19 Jul 2016

Clarifying a Problem with NGDP Targeting

Scott Sumner 35 Comments

[UPDATE below.]

I fear that even you, my loyal blog readers, may not fully appreciate just how insightful my earlier post on Scott Sumner was. So let me take the humor out of it and write plainly.

In this post on the Irish “miracle” (of apparently huge economic growth), Scott wrote:

I’ve argued that NGDP targeting is not always appropriate for small open economies, citing examples such as Australia and Kuwait. Actually, it’s probably much more appropriate for Australia than Ireland. The key is whether NGDP tracks total labor compensation fairly closely. Where it does, as in the US, then NGDP targeting is appropriate. Where it doesn’t, as in Kuwait, then you want to target total labor compensation, perhaps per capita.

Look at that part I put in bold. Scott added it as almost a throwaway line, but it underscores that there are all sorts of variants of his framework, and they could (potentially) lead to huge differences in outcomes.

For example, suppose Trump becomes president and then tells Scott he wants him to design the new Fed regime. After quickly deleting all of his anti-Trump blog posts, Scott comes up with a mechanism by which the Fed has zero discretion, and simply buys/sells futures contracts (in a subsidized market) to ensure that the market always expects total labor compensation to grow at 5% per annum, with level targeting. Originally Scott had thought about doing NGDP targeting, but since he was given free rein, he decided to play it safe and go directly for total labor compensation.

Unfortunately, in yet another completely unexpected move, Trump reads the work of Bryan Caplan and decides that the only way he can pay off the national debt in 8 years is to let in 30 millions new workers per year.

Contrary to the warnings of the nativists, it turns out Bryan Caplan is right: Although certain sectors get crushed, on average real wage rates are poised to go up for the average American worker, even if we restrict our attention to the original group (before Trump came in and opened up the floodgates).

However, nobody realizes–until it’s too late–that Bryan Caplan’s cool plan (when considered by itself), plus Scott Sumner’s cool plan (when considered by itself), lead to disaster when they’re combined–using the very same framework that Bryan and Scott employ.

In the first year, with the influx of 30 million new workers, total real labor compensation is poised to jump by (say) 15%. But the new monetary regime limits the total growth in nominal labor compensation to 5%. So that means on average, nominal wage rates need to fall by 10%. [UPDATE: These numbers could work, but it is probably misleading you by me picking 15%, 5%, and 10%. I think this tripped up David Beckworth in the comments below, and he understandably thought I was confused at Step 1. In a follow-up post I’ll pick a clearer numerical example.]

If prices and wage rates were perfectly flexible, this wouldn’t be a big deal. But Bryan Caplan thinks nominal wages are not flexible, and Scott Sumner’s entire case for NGDP targeting rests on the assumption of sticky prices (in particular, sticky nominal debts). For example, someone who just bought a house with a 30-year mortgage is going to be screwed when the new Fed regime, coupled with much more open borders, causes his nominal paycheck to drop 10%. His mortgage payments don’t drop, even though food prices fall 15%.

In conclusion, my point isn’t to warn, “We better hope we don’t get Open Borders plus NGDP targeting in the same year.” Rather, my point is that Scott Sumner’s case is actually much more nuanced than I think some of his biggest fans appreciate. Yes, Sumner himself can be quite nuanced, but I’m curious: For those of you who’ve been reading him for years, did you realize the policy would blow up with rapid population growth? Or that if the Irish economy had implemented it last year, its people would be in a depression right now (according to Scott’s world view)?

One more parting shot: If you’ve ever described Market Monetarism as a policy of “encouraging steady growth in total spending,” does it matter that NGDP is actually a subset of total spending? (GDP is spending on final goods and services, not on intermediate goods.)

19 Jul 2016

Scott Adams and I ALSO Disagree About Politics

Politics 35 Comments

In an intriguing post, he writes (and I’m coming in halfway through his post, so click the link for full context):

To the great puzzlement of everyone in America, and around the world, Comey announced two things:

1. Hillary Clinton is 100% guilty of crimes of negligence.

2. The FBI recommends dropping the case.

From a legal standpoint, that’s absurd. And that’s how the media seems to be reacting. The folks who support Clinton are sheepishly relieved and keeping their heads down. But the anti-Clinton people think the government is totally broken and the system is rigged. That’s an enormous credibility problem.

But what was the alternative?

The alternative was the head of the FBI deciding for the people of the United States who would be their next president. A criminal indictment against Clinton probably would have cost her the election.

How credible would a future President Trump be if he won the election by the FBI’s actions instead of the vote of the public? That would be the worst case scenario even if you are a Trump supporter. The public would never accept the result as credible.

That was the choice for FBI Director Comey. He could either do his job by the letter of the law – and personally determine who would be the next president – or he could take a bullet in the chest for the good of the American public.

He took the bullet.

Thanks to Comey, the American voting public will get to decide how much they care about Clinton’s e-mail situation. And that means whoever gets elected president will have enough credibility to govern effectively.

Comey might have saved the country. He sacrificed his reputation and his career to keep the nation’s government credible.

It was the right decision.

Comey is a hero.

Actually I’d say it’s just the opposite. Americans pride themselves (foolishly, to be sure) on thinking they live under the rule of law, not of (wo)men. There is no surer way to delegitimize the US government that to have the head of the FBI say, “This person clearly broke the law and we would want anyone else to be prosecuted for this, but she’s politically powerful so the rules don’t apply to her.”

Also, in terms of ability to govern credibly, this will hang over Clinton should she win, and it will make people think less of Trump should he win.

19 Jul 2016

Melania Trump Plagiarism: Crazy Like a Fox?

Trump 12 Comments

I posted this on Facebook:

OK watch this: SUPPOSE for one second that the Trump campaign–which defied all the odds and managed to knock out the Bush dynasty plus some other candidates that were ostensibly qualified politicians–isn’t completely stupid. SUPPOSE for one second that they wouldn’t let a plagiarized speech by the candidate’s wife slip through. (After all, critics think the “Star of David” was intentional and not a slip up.) So now you’ve got all the media broadcasting Melania’s speech, side by side with Michelle Obama. So free publicity, and subconscious message that “Trump campaign respects the thoughts of a black woman when they uphold American values.” Discuss.

Then Dan Doherty added in a comment: “Not to mention that it already has you subconsciously associating Melania with the first lady in your head.”

When Scott Adams links to this post, I’ll be happy if he praises me, but it’s OK if he just says, “Exactly. I’ve been predicting this for a while now.”

19 Jul 2016

Steve Landsburg and I Disagree About Politics

Steve Landsburg, Trump 13 Comments

Steve thinks that Hillary Clinton should pick Jeb Bush as her VP, and that in so doing she would win in a landslide. I said in a comment: “I think if Hillary and Jeb were on the same ticket, Trump would quite plausibly tell people, “See folks? There’s no Dem vs. Rep. It’s the elites versus you. Let’s make America great again, they clearly don’t want me to upset their plans to screw you over.”” (I had first asked him to clarify if he personally wanted Clinton to beat Trump, and if so, why.)

To this Steve responded:

Bob Murphy (#92):

1) Yes, I would *VASTLY* prefer Clinton/Bush to Trump,for a variety of reasons. Key among them is, as you put it “minimizing mean square destruction”. Trump, if elected, is probably Berlusconi but plausibly Mussolini.

2) Another reason: With Trump in the White House, I think the most plausible scenario is that nobody in power opposes him from the right. The Republicans crumble and fall into line; the Democrats are delighted with his anti-trade pro-regulation pro-tax statism. With Hilary in the White House, there will be congressional opposition and, thank God, probable deadlock.

3) Yes, I’m sure that a Clinton/Bush ticket will fire up the Trump voters as you say, but I don’t see where it brings in any *new* Trump voters. At the same time, it gives the vast army of anti-Trump Republicans psychological cover for voting for a Democrat. So I think it locks up the election for Clinton.

In short: I’m saying that this would be both good strategy for Clinton and very good for the country. (Where “very good”, of course, is relative to the realistic alternatives, not to anything I’d design.)

Wow. I think Clinton vs. Trump is like getting the flu versus kicked in the crotch: I know what the flu is like, and it’s awful. I actually don’t know how bad getting kicked in the crotch would be, but it’s different. For sure I would prefer to receive neither.

But if I’m agnostic on who would be worse (largely because Trump is so unpredictable), I am quite sure that if Hillary Clinton picked Jeb Bush as her running mate, that Trump would win. He would pick up some votes, and there would be tons of Clinton voters who would stay home or vote Jill Stein. This would swamp, in my opinion, the number of Republicans that Clinton would gain. Indeed, there might be a rush of people to vote for Trump, once they see just how much we have a one party system right now, were the Clinton and Bush dynasties to formally unite on the same ticket.

Last thing: I hadn’t thought of the gridlock aspect, so Steve has a good point there. But, it’s hard to evaluate that point, when lots of people are complaining about Trump being so divisive that no one will work with him, and he won’t get anything accomplished.

18 Jul 2016

Two Snarky Comments on Sumner

All Posts, Humor, Scott Sumner 4 Comments

With all of my traveling this summer, I worry that Scott Sumner feels I am neglecting him. (After all, I have a weekly podcast devoted to Krugman–have I forgotten my Market Monetarist friends?)

So as to partially rectify my benign neglect, here are two snarky comments on recent Sumner posts:

==> In this post responding to a critic of his NGDP targeting plan, Scott explains that he just needs half a billion dollars to show how awesome his proposal is–are you really going to deny him that? Well, now that he thinks about it some more, Bill Woolsey’s idea is better. But stop pestering him with these details; Scott can fix the world economy.

==> In this post on Irish GDP, Scott writes:

I’ve argued that NGDP targeting is not always appropriate for small open economies, citing examples such as Australia and Kuwait. Actually, it’s probably much more appropriate for Australia than Ireland. The key is whether NGDP tracks total labor compensation fairly closely. Where it does, as in the US, then NGDP targeting is appropriate. Where it doesn’t, as in Kuwait, then you want to target total labor compensation, perhaps per capita.

Those remarks got me thinking: Imagine at the Mercatus Center one day, people are sitting around drinking coffee in the lounge. Then Bryan Caplan runs in and says, “Guys! Awesome news! I got a small country with new political leadership to agree to completely open borders! They’re expecting enormous rates of immigration! Critics are predicting massive crashes in wage rates for existing workers, but this experiment will prove those fears to be baseless once and for all!”

Everyone says, “That’s great Bryan! Well done!”

Then Scott Sumner bursts into the room. “Guys! Awesome news! I got a country with new political leadership to agree to set total nominal GDP to 5% annual growth!”

Everyone goes white. Scott can’t understand why they aren’t happy for him.

17 Jul 2016

Hubris, Doubt, and Faith

Religious 13 Comments

I am pretty sure Richard Feynman once said something like, “In science, we have to have the courage to say, ‘We don’t know,'” and in context he was criticizing the religious mindset. (If someone knows the exact quote, let me know and I’ll update the post.)

Believe me, having gone through an extensive period of “devout atheism” (my term at the time) where I thought Feynman was the coolest guy, I totally understand why he would say that. And I have cringed at some Christians who, say, try to use the Laws of Thermodynamics as a “refutation” of Darwinism when it’s obvious they don’t really know what they’re talking about.

Yet on the other hand, I can also see how the believers in modern scientism (not to be confused with actual science) are similarly overconfident in metaphysical positions, without even realizing just how dubious they are. For example, the people who say they follow only the dictates of logic and reason (not superstitious books) will say that in science we must be empirical; we can’t invoke the hypothesis of a “creator God” because that’s not testable. Yet when you point out that the constants of the physical universe are apparently “fine tuned” to support intelligent life, they explain these observations by theorizing there are an infinite number of possible universes, and so we–as intelligent life forms–shouldn’t be surprised to find that we reside in one of those universes where the charge on an electron is juuuust right. They seem not to realize that hypothesizing the existence of an infinite number of universes that are, by definition (at least in some frameworks), undetectable with our equipment is somewhat awkward in light of their statements about a deity.

Let me come at this another way. Atheists will point to something really awful, like the Holocaust, and demand, “Why would a good God let this happen?” I have learned from personal experience that it is by no means a mark of my humility and moral courage to say, “I don’t know.” Instead, I am mocked for admitting I can’t explain everything within my framework. “Oh ha ha, how convenient, ‘God works in mysterious ways.’ Admit it, there is no explanation.”

So to sum up: When an atheist empiricist says, “I can’t explain everything in my framework; my knowledge is incomplete; at some point I have to say, ‘I don’t know,'” this is the mark of true wisdom. When a Christian says, “I can’t explain everything in my framework; my knowledge is incomplete; at some point I have to say, ‘I don’t know,'” then it is the mark of an intellectual swindle.

Finally: This is what faith actually means. Contrary to confident assertions otherwise, faith does NOT mean, “Turning off your reason” or “Believing the irrational.” No, an example of faith would be, “I personally can’t give you a convincing explanation of why the Holocaust happened. However, the Bible DOES give us specific explanations of why God let other injustices occur, such as Joseph’s brothers selling him into slavery and of course the torture and murder of the greatest Man to ever live. Knowing the character of God, I have faith that His plan is good, and that one day it will make sense to me, even though right now I can’t explain much of what He allows.”

If you scoff at this, be careful in how you frame your objection. Make sure you wouldn’t equally knock down someone who says, “I can’t currently reconcile the physical laws of gravity and quantum mechanics, but given my understanding of nature, I believe that there *is* an underlying order to it all, which will be beautiful once people learn more about it.”

12 Jul 2016

Catching up on Podcasts

Contra Krugman, Lara-Murphy Show, Shameless Self-Promotion 10 Comments

==> Tom and I talk Trump, globalization, and Chinese currency manipulation in the latest Contra Krugman.

==> Carlos and I talk Brexit in the latest Lara-Murphy Show.

10 Jul 2016

Sobran on Intrinsic Excellence of Christianity

Religious 27 Comments

Joe Sobran wrote this essay a while ago at Easter time, and it echoes what I was saying last week. Some of his particular statements I don’t find persuasive, but below are some of the good ones:

Then there is the argument from comparative religion. Religions are a lot alike, they can’t all be true, so isn’t it probable that they are all false? By that kind of reasoning, you can prove not only that we don’t know who wrote Hamlet, but that it was never written at all.

Was Jesus just like a lot of other religious leaders? Such as? Do other religions have prayers like the Our Father? Did the ancient Greeks ask Zeus to “forgive us as we forgive others”? Did the Aztecs pray like that? How many other religions command their votaries to rejoice, be of good cheer, have no fear? (“Trust in Poseidon”?)

And many other religious figures, we are told, have performed miracles every bit as impressive as those attributed to Jesus. Really? Did they cure blind men and cripples while assuring them that their sins were forgiven?

And did they, even after they had died (and risen again, it goes without saying), make converts who would die for what they had taught? Did any of them ever give a speech like the Sermon on the Mount? If so, where can I find a copy?

For that matter, did any of these impressive religious teachers, who seem to have been very numerous, match Jesus in what has been called his “command of the moment,” making memorable retorts, still quoted centuries later, to enemies trying to trap them with trick questions? Have any of their reported ad libs endured as permanent moral teachings, like “Whoever among you is without sin, let him cast the first stone”?

Come to think of it, the atheists could strengthen their case somewhat by producing the prayers of other religions to show how much they resemble, or even surpass, Christian prayers. Why don’t they? Just asking. But I have my suspicions.

When you point to the rather horrid regimes run by atheists in the twentieth century, you can count on the atheists to disown them, on the pretext that men like Stalin were the “wrong” sort of atheists because they were just as “dogmatic” as Christians. With people who argue this way, you’d better cut the deck before letting them deal the cards. They’re saying that empirical evidence is inadmissible — except when they want to use it.

How can God be both good and omnipotent, when there is so much evil in the world? I can’t answer this one, and it has tormented believers so deeply that the Scriptures themselves ask it many times. It’s known as the Problem of Evil. I can say only that it’s trumped by the real mystery, the Problem of Good.