In recent years, I’ve been bemoaning a new “dark age of macroeconomics”. I know less about current trends in micro, and thus was interested in these comments by Steven Levitt (from an interview by Jon Hartley):
Steve: “Yeah, yeah, sort of everywhere. Every macro department feels a lot like heavily influenced by Chicago. And I think for better or worse that has been a success story for the Chicago way of thinking. I think just really the opposite for Chicago micro; we have not had very many students who’ve gone out and been influential, maybe Ed Glaeser being a clear counter-example to that. And I think in the marketplace for ideas, I gotta say that the Chicago price theory really has lost. And it hasn’t caught people’s imagination. And I remember I was on a call with Milton Friedman as long after he left. He left Chicago in 1978, but this must have been 20-something years later where he was upset that Chicago price theory was not doing well, that it wasn’t being appreciated. And I remember Casey Mulligan saying, “Hey, Milton, I thought you believed in markets. Let’s just face it, price theory is losing in the market for ideas.” And Milton Friedman got so upset about that. He believed in markets until it applied to Chicago price theory where he thought that it was the right way, so markets shouldn’t have any bearing on it. But I think that’s just the truth. That the people who you think of as being the logical heirs to Chicago price theory, the two that come to mind really are Ed Glaeser and Jesse Shapiro, they’re not at Chicago. And with Kevin [Murphy] retiring, there isn’t, when Kevin Murphy retiring, there just isn’t anybody around now really, other than Casey Mulligan, who could really keep the torch going. And the movement in terms of textbooks and what people are taught is just so away from what I think of Chicago price theory, which is not as mathematical, it’s more about how you take the simple tools the very old tools you know tools that go back to people like Marshall and how you use them. It’s really the skill that I see in Chicago price theory (one that I don’t have) is how do you look at a problem and understand it to the lens of the right tool. And it’s not complicated. It’s usually very simple. Once you can see it, it’s usually not much more than intermediate micro is what gets applied. And it’s more artistic. And I really feel like our field has moved towards technicality. Harder proofs. More mathematical. And I don’t see any going back. I think it is essentially lost to posterity at this point.”
I find this very depressing. To me, Chicago price theory is not just a branch of economics, it is economics. It’s the core of what we know about applying economic theory to the real world. When I’m told that Chicago price theory is going out of style, it tells me that economics as a field is going out of style.
And it is. Does anyone doubt that economists have far less influence in the Biden administration than in previous administrations? Or that they would have little influence in a future Trump administration (likely to be dominated by protectionists like Peter Navarro and Robert Lighthizer)?
PS. I’m not convinced by the “market test”. Political and economic fads go in and out of style. What’s popular at one point in time tells us little or nothing about what will be trendy a few decades into the future. Monetarism lost the market test in the mid-20th century, then won the market test, and then by the end of the century we ended up with a synthesis of monetarist and Keynesian ideas.
There is evidence that nominal wages in Japan are finally starting to rise:
Toyota Motor Corp. met its labor union’s demands for increases in salary and bonuses in full for the fourth straight year, in another sign that a sustainable wage-price cycle may be taking hold in Japan’s economy as the central bank considers the timing of a long-awaited interest rate hike.
The yen rose and government bond futures fell — signs traders were adding to bets on an imminent move by the Bank of Japan . . .
Economists expect the results of negotiations between companies and unions to point to stronger wage growth than last year. That should clear the path for the BOJ to end the world’s last negative interest rate regime by April, according to a majority of economists in a Bloomberg survey.
While the media focuses on price inflation in places like Japan (too low) and the US (too high) the real issue has always been wage inflation. Is Japan’s wage inflation sustainable? I don’t know. If I were the BOJ, I’d be in no rush to tighten policy. (Recall the mistakes of 2001 and 2006.)
The same picture works if you replace wage inflation with NGDP growth.
1. This confused me:
Renewed efforts by Congress to force TikTok to sell or face a ban in the US have the backing of the White House, even as President Joe Biden’s reelection campaign has started to use the platform to reach younger voters.
I’m confused. If using Tiktok endangers national security, then why is Biden using TikTok? I get that his specific tweets don’t endanger security, but doesn’t his use make TikTok more popular?
2. I’m confused. Why would Trump try to ban TikTok in 2020, and then suddenly support TikTok after meeting a GOP investor who own’s $21 billion worth of TikTok, right after losing some legal cases that threaten to bankrupt him?
3. A recent Hamilton Project report provides some pretty convincing evidence that recent population growth has been much higher than the Census estimates. Their findings would also explain the large divergence between the payroll jobs numbers and the household survey.
4. I’ve been pretty critical of white nationalists (and still am), which makes this recent Scott Alexander post on our insane identity politics all the more provocative:
In Bizarro-America, the only people who don’t think people’s value as human beings depends on their genetically-determined race are the white nationalists!
Read the whole thing, it’s great.
[FWIW, I’m completely opposed to all forms of “identity”, on both the left and the right. People are people. That’s all that matters. Gender, race, religion, ethnicity . . . who cares? That makes me far left on some issues and far right on others.]
5. Speaking of Scott Alexander, this tweet reminded me of a recent debate we had over whether building more housing reduces housing prices:
The before and after skyline views makes Austin look like a Chinese city.
6. The NYT has an article discussing the strange new left-right coalition in support of YIMBYism:
Take, for instance, the YIMBY mantra of allowing taller buildings and reducing the permitting hurdles to build them. Is this, as many Democrats say, a way to create more affordable housing, reduce neighborhood segregation and give low-income households access to high-amenity areas and schools?
Or is it, as Republicans say, a pro-business means of reducing regulation and enhancing property rights by giving landowners the freedom to develop housing?
Is it, somehow, both?
7. This Cato headline caught my eye:
List of 120+ Biden Actions to Help Try To ‘Shut the Border’
Generally, it’s better to make more modest claims.
8. I see people suggesting that even if Trump wins, he’ll only be in office for 4 years. These people don’t understand that the Republican Party no longer exists. There’s the Democrats and the Trump Party. There is no Republican Party, so things will never go back to normal. Here’s the NYT:
Twenty-six Republican senators voted against the recent aid package for Ukraine, which a pre-Trump Republican Party would have overwhelmingly supported. And of the 17 Republican senators who were elected beginning in 2018 and who are age 55 or younger, 15 voted no.
Those Trumpistas are the future of America.
9. In a normal country like Canada or Australia, candidates debate issues on a roughly level playing field. In a banana republic like Venezuela, the entire election revolves around one larger than life figure, who has a personality cult. Issues don’t matter, other than the issue of what you think about the dominant politician. Which of the two better describes the US? You be the judge (from Edward Luce in the FT):
Here is a checklist of Donald Trump’s recent activity. He promised on day one of his presidency to let January 6 convicts out of jail, close the US-Mexico border and “drill baby drill” for gas and oil. He feted Viktor Orbán in Mar-a-Lago as the best leader in the world and assured Hungary’s strongman that he would not “give a penny” to Ukraine. He took out a $91.6mn surety bond to pay defamation damages to his sexual assault victim, E Jean Carroll.
He purged the Republican National Committee with 60 staff firings — the opening move by his daughter-in-law, Lara Trump, who he handpicked as RNC co-chair. . . . It seems almost trivial to add that new detail emerged about Trump’s apparent soft spot for Adolf Hitler.
All this happened since last Friday. . . . In another time, with a normal candidate, any single one would hijack the news cycle. Trump’s candidacy is so far off the charts it is almost paranormal. That is the essence of his political appeal. It means he is judged by a different standard to Biden, or any other politician, Democratic or Republican.
10. This is from an excellent Tyler Cowen post:
[I]f TikTok truly is breaking laws on a major scale, let us start a legal case with fact-finding and an adversarial process. Surely such a path would uncover the wrongdoing under consideration, or at least strongly hint at it. Alternately, how about some research, such as say RCTs, showing the extreme reach and harmful influence of TikTok? Is that asking for too much?
Now maybe all that has been done and I am just not aware of it. Alternatively, perhaps this is another of those bipartisan rushes to judgment that we are likely to regret in the longer run.
Funny how these “bipartisan rushes to judgment” so often involve China, not Russia. I wonder why?
11. Many commenters are under the mistaken impression that I’ve called Trump a Nazi. Not so. They are confusing me with Trump’s former aides. You know, the “best people” that Trump said he would hire to staff his administration. Those are the people that claim Trump is a Nazi sympathizer. Ohio senator JD Vance also suggested that he might be a Nazi. I just think he’s a borderline fascist, so don’t blame me for these wildly excessive accusations by his supporters and subordinates.
12. I always assumed that Trump plans to surrender to Putin, but it’s still sad to see it confirmed by Victor Orban. In the same article, this caught my eye:
JOE KERNEN: Have you changed your, your outlook on how to handle entitlements Social Security, Medicare, Medicaid, Mr. President? Seems like something has to be done, or else we’re going to be stuck at 120 percent of debt to GDP forever.
Or else? That’s the best plausible outcome, the one that occurs if we dramatically cut spending and/or raise taxes. The actual outcome will likely be far worse.
And check out Trump’s garbled response to Kernen’s question, which makes Biden seems like Daniel Webster in comparison.
Here’s The Economist:
The economists who had warned that excessive stimulus and overheating demand, rather than production snarls, would make inflation a more serious problem seemed prescient. In the shorthand of the day, it looked as if “Team Persistent” had defeated “Team Transitory”.
Fast-forward to the present, and something strange has happened. The Fed, along with most other major central banks, has acted as if Team Persistent was right. It jacked up short-term interest rates from a floor of 0% to more than 5% in the space of 14 months. Sure enough, inflation has slowed sharply. But here is the odd thing: the opposite side of the debate is now celebrating. “We in Team Transitory can rightly claim victory,” declared Joseph Stiglitz, a Nobel prizewinner, in a recent essay.
It’s hard to believe that some prominent economists believe our recent inflation has been due to supply side factors. In fact, the inflation experienced over the past 4 years has been all demand side. The total amount of supply-side inflation has been zero, none, nada.
Over the past 4 years, the PCE price index is up 16.7%. Under FAIT it should have risen by 8.2% (i.e., 2%/year). Thus we’ve had roughly 8.5% excess inflation (a bit less due to compounding.)
Aggregate demand (NGDP) is up by 27.6%. Under FAIT targeting (which is similar to NGDPLT) it should have been up by about 17% (i.e., 4%/year). So we’ve had a bit less than 10.6% extra demand growth. That explains all of the extra inflation.
Supply shocks do explain inflation over shorter periods of time. But people who point to supply shocks tend to forget that they are transitory. For every negative supply shock like 2022, there’s a positive supply shock like 2023. Over any extend period of time the supply shocks cancel out, leaving virtually all excess inflation due to demand shocks.
It’s always been this way. The PCE price index rose at a 6.1% annual rate between 1965 and 1981. NGDP rose by 9.6% annual rate. That means the “Great Inflation” was 100% due to excessive growth in demand—supply shocks had nothing to do with it. Our textbooks are wrong. (Of course supply shocks do explain some of the inflation in individual years such as 1974 and 1980, but they do not contribute at all to the longer run trend in inflation during 1965-81.
As a first approximation, all supply side inflation is transitory, and all demand side inflation is permanent. Those who predicted transitory inflation (including for a brief period me) were completely wrong. In 2021, I naively believed the Fed was serious about FAIT.)
Some people seem to believe that transitory means something like the following inflation path:
2% 2% 4% 4% 4% 2% 2% 2% 2%
In fact, it would mean something like:
2% 2% 4% 4% 4% 0% 0% 0% 2%
If it’s truly transitory, then inflation should average 2% in the long run.
Some of the populists that infest my comment section have challenged my claim that the economy is doing well, despite 51% of the public rating it as “poor”. They suggest that I am arrogant to disagree with the general public. After all, doesn’t the average American understand his or her economic situation better than a pointy headed intellectual?
Yes, they do understand their own situation better than I do. And when asked how they are doing, they tend to respond that their own financial situation is pretty good:
The Axios Vibes poll has found that when asked about their own financial condition, or that of their local community, Americans are characteristically optimistic. . . . 63% of Americans rate their current financial situation as being “good,” including 19% of us who say it’s “very good.” . . . Americans who believe their community’s economy is strong outnumber those who think it’s weak. They’re right.
I agree! The average American only knows a tiny fraction of the 330 million people who live in this huge country. They have only two ways to evaluate the performance of the overall economy—their local situation, and what they read about the national economy in the media. So why are people more negative about the overall economy than they are about their own personal finances? There are several factors at play:
1. The news media is relentlessly negative. Thus people typically praise the school their children attend, even as they suggest that America’s educational system is going down the tubes.
2. One sector of the public is now highly irrational. In recent years, most GOP voters have become completely unhinged. (Look at the lunatic they just overwhelmingly voted for in the North Carolina gubernatorial primary.) When asked how the economy is doing, GOP voters fear that if they say “good” it will be viewed as an endorsement of Biden. Thus they overwhelmingly say “poor”. Dems are also biased, but far less so than Republicans. Ditto for the media. Both sides are biased, but the GOP media is far more biased.
In the past, the loonies were evenly distributed between the two parties. Lots of Dems thought 9/11 was an inside job. But in recent years most of the conspiracy nuts are moving toward the GOP, producing a very unbalanced situation. Indeed belief in absurd conspiracy theories is now almost a requirement if you wish to avoid the label “RINO”. “Of course Trump won the 2020 election!”
Put it all together and you have a situation where polls on the condition of the economy are essentially meaningless. The only poll that matters is the one asking people how they themselves are doing. And by that measure the economy is fine.
Yesterday, I saw Dune 2 in a huge theater (with only one other patron.) Before the feature presentation, I was subjected to 35 minutes of torture. First a series of ads, then one preview after another full of loud explosions and ridiculous CGI monsters. (Remakes of Planet of the Apes, King Kong and Mad Max, among other things.)
It’s fruitless for me to bemoan the state of modern cinema, as these films are not aimed at me. In fact, Hollywood is doing an increasingly effective job at giving viewers what they want. As a film lover I’m appalled, but as an economist I applaud.
During the course of my life, I’ve seen corporate America become better and better at figuring out what people want. Here are a few other examples:
My wife and I often complain that restaurant food is too salty. But why is that? it probably reflects the fact that most people like salty food. The restaurant industry is become more efficient, better at producing giant portions of the sort of salty (and sweet) food that people wish to consume. Hence obesity.
When I was young, the news media consisted of dignified figures like Walter Cronkite and David Brinkley. Now you turn on the cable news and see mindless bimbos screeching out partisan propaganda at the top of their lungs. (Fox is the worst, but many other news sites have also gotten worse.) The TV industry figured out that people don’t want Walter Cronkite; they want wild conspiracy theories promoted by people yelling at the TV screen.
In the film American Splendor, there was this exchange between two characters
Mattress Guy #1: So is the girl smart?
Mattress Guy #2: Well, I guess she’s about average.
Mattress Guy #1: Average! Man, average is dumb!
With a few notable exceptions, the vast majority of readers of this blog have IQs well above 100. It’s tempting to assume that people with IQs of 100 are stupid. But they aren’t—they are average. In the days of Cronkite and Brinkley, TV news was pitched to people with IQs of 115. Now it’s aimed at average people. They only seem stupid, because you and your acquaintances live in a bubble surrounded by people who are above average.
The modern media is getting better at delivering what consumers want. Don’t like it? You are not the target audience.
PS. Even Trump and Biden presumably have IQs above 100. They only seem dumb because we subconsciously expect our presidents to be above average.
PPS. So what does average intelligence look like? This:
Robinson, who is the state’s lieutenant governor, has said he “wouldn’t be surprised” if the 1969 moon landing was fake and the 9/11 terrorist attacks were an “inside job.” He’s “SERIOUSLY skeptical” of President John F. Kennedy’s assassination and of the 2017 mass shooting in Las Vegas. He falsely accused David Hogg, a survivor of the 2018 mass shooting at Marjory Stoneman Douglas High School in Parkland, Florida, of being a paid actor. He’s claimed that climate change is based on “junk science.” . . .
In lesser-noticed social media posts, Robinson has said that news coverage of police shootings is part of a media conspiracy “designed to push US towards their new world order.” He and his wife both liked a since-deleted Facebook comment that stated, “WWG1WGA are my ‘Identity’ letters,” a reference to the QAnon rallying cry “Where we go one, we go all.” In October 2018, on a day when authorities intercepted pipe bombs intended for President Barack Obama, Secretary of State Hillary Clinton and CNN, Robinson suggested on Facebook that they had done it to themselves. “If you can’t beat ’em, bomb yourself,” he wrote.
When Trump finally passes from the scene, Robinson will be the new face of the GOP.
There are times when the claims of bubble proponents becomes so far-fetched that you wonder if it’s all just a spoof. Bloomberg provides a recent example:
Nvidia Corp.’s rise is captivating the stock market and driving the S&P 500 Index to new highs. But it also raises cautionary reminders of another investor darling that soared on dreams of a technological transformation, only to tumble back to earth when those hopes turned to disappointment.
That stock belongs to Tesla Inc., which sparked its own mania in 2017 as investors bet that electric vehicles were going to take over the world.
Yes, shed a tear for those foolish investors that bought Tesla during its 2017 stock “mania”.
I’m not sure which is more embarrassing, the fact that most economists believe in bubbles, or the fact that most economists seem to believe that interest rates show the stance of monetary policy.
This made me laugh out loud:
Biden can’t catch a break. For the past year, Dems have been scheming to run against Trump, arguably the weakest candidate in US history. Now they are finally getting their wish, and Biden’s going to lose. (They don’t read my blog.)
Here are some truths about the current US economy:
1. It’s in very good shape (say between good and excellent.)
2. In the 1970s and 1980s, it was widely believed that it was impossible for the economy to be this good—to have such low inflation during a period of 3.7% unemployment.
3. The foreign media is almost universally drooling over how good the US is doing, and frequently compares the booming US economy to the weak economies of Europe and China. The economy is so strong that there is a huge surge of people desperately trying to get into the US. Is it any surprise that workers in countries paying $2/hour are attracted to a place where McDonalds pays $20/hour? Good luck with that wall Mr. Trump!!
Unfortunately for Biden, the people of the past don’t vote and foreigners don’t vote. Actual living Americans believe the economy sucks.
So am I sad that Biden is getting such bad luck? Not really. While the economy is good to excellent, his economic policies are fair to poor. (The poor part is his fiscal policy and his industrial/trade policies—the rest is fair.) Voters are right about Bidenomics, but for completely bogus reasons. Heck, most voters probably support his stupid policies.
And then there’s the bad karma from the Dems’ cynical attempt to pump up the Trumpian part of the GOP in the hope that it would be easier to defeat.
PS. I know, I know, it’s the high grocery store prices. And Trump’s going to fix that problem by . . . . checks notes . . . running massive budget deficits, an easy money policy, high tariffs on imported food and expelling all the illegal farm workers. As usual, Matt Yglesias nails it:
The day after the 2020 election, I suggested that the results were bad news, as now we’d have 12 years of Trump instead of 8 years of Trump. I immediately realized that the closeness of the race meant that Trump would be back—more fascist than ever and seeking revenge against those who oppose him. Flash forward to 2024, and Trump is already the de facto president of the United States.
For the sake of argument, assume the president were Joe Biden. We know that Biden supports more aid for Ukraine, as do the overwhelming majority of representatives in Congress. But President Trump is opposed, so it won’t happen. Ditto for the border control bill. Indeed nothing substantive will happen without Trump’s OK.
Most of our political pundits are stuck in the 20th century, before America became a banana republic. They no longer know how to make sense of our politics, as they are not willing to accept the fact that we are no longer a serious nation. They keep waiting for some positive trends to show up. It won’t happen. There are now only two political parties—the Democrats and the Trump cult. And the Dems are too weak to put up a serious fight. (Trump recently said that all the non-MAGA Republicans should just leave the GOP–he doesn’t need them.)
Unfortunately, while the US richly deserves to pay a price for our dysfunction, our political implosion will initially impact the rest of the world—with the Ukrainian people being the first to suffer. Life is unfair.
PS. The National Review had a couple nice pieces on Trumpism. Here’s Andrew McCarthy:
It’s time to retire “RINO.”
That means “Republican in name only,” of course. It’s a stale epithet. Mildly clever in its origins, it referred mainly to elected Republicans in Washington who posed as conservatives for their home-state constituents (“severely conservative” as the squishy Mitt Romney described himself), but who, at best, mounted little meaningful resistance to the progressive ascendancy and Leviathan’s expansion.
RINO is inapposite with the Republican Party having become the Trump Party. Indeed, it’s the Republican Party that is now “Republican in name only.” No longer are we talking an entity that is substantively the Republican Party — meaning the politically and ideologically conservative major party in the United States. A party wedded to that orthodoxy no longer exists, so it is irrational to speak of RINOs who feign allegiance to the orthodoxy.
And Jim Geraghty:
Christian Schneider reminds us that this weekend, Ron DeSantis endorsed the man who’d previously shared a photo of him with the caption, “Here is Ron DeSantimonious grooming high school girls with alcohol as a teacher.”
Think about what it would take to endorse a man who said something like that about you.
And you people wonder why I’m so cynical about politics.
I’m occasionaly asked how NGDP level targeting would have performed in a specific historical case, such as 1981 or 2023. The usual worry is that when NGDP is well above trend, a policy of level targeting might require a highly contractionary monetary policy, triggering a recession.
Here it’s worth recalling the Lucas critique (from Wikipedia):
The Lucas critique argues that it is naïve to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data.
The problem with trying to evaluate how NGDPLT would have done in a specific case is that if the policy had been in effect during that period then the condition of the economy would have been much different. Thus if NGDPLT had been in effect during the 1970s, then it’s unlikely the economy would have become so overheated by 1981. Indeed the whole point of NGDPLT is to prevent the sort of inflationary policy we had during 1965-81.
If NGDPLT had been adopted last year, it’s unlikely that the Fed would have tried to push the economy back to the pre-2020 trend line, as that would have triggered a deep recession. They would have started from a new trend line. On the other hand, if NGDPLT had been adopted in 2020, then monetary policy would have been far tighter in 2021, and the economy never would have become so overheated.
The Lucas critique is often viewed as a cautionary tale—something that makes it likely that policy innovations will disappoint. In the case of NGDPLT, however, the Lucas critique suggests that the policy might be more effective than it appears at first glance. Instead of thinking about how NGDPLT would deal with all of the “shocks” we’ve experienced over time, think about how NGDPLT would have prevented those shocks from occurring in the first place.
Off topic: Conor Sen has a good piece on how the economy seems to be re-accelerating:
Slower inflation was supposed to be a sign that the economy was cooling, all part of the Federal Reserve’s plan for higher interest rates to restore balance to the economy. For a while, things looked on track. But since the middle of January there’s an argument that economic activity is picking up again, despite monetary policy being tighter than at any point in years. . . .
Frequent readers of mine will note that this is a walk-back of a bias I’ve had for the past few months. I started worrying about a labor-market slump in early November as the unemployment rate rose and worker income growth slowed. Earlier this month, I described the recovery in some cyclical parts of the economy as akin to a “dead cat bounce” that would eventually be swamped by high interest rates; it’s not unreasonable for something like existing home sales to climb when transactions were at their lowest level since 2010.
Frequent readers know what I’m about to say. At no time in the past few years has monetary policy been “tight”. Indeed it’s been generally expansionary, which is why NGDP growth remains excessive.