At EconLog Arnold Kling has been trading blows with Bryan Caplan. In his justified revulsion at Scott Sumner’s views, Kling swings too far in the opposite direction when he declares:
There is a short run in which monetary policy cannot control nominal GDP, and there is a long run in which monetary policy cannot control real GDP. That is, there is a short run in which M affects only V and a long run in which M affects only P.
Suppose we measured GDP on a weekly basis. What can the Fed do this week that would affect nominal GDP next week? I say “nothing.” Maybe Scott Sumner wants to say, “the Fed can change expectations,” in which case we can start our argument there. I don’t think that the expectations that matter for next week’s nominal GDP are expectations that can be changed quickly. Or maybe Sumner will concede that next week’s nominal GDP is given, so that for next week any big increase in M will result arithmetically in a big decrease in V.
I don’t claim to speak for Scott–I think the Zimbabwean central banker does that just fine*–but I for one would not concede that “next week’s nominal GDP is given.”
Suppose Bernanke told his minions (the flying monkeys) to go out to every grocery store as fast as they could, and start buying everything in the store. A Fed official literally calls up the general manager of a large grocery store, and says, “I want to buy every item on your shelves.”
The guy says, “Whoa, I bet you want a big discount, right?”
The Fed official says, “No, in fact, if you double all your prices before giving me the bill, that’s fine with me.”
But the catch is, it’s an actual purchase. The store owner can’t just send a bogus invoice and then sell the physical product to other customers. The Fed needs to take physical delivery of the items in the invoice, or else they cancel the (humongous) check written on the Fed.
You’re telling me that if Bernanke made it his mission in life to acquire as many gallons of milk, cartons of eggs, pounds of butter, etc. etc., as fast as he could get his operation to start doing so, that all the grocery store managers would say, “Hmm, that’s odd. Have you heard about what’s happening at Wal-Mart and Kroger? Maybe at next month’s board meeting we should bring this up.” ? Are they going to continue selling down their inventories at the prevailing price?
Now maybe Kling means, the Fed can’t change nominal GDP in the short run using only conventional monetary policy. But I think I’ve read all his posts on this topic, and I never see him giving such a caveat. No, he seems to be literally saying that the Fed can do nothing to alter nominal GDP in “the short run.”
In fact, let’s not even go to the trouble of the above. Suppose Bernanke goes on national TV and declares on a Monday, “Any store owner who can show me proof that his typical sales have increased by at least 10% this week as compared with his average weekly sales, will get a personal check for $1 billion, drawn on the Federal Reserve.”
I’m not saying I know exactly what would happen after such an announcement, but I’m pretty sure nominal GDP would be different that week, and I’m also pretty sure expectations would change very quickly. The only possible intertia would be due to the fact that people didn’t think Bernanke was actually serious. But once he started sending checks–that cleared–to business owners during the course of the week who had boosted their measured sales by buying their own inventory from their businesses, then I think people would get the hint and start brainstorming.
I suspect that eventually we’ll find Kling admitting–just as Caplan has to with his bizarre claim that “parents don’t matter”–that really he means, “If we tinker at the margins, and don’t consider examples that obviously demonstrate my claim is completely false, then the Fed [/parents] matters a whole lot less than most people think.”
* For newcomers to Free Advice, I should clarify that Scott understands my bizarre humor theory. I am 95% confident he would not be offended by the above salvos. (See fifth sentence here.)
Hey kids, pop quiz time!
(1) Using this Paul Krugman NYT column from September 24, tell us how costly the CBO says Waxman-Markey’s cap-and-trade plan will be, in the year 2050.
(2) Using this Paul Krugman blog post from September 27, tell us how costly the CBO says Waxman-Markey’s cap-and-trade plan will be, in the year 2050.
(3) Calculate the maximum discrepancy between your answers for (2) and (1), in percentage terms of the answer for (1).
(4) Using Krugman’s blog post, find the spot where Krugman explains the size of your answer for (3). (Hint: Don’t spend too much time looking.)
(5) Relying on both Krugman’s blog post and his NYT column, which side of the climate debate does Krugman think is full of ideologues playing fast and loose with statistics to bamboozle a gullible public?
UPDATE: Some readers point out in the comments that the same CBO report (pdf, pages 2-3) contains both the “1.2 percent of income” and “1.1% – 3.4% of GDP” estimates for the cost of Waxman-Markey in 2050. So that means we can’t get too upset at Krugman for switching between these two stats from one article to another. However, my beef is now with the CBO: I think they must be doing things like saying, “The efficiency mandates will mean people will have to spend less on heating their homes etc.,” but still, there should be an idiot check. How can it be that Waxman-Markey will reduce GDP by 1.1% – 3.4% by 2050, yet at the same time will only reduce household income by 1.2%? That just doesn’t make sense.
Michele Bachmann (R-MN) graciously held up a copy of my book Meltdown, which she said she was reading and enjoying very much. She was likewise concerned about the extent of the Fed’s discretionary powers, and the extent to which the taxpayer winds up on the hook for things he doesn’t even know about. I took the opportunity to clarify a point she already understood, but which is sometimes obscured in the shorthand we use: the impact on the taxpayer is really an impact on him in his capacity as a holder of dollars. If the Fed’s arrangements with private firms leave the central bank with lower-quality assets than before, then its ability to carry out its policies while preventing price inflation from getting out of hand is impaired. The Fed’s ability to sterilize its injections – i.e., taking dollars out of one sector of the economy as it injects them into another – is compromised when there is a decline in the quality of the assets it intends to sell to withdraw the dollars. In other words, it can still inject dollars, but it’s now harder to remove them (since its assets no longer fetch as many dollars).
You see the mistake Tom is alluding to here, when people write denunciations of the bailouts and monetary base growth, then say, “Taxpayers are on the hook.” But no, if we’re talking about Fed operations, then it’s not taxpayers per se, but holders of dollar-denominated assets, who are on the hook. For example, the Chinese central bank stood to lose a lot from Bernanke’s inflationary activities. But it’s understandable why Fed critics rally the troops with the cry of “taxpayers!” rather than “Chinese!”
Bill R. sends along this interview with Thomas Sowell. Start it at the 5:00 mark, and you’ll see that Sowell makes the same point regarding the alleged “rescue” of the credit markets as I did on Kudlow. From the timing, I’m guessing it was an independent discovery. I’m surprised more people aren’t using this argument.
In a fascinating article, Lilburne explained that Nicholas Biddle did what he could to wreck the US economy to prevent Andrew Jackson from de-chartering the Second Bank of the United States. Is Bernanke thinking of something similar? From Bloomberg (HT2LRC):
Federal Reserve General Counsel Scott Alvarez said audits of monetary policy by the U.S. Congress could lead to higher interest rates and reduced confidence in central bank policy.
Congressional audits of monetary policy could “cause the markets and the public to lose confidence in the independence of the judgments of the Federal Reserve,” Alvarez told the House Financial Services Committee today in response to a question from Representative Dennis Moore, a Kansas Democrat. Alvarez said in his prepared remarks the audits would probably “chill” the central bank’s discussions on interest rates.
Now this is interesting. When the “audit the Fed” movement first came on the scene, the Fed apologists warned, “This will cause the Fed to keep interest rates too low for too long. When the Fed decides it needs to raise rates to prevent inflation, Pelosi and Reid will butt their noses in and insist on prolonging the period of easy money.”
Well the threat of inflation didn’t scare off the villagers, so now the Fed is threatening us with higher interest rates if we don’t mind our own beeswax and stop asking how many billions they shoveled out to particular financial institutions, foreign and domestic.
In fairness to the Fed apologists, these two threats aren’t mutually exclusive, because nominal interest rates alone do not completely summarize Fed policy. Because of the loss of “independence,” the Fed might pump in more money than it otherwise would, leading to higher dollar-prices. At the same time, because of world investors’ loss of confidence in the Fed’s ability to contain price inflation, long-term interest rates on dollar-denominated assets might be higher than they otherwise would be. So, it’s not really a contradictory threat of “we’ll have interest rates that are too low and too high simultaneously.” Rather, the Fed officials could argue that the tradeoff between interest rates and (price) inflation will shift against the US–meaning the Fed needs to jack up interest rates to ensure a given level of price inflation–while the interference from Pelosi & Co. will force the Fed to err on the side of high inflation, on this new tradeoff.
Even though one could synthesize the two warnings in the above fashion, I think what’s really going on is that the Fed officials like the current situation just fine, where they can literally write as many checks as they want, backed up by an infinite amount of money, and they don’t even have to tell Congress (let alone CNBC) who got how much money.
Putting this down into words will not do it justice, but I wanted to share my experience late Friday night. While walking home from the open bar on Mackinac Island, I was struck by how many stars I could see. If you’ve lived in a big city your whole life, you might be amazed at just how many you can see on a clear night when you get away from big buildings.
So I’m marveling at it but then I realize my view is still being hurt by the occasional streetlight. Across the street from the Grand Hotel is a golf course. Right near the sidewalk is a big sand trap, and I realize that if I just walk to the other side of it, the hill will be blocking the light from the street and I’ll be able to look up at a fairly uninterrupted view.
I stood there on the sidewalk wavering. It was about 1 in the morning, and it was cold out–I had come from Nashville and just brought a light jacket, so I wasn’t really prepared for the upper Michigan weather–and I wasn’t sure if it was worth sneaking onto the golf course just to see how many more stars were visible outside the blare of the streetlight. But something nudged me to go for it, and I don’t think it was Richard Thaler.
I waited for some other pedestrians to get out of sight, and then I walked onto the course and down the first hill. My mouth literally dropped open. I could not BELIEVE how many stars I could now see. I have never in my life seen so many in the night sky. It looked like a planetarium show, except this was the real deal. Whereas humans can create a similar show of beauty by projecting light from a machine onto a ceiling 30 feet or so above your head, here was the Lord of the universe putting on a similar show, except He decided to use balls of gas undergoing nuclear reactions, some of which were millions of light-years away.
After testing to see just how wet the grass was, I laid down and just stared up. I had to turn my head from side to side to drink it all in; I couldn’t capture it all without swiveling. I said “oh my gosh” and realized it wouldn’t be cursing for me to say “oh my God.” The second time I said it, I actually saw a “shooting star” the instant I said it, which was a nice finishing touch. (I don’t know if I’ve ever seen a shooting star in real life before.)
It was an extremely pleasant way to finish the night. To (greatly) paraphrase Richard Feynman who was making a different point: There needn’t be a tension between knowledge of the natural world and faith in God. In fact, the reason I was in such awe was that I had a (very vague) understanding of how far away the stars generating that light had to be. I don’t imagine that the fishermen hanging around Jesus would have appreciated the night sky more than I did a few days ago, simply because it was more of a “mystery” to them.
I participated on an energy panel at the Republican Leadership Conference at Mackinac Island on Friday. (I was there in my capacity as an economist with IER. I’m pretty sure they would have me talk at the UAW convention if we were welcome, which we’re not.) Some highlights:
* I met Jay Riemersma who is running for Congress. He had been a tight end for the Buffalo Bills so I had to text my brother and dad. (I grew up in Rochester, NY. The Bills lost the Superbowl every year I was in high school. That seriously affected the trajectory of my life. I’m not kidding.) The guy who introduced us said, “Yeah, Jay here used to play QB, and then he had to put on 30 lbs. for his new job as tight end.” So I said, “That’s funny, when I got hired as an economist I put on 30 lbs. too.” He chuckled, but then again he was running for office.
* I’ve been to this event once before, in 2007. I love it because the guy running for attorney general will stand outside the ferry dock, shaking everybody’s hand. If you explain you’re not a Michigan voter, he’ll say, “You can still vote with your checkbook.” Hey it doesn’t hurt to ask.
* I had a few hours to kill before my talk, so I wandered around the island looking at all the quaint shops. (BTW there are no cars allowed on the island, except some emergency vehicles. Otherwise it’s horses and bicycles. And yes we made the obvious jokes about cap and trade 2 years ago.) The best sign I came across said, “The difference between inlaws and outlaws is that outlaws are wanted.” Ba-DUM.
* When we lived in Hillsdale, MI my wife and I loved the ice cream from “Mackinac Island Creamery.” Well, turns out there is no such thing. First Santa, now this.
* Some guy in the crowd tried to zing me during the Q&A. I was there to discuss the impacts of cap and trade on Michigan’s economy. Now I really did give a big caveat and say, “Nobody knows what the impact of something in 30 years will be, but, the Heritage Foundation used a Global Insight model blah blah blah, and projected an average job loss of 40,000 between the years 2012 and 2030″ or something like that. So this guy asks me if that’s really a per year job loss figure. I can see where he’s going–i.e. you’re going to lose more jobs than there are people in Michigan–and so I try to clarify that no, what the figure means is that the model shows the number of jobs below a baseline (with no cap and trade), and that gap is, on average, 40,000 jobs. Then someone else on the panel [who was the local moderator, not an actual presenter] jumps in and says that he’s seen estimates of cap and trade on a national scale, where the loss is 2 million jobs. So the heckler comes back and says, “That’s per year?” and the other guy says, “Yeah.” (I think it’s actually what I was trying to say in reference to the figure I cited for Michigan.) Then the heckler says, “So over a ten-year frame, that’s 10% of the entire US workforce you’re saying will lose their jobs from cap and trade?” and the other guy just goes, “Exactly,” and takes the next question. I think the other guy didn’t really understand the distinction the heckler was making, but I just thought it was hilarious because the heckler was expecting him to slap his head and say, “You’re right, we’ll leave the room now.”
* Apparently these Mackinac Island conferences have a reputation for being quite socially liberal in terms of alcohol. (There was a girl puking in a flowerpot when I walked back to the hotel Friday night from the bar.) Picture it: 2,100 enthusiastic Republicans invade a sleepy island for a weekend, with political groups having open bars all over the place. (And I mean, you go into the actual bar, and the waitresses serve you for free.) If only Robert Wenzel had been there! Then he could have approached two girls and said, “Do you ladies know my famous friend Bob? He corresponds with Glenn Greenwald…”
* Back in 2007, Rudy Giuiliani gave the keynote dinner address, and it truly was a good speech. I thought he had a good shot at being the nominee at that point. In contrast, my chaperone on the island–you can’t let PhDs loose in an unfamiliar place; we might end up in a locker or something–referred to John McCain as “dead man walking” when his procession went by. So, we basically didn’t predict the primaries very well. Anyway, this time around I left Saturday morning, so I didn’t get to hear Mitt Romney give the keynote dinner talk. During the Friday dinner, one of the warmup guys had a good generic line deployed against some Michigan Democrat: “He reminds me of a slinky. He’s not useful for anything, but he’s fun to push down the stairs.” Ba-DUM.
UPDATE: Oh man, I almost forgot to mention that I met Michael Lynch, occasional blogger for MasterResource. (See him take on “peak oil” here, where he defends himself from the critics of his NYT op ed.) Believe it or not, Lynch is a bigger wise*ss than me. (!!) Quick example: We were waiting to get on the ferry, and there was a big yellow school bus that pulled up. Out flowed about 30 kids, probably 10 – 12 years old. Of course they’re all excited to ride the ferry, the chaperones are trying to keep them from jumping into the frigid water, etc. etc. So one girl comes up to us and goes, “We’re here on a field trip. We all go to the same school.” Lynch says, completely deadpan, “Oh, I figured it was either that, or you had all escaped from a prison for really short people.” I’m not kidding, he didn’t crack a smile or anything, he just let the girl process that for a moment and shrug it off as she told her friends they could cut us in line.
But we’re intellectual geeks so no tear gas was involved. I’m in a hotel right now in Mackinac Island, so I haven’t had time to watch this stuff. But here’s Tom Woods wielding a fiery sword of truth, and below is the only video I’ve found so far. When I get back to the room tonight I’ll post some better stuff.
P.S. As I said, I haven’t had time to watch the above. But I’m pretty sure I recognize the bald spot of the guy on the left of the witness table.
P.P.S. Off topic, but the TVs are blaring this stuff about a guy buying supplies in a beauty shop in order to make a “weapon of mass destruction.” So, if you can build a WMD using Obsession, shouldn’t we admit the War on Terror has as much chance of success as the War on Drugs?