What you see is what you get


Remembering 1971, Richard Nixon And Tariffs David Glasner? (Also, Don Trump Is A Creampuff)

A Benjamin Cole post

For people of a certain generation, the brilliant, cunning, yet curiously tone-deaf and self-destructive Richard Nixon, U.S. President (1969-1974), is a bottomless well of interesting stories.

Remembered by a dwindling few is that Sunday of August 15, 1971 when Richard Nixon slapped on a 10% tariff, or import surcharge, on nearly all goods entering the United States. Hard as it is to believe today, Nixon also instituted nationwide wage-and-price controls, and took the U.S. dollar off of gold.

And you think Don Trump talks tough? Nixon walked the walk.

Indeed, just a little bit of Camp David weekend work for Nixon, who took to the airwaves that summer evening to tell the American public,  “If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.”

Not only is Trump a piker, but he could take lessons from Nixon how to frame an argument.

BTW, top-blogger Scott Sumner will be especially appalled at this: The Dow Jones Industrial Average rose 33 points the next day on Monday, August 16, its biggest daily gain in history—history!—up to that point, and the New York Times editorialized, “We unhesitatingly applaud the boldness with which the President has moved.”

Balance Of Payments

There were always many reasons fair and foul for every Nixonian policy, and the “Nixon Shock” was no different. Nixon wanted to get re-elected, and was going for short-term gains.  Playing to the crowd was routine. (I will leave it to Scott Sumner to explain why Wall Street loved trade tariffs.)

But there was also a prominent economic theory of the time that chronic trade deficits impoverished a nation, even if free trade was a good idea. A nation running perennial trade red-ink, and consequent mounting debts to foreigners, would eventually face serous and sustained currency devaluation, meaning citizens could afford less on global markets.

Put bluntly, after the debt-reckoning, instead of traveling overseas and living like kings, Americans would stay home and clean hotel rooms for rich international visitors.


Indeed, it remains a curious feature of modern-day U.S. macroeconomics that federal domestic borrowing to run the national budget is roundly jeered, but trade-induced mounting debts to foreign powers are touted as a positive.

To be sure, the U.S. Federal Reserve seems to be able to print money to monetize debts, national and offshore, though that is hardly a popular sentiment in many circles. For now, I heartily recommend this solution, btw.

But the free-traders say worry not, that the offshore holders of trillions of trade-gained U.S. dollars must invest in the U.S., and that is a valid observation too—but if foreigners “invest” in the U.S. by buying bonds, it just means nationals owe foreigners money to maturity, or 30 years on long-term U.S. Treasuries. If foreigners buy dividend stocks, or property, then nationals owe them dividends or rents in perpetuity.

Americans may be cleaning toilets yet for offshore wealthies. The Chinese own the Waldorf, btw.


Sometimes you will read that that no one anymore bakes their own bread, fixes their own car, and slaughters pigs. So the software programmer trades his services for those goods and services, and everyone benefits. International free trade is like that, and everyone benefits.

But there is still an uneasy feeling.

Are U.S. citizens trading software programming to afford bread, auto repairs and pig-meat cutlets—but also mortgaging the house?

Only to the tune of $500 billion to $700 billion a year, the amount of recent U.S. trade deficits.

The free traders obscure that part of the analogy.


David Glasner blogged recently that free trade is perhaps the most gloried totem in all of macroeconomics.

Still, the advantages of free trade are theoretical, and the world is full of huge structural impediments and institutional imperfections.

Not only that, if free traders were truthful, they would concede that the U.S. economy is taking on mounting debts held offshore.

If you think pointy-headed academia is becoming hostile to non-PC ideas, then try telling modern-day macroeconomists that free trade as conducted today might not be great for the United States, that there may be immediate and also long-run consequences worth exploring.

Now that is a non-PC topic.

PS. Unfortunately, from an intellectual perspective the Nixon experiment with 10% tariffs was short-lived, only four months. After the tariff experiment, the real U.S. GDP expanded by 5.3% in 1972, followed by 5.8% in 1974, so if tariffs were harmful, it may not show up in the data. In fact, the GDP data looks great, but then perhaps without the tariffs the growth rate would have been higher.

PPS. It does seem free traders cite theory when theory works, and then structural impediments, when that works. For example, the U.S. dollar is a reserve currency, so the US can pay off foreign debts by printing money. That is a structural impediment, or institutional imperfection, that works in U.S. favor, often cited by free traders.

Why is the Fed ignoring its own data?

A James Alexander post

Back in 2014 the Federal Reserve boffins created a Change in Labour Market Conditions Index to check up on the changes in the state of the labour market. It is a broad diffusion index based on 19 underlying data components. It is clearly meant to provide a guide for progress towards or away from the “full employment” half of its dual mandate. It is released the day after the BLS monthly employment report. It monitors unemployment data, participation rates, wages, JOLTs and hiring expectations, etc. It is a very handy single number figure.

And it is not looking good. Monday’s release for March 2016 was the third successive month of negative change. It shows an eerily close relationship to the active monetary tightening undertaken in December by the Fed.


The Fed has chosen to ignore it. Why? We should be told. It’s one thing telling the market it is wrong, but quite another for a “data-driven” organisation to ignore its own data.

It’s the economic models not the dots that are the problem

A James Alexander post

There has been lots of chatter about the meaning and usefulness of the FOMC’s dot plots indicating future interest rates. Kocherlakota tried to help:

 The dot plot has two big perception problems. The first is the belief that it reflects officials’ interest-rate forecasts. It doesn’t. Rather, it shows what each participant thinks the Fed should do, based on his or her individual forecast of how the economy will evolve and what the optimal response would be.

The second issue is that investors tend to see the dot plot as a commitment about the trajectory of rates.

 I think the first point is a fairly fine distinction. There isn’t much difference between a forecast result and a recommended result if the forecast is made by someone in a position to influence that result.

The dots seem to me to be a bit of a sideshow, what is really important are the economic forecasts of RGDP, PCE Price Inflation and unemployment. If the FOMC projects that these indicators will all be above target in two years’ time then the market can only draw one conclusion – policy will be tightened.

Even on target projections can provide an interpretative challenge. Are the projections only on target because the FOMC has assumed rate rises to pre-emptively prevent an overshooting of targets?

What rightly concerns the market is that the FOMC appears to think it has to raise rates despite PCE Price Inflation well below 2% now. And, to a lesser extent, that the FOMC unemployment can now only go up from current levels.

The market can only infer that the FOMC thinks PCEPI will rise well above 2% in two years’ time unless it raise rates further, and that employment will not suffer from the rate rises.

The FOMC members must be very confident about the economic recovery and the future path of PCEPI and employment. The dots help the market interpret the confidence of the FOMC in its economic forecasts, with both scenarios of no rate rises and one including rate rises. The fact that the economic projections incorporate projections of rate rises means that the market is right to see the dots as a commitment to the trajectory.

The problem is the FOMC economic projections contrast with the much more cautious view of the market on the economy. Market implied expectations for PCEPI, through looking at always higher implied CPI, are much lower than the FOMC projections. And here lies the interesting and market-moving clash.

Are the FOMC willing to put their money, or rather decisions, where their mouths, or rather projections, are? Will they raise rates and tighten policy thinking that their own inflation projections are so far superior to those of the market?

If they do move to raise rates further this will be seen as damaging the economy as evidenced by the markets dropping further.  The FOMC says it is data-driven, but is highly selective in the data it chooses. Historic, open to revision and question, data is OK for them to observe, but data that indicates the best guess of hundreds of thousands of investors about the likely future such as market prices is ruled out. The market then worries that the FOMC will only react to the damage that they have caused when the economic data continues to follow current weak trends, or worse.

Alternatively, if the FOMC holds off from rises then the market will wonder what it is that they are looking at if not their own economic forecasts. This is the heart of the FOMCs credibility problem. The markets see the FOMC as an unreliable friend, the FOMC sees markets as unreliable, period.

The FOMC raises its economic projections above the market´s and then sometimes use them to justify a monetary policy and sometimes lay them to one side. The FOMC may be right to ignore its own projections, Market Monetarists and others certainly think that, but it should then acknowledge that it has done so and that it has become less certain about its economic models. Market Monetarists and the market in general, have seen the Phillips Curve discredited time and time again but the stubborn sticking to it by the consensus at the FOMC and consensus macro means that their credibility is very low, and hence confusion reigns. Confusion about the dots is merely a symptom of this wider confusion. The dots are blameless.

Getting rid of the dots as some have suggested or amalgamating them into one projection will not get rid of the faulty models. And the market will anyway continue to speculate on the future path of the target Fed Funds rate. The UK has no dot plot or rate projection, but the market has created an implied one. The BoE even uses it in its models in a bizarre game of cat and mouse, both steering the consensus and decrying it when out of kilter with its own best guess.

FOMC splits, and it is a good thing!

A James Alexander post

It had already been argued here last month that the FOMC looked like it was splitting judged by the January 2016 Minutes. We said that this was a good idea given the hopeless leadership from the Yellen/Fischer axis.

It has also been looking like William Dudley, newly reappointed as governor of the NY Fed, has been expressing the market views even more clearly. Letting markets set monetary policy is a good thing, the sum of all views and not just those of a few people sitting on a committee.

Well, it looks like the split has come to pass. The newswires were hot when Brainard gave a clearly dovish speech earlier this month the very same day as uber-hawk Fischer tried to claim that inflation was about to accelerate out of controlfour more hikes .

With hindsight, the particularly old school speech Fischer gave to the NABE looks to have been even more of a retirement speech than it read at the time. His disastrous “four more hikes” interview in early January has damaged his credibility beyond repair, his retirement cannot come too soon.

As we argued in February, especially after looking into Brainard’s biography she is a deeply political figure, very close to the Clintons. If Hilary is to win the election only a fool or an inflation hawk (they are often the same) would think that tightening monetary policy is a good thing. Just to be clear, Market Monetarists are hawks too, whenever nominal growth is persistently above trend.

If we are right and politics has split the FOMC then we are in for a really good spell of dovish monetary policy out of the Fed. Yellen’s comments today show either someone confused, covering up a split or secretly supportive of the splitters – and against the Fedborg and their “normalisation” mania (remember that).

She said nothing much had changed on fundamentals but the FOMC wanted to be more accommodative.

She said that the FOMC had declined to declare where the bias on risk was because some thought them balanced but some thought them to the downside (ie the splitters) – “there is no collective judgement in this statement … we declined to make a collective statement”.

She said that the things pushing up core CPI were volatile – but the normal view is that core excludes volatile items.

Who cares for now. Looser monetary policy in an environment of weakening NGDP growth has to be a good thing.

The splitters need to build on their success by shifting focus to NGDP Growth targets and away from targeting, unmeasurable, inflation.

Market Monetarism & Divine Coincidence

Tyler Cowen wrote How tight is monetary policy now?, and some remarks on ngdp and market monetarism:

Given that I don’t see monetary policy as so tight right now, I suggested that if we have a recession it was likely to be a risk premium recession.  The big uptick in gold prices is consistent with this view, though hardly proof of it.

So what is the context here?  I am worried that if the United States has a recession this year (still unlikely, in my view, but maybe 20%?), that recession will be blamed on “tight money.”

To get more specific yet, I am very much a fan of the ngdp rule approach to monetary policy, but I am uncomfortable with one strand in market monetarist thought.  I worry when low ngdp growth is blamed for low growth rates of real gdp.

I don´t understand Tyler. After all, in Chapter 12 of his Modern Macroeconomic Principals textbook “Business Fluctuations and the Dynamic Aggregate Demand-Aggregate Supply model”, we see variants of this chart (AD is given by the growth of NGDP as in m+v=p+y, (where lower case letters denote rates of growth):


From the chart, you see that a fall in NGDP growth results in lower RGDP growth (and lower inflation).

Nick Rowe commented in Targeting, Tautologies, and Double Divine Coincidence  concluding:

  1. Now what is really weird is that the real world did in fact seem to be a place where double divine coincidence were true.Until it wasn’t. An outside observer, who did not know that central banks were targeting inflation (OK, it was CPI not GDP deflator inflation), and who mistakenly thought they were targeting NGDP instead, would infer from the data that stabilising NGDP did indeed seem to be consistent with stabilising RGDP, and that the NGDP version of divine coincidence were true. Furthermore, that outside observer would see no reason to change his mind since the recent recession. It is the P version of divine coincidence that has failed empirically, when we look around the world. The NGDP version of divine coincidence is hanging in there.

He had written up on that a few years back:

Inflation targeting seemed to work pretty well, and the theory about why it worked pretty well came after, not before, the policy itself. But any outside observer, who looked at the data, but didn’t know that the Bank of Canada said it was doing IT, could equally well have asked: “Why does PLTwork pretty well?” or “Why does NGDPLT work pretty well?”. But nobody asked those questions, of course. Since the Bank of Canada said it was doing IT, it must be IT, rather than PLT or NGDPLT, that seemed to work pretty well. With hindsight, we were daft, because we let the Bank of Canada frame the question for us.

All we know from 1992-2008 data is that either IT or PLT or NGDPLT seemed to work pretty well, but we don’t know whichIt took a shock to let us see the difference.

Since IT seemed to work pretty well, and I never thought that maybe it was PLT or NGDPLT that seemed to work pretty well, I became a supporter of IT.

Then the facts changed.

And I had provided some illustrations in 3 Dogs, two didn´t bark.

And this post provides what I believe is great visual evidence in favor of the NGDP version of “divine coincidence”, which I reproduce here:




Soon meteorology will be required credit for economic majors

In the first quarter of last year and the year before, “unusually bad weather” was deemed responsible for the negative growth surprises.

The “weather factor” is becoming more common.

Example 1:

In addition to seasonal effects, abnormal weather can also affect month-to-month fluctuations in job growth. In my paper “Weather Adjusting Economic Data” I and my coauthor Michael Boldin implement a statistical methodology for adjusting employment data for the effects of deviations in weather from seasonal norms. We use several indicators of weather, including temperature and snowfall.

Example 2:

As for the slight slowdown in consumption at the end of 2015, December was both the warmest and the wettest on record. The warmth reduced spending on heating; the wet may have kept people indoors. Spending at restaurants fell by 1.7%, notes Paul Ashworth of Capital Economics, a consultancy. Now that the heavens have closed, wallets should reopen.

Agree that sometimes it´s a fun read!

The Fed Shows Class Bias?

A Benjamin Cole post

In general, the “class glass” is a poor lens for analyzing U.S. politics and macroeconomic policies.  To be sure, the nation has interest-group politics in spades, and groups are often well-financed.

And certainly, whenever past Dallas Fed President Richard Fisher sallied forth there was the potential for embarrassing spectacle, as when he held a press conference to condemn wages rising faster than prices. Or to warn that rising prices of antiquarian collectible books harbingered an inflation that merited a tighter monetary noose immediately.

But, in general, does Fed monetary policy exhibit class bias?

Perhaps So

Think about two aspects of Fed policy: The Fed appears committed to keeping (at a minimum) about one out of 20 Americans who want work to being unemployed, and now has committed to paying 0.50% interest on excess reserves (IOER), regardless of how much capital is surplus.

On jobs, the picture may be worse than at first blush. According to JOLTS data there are 5.3 million job openings in the U.S., but the number of unemployed is 7.9 million at latest read, and that excepts the millions who have given up looking for work. There are still, in aggregate, more people who want work than available jobs, and this appears at least partially the result of official Fed policy. People who want to work get to play musical chairs. No class bias? Would the AFL-CIO endorse such a policy? Would any job-hunter?

On IOER, the question can be asked, “Have those with money to save demanded a return on ultra-safe short-term savings—market forces be damned—and has the Fed complied?”  To be sure, there has been a constant chorus from some quarters that the Fed is engaged in “financial repression”—that is, holding down interest rates. There is a vocal, influential tribe in the U.S. that at any moment calls for tighter money, with the servile organ of The Wall Street Journal op-ed page ever available.

An earnest question cuts the other way as well. Without the Fed’s “reverse repo” program, what would be short-term interest rates today? Rates are negative through much of the developed world.

Of course, the proposition that the Fed’s 0.50% IOER is merely interest group politics, and capture of regulatory agency (the Fed) by the regulated (the banks) is a viable one as well.


The policy-making Federal Open Market Committee does not have a “labor” seat, or seats from the manufacturing, real estate, agriculture, or tourism industries.  To say the financial industries are influential at the Fed would not be provocative.

Do influential financial industries create proxy for class bias at the Fed?

It is a reasonable question.


From the St. Louis Fed, here are the PCE Deflator figures, chain-type index, for the last two years. It shows a 1.54% increase in prices in the last eight quarters. That is not per quarter; that is total. That is about 0.75% annual inflation, or not even 1% annual inflation.  The Fed has proposed four rate increases in 2016. Really?

2013-10-01  108.108

2014-01-01  108.540

2014-04-01  109.117

2014-07-01  109.441

2014-10-01  109.322

2015-01-01  108.795

2015-04-01  109.391

2015-07-01  109.740

2015-10-01  109.775