Ed Yardeni And Scott Sumner

A Benjamin Cole post

Market Monetarist don Scott Sumner has indirectly responded to Ed Yardeni’s surmising that it is secular stagnation and weak demand that is causing the crummy U.S. productivity stats.

Sumner notes official unemployment rates have been falling, hard to square with sluggish AD causing schlumpy productivity.

But what if I told you Americans are working about the same number of hours in aggregate today as in 2007…and in 2000?

BC Productivity_1

For Q1 2016, the index of hours worked nationally in the United States private sector was 112.3. It was 110.2 in Q2 2007, and 109.2 in Q2 2000. That is 16 years of essentially no employment growth in the United States. There is plenty of capacity, even in labor, on the sidelines.

BC Productivity_2

And above is output per hour. It flat-lines after 2010.

So, as a nation, Americans are working about as many hours as 16 years ago, and output per hour has not risen much in the last six years.

Does that strike anyone as an era of robust AD?


The last 16 years sure looks like an economy limping along.

Maybe a surge in aggregate demand—helicopter drops, for example—would not boost productivity, and would only boost employment and total hours worked. Boy, what a terrible outcome!

Or maybe productivity is sluggish as labor is cheap. Employers just add some bodies on to meet the small increases in demand.

As a counter-example, if the U.S. eliminated the minimum wage, it is likely productivity would drop, even as employment surged. But aggregate demand could stay weak, even with the decrease in unemployment.


The truth is, aggregate demand is weak globally, which is why economies everywhere are waterlogged with capacity, especially China and Japan, which have built up exporting industries to service world markets.

If global aggregate demand is weak, does that not suggest a universal condition, such as tight major central banks?

Are bond yields low?

In a recent post, Scott Sumner argues that they are not particularly low conditional on NGDP growth.

The chart shows that for a long time bond yields have been falling together with the fall in inflation expectations (from the Cleveland Fed), which were converging to the 2% “target”.

Falling Idol_1
Since the Great Recession ended , however, there has been a disconnect, with the yield continuing to fall while inflation expectations, although below target, have remained stable.

This disconnect can be attributed to the low growth of NGDP which, after tanking in 2008 has never “tried” to get back on the “saddle”. The chart illustrates.

Falling Idol_2

Once the recovery began in mid-2009, NGDP growth accelerated. After mid-2010 it “tapered off”. So there would be no “catch-up” growth. The NGDP growth chart illustrates.

Falling Idol_3

With inflation expectations below target and expectations of low nominal and real growth going forward, there´s no reason for yields to rise! And so they fall. Notice that the start of the rate hike talk in mid-2014 clinches the “low nominal growth-low inflation-falling yield” scenario.

Falling Idol_4

PS Tim Duy has a good post. On John Williams:

Williams gives his view of the disconnect between financial markets and the Fed:

In term of the private-sector forecasts, I think it’s very hard to fully understand what the Fed’s decision-making is given that we haven’t done many active policy steps in the last few years. I mean we did obviously as I mentioned the asset purchases during that period, but since we’ve ended that, we talked a lot about raising rates, we’ve given a lot of “dot plots” about raising rates, we did one rate increase in December, but then it has been over six whole months since then, and – I try to put myself in the shoes of a private sector forecaster – one of the hard things to do is kind of see what is our reaction function. What is it that is driving our decision?…

…Right now we’re just in a situation where there is just not a lot of data on actual actions because, for various reasons we’ve held off a long time on our first rate increase and then we held off so far on a second rate increase.

This I think is wrong; lack of action is a policy choice as much as action. Williams seems to think the only useful information about the Fed’s reaction function comes when the Fed changes rates. This implies that holding policy steady conveys no information. I would argue that steady policy is in fact signaling the Fed’s reaction function, and hence, in combination with the data flow, financial market participants are concluding that the Fed will continue at a glacial pace regardless of what the “dots” say. Indeed, I would say that financial market participants are signaling that the Fed’s stated policy path would be a policy error, an error that they don’t expect the Fed to make. I guess you could argue that the market doesn’t think the Fed understands it’s own reaction function. And given the path of policy versus the dots, the market appears to be right.

“Shake, Rattle & Roll”

Scott Sumner throws the “supply-side curve ball”:

But some Keynesians keep pretending that demand is the only problem facing the world.  It’s not; the supply side has been gradually deteriorating for more than a decade.  Brexit will make this problem even worse.

Meanwhile, Bernanke prevaricates:

Political outsiders have had quite a good year in the United States (and elsewhere), and many pundits have attributed their success to voters’ profound dissatisfaction with the economy. Certainly there is plenty to be dissatisfied about, including growing inequality of income and wealth and stagnation in real wages. But there are positives as well, including an improving labor market, low inflation, and low gasoline prices. How do people really feel about the U.S. economy?

[Unfortunately, all the “positives” are a consequence of his monetary policy errors]

And concludes:

In a highly polarized environment, with echo-chamber media, political debates often become shrill, and commentators and advocates have strong incentives to argue that the country’s future is bleak unless their party gains control. In this environment, it seems plausible that people will respond more intensely and negatively to open-ended questions about the general state of the country, while questions in a survey focused narrowly on economic conditions elicit more moderate responses. Without doubt, the economic problems facing the country are real, and require serious and sustained responses. But while perceptions of economic stress are certainly roiling our national politics, it may also be that our roiled politics are worsening how we collectively perceive the economy.

[More likely, it is the way we collectively perceive the economy that is shaking our politics]

For many years (decades in the case of the US and UK) before the “crisis”, the big developed economies (ex-Japan) were doing well. There was no suggestion of “new normal”, “great stagnation” or “depression”. The “supply-side” seemed just fine. Suddenly, almost as if central bankers were perfectly “coordinating”, those economies were walloped!

The first panel shows how central banks were de facto targeting NGDP-LT. The result was nominal stability (that includes low/stable inflation). Maybe because they thought they were targeting inflation, when oil prices pressured headline inflation they simultaneously freaked.

Shake Rattle & Roll_1

When central banks pulled up the hand brakes with force, the real economy was squeezed. As I argued here, the Fed (and the other central banks) seem to be happy with where the economies are. And if they are happy, that´s where they will stay, mired in depression. Note that the EZ central bank even acted more destructively, bashing a weekend economy over the head after it had already fallen to its knees.

Shake Rattle & Roll_2

Shake Rattle & Roll

Market Monetarism needs people to predict recessions … and growth

A James Alexander post

Scott Sumner made a somewhat light-hearted comment in a recent post that “no-one can predict recessions”. It made me stop and wonder what was the point of Market Monetarism in that case. The essence of MM is that market forecasts of NGDP Growth should guide monetary policy, should be monetary policy. Fair enough. But does this imply, in the case of a negative demand shock, which increases money demand, an immediate increase in base money supply? Perhaps it does and we will all be very happy.

In our imperfect current world where the monetary authorities seem to mostly target less than 2% Core CPI two years out, the markets will still anticipate the impact of this goal on monetary policy and therefore on both real and nominal economic activity.

But markets are nothing more than numerous individuals, or trading robots programmed by individuals, making investment decisions. Some will certainly forecast recessions and invest appropriately. Is Scott saying that these people are inevitably going to be wrong? The Efficient Market Hypothesis (EMH) may say that it is impossible to be right all the time, to consistently beat the market, but it doesn’t and won’t stop people trying.

Indeed, people have to try to forecast the future or Market Monetarism would not work. You have to have markets for Market Monetarism. Scott has correctly advocated a specific market for NGDP Futures, but all financial markets are essentially futures markets, in the sense of forecasting or predicting future streams of revenues from assets, either income or some capital gain.

Is Scott saying no one can forecast future streams of revenues?

Perhaps he is just being careful, like most academic economists. The most famous economist of the twentieth century, J M Keynes, was of course famous also for his financial acumen. Putting his money where his mouth was, or at least putting his money to work in a highly successful way. Perhaps he made his pile by inside information, who really knows, but successful at forecasting asset price movements for money he certainly was.

How a myth is born

Bernanke HeroFirst, you get a “The Hero” magazine cover


Bernanke Person of the YearThen you get to be Person of the Year

Bernanke Hero1

And finally, you write a memoir titled “The Courage to Act”



and voilá, the myth is born!

The latest invocation comes from Simon Wren-Lewis:

Here is an extract from an interview with Ben Bernanke by George Eaton in the New Statesman:

Though a depression was averted in 2008, the recovery in the US and the UK has been slow. Bernanke partly blames the imposition of fiscal austerity (spending cuts and tax rises), which limited the effectiveness of monetary stimulus. “All the major industrial countries – US, UK, eurozone – ran too quickly to budget-cutting, given the severity of the recession and the level of unemployment.”

Partly thanks to Bernanke’s leadership (and knowledge), the Great Recession was not as bad as the Great Depression of the 1930s. Monetary policy reacted much more quickly, and financial institutions were (nearly all) bailed out. In 2009 we also enacted fiscal stimulus, but in 2010 we reverted to the policies of the early 1930s with fiscal austerity. That mistake was partly the result of panic following events in the Eurozone (see the IMF analysis discussed here), but it also reflected political opportunism on the right.

However, as Scott Sumner concludes in a recent post:

That’s why it’s so important to get the facts right. Just as the Abe government showed the BOJ was not out of ammo in the early 2000s, a close examination of what the Fed did and didn’t do, and a cross country comparison of monetary policy during the Great Recession and recovery, shows that monetary policy is always and everywhere highly effective.

What are the facts?

The chart shows that during the first few months of the Great Depression (GD) and the Great Recession (GR), the behaviour of NGDP was similar.


After that, things were very different. What Bernanke´s knowledge did was to apply the results from his “made my name” 1983 article “Nonmonetary effects of the financial crisis in the propagation of the Great Depression”, by going on a bank bail-out spree, thus avoiding the propagation factors that were very “active” in 1931/32.

The charts from the Great Depression indicate what Bernanke avoided. They also show that to get the economy to “turn around” and take a path back to the previous trend, monetary policy has to be really expansionary. That was true even with interest rates at the ZLB, as happened when FDR made a significant change in the monetary regime, cutting the link to gold in March 1933, almost four years after the start of the depression! NGDP growth went up by enough to put the economy on the path back to trend.


The next charts show what happened now. Notice that in the early 2000s, Greenspan also allowed NGDP to drop below trend, but that mistake was fully offset, and by the time Bernanke took the Fed´s helm. NGDP was back on trend.

Without going in to all the details, the fact is that Bernanke allowed NGDP to fall in “Great Depression style”. As mentioned, he avoided a second “GD” by bailing-out the financial system. In addition, by introducing QE in March 2009, monetary policy reacted much more quickly than in the “GD”.


However, notice the difference. In Bernanke´s case, monetary policy was just sufficient to put the economy on a growing trend along a lower level path. It never tried, as happened after March 1933, to get back to the original trend path. Thus, the economy is stuck in a “lesser depression” a.k.a. “Great Stagnation”.

And that really has nothing to do with fiscal policy.

Don’t base monetary policy on unreliable data

A James Alexander post

Scott Sumner, like many, was very taken with the latest average hourly earnings figures. The tick-up seemed to be breaking a very dull trend and taking the growth rate back up to the heady heights of 2007.

Unfortunately, the series he used – average hourly earnings for all private sector employees, seasonally-adjusted – only goes back to 2007. The much more traditional series for private sector non-supervisory and production employees goes back to 1965. This chart is perhaps a better guide to the long-run trends. It is far harder to spot any significant trend breakout.

JA Wage Growth_1

Also, the bigger data set includes many more service sector employees where hourly earnings aren’t a particularly relevant measure of pay. There are 120 million total private sector employees, but only 20 million of them who are outside (above?) the non-supervisory and production category.

It should be a simple matter to check the average hourly earnings of the 20 million supervisory and non-production workers but it isn’t. There doesn’t seem to be a dataset released for that, indicating to me at least that it isn’t a robust data set. It’s not on FRED and it’s not even on the Bureau of Labour Statistics website. There are some (very old) discussions about how the hours for this segment are calculated, but not a lot of recent statistical material, if any. I think this makes it highly dangerous to rely on the all private workers average hourly earnings growth figures.

The seasonal adjustments may also be harder to do and often lead to large revisions. The non-seasonally adjusted version of Scott’s chart looks a lot less compelling.

JA Wage Growth_2

In the absence of any guidance from the BLS that I can find I did a some simple calculations to find out the average weekly pay of the “white collar” employees. It is more than twice that of the “blue collar” staff.  And the gap must be growing given the recent trends in the two indices in the first chart. If I was to derive a longer term chart for the growth in “white collar” average earnings per hour then I bet I would find a very volatile series indeed. The question is then: should this highly volatile, not particularly robust, sub-series drive monetary policy? Of course, not.

JA Wage Growth_3

All this discussion is a bit beside the point given the horribly low and lower overall inflation figures and the negative growth  in US$ base money. The Fed is still wedded to the output gap/Philips theory of inflation and it has been proven wrong – no respectable mainstream economist who believes in basic macro would have predicted a halving of the US unemployment number without a major rise in wages. They (and the central banks) need to rethink their macro, it is time for them to ‘fess up and stop worrying about such ad hoc concepts as “secular stagnation”. Just as the inflationistas have had to rethink their understanding of macro – I should know, I used to be one. Money drives nominal growth and wages, and good nominal growth allows strong real growth.


Unheeded Lesson

After doing their usual GDP autopsy in “It May Sound Disappointing But It’s Not!”, Thomas Cooley and Peter Rupert write:

It is clear that the U.S. economy is continuing to grow. That consumption and basic investment are strong is a sign that the domestic fundamentals are pretty strong. Real disposable personal income increased by 3.5%. Declines in the energy sector have held back investment in non-residential structures and equipment and that doesn’t promise to improve in the near future…

… There is a growing chorus of people who believe that they are doing unseen harm by not normalizing monetary policy. There will be a couple more employment reports and the second estimate of Q3 GDP before the next FOMC meeting in mid-December, so time and data will tell!

Now for the unheeded lesson: GDP=C+I+G+(X-M)=Grossly Deceptive Partitioning:

When I discuss the effect of monetary stimulus on aggregate demand with other economists, I notice that they often want an explanation couched in terms of the major components of GDP.  I find this very frustrating, as this approach does more to conceal than illuminate…

… Macroeconomics should be about aggregates, not components of spending.  Yes, changes occurring in the various components of GDP can impact interest rates, and thus velocity.  And if monetary policy is inept (i.e. doesn’t offset changes in velocity) that can impact nominal spending, but it certainly isn’t the most illuminating way of looking at the issue.  It’s like trying to explain changes in the overall price level by modelling changes in the nominal price of each good—theoretically possible, but a waste of time.

And what are the aggregates saying? They are reflecting the visible harm monetary policymakers are making through tightening monetary policy by “word of mouth”!

Echoing Friedman, Bernanke once said: To gauge the stance of monetary policy, look at what´s happening to nominal spending (NGDP or Nominal Final Sales, for that matter) and inflation.

And the message is clear!

Pill to swallow

The “Big, Blunt Instrument”!

Yellen Has Over 6 Million Reasons to Take Her Time Raising Rates:

Yellen’s focus on the under-employed is steering monetary policy toward a bold experiment: The Federal Open Market Committee will use the big, blunt instrument of low interest rates to push the jobless level low enough to pull more labor-force quitters and part-timers back into full-time work.

The hope is that it will kick-start a virtuous cycle of investment, higher productivity and better pay that will heal the vestiges of the worst recession since the Great Depression.

It’s a “new view of the reach of monetary policy,” said Laurence Meyer, who served on the Fed’s Board of Governors with Yellen in the 1990s. It “goes against everything I taught at the university for 27 years.”

Most (all) of the people involved in the 1929 and 1937 BIG monetary mistake are dead. But history books, contemporaneous articles and “modern” analysis are still available (a new item, Scott Sumner´s opus on the Great Depression will be available December 1). Therefore, to call low (“zero”) interest rates a “big, blunt instrument” is hilariously shocking!

Monetary offset: the matrix

A James Alexander post

Market Monetarists make a big deal about automatic offsetting of fiscal easing by independent central banks with Inflation Targets. There has been a lot of debate about it but not much agreement. I have tried to simplify the picture through this diagram.

The quadrants represent the four combinations of monetary and fiscal policy.

Too Hot

There is widespread and justified fear of the top left quadrant, easy monetary and fiscal policy. It hardly ever ends well. The most extreme case being Germany in 1923 but there are many modern examples. The minor regional spat in the UK over Corbynomics and Peoples’ Quantitative Easing (PQE) shows that the idea of government’s taking control of monetary policy and just printing to pay for spending is still seductively attractive. It will produce higher inflation and higher nominal GDP, but results in a collapse of RGDP as entrepreneurs and wealth flee the country. It would also make accusations that recent conventional QE results in some winners and some losers seem trite, and it is in fact not true. Whereas governments who hyperinflate always reward favoured special interest groups with new money first. Ironically or, rather, tragically, Greece has long had a very famous tradition of paying the army first and police with new funds. The rule still persists today as the end-result of hyperinflation is so often a breakdown of law and order so the government needs to protect itself above all else.

Too Cold

It is hard to believe that any country would voluntarily put itself in the lower right quadrant of having both contractionary monetary and fiscal policy. However, the EuroZone as a whole in 2008 and more seriously in 2011 was firmly in this horrible position. There was one rate rise in 2008  in the midst of collapsing economic expectations and constant calls for fiscal discipline. There were even two rate rises in 2011 in the midst of quite serious reductions in fiscal spending or technically speaking, cyclically adjusted primary balances (CAPB).

Why did they do this? The still largely experimental monetary union of the EuroZone has too many chefs and too diverse a set of economies. Fortunately, this is all water under the bridge now,and policy seems set much better now under Draghi and the current QE. It will still be a painfully slow recovery as in the US because of the Inflation Target Trap (ITT),but it is better than not doing QE.

Dead End

It is also hard to believe any country or currency bloc would voluntarily go into the lower left quadrant, with a fiscal policy set for expansion but a monetary policy set for contraction. Again, we see it too often, This is the classic monetary offset of Scott Sumner whereby fiscal expansion is deliberately sabotaged, or just unconsciously sabotaged, by central banks with inflation targets. Expansionary fiscal policy shifts demand curves to the right but contractionary monetary policy shifts it back down again. Independent central banks do it actively, or in their sleep, or markets think they will and so it happens. Bizarre, but true.


The upper right quadrant is by far the least bad of the four as monetary policy demonstrably offsets contractionary fiscal policy, if such a policy has been decided upon by the politicians. It’s not great but an acceptable way out of recession, once the initial shock is over. Better, of course, not to have the recession in the first place.


Not on the quadrant is the best situation, akin to the Great Moderation, where the real economy grows at a reasonable pace and the central bank maintains stable nominal growth too.

La la land

A mythical section that many Keynesians flirt is one where monetary policy is powerless to be expansionary. The famous Zero Lower Bound. QE and now negative interest rates have demonstrated that in practical terms monetary policy is never out of ammo. Too often central banks are out of the will to use the ammo at their disposal – trapped by Inflation Targets,and Inflation Targets morphing into Inflation Ceilings.


A common criticism comes from Keynesians who suggest darkly that Market Monetarists actually don’t approve of fiscal easing at all. But that is a separate question where there is a range of views. Scott Sumner has made it clear that he thinks fiscal easing via tax cuts, particularly employer payroll taxes, is preferable to additional spending. Some Keynesians agree with this too (eg Ralph Musgrave here). 

I tend to agree with Sumner because I, like most of those in financial markets, do not regard the government as particularly effective at spending.  There are few empirical studies, but plenty of anecdotal evidence, that governments find it hard to deliver large projects, on time, on cost or even at all. Governments find it hard to “pick winners”, and usually just get captured by fast-talking charlatans. Increased spending on the two biggest areas, education and health, may have benefits but there are many arguments about how that  extra spending has a multiplier above one, even in the absence of monetary offseet. Fears centre around “capture” of additional resources by various internal interest groups without any additional output. “Value for money” being the issue as good cost/benefit analysis is rarely undertaken. Increased spending on welfare, ie government transfers, obviously does not boost GDP as it not part of GDP.

To be balanced, the evidence seems to be that tax unfunded, employee-side or business, tax cuts doesn’t lead to a lot of extra growth. Whether that is due to monetary offset coming into play or because the supply side benefits not coming through is unclear.

UK academic economists should (and need to) work with markets not ignore them

A James Alexander post

Tony Yates has directed me to take a course in monetary economics. It seems like it would last a year at least. I would then be better able to understand the deep and meaningful research that tackles the Market Monetarist questions posed by me in a comment on his blog:

“Most of them are discussed at length in the applied monetary econ literature. Many not resolved conclusively. If someone paid me to do this, I would take you through it all, but it would take a couple of terms to take you through it. But don’t fire them thinking that somehow these are great mysteries central bank economists aren’t already thinking about, and that aren’t already dealt with in frameworks they are given and how they are applied. They are.”

For what it’s worth, I did take the shorter, but still challenging course on Scott Sumner’s blog, as well as slogging through a BSc Econ more than a few years ago.

I think Yates’ course might be interesting but would it really help me with my questions.. The blogsphere is alive with debate on them and sometimes academic papers are referred to, but most seem unsatisfactory in one way or another.

Anyway, would they help answer this question: Would you ever create a model that included occasional, but deeply random tightening and loosening of monetary policy by central banks?

To this one he answered: “Yes, if you thought central banks faced measurement error in real time, or changes in committee membership that meant changes in the preferences of the median committee voter. Have a look. Large literature on just that.”

However, this misses the point somewhat. It is not just a “measurement error in real time” that markets are dealing with. They want to know: What is the Fed or the BoE trying to measure? What are they targeting? These are deeper questions than mere “measurement error”.

And why have central banks picked 2% as the inflation target? Where is the rigorous model on that? Where is the academic model for that 2% becoming a ceiling?

The market understands all this confusion, or as Yates’ sweetly put it “many [questions are] not resolved conclusively”. The markets actively try to sum it all up in prices, in real time. Yates et al’s beloved “long and variable lags” are merely the arithmetical part of the markets’ realtime NPV calculations.

So why not use that market consensus, on the state of the economy (aka “real time measurement error”) and the state of mind of the central banks (aka “changes in committee membership that meant changes in the preferences of the median committee voter”),  to steer monetary policy. That is, use targeting of market forecasts for NGDP Level Growth?

Why the fear of markets?

It’s a real puzzle. I suspect many academic economists, UK ones especially, under-rate the market because they are so far removed from it. Most have final salary pension schemes, or presumably like Yates, also Bank of England/civil service like gold-plated, index-linked, unfunded ones. They think they have no direct stake in the markets and end up being dismissive of the whole thing.

I would recommend they go and sit and ponder the £5bn deficit in the academics’ own pension scheme and worry about how to fund those far-off liabilities, the ones linked to future inflation and future interest rates and many, many other assumptions about the future. And find investments that can deliver against those assumptions in a low-risk, low volatile way, via real financial and other assets. It’s tough.

Great and serious minds worry about this question. UK academic economists seem oblivious, yet their financial future rests on their fund making the right investments. On forecasting how markets will turn out. It’s not just an academic exercise but a real one. Markets are for real people like you, too, not just speculators.

Of course, maybe they expect the government to nationalise the university scheme like it did with the UK Post Office, take the assets, reduce the public sector debt and just add yet more unfunded liabilities onto the state sector balance sheet. Or rather off the balance sheet. Nationalisation would reduce some risks as it would provide a state guarantee. But what will the guarantee be worth it in 30 years time given the restrictions already starting to be imposed? Not trying to worry you guys or anything.