Matt Nolan

Scott Sumner wins

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That is my impression of what is going on here (see Fed minutes too):

The Fed also said for the first time that it was considering targeting a path for the level of nominal gross domestic product as a way to increase price expectations.

And in case you aren’t sure who I’m talking about – Scott Sumner is the author of this excellent blog here, and has been pushing the NGDP target line for the entire crisis.  See the start of the blog in February 2009 – in the depths of the crisis.

While such a target doesn’t help in the face of a “supply side” shock, it does deal with “demand side” issues eg here.

Update:  His semi ‘celebration’ here.

Matt Nolan

A step too far: The case against pursuing direct capital/trade/currency controls

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To start off with I have to admit I like Bernard Hickey.  I like the fact he has got out there, written about New Zealand economic issues, and pushed to add an open debate type platform to the discussion regarding the New Zealand economy.  As a result, I may have not been critical enough when I read his posts in the past – as I did not see this coming.  In truth, the calls for exchange rate, trade, and capital controls is a massive step too far in what could well be the wrong direction.  Let me talk about the points Hickey has raised:

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Matt Nolan

TARP. An increasingly attractive intervention …

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Via Tyler Cowen’s twitter:

Some people hate me for this view, but TARP is looking better all the time.

I agree.  This will be worth a post at some point – but not today 😀

People who have a free moment, feel free to discuss it in the comments 😉

goonix

A wild day on the markets

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The Dow Jones Industrial Average fell nearly 1,000 points today, the largest intra-day fall since 1987.

It’s not quite certain yet what caused it, with some blaming an “erroneous trade”, possibly via human error or a computer glitch. It seems the initial fall, whatever the cause, then triggered many more sells as paranoia over the global situation, particularly Greece, grew. Crazy!

Matt Nolan

On “the” fiscal stimulus

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Over at Kiwiblog there is discussion of the Democrat loss in Massachusetts.  Reading through the piece David Farrar stated:

Priorities. Obama’s fiscal stimulus did little bar increase the deficit massively, and turn the country into deficit hawks. Unemployment went well beyond his worst forecasts

Now I found this statement unusal in that David’s writing is usually very balanced, and yet I do not find this statement balanced at all.  Why?

  1. We have no idea if Obama’s fiscal stimulus did anything until the data is all finalised.  In a couple of years researchers will be able to look over the data and discuss the design, implementation, and need of the scheme and reach an educated conclusion.  At the moment people can only present an opinion on the basis of ideology.
  2. Personally (going onto my ideology 😉 ), I think the fact that unemployment rose even further than expected was the result of the shock being larger than expected (and areas of the US economy being more fragile).  During the crisis the US government was able to borrow cheaply and use this borrowing to undertake investment when the cost of building this investment was cheap (thanks to the spare capacity in the economy) This sounds like a good thing to me …
  3. Unemployment as high as  10% indicates to me that there was a hole in demand – I do not believe that “structural” economic issues could be sufficient enough to warrant 1/10 people who want a job not being able to get a job.  With the Fed unwilling to soften its monetary stance further the government is in a position to be “consumer of last resort”.  Although I don’t really like the idea of this, in the face of sticky prices and a massive shock to the economy I have to concede that such a role exists in extreme circumstances.

As a result, if I had to guess I would say that the immediate crisis would have been worse if the stimulus hadn’t happened. This appears to be a moderate position among economists, between the “stimulus did nothing” and the “we needed more stimulus” extremes.

Now, we may find that the long run impact of this borrowing will be bad, and we may look back on the evidence and find that the scheme is flawed.  However, the point that “Obama’s fiscal stimulus did little bar increase the deficit massively” is an extreme view (that could potentially turn out to be true) – not an objective fact.

Matt Nolan

Uncertainty and asymmetric risks

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Justin Wolfers says Charles Plosser is being a bit silly on the Freakonomics blog.

Specifically he says that:

  1. Plosser says we should tighten more quickly than estimates of “slack” suggest, as the level of slack is uncertain,
  2. However, since slack is uncertain it could be higher or lower – so this doesn’t make sense unless you weigh the outcome with lower slack more highly than the outcome with higher slack, which seems wrong!

Now I think he is being a bit sneaky here.  Yes there is uncertainty, but the perceived ex-ante risks around this uncertain variable are asymmetric.

What the hell am I trying to say here?  Well, we know that potential economic activity seems to be “trend stationary” over time (so it tends to rise at an average rate), however we aren’t quiet sure of the trend.  When we measure “slack” in a “recession” we are normally coming off a high point – which biases up our trend estimate.  Macroeconomists do heaps of stuff to try and correct it – but we often end up with a higher estimate than seems fair.

As a result, even though slack is uncertain there is a greater likelihood that slack will turn out to be smaller than it is currently thought to be rather than larger.

Of course, on an unrelated note I would say that economists should look at the unemployment rate as a measure of slack a lot of the time – as we have a measure of it, and it does give us an indication of the relative “hole” in the economy.  With unemployment over 10% the US should still be looking at substantial stimulus – so Plosser seems a little gun ho.