Tuesday, April 30, 2013

Taylor on monetary policy

John Taylor has a lovely little blog post, encapsulating so much in a few sentences. An excerpt with comments (emphasis mine)
...there is a crucial issue which explains much of the enormous difference of opinion between critics and supporters of the Fed’s current policy. Critics such as me and Allan Meltzer ... argue that monetary policy should focus on a clear strategy for the instruments of policy. A goal for inflation or other measures of macro performance is not enough if it is simply part of a whatever-it-takes approach to the instruments. Such an approach results in highly discretionary and unpredictable changes in policy instruments with unintended adverse consequences, as we have been seeing in recent years.

Supporters such as Adam Posen... are just fine with the Fed using, even year after year, a whatever-it-takes approach to the instruments of policy as long as there is an overall goal. With such a goal in mind, so their argument goes, the central bank can and should always intervene in any market, by any amount, over any time frame, with any instrument or program (old or new), and with little concern for unintended consequences in the long run or collateral damage in the short run (say on certain groups of people or markets) as long as it furthers that goal.

Critics are very concerned about those unintended consequences and collateral damage; they are also concerned about an independent government agency wielding such a great deal of power as it carries out a year-after-year whatever-it-takes approach. Supporters are much less concerned.
I have always had this problem with nominal GDP targets, inflation targets, and so forth. Ok, the Fed adopts your target. Now what? If nominal GDP doesn't do what the Fed wants it to do, what should the Fed do about it? Talk more? (Monetary policy is starting to look more and more like foreign policy here).

Taylor points out a deeper danger. The Fed's "mandate," the list of its "goals," keeps expanding. Beyond just inflation and unemployment, now the Fed is in charge of "financial stability," managing "systemic risks," the health of specific markets (mortgages, exports), the health of specific institutions (too big to fail banks), the diagnosis and pricking of bubbles (when not the deliberate stoking of such bubbles), management of the details of every part of financial system (how swaps get traded, for example) and surely coming soon a federal anti-crabgrass mandate.  The list of things the Fed can do in pursuit of these goals is getting bigger and bigger too, while the power of its conventional instruments (setting short rates, quantiative easing) is diminishing.  If the Fed doesn't think banks are lending enough, and to the right people, in pursuit of one of its many goals, what stops them from using their regulatory power to just go tell the banks who they should lend to?

We have told the Fed to attain unattainable goals, and given it great power to do "whatever it takes" in their pursuit.  The Fed seems to go along. It's fun to be given so much power, in the short run at least.  But in a democracy, the price of great independence must be limited power, and the Fed will soon have to choose. Congress already limited some of the Fed's powers after some "whatever it takes" of the financial crisis.

Taylor, of course, would like the Fed limited to the instrument of short-term rates, and to follow the Taylor "rule" for setting them. But the principle is larger than that instance.

Sunday, April 14, 2013

Alternative Maximum Tax

This is an Op-Ed for the Wall Street Journal, original here on April 15 2013

Source: Wall Street Jouirnal
They keep coming back, like the villains of a good zombie movie, chanting "more taxes, more taxes." Long ago, Congress passed the alternative minimum tax, or AMT—a simple flat rate to ensure that in an insanely complex tax code, no one escapes paying something. Now we need an alternative maximum tax as a simple, rough-and-ready way to limit the tax zombies' economic damage. Call it the AMaxT.

With Monday's deadline for filing tax returns looming, let's start a national conversation: How much is the most anyone should have to pay? When do taxes indisputably start to harm the economy and produce less revenue—when government takes 50% of people's income? 60%? 70%?

I like half, but the principle matters more than the number. Once the country settles on a number, each of us gets to add up everything we pay to government at every level: federal income taxes, yes, but also payroll (Social Security, Medicare, etc.) taxes, state, city and county taxes, estate taxes, property taxes, sales taxes, payroll taxes and unemployment insurance for nannies, household workers, or other employees, excise taxes, real-estate transfer taxes, and so on and on, right down to your vehicle stickers and those annoying extra taxes on your airline tickets.

On April 15, once this total hits the alternative maximum tax, you've done your bit and federal income taxes can take no more. You compute federal income taxes as usual, but then you get to reduce the "tax due" that the total is less than the alternative maximum.

What the IMF consideres macro

Via Greg Mankiw's blog, I learned about the IMF conference on "Rethinking Macro Policy." See the announcement and program here. I reproduce the program below.

I find this most striking as a reflection on what the IMF considers "macro." Yes, they have the whole spectrum, indeed, all the way from  Geroge Akerlof and Joe Stiglitz on the far left end of traditional Keynesian economics, to... Olivier Blanchard and David Romer on the pretty-far left end of somewhat new-Keynesian economics?

Debt and growth in 10 minutes

This is a short video from last year. I only just found out it exists. It still seems pretty topical, and (for once) condensed because Lars Hansen really forced me to obey the 10 minute time limit!

There is a better link here from the BFI page here that covers the whole event, but I couldn't figure out how to embed those.

Friday, April 12, 2013

Energy Idiocy

What is it about energy that send all sides of the political spectrum into spasms of babbling idiocy? Here are two items heard on my jog yesterday, courtesy of NPR, one from the right, one from the left, with the NPR interviewers mindlessly accepting idiocy in the middle.

Start with NPR's coverage of Gina McCarthy's Senate confirmation hearings. The issue is the EPAs efforts to close down coal-fired power plants to reduce carbon emissions

Wednesday, April 10, 2013

Interest rate graphs

Where are interest rates going? Here are two fun graphs I made, for a talk I gave Tuesday at Grant's spring conference, on this question. (Full slide deck here or from link on my webpage here)

Here is a graph of the recent history of interest rates. (These are constant maturity Treasury yields from the Fed)  You can see the pattern: