Wednesday, February 27, 2013

Brother David Ignatius Explains it all to You

I don't want to take anything from Ron Fournier, but I think this column by David Ignatius is the perfect expression of village idiocy.

It has it all
1) Ballance.  Ignatius neglects to mention that Obama proposed the sequester when the only alternative was default.  He doesn't mention that there was a debt ceiling crisis in 2011.  He more or less accuses Democrats (all of us) of treason to balance his criticism of insane Republicans.
2) The cult of the Presidency.  Obama should take control "firmly" by making a "Presidential Statement".  Here (my 2nd link to that post) Krugman mocks the idiocy better than I can here.
3) Obama is too mean.  It would work if his statement were addressed to all Americans not just those who voted for him and he is playing the blame game.  Obama is too nice.  He must speak firmly with the Republicans as Ignatius speaks firmly to drunk drivers and take the wheel firmly in his hands.  If I am very charitable and interpret this is a proposal rather than a metaphor run off the road, then I conclude that Ignatius just proposed a coup.  In any case he's doing it wrong.
4) Pompous and very bad writing. OK I write for shit, but I'm not pretentious.  Ignatius uses an simily -- Republicans are like drunk drivers.  He makes a mess of it.  He says Obama should firmly take the wheel (a coup?).  He also says that the thing to do when in a car driven by a drunk is to speak firmly.  Has Ignatius attempted to grab the wheel from a drunk driver ?  I sure haven't.  I don't think that works very well.  In any case, when he gets off his high horse of a metaphor which has run off the rails, Ignatius is back to proposing speech a "presidential statement" which will solve everything somehow.  So what do you do if the drunk just keeps driving and ignores your firm command to hand over the keys ?  I don't know and I don't think Ignatius does.  He's lead into a trap by his metaphor  If someone is in the drivers seat with their foot on the gas and just won't listen, there really isn't much a passenger can do.  Obama isn't just a passenger.  Ignatius chose the metaphor.  It doesn't serve his purposes.  But the dozens of words are too valuable to erase.
5) no consideration at all of the possibility that it might be a bad idea to cut the deficit immediately when unemployment is 7.9% and we are in a liquidity trap.  Ignatius goes off topic to discuss policy.  He thinks that he has explained what is to be done when he suggests cutting Medicare and social security and "modestly" increasing tax revenues.  He didn't have to insert this in a column on how the Republicans in congress are acting insanely and on what can be done about this.

Tuesday, February 26, 2013

Great Minds Think Alike

The thoughts of Paul Krugman and Brad DeLong turn to Darth Vader.

I liked the film, but, at the time, I thought great minds grew up.

Friday, February 22, 2013

Still not calm about Monetary Policy

David Glasner has a post here commenting on an earlier post of mine.  I can't decide what to quote so please just read it if you want to make any sense of what follows.

One question I forgot to ask in comments:  what does WADR stand for ?

I wrote two comments which I am basically storing here for future reference.  Also the first was typed on an iPad with autocorrect (BLEG how does one turn that off) which corrects my English to Italian and makes worse gobbledygook than I do by myself.  I have corrected the spelling here using the new improved super technology called "a keyboard"

I haven’t really read this post (just skimmed it). I note your question on breakevens and stock prices. I haven’t 2 through to which are, at legasti, sincere.
1) I don’t think that stock prices tell us much about anything. In particolar they have a low correlation with future GDP and employment growth IIRC. I through this question was settled in 1987.
2) I don’t think that monetary policy has much effect on expected inflation (except through past inflation). I note that event studies (in the huge Woodford paper) show Tiny effects 3 out of 4 (or 4 out of 5) have the expected sign.
3) I think breakevens are vero well explained by lagged inflation, lagged core inflation and lagged changes in the price of petrolem. I don’t see any effects of shifts of monetary policy in this graph
4) I also think that in the early 80s that monetary policy shifts affected expected inflation via high interest ratea caused high unemployment which caused low inflation which caused low expected inflation.
5) I am not convinced that any model developer other than * adaptive* expectations augmented Phillips curve is as empirically successful.
Are you sure that we don’t disagree all that much ?
I promise this comment is sincere and not exaggerated.

Here I am again.  I have now read the post.  I have two observations

1) Get the null on your side is my motto (I admit it).  You follow this.  You suggest that your hypothesis is the hull hypothesis then abuse Neyman and Person by implying that we can draw interesting conclusions from failure to reject the null.  Basically the sentence which includes the word "null" is the assertion that we should assume you are right and I am wrong until I offer solid proof.  To be briefer, since we are working in social science, you are asking that I assume you are right.  This is not an ideal approach to debate.
I ask you to review your sentence which contains the word "null" and reconsider if you really believe it.  The choice of the null should be harmless (it is an a priori choice without a prior).  How about we make the usual null hypothesis that an effect is zero.  Can you reject the null that monetary policy since 2009 has had no effect ? At what confidence level is the null rejected ?  Did you use a t-test ? an f-test ?  "null" is a technical term and I ask again if you would be willing to retract the sentence including the word "null".

2) using expected inflation to identify monetary policy is only a valid statistical procedure if one is willing to assume that nothing else affects expected inflation.  If you think that say OPEC ever had any influence on expected inflation, then you can't use your identifying assumption.  In particular TIPS breakevens can be fairly well fit (not predicted because not out of sample) using lagged data other than data on what the FOMC did.

again I refer to

(legend here red is the 5 year TIPS breakeven or expected inflation, Blue is the change over the *past* year of the price of a barrel of oil times 0.1 plus 1.6, green is the geometric mean of the change over the *past year* of the personal consumption deflator and the personal consumption minus food and energy deflator.

I find the brief and boring period 203-2007 most interesting.   Expected inflation is almost perfectly fit by lagged inflation (geomentric mean of core and total).

I don't see how anyone could look at this graph and then claim we can identify monetary policy by the TIPS breakeven.  That is only valid if nothing but monetary policy affects inflation expectations.

Similarly in 1933 monetary policy wasn't the only thing that changed.  I understand that there was considerable policy reform in the so called "first hundred days.  " The idea that we can identify the effect of monetary policy by looking at the USA in 1933 is based on the assumption that Roosevelt did nothing else.  This is not reasonable.

But I think we can detect the effect of recent monetary policy on TIPS breakevens if we agree that it (including QE) is working principally through forward guidance.  There should be quick effects on asset prices when surprising shifts are announced.  QE 4 (December 2012) was definitely a surprise.  The TIPS spread barely moved (within the range of normal fluctuations).  I think the question is settled.  I do not think it is optimal to ignore daily data when you have it and treat same quarter as the same instant.  Some prices are sticky and some aren't.  Bond prices aren't.

Wednesday, February 13, 2013

Robert Waldmann will not calm down.

Comment on this post by David Glasner

I do not find any reference to the zero lower bound in this post.  Your analysis of monetary expansion does not distinguish between the cases when the ZLB holds and when it doesn't.  You assume that the effect of an expansion of the money supply on domestic demand can be analyzed ignoring that detail. I think it is clear that the association between the money supply and domestic demand has been different in the USA since oh September 2008 than it was before.  This doesn't seem to me to be a detail which can be entirely overlooked in any discussion of current policy.

Also, I note that prior to his Stelzer "jejune dismissal of monetary policy," Stelzer jenunely dismissed fiscal policy.  You don't mention this at all.  Your omission is striking, since the evidence that Stelzer is wrong to dismiss fiscal policy is overwhelming (not overwhelming enough to overwhelm John Taylor but then mere evidence couldn't do that).  In contrast, the dismissal of monetary policy when an economy is in a liquidity trap is consistent with the available evidence.

I hereby challenge you to show data on US "growth"  meaning (I agree with your guess) mostly employment growth since 2007 to someone unfamiliar with the debate and ask that person to find the dates of shifts in monetary policy.  I am willing to bet actual money (not much I don't have much) that the person will not pick out QEIII or operation twist.    I also guess that this person will not detect forward guidance looking at day to day changes in asset prices. €

I claim that the null that nothing special happened the day QEIV was announced or any of the 4 plausible dates of announcement of QE2 (starting with a FOMC meeting, then Bernanke's Jackson Hole speech then 2 more) can't be rejected by the data. This is based on analysis by two SF FED economists who look at the sum of changes over three of the days (not including the Jackson Hole day when the sign was wrong) and get a change (of the sign they want) whose square is less than 6 times the variance of daily changes (of the 10 year rate IIRC).  IIRC 4.5 times.  Cherry picking and not rejecting the null one wants to reject is a sign that one's favored (alternative) hypothesis is not strongly supported by the data.