Friday, September 23, 2022

Brexit might not have been such a bad idea after all -- EU insanity

I was for Fixit, not Brexit. The EU is a great idea. They put together articles of confederation, empowering an out of control bureaucracy. OK, we did that too, minus the bureaucracy part. Try again, with a real constitution, a real federal government, clear separation of powers, checks and balances, and a careful list of limitations, not long vague aspirations. 

Europe has not taken that suggestion, nor the hint offered by the Brits leaving. The latest evidence is a tiny puff in this hurricane of hot air, which I found on this tweet

That sounds interesting, in a waste time on twitter while procrastinating getting to work sort of way. And I was encouraged--EC bureaucracies looking for outside advice, breaking out of the bubble seems like a good idea. Hey, maybe I'll apply, I thought. 

I followed the link to the official announcement and it offers in a nutshell what's going on in EU "policy-making," (and a hint why I hate that word)

The latest communication on industrial policy strategy (COM(2021) 350final) has shifted the attention towards an ecosystem approach to industrial policy, focusing on industrial ecosystems and their complex interconnections related, among other things, to entrepreneurship (and SMEs), innovation, skills, value creation and social impact.
After mulling over the obvious reality of war, supply chains, etc. 
..a reactive stance is not sufficient and needs to be complemented by a forward-looking reflection aimed at properly considering externalities and risk factors to be prepared for - and therefore more and more resilient against - possible additional challenges (for instance in terms of disruptions and shortages but also new, far from impossible health crises), remaining consistent with crucial long-term objectives. Progress is more than innovation and EU competitiveness, more than continuous growth and geopolitical predominance. [Who are you kidding?] It is also quality of life, sustainable production and energy generation, digitally advanced (but also digitally safe and fair) infrastructure, “enlightened” decision-making at corporate level eventually influenced by well-informed choices at consumer level.
My emphasis. The subject is a bit mysterious in all these passive sentences, but I believe it is "EU industrial policy." I'm glad it will take on scare-quote enlightened decision making at the corporate level and allow eventually for some "well-informed" choices "at the consumer level." That's you with the pitchforks.  
This may imply putting into question traditional policy yardsticks such as the focus on industrial sectors as done with the shift towards an ecosystem approach, [the focus on] on the overarching principle of economic efficiency as a first best for resources allocation e.g. by factoring in risks associated to critical strategic dependencies, or the focus on traditional stakeholders (for instance, by including a wider set of actors, in a truly ecosystem mindset going beyond industrial activity and including other relevant players, such as universities, research centres, and even the role of local communities). This may be more effectively inspired by policy missions, rather than sectoral or even social cleavages.
Well, no wonder they need some outside economists if they're going to perfectly foresee "critical strategic dependencies" in the "ecosystem," such as, oh, maybe Russia might turn off the gas some day.  "Policy missions, rather than sectoral or even social cleavages?" I have no idea what that means. 

This may also imply some reshuffling in policy priorities, for instance by having some ethical yardsticks considered upfront (namely, but not only, with respect to innovation),

"by having ethical yardsticks considered upfront." Don't you love passive voice? "namely... with respect to innovation" is truly chilling. That means, before you can innovate, the great directorate of industrial policy will decide if your innovation is "ethical," as it affects "stakeholders" and the "industrial ecosystem." What is the chance James Watt's steam engine will make it past that? 

by enshrining sustainability considerations (and related externalities often ignored in the past) in trade-offs underlying corporate choices, by thoroughly considering social impact of public and private investment as a major element of choice.

Passive means us. Can any investment get past this? Oh yes, 

“Social cheerleading” and “greenwashing” should become strictly unfeasible, starting from becoming easily detectable. This may imply rethinking the incentives and mechanisms to better align public goals and private behaviour. It may also imply refining our metric to measure progress.

Heavens, we wouldn't want to have any greenwashing here. 

If addressed only from a national perspective, all the challenges and reflections above would seem and would be unsurmountable. A truly coordinated European approach exploiting the potential of the Single Market would be of the utmost importance...

Now you know why the Brits left. 

What follows is a non-exhaustive list of examples of themes of interest to DG GROW within the broad areas defined above: [edited here]  
• Industrial policy in the Single Market: moving forward avoiding fragmentation and minimising short-term losses
Aha, so industrial policy involve "short term" losses! 
• A mission-oriented Single Market to increase ownership, generate momentum and help prioritising actions aimed at improving its functioning
Ownership can be transferred, but how can ownership be increased? Otherwise as empty a sentence as I've seen in a long time. 
• Strategic dependencies, monitoring risks and building supply chains resilience
Yes, you did such a great job on that one by banning fracking and decommissioning nuclear power.
• Dependencies and the search for new economic models
• Alternative purposeful business practices
Just savor the empty words. Or are they Orwellian and full of meaning? 
• Unlocking the green business case; the role of the Single Market
• Investment needs to leap forward

A Great Leap Forward? How are you going to leap forward given the previous page that says, basically, all investment must stop? 

• New metrics to measure economic progress
We haven't dug ourselves into a 20 meter hole. It's only a tenth of a furlong!  

I am tempted to apply. I offer this: "Cut the BS, get out of the way, quit and get some real jobs. The pretense of technocratic competence to understand and manipulate such a huge Rube-Goldberg view of the world is just laughable." Send the 15,0000 euro check to Hoover. 

I originally thought this would be illegal. But on a little research, the Lisbon Treaty, which was supposed to improve the EU, takes a big step backwards. 
The Lisbon Treaty introduced in its Art. 3 new language into primary law that expresses the ambition to give the EU a stronger social dimension.1 In comparison to its predecessor provision of Art. 4 (1) of the Treaty Establishing the European Community, which solely relied on the ‘principle of an open market economy with free competition’, the basic objectives of the EU were broadened. Art. 3 TEU now includes objectives that come across as a promise to rebalance market and non-market values through the foundational provisions of the European Union. In line with other wide-ranging objectives, like fighting social exclusion, this article includes the eye-catching sentence that the EU aims for ‘a highly competitive social market economy’ that seeks to achieve ‘full employment and social progress’
Liz Truss may struggle to convince the UK that to fix supply you have to fix supply (great WSJ commentary by Joe Sternmberg here) but at least she knows where to go. Europe still seems lost in the fog.  

This is of course likely to go nowhere, to just employ PhD economists to write reports nobody reads. But who knows, having missed a real estate bust, a sovereign debt crisis, a pandemic, an energy crisis and a war, the ECB is doubling down on climate change stress tests, so you never know what foolishness can actually make it into policy. 

And it's not all so bad. Ukrainians look East vs. West. A bunch of bureaucratic tomfoolery looks a whole lot better than what Vlad the Impaler has to offer. Go Europe. Some day, fixit.

Wednesday, September 21, 2022

Gramm, Early and the Unfixable Problem

Phil Gramm and John Early have a new WSJ oped, based on their smashing new book. Both are based on an astounding fact: The numbers used by the Census Bureau, and countless following researchers, to define income inequality and poverty do not include taxes, which reduce income of the rich, and transfers, which increase income of the poor. The latter, obviously, matters to just how many Americans fall in the Census Bureau's definition of poverty.

Specifically, in the oped, the new refundable tax credit cannot, by arithmetic, do anything to alleviate measured child poverty because 

"the income numbers used to calculate the official poverty rates don’t count refundable tax credits as income to the recipients. "

This is wonderful for advocates of ever larger transfer programs, as it creates a problem that can never be measured to be fixed! 

The more general issue 

The Census Bureau fails to count two-thirds of all government transfer payments to households in the income numbers it uses to calculate not only poverty levels but also income inequality and income growth. In addition to not counting refundable tax credits, which are paid by checks from the U.S. Treasury, the official Census Bureau measure doesn’t count food stamps, Medicaid, the Children’s Health Insurance Program, rent subsidies, energy subsidies and health-insurance subsidies under the Affordable Care Act. In total, benefits provided in more than 100 other federal, state and local transfer payments aren’t counted by the Census Bureau as income to the recipients

The book goes on to show how this startling omission overturns just about everything you've heard from the hyperventilating classes about income inequality. Granted, spending zillions on rotten health insurance that people value much less than a dollar per dollar is not quite the same as cash, but there are lots of cash or cash equivalent transfers in there. 

A question I do not know the answer to: Do means-tested programs count as "income" the transfers from other means-tested programs? If a program is only available to, say, those with less than $50,000 per year income, does that figure include any other means-tested programs?  Even the ones that send cash, rather than in-kind transfers such as rent, energy, and health insurance subsidies? I suspect largely no. If not, the incentives for means-tested programs are far worse than even they appear. Facts welcome.

One might easily respond that ok, but evil capitalism created wider pre-tax pre-transfer inequality, and only by the grace of larger and larger transfers has some measure of stability been restored. Well, which is the cause and which is the effect -- wider pre-tax pre-transfer inequality, or the large expansion of means-tested programs, all of which add to the stupendous marginal tax rates facing Americans with less opportunity? The book goes on to argue convincingly the latter. I'll cover that later. Noting here, they anticipate the argument. 

Thursday, September 15, 2022

Fisherian Intuition

Interest rate neutrality is easy to state in equations but hard to digest intuitively. 

The equation says that interest rate = real rate plus expected inflation, \[i_t = r + E_t\pi_{t+1.}\]In one direction this is easy: If people expect a lot of inflation, then they demand higher nominal \(i_t\) interest rates to compensate for the declining value of the dollar. That leaves the real \(r\) interest rate unchanged. 

(Note: this post uses mathjax equations. If you can't see them, come to the original.) 

But in our economy the Fed sets the nominal interest rate and the rest must adjust. In the short run with sticky prices and other frictions the real rate may change, but eventually the real rate is set by real things and expected inflation must rise.  We can study that long run by leaving out  the sticky prices and other frictions, and then expected inflation rises right away. Rises. Higher interest rates raise inflation. How does that really work? What's the economic force? 

Standard intuition says overwhelmingly that higher interest rates cause people to spend less which lowers inflation.  The equations seem like they're hiding some sort of sophistry. 

(Fed Chair Powell explains the standard view well while sparring with Senator Warren here. The clip is great on several dimensions. No, the Fed cannot increase supply. No, none of what Senator Warren talks of will make a dent in supply either. The elephant in the room, massive fiscal stimulus, is not mentioned by either party. Just why each is silent on that is an interesting question.)

This is a lovely case that individual causality goes in the opposite direction of equilibrium causality. That happens a lot in macroeconomics and can cause a lot of confusion. It also is an interesting case of mistaking expected inflation for unexpected inflation. Along with confusing relative prices for inflation, that's common and easy to do. Hence this post. 

Wednesday, September 14, 2022

Email feed restored

A while ago, Google turned off the ability to receive the Grumpy Economist, and all the other blogger blogs, by email. I have now figured out how to restore it. I moved over to If the import of the old email feed worked as it is supposed to, you're receiving this in your email once again. If not, you can click on the huge button to the right to get Grumpy by email. (I'll figure out how to make that prettier sooner or later.) I also announce each new blog post on twitter, and if you prefer that you can click the twitter link to follow me there. encourages me to pass along all the "great additional features" you can use, here. You can now "define filters and more delivery channels, e.g... receive your news via Telegram, news page etc. (many others to follow soon)."

Thanks to several devoted readers who wrote to complain, nudging me to figure this out. If it still doesn't work, either comment here or email me directly. 

If I link "Feedburner alternative" and "Feedburner replacement" to,  they give me a $10 USD credit. Done!  

More substance on the way soon! 


You will receive an email that looks like this. It invites you to click a link. This is a legitimate email. 

Friday, September 9, 2022

Energy Agony

Two era-defining articles popped up in today's Wall Street Journal. 

In "the coming global crisis of climate policy," Joseph Sternberg writes 

...Anyone who still thinks climate change is a greater threat than climate policy to financial stability deserves to be exiled to a peat-burning yurt in the wilderness.

...the world’s central banks and other regulators are in the middle of a major push to introduce various forms of climate stress testing into their oversight. ...The fad is for quantifying, with preposterous faux-precision, the costs of reinsuring flood risks, or fire, or the depressed corporate profits of a dystopian hotter future.

Well, if you seek “climate risk” to financial stability, look around you. It has arrived, although in exactly the opposite manner to what our current crop of eco-financiers predicted....

The U.K. may be facing a wave of business bankruptcies exceeding anything witnessed during the post-2008 panic and recession...The culprit is energy prices...Matters are probably worse in Germany,...

Banks and other financial firms inevitably will find themselves right at the edge of the water if or when a tsunami of energy-price bankruptcies washes ashore.

Thursday, September 8, 2022

Expectations and the Neutrality of Interest Rates

Expectations and the Neutrality of Interest Rates is a new paper. It's an essay, really, expanding on a lunch talk I was privileged to give at the Minneapolis Fed "Foundations of Monetary Policy" conference in honor of the 50th anniversary of Bob Lucas' 1972 "Expectations and the Neutrality of Money." 


 Lucas (1972) is the pathbreaking analysis of the neutrality and temporary non-neutrality of money. But our central banks set interest rate targets, and do not even pretend to control money supplies. How is inflation determined under an interest rate target? 

We finally have a complete theory of inflation under interest rate targets, that mirrors the long-run neutrality and frictionless limit of monetary theory: Inflation can be stable and determinate under interest rate targets, including a k percent rule, i. e. a peg. The zero bound era is confirmatory evidence. Uncomfortably, long-run neutrality means that higher interest rates eventually produce higher inflation, other things (and fiscal policy in particular) constant. 

With a Phillips curve, we have some non-neutrality as well: Higher nominal interest rates raise real rates and lower output. A good model in which higher interest rates temporarily lower inflation is a harder task. I exhibit one such model. It has the Lucas property that only unexpected interest rate rises can lower inflation. A better model, and empirical understanding, is as crucial to today's agenda as Lucas (1972) was in its day. 

Much of this is contentious. The issues are crucial for policy: Can the Fed contain inflation without dramatically raising interest rates? Given the state of knowledge, a bit of humility is in order. 

 The link also has slides, if you like those. In one slide, I managed to put together the 54 year project to (finally) produce a full theory of inflation under interest rate targets: 

Friday, September 2, 2022

Apartment inflation


This beautiful graph comes from (Courtesy Andy Atkeson who used it in a nice discussion of a great paper by Ivan Werning at the Minneapolis Fed Foundations of Monetary Policy conference.) 

The central lines that don't move so much are the average rent. This is the quantity used by the Bureau of Labor Statistics to compute the consumer price index. The blue and yellow lines are the rent of new leases. 

The first thing this informs is the economic theory of "sticky prices." Apartment rents are a classic "sticky price;" the rent is fixed in dollar terms for a year. So, landlords deciding how much rent to charge, and people deciding how much they're willing to pay,  balance rents now vs. higher rents in the future. If everyone believes that inflation will be 10% over the next year, then it makes sense to raise the rent 5% now, and to pay the 5% higher rent, because  the savings at the end of the year balance the cost in the beginning. (Obviously, the economics are much more subtle than this, but you get the idea.) And Voila', you see it. 

The graph also says there is some predictability and nomentum to inflation. Inflation should not be a surprise to forecasters. If you see rents on new leases much above average rents, it's a pretty good bet that average rents will be rising in the future! This kind of phenomenon may be under exploited in formal inflation forecasting. 

And, on the continuing speculation whether inflation will go away with interest rates still substantially below current inflation, the graph does seem a leading indicator that the rational expectations model is winning.  

Clarification: Of course, the graph says nothing about causality; did new leases rise sharply because people expected inflation in average leases, or did new leases rise for other reasons, and we're just seeing the old theorem that marginal  > average when average is rising. But it is consistent with the expectations story, and illuminates that story nicely. 

Thursday, August 25, 2022

WSJ inflation stability oped -- with pictures

"Nobody Knows How Interest Rates Affect Inflation" is a new oped in the Wall Street Journal August 25. (Full version will be posted here Sept 25). It's a distillation of two recent essays, Expectations and the Neutrality of Interest Rates and Inflation Past, Present, and Future and some recent talks.  

The Fed has only very slowly raised interest rates in response to inflation: 

Does the Fed's slow reaction mean that inflation will spiral away, until the Fed raises interest rates above inflation? The traditional theory says yes. In this theory, inflation is unstable when the Fed follows an interest rate target. Unstable: 

In this view, the Fed must promptly raise interest rates above inflation to contain inflation, as the seal must move its nose more than one for one to get back under the ball. Until we get interest rates of 9% and more inflation will spiral upward. 

The view comes fundamentally from adaptive expectations. Inflation = expected inflation - (effect of high real interest rates, i.e. interest rate - expected inflation). If expected inflation is last year's inflation, you can see inflation spirals up until the real interest rate is positive. 

But an alternative view says that inflation is fundamentally stable. Stable: 

In this view, a shock to inflation will eventually fade away even if the Fed does nothing. The Fed can help by raising interest rates, but it does not have to exceed inflation. (That is, so long as there is no new shock, like another fiscal blowout.) This view comes from rational expectations. That term has a bad connotation. It only means that people think broadly about the future, and are no worse than, say, Fed economists, at forecasting inflation. Story: If you drive looking in the rear view mirror (expected road = past road), you veer off the road, unstable. If you look forward, even badly, (expected road = future road), the car will eventually get back on the road. 

Econometric tests aren't that useful -- inflation and interest rates move together in the long run in both views, and jiggle around each other. Episodes are salient. The unstable view points to the 1970s: 

The Fed reacted too slowly to shocks, the story goes, letting inflation spiral up until it finally got its nose under the ball in 1980, driving inflation back down again. But the stable view points to the 2010s: 

It's exactly the opposite situation. Deflation broke out. The Fed could not move interest rates below zero. The classic analysis screamed "here comes the deflation spiral." It didn't happen. Wolf. If the deflation spiral did not break out, why will an inflation spiral break out now? 

Not elsewhere: As I look at these, I start to have additional doubts about the classic story of the 1970s. The Fed did move interest rates one for one. Inflation did not simply spiral out of control. For example, note in 1975, inflation did come right back down again, even though interest rates never got above inflation. The simple spiral story does not explain why 1975 was briefly successful. Each of the waves of inflation also was sparked by new shocks. 

Who is right? I don't pound my fist on the table, but stability, at least in the long run, is looking more and more likely to me. That says inflation will eventually go away, after the price level has risen enough to inflate away the recent debt blowout, even if the Fed never raises rates above inflation. In any case, it looks like we have another really significant episode all set up, to add to the 1970s and 2010s. If inflation spirals, stability is in trouble. If inflation fades away and interest rates never exceed inflation, the classic view is really in trouble. The ingredients are stirred, the test tube is on the table... 

But, that's a conditional mean. A new shock could send inflation spiraling up again, just as may have happened in the 1970s. New virus, China invades Taiwan, financial crisis, sovereign debt crisis, another fiscal blowout -- if the US forgives college debt, why not forgive home loans? Credit cards? -- all could send inflation up again, and ruin this beautiful experiment. 

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.