The Grumpy Economist

This post is from a set of comments I gave at the NBER Asset Pricing conference in early November at Stanford.  Conference agenda here. My full slides here. There was video, but sadly I took too long to write this post and the NBER took down the conference video. 

I was asked to comment on "Downward Nominal Rigidities and Bond Premia" by François Gourio  and Phuong Ngo. It's a very nice clean paper, so all I could think to do as discussant is praise it, then move on to bigger issues. These are really comments about whole literatures, not about one paper. One can admire the play but complain about the game. 

The paper implements a version of Bob Lucas' 1973 "International evidence" observation. Prices are less sticky in high inflation countries. The Phillips curve more vertical. Output is less affected by inflation. The Calvo fairy visits every night in Argentina. To Lucas, high inflation comes with variable inflation, so people understand that price changes are mostly aggregate not relative prices, and ignore them. Gourio and Ngo use a new-Keynesian model with downwardly sticky prices and wages to express the idea.  When inflation is low, we're more often in the more-sticky regime. They use this idea in a model of bond risk premia. Times of low inflation lead to more correlation of inflation and output, and so a different correlation of nominal bond returns with the discount factor, and a different term premium. 

I made two points, first about bond premiums and second about new-Keynesian models. Only the latter for this post. 

This paper, like hundreds before it, adds a few ingredients on top of a standard textbook new-Keynesian model. But that textbook model has deep structural problems. There are known ways to fix the problems. Yet we continually build on the standard model, rather than incorporate known ways or find new ways to fix its underlying problems. 

Problem 1: The sign is "wrong" or at least unconventional.

Last week I was honored to be moderator for a discussion with Greg Lukianoff and Rikki Schlott on their new book "Canceling the American Mind" at the Commonwealth Club of San Francisco.  Link here, if the embed above doesn't work 

Here are my questions. I shared them with Greg and Rickki ahead of time, so the actual questions are a bit shorter. But this may give you some interesting background, and I think they're good questions to ponder in general.

The videos from the Hoover Monetary Policy Conference are now online here.  See my previous post for a summary of the conference. 

The big picture is now clearer to me. Phil Jefferson rightly asked, what do you mean off track? Monetary policy is doing fine. Interest rates are, in his view, where they should be. He argued the case well. 

But now I have an answer: The Fed has had three significant institutional failures: 1) Its inflation target is 2%, yet inflation exploded to 8%. The Fed did not forecast it, and did not see it even as it was happening. (Nor did many other forecasters, pointing to deeper conceptual problems.) 2) In the SVB and subsequent mess, the Fed's regulatory apparatus did not see or do anything about plain vanilla interest-rate risk combined with uninsured deposits. 3) I add a third, that nobody else seems to complain about: In 2020 starting with treasury markets, moving on to money market funds, state and local financing,  and then an astonishing "whatever it takes" that corporate bond prices shall not fall, the Fed already revealed that the Dodd-Frank machinery was broken. (Will commercial real estate be next?) 

Yet there is very little appetite for self-examination or even external examination. How did a good institution, filled with good, honest, smart and devoted public servants fail so badly? That's not "off-track" that's a derailment. 

Well, two sessions at the conference begin to ask those questions, and the others aimed at the same issues. Hopefully they will prod the Fed to do so as well, or at least to be interested in other's answers to those questions. 

(My minor contributions: on why the Taylor rule is important here, where I think I did a pretty good job; and comments on why inflation forecasts went so wrong at  1:00:16 here.)

The videos and speeches of the Bradley prize winners are up. My video here (Grumpy in a tux!), also the speech which I reproduce below. All the videos and speeches here (Betsy DeVos and Nina Shea) My previous interview with Rick Graeber, head of the Bradley foundation. 

Bradley also made a nice introduction video with photos from my childhood and early career. (A link here to the introduction video and speech together.) And to avoid us spending all our talks on thanking people, they had us write out a separate thanks. That seems not to be up yet, but I include mine below. I am very thankful, humbled to be included in such august company, and not so boorish that I would not have spent my whole talk without mentioning that, absent the separate opportunity to say so. 

Bradley prize remarks (i.e. condense three decades of policy writing into 10 minutes): 

Creeping stagnation ought to be recognized as the central economic issue of our time. Economic growth since 2000 has fallen almost by half compared with the last half of the 20th Century. The average American’s income is already a quarter less than under the previous trend. If this trend continues, lost growth in fifty years will total three times today’s economy. No economic issue — inflation, recession, trade, climate, income diversity — comes close to such numbers.

Growth is not just more stuff, it’s vastly better goods and services; it’s health, environment, education, and culture; it’s defense, social programs, and repaying government debt.

Why are we stagnating? In my view, the answer is simple: America has the people, the ideas, and the investment capital to grow. We just can’t get the permits. We are a great Gulliver, tied down by miles of Lilliputian red tape.  

 Two great videos just dropped related to fiscal theory. 

The first is an "Uncommon Knowledge" interview with Peter Robinson. We start with fiscal theory and move on far and wide. Peter is a great interviewer, and the Uncommon Knowledge production team put together a great video of it. Pick your link: Video at Hoover (best, in my view); Hoover event page with podcast, links and more info, Youtube, Twitter, Facebook. 

Second, Michael Strain at AEI moderated a great panel discussion on fiscal theory with me, Robert Barro, Tom Sargent and Eric Leeper. Three of the founding fathers of fiscal theory offer thoughtful comments, and Michael had provocative questions. I start with a 20 minute presentation, with slides, so this is the most compact "what is the fiscal theory" video to date. It's at the AEI event page or Youtube 

Mark your calendars! February 28th 3:00 PM eastern the AEI's Michael Strain will host a zoom event on Fiscal Theory of the Price Level. Info and registration here. 

This event will be particularly good because Michael convinced Robert Barro, Tom Sargent, and Eric Leeper to come and discuss. These are the giants on whose shoulders I meekly stand. 

Robert Barro did the modern version of "Ricardian Equivalence." If people look at government debt and understand that there will be taxes to pay it off, they save and the deficit (with lump sum taxes) has no effect. He also did the modern version of tax smoothing. It is good government policy to borrow in bad times, and repay in good times, with steady low taxes, rather than raise distorting tax rates a lot in bad times. Both underlie fiscal theory,  

Tom Sargent, with Neil Wallace wrote “Unpleasant Monetarist Arithmetic,” the cornerstone of the modern fiscal theory. They pointed out that if fiscal policy is stuck in deficits, monetary policy can only choose to inflate now or inflate later. Tom went on to write many fantastic papers on the theory of fiscal-monetary interactions, and on their place in economic history. His "ends of four big inflations" showed that the great post WWI hyperinflations ended when the fiscal problem was solved, involving no monetary stringency. A good lesson, now mostly forgotten in the widespread view that ending inflation must come with misery. His Nobel speech “United States Then, Europe Now” is a great example of historical work. In my view, the Nobel Committee should have given him a prize for monetary-fiscal interactions, which is even better than the econometric work they cited. Maybe he'll be the first economist to get two.    

Eric Leeper is the original innovator of the modern fiscal theory in his paper "Equilibria under ‘active’ and ‘passive’ monetary and fiscal policies. " Eric put fiscal theory in the context of interest rate targets, r rather than money supply, which is how all our central bankers operate, and includes nominal rather than real debt. Thus, he integrates fiscal theory with how our monetary policy actually works, creates the essential model of inflation under interest rate targets, and integrates fiscal theory with modern new-Keynesian or general equilibrium models that are 99% of all applied work. 

I'm going to try to be as brief as possible so we can hear from these amazing economists, plus Michael, no slouch himself. This much talent can't possibly sit still and not say things that are a bit critical, and thought provoking. 

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Vince Ginn of the "Let People Prosper" Podcast did a very nice interview on FTPL.  Like many economists, Vince has a good monetarist heart, and explaining the difference between FTPL and monetarism was useful for me. 

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As of January 17, The Fiscal Theory of the Price Level is formally released! Along with this good news, I have some bad news -- I have to take down the free version on my website. However, keep that in mind for the (sadly) evolving typo list, sample chapters, online appendix, follow on essays, and revisions as they come. I already have a revised Chapter 5 posted, which does a better job of introducing fiscal theory in standard new-Keynesian models. 

I revised "Expectations and the neutrality of interest rates" and presented at the Hoover Economic Policy workshop. Thanks to the great Hoover team, here it is by video. If the embed doesn't work, here's the Hoover webpage with the video. The updated paper and slides are here. 

I did a podcast on health policy with  Daniel Belkin and Mitch Belkin at the External Medicine Podcast. video embedded above, audio at the link. They're a great team. Free market health care and insurance is a hard sell, having to climb mountains of the usual objections and anecdotes! 

It's been a busy week for video. I started Monday with a good roundtable with Benn Steil at the Council on Foreign Relations "Understanding Inflation and its Causes" 

Tuesday we did a great Goodfellows conversation with Larry Summers. (Audio podcast at that link, plus video if the embed doesn't work.) Larry answers "what would you do at the Fed" much better than I did when Benn asked, among other great topics. 

This week also Casey Weade posted a podcast and video interview we did on Fiscal Theory of the Price Level, for a general audience, at his "Retire with Purpose" podcast. Casey did a great job asking good questions and steering the conversation. Link, including audio podcast

More got recorded, not up yet... a busy week.  

I had a great time at the CATO monetary policy conference last week. A brief view on why we're having inflation and the chance it will continue:  

Briefly, a helicopter dropped. The Fed fell flat. And here we go. Grumpy got steamed up on this one. 

If the embed doesn't work, try the direct link or the above conference link. Greg Ip moderated well, and stick around for insightful comments from Fernando Martin, Mark Sobel, and David Beckworth.

A keynote talk at the FGV EPGE (Brazilian School of Economics and Finance) 60th anniversary conference, program here. Direct link to my talk here (YouTube).  (I start at about 4:00 if you're impatient). I plan to turn these thoughts in to an essay at some point. All the conference videos here 

The theme: Central banks, and especially the US Fed, are spinning out of control. I trace the history of this expansion, and how little steps taken here and there mushroomed. The decision in 2008 to regulate assets rather than pursue equity-financed banking, and buying huge amounts of assets, are small steps that mushroomed. They are the moment that central banks became the proverbial two year old with a hammer. The end, the natural meaning of "whole of government" approaches, must be the end of central bank independence and their complete politicization. 

The goodfellows video and podcast returns! Direct link, in case the above embed doesn't work for you. 

I gave the UCSD economic roundtable lecture Friday June 11 on inflation and the future of the Fed. It summarizes quickly a number of themes from previous Grumpy writings, and if you enjoy videos you might find it fun. Youtube link in case the above embed does not work. 

I happened on the New York Fed website, proclaiming on its landing page that it is now

"...dedicated to understanding and finding solutions to the numerous forms of inequality that communities of color experience and working with communities in our District to address deep-seated inequities," 

in case you want documentation that the Federal Reserve is taking on inequality and racial issues. 

Slides available here. 

 I did a few fun video conversations last week. 

This is a conversation with Ryan Bourne, Megan McArdle, and Alex Tabarrok on economics and the year of covid. Direct link if the above embed doesn't work. 

Then I had a nice conversation with Mike Hartmann at The Giving Review, link here with transcript, (slightly edited, please refer to that if you want to quote me. The above is just a screenshot, you have to go to the link). 

We explored my view that the US should eliminate the whole non-profit business, most of all the tax deductibility of contributions to non-profits, but also (less importantly) the non-profit corporate form. While many non-profits do a lot of good (my employer!) the system has become obscenely perverted, mostly as a tax-supported vehicle for political action, but also a tax dodge available only to the super duper wealthy, and a means of protection from the market for corporate control for flabby institutions. I trust that genuine useful charities will still attract donations -- maybe more -- from the substitution effect than they lose without tax deductions. 

I've long been meaning to gather facts and figures to see if this salty opinion makes as much sense as I think it does, and I'm glad to learn about Philanthropy Daily, a resource that will be helpful.

Oh yes also a great GoodFellows with Bjorn Lomborg on climate. I love talking to Bjorn. He has an extensive command of the facts and science, and he's still an optimist that facts and science will actually make a dent in this debate. As global warming moved to climate change to climate crisis to climate justice to climate risks (financial) I'm less optimistic, but hope must be let out of Pandora's box.  Also 

with Bari Weiss on media, censorship, free speech and assorted issues. Direct links, podcast  versions, and more all here. 

Conversation with Tyler podcast interview. Perhaps predictably, the most challenging interview / podcast I've ever done. Video here  and embed below