A Partisan Nonpartisan Blog: Cutting Through Confusion Since 2012
Here is a link to my 66th column on Quartz, “Japan should be trying out a next-generation monetary policy.” My working title was “Japan is wasting its time trying to raise inflation.”
Monday’s post “Is the Bank of Japan Succeeding in Its Goal of Raising Inflation?” was written in conjunction with writing this column.
I often have occasion to say that I have presented my proposal for eliminating the zero lower bound all around the world. I give the full list of where I have given talks on eliminating the zero lower bound in “Electronic Money: The Powerpoint File.” To see how literal that statement can be taken, I wanted to tally up how many time zones I can account for, only counting presentations at central banks and their branches. I intend to keep this updated as I add additional time zones.
Here they are, in the order of sunrise on a particular calendar date, with the first date listed when I have been to more than one central bank or branch of a central bank in that time zone. Note that UTC 0 is the same as Greenwich Mean Time.
To put this in perspective, let me point out that some time zones are not as well provided with central banks and central bank branches as other time zones! But other time zones I hope to add soon.
My paper coauthored with Dan Benjamin, Ori Heffetz and Nichole Szembrot on how to build national well-being indices in a principled way is now available to the everyone free on PubMed at the link above.
The Wikipedia article on Charlie Hebdo reports that after the French satirical magazine Charlie Hebdo published cartoons making fun of the the prophet Mohammed,
On 7 January 2015, two Islamist gunmen[53] forced their way into the Paris headquarters of Charlie Hebdo and opened fire, killing twelve: staff cartoonists Charb, Cabu, Honoré,Tignous and Wolinski,[54] economist Bernard Maris, editors Elsa Cayat and Mustapha Ourrad, guest Michel Renaud, maintenance worker Frédéric Boisseau and police officers Brinsolaro and Merabet, and wounding eleven, four of them seriously.
In response, many of those who saw this as an affront to free speech used the slogan “Je suis Charlie,” or “I am Charlie.” But what of the murderers? I liked what the article “Slavoj Žižek on the Charlie Hebdo massacre: Are the worst really full of passionate intensity?”(tweeted to me by John L. Davidson) had to say:
William Butler Yeats’ “Second Coming” seems perfectly to render our present predicament: “The best lack all conviction, while the worst are full of passionate intensity.” …
However, do the terrorist fundamentalists really fit this description? What they obviously lack is a feature that is easy to discern in all authentic fundamentalists, from Tibetan Buddhists to the Amish in the US: the absence of resentment and envy, the deep indifference towards the non-believers’ way of life. If today’s so-called fundamentalists really believe they have found their way to Truth, why should they feel threatened by non-believers, why should they envy them? When a Buddhist encounters a Western hedonist, he hardly condemns. He just benevolently notes that the hedonist’s search for happiness is self-defeating. In contrast to true fundamentalists, the terrorist pseudo-fundamentalists are deeply bothered, intrigued, fascinated, by the sinful life of the non-believers. One can feel that, in fighting the sinful other, they are fighting their own temptation.
It is here that Yeats’ diagnosis falls short of the present predicament: the passionate intensity of the terrorists bears witness to a lack of true conviction. How fragile the belief of a Muslim must be if he feels threatened by a stupid caricature in a weekly satirical newspaper?
“There exist in American life many great habilitating organizations. People meet them young, often before they even know what they are. One of these is the US armed forces; another is the economics profession.”
– David Warsh, Economic Principals: Masters and Mavericks of Modern Economics, p. 289.
image source
On June 29, 2012, I posted “Future Heroes of Humanity and Heroes of Japan,” advocating just the sort of massive asset purchases the Bank of Japan has undertaken. Although I now think that using deep negative interest rates after eliminating the zero lower bound is a far superior policy, I am still interested to see how well massive quantitative easing has worked.
Japan’s GDP shrank by .4% in the 2d quarter of 2015. It is now slightly below the level it had in the first quarter of 2008, although with the shrinking of the Japanese population, per capita GDP is up about 1% since the first quarter of 2008. Overall, Japan has managed to clamber back up from blows of the Great Recession, but can it achieve sustained, robust economic growth?
Source: Cabinet Office of Japan. Real GDP shown as the logarithmic percentage above the GDP peak in the first quarter of 2008.
The remarkable Japanese election in December 2012 put Prime Minister Shinzo Abe in charge, and induced a major change in monetary policy, as the Bank of Japan under Governor Haruhiko Kuroda embarked on a program of quantitative easing on steroids, committing to buying bonds and other securities equal in value to over half of GDP every year.
Source: Cabinet Office of Japan. Deflators for components of Real GDP shown as the logarithmic percentage above the price peak in the third quarter of 2008.
“Abenomics” seems to have had an effect. One of the key objectives for monetary policy has been to turn deflation into inflation of 2%. The quarter before Abe’s election was the low point for prices. Since the third quarter of 2012, consumption prices (blue), house construction prices (red) and business investment prices (green) have been on an upward track. Both the consumption prices and residential investment prices have a big jump up between the first and second quarter of 2014 due to Japan’s big sales tax increase. That jump due to the sales tax increase says nothing about whether or not monetary policy is working, so the upward trend in consumption prices is quite unimpressive. But because business spending is exempt from sales taxes, the business investment prices are unaffected by the sales tax increase; business investment prices show a steady increase since Abe was elected.
The steady increase in business investment prices, and volatile upward trend of house construction prices are important because the reason Japan wants to have more inflation is that when businesses build a factor or buy a machine, or someone builds a house, they are comparing the interest rate they have to pay to how fast the value of their investment or house will go up with time—of which inflation is an important component. And the price trends that matter for such investment decisions are the price trends for residential investment and business investment. (Indeed, Bob Barsky, Chris Boehm, Chris House and I have an early stage working paper arguing that for this reason central banks should pay much more attention to investment goods prices than they do.)
One way of seeing how well Japan has turned around its price trends is look at Japanese inflation compared to US inflation. In the graph below, a flat line would mean that Japanese inflation was equal to US inflation. Even after correcting for the sales tax increase, since Prime Minister Abe’s election late in 2012, inflation for consumption and business investment don’t look that different in Japan than in the US, and the lower inflation for residential investment reflects relatively high inflation for that component of GDP in the US rather than a lack of inflation in Japan.
Source: Cabinet Office of Japan. Deflators for components of Japan’s Real GDP shown as the logarithmic percentage above the price peak in the third quarter of 2008 minus the logarithmic percentage of the corresponding US prices above their level in the third quarter of 2008.
Japan’s Performance is Still Substandard. So far, this sounds like a rosy picture. But it isn’t. A stagnant economy is a bad outcome. And even if Japan’s current inflation trends continue, they still don’t make a zero interest rate low enough in comparison to set off the investment boom that is needed to jump-start the Japanese economy. After all, the US inflation statistics used as a point of reference for Japan’s above don’t give the Fed that much room to maneuver under current policy parameters either.
How Japan Can Get Out of Its Bind. What Japan needs is an even more dramatic shift in its monetary policy: deep negative interest rates.
In a recent Quartz column, I talk about the growing acceptance of the idea that the so-called “zero lower bound” or “effective lower bound” on interest rates can be eliminated. In particular, a time-varying paper currency deposit fee on net deposits at the cash window of a central bank can make it possible to cut interest rates as low as needed, without having to worry about people hoarding paper currency. The secret is that the central bank is promising to convert money in the bank into more and more paper currency in the future—at a more than 1-for-1 exchange rate, so storing cash is a worse deal than taking a negative interest rate in the bank but then being able to convert those funds into cash at a favorable exchange rate in the future. If interest rates later turn positive, this process can be reversed, or if necessary, it can go on indefinitely. I have personally visited central banks all over the world explaining such an approach, and take care to explain to central bank staffers and decision-makers how smoothly this can work.
When I visited the Bank of Japan in June 2013 to explain how to eliminate the zero lower bound on interest rates and use deep negative rates to revive the Japanese economy, the Bank of Japan wasn’t ready. Given the partial success that they have had with massive quantitative easing, and the dramatic election results it took to get to that far, I still don’t think don’t think the Bank of Japan is ready for deep negative interest rates. But that is the first step on Japan’s road back to a vibrant economy.
One thing I like in John Stuart Mill’s On Liberty is his consistent distinction between what deserves criticism from what deserves legal prohibition. Divorcing without sufficient cause someone who has been encouraged by fair promises to build their life on the assumption that a marriage will be lasting is a good example. Here is what he says in paragraph 11 of On Liberty “Chapter V: Applications”:
Baron Wilhelm von Humboldt, in the excellent essay from which I have already quoted, states it as his conviction, that engagements which involve personal relations or services, should never be legally binding beyond a limited duration of time; and that the most important of these engagements, marriage, having the peculiarity that its objects are frustrated unless the feelings of both the parties are in harmony with it, should require nothing more than the declared will of either party to dissolve it. This subject is too important, and too complicated, to be discussed in a parenthesis, and I touch on it only so far as is necessary for purposes of illustration. If the conciseness and generality of Baron Humboldt’s dissertation had not obliged him in this instance to content himself with enunciating his conclusion without discussing the premises, he would doubtless have recognised that the question cannot be decided on grounds so simple as those to which he confines himself. When a person, either by express promise or by conduct, has encouraged another to rely upon his continuing to act in a certain way—to build expectations and calculations, and stake any part of his plan of life upon that supposition—a new series of moral obligations arises on his part towards that person, which may possibly be overruled, but cannot be ignored. And again, if the relation between two contracting parties has been followed by consequences to others; if it has placed third parties in any peculiar position, or, as in the case of marriage, has even called third parties into existence, obligations arise on the part of both the contracting parties towards those third persons, the fulfilment of which, or at all events the mode of fulfilment, must be greatly affected by the continuance or disruption of the relation between the original parties to the contract. It does not follow, nor can I admit, that these obligations extend to requiring the fulfilment of the contract at all costs to the happiness of the reluctant party; but they are a necessary element in the question; and even if, as Von Humboldt maintains, they ought to make no difference in the legal freedom of the parties to release themselves from the engagement (and I also hold that they ought not to make much difference), they necessarily make a great difference in the moral freedom. A person is bound to take all these circumstances into account, before resolving on a step which may affect such important interests of others; and if he does not allow proper weight to those interests, he is morally responsible for the wrong. I have made these obvious remarks for the better illustration of the general principle of liberty, and not because they are at all needed on the particular question, which, on the contrary, is usually discussed as if the interest of children was everything, and that of grown persons nothing.
Nowadays, people are often advised that they must plan as if a marriage won’t last. That is not costless. For example, there are many important forms of relationship-specific human capital–knowledge and skills that are valuable if one stays with one’s current spouse but would not carry over to the next spouse. Acting as if a relationship won’t last inhibits the accumulation of such relationship-specific human capital, which in turn can make the relationship more likely to break up, in at least a partially self-fulfilling prophecy.
It is quite awkward to talk about divorce, since speaking of divorce as a failure seems like speaking against one’s divorced friends. But a divorce is a failure–just as a bankruptcy is a failure. People often pick themselves up and achieve success after a business failure, but that doesn’t make a business failure a good thing in itself. Similarly, people often pick themselves up after a divorce and make a good life for themselves thereafter (sometimes involving a second marriage and sometimes not), but the divorce itself was not a good thing unless something else worse than a divorce happened or was revealed before the divorce.
Of people I know who have divorced, I definitely think many of them have made the right decision. Yet I wonder how often everyone’s knowledge that divorces are relatively common on the part of at least one of the two spouses helped make things go bad enough that they got to that point–either because someone made an incautious choice of mate because they knew they could get out of the marriage, because the acquisition of relationship-specific human capital was inadequate, or because feasible efforts to work things out didn’t seem worth the heroic efforts required.
I wrote one post of marriage advice on Valentine’s Day 2014: Marriage 101. I consider research on how to make marriages better and more stable extremely important.
It is said that two heads are better than one. Two hearts are also better than one. Marriage has the potential to bring human beings to a higher plane. But its ability to do so is severely compromised if people bail out too quickly. Among many other things, a spouse is a mirror, who helps us see ourselves more clearly–the ugly parts of our souls as well as the beautiful parts. Besides its many other practical consequences, bailing out too quickly from a marriage makes it much less likely that one will deal with the ugly parts of one’s soul.
The Stratechery post linked above is a very interesting additional twist to the discussion I bulletpointed on robot cars in my post “The Economist on the End of Cars as We Know Them” three days ago.
One other idea that is missing from “The Economist on the End of Cars as We Know Them” is the idea that to the extent people don’t own cars, but use a different car for each trip, it becomes much easier to electric cars. For certain trips, the short range of electric cars is a big problem, but for many trips, it is fine. And a robot-driven car can look for moments in its many peregrinations when it is close to a fast-charging station. (If a robot-driven electric car is in use a really high fraction of the time, then it will be hard to find a time to charge it that doesn’t have a serious opportunity cost. So there will be a premium on fast charging. But the fast-charging stations can be fairly widely spaced apart since the robot-driven car covers a lot of ground. This means that high-fixed-cost fast-charging stations will make sense.
Leonardo Da Vinci’s “aerial screw” helicopter is the only type of helicopter designed early enough to have delivered Maryland’s 1733 monetary injection.
I am pleased to host another guest post by University of Michigan graduate student Owen Nie on monetary history. Don’t miss Owen’s earlier guest posts:
This one is drawn from Richard Lester’s chapter “Social dividend in Maryland in 1733” in Monetary Experiments: Early American and Recent Scandinavian (New York: Augustus M. Kelley, 1970, pp. 142-151).
Maryland, for the first thirty years of the 18th century, had been using tobacco, their main product for exports to Britain, as currency and the value of it naturally varied with world price of tobacco. In 1733 a bill was passed for 90,000 pounds of paper money to be issued, 48,000 pounds of which was an outright gift to the inhabitants in order for the monetary expansion to take effect swiftly; the rest was introduced as loans. This helped avoid diverting resources from tobacco plantations and revived trade. It would have had a greater effect had paper money been declared legal tender before 1747.
Between 1733 and 1747 tobacco, coins and paper money coexisted as monetary standards. The state ordered that some tobacco be burned in 1733 to increase its price. In 1748 Maryland’s paper currency rose to par in terms of British sterling and from 1764 remained on par with gold and silver despite a sequence of issuances. Both as a business practice for the government and as a stimulus for the private sector, Maryland’s monetary expansion was a remarkable success considering its faithful redemption, maintenance of value all the way through 1776 and benefits to trade and industry.
Google’s autonomous car. Image source.
On August 1, 2015, the Economist’s “The World If” column was titled “If Autonomous Vehicles Rule the World: From Horseless to Driverless.” Because I have had at the back of my mind the intention of writing a column on the coming transformation of automobiles, I could appreciate just what a wonderful article this is. I highly recommend it. Its thesis statement is:
… self-driving vehicles that can be summoned and dismissed at will could do more than make driving easier: they promise to overturn many industries and redefine urban life.
In bullet points, the support for this thesis statement is as follows (with a few comments of my own added in italics):
Linked above is an excellent post that says some things I haven’t managed to say very well in my posts on Mormonism, but have tried to circle around. You can see my attempts to make these kinds of points in these posts:
You might also be interested in these two guest posts about Mormonism appearing on this blog:
“[The story of Socrates] has defined for twenty-four centuries the essential components of the life of the mind: to wit, the ability to give a reasoned basis for belief and the quest to find the truth that lies behind appearances. His practice of asking embarrassing questions, even at the risk of personal loss, and even without hope of an immediate answer, is fundamental to what we are.”
– Harold Attridge, as Dean of the College of Arts and Letters University of Notre Dame. As quoted in Cultivating Humanity: A Classical Defense of a Liberal Education, by Martha C. Nussbaum, p. 266.
In the comment section of “Why Thinking about China is the Key to a Free World,” Kierto Duong claims that I underrate the Chinese government. The video above was a key part of his defense.
The video is somewhat off target for what I was saying in “Why Thinking about China is the Key to a Free World.” I never said that democracy was crucial to prosperity but that freedom is crucial to prosperity. The following passage in “Why Thinking about China is the Key to a Free World.” gives the working definition of freedom I am using:
When Dan Benjamin, Ori Heffetz, Nichole Szembrot and I surveyed more than four and a half thousand Americans about what they viewed as the most important objectives for public policy, the top two (of 131 choices) were “freedom from injustice, corruption, and abuse of power in your nation,” and “people having many options and possibilities in their lives and the freedom to choose among them.”
This pairing of responses shows an awareness of the danger to freedom from those who would organize the institutions of a nation to serve the interests of an in-group at the expense of an out-group. At the beginning of the struggle toward freedom, the in-group is very small and the out-group large. At later stages of the struggle toward universal freedom, the in-group will be large and the out-group small. But adding up across the world, it is not at all clear that a majority of the people in the world today can be called truly free.
This kind of freedom is not synonymous with democracy. In particular, I think the kind of counter-majoritarian rules in the Bill of Rights (including the 9th amendment to the US Constitution that suggests there are many, many other rights not explicitly listed) take freedom a long way beyond where it would be from democracy alone. And indeed, the US is now much less free than it might be because over time, majoritarian forces described in Barry Friedman’s excellent overview of Supreme Court history The Will of the People: How Public Opinion Has Influenced the Supreme Court and Shaped the Meaning of the Constitution have eroded some of the freedom-enhancing principles in the constitution.
Also, the United States would now be significantly more prosperous than it is if Franklin D. Roosevelt had not pushed the Supreme Court to abandon key principles of economic freedom. (The gold standard and other bad monetary policy ideas thus not only contributed greatly to Hitler’s rise to power but also to the erosion of key US constitutional principles.)
At the end of “Why Thinking about China is the Key to a Free World,” I give two examples of how freedom might be supported that are not about ordinary democracy:
So, as I advocated here in “Yes, There is an Alternative to Austerity vs. Spending: Reinvigorate America’s Nonprofits,” it is enough to use the arm of the government to require more substantial charitable contributions, while giving people wide latitude to decide which particular causes they want to support. This can both assist in things the government is now doing, such as taking care of senior citizens and supporting medical research, and begin to take care of things that should be done, but aren’t. With millions of people each required to do something, but allowed to think and decide for themselves what most needs to be done, the odds that the benefits of freedom and prosperity extend into all the nooks and crannies of society improve dramatically.
Finally, though efforts to measure national well-being in ways that respect the full range of things human beings care about are still in their infancy, there is hope that developing such measures as counterpoints to GDP can guide public policy toward ways of improving the quality of life in nations that use them in unexpected ways. Such measures of national well-being might also be used by autocrats to keep those they rule over just happy enough to forestall rebellion, but those rulers would be faced with this truth: people love freedom, and will never be content for long without it.
There is a lot to think about in trying to define freedom, but it is not synonymous with democracy.
I stand by my prediction that greater freedom in China would ultimately lead to more prosperity. But many of the key dimensions of freedom that would help China the most are not about democracy per se.
Hedy Lamarr, according to Wikipedia was an inventor first, actress second.
Hedy Lamarr, Inventor
Reblogged from asapscience.
I find Larry Summers’ argument in his latest Financial Times column linked above quite persuasive: that the Fed should wait until at least the beginning of 2016 to raise rates. In addition to assessing the economic situation, he points to a possible reason for bias in the Fed’s decision making that rings true to me. Larry writes:
I doubt that, if rates were now 4 per cent, there would be much pressure to raise them.
Although positive versus negative would be more salient than it rationally should be in any case, I think the zero lower bound makes a rate of zero seem more special than it really is. Knowing that the zero lower bound is a policy choice rather than a law of nature makes monetary policy choices at an interest rate more obviously like choices at a 4% interest rate. In either case, the decision should be made based on the behavior of inflation, output, and labor market measures, not on whether the interest rate seems high or low in an absolute sense. I don’t agree with Larry Summers’ take on what interest rates are likely to be once the economy has fully recovered, but his take point to the truth that there is great uncertainty about exactly what the medium-run natural interest rate and the long-run natural interest rate are.
And since there is still in all likelihood an output gap, the short-run natural interest rate could be quite a bit lower. See my posts
In addition to Larry Summers’ arguments for holding off on raising rates, I have a conceptually quite distinct argument: the Fed can afford to wait to raise rates, because it can always raise rates very fast if it needs to later on.
Contrary to what optimal control models suggest, monetary policy committees around the world tend to believe the fallacy that (although events can sometimes overrule this) it is a good thing to raise and lower rates slowly. This belief shows up as policy rate movements being predictably in one direction for a long time, with small steps along the way. Optimal control models suggest that instead a policy rate should look a lot more like a random walk modified by some drift and mean reversion. That means that optimal monetary policy should have lots of reversals and dramatic movements in the interest rate when there has been relatively big news since the last meeting.
Let me address one myth: that Mike Woodford has shown that interest-rate smoothing makes sense. I would be glad to be corrected, but I think this myth arises because Mike talked about the Fed carrying about affecting the bond markets (and more generally macroeconomic) expectations of future rates. Just as backward-looking state variables have forward-looking costate variables, bond market expectations are like a forward-looking state variable for the Fed; those bond market expectations have a corresponding backward-looking costate variable.
As an analogy, in working toward my dissertation, I did an unpublished efficiency-wage model (which you can see and freely download here) in which, to motivate workers with an expectation of future pay making a job valuable, there is a backward-looking costate variable that can be interpreted as “seniority.”
Such backward-looking costate variables giving guidance about doing the right thing in relation to bond-market expectations contribute additional drift terms to the optimal policy rate, but it still seems to me that over a six-week span of time between FOMC meetings, the variance of news is sufficient that the effect of news should typically be substantially larger than the sum of all drift terms on the policy rate. Hence the metaphor of a muddy random walk.
