You can call Federal Reserve policies aimed at the sending of signals that alter the expected rate of future inflation “monetary policy” if you want, but then you lose analytical clarity–because the way such policies work (if they work) is not the “normal” way that “normal” monetary policy works.

Prof. Delong

New rule: to opine on monetary policy you have to have opened a textbook on the subject that was written in the last 30 years.

From Micheal Woodford’s text (in a section in the introduction called “Central Banking as Management of Expectations”):

For successful monetary policy is not so much a matter of effective control of overnight interest rates as it is of shaping market expectations of the way in which interest rates, inflation and income are likely to evolve over the coming year and later. On the one hand, optimizing models imply… behavior should be forward looking… Moreover, given the increasing sophistication of market participants… it is plausible to suppose that a central bank’s commitment to a systematic policy will be factored into… forecasts… Not only do expectations about policy matter, but… very little else matters…

From Carl Walsh’s text:

Macroeconomic equilibrium depends on both the current and expected future behavior of monetary policy.

From Dornbusch, Fischer and Startz’ undergrad text:

You will remember that the nominal interest rate has two parts: the real interest rate and expected inflation… should [a zero interest rate liquidity trap] occur… policymakers are prepared… to pump money into the economy [and thus raise expected inflation].

From Jones’ new (and excellent) undergrad text:

To the extent that policymakers can influence, or manage, these expectations, they can reduce the costs of maintaining a low target level of inflation. This is one of the most important lessons of modern monetary policy… To the extent that the central bank can coordinate people’s expectations of inflation, it can maintain low and stable inflation without the need for [the bank to induce] recessions. Such coordination requires credibility and transparency on the part of the central bank.

From the Encyclopedia of Economics James Tobin says:

While not all monetarists endorse Friedman’s rule, they do stress the importance of announced rules enabling the public to predict the central bank’s behavior… Long rates depend heavily on expectations of future short rates, and thus on expectations of future Fed policies. For example, heightened expectations of future inflation or of higher federal budget deficits will raise long rates relative to short rates because the Fed has created expectations that it will tighten monetary policy in those circumstances.

Sam, Fred and the deer in the road

A story:

Fred is driving a car down a deserted highway in the middle of the night. His friend Sam is in the passenger seat. Fred reaches down to pick up something he dropped, taking his eyes off the road ((or maybe he doesn’t know he’s driving)). When he lifts his gaze back to the road, a deer has appeared.

What should Fred do? What should Sam do?

Clearly Fred should make a measured jerk of the wheel and swerve out of the way of the deer and Sam should do nothing. If Fred doesn’t swerve out of the way, he is responsible for the resulting crash. If Sam yanks on the wheel causing the car to go out of control and slam into a guard rail, he’s responsible for making the crash much worse.

The deer in the road is ultimately the cause for the crash, but as a force of nature he can’t be blamed for it. It is the actions or inactions of the people in the car that determine culpability. Because their actions determine whether or not the crash occurs and its severity, their culpability may not limited to not preventing the crash but for making it worse.

Friedman and Swartz found that Fred was at fault for the crash because he didn’t swerve when he should have. Ohanian has conjectured and has found some support in the data for the idea that Sam is at fault for making the crash worse because he jerked on the wheel.

But in the historical example, didn’t Sam jerk the wheel again after the car hit the guard rail? Yes, but jerks on wheels can, by luck, right out-of-control cars. Luckily for Sam, Eggertsson has found this was the case in the historical example. In that case, a jerk on wheel in the right direction happened to be productive.

Notice this doesn’t mean wildly jerking the wheel and sending cars out of control is a good idea. Also, the lucky productivity of the second jerk on the wheel doesn’t mean the first wasn’t bad.

Unintended consequences of snark

“So yes, John, the Atlantic’s economics expert didn’t realize just how much the kind of regulations Democrats are now pushing had managed to screw up New York’s health insurance market.” — Megan McArdle

Here’s J. Bradford DeLong:
“No Megan we are not for health care reform because we hate freedom. We are for health care reform because our health care sector is wedged.”

What exactly, Professor, is the health care sector wedged between?

Why oh why can’t we have a better press corps professoriate?

(I fully expect this snark will have its own set of unintended consequences, but this here is what the internets are built on!)



The President brings representatives from the credit card industry in to talk about changing their relationships with their customers, and announces his principles for consumer protections.

I don’t remember voting for the CEO of visa or mastercard. Not to step on Don Boudreaux’s territory, but here’s a gem:

Q Is there a balance between protecting consumers and letting the credit card companies have revenue here?

THE PRESIDENT: We think that it’s been out of balance. And so we think we need to create a new equilibrium where credit is slowing, those who are issuing credit are able to make a reasonable profit — but they’re doing so in a way that is responsible and consumers are not finding themselves in a bad situation that they didn’t anticipate.

The credit card stocks didn’t tumble or anything so my question is with all this cheap talk who is Obama pandering to? Even if the terms of sub-prime mortgages are a big mystery, the terms of credit cards aren’t. Everybody knows cards have high interest rates and that they always have. Who has accumulated large balances on their cards by making purchase after purchase, not paying down the balance every month and yet thinks these large debt burdens are somehow the credit card company’s fault?

Of policies and goals

There’s what you want to accomplish and there’s the best way of accomplishing those goals. It seems there’s often little disagreement on what people want to have happen; help the poor, protect the environment and encourage growth, for example. It seems obvious that policies should be chosen that best implement these goals; negative income tax, Pigovian taxes and subsidies on basic research, in order.

It is ironic that most policy debates get heated and start sounding like disagreements about normative goals when they’re just arguments about what policies are best at attaining common goals. The passion should be in normative fights, not normative-sounding fights. Positive analysis of policy’s effects are more or less boring, but its these discussions that I see become most heated (e.g. the stimulus debate).

Perhaps this is because those debating suspect their opponent is hiding some agenda. They suspect their opponent doesn’t really share their normative goals. They think the opponent’s “so-called” positive analysis of the policy in question is tainted by a desire to see policy not work.

What’s funny about this is that if policy analysis is done in a transparent way, one should be able to discern if the analysis is flawed. Why question the motives of the arguer when the argument can be criticized directly?

This line of reasoning only works for positive analysis of policy. Normative goals come from the ether and there’s no reason to think people will agree on goals. So perhaps there’s a different phenomenon explaining the passionate disagreements over policies. People simply confuse positive analysis for normative. They associate certain policies — minimum wages and rent controls, subsidies for “green” technologies and direct R&D, in order — with normative goals. Any opposition to those policies is prima facie evidence of opposition to their objective.

If this is the case, its really annoying. Knock it off, please.

Screaming at the Internet: Presidentialness edition

Does Palin seem less presidential than Howard Dean, for example, because:

  • she’s eight years younger than Howard Dean when he ran for President?
  • she’s only been the governor of a small State for little over two years whereas Dean was the governor of a small State for 12?
  • she’s a she?

Does she seem less presidential than Barack Obama because:

  • she has more experience as an elected official but of smaller districts?
  • she didn’t give a speech at the 2004 Democratic Convention?
  • she soundly defeated a party lion in her governors race, but Obama was able to beat The Hillary Clinton?
  • she’s a she?

Does she seem less presidential than Joe Biden because:

  • she hasn’t been representing a number of people about half the population of Alaska for 35 years in Washington?
  • … ((I mean really, Joe Biden? Presidential? He’s Kerry with less hair and swift-boats or not, Kerry proved himself to be less than Presidential material.))
  • she’s a she?

Look, I’m not the first person in a crowd to scream sexism. I’m usually the last. But the reaction to her selection as McCain’s VP smacks of it.

UPDATE: I should mention that with my winnings from the primaries last night I went all-in on Obama in the general election. The Palin selection didn’t change my opinion that Obama has a 70% to win the race.

Vindication of a scientist?

People are saying Larry Summers is “vindicated” by a study showing males have higher variance in math ability than females. Does it make sense to talk of vindication for a scientist when data is found supporting his or her hypothesis?

According to Google:

Definitions of Vindicated on the Web:
* absolved: freed from any question of guilt; “is absolved from all blame”; “was now clear of the charge of cowardice”; “his official honor is …

* “Vindicated” is a song by Dashboard Confessional released on the 2004 soundtrack for the movie Spider-Man 2. This track can be considered the theme for the Spider-Man 2 movie. The song is also featured on the Bonus Track edition of their 2006 album, Dusk and Summer.

* justified, avenged or cleared of blame

Larry Summers isn’t a song and people aren’t saying his claims are vindicated (and they’re not because these data were more or less known at the time of the controversy) and Summers hasn’t been avenged. So why all the drama?

Larry Summers has only been vindicated if you’re playing the same game the Harvard faculty was when they had Summers fired, i.e. engaging in a War on Science.

So internet, stop saying this study vindicates him!


Part in our continuing series… Screaming at the INTERNET!

One of the main reasons out-of-wedlock births have skyrocketed in recent decades is because it has become so difficult for poor and poorly educated young men to earn enough to support a family.

Bob Herbert

I don’t see why diminishing economic opportunities mean we can’t “wag our fingers” at dudes that don’t support their kids. I suspect a family has much less ability to support itself when fathers are absent, whether or not the father has bad economic prospects.

Besides economic prospects for high school educated folks haven’t declined since 1960 when out of wedlock births were uncommon. They’ve stagnated ((Wage data from IPUMS, a rocking site, via this rocking tool. CPI data from Measuring Worth)).

Its hard to make the case that a variable that’s not changing is “the main reason” for large changes in another variable.