrong
or, and most likely,
c) both.

[skip]

 I do name Beckworth, Sumner and Yglesias here and now.

The 7:33 is Pacific time so my prediction had already been proven false an hour before I made it.

I was wrong.  I misinterpreted Yeglesias's earlier arguments that QE2 and Twist weren't done just right as special pleading.

Yglesias demonstrated intellectual integrity yesterday.  I am trying to demonstrate a bit of it today.

The Religious right, the Declaration of Independence and Jefferson

I am ignorant, speculating, and asking for information. I am a bit puzzled by self proclaimed constitutional conservatives enthusiasm for the Declaration of Independence.  I always consider the Declaration to be the lefty document and the Constitution to be a sharp shift right.

My guess is that they mainly interested in one word in the Declaration "creator".  OK also "the Supreme Judge of the world" and "divine Providence"

They also consider themselves Jeffersonian which is odd, since he is the only major party presidential candidate to refuse to publicly declare himself a Christian (and in private correspondence said he was a Christian only if belief in implausible claims such as the virginity of Mary was optional "And the day will come when the mystical generation of Jesus, by the supreme being as his father in the womb of a virgin will be classed with the fable of the generation of Minerva in the brain of Jupiter" http://www.beliefnet.com/resourcelib/docs/53/Letter_from_Thomas_Jefferson_to_John_Adams_1.html Jefferson, of course, was no more an atheist that Robespierre was (although he believed in freedom of concience, tolerated atheists and didn't sentence atheists to death as Robespierre did)).

I note that the Declaration was amended by Congress.  The working document is here with a transcription

from Jefferson's draft "We hold these truths to be sacred & undeniable; that all Men are created equal & independent; that from that equal creation"

no "creator" similarly the draft contains no reference to any "supreme judge"  and no reference to  anything "divine" anything (search to check)

http://www.ushistory.org/declaration/document/rough.htm

Of course Jefferson was one person and Congress had the authority to ignore his draft entirely (or vote down the resolution to be independent).

Reinhart Rogoff data analysis

I am analyzing the data set used by Reinhart and Rogoff and by Herndon Ash and Pollin in their critique.
In particular I am analysing the the stata data set RR-processed.dta with data on public debt to GDP ratios and real GDP growth in 20 developed countries since 1946.

I will always use all of the available data and weight country*year observations equally (that is use the HAP approach).

First I note (as many including R-R have) that the original work shows no particular evidence of a critical level of debt around 90% of GDP.  the level 90% was chosen by R and R.  It is not at all possible to see if the underlying association is non linear by looking at the average growth rate in an open ended category.  In particular the average debt/gdp ratio which is over 90%  could be say 900% for all the reader of the table knows.  This should be obvious but I present two tables. the first corresponds to the Herndon Ash and Pollin (2013) PERI wp 322 results

While much less dramatic than the R-R table, it does seem to show a nonlinearity as one goes from category 3 (60%
However, this is largely due to the fact that the increase in the category average debt to GDP ratio is very large as is shown by the following table

The increase in the subsample average debt ratio from category three to four is over 47.9%, the increase from category 1 to category 3 is under 53.6% -- the difference in debt ratios is about the same going from category one to three and from three to four.  Similarly the differences in growth rates over 0.98 to under 1.02 are similar.  There is no hint of non linearity.  The cutoff was imposed by R and R and does not reflect a  result.  Of course this has been shown much better and much more thoroughly by HAP and then their colleague  Arindrajit Dube using non parametric regressions.

Ah yes Dube's main point is that the data suggest that causation runs from low growth to a high debt to GDP ratio and not from high debt to low growth.   I have a little bit to add to that (but mainly click the link).

Some more nearly interesting results relate to the direction of causation.  There is a standard approach to testing if correlation is causation from x to y.  It is called a test of the weak exogeneity of x.  Really it just means that the OLS estimate is similar to an instrumental variables estimate.  I will use the 5 year lagged debt/GDP estimate as an instrument.  The idea is that if high debt causes slow growth, then high debt which is predictable in advance based on the lagged ratio should have the same association with growth as debt surprisingly accumulated in the past 5 years.  This is a lot of talk to explain a very simple regression with the 5 year lagged ratio included.

Here are some results

The simple regression showing a tiny negative effect of debt/GDP on the subsequent years real GDP growth

This says that increasing the ratio by 10% of GDP is associated with a decline in the rate of growth of 0.18%  per year.  Basically there was never any need to go on.  This is a tiny effect completely dwarfed by Keynesian stimulus effects for modest multipliers. This has long been noted.

But there is great interest in the data set anyway.

Next I have to exclude observations for which I don't have the lagged ratio, so the next regression


. reg dRGDP debtgdp if l5debtgdp!=.

says only use the data if the 5 year lagged debt to gdp ratio (lfdebtgdp) is not missing.  This matters almost not at all.

OK now finally the regression of interest

 reg dRGDP debtgdp l5debtgdp if l5debtgdp!=. 

This is a regression of one years real GDP growth on the debt to GDP ratio and the 5 year lagged debt to GDP ratio ( l5debtgdp)

OK that's about it.   If one trusts the standard error calculation, one concludes that there is very very strong evidence that, given debt now, it is much better to have been highly indebted already 5 years ago.  This is the pattern one would expect if low growth caused a high debt to GDP ratio.  Future growth is low if debt is higher than one would predict given debt 5 years ago -- presumably because that is the result of disappointing growth and growth rates are serially correlated.  

Old debt is not so damaging.  This means that it comes out looking as if old debt is positively a good thing (really the regression doesn't show this it shows if you have debt it is better for it to be old).

OK that's just the first regression of interest.  It is a barbaric pooled regression in which I am assuming that, aside from debt, countries are all alike and also that, again aside from debt, years are all alike.  The fact that quite a few countries had poor growth in say 1975 is a complete mystery to the poor computer.  

The next regression includes a complete set of country dummies (so it is a country fixed effects regression)

. reg dRGDP debtgdp l5debtgdp count* if l5debtgdp!=.

Well that's pointless.  Let me zoom in on the coefficients of interest

Oh the coefficient on the lagged ratio is actually a bit larger. There is no hint the coefficient in the first regression of interest was due to omitting country effects.

Now I add a complete set of year dummies (many of which are dropped because I don't have lagged debt for that year and one of which is dropped because they all add up to the constant term).

(note I can't capture all of the boring coefficients)

Again zooming in


The coefficient is about three fourths as large as the original barbaric pooled estimate.  Yes some of the bad growth causes a high debt to GDP ratio effect is picked up by year dummies.  But the remaining country specific part of the reverse causation effect remains about as large as the original growth debt correlation.

I am not really saying that the null that R-R correctly interpreted their regression is rejected at the 0.001% level.  You shouldn't believe the standard errors. Stata calculated them under the assumption that the disturbances to growth rates are Not serially correlated and the motivation for the regression is that they are.

The simple (for the simpleminded STATA user) way to deal with this is to recalculate the standard errors allowing unrestricted correlation of errors for the same country.  This is a new calculation of the standard errors for the exact same coefficient estimates.

. reg dRGDP debtgdp l5debtgdp  if l5debtgdp!=.,cluster(cntry)

gives a new T-statistic on l5debtdgp of 3.19 markedly smaller than the uncorrected t-stat of 5.11 but still very significant.

including country dummies and calculating serial correlation robust standard errors

 reg dRGDP debtgdp l5debtgdp count*  if l5debtgdp!=.,cluster(cntry)

gives a t-stat of 3.76 again much smaller than the uncorrected standard error of 6.35 but still very significant.

I'd love to stop here (of course) but including country effects, year effects and allowing for serially correlated disturbances over time for the same country is just too much for the poor t-statistic which falls to 1.14.

I don't worry much about this.  R-R don't include year dummies or calculate standard errors at all, so I don't think I have to when critiquing them (also I started writing before estimating that regression).

OK I can't resist one more regression. Since the validity of OLS on the current debt to gdp ratio is highly suspect, how about a regression on the 5 year lagged ratio ?

The coefficient is smaller (no surprise this isn't evidence of reverse causation bias at all).  the t-statistic is -3.40 under the assumption of serially uncorrelated disturbances.  The t-statistic becomes -1.44, that is statistically insignificantly different from zero, when standard errors are calculated allowing serial correlation within a country

finally here is the do file which I used to generate the results from the HAP version of the RR data set

clear 

use C:\rjw\Papers\Peri\RR-processed.dta

quietly tab Country,gen(count)

gen cntry = count1+2*count2+3*count3+4*count4+5*count5+6*count6 + 7*count7 + 8*count8+9*count9+10*count10+11*count11+12*count12+13*count13+14*count14+15*count15+16*count16+17*count17+18*count18+19*count19+20*count20

quietly tab Year, gen(yr)

sort cntry Year

gen debtcat = 1 + floor(debtgdp/30)

replace debtcat = 4 if debtcat>4

gen episode = 1 in 1/1

replace episode = episode[_n-1]+1-(debtcat==debtcat[_n-1])*(cntry==cntry[_n-1]) in 2/1175

gen debtct1 = debtgdp<30 div="">

gen debtct2 = (debtgdp<60 debtgdp="">=30)

gen debtct3 = (debtgdp<90 debtgdp="">=60)

gen debtct4 = debtgdp>90

gen debtm90 = (debtgdp-90)*(debtgdp>90)

gen l5debtgdp = debtgdp[_n-5] if cntry==cntry[_n-5]

tab debtcat,sum(dRGDP)

tab debtcat,sum(debtgdp)

reg dRGDP debtgdp debtm90

reg dRGDP debtgdp

reg dRGDP debtgdp if l5debtgdp!=.

reg dRGDP debtgdp l5debtgdp if l5debtgdp!=.

reg dRGDP debtgdp l5debtgdp count* if l5debtgdp!=.

reg dRGDP debtgdp l5debtgdp count* yr* if l5debtgdp!=.

reg dRGDP debtgdp l5debtgdp if l5debtgdp!=., cluster(cntry)

reg dRGDP debtgdp l5debtgdp count* if l5debtgdp!=., cluster(cntry)

reg dRGDP debtgdp l5debtgdp count* yr* if l5debtgdp!=., cluster(cntry)

reg dRGDP l5debtgdp if l5debtgdp!=.

reg dRGDP l5debtgdp if l5debtgdp!=.,cluster(cntry)

Kevin Hoover Libels Samuelson and Solow

In this article Kevin Hoover claims he can summarize Samuelson and Solow (1960) by quoting the legend to their figure 2 removing necessary context.  His assertion is false.  It is easy to prove his claim is false, by reading the two paragraphs which follow his out of context quote.

Hoover wrote "he close fit between the estimated curve and the data encouraged many economists, following the lead of Paul Samuelson and Robert Solow, to treat the Phillips curve as a sort of menu of policy options. "

To the extent there is any basis at all for this claim, it is the legend to figure 2 "This shows the menu of choice between different levels of unemployment and price stability, as roughly estimated from the last 25 years of American data".  Yep there it is the word "menu".

The first full paragraph after figure 2 reads, and I quote (with possible typos and emphasis mine)

Aside from the usual warning that these are simply our best guesses, we must give another caution.  All of our discussion has been phrased in short-run terms, dealing with what might happen in the next few years. It would be wrong, though, to think that our Figure 2 menu that related obtainable price and unemployment behavior will maintain its same shape over in the longer run.  What we do in a policy way during the next few years might cause it to shift in a definite way.

This is the famous critique of Samuelson and Solow (1960) for which roughly 7 economists were awarded the Nobel memorial prize.  It is right there in Samuelson and Solow (1960).  

The following paragraph anticipates everything the slightest bit useful that Friedman or Lucas wrote about the Phillips curve.  Again I quote.

Thus it is possible that after they had produced a low-pressure economy, the believers in demand-pull might be disappointed in the short run; i.e., prices might continue to rise even though unemployment was considerable.  Nevertheless, it might e that the low-pressure demand would so act upon wage and other expectations as to shift the curve downward in the longer run - so that over a decade, the economy might enjoy higher employment with price stability than our present-day estimate would indicate.

Some macroeconomists claim that the field has progressed in my life time (I was born in 1960).  Indeed some claim that there has been a revolution on the order of the Copernican revolution.  I agree with Paul Krugman that the sole basis for this claim is the discovery which I just quoted and which was published 6 months before I was born.

In the following paragraph Samuelson and Solow anticipate the work of OJ Blanchard and Samuelson's nephew published in 1985 while also admirably refraining from polluting the economics literature with the word "hysteresis,"   They anticipate Friedman's critique of them and Blanchard and Summers's critique of Friedman.

But also the opposite is conceivable.  A low pressure economy might build up within itself over the years larger and larger amounts of structural unemployment (the reverse of what happened from 1941 to 1953 as a result of strong war and post war demands).  The result would be an upward shift of our menu of choice, with more and more unemployment being needed just to keep prices stable

That is they anticipated that what happened in the 1970s was possible then went on to note that what happened in Europe in the 1980s and 1990s was also possible.

Mainstream macroeconomics has only gotten as far as the second full paragraph after Figure 2 in Samuelson and Solow (1960).  It is, from time to time, noted that cyclical unemployment can become structural (the overwhelming micro evidence can't be ignored completely).  But the standard view is that the long run Phillips curve must be vertical, as Friedman said, and that two decades are a very short time.  I note that the not ultra orthodox Krugman describes this as part of the canon.

Milton Friedman’s assertion that there is no long-run tradeoff between inflation and unemployment turned out to be correct, and is now part of the standard canon.

Krugman is also confident that cyclican unemployment causes life long losses for the unemployed.  He knows that this is inconsistent with the standard canon.  The natural rate of unemployment is one and many constant and variable it resolves all contradictions by embodying them.

Friedman's critique of the Phillips curve was not an interesting combination of validity and originality.  It is demonstrably invalid and completely unoriginal.

The Phillips Curve and Nick Rowe

Nick Rowe says that succesful inflation targetting may make the Phillips curve flatter or may cause the empirical Phillips curve to be flatter even though the structural relationship behind the Phillips curve is unchanged.  He illustrates his argument with an example of a Phillips straight line.  I give him a hard time in comments.


I have to note an even simpler expanation.  The Phillips curve is a curve.  In Phillips's data for anchored inflation (pre 70s indeed pre 60s) equation one is rejected.  The Phillips curve was convex so the slope was low for low inflation rates.

I think this is an absolutely fair critique of the IMF research paper which asserts that the Phillips curve has changed.  It is only valid analysis if by "curve" means "straight line"

Long before any systematic thought about expectatiions, Phillips, Samuelson and Solow could have predicted that the slope of inflation with respect to Y would be low at low inflation rates.

In the available data, successfully targeted inflation and low inflation occur mostly at the same times and places.

Your story is interesting, but it can only be distinguished from the curves curve hypothesis is there is an episode of inflation targeting with a high target or an episode of unsuccessfully targeted but low inflation . There has not yet been a high inflation target, so the (post Phillips) example would have to be Japan where inflation has been very low and under target often over the past two decades.  The Japanese Phillips curve is flat.  The result is more nearly low inflation implies low slope not successful targeting implies a low slope.

Note the original Phillips curve as graphed by Phillips generally showed a low slope at low inflation rates http://en.wikipedia.org/wiki/Phillips_curve

There were two years of sharp deflation, one of -3% and 11 (of 36 in the scatter graph I am eyeballing) with inflation from -2% to +2% and unemployment from 10 % to 22%.

A flat Phillips curve at low inflation rates is not a new phenomenon which occured after monetary authorities learned how to successfully target inflation.  Phillips's data set also includes a year with nominal wage inflation of 32%.

Ragging on Rogoff

I can't resist.  This post has nothing to do with the recent Excel-ent work by Herndon e al at UMass Amherst.   I just want to pick on something Kenneth Rogoff wrote for Project Syndicate in 2012

He is discussing debt and growth with reference to his work with Carment Reinhart using a large data set (not the earlier work with 20 15 countries post 1946 and New Zealand post 1950.  Rogoff  wrote [I add the necessary steps which he skipped in square brackets]

Of course, there is two-way feedback between debt and growth, but normal recessions last only a year [and the only variation in growth is that due to normal recessions and that caused by high debt] and cannot explain a two-decade period of malaise [which must be due to debt as no one and especially not Robert Barro has ever found anything else which is correlatedwith growth over intervals of more than two decades].


I think my expostulation of his reasoning is entirely fair and that he absolutely is arguing that there is, for example, no pattern of convergence withing the OECD post world war II, no significant difference between growth pre and post World War II and, in sum his argument is "correlation is, of course, not causation, however oh look a shiny object."  

The next sentence

"The drag on growth is more likely to come from the eventual need for the government to raise taxes, as well as..." 

Rogoff asserts either that high taxes cause low growth or that high expected future taxes cause low growth.  He should know that this view is unsopported by available evidence.  It is an article of faith for Republicans (and here I'm sure he is sincere).  But he is discussing simple correlations in historical data and he must understand that there is a problem in arguing that the correlation between high debt and low growth is explaind by high debt causing  a high ratio of tax revenues to GDP when the ratio of tax revenues to GDP is not significantly partially correlated with low growth in standard regressions (meaning regressions which include initial GDP per capita).

Rogoff relies on simple historical correlations and ignores them in the same paragraph.

Only Correct

On Thu Apr 18, 2013 8:00 AM EDT Steve Benen* noted an incorrect claim of fact in The New York Times

The New York Times reports today that on background checks, "just enough Democrats broke with their party to make a difference." That's demonstrably wrong: 51 Democrats supported the bill, as did four Republicans, while four Democrats broke ranks. For the math impaired, 51 + 4 + 4 = 59. It took 60 votes, not 59, to overcome the GOP filibuster.

Days without a correction of the error so far 0.


*as per my title I corrected a typo here.

What She Said

an op-ed

What Gabrielle Giffords said.

Quote of the Day

6. The good news? Our political system is still way better than North Korea’s.
by Chait (rhymes with hate).

Michael Ash replied to my E-mail !!!

UMass Amherst Economics Chairman Michael Ash, who is much more famous today for being, with Thomas Herndon and Robert Pollin one of three authors of UMass Political Economy Research Institute working paper 322 which totally won the internet (like totally for real you betcha)  responded to an e-mail from me !?!

How can he possibly keep up with his e-mail ?  I mean he is a total webstar.  For one thing it is possible to find his e-mail address with google (Herndon is first author, which means something, because H comes after A in the alphabet, but my 3 minutes of googling turned up Ash because he is a professor at UMass Amherst).

update: won the Twitterverse too of course.

Burned on the Fourth of July

Paul Krugman writes  Holy Coding Error, Batman on a critique of Reinhart and Rogoff 2010 -- the paper which asserted an association between dept to GDP ratios over 90% and slow growth.  The critique (via Mike Konczal) asserts that simple analysis of the raw data does not support Reinhart and Rogoff's conclusion.  Konczal also notes that other researchers long since complained that Reinhart and Rogoff did not release their raw data.  I clicked the link to Dean Baker and read

a separate paper that claims that economies perform more poorly once their debt to GDP ratio exceeds 90 percent. Mr Rogoff and Ms. Reinhart have declined to adhere to standard ethics within the economics profession and have refused to share the data on which they base their conclusion with other researchers.

 That's strong language even for Baker.  The Baker post is dated July 4 2010 ! It's been over 2 years and 9 months since Reinhart and Rogoff's ethics were publicly challenged.  The new information is not reassuring.  I am, as often happens, astonished by my ignorance -- I had no idea that there was anything unusual about public data availability.  I note that the article was published in the AER

Reinhart, Carmen M., and Kenneth S. Rogoff. 2010. "Growth in a Time of Debt." American Economic Review, 100(2): 573-78.

 The AER has rejected all of my submitted manuscripts, but I always assumed that raw data had to be made available to the AER prior to publication and that the AER shared the data with the public.  What happened ?

Also new blog heading "Bakers' dozen" for the 13 times Baker is way ahead of most economists (especially including me).  We have
1) The housing bubble
2) It makes no sense to assume labor productivity growth will slow but returns on equity will stay high when defending Bush's Social Security scheme.
3) The 2007-9 recession is actually close to what one would predict based on the decline in housing prices based on data collected when underwater mortgages were extremely rare.
4) This.

I don't want to suggest that Baker is much less original than I thought for a moment there. I do *Not* want to get on his bad side.  I need 9 more examples STAT.  In comments please.

On Wren-Lewis on the IMF

Recently, I have complained about Simon Wren-Lewis, the IMF research staff and commentary on an IMF staff paper.  Not to close a rhetorical loop, but just because it's what I believe, I am pleased to write that I think that Simon Wren-Lewis's comment on the IMF staff report is perfect

"the recent IMF study I discuss here shows, either low inflation or credible inflation targets (or both) seem to have weakened the impact of the output gap on inflation, "

(also somewhat briefer than my series of posts and comments on other blogs).

More on Avent and the IMF

In the post below, I vigorously criticize IMF staff and Ryan Avent for claiming that central banks adopted low inflation targets in the early 80s without noting that the Fed did not adopt an inflation target until January 25 2012.  I have now read Avent's post as patiently as I can (meaning I skipped ahead).

Avent wrote "That the disinflation of the 1980s has generated a flattening of the Phillips curve is precisely what the IMF demonstrates:"  

This claim is illustrated by a figure which does not show that.  Even if a curve hasn't changed at all, the slope depends on where you are (that is the curve is not a straight line).  The figure does suggest that  the IMF staff are willing to assume that the Phillips curve is a sraight line, or rather that they are willing to support their argument by presenting a graph which tends to convince people willing to make that assumption

The graph does not demonstrate any change at all in the Phillips curve (I'm not saying it didn't change just that the question can't be answered with the graph).  You can't see if different points lie on the same curve by plotting changes on changes, because the slope of a curve isn't constant.  

In particular, inflation is much lower now than it was in the early 80s.  It is possible that the slope of the Phillips curve is lower now, because the Phillips curve is a curve.  The pattern from 2007 on is clearly different from the pattern in the 1930s.   It is not clear that it is different from what would have happened from 1980 to 1994 if inflation had been around 2% in 1980.  

Oh and the 30s were different. In most developed countries, the unemployed don't risk starvation any more.  The welfare state was quite different back when high unemployment caused sharp deflation.

I swear that this post has been edited to make it less rude.  You don't want to read the first draft.
Also I deleted a draft conclusion to the update to the post below, becuse it was too inflamatory.  I am trying to be as polite as I possibly can without actually lying.

update:  Now I am going to make some graphs.  They are totally unlabeled only partly because I am lazy but also because I want the reader/graph eyeballer to try to guess what they are.  They are US analogs of the IMF graph with the change in core inflation on the y axis and the change the civilian unemployment rate on the x axis.  All graph 17 data points (as in the green series from the IMF).  Two  show data from after the Fed flattened the Phillips curve in the "early 80s".  Which two show the new flat Phillips curve ?

Figure 1 (chosen from three figures at random by the eyes closed point and click method)

Figure 2 (not chosen at random)

Figure 3

Don't peek 


do you really want to peek ?


Come on it's more fun if you guess then look ?

Did you peek ?


OK the answer is that figures 1 and 3 show the new flat post early 80s Phillips curve which is due to inflation targetting.  

Did you guess without peeking ?

Firgure 1 shows 17 quarterly inflation changes from 1985q1 minus 1984q4 on.  They are the first data which came undeniably after the early 80s.  Figure 3 shows the most recent 17 quarterly changes.   It is not markedly different from figure 1 because of autoscaling (not "not *just* because I am lazy" does not imply "I am not lazy") but it is much flatter (the range of unemployment changes is 4 times as large and the range of core inflation changes is about the same).


Figure 2 is the first 17 available quarters from Fred from 1958q2 - 1958q1 (when the core CPI series starts).  The first of those data were collected before Phillips published his famous scatter (with labled axises even) .  The last in the first quarter of 1962 rather before the modern advances in monetary theory.  It is very flat indeed.  If Phillips had relied on FRED, he wouldn't have gotten published at all.  Inflation bounced around way back then, but there is almost no relationship between the change in inflation and the change in unemployment.

This is what Phillips saw for extremely low inflation rates.  The rediscovery of the fact that the Phillips curve has a low slope at inflation rates near zero is not pathbreaking progress.

Comment on Simon Wren-Lewis

Simon Wren-Lewis wrote

I think there were three important contributory factors to what happened in the 1970s that are just not present today. First, our knowledge of inflation output trade-offs, although hardly complete now, was much weaker back then. Second, the Fed and other monetary policy makers did not have clear inflation targets that they were publicly committed to. Third, there appeared to be an alternative instrument for dealing with inflation: direct controls on prices and wages. The 1970s really was a different world in terms of the understanding of macroeconomic policy.

I comment


I think the argument for publicly stated inflation targets has the same vulnerability as the argument for a single mandate.  The Fed did not state an inflation target until recently.  I might be ignorant but I think there have been two Fed statements on inflation targets the December 12 up to 2.5% is ok so long as unemployment is over 6.5% and a 2% target stated the previous year.

I just googled [greenspan inflation target].  The second link is entitled "Greenspan Rejects Inflation Targets"
http://www.nytimes.com/2001/10/12/business/greenspan-rejects-idea-of-inflation-targets.html

"'A specific numerical inflation target would represent an unhelpful and false precision,' Mr. Greenspan said."  I submit that Mr Greenspan managed to avoid high inflation in spite of specifically rejecting your advice.

The first hit says that Bernanke is for inflation targetting, but I think a FOMC chaired by him first announced a target well after 2010 (I think in 2012).

The search (not that it should be hard to reproduce) http://bit.ly/ZjTxwW

OK now I google [Bernanke inflation target" and get
http://www.reuters.com/article/2012/01/25/us-usa-fed-inflation-target-idUSTRE80O25C20120125
"By Jonathan Spicer
Wed Jan 25, 2012 6:35pm EST
(Reuters) - The Federal Reserve took the historic step on Wednesday of setting an inflation target, a victory for Chairman Ben Bernanke that brings the Fed in line with many of the world's other major central banks."  Yep 2012 (but close whew).

I'd also say that there was very little discussion of wage and price controls in the USA during the period of high inflation.  There were wage and price controls in 1973 *before* the oeriod of high inflation.  My sense during the 70s is that they were considered to have been one of Nixon's mistakes.  I can't believe that faith in wage and price controls was a significant factor affecting policy.

update: Staff at the IMF and Ryan Avent too. The IMF staff wrote "when central banks whipped inflation in the early 80s and set low targets for it."  Ryan Avent quotes the historical claim without comment here (RA is identified as Ryan Avent here). Again, the FOMC set a target for inflation on January 25 2012.

Warning big pdf.  I was not sure that Paul Volcker never declared an inflation target.  I'm afraid the best link I can find is to this pdf entitled "Inflation Targetting in the United States ?" it is a chapter from a conference book from 2003 called "The Inflation Targetting Debate" edited by Ben Bernanke and Michael Woodford (who know a bit about monetary policy and have views on inflation targetting).

Note the question mark in the title.  It was not agreed in 2003 that the USA had had inflation target since the early 80s.  The question was whether it should have a target.  The discussant of the chapter argued that it definitely did not have an inflation target in the mid 80s -- inflation and forecast inflation were over 2% and the FOMC didn't do anything about it or much discuss doing anything about it.

Of course it is possible that Volcker had a target which just happened to be over 2%.  Perhaps he considers a 2 % target too low and supports a higher target.  (please do click those links).

It is obvious that Volcker accepted 4% inflation not because that was his target (such a target is, to quote Volcker "nonsense") but because he wasn't targetting inflation but was rather balancing an obviously weak desire for low unemployment with a desire for inflation to be as low as possible.

It was argued, ad nauseum, that clear simple verifiable rules were key to successful monetary policy. That argument was repeatedly rejected by Volcker [and Greenspan*] by their words and Volcker's deeds.   The advocates of simple rules don't conclude that Volcker doesn't know how to handle inflation so some of them have rewritten history.

*update

Shrilling for not[Thoma] Duy

Mark Thoma once claimed to be pleased that I was shrilly criticizing him.  I sure hope he meant it, because here I go again.  He  Mark Thoma quotes Tim Duy who comments on the newly released FOMC minutes
update:  I missed the rather clear "One more from Tim Duy" at the beginning of the post. and thought I was commenting on Thoma's thought.  I apologize for the error.

I have long believed that the Fed failed to appreciate the signalling component of quantitative easing. Indeed, I could be convinced it was the most effective channel of transmission. I am glad to see that policymakers are starting to see that as well.

In comments I go to FRED and stay there (part of the reason is I have exams to grade and FRED is one place to hide from them).


The signalling effect of QE should show up as low medium term interest rates.  I think there really is no sign of this on the dates of announcement of QE2 (3 or 4 dates right there) QE3 or QE3.1 (Dec 12 2012).  I don't see it either on the day (as asset prices should respond quickly) or over an interval of time.

I really think that the hypothesis that signalling future short term rates is a highly effective component of QE is fairly easily testable and rejected by the data.

Consider QE3 announced September 13 2012 the 5 year constant maturity rate went from 0.7 on he 12th to 0.65 the 13th to 0.72 the 14th.  These are tiny fluctuations.  Over a longer horizon in all of September it went from 0.62% on the first trading day (Tuesday the 4th) to 0.62% on Friday the 28th.  The 3 year rate declined all of one basis point on the 13th then rose 5 on the 14th (0.33 to 0.32 to 0.35) in all of September it moved not at all (0.31 on the first trading day  to 0.31 on the last).

There is no sign at all of a forward guidance effect. I note QE3 included explicit forward guidance about future short term rates.

QE4 (December 12th 2012) was definitely a surprise.  The 3 year rate shows no change on the 12th and up 2 basis points on on the 13th.  From the first to last trading day in December it went up 2 basis points.  The 5 year rate down one basis point on the 12th and up 4 on the 13th.  In December overall it went up from 0.63% to 0.72%.

Again no sign of a forward guidance effect.  The fluctuations are tiny, much to small to be economically significant and even too small to be statistically significant.

QE2 is harder as the announcement was telegraphed.  There was Bernanke's August 27 2010 Jackson Hole speech, the  and the final announcement November 3 2010 and other announcements in between (and even the FOMC meeting before the speech).  The 5 year rate went up (a bit) on August 27th and was higher the 28th than the 26th.  It dropped 11 basis points from the November 2nd to 4th. This is the best news the forward guidance hypothesis and it is definitely economically insignficant.  Overall from August 26th till the last trading day in November 2010 the 5 year rate went up.

I might be convinced that forward guidance is the strongest channel for QE to work, but only because I might be convinced that QE doesn't work at all.  In fact, I think that the right kind of QE would work -- that so called QE would be buying 100% of new issues of RMBS at a higher than market price.

Just When I thought it was safe to go back in Moneybox

I'm trying honestly I'm trying.  To avoid boring any possible hypothetical readers, I try not to read anything Matt Yglesias writes about monetary policy.  I  thought it was safe to read this post.

The Key Contrasts in the Budget Debate

OK budget, fiscal safe.  But nooo he has to slip something on monetary policy in the post.  My boring comment follows.

Sometimes I bore myself. Actually I often bore myself.  I have a rule to read nothing on monetary policy which is written here.  But with no warning you toss in an assertion about monetary policy in a discussion of fiscal policy with "I think it's difficult to gauge the real Federal Reserve policy response function and thus the ultimate impact of this difference" Here you assume (as always) that the zero lower bound doesn't matter and the issue is what the Fed chooses.  For the sake of argument, I concede that the Fed could counter the effects of the sequester.  It is easy to gauge that it won't.

The reason that my discussion of monetary policy is so heated, verbose and bitter is exactly this post.   Your faith in monetary policy affects your discussion of fiscal policy.  This effect is terrible.  I know you said we don't know but probably.  The point is that if the debate is " we are bankrupt and the deficit will eat your children " vs "we don't know but probably" then the austerians will win.

Our disagreement about how the Fed could stimulate should not cause either of us to forget that it won't do what we suggest.http://www.slate.com/blogs/moneybox/2013/04/10/obama_fy_2014_budget.html

World Without Macroeconomists

Ex Macroeconomist Noah Smith argues that it is a good thing that there are professional macroeconomists.  He has two arguments

1)

 So does this mean that macro research is useless for policymaking? No! Not at all!! Because here's an interesting thing about policymaking: No matter who advises the policymakers, policy is going to get made. That includes economic policy. So if there were no academic and Fed macroeconomists around to advise policymakers, who would policymakers listen to on economic matters?

My guess: Some very dangerous people. 

2) useful things have been learned from empirical macro including stuff you see with half an hour of FREDing and "slightly less than half of people seem to be "hand-to-mouth" consumers who don't obey the Permanent Income Hypothesis."


My rude comments.


1) A world without macroeconomists wouldn't be a world without economists who talk to journalists about the macroeconomy.  The risk is that the voice of the economics profession will be trade theorists, economic historians, behavioral economists and finance economists such as Krugman, DeLong, C Romer, Goolsbee, Fama and Cochrane (note ex macroeconomist Smith decided to go into finance).

I actually think that macroeconomists have very little influence on macroeconomics as perceived by policy makers and the public.  Summers is influential.  He is also a total heretic (he didn't leave the field, the field left him).  Blanchard and Woodford are influential macroeconomists and reasonable people.

The world has chosen not to benefit from the insights of the most influential academic macroeconomists Robert Lucas and Edward Prescott.  I don't think you think this is a bad thing.

2) On consumption and the PIH the data suggest that somewhat less than half of consumption is by hand to mouth consumers.  They don't suggest anything about the rest.  The rest of fluctuations in consumption can't be predicted by predicting current GDP.  Also radioactive decay can't be predicted by predicting current GDP.  The PIH is not a good theory of radiactive decay.

The (representative agent with an additively separable utility function and no liquidity constraint version of the PIH) glass is not much more than half full.  I am not aware of evidence that it isn't empty.

Kevin Drum suggests I have a 2 digit IQ and asks for a natural experiment

Christian Roots of School Voucher Movement Still Pretty Obvious

.... those of us who are over the age of 40 and have three-digit IQs remember where this all started: with segregated Christian schools in the South who were denied tax-exempt status in the 70s. This was one of the formative protest issues for the Christian right, and led directly to their campaigns for state and federally funded vouchers for parents who sent their kids to Christian academies.

ouch 



Chance of redemption 

Needed: Clever Economists to Study Benefits of Marrying Early

Which is better, getting married early or getting married late? Beats me.
[skip]
This is just begging for one of those clever natural experiments so beloved of economists these days. ... Where's freakonomics when you need it?

from the Wiki on "selective service"

http://en.wikipedia.org/wiki/Selective_service

President Kennedy set up Executive Order 11119 (signed on September 10, 1963), granting an exemption from conscription for married men between the ages of 19 and 26. President Johnson later rescinded the exemption for married men without children by Executive Order11241 (signed on August 26, 1965 and going into effect on midnight of that date). 

There is going to be an effect of turning 18 in 64 not 63 or 65.  Not such a huge deal since the chance of getting sent to Vietman in 63 and 64 was zero, but I'm glad I wasn't a fly on the wall Midnight August 26 1965 when guys told their fiancees they weren't getting married.  

Did Progressives Need Contrarians ?

Wow it seems Ed Kilgore doesn't place a limit on the length of comments.  After my latest screed (copied below) I bet he will.  He's back to talking about the old new Democrat Old Democrat debates.  He is trying to argue that the DLC no longer exists, because they convinced the party (I didn't rejoin the party the party rejoined me).  He asserts this in various ways and presents no evidence.  Go read his post (I won't read it again to excerpt )

Here is my overlong rant of a comment.


Let's grind old axes (you re-starting it). I actually agree with Welch about liberal contrarians such as those who populated the DLC.   You have changed.

I do not believe that your relationship with other liberals has changed because you convinced us. I didn't manage to quite finish the post before starting this comment I lost it at "One important reason the tone of liberal “heresy” has changed is that the “contrarians” won a lot of battles, from the “reinventing government” movement"

OK I know something about that movement cause I visited Brad DeLong at Treasury once.  He said that Larry Katz couldn't see me because he was reinventing government -- this shows Katz would have some insight into what the reinventing government movement.  Katz later told me it basically consisted of replacing social programs with vouchers.  In 2000 He denounced Al Gore as a flip flopper for heading the effort to reinvent government and then denouncing school vouchers.  So someone who is definitely expert on the topic identified school vouchers as typical of reinventing government.

I think the debate within the Democratic party is over because you were totally wrong and the evidence has convinced all reasonable people.  In the 90s liberal heretics (including by the way Albert Shanker) supported the use of private profit making contractors to achieve liberal goals.  The idea was that the private sector is more efficient.  The data show that this approach costs more (a key test case is Medicare Advantage which was imposed by Republicans and which was not the idea of a liberal heretic).  The debate is largely over, because most Democrats are reasonable and the data are clear.  But the resolution is the opposite of the one you asserted.  The party is united, because people generally aligned with you (I don't know about you personally) lost it.

There was also a big debate about financial regulation. Clinton signed bills deregulating finance.  This was highly praised by many liberals (including Brad DeLong see above).  The debate was won by the reformers who supported deregulation.  That debate too is resolved, because I and people with whom I associate (DeLong and my other PhD supervisor Larry Summers) admit that we were wrong.

The new Democrats don't argue with the paleo liberals on many old topics because the data have proven that the new Democrats were wrong.


OK I managed a few more lines and got to "modernizing their means in order to make them more effective in meeting their stated purposes and in maintaining political support for them. "  I am not a knee jerk conservative, but I object to the identification of "modernizing" with "making ... more effective".  In fact modernized social programs are less efficient.

But mostly I object to the "and".  What happens if swing voters are wrong about what works ?  The new Democrat approach is to assume that you and the moderate middle agree and you are right.  The problem is that the new approaches are less efficient than the old ones (this is accounting and you accept it for the ACA elimination of the Medicare Advantage excess payments and transition from outsourced to in house servicing of student loans).

I think it is clear that the DLC and the Washington Monthly broke up when it became clear that hard headed reality based data driven analysis was inconsistent with saying what one had to say to win the votes of a significant majority of white southerners.  I'm glad you stayed with the reality based community when you had to chose between respect for data and for the DLC.

But I get irritated when you rewrite history.  I got especially irritated when you rewrite history and accuse Jason DeParle of grinding old axes when he reported current events here
http://www.washingtonmonthly.com/political-animal-a/2012_04/ryan_budget_not_the_new_welfar036597.php

You want to bury the hatchet ? Fine.  You don't have to admit that the data prove you were wrong.  But stop claiming that we admit that you were right.  We can put the past behind us.  I even managed for months.  But you keep digging it up.

OK I've made it to the end of the post and only lost it one more time.  It was at "Maybe those are the people Welch misses. But they were never the dominant personalities at WaMo, the DLC, or even TNR (all institutions I’ve been identified with, BTW)."  Note above on how I congratulate you on the huge shift from the DLC to the WaMo.  I think one of those three things is not like the others.  TNR published articles describing the DLC as effectively working as professional contrarians.  The author did not claim to read minds and nor did I, but he noted, and quoted a DLC staffer noting, that the only role the DLC played in the public debate was as a place to find Democrats criticizing the Democratic mainstream.  I am sure that this was not the aim of people at the DLC that you cared about it that you hated this fact. But it was just the way things were.  This was agreed.  Note again the DLC staffer.  I don't think the article is on the web.

So a challenge.  Ask your new colleagues at WaMo if they would like to appear on a list of WaMo employed supporters of the DLC.  Then post it.  I guess that your identification of the DLC and the Washington Monthly as generally similar in orientation and part of the same intra party movement is inconsistent with the data which are available to you (but not to me).

Finally why are you posting about the DLC and not about ACORN ?

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end of comment

Even more here.  My answer to the question in my title is "yes of course but not those contrarians".  Criticism is good in general, but some criticism is incorrect.  It is important to avoid ideology, by which I mean it is important to accept cognitive dissonance.  In particular I am thinking of the ideology which identifies the way to develop effective policy and the way to win elections.  This ideology (once I think deeply felt by Kilgore) is populist in the original meaning of the word (now it is used to mean rude and loud).  It is based on the idea that ordinary people have common sense and are probably right when most disagree with self declared experts.  One can be sincerely convinced of this if and only if one thinks that foreign aid is more than 10% of the US Federal Budget.  In the real world, the self declared experts know some relevant facts which most people don't know*.  So one often has to decide between doing what is mosty likely to work and doing what is politically popular.

The Pundit's fallacy is to assume that makng some choice which they think is sound is the way to win elections.  I think the DLC fallacy was to think that the things one had to say to win a majority of white votes in the South made sense.  This means they thought that ordinary people of other regions and ethnicities weren't uh ordinary enough or something.  I just checked.  Will Marshall is from south of the Mason Dixon line (so am I).  I am shocked to find he is from Virginia.  I would have guessed further South.

Look Kilgore was part of the new Southern white wing of the Democratic party (new as in definitely not the old segregationist wing).  This is now a tiny fringe -- the far left fringe of Southern whites and the far right fringe of the Democratic Party.  Since the Democrats gained the ability to win Presidential elections without the votes of Southern whites, it has become irrelevant.   Kilgore did not allow regional loyalty to convince him to go down with the ship.  That's an excellent thing since he is a excellent journalist thinker and writer.

But I really wish he would stop declaring victory after a defeat.


*(an aside as a professional economist I must admit that I believe when the view of the typical economist is different from that of the typical man in the street,  the man in the street is more likely to be right.  The typical views of economists include counter intuitive results analysis of simple models.  If the simple models were reality, the stuff you here on the street would not make sense.  Wait a few decades and economists will find a model which fits the ordinary guy conventional wisdom.  The analysis of models can't teach us about the world -- it can only yield hypotheses which must be tested.  In many many cases the average economist disagrees with the average guy because the average economist has made assumptions for tractability which imply silly results which don't hold in a more sophisticated model.  But we are the exception.  OK also expert astrologers).

Question of the day

PPP says 28 % of US adults " believe a shadowy elite are conspiring to form world government."

Atrios asks "Aren't They"

So is he part of the crazification 27% or is he a one percenter ?

Advertizing revenue is magic, but I think that there is a hint in the same post

" 'just 4% of respondents — believes shape-shifting lizard people control the world.'

Pretty sure there's something to that lizard people thing, too."

I for one (that is 0.00000033% of the US population) think I love that man.

Oh wait I get it.  He's a shape changing lizard person (that's one way to avoid falling for the conventional wisdom).

Update: from the same poll, I find my second most extreme out of the mainstream view may now be my third most extreme out of the mainstream view.  My most out of the main stream view is that there definitely is no God so I'm part of the atheist roughy 3% (much smaller than the 20% who don't identify with any organized religion most of whom are neither atheist or agnostic -- I guess they are sure there's Something Divine but not sure exactly What).  My current second most flaky far out their view is that the US foreign aid budget should be increased.  This might edge out atheism if one specifies "at least 20 fold" as I do.

But my third flakiest view is that Lee Harvey Oswald acted alone.  It is now shared by 25% of adult Americans.  Believe me this is way up (during most of my life more people believed that Elvis Presley was alive than believed that Lee Harvey Oswald acted alone -- of course for a good third of my life Elvis Presley was alive, so there is that).

Anyway the fraction of US adults who think Oswald acted alone (as I do) is now almost as large as the fraction of Illinois voters who voted for Alan Keyes.  I feel almost mainstream.