Thursday, March 11, 2021

Hoover Economic Policy seminar online

The Hoover Economic Policy working group seminars are now online for anyone who is interested. Follow the link and click "news and events." These happen on Wednesdays at noon, and are put up soon after. Interesting speakers, interesting discussion. Here's what's available so far:

Michael Bordo and Mickey Levy Wednesday, March 10, 2021 “Do Enlarged Fiscal Deficits Cause Inflation: The Historical Record.”

Chad Jones Wednesday, March 3, 2021 “The End of Economic Growth? Unintended Consequences of a Declining Population.” 

Eleni Kounalakis And Lee Ohanian “The Exodus of Firms from California: Facts, Reasons, Solutions.” 

A Special Event in Honor of Secretary George Shultz Wednesday, February 17, 2021


16 comments:

  1. A WSJ Pro article in the 'Central Banking' docket reports that, according to the "non-partisan Committee for a Responsible Federal Budget", the federal government will pay $300 billion this year for interest charges to finance the federal debt. The article notes that according to the committee, the interest cost of the debt increases by $225 billion for each 100 basis points rise in the interest rate on the federal debt.

    Navigate to: https://www.wsj.com/articles/group-warns-cost-of-deficit-financing-a-risk-for-u-s-government-11615410907

    The WSJ Pro webpages, of which the page at the URL above is one, require a subscription to view.

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    Replies
    1. Yep,

      Something that bit GHW Bush in the buttocks with his "No New Taxes" pledge during the 90-91 recession.

      Have the Republicans figured out that instead of giving tax breaks away without consideration for the debt build up, they should sell them through the Treasury department instead?

      Probably not.

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    2. Rhetorical question, FRestly. But, did the R's give away tax breaks for no consideration? I'd have to say, no. R's would have gained political contributions and votes--all good and sound consideration, politically-speaking. But beyond that, R's would have boosted their voters' bottom-lines and that would have raised employment and economic growth, as it appears to have done. Government revenue would have increased as well, along with the private sectors' increases.

      Consider the contrary approach. D's increase public transfers without raising private investment or employment; to pay for the increased spending, taxes on private individuals and corporations are set to rise, according to the administration. A double-whammy in effect: greater deficits, higher taxes, no net effect on private investment in productive assets (private gains are taxed away, reducing incentives for taking on real dollar investment risks).

      Given the magnitude of the spending increase, and the easy-money stance of the federal reserve, one gets inflation on top of higher tax rates. It is, as several of the participants in the discussion of the Bordo-Levy paper observed, a case of the missing federal reserve target for the upper limit of the inflation rate that would trigger the fed to act--is it 5%, is it 6%?--no one knows. If history is any guide, the fed will be laggardly in its response and when it does decide to stir itself, it will over-compensate and take the economy into recession (as it repeatedly did in the past).

      We live in interesting times.

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    3. "Rhetorical question, FRestly. But, did the R's give away tax breaks for no consideration? I'd have to say, no. R's would have gained political contributions and votes--all good and sound consideration, politically-speaking."

      Good politics and good economic policy seldom intertwine.

      "Consider the contrary approach."

      I already described the contrary approach, instead of selling bonds, sell tax breaks.

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    4. How much could the U.S. raise by selling 'tax breaks'? What would a tax break be worth? Would a pension fund or an insurance company, or an overseas domiciled investor with no U.S. presence, need a U.S. tax break? If the answer is no, then selling tax breaks might not raise the trillions that the U.S. government needs to cover its on-going deficits. Sorry, but it is the proponent's task to present the data supporting his proposal. It is not the respondent's task to do the proponent's work for him.

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    5. How much could the U.S. raise by selling 'tax breaks'?

      Quite a lot - how about $7 trillion for starters:
      https://fred.stlouisfed.org/series/MMMFFAQ027S
      https://fred.stlouisfed.org/series/DEMDEPSL

      What would a tax break be worth?
      The potential rate of return would be set by Treasury Department commensurate with the output gap - higher output gap = higher potential rate of return. The realized rate of return would be up to the individual investor (No free lunches).

      "Would a pension fund, mutual fund, or an insurance company...need a U.S. tax break?"

      Presuming that either or both the fund / company and the beneficiary for the fund / insurance are located in the US, then yes.

      "Sorry, but it is the proponent's task to present the data supporting his proposal. It is not the respondent's task to do the proponent's work for him."

      That's fine except this is the third time that I have described this exact proposal to you.

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  2. An article appearing in the Financial Times reports that the government of New Zealand has instructed the central bank to add stabilizing home prices to its remit, starting March 1st of this year.

    "It is novel and healthy for a politician to recognize the unintended consequences of easy money. If this idea catches on, it could lead to greater financial and social stability worldwide. Decades of loose central bank policy have done less to generate growth in the real economy than in the financial markets—and those gains benefit mainly the rich," Ruchir Sharma, Morgan Stanley Investment Management’s chief global strategist, writes in the Financial Times journal. [content found in "REAL TIME ECONOMICS" email alert, by Jeff Sparshott, at the Wall Street Journal, March 15th, 2021.]

    The article lies behind a paywall at https://www.ft.com/content/c8959502-7dae-43b1-b993-3bf85fb4325a

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    Replies
    1. Old Eagle Eye,

      Yep, the US central bank used to do that when home prices (instead of OER) was included in the CPI. Ronald Reagan (former governor of California) dispensed with that notion in 1983.

      So tell me, was it high interest rates in the 1980's that brought inflation under control or was it simply redefining how inflation (CPI) was calculated that did the trick (along with opening Prudoe Bay in Alaska to oil exploration)?

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    2. There is no "Prudoe Bay" in the State of Alaska, FRestly. Prudhoe Bay, AK, is the place you seek.

      Mortgage rates of 22% per annum will spoil anyman's morning coffee; and, so it was in 1980-1. If, the response of companies such as MacMillan Bloedel Ltd. (HQ: Vancouver, B.C.) was any indicator--it let go 10,000 employees in one calendar quarter in the autumn of '81--I'd bet on the "high interest rates" rather than "simply redefining how inflation (CPI) was calculated...".

      Interest rates did a number on a broad swath of investors in those years--people who were wagering on rising housing prices and leveraging their wagers. Re-calibrating the "CPI" would not have done any of that or had any impact what-so-ever with the lenders or the borrowers. How to prove that? Quite simple, in fact, when you think about it. If I index the price level in 1960 to 100, and then re-calibrate and index the price level in 1980 to 100, have I changed anything in a material sense? No. QED.

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    3. Old Eagle Eye,

      "Mortgage rates of 22% per annum will spoil anyman's morning coffee."

      https://en.wikipedia.org/wiki/Home_mortgage_interest_deduction

      I don't know. Borrowing at 22% for a mortgage, deducting the interest payments from my tax liability, and then lending to the US federal government at the same 22% sounds like easy money (not tight money).

      "If the response of companies such as MacMillan Bloedel Ltd. (HQ: Vancouver, B.C.) was any indicator--it let go 10,000 employees in one calendar quarter in the autumn of '81-.."

      I thought we talking about the effect that the higher interest rates had on inflation, not employment.

      "Re-calibrating the CPI would not have done any of that or had any impact what-so-ever with the lenders or the borrowers."

      You didn't answer the question. Was it high interest rates in the 1980's that brought inflation under control or was it simply redefining how inflation (CPI) was calculated that did the trick (along with opening Prudhoe Bay in Alaska to oil exploration)?

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    4. MacMillan Bloedel Ltd. is a Canadian company - yes?

      Was the Canadian central bank at that time (1980-81) targeting inflation or were they targeting exchange rate parity with the US dollar?

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    5. Multi-national company, head-quartered in the City of Vancouver, B.C.
      The company produced lumber, paper, and liner-board in Canada and the U.S. It sold product world-wide--Japan, Europe, U.K., wherever their products could find markets. MacBlo had plants in the S.E. U.S.A. producing lumber and paper products.

      Canada is an open economy that sends eighty-percent of its exports to the U.S. There has been very little change in that proportion of exports during the past forty years or so.

      But, let's look at the record.

      Exhibit 1: Bank of Canada chart of the historical foreign exchange rates between the Canadian dollar and U.S. dollar--see p. 14 in the PDF document found at https://www.bankofcanada.ca/wp-content/uploads/2010/07/june1970.pdf At April 4, 1974, the Cdn$ reached $1.0443, but by Feb. 4, 1986 the Cdn$ had declined to $0.6913. In the 5-yr period 1971-1975, the Cdn$ was trading at par to the US$ (on average). During the 11-yr period 1976-1986, the Cdn$ was on an unbroken linear downward trend. No evidence here that the BoC was managing to maintain the Cdn$:US$ at a fixed ratio.

      The data on the rates of inflation and rates of interest between the two countries can be obtained at https://www150.statcan.gc.ca/n1/pub/11-210-x/2010000/t098-eng.htm . I leave it to you to run the comparisons using the data in those tables.

      The picture comparing the countries' respective short-term interest rates can be found at FRED (St. Louis Federal Reserve Bank). The chart at https://fred.stlouisfed.org/graph/?g=C6Ur shows the time series of the ratio of the Cdn 3-mo. interest rate to the U.S. 3-mo. interest rate. During the 1978-1986 time period, the ratio averages around 1.2:1, within a range of 1:1 to 1.6:1. Befitting a smaller economy, the Cdn short-term interest rate is generally higher than the comparable U.S. rate.

      Inflation rates can be compared. The chart at U.S. and Canadian rates of inflation between 1968 and 1992
      https://fred.stlouisfed.org/graph/?g=C6Wh shows that the inflation rate in Canada led the inflation rate in the the U.S.A. until 1984 when both countries' inflation rates coincided. Canada had higher rates of inflation for longer than the U.S. did.

      If the BoC was targeting forex parity with the U.S. dollar, it wasn't particularly successful at it. Inference: the BoC followed Paul Volker's example and took the opportunity to tackle Canada's inflation problem at the same time as Volker was routing out the U.S.'s. --Misery loves company.

      Does that answer your query satisfactorily?

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  3. Very interesting.

    A few important questions:
    1. Is the seminar accessible live every time, or is it simply recorded and uploaded on the website thereafter?

    2. Is there a way to get email notifications pertaining to a new seminar being made accessible? It seems to be occurring every week, but there is a very long pause from November to January.

    A calendar would also do the trick. From what I can see, they do not post the schedule ahead of time and it's just a matter of being aware of what's coming and when to expect breaks to occur.

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  4. “So the one price that we published is the price with the U.S. of $19.50 per dose. Obviously, that’s not a normal price like we typically get for a vaccine, $150, $175 per dose,” he said, “So pandemic pricing.” -- Pfizer CFO, Frank D’Amelio.

    “We believe it’s becoming increasingly likely that an annual revaccination is going to take place,” he said. “Factors like efficacy, booster ability, clinical utility will basically become very important.”

    'Free market' pricing policy: MR = MC → Q* → P(Q*). ↑ Net private benefit; ↓ consumer surplus. 'Plus ça change, c'est la même chose.'--Jean-Baptiste Alphonse Karr.

    What was missing from the Hoover discussions (very informative as they were) was the interplay and interdependence between micro- and macro-economics. We see in D'Amlio's remarks delivered to the Barclays Global Healthcare Conference during the second week of March, 2021, an inkling of the motivation which attracted Pfizer to the possibility of developing and producing BioNTech's mRNA vaccine to counter the SARS-CoV-2 virus infections. It wasn't solely altruistic, or coercive, motivations at play. The prospect of significant opportunities to reap net private benefits, in a monetary way, that drew Pfizer's investable capital to BioNTech's bio-medical innovation. The prospect of a 'free-market', when the pandemic gives way to endemic, draws a finance man's attention and his money. Were it ever any other way?

    Article: https://nationalpost.com/news/world/pfizer-exec-sees-significant-opportunity-to-increase-covid-vaccine-price-for-annual-booster-shot

    ReplyDelete

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