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.  

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. 

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! 

Woke week

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

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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. 

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DEI at UC

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. 

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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. 

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: 

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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. 

Sincerely, 

[Signatures] 

******

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. 

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."