Saturday, April 16, 2022

Regulatory capture: trucking edition

Dominic Pino has a lovely National Review article on Mexican trucks. Watch the sausage in the making. Excerpts with commentary

Congress banned Mexican truckers from entering the U.S. in 1982. NAFTA, which came into effect in 1994, committed the U.S. to removing that restriction by 2000.

1994 was 28 years ago.  

The U.S. left the restriction in place anyway, and was found to be in violation of the agreement in 2001... The Bush administration said it would remove the restriction.

But organized labor and environmental groups...sued to keep the restriction in place. The environmentalists claimed that Mexican trucks did not meet American safety and environmental regulations. The Teamsters and other unions had an obvious motive: keeping out the competition....

In 2004.. the Supreme Court ruled against the environmentalists and unions and said that the Bush administration could remove the restriction and bring the U.S. in line with its obligations under NAFTA. Clarence Thomas wrote for the unanimous court.

Unanimous.

Friday, April 15, 2022

Video week

It's been a busy week for video. I started Monday with a good roundtable with Benn Steil at the Council on Foreign Relations "Understanding Inflation and its Causes

Tuesday we did a great Goodfellows conversation with Larry Summers. (Audio podcast at that link, plus video if the embed doesn't work.) Larry answers "what would you do at the Fed" much better than I did when Benn asked, among other great topics. 

This week also Casey Weade posted a podcast and video interview we did on Fiscal Theory of the Price Level, for a general audience, at his "Retire with Purpose" podcast. Casey did a great job asking good questions and steering the conversation. Link, including audio podcast

More got recorded, not up yet... a busy week.  


Inflation and the end of illusions.

An oped at Project Syndicate

Inflation’s return marks a tipping point. Demand has hit the brick wall of supply. Our economies are now producing all that they can. Moreover, this inflation is clearly rooted in excessively expansive fiscal policies. While supply shocks can raise the price of one thing relative to others, they do not raise all prices and wages together. 

A lot of wishful thinking will have to be abandoned, starting with the idea that governments can borrow or print as much money as they need to spray at every problem. Government spending must now come from current tax revenues or from credible future tax revenues, to support non-inflationary borrowing. 

Stimulus spending for its own sake is over. Governments must start spending wisely. Spending to “create jobs” is nonsense when there is a widespread labor shortage. 

Unfortunately, many governments are responding to inflation by borrowing or printing even more money to subsidize energy, housing, childcare, and other costs, or to hand out more money to cushion the blow from inflation – for example, by forgiving student loans. These policies will lead to even more inflation. 

Sunday, April 10, 2022

Fed psychology updates

Updates and rumination on my last few posts, why has the Fed responded so slowly to inflation. (Last post

1. Forward guidance? 

For the last several years, the Fed has placed more and more weight on "forward guidance." This is the theory that by promising to keep interest rates low in the future, even after the time to do so will have passed, the Fed can stimulate immediately. That is especially useful at the zero bound, and it is an important and explicit part of the Fed's new (well, pre-covid!) strategy. 

I and others were critical. Who will believe that the Fed, ex-post, will do what is not right at the time? I complained, will the Fed ever say to Congress, "yes, we should be raising rates, but we promised to keep them low 3 years ago when we were fighting deflation, so we have to keep that promise now. Sorry, inflation is going to have to rip a little stronger." 

Well, that seems to be exactly what the Fed is doing. Surely some thought of "we promised to keep rates low, now we'd better do it or people will never believe our promises" might be what's going on. I would be curious from Fed insiders if this is part of the discussion. 

Thursday, April 7, 2022

Is the Fed new-Keynesian?

I realize that the title of my last post, Is the Fed Fisherian? was not as clear as it could be. The model I used to understand the Fed's forecast was, in fact, completely standard new-Keyenesian. The new-Keynesian model has the Fisherian property -- a permanent interest rate rise raises inflation, at least eventually -- but that is not its core feature. A clearer description is, is the Fed new-Keynesian -- and thereby, only incidentally, Fisherian. 

Beyond clearing that up, today I want to add unemployment. In part, I am motivated by a new working paper by Alex Domash and Larry Summers, warning that the Fed will have to raise interest rates to stop this inflation, and doing so will cause a recession. They also point out that scenario in the past, most notably 1980. 

So what model can account for the Fed's rosy employment scenario? It turns out that the little new-Keynesian model from the last post accounts for its unemployment views as well. And that the same model accounts for its inflation, unemployment, and funds rate forecasts together makes it more credible that this is a reasonable model of how the Fed thinks.  

The Fed, it seems is new-Keyensian. That makes some sense; their models are new-Keynesian. We shall see if those models are right. 

I start today by plotting again the Fed's projections, this time including unemployment. As well as inflation going away on its own without a period of high interest rates, you see inflation gently converge to the Fed's view of a long-run 4% natural rate. Is there a model behind this rosy scenario? Yes. 

Monday, April 4, 2022

Is the Fed Fisherian?

The current situation, and puzzling inertia



Inflation has been with us for a year; it is 7.9% and trending up. March 15, the Fed finally budged the Federal Funds rate from 0 to 0.33%, (look hard) with slow rate rises to come.  

A third of a percent is a lot less than eight percent. The usual wisdom says that to reduce inflation, the Fed must raise the nominal interest rate by  more than the inflation rate. In that way the real interest rate rises, cooling the economy. 

At a minimum, then, usual wisdom says that the interest rate should be above 8%. Now. The Taylor rule says the interest rate should be 2% (inflation target), plus 1.5 times how much inflation exceeds 2%, plus the long run real rate. That means an interest rate of at least 2+1.5x(8-2) = 11%. Yet the Fed sits, and contemplates at most a percent or two over the summer. 

This reaction is unusually slow by historical precedent, not just by standard theory and received wisdom. The graph above shows the last episode for comparison. In early 2017, unemployment got below 5%, inflation got up to and just barely breached the Fed's 2% target, and the Fed promptly started raising interest rates. Inflation batted around the Fed's 2% target. March 2022 unemployment is 3.6%, lower than it has been since December 1969. No excuse there.