Tuesday, August 9, 2022

Climate policy numbers

Most legislation or regulation that spends hundreds of billions of dollars aimed at a purpose is extensively analyzed or scored to that purpose. OK, the numbers are  often, er, a bit unreliable, but at least proponents go through the motions and lay out assumptions one can examine and calculate differently. Tax and spending laws come with extensive analysis of just how much the government will make or spend. This is especially true when environment is concerned. Building anything requires detailed environmental assessments. An environmental review typically takes 4.5 years before the lawsuits begin. 

In this context, I'm amazed that climate policy typically comes with no numbers, or at least none that I can find readily available in major media. We're going to spend an additional $250 billion or so on climate policies in the humorously titled "inflation reduction act." OK,  how much carbon will that remove, on net, all things included, how much will that lower the temperature and when, how much and when will it quiet the rise of the oceans?  

Finally, I have seen one number, advertised in the Wall Street Journal

Our contributor Bjorn Lomborg looked at the Rhodium Group estimate for CO2 emissions reductions from Schumer-Manchin policies. He then plugged them into the United Nations climate model to measure the impact on global temperature by 2100. He finds the bill will reduce the estimated global temperature rise at the end of this century by all of 0.028 degrees Fahrenheit in the optimistic case. In the pessimistic case, the temperature difference will be 0.0009 degrees Fahrenheit.

Bjorn's twitter stream on the calculation.

Saturday, August 6, 2022

The Fiscal Theory of Inflation

We often summarize that the fiscal theory is a theory of the price level: The price level adjusts so that the real value of government debt equals the present value of surpluses. That characterization seems to leave it to a secondary role. But with any even tiny price stickiness, fiscal theory is really a fiscal theory of inflation. The following two parables should make the point, and are a good starting point for understanding what fiscal theory is really all about. This point is somewhat buried in Chapter 5.7 of Fiscal Theory of the Price Level

Start with the response of the economy to a one-time fiscal shock, a 1% unexpected decline in the sum of current and expected future surpluses, with no change in interest rate, at time 0. The model is below, but today's point is intuition, not staring at equations. This is the continuous-time version of the model, which clarifies the intuitive points. 

Response to 1% fiscal shock at time 0 with no change in interest rates

The one-time fiscal shock produces a protracted inflation. The price level does not move at all on the date of the shock. Bondholders lose value from an extended period of negative real interest rates -- nominal interest rates below inflation. 

 What's going on? The government debt valuation equation with instantaneous debt and with perfect foresight is \[V_{t}=\frac{B_{t}}{P_{t}}=\int_{\tau=t}^{\infty}e^{-\int_{w=t}^{\tau}\left(  i_{w}-\pi_{w}\right)  dw}s_{\tau}d\tau\] where \(B\) is the nominal amount of debt, \(P\) is the price level, \(i\) is the interest rate \(\pi\) is inflation and \(s\) are real primary surpluses. We discount at the real interest rate \(i-\pi\). We can use this valuation equation to understand variables before and after a one-time probability zero "MIT shock." 

With flexible prices, we have a constant real interest rate, so \(i_w-\pi_w\). Thus if there is a downward jump in  \(\int_{\tau=t}^{\infty}e^{-r \tau}s_{\tau}d\tau\), as I assumed to make the plot, then there must be an upward jump in the price level \(P_t\), to devalue outstanding debt. (Similarly, a diffusion component to surpluses must be matched by a diffusion component in the price level.) The initial price level adjusts so that the real value of debt equals the present value of surpluses. This is the standard understanding of the fiscal theory of the price level. Short-term debt holders cannot be made to lose from expected future inflation. 

But that's not how the simulation in the figure works, with sticky prices. Since now both \(B_t\) and \(P_t\) on the left hand side of the government debt valuation equation cannot jump, the left-hand side itself cannot jump. Instead, the government debt valuation equation determines which path of inflation \(\{\pi_w\}\) which, with the fixed nominal interest rate \(i_w\), generates just enough lower real interest rates \(\{i_w-\pi_w\}\) so that the lower discount rate just offsets the lower surplus.  Short-term bondholders lose value as their debt is slowly inflated away during the period of low real interest rates, not in an instantanoues price level jump. 

In this sticky-price model, the price level cannot jump or diffuse because only an infinitesimal fraction of firms can change their price at any instant in time. The price level is continuous and differentiable. The inflation rate can jump or diffuse, and it does so here; the price level starts rising. As we reduce price stickiness, the price level rise happens faster, and smoothly approaches the limit of a price-level jump for flexible prices. 

In short, fiscal theory does not operate by changing the initial price level. Fiscal theory determines the path of the inflation rate. It really is a fiscal theory of inflation, of real interest rate determination.  

The frictionless model remains a guide to how the sticky price model behaves in the long run. In the frictionless model, monetary policy sets expected inflation via \(i_t = r+E_t \pi_{t+1}\) or \(i_t = r+\pi_t\), while fiscal policy sets unexpected inflation \(\pi_{t+1}-E_t\pi_{t+1}\) or \(dp_t/p_t-E_t dp_t/p_t\).  In the long run of my simulation, the price level does inexorably rise to devalue debt, and the interest rate determines the long-run expected inflation. But this long-run characterization does not provide useful intuition for the higher frequency path, which is what we typically want to  interpret and analyze. 

It is a better characterization of these dynamics that monetary policy---the nominal interest rate---determines a set of equilibrium inflation paths, and fiscal policy determines which one of these paths is the overall equilibrium, inflating away just enough initial debt to match the decline in surpluses. 

Response to 1% deficit shock at time 0 with no change in interest rate 

This second graph gives a bit more detail of the fiscal-shock simulation, plotting the primary surplus \(s\), the value of debt \(v\), and the price level \(p\). The surplus follows an AR(1). The persistence of that AR(1) is irrelevant to the inflation path. All that matters is the initial shock to the discounted stream of surpluses. (I make a big fuss in FTPL that you should not use AR(1) surplus process to match fiscal data, since most fiscal shocks have an s-shaped response, in which deficits correspond to larger surpluses. However, it is still useful to use an AR(1) to study how the economy responds to that component of the fiscal shock that is not repaid.) 

To see how initial bondholders end up financing the deficits, track the value of those bondholders' investment, not the overall value of debt. The latter includes debt sales that finance deficits. The real value of a bond investment held at time 0, \(\hat{v}\), follows \[d \hat{v}_t = (r \hat{v}_t + i_t - \pi_t)dt. \] I plot the time-zero value of this portfolio, \[e^{-rt} \hat{v}_t.\] As you can see this value smoothly declines to -1%. This is the quantity that matches the 1% by which surpluses decline. (I picked the initial surplus shock \(d\varepsilon_{s,t}=1/(r+\eta_s)\) so that \(\int_{\tau=0}^\infty e^{-r\tau}\tilde{s}_t d\tau =-1.\) )

Response to interest rate shock at time 0 with no change in surpluses 

The third graph presents the response to an unexpected permanent rise in interest rate. With long-term debt, inflation initially declines. The Fed can use this temporary decline to offset some fiscal inflation. Inflation eventually rises to meet the interest rates. Most interest rate rises are not permanent, so we do not often see this long-run stability or neutrality property. The initial decline in interest rates comes in this model from long-term debt. As the dashed line shows, with shorter-maturity debt inflation  rises right away. With instantaneous debt, inflation follows the interest rate exactly. 

Again, in this continuous-time model the price level does not move instantly. The higher interest rate sets off a period of lower inflation, not a price-level drop. 

With long-term debt the perfect-foresight valuation equation is \[V_{t}=\frac{Q_tB_{t}}{P_{t}}=\int_{\tau=t}^{\infty}e^{-\int_{w=t}^{\tau}\left(  i_{w}-\pi_{w}\right)  dw}s_{\tau}d\tau. \] where \(Q_t\) is the nominal price of long-term government debt. Now, with flexible prices, the real rate is fixed \(i_w=\pi_w\). With no change in surplus \(\{s_\tau\}\), the right hand side cannot change. Inflation \(\{\pi_w\}\) then simply follows the AR(1) pattern of the interest rate. However, the higher nominal interest rates induce a downward jump or diffusion in the bond price \(Q_t\). With \(B_t\) predetermined, there must be a downward jump or diffusion in the price level \(P_t\). In this way, even with flexible prices, with long-term debt we can see an instant in which higher interest rates lower inflation before ``long run'' neutrality kicks in. 

How does the price level not jump or diffuse with sticky prices? Now \(B_t\) and \(P_t\) are predetermined on the left hand side of the valuation equation. Higher nominal interest rates \(\{i_w\}\) still drive a downward jump or diffusion in the bond price \(Q_t\). With no change in \(s_\tau\), a spread \(i_w-\pi_w\) must open up to match the downward jump in bond price \(Q_t\), which is what we see in the simulation. Rather than an instant downward jump in price level, there is instead a long period of low inflation, of slow price level decline, followed by a gradual increase in inflation. 

Again, the frictionless model does provide intuition for the long-run behavior of the simulation. The three year decline in price level is reminiscent of the downward jump; the eventual rise of inflation to match the interest rate is reminiscent of the immediate rise in inflation. But again, in the actual dynamics we really have a theory of \emph{inflation}, not a theory of the \emph{price level}, as on impact the price level does not jump at all. Again, the valuation equation generates a path of inflation, of the real interest rate, not a change in the value of the initial price level. 

The general lessons of these two simple exercises remain: 

Both monetary and fiscal policy drive inflation. Inflation is not always and everywhere a monetary phenomenon, but neither is it always and everywhere fiscal. 

In the long run, monetary policy completely determines the expected price level. As the inflation rate ends up matching the interest rate, inflation will go wherever the Fed sends it. If the interest rate went below zero (these are deviations from steady state, so that is possible), it would drag inflation down with it, and the price level would decline in the long run. 

One can view the current situation as the lasting effect of a fiscal shock, as in the first graph. One can view the Fed's option to restrain inflation as the ability to add the dynamics of the second graph. 

Don't be too put off by the simple AR(1) dynamics. First, these are responses to a single, one-time shock. Historical episodes usually have multiple shocks. Especially when we pick an episode ex-post based on high inflation, it is likely that inflation came from several shocks in a row, not a one-time shock. Second, it is relatively easy to add hump-shaped dynamics to these sorts of responses, by standard devices such as habit persistence preferences or capital accumulation with adjustment costs. Also, full models have additional structural shocks, to the IS or Phillips curves here for example. We analyze history with responses to those shocks as well, with policy rules that react to inflation, output, debt, etc. 

The model  I use for these simple simulations is a simplified version of the model presented in FTPL 5.7.  

$$\begin{aligned}E_t dx_{t}  &  =\sigma(i_{t}-\pi_{t})dt \\E_t d\pi_{t}  &  =\left(  \rho\pi_{t}-\kappa x_{t}\right)  dt\  \\ dp_{t}  &  =\pi_{t}dt \\ E_t dq_{t}  &  =\left[  \left(  r+\omega\right)  q_{t}+i_{t}\right] dt \\ dv_{t}  &  =\left(  rv_{t}+i_{t}-\pi_{t}-\tilde{s}_{t}\right)  dt+(dq_t - E_t dq_t) \\ d \tilde{s}_{t}  &  = -\eta_{s}\tilde{s}_{t}+d\varepsilon_{s,t} \\ di_{t}  &  = -\eta_{i}i_t+d\varepsilon_{i,t}. \end{aligned}$$

I use parameters \(\kappa = 1\), \(\sigma = 0.25\), \(r = 0.05\), \(\rho = 0.05\), \(\omega=0.05\), picked to make the graphs look pretty. \(x\) is output gap, \(i\) is nominal interest rate, \(\pi\) is inflation, \(p\) is price level, \(q\) is the price of the government bond portfolio, \(\omega\) captures a geometric structure of government debt, with face value at maturity \(j\) declining at \(e^{-\omega j}\), \(v\) is the real value of government debt, \(\tilde{s}\) is the real primary surplus scaled by the steady state value of debt, and the remaining symbols are parameters. 

Thanks much to Tim Taylor and Eric Leeper for conversations that prompted this distillation, along with evolving talks. 

Friday, August 5, 2022

China game theory

In the last Goodfellows, we batted around the question of how China would respond to Nancy Pelosi's visit. 

In this context, news just came in, announcing responses that we had not thought of: China is giving the US a big middle finger on climate. The announcement, from the Ministry of Foreign affairs, is short and clear: 

In disregard of China’s strong opposition and serious representations, Speaker of the U.S. House of Representatives Nancy Pelosi visited China’s Taiwan region. On 5 August, the Ministry of Foreign Affairs announced the following countermeasures in response:

1.Canceling China-U.S. Theater Commanders Talk.

2.Canceling China-U.S. Defense Policy Coordination Talks (DPCT).

3.Canceling China-U.S. Military Maritime Consultative Agreement (MMCA) meetings.

4.Suspending China-U.S. cooperation on the repatriation of illegal immigrants.

5.Suspending China-U.S. cooperation on legal assistance in criminal matters.

6.Suspending China-U.S. cooperation against transnational crimes.

7.Suspending China-U.S. counternarcotics cooperation.

8.Suspending China-U.S. talks on climate change.

My emphasis. Slip the knife in at the end. (The others are also interesting.) 

Friday, July 29, 2022

Inflation explainer

A few Stanford colleagues got together to talk about inflation, and that gave me an incentive to summarize recent writings as compactly as possible. Here goes, and thanks to everyone for a great discussion. 

The big question

Here we are, 9% inflation. Yes, I think it came from the big fiscal helicopter drop. Others have other theories. 

Don't confuse inflation with relative prices. An oil price shock can make oil more expensive than other things. But it does not determine whether oil goes up 10% and wages go up 5%, or oil goes down 5% and wages go down 10%. The central phenomenon is a decline in the value of money, that prices and wages all go up together. The clearest indication that is the phenomenon is that wages are going up. Of course people and politicians care most about prices relative to wages. But don't let that confuse us about the economic issue. 

Slide courtesy Arvind Krishnamurthy

The important question right now is, will the Fed's slow reaction lead to spiraling inflation? Conventional economic wisdom says that it takes interest rates above inflation to bring inflation down. As long as interest rates are below inflation, inflation will spiral up. That needs 10% or more interest rates, now. But the Fed thinks that interest rates are already "neutral," meaning that a 2.25-2.5% interest rate and 9% inflation does not push inflation up any more. How can they believe this? 

Markets also believe that inflation will largely go away on its own, with no period of interest rates substantially above inflation:
Slide courtesy Arvind Krishnamurthy

Right now (right side of graph), markets think that inflation 5 years from now (lower blue line) will be 2.5%, and average inflation in the next 5 years will be about 3.4%. And these numbers have come down recently! Of course these markets like the Fed completely missed the emergence of inflation: both numbers were 2.5% in January 2021 on the day that inflation broke out. But that's their current forecast. 
Slide courtesy Arvind Krishnamurthy

And here is the market forecast of interest rates. Markets think rates will rise briefly to 3.5%, but then go quickly back down to 2.5%. Inflation goes away on its own. How can that be? 

So much for the real world, how does it work in theory? 

This slide boils down 50 years of macroeconomics. i is interest rate, pi is inflation, x is output, the rest are parameters. There are two basic ingredients. First in "IS", higher real interest rates -- nominal interest rate i less expected inflation -- lowers output x. (The correct equation has the grayed out term, but that doesn't turn out to matter for these points.) Second, in "Phillips," inflation is higher if people expect more inflation in the future -- in that case, raise prices now -- and if the economy is booming. 

Now, put those ingredients together, and we have the dynamic relationship between interest rates and inflation shown in the third equation. 

But what is expected inflation? Starting with Milton Friedman in 1968, and proceeding through the Keynesian tradition since then, conventional wisdom says expected inflation is driven by whatever happened last year, "adaptive" expectations. Substitute that in, and you have the dynamics just above the left hand graph.

 Inflation = (number bigger than one) x last year's inflation minus (number) times interest rate.
(Number bigger than one) means that inflation is unstable. If the Fed leaves interest rates alone, any small inflation will get bigger and bigger over time. This is the conventional wisdom that until the Fed raises rates above existing inflation, inflation will keep getting worse and worse. 

What if people are smarter than that? What if their expectations for next year are "rational," including all information, or at least "consistent," a model should write that the people in the model have the same expectations as those of the model, we economists are not so much smarter than everyone else.  Now we have the right hand group, and inflation dynamics are. 

Next year's expected inflation = (number less than one) x this year's inflation plus (number) times interest rate 
Now inflation is stable. Even if the Fed does nothing inflation will eventually -- accent on eventually, a lot may happen along the way -- come back down again.  

Rational (or at least consistent) expectations, the idea that people think about the future when making decisions today, has been the cornerstone of macroeconomics since about 1972. It is part of the "new-Keynesian" tradition marked NK. There too, inflation is stable. The NK models can't tell you which of the dashed paths will happen, so they predict inflation will bat around between them. But they are all stable. Fiscal theory of the price level picks one of the dashed paths. Inflation is now stable and determinate. 

Now you see the central economic question. Another way to put it, it's really about the sign of output in the Phillips curve. Does higher output, and lower real interest rates, cause inflation to grow, or to decline--to raise today's inflation above future inflation? 

The Fed, and the markets, are taking the stability view, which the model produces by rational expectations. It's not completely crazy. 

The Facts

What does history tell us about this momentous question? Well, that depends. 

The conventional stylized history of inflation comes from the 1970s, top graph.  The Fed didn't do as bad a job as most people say. In each of the four waves of inflation, the did, promptly, raise interest rates at least one for one, and usually more so, with inflation. The Fed never waited a whole year to do anything. And yet it was not enough, with inflation steadily ramping up, until in 1980 the Fed finally put interest rates decidedly above inflation, and left them there for years, despite a bruising recession. 

With that standard interpretation of history, and the adaptive unstable model in mind, the conventional view economists are exactly right to be screaming from the rooftops that the Fed needs to raise interest rates, now. 

But now there is another history. In the zero bound era, bottom graph, deflation threatened. (I plot core cpi. Actual CPI got to 2% deflation.) The same unstable/spiral view said, here we go. The Fed can't lower interest rates anymore, so we'll have a deflation spiral. It never happened. Inflation was quieter at the zero bound than before when the Fed was moving interest rates around! 

Europe's zero bound lasted longer, until now. And Japan's longer still, starting in the early 1990s. You can't ask for a clearer test that inflation can be stable (and quiet) while central banks do nothing with interest rates. In theory, that needs a lot of preconditions, in particular that no other "shocks" come along -- we just saw a big one, more are coming. But the "stable" theory at least has one episode to counter the standard story of the 1970s. 

In short, ye who say inflation will spiral upward if the Fed does not raise interest rates to 10% or more tomorrow, did ye not also say that inflation would spiral downward at the zero bound? 

It's not completely crazy. 

A fuller simple model

My last slide shows a simulation from a real but still very simple model. It has sticky prices, the full IS curve, rational expectations, and long-term debt. In the top panel, there is a 1% fiscal shock -- the government hands out 1% more debt and people do not think this will be repaid -- and the Fed does nothing. Again, in my view, we just did this times 30. The graph shows a lot of interesting things. First, a one-time fiscal shock leads to persistent inflation. Over several years of inflation higher than interest rates, inflation eats away at the value of government bonds. It does not lead to a one-time price level jump. We're living that period. But the inflation of a one-time fiscal shock eventually fades away on its own. (Don't take steadily declining inflation too seriously. It's pretty easy to spiff up the model to a hump-shaped response that rises smoothly for a while before turning around.) 

Monetary policy is not helpless. What happens if the Fed raises rates, as it is starting to do, but there is no unexpected change in fiscal policy (i.e. continue to spend like drunken sailor, as before covid). In this simple model the Fed can lower inflation in the short run. Notice output fall. Yes, the Fed's tool is to cause a bit of recession (IS), and that pushes down inflation (Phillips). The Fed hopes to add just enough of the bottom curve on to the top curve to keep inflation somewhat moderated. But the Fed cannot eliminate inflation. Notice inflation goes up in the long run. The Fed bought lower initial inflation at the cost of prolonging the inflationary period. Eventually, in this model, inflation goes to wherever the Fed sets interest rates. I plotted interest rates that stay high forever so you can see how it works, but if the Fed eventually brings those rates down, so does inflation come down. 

The ideal end to inflation would have the Fed do a little bit of this, and then Congress wakes up and gets fiscal policy in order -- passes the negative of the top graph. 

Bottom line, both fiscal and monetary policy matter for inflation. Add the two graphs as you please to think about scenarios. 

It's not so crazy. 

Is this how the world works? I don't have pound fist on table certainty. I have spent so much of my life thinking the Fed has to raise interest rates promptly to avoid inflation, and so many economists think that's true, that fully digesting the rational expectations view is very hard. Yet theory, the Fed, markets, and the zero bound experience speak loudly. 

In any case, if nothing terrible happens (these simulations assumptions no additional shocks), we will soon have another great test of macroeconomic theories, adding to the zero bound episode. Inflation will either fade away back down towards the Fed's interest rates, or inflation will continue to spiral upward until the Fed raises rates dramatically. 

Yes, economics really doesn't fully know the answer to the most basic question, is inflation stable or unstable around an interest rate target, and does the Fed need to raise interest rates more than observed inflation to bring inflation under control. You now know as much as just about anyone. 

The IS and Phillips curves (especially the latter) are awfully weak building blocks as well.  

Thursday, July 28, 2022

The Fed Needs Fiscal Help

The Fed Cannot Cure Inflation by Itself, Wall Street Journal June 28 2022

This is the original version, before WSJ edits. They made it shorter, but I think this version is better. 

The Fed cannot cure this inflation alone. Relying on it to do so will only lead to cycles of stagflation. 

Our inflation stems from fiscal policy.  We are seeing the effects of about $5 trillion of printed or borrowed money, most sent out as checks.  But that alone need not cause inflation. The new money is reserves, which pay interest, and so are equivalent to Treasury debt. The US can borrow and spend without inflation, if people have faith that debt will be repaid, and that Treasury debt is a good investment. Then those who wish to spend will sell it to those who wish to save. With this faith, the US has had many deficits without inflation. The fact that this stimulus led to inflation implies a broader loss of faith that the US will repay debt. 

The Fed’s tools to offset this inflation are blunt.  By raising interest rates, the Fed pushes the economy toward recession. It hopes to push just enough to offset the fiscal boost. 

Tuesday, July 26, 2022

Health policy video/podcast

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! 

Sunday, July 10, 2022

Woke week

Two readings from last week, in the self-destruction of American academia and other institutions. 


The Nature of the Beast

Bari Weiss writes another powerful essay, from a talk given at the new University of Austin. Really, you should read the whole thing, but here is one particularly delicious excerpt: 

The ideology that is trying to unseat liberalism in America begins by stipulating that the forces of justice and progress are in a war against backwardness and tyranny. And in a war, the normal rules of the game must be suspended. Indeed, this ideology would argue that those rules are not just obstacles to justice, but tools of oppression. They are the master’s tools. And the master’s tools cannot dismantle the master’s house.

So the tools themselves are not just replaced but repudiated. 

By ``liberalism'' Bari means the philosophy of freedom, spanning classical liberalism to the traditional American left. She does not say, but could go on, that this is a fundamentally anti-democratic authoritarian movement. When you are in the right, and the opposition is wrong, evil, racist, and so forth, and the world faces crisis after imagined crisis, we have no time for dissenting views and procedural niceties.  

Persuasion—the purpose of argument—is replaced with public shaming. Moral complexity is replaced with moral certainty. Facts are replaced with feelings. The rule of law is replaced with mob rule.

Ideas are replaced with identity. Forgiveness is replaced with punishment. Debate is replaced with disinvitation and de-platforming. Diversity is replaced with homogeneity of thought. Inclusion with exclusion. Excellence with equity.

In this ideology, disagreement is recast as trauma. So speech is violence. But violence, when carried out by the right people in pursuit of a just cause, is not violence at all—but in fact justice.

(Savor a bit Bari's delicious writing. Night is day, truth is falsehood, good is evil -- sonorous repetition is a great tool.) 

In this ideology, bullying is wrong, unless you are bullying the right people, in which case it’s very, very good. In this ideology, information that does comport with The Narrative is recast as disinformation, its proponents as conspiracy theorists. In this ideology, education is not about teaching people how to think, it’s about re-educating them in what to think. In this ideology the need to feel safe trumps the need to speak truthfully. 

In this ideology, if you do not tweet the right tweet or share the right slogan, your whole life can be ruined. Just ask Tiffany Riley, a Vermont school principal who was fired—fired—because she said she supports black lives but not the organization Black Lives Matter.

In this ideology, the past cannot be understood on its own terms, but must be judged through the morals and mores of the present. It is why statues of Grant, Lincoln and Washington were torn down. It is why William Peris, a UCLA lecturer and an Air Force veteran, was investigated because he read Martin Luther King’s “Letter from Birmingham Jail” out loud in class. 

In this ideology, intentions don’t matter. That is why Emmanuel Cafferty, a Hispanic utility worker at San Diego Gas and Electric, was fired for making what someone said they thought was a white-supremacist hand gesture. In fact, he was fidgeting with his fingers out of his car window. 

In this ideology, you are guilty for the sins of your fathers. In other words: you are not you. You are only a mere avatar of your race or your religion or your class. That is why third graders in Cupertino, California, were asked to rate themselves in terms of their power and privilege. It is why an elementary school in Washington, D.C. gave kindergarteners a “fistbook” asking them to identify racist family members.

In this system, we are all placed neatly on a spectrum of “privileged” to “oppressed.” We are ranked somewhere on this spectrum in different categories: race, gender, sexual orientation and class. Then we are given an overall score, based on the sum of these rankings. Having privilege means that your character and your ideas are tainted. This is why, one high schooler in New York tells me, students in his school are told “if you are white and male, you are second in line to speak.” This is considered a normal and necessary redistribution of power.

Victimhood, in this ideology, confers morality. “I think therefore I am” is replaced with: “I am therefore I know.” Or: “I know therefore I am right.”

This ideology says there is no such thing as neutrality, not even in the law, which is why the very notion of colorblindness—the Kingian dream of judging people not based on the color of their skin but by the content of their character—must itself be deemed racist. 

In this ideology, the equality of opportunity is replaced with equality of outcome as a measure of fairness. Racism is no longer about individual discrimination. It is about systems that allow for disparate outcomes among racial groups. If everyone doesn’t finish the race at the same time, then the course must have been flawed and should be dismantled.

(Savor that sequence of topic sentences.)  

Thus the efforts to do away with the SAT, or the admissions test for elite public schools like Stuyvesant and Lowell—for decades, the engines of opportunity that allowed children of poor and working-class families to advance on their merit, regardless of race. Or the argument made by The New York Times’ classical music critic to do away with blind auditions for orchestras.

(Blind auditions were put in place as an effort to remove prejudice in favor of white male performers. They have not produced the desired demographic effect.)  

In fact, any feature of human existence that creates disparity of outcomes must be eradicated: The nuclear family, politeness, even rationality itself can be defined as inherently racist or evidence of white supremacy. The KIPP charter schools recently eliminated the phrase “work hard” from its famous motto “Work Hard. Be Nice.” Why? Because the idea of working hard “supports the illusion of meritocracy.” 

In this revolution, skeptics are recast as heretics. Those who do not abide by every single aspect of its creed are tarnished as bigots, subjected to boycotts and their work to political litmus tests. The enlightenment, as the critic Edward Rothstein has put it, has been replaced by the exorcism. 

What we call “cancel culture” is really the justice system of this revolution. And the goal of the cancellations is not merely to punish the person being canceled. The goal is to send a message to everyone else: Step out of line and you are next. 

It has worked.

A recent CATO study found that 62 percent of Americans are afraid to voice their true views. Nearly a quarter of American academics endorse ousting a colleague for having a wrong opinion about hot-button issues such as immigration. And nearly 70 percent of students favor reporting professors if the professor says something that students find offensive, according to a Challey Institute for Global Innovation survey. Think about that. A majority of students in America think it is a virtue to inform on their wrong-thinking professors. 

Bari goes on to tell her young audience, take your country back, found institutions again. 



I saw this week an article on how the University of California's DEI bureaucracy is destroying the institution, by Steven Brint and Komi T. German, professors at UC. (I hate to use the Orwellian term DEI -- it is really Conformity, Preference and Exclusion. But we'll suffer through.) It's a year old, but still vibrant. 

The use of mandatory DEI statements as initial screening mechanisms in faculty hiring is the most dramatic of the new administrative policies...

...By 2019, eight of the ten UC campuses mandated that ladder rank faculty recruitments require candidates to submit diversity statements. These statements ask candidates to discuss what they have contributed to the University’s goals of diversity, equity, and inclusion. The rubric used by the UCs to evaluate diversity statements...delineates criteria for scores ranging from 1 (“poor”) to 5 (“excellent”). An applicant who “doesn’t discuss gender or race/ethnicity” should receive a “poor” score, as should an applicant who sees DEI as “antithetical to academic freedom or the university’s research mission.” By contrast, an applicant who discusses DEI as “core values that every faculty member should actively contribute to advancing” should receive an “excellent” score.

It is the naïve candidate who simply discusses his or her efforts to encourage and recruit students or faculty members of color. These efforts are considered minimal. As UC Merced sociologist Tanya Golash-Boza counseled applicants in the pages of Inside Higher Ed, do not worry about coming across as “too political,” because such fears might lead them to write a “blasé statement.” Instead, she recommends that they demonstrate their “awareness of how systemic inequalities affect students’ ability to excel” and their commitment to “activism.” She encourages applicants to “tell your story”—that is, to point out the obstacles they have faced, or, alternatively, to “acknowledge your privilege.” She also recommends that applicants focus on “racial oppression, sexism, homophobia, transphobia, ableism, or some other commonly recognized form of oppression.” When it comes to teaching, she encourages applicants to express their commitment to “antiracist pedagogy” (Golash-Boza 2016).

My emphasis. I'm all for a diverse faculty and student body, on dimensions including but also beyond skin color and sexual identity and preferences. But the point here is forced political speech and activity, most of all to supporting the DEI office!  

But here comes the good part:

In 2018, the University began to experiment with the use of diversity statements as the initial screening device in faculty searches, .... In a presentation prepared by the UC Davis vice provost for academic affairs search committee members were instructed to review a candidate’s “Contributions to Diversity” statement before any other part of an application, and that candidates who do not “look outstanding with regard to their contributions to diversity” would not advance for further consideration in the hiring process. Reiterating this message, the vice chancellor explained at a conference that “in these searches, it is the candidate’s diversity statement that is considered first; only those who submit persuasive and inspiring statements can advance for complete consideration.” ...(Ortner, 2020).

Jaw drops. 

UC Berkeley has published information about the effects of the policy mandating the use of diversity statements as an initial screening device. In one faculty search, less than one quarter of otherwise qualified candidates had submitted diversity statements that were sufficient for advancement to the next hiring stage.

The constraint binds. This is not a form to fill out with boilerplate.  

The files for these 214 candidates were then sent to the appropriate departmental search committees to create a short list for interviews (these are typically 3-6 candidates per job). 

Note here it is clear -- the departmental search committee does not even get to see the file until the DEI bureaucracy blesses it! 

During their job talks and interviews, candidates were asked to explain their ideas about diversity, and their responses determined whether they were eligible to be hired in this late stage. Thus, at every stage of the hiring process, candidates were eliminated because they were perceived as being insufficiently committed to DEI, regardless of their academic qualifications

During their job talks. Enough about dark matter in the early universe, now, we really want to know how many protests you've been to in the last two years... 

To my mind the screening for active political participation is the most galling. It is, of course, a way to avoid federal and state anti-discrimination laws: 

The race and gender characteristics of the applicant pool in the UC Berkeley search changed substantially after candidates were evaluated on the basis of their diversity statements. The representation of women increased from 42 percent of applicants to 64 percent of the finalists, whereas the representation of men decreased from 57 percent of applicants to 36 percent of the finalists. The representation of African Americans increased from 3 percent of applicants to 9 percent of the finalists; and the representation of Hispanics increased from 13 percent of applicants to 59 percent of the finalists. By contrast, the representation of Asian Americans dropped from 26 percent of applicants to 18 percent of the finalists, and the representation of whites decreased from 54 percent of applicants to 14 percent of the finalists.

After the Supreme Court tosses out Harvard's anti-asian admissions policies, it will be how interesting to see what happens here. But, back to the point, political conformity is the most important message. (I'd be interested to see how many Black conservatives survived the process!) 

The policy of winnowing applicant pools based on diversity statements poses an obvious threat to the climate for academic freedom because of the implicit and explicit expectation that faculty must express a specific view regarding DEI. It is highly plausible that candidates will be (and arguably already have been) discriminated against not only because they do not subscribe to a particular set of political beliefs (as indicated by the UC scoring rubric criteria for “excellent” versus “poor” scores)...

The piece goes on to describe the history of this process, mainly from a desire to increase the number of women and minorities in the faculty. 

Most relevant to academic freedom, the essay goes on to describe the thought police: A secretive bureaucracy that processes all complaints of "behavior that is inconsistent with our Principles of Community." Secretive, because "The number and disposition of incidents filed based on the reports is unknown because UC has failed to disclose incidents or how they have been handled." Then "mandatory training and the appointment of a vice chancellor for diversity, equity and inclusion with a budget of $3 million. UC DEI initiatives accelerated following these events." 

In the summer of 2019, the University added equity advisors to every program on eight of its campuses. The equity advisor is “a senior ladder faculty member who participates in the faculty recruitment process by raising awareness of best practices…. Their role is to help advance diversity and to ensure that a climate of inclusion and equity is maintained throughout the search process” (UCOP 2019). Some Equity Advisor programs have expanded their purview to include other areas, such as faculty advancement and retention, salary equity decisions, formal and informal mentoring of faculty, advancing diversity in graduate admissions, and department climate. They “organize faculty development programs, address individual issues raised by women and underrepresented minority faculty, ... equity advisors are empowered to mediate...People can report, among other things, “expressions of bias,” “hate speech,” “bias incidents,” and a “hostile climate.”

Noting the conflict between free speech and such efforts, the authors note wryly 

it is perhaps indicative of the University’s stance that no academic freedom advisors are on the payroll.

The essay echoes familiar (to us) stories, 

Academic freedom was sacrificed for the representational mission when an accounting professor at UCLA was placed on academic leave for denying students’ demands for a “no-harm” final exam following the death of George Floyd (Flaherty, 2020). It was violated when a political science professor at UCLA was subjected to a review by the University’s Discrimination Prevention Office for presenting Martin Luther King Jr.’s “Letter from a Birmingham Jail” and clips from a documentary on racism, both of which included the “N-word” (Korn, 2020). It was compromised when UC Berkeley faculty and students were advised not to use the phrase “America is a melting pot” or a “land of opportunity” (Volokh 2015). And the climate for academic freedom became chillier when a professor of history at Berkeley wrote an open letter to colleagues expressing concern about the “racial injustice” and “institutional racism” narratives of the anti-racism movement and the Berkeley’s history department responded by issuing a statement that it “condemn[s] this letter: it goes against our values as a department and our commitment to equity and inclusion” (Grimes, 2020).

Yet the main rot is silent: 

Unlike these examples, most of the changes in the day-to-day affairs of the University have not reached the media; they have been incremental, including administrative appointments vetted for adherence to the University’s DEI values; the labeling of DEI statements in department meetings as “helpful” and academic freedom statements as “defensive”; and the institution of “voluntary” listening and diversity training sessions in which the loyalty of those absent becomes questionable in the eyes of attendees. These incremental changes eventually lead to qualitative shifts.  

The essay goes on to discuss Critical Theory vs. rationalism, and useful thoughts on why things have headed this way, along with what seems to be a long "we really aren't racists apoloigia." Worth a read. 


You're probably tired, as am I, but next read Joseph Manson's Why I'm Leaving the University, on just how UCLA is falling to pieces. 

Monday, July 4, 2022

Letter to the AEA

A group of economists recently posted a petition to the American Economic Association, that it move its annual meetings away from New Orleans this year and Texas next year, because of those states' abortion laws. If you're an economist interested in our -- so far -- leading professional society, you should read and consider the whole petition.  It has of course attracted a lot of attention on social media 

Excerpts, so you get the central idea: 

Louisiana’s ban on abortion... makes it illegal to obtain an abortion in Louisiana and criminalizes healthcare providers who perform abortions. ...These restrictions on healthcare place an undue, differential burden on young women in the economics profession, who are forced to balance the risk of needing medical care unavailable in Louisiana with their professional obligation to attend the Annual Meetings...

The AEA bylaws state the our organization “will take no partisan attitude, nor will it commit its members to any position on practical economic questions.” However, the health and human rights of pregnant AEA members transcend partisanship. Economists who are pregnant or might become pregnant have an equal right to participate in our Annual Meetings without facing disproportionate health risks.

To protect the health and wellbeing of all AEA members, I encourage the Executive Committee to relocate the 2023 and 2024 meetings, and to commit to holding future meetings in states where women’s rights to necessary pregnancy care are protected.

I participated in an effort with a group of economists to write a letter to the AEA Executive Committee opposing this move, which is below and is the point of this blog post. 

I emphasize this letter has nothing to do with abortion. I favor of  free abortion access. Our objection is to the AEA going deeper down the rabbit hole of politics in either direction. 

I do not think there is any danger that the AEA will actually move its meetings. The executive committee is pretty sensible. However, there is a danger that the AEA will feel moved to issue additional statements of its support for political causes, and instructions to its members on how we all should feel and act. I hope the letter will nudge the AEA back to an a-political role, and to focus on the great current danger: increasing restrictions on academic freedom, and the rush to conformity and exclusion on political, ideological, or even economic matters. I also hope the AEA leadership will become a bit more aware of the wide diversity of views of its membership, and strive to become more inclusive. There are actual (gasp) Republicans. There are quite a few Catholics. A scientific professional organization must be much more open than organizations who are founded to advance particular causes. 

And that is my purpose in sharing the letter publicly. It is up to all of us to nudge our professional organizations to activities we value. If you browse the AEA website, or read the statements of its new officers you get a sense of where it is going. If you think different activities are important, such as defending academic freedom, then speak up. 

I salute the petition writers however. This is exactly what the Court had in mind in sending abortion back to the states. They must be watching the attention to state laws and state legislatures with pride. Go for it. There are many organizations that will help channel your advocacy for changing Louisiana's and Texas' abortion laws; Planned Parenthood, ACLU, and many more. If you go to Louisiana, bring a sign and organize a protest.  As a supporter of abortion rights, I would like to see state legislatures squirm, and at least to think through their laws more clearly. They are now the dog that caught the car. If you favor abortion restrictions, there are plenty of organizations that will help you to express those views as well, and bring pressure on state legislators. 

But not every organization needs to be bent to one view of every cause. The AEA must be a diverse and inclusive organization, focused on its narrow goal. 

The letter: 


Dear AEA executive committee:

We write regarding the petition to move the ASSA meetings away from New Orleans this year, Texas in 2024, and avoid similar locations in the future. We encourage you to resist the temptation of doing so.

This ought to be a layup. The AEA bylaws state that the association “will take no partisan attitude, nor will it commit its members to any position on practical economic questions.”  The petition is a clear attempt to boycott states based on their abortion laws. 

Yes, the petition claims the health of AEA attendees is at risk. But that claim is a transparent subterfuge. The chance that an AEA member needs abortion care during the three-day meeting and cannot get it due to Louisiana’s restrictions is essentially zero. The Louisiana law has been blocked, rendering any danger even less likely.  The petitioners present no evidence otherwise. Moreover, there are many health risks to attendees, but the AEA does not routinely survey host cities for the availability of hospitals, emergency rooms, quality of stroke or heart attack care, kinds of health insurance accepted, and so forth. 

Even if you believe there is a health risk, genuinely dissociated from your and members’ political views, you should recognize that this move will be universally perceived as a political boycott. 

Now you may feel that state-level abortion restrictions are such a vital issue that the AEA should break its bylaws to proceed with this boycott. However strongly you feel, we urge you not to do so, and to take this opportunity to strengthen the AEA’s status as an apolitical organization whose central mission is the advancement of economic science. 

 We stress that this recommendation is not about abortion. Our views on the matter vary, including some who support very lenient restrictions. 

The AEA rightly has never taken a stand on important economic issues of the day, and except for the George Floyd statement and reading list, has never taken a stand on important moral, social, or political issues, including the red scare, the Vietnam War, and others. Now is not the time to start. 

The first reason is diversity and inclusion, which have become mainstays of the AEA’s objectives. Diversity and inclusion include diversity of political affiliation, religious belief, and ideological orientation. People of different views must feel welcome, especially in a professional scientific organization.

Now it is likely that a majority of AEA members favor less restrictive abortion laws than those of Louisiana. Studies of the AEA find that AEA members are 3.8:1 Democrat/Republican, with AEA officers and editors 8:1, compared to a general population 1.3:1. Though not all Democrats are of one mind on abortion, these numbers suggest that a majority of the AEA membership supports a broad set of abortion rights—though perhaps not as uniformly as AEA leadership. 

But diversity and inclusion are the antitheses of imposing the majority’s political, moral, or ideological views. How would those members who support abortion restrictions, or merely the right of the citizens of Louisiana to vote democratically on this contentious issue feel if the AEA tells them that their views on this topic are so beyond the pale that the AEA cannot have a meeting in any state with restrictive abortion laws? 

Diversity and inclusion by political and ideological orientation and religious belief intersects with the racial and gender categories on which the AEA has placed more focus. Many Hispanics, Blacks, and women oppose abortion. According to a recent Pew Research Center survey, 40% of Hispanics, 27% of Blacks, and 35% of women state that abortion should be illegal in all or most cases. Are they additionally unwelcome in the AEA? In any diversity effort, it is imperative to emphasize that views of under-represented minorities may be heterogenous, and differ from the views of incumbent leadership in many unexpected ways.

The second reason is the precedent that this move will create. Suppose we accept the argument that the AEA cannot hold the meetings in Louisiana, and even the safety rationale. Then, what about states such as Texas or Arizona where non-U.S. citizen attendees may be at risk? Dreamers, undocumented immigrants, and foreign students with visa issues exist in our membership too. What about state and city gun regulations? AEA members have in the past been victims of robberies and other crimes at meetings. Members may feel unsafe in cities with easy standards for gun ownership. Others may feel unsafe that a city or state restricts their legal gun ownership. Some may feel unsafe that city police departments disproportionately target minorities, or that that are not enforcing gun laws, solving murders, and allowing too much crime. When we recognize this is a boycott, members may want to boycott cities whose public schools disastrously hurt the disadvantaged, or whose environmental or building policies they disagree with.  The list is endless. 

You should also consider the consequences. If you start boycotting red states, their legislatures may well forbid public universities from recruiting at AEA meetings and paying for conference attendance.  

Acceding to this petition will have a chilling effect on our entire profession. The outstanding catastrophe in contemporary academia is the increasing restriction on speech, academic freedom, freedom of inquiry, and the rise of political coercion. More and more students and young faculty especially are afraid to speak, to research contentious topics or to reveal religious and political affiliation, or other indicators of unpopular opinion. As a professional scientific organization, the AEA should loudly champion and defend diversity of research, opinion, expression, and inquiry for all our members. 

As we said, this ought to be a layup. You should respond that you do not see a quantitatively important danger to the safety of participants, and take the opportunity to stress that the AEA is not political, and that support for diversity, inclusion and free expression of different views is central to its mission.  We trust that you figured this out already, but perhaps our thoughts can help to steel your nerves and sharpen your response.  

As a sign of the problems pointed out in this letter, some signatories are concerned of professional repercussions if their view is known in public. We ask for your discretion not to forward this letter beyond your committee or to broadcast its signatories. This is a private letter to you, not a petition. 




Yes, at the request of quite a few people, we do not divulge names to anyone but the AEA committee. A sign of the times, and the main issue confronting academic economics which our professional organizations are completely ignoring. The signatories did OK my publicizing the contents of the letter. 

Happy 4th of July to all. It's a good day to celebrate our messy chaotic democracy, approaching 250 years. 

Update: In response to the comment below. Since this is not a public letter or petition, it's really not set up to add signatures. The best way to show support for these ideas is to write the AEA Executive Committee members directly. And tweet or rebroadcast on your favorite social media. 

Sunday, July 3, 2022

How much do interest rates help?

So if the Fed raises interest rates, how much and how soon will that help inflation? For another project, I went back to Valerie Ramey's classic review. Here is her replication and update of two classic estimates: 

Two estimates of the effect of monetary policy shocks. Top:  Christiano et al. (1999) identification. 1965m1–1995m6 full specification: solid black lines; 1983m1–2007m12 full specification: short dashed blue lines; 1983m1–2007m12, omits money and reserves: long-dashed red lines. Light gray bands are 90% confidence bands. Bottom: Romer and Romer monetary shock. Coibion VAR 1969m3–1996m12: solid black lines; 1983m1–2007m12: short dashed blue lines; 1969m3–2007m12: long- dashed red lines. Source: Ramey (2016)

The left side tells us what the federal funds rate typically does after the Fed raises it. The right shows the effect of the rate rise on the level of the CPI. Inflation is the slope of the curve. The horizontal axis is quarters. The top panel uses a vector autoregression. The bottom panel uses the Romer and Romer reading of the Fed minutes to isolate a monetary policy shock. 

Top pane (VAR): Multiplying by 10, a 2 percentage point rise in the funds rate (blue dash) might lower cumulative inflation by one percentage point in three years (12 quarters), before it runs out of steam. The black line is the most hopeful, but it is essentially the 1980 experience. Still, multiplying by 5, a 2 percentage point rise in the funds rate only lowers inflation half a percent in those first three years (12 quarters), though after 10 years (40 quarters) you get a full percentage point reduction in the price level.

Bottom panel (Narrative): In  the black and red lines that include the 1980 shock, a 3% rise in interest rate produces no noticeable decline in inflation for the first three years. 10 years later, the price level is a decent 4 percent lower, but that is 0.4% per year reduction in inflation. The blue lines that exclude 1980 show a plausible longer-lasting shock, but 1% higher interest rate only produces 1% lower price level in 10 years, m 0.1% per year. 

The problem is the ephemeral Phillips curve, which I emphasized in my WSJ oped. In the VARs, the Fed is pretty good at inducing a recession. Here are the Romer-Romer shocks' effects on output and unemployment: 

It's just that inducing recessions is not particularly effective at lowering inflation. 

And I cherry picked good looking graphs. Many estimates don't find any effect on inflation, or even a positive one: 

No theory today, just the facts. This is the empirical basis for the idea that the Fed can swiftly stop inflation by raising interest rates. The underlying machinery does the best that 50 years on the topic has been able to do to separate causation from correlation, and to isolate the Fed's actions from other influences on inflation. Perfect, no, but this is what we have. 

Perhaps counting on the Fed to stop inflation all by itself is not such a great idea. And I don't have in mind more jawboning and WIN buttons. 

Update: A few Twitter commenters say that we really don't get much out of "normal times" and we have to look to big "regime shifts." 1980 is an example, and the results with and without 1980 are telling. But that is perhaps the point. If so, then it will take a "regime shift" to tame inflation not the usual "tools." 


Sunday, June 19, 2022

Economic Freedom in the Alito Draft

I read the draft Supreme Court decision on Roe v. Wade. I was surprised that the draft so quickly prejudges economic liberty, which I thought of as a topic still open for debate. I wrote the essay below. I haven't been able to interest any of the usual places that publish my op-eds, so, with the decision likely to come next week, here it is. 


Dear Justices: As you overturn Roe, don’t prejudge economic liberty! Economic, social and political freedom are intertwined. Reform of the administrative state is America’s next great challenge. Leave us the chance to argue for liberty and privacy to transact, communicate, and work as we wish. 

Justice Alito’s draft opinion affirms that the Constitution includes privacy and liberty among unenumerated rights. Good. To counter hysteria that other precedents would soon fall, he explicitly affirms them. Good. Of “the right to marry a person of a different race, … the right to marry while in prison,… the right to obtain contraceptives, … the right to reside with relatives, …the right to make decisions about the education of one’s children, … the right not to be sterilized ,… to undergo involuntary surgery, forced administration of drugs,…[the] right to engage in private consensual sex acts,…the right to marry a person of the same sex,’’ Justice Alito writes that overturning Roe, “…does not undermine them in any way”  (p.32).

And then he—or perhaps overenthusiastic clerks—takes a step too far. The draft also reassures the left that their economic agenda is not at risk, by explicitly affirming the radical jurisprudence of the late New Deal. 

The draft opinion savages  Lochner v. New York as  “Freewheeling judicial policymaking,” a “discredited decision,” (p. 14) and an “erroneous decision’’ on the scale of the infamous Plessy v. Ferguson (p.64). Lochner examined whether the state of New York could restrict hours of work. The 1905 court found such limitations interfere “with the right and liberty of the individual to contract.” (George Will's Conservative Sensibility tells the story well.)  The draft praises West Coast Hotel (1937), which overruled an earlier case “which had held that a law setting minimum wages for women violated the “liberty” protected by the fifth amendment.” Economic liberty gets sarcastic scare quotes. Piling on, “West Coast Hotel signaled the demise of an entire line of important precedents that had protected an individual liberty rights against state and federal health and welfare legislation,” including decisions “holding invalid a law banning contracts forbidding employees to join union,” or “holding invalid laws fixing the weight of loaves of bread,” (p. 36) and more. 

The separation between social and sexual liberty and privacy and extensive government intrusion into the most minute economic affairs makes no logical sense. The draft tries and fails. The draft claims that “appeals to a broader right to autonomy…could license fundamental rights to illicit drug use, prostitution, and the like.” But we can talk about Uber drivers’ right to set their own hours without demanding legal prostitution. We might not even want to prejudge a fundamental right to "illicit" drug use, which in that phrasing includes violating the FDA's latest diktats. The draft states that “what sharply distinguishes” other rights from abortion is the “life of an unborn human being.” But even drug use and prostitution do not involve unborn life. 

The draft denies unenumerated rights not “deeply rooted in history and tradition.” (p. 11) That is an interesting addition to the Constitution’s text, and I imagine legal scholars might want to debate that limitation. The framers could have added it, but did not do so. This is its central argument. It extensively describes legal restrictions on abortion in the 19th century, when the 14th amendment was written, to document that an individual right to abortion is not "deeply rooted in history and tradition." 

But by that standard, the Court must then allow that history and tradition, our “scheme of ordered liberty,” long favored economic liberty and privacy. The same history of 19th century law would not find an inkling of the Department of Labor’s intrusive regulations or the FDA’s baby formula fiasco. Economic regulation was novel, not economic liberty. And many people today believe that political and social liberty cannot exist without economic liberty. Start with Friedman's Capitalism and Freedom. 

The draft proclaims that economic liberty is subject to majoritarian rule, where personal and sexual liberty is an individual right. Again citing West Coast Hotel, “the court .. overruled decisions that wrongly removed an issue from the people and the democratic process.” (p. 40.) But economic liberty must be an individual right, protected from the whims of the majority, which is even more inclined to use law to enrich one at the expense of the other than it is to force sexual conformity. We don’t vote whether a city should grab a house and turn it in to a mall or a homeless shelter. Well, we do, but we shouldn’t. To function, property rights must be an individual right. 

In needlessly asserting one narrative history of economic rights while making a decision on abortion, the draft gratuitously denies the possibility of another history: The Lochner-era court did hold to the Constitution’s protections and the country’s history and traditions, until the political pressure and Roosevelt’s court-packing threats caused the court to back down, and to write constitutional gibberish, rather than wait for the consensus that constitutional amendment would bring. 

I support an individual Constitutional right to abortion. But I also support the court overturning Roe v. Wade. Many thoughtful people on the left agree (for example, Yale Law's Akhil Reed Amar on Common Sese). My policy preferences should not matter in any of my arguments today, but I think they do. If more of us were able to separate our policy preferences from judgement whether the court or state legislatures should decide an issue, as a matter of practicality and keeping the country together, we might have a healthier debate. 

Abortion needs to go back to the states. The court never considered a clear right, instead trying to write the compromises only legislatures can broker. How about trading some abortion restrictions for greater funding for contraceptives, adoption, child care and so forth? Only a legislature can do that, and produce the buy-in that such compromises produce. I won't be totally happy, you won't be totally happy, but we can stop tearing the country apart. Yes, “far from bringing about a national settlement of the abortion issue, Roe and Casey have enflamed debate and deepened division” (p. 6) because  “Those on the losing side…could no longer seek to persuade their elected representatives to adopt policies consistent with their views.” (p. 40) More importantly, after Roe, they must try to persuade their fellow citizens to elect different representatives, and politicians will have to recalibrate their positions. It's easy to be extreme when we know nothing can happen. Both parties are now the dog that caught the car. 

Most of all, abortion has poisoned Court politics and public debate for 50 years. The Court, and we who argue about what the court should do, and what kind of justices to appoint, can finally move on to languishing great questions of our government. 

Prime among those is how to reform our dysfunctional government by executive order and imperious bureaucracy. Wickard v. Filburn could be the new Roe v. Wade. Filburn grew wheat on his own farm to feed his own animals. The 1942 Court held that the federal government’s power to regulate interstate commerce extended to forcibly stopping Filburn from doing so, in order to drive up the price of wheat. The Court affirmed it in Gonzalez v. Raich (2005), with even Antonin Scalia concurring. The Court decided that growing pot in your own backyard for your own private medicinal purposes, legal in a state, can be banned by the federal government as interstate commerce. This case lies at the foundation of the administrative state. Really? Is this beyond dispute? 

For years, Justices before the Senate loudly said they would not prejudge Roe v. Wade, so as not to prejudge cases before hearing them. Yes, it is wise for the Court to say loudly that this decision does not imperil to contraception and interracial marriage, if only to reveal how many critics don’t bother to read decisions. But please, don’t needlessly prejudge economic freedom. Sometimes, silence is golden. 


Update: The ruling is out, and most of the economic rights trashing is gone! Economic liberty is still in quotes, and West Coast Hotel still reverses a "wrong" precedent, but it's a lot better. 

I heard over and over again on NPR yesterday how the court has never taken away rights before. Uh, hello? The right to contract, to decide your own hours and nature of work, to build whatever you want on your property no matter what the planning, historical, zoning commission say; the right to grow wheat in your own back yard and feed it to your horse.  

Thursday, June 16, 2022

Fiscal Histories

Fiscal Histories  is a new paper, a second try at an essay on fiscal theory for the Journal of Economic Perspectives. 

The basic concept is to explain the fiscal theory of the price level with no equations by applying it, by seeing how it might be able to explain and interpret a wide variety of historical episodes. Abstract: 

The fiscal theory states that the price level adjusts so that the real value of government debt equals the present value of real primary surpluses. Monetary policy remains important. The central bank can set an interest rate target, which determines expected inflation, and news about the present value of surpluses drives unexpected inflation. I exposit fiscal theory by offering an interpretation of historical episodes, including the gold standard, currency pegs, the ends of hyperinflations, the success of inflation targets, the rise and fall of inflation in the 1970s and 1980s, the long quiet zero bound of the 2010s, and the 2021-2022 inflation. Going forward, fiscal theory warns that inflation will have to be tamed by coordinated monetary and fiscal policy. 

I thank Erik Hurst and Tim Taylor for the concept. Most of the stories are summarized from the Fiscal Theory of the Price Level, but pulling them out, putting them in one place and simplifying them is a great idea. The key idea

I think through how fiscal theory can account for important episodes. A first purpose is expositional: by this method we can understand how fiscal theory works, and what elaborations it might need. A second purpose is more serious: analyzing episodes is the crucial way we evaluate all macroeconomic models. 

I mostly tell plausible stories, rather than summarize well-worked out and published economic history or quantitative analysis. Fiscal theory is new, and that work is just beginning. But stories rightly come first. Formal analysis always builds on plausible stories. Moreover, that there are such plausible stories, that it provides a framework that can possibly account for history as MV=PY and IS-LM do, is news, since many people opine that fiscal theory can be quickly dismissed by well-known episodes. I also hope to inspire detailed analysis. 

The paper also shows the results of a nice model, and sneaks the model in a footnote, that gets at the basics of fiscal theory with sticky prices more simply than I did in FTPL. The graph: 

Figure 1: Responses of inflation and output in a simple fiscal-theory sticky-price model. Top: 1% deficit shock with constant interest rate. Bottom: Interest rate shock with constant surpluses

You can think through a lot of fiscal theory with these graphs. The first graph is a fiscal shock with no change in interest rate, which is roughly what I think we saw in 2021. It leads to protracted inflation, and devalues outstanding bonds with a period of negative real interest rates. The second graph is an interest rate rise with no change in surpluses. It gives a temporary inflation decline. Reality combines the two graphs. The Fed's rate rises will add the second graph on the first, which will help. A bit. For a while. 

Yes, repackaging the same ideas in a lot of different ways. I hope to find one that works, or at least to offer different packages for different tastes. 

I'm not sure of the title yet. Fiscal Fables? Fiscal Bedtime Stories? ; ) 

Tuesday, June 14, 2022

ECB word salad hubris

The  Speech by the ECB's Isabel Schnabel, advertised on the official ECB twitter stream 

caused a characteristically grumpy outburst from me. Savor the ECB's tweet in all of its glory: 

We will not tolerate changes in financing conditions that go beyond fundamental factors and that threaten monetary policy transmission.


In December of last year, we made clear that we would not tolerate price adjustments that would undermine the transmission of our monetary policy

So now central bankers know what "fundamentals" are in all asset prices, and "will not tolerate" bond prices (aka "changes in financing conditions") that deviate from their idea of "fundamentals." And I thought they had an inflation mandate, and a short-term interest rate "tool." 

The contrast between the vision of detailed machinery that central bankers think they know how to control and any actual scientific knowledge of the monetary and financial system is gaping. The one thing I actually know as an "expert" is how little anyone else actually knows. Nobody really knows what the "monetary transmission mechanism" is to start with, let alone how "financing" conditions affect it. And if Ms. Schnabel knows reliably how to distinguish prices from "fundamentals" I know a lot of hedge funds that would pay her a whole lot more than the ECB does! 

As one way to see that gap, I compiled the following list of central-bankerese from her speech. At a minimum, if you want to be a central banker, learn to talk like this. As a human, ask yourself if anybody actually knows what any of this word salad actually means, let alone if the ECB has the technical knowledge to control it. (Some, of course, is just complex euphemism.) If I knew more computers it would be great fun to program up an AI that can replicate a central banker. It shouldn't be that hard, because nobody knows what any of this means! 

Your central banker word-salad vocabulary list: 

vulnerability to fragmentation risks 

disruptive and self-fulfilling price spirals 

financing conditions 


national borrowing conditions


Monday, June 13, 2022

AEA P&P, a measure of an organization

The American Economics Association papers and proceedings are out. This is a selection of the selection of papers presented at the AEA annual meetings. It tells you a lot about where the economics profession is--what papers are submitted--and also where the AEA as our (so far) premier professional organization is--what papers got included -- and perhaps more interestingly, where it isn't. 

Here are the papers. The AEA put the sessions in random order; I reorganized by rough topic. Of course many of the topics have intersectional elements so this isn't perfect either. Comments below, but you should read the raw data first and find your own inferences. 


On the Dynamics of Human Behavior: The Past, Present, and Future of Culture, Conflict, and Cooperation



  • Black Land Loss: 1920−1997
  • Intersectionality and Financial Inclusion in the United States
  • At the Intersection of Race, Occupational Status, and Middle-Class Attainment in Young Adulthood
  • Child-to-Parent Intergenerational Transfers, Social Security, and Child Wealth Building


  • Media Access and Consumption in the Civil Rights Era
  • On the Impact of Federal Housing Policies on Racial Inequality
  • Sundown Towns and Racial Exclusion: The Southern White Diaspora and the "Great Retreat"
  • Discrimination, Segregation, Integration, and Expropriation

Thursday, June 9, 2022

Climate finance emperor update

I wrote a review of Stuart Kirk's climate finance speech, which among other things criticized the Dutch Central Bank for putting fingers on the scale in order to make "climate financial risk" look bigger than it is. 

Remember where we are. Here we are not talking about the fantasy that in the next 5 years or so, on the scale of actual bank investments and regulatory horizon, some physical "climate" event will destroy the financial system. We are talking about "transition risk," the chance that our legislators take such extreme action that their carbon policies cause a financial meltdown of systemic proportions. And here, whether a carbon tax could do that.  

Robert Vermeulen of the Dutch Central Bank wrote (in personal capacity, and with extraordinary politeness given the circumstances) to defend their calculations:  

In the Dutch Central Bank scenario Kirk refers to we model the impact of a US$ 100 increase in the carbon price. On whether this is low, high or outrageous we can debate, but if fully passed on to consumers it would make a round trip Amsterdam – New York US$ 200 more expensive.

 The GDP numbers in the table need to be interpreted as relative to the baseline. So, let us assume a baseline GDP growth of 2% per year. Suppose the economy has size 100 in year 0, then the size of the economy is 110 in year 5. So, this baseline economy has a GDP level of 102 in year 1, 104 in year 2, etcetera. Since the scenario needs to be read as relative to the baseline, the GDP level in the scenario is 100.7 in year 1, 100.8 in year 2, 103.2 in year 3, 106.7 in year 4 and 109.5 in year 5. So, the carbon price we model by no means destroys the economy.

With respect to the interest rate shock, this variable is not assumed but follows endogenously from the model. Note that the long-term interest rate increases by 1 percentage point. As the economy grows slower compared to the baseline, the interest rate converges again to the baseline interest rate and is about equal to it in year 5. To put things into perspective, the US 10-year gov’t bond yield increased from 1.72% on March 1st to 3.12% on May 6th this year. Since a carbon price has a very similar effect on fossil fuel energy prices, the increase in long-term interest rates is not something strange and fully in line with what we observed this year.

The main point "the interest rate shock...is not assumed but follows endogenously from the model" Kirk is not correct  in alleging that the high interest rates are a separate assumption plugged in to the model to make GDP fall. 

I have not read the appendix, nor studied the model. However, this being a blog, that won't stop me from a few speculations. 

I am still a little bit puzzled. That a 2% of GDP tax increase should lower GDP makes a lot of sense, as it adds distortions (not counting externalities) to the economy. But real interest rates usually fall in recessions. Perhaps this is a nominal interest rate rise? 

It is also puzzling that a carbon tax is so damaging. In response I needled Robert a bit: Why don't you simulate a decline in Europe's already prodigious fuel taxes? If a rise in the carbon tax lowers GDP this much, a decline in fuel taxes should raise GDP and lower interest rates by similar amounts! 

In response to a few queries from me, Robert adds: 

Please note that we investigate tail risk scenarios and how banks would be affected in case of a sharp increase in carbon prices. In case the policymaker wants to meet the Paris Agreement carbon emission targets we would argue that you ideally present companies with a predictable policy path until 2050. This allows gradual adjustment in the economy, but it requires action soon. However, when governments wait too long and still want to meet the emission targets the economy will receive a bigger shock. 

This is interesting. I presume this means the economic model has very large "adjustment costs." Usually taxes have a "level effect" so the speed of implementation doesn't matter that much. Kirk might have a thing to say about a model in which putting in the carbon tax suddenly has much larger effect than spreading it over a few years.  

Perhaps interesting, in the study we also analyze the effects of technological shocks which make solar power much cheaper and easier to store. Basically this is a deflationary price shock and due to the adjustments in the economy it still leads to some temporary lower GDP growth relative to the baseline growth. In this case you indeed see interest rate decreases because the shock of the source is deflationary, i.e. energy becomes cheaper.

No matter what you do GDP goes down? Usually cost-reducing supply shocks are good for GDP. It seems that this model has a very strong Phillips curve, so that lower inflation (which we now all might think of as a good thing) lowers GDP? Good thing our ancestors who built power plants, highways, and dikes, didn't think that supply improvements lower GDP! The last comment leads to my question whether we're looking at real vs. nominal interest rates.   

Saving the best for last: 

 Please note that carbon price increases, at least of the magnitude we modeled, should not lead to financial crises. For the Dutch economy a US$100 carbon price increase amount to a little less than 2% of Dutch GDP at face value. We modeled it as a quota (e.g. similar to OPEC production limits), so the benefits of the higher prices fall on to the fossil fuel producers. In case you would model it as a tax levied by the governments and would assume that the tax is redistributed e.g. as a decrease in the VAT, you would find (much) smaller GDP impacts. Therefore, with appropriate policies you can ideally achieve simultaneously lower carbon emissions and minimize negative short-term impacts on the economy. 

"Carbon price increases, at least of the [big] magnitude we modeled, should not lead to financial crises." Well, the game is up right there. As for the topic of Kirk's whole speech, is there a financial system risk from climate, or is this all a smokescreen to get central banks to de-fund fossil fuels where legislators will not go, the game is up. (And, I would add, it is even more contradictory for regulators to say they have to step in to de fund fossil fuels before legislators impose the big carbon tax because legislators will never impose the big carbon tax.) 

The last part is important as we think about the actual issue: What you do with  carbon tax revenue matters a lot to its impact on its economic effect. If the carbon tax revenue is used to offset other distorting taxes,  I can easily imagine that GDP rises, a win-win. There are other taxes with far higher marginal rates and far worse distortions. 

We are of course witnessing an experimental version of the calculation, courtesy of Vladimir Putin. Others such as Ben Moll are making more microeconomic calculations that the effect of this large and sudden price hike and quantity reduction will be much smaller. We shall see. We shall also see if there is any stress at all on the banking system as a result of higher oil prices. For now, higher prices are causing dramatic increases in profits of legacy oil, not the collapse that climate financial risk advocates predicted. Econ 101 works.  But it is worth pointing out that the carbon tax and "Putin's price hike" are economically identical, so experience of one can inform the other, and complaining about one is a bit silly if one enthusiastically endorses the other.