The Armchair Federal Reserve Governor
Here is most of what is above the fold of a recent Vox article:
9 reasons the Fed made a mistake today
Let’s see what deductions we can make if we take the article at face value.
- There are nine reasons that the Federal Reserve Board should have done something it didn’t. The Fed missed all nine. There is no support for the action the Fed chose. The Fed, where economics PhDs cavort as if they were Playmates at the Hefner estate, chose a completely unsupported action over the correct, well-supported one.
- Despite the formidable tasks of beating the Fed at a game it has been playing for 101 years with a blank check for a budget, Vox also managed to figure out the optimal lane in which you should drive and how society judges its pop artists.
Such commentators claim for themselves something just short of omniscience. Anyone who claims to know contemporaneously in which direction the Fed has erred has a truly Homeric ego even if they seem otherwise circumspect.
Please don’t take this to be criticism of Vox alone. There is no infographic big enough to fit all the smart people with overinflated senses of their own competence. Also, do not question the good intent of any of these writers. Such articles are written by earnest, kind-hearted souls. They are smart enough to plot unemployment rates on a chart and do a bit of analysis, but too self-assured to question whether others better trained, equipped, incentivized, and focused than them might do better than they.
Unless you find yourself on a reserve board somewhere, it is unlikely that you have done the work necessary to reliably beat the Federal Reserve at its own, full-time gig.
Related: The Armchair CEO
Buried in all that is a point: The Fed does have an employment mandate (which I suppose they sometimes vaguely recall as part of their new hire orientation packets), and inflation is still below 2% and their target is 3%, and unemployment is still high.
OTOH, frankly QE isn’t helping much anyways. It’s not exactly hurting, I don’t think, but stuff gets kinda weird at the point the US is at from what I understand. (it’s all zero bounds and liquidity traps and stuff, which is well beyond me, other than that it’s not business as usual).
The ten-year T-bill rate is 2.44%, last I checked. Which means, whatever the Fed does or why, the word “inflation” should only come up in the context of “Absolutely none. In fact, we need some and we don’t have it. We’re WAY low on inflation”.Report
I share in the surprise at the decision. But surprise needs an interpretation, and I can see two ways you can go…
1. The Fed is staffed with idiots who don’t bother to look up unemployment and inflation rates before setting policy.
2. The Fed is using information I don’t know about in making its decisions.
There are others. For example, you might infer that the Fed is in someone’s back pocket or that it faces incentives to be overly hawkish, but I think most people tend to go with #1. And while that is a possibility, I find #2 more plausible.Report
Of course the Fed’s in someone’s pocket. 😉
No, but seriously — it’s rather difficult to coordinate blackmailing everyone — or bribing everyone, particularly in an environment where other people would also like to do so.
The FED always has information everyone else doesn’t have.Report
Vikram:
There’s also:
1) The Fed is composes mostly of banking and finance guys, and live in a banking and finance world and thus prioritize…banking and finance, perhaps even completely unconsciously.
(The Fed, if nothing else, has not seemed to care about it’s employment mandate in years)
What’s his name’s new book — Stress Test — he talks about the financial collapse, and it’s obvious he considered the entire recession basically a confidence shock — a giant bank run equivalent. He talks a bit now about a debt overhang, but at the time he didn’t even consider it except to dismiss it.
You don’t need incompetence or conspiracy — you just need, well, a rather uniform point of view, seeing banking and finance as the big indicators of the economy.
They’ve gotten darn creative in the years since, yet they are still inflation hawks (indeed, while the inflation target was 3% they tend to act like it’s really 2%) and haven’t considered other policies — like raising the inflation target to 4% and committing to it for a set period.
Low inflation is great for banks, not so good for borrowers.Report
I’d be a little more comfy with the “information I don’t have” option if the Fed was making really solid projections about future growth, but that doesn’t seem to be the case. I don’t think that the “idiot” or “in somebody’s pocket” theories are likely to be true, though. I do think that just because the Fed is structured to be independent-ish from political concerns that people underestimate the extent that the people running it worry about political concerns. It’s very hard to maintain any policy that deviates from historical norms when people are slinging poop at you for doing it, even if circumstances deviate from historical norms. The Fed chair is a famous person who is almost always concerned with reputation and legacy.
Doing “unprecedented” things is very gutsy when the stakes are high and the spotlight is on you. It’s a high-risk high-reward way to go. You could be a hero or a villain depending on whether or not it works. Making decisions that feel “normal” to most people will keep you mostly off the villain list.Report
Eh, before the ‘splosion, monitoring the banks and financial institutions was probably thought (at the Fed) to be more the job of the SEC than the Fed.
Whether or not the SEC had the authority, range, and audit power necessary to do that job is an aside.
So I don’t know how much of the financial system collapse is really the fault of the *Fed*, per se. They obviously contributed to the problem (and IMO have really jumped out of their normal range of behaviors in the last six years, which is the only pushback I’ll give to Vikram on this score: the Fed is operating in largely-uncharted-to-the-Fed waters… plus, the Fed is operating in multiple problem domains with very large validity issues).Report
1) The Fed is composes mostly of banking and finance guys, and live in a banking and finance world and thus prioritize…banking and finance, perhaps even completely unconsciously.
This is a fair critique. Though are we really to believe that to get a better picture of the real economy we should turn to political bloggers?Report
No, but you might turn to economists. Matt’s echoing a lot of economists there. Mostly the ones who weren’t surprised by the last decade.
Got to remember, the Great Recession — and the bulk of the Fed — are probably people who were blindsided by all this. The past decades had been what Krugman calls (I don’t know if it’s a standard term or his) the “Great Moderation” where monetary policy (aka, The Fed) basically had absolutely no problems manhandling the economy.
Everything was roses and ponies, you know?
Then this hits, and all their models are wrong — the Keyensians (or New Keyensians or whatnot) could explain it, but the Austrians and I’m guessing most of the Fed (people that really came into their career and economics starting in the 60s and 70s) couldn’t. (Not that the Keyensians are perfect or even right — , but their models actually work in this case. Call it different tools for different jobs).
I still recall Greenspan, baffled, on TV as he visibly struggled with the fact that the economy was doing stuff it shouldn’t, by his lights. (Which really was just deserts for pimping ARM’s, but still).
It’s to their credit that the Fed actually reached out and tried crazy stuff (to them) like QE. They realized, at the very least, they were pushing on a string and that the US Government wasn’t gonna react fast enough or do enough so they tried their best, but it’s pretty obvious they’re still trying to explain the last decade, trying to alter their models even as they try to fix it.
Whereas, again, Keynes would just point out that the vast majority of ‘spenders’ are paying down debt or simply don’t have any money, and thus the economy will stagnate until the debt is paid down or those folks get a sizable raise — or both. And the last thing you need to worry about is general inflation in a time of high unemployment and decades-long stagnant wages. You can’t kick-start the cycle if people can’t bid up prices.
Call it..big versus little picture. The Fed seems to be relying on stuff that’s always worked over their short-term baliwick, models and such that are generally quite accurate. The big picture, however, has shifted enough that it’s all out of sync and so they’re flailing. They don’t want to toss 30 years of understanding (fairly effective understanding), and frankly even if the Keynes model was 100% accurate there’s not much the Fed CAN do.
They can target a higher rate (like Japan is doing) and commit to it, which is effectively shooting for a negative interest rate.
I’m not sure it’ll do any good. I think we’re expecting miracles from the Fed when the problem is outside of their control: Too much money in too few hands, and the middle class in debt. The rich can’t buy enough, and the middle class can’t afford to — they’re paying down debt and even if they weren’t they haven’t seen a raise in ages.
There’s no Fed policy that can address that.Report
morat20,
The work of some economists — some of them working Very Hard, was what got us Yellen. As I trust these blokes, I figure that her kick in the pants strategy might just help.
Printing buckets of money fixes debt, and it always has. The Fed could print buckets of money, but the trick is making sure it gets out of bankers pockets (One might wonder if I’m biased here. Probably rightly so.)Report
@vikram-bath This is a false dilemma. @morat20 points out alternative #3. #4 (or 3b) is that the Fed is prioritizing things differently (and by some opinions, incorrectly) and therefore are making the wrong decision based on optimizing around the wrong thing.Report
morat,
Yeah, I dig you on inflation, and QE has been a weird policy from the getgo.
Still, we HAD A BUBBLE with <3% inflation (real estate)…
Yellen's right to be easing off on an emergency policy.Report
Asset bubble is not the same as inflation.
That’s like saying…um…all cars are unreliable because GM had a recall on the ignition.Report
morat,
sure thing. But the fed doesn’t like asset bubbles (and they’re right not to! Japan’s still not finished with the shit that fucking up real estate caused for them!)Report
Asset bubbles are unavoidable. In fact, I’d be real money they’re going to become common.
What makes bubbles? Too much money chasing too few goods.
We’re awash in investment money, all of them clamoring to make at least 5% a year, year after year, while the economy barely grows. Companies are sitting on cash, even, tons of it.
All that investment money has to go somewhere, so it blows bubbles. The real estate bubble didn’t happen because every American decided to flip houses or lie to mortgage companies — it happened because there was demand for mortgage-backed securities by investors, which meant an industry sprung up generating them.Report
morat,
Standard (non inventive) growth of the economy goes by workforce growth (population growth as well). Which is about 1-2%.
Looking for 8+% is just batty, ain’t it?
Capital is going to start driving workers out wholesale. Which will be … interesting.
(Robotic Construction and Robotic drivers are just the start. Oh, did I forget to mention Darpa’s robotic soldiers? Robotic doctors — telesurgery).Report
There is something to be said for the argument that the Fed has consistently overestimated economic growth in their projections since the crisis began. If they haven’t updated their methodology or priors, there’s a good argument to be made that this is another case of premature tightening.
Also, I don’t read the Yglesias article as saying, “These are the 9 criteria on which the Fed should have made the decision, and any one of them is sufficient for further stimulus, so they had 9 chances to get it right and were 100% wrong 9 times in a row.” I read it as, “These are 9 good reasons they should have gone the other way.” The “no support” position seems to be yours. Perhaps Yglesias should have shared some of the Fed’s arguments in favor of their position with us. Then again, the key argument seems to be that things are about to get better this time.Report
If they haven’t updated their methodology or priors, there’s a good argument to be made that this is another case of premature tightening.
I think it is likely that the Fed is acutely aware of its failings and updates accordingly.
The “no support” position seems to be yours.
I don’t see anywhere in the piece that provides a reason acted the way it did. By not providing such a reason, The Fed comes across as holding the idiot ball.Report
If it was doing it well, I’d expect a noticeable change in the nature of its errors. Not necessarily being “right” all the time (or even more often), but at least making an equal number of errors above and below the line. We’re looking at systematic bias in one direction more or less year after year. I’ll give people the benefit of the doubt about what to do about the future when they’re experts as long as their predictions about the future tend to pretty good, but that’s not what’s going on here.
When somebody says, “I’m doing X because I predict Y will turn out to be true, and Y is a good justification for X,” and Y consistently doesn’t happen, I’m going to start asking if X is really the right policy, and it has nothing to do with whether or not X is correct assuming that Y turns out to be true.
A couple of things:
1) Plenty of opinion pieces argue their case without arguing their opponents case for them without being called out for kneecapping their opponents. I don’t see a lot of counterarguments in your piece arguing the position that Yglesias is actually a sharp guy making good observations rather than an arrogant windbag, but I don’t hold that against you.
2) The Fed and its reps rarely do a great job of making their own case, and now appears to be just one of those cases. The best we’ve seen so far is a lot of people positing something along the lines of secret evidence that the rest of us don’t have.
I suspect that the main argument is something like, “Yes, there’s good theoretical justification for what you’re proposing, but we’re going to be cautious because we don’t want to end up on the wrong side of history.” That argument doesn’t sound good (although it’s not totally unreasonable), so it’s simply not made. Instead we get overly optimistic predictions about the future that justify doing what they’re more comfortable with even though present-day data may not support it that well.Report
tf,
it’s not positing. The FED is able to get data before the rest of us by law — they’re allowed to look at books we can’t touch.Report
at least making an equal number of errors above and below the line.
The economy doesn’t have that level of responsiveness to inputs over short periods of time. If it did, then we would move from boom to recession then back to boom on a quarter-to-quarter basis based on what type of error the Fed had made the prior quarter. Instead, the economy is more like a cruise liner or oil tanker, with errors only apparent miles after they were made.
“I’m doing X because I predict Y will turn out to be true, and Y is a good justification for X,” and Y consistently doesn’t happen, I’m going to start asking if X is really the right policy, and it has nothing to do with whether or not X is correct assuming that Y turns out to be true.
Genuine question: If we were to apply this, wouldn’t this be reason to give up on quantitative easing?
I don’t see a lot of counterarguments in your piece arguing the position that Yglesias is actually a sharp guy making good observations rather than an arrogant windbag,
In my defense, I strongly implied he was both smart and arrogant!
we get overly optimistic predictions about the future
I haven’t examined the Fed’s models. I’m not an economist, let alone a macro guy. But I do know that they do actually have models while their critics can’t be bothered and instead point to selected data points like civilian unemployment rates. It’s rare that critics even get to the level of sophistication of examining rates of change in unemployment rates.
And I do realize that there are dangers in looking only at the sophistication of the tools used by a carpenter to judge his skill, especially when the one with the fancy tools has done some shoddy work work in his years. But I take the fact that most Fed critics don’t do their own modeling work as evidence that they don’t know better than those who do the work.Report
@kim
That argument works once or twice. Three times, tops. We eventually get the data, and we eventually get the economic results that we can use to compare to the Fed’s predictions. I’d have bought into the idea that “this time the secret data is really telling them something different” argument if it hadn’t turned out to be wrong so many times in the past few years. Now I’m more inclined to think that the secret data is more of the same and the outcome will be more of the same.Report
Sorry about the explosion of mixed metaphors splattering that comment like clowns on Christmas.Report
tf,
“reading the data wrong” and “failing to extrapolate properly” are still fair charges (and the more you’re pointing to actual numbers, the more i’m on your side). I’m simply saying that they CAN get data that the rest of us do Not have access to.Report
The effect of Fed activity on GDP (and its expected lags–surely nobody at the Fed is surprised that there’s a delay in response to Fed action) is rolled into the model that gets them to predicted GDP. If their future GDP predictions are always wrong in one direction, there’s something systematically wrong with their models or their data. If they were doing it right, I’d expect their projections of future GDP to be too low as often as they’re too high. If the problem was with the Fed not knowing that its own effect is delayed, I’d at least expect that bias to be different at different time horizons, but that doesn’t seem true to my eye either. It’s generally high when they’re predicting 6 months or 3 years down the road.
That’s a good question. I’m arguing that the models say we should do X if we expect Y and ~X if we expect ~Y. If we do X while expecting Y, and we keep seeing ~Y and seeing bad results, that tells us that we’re bad at figuring out the future path of Y, or it could mean that X causes ~Y, which would turn our understanding of the world upside down. Maybe. But I don’t see a lot of good reason to accept that explanation over the one that matches better with other data and theory. The high bias could genuinely be because the knob “change in money supply => future nominal GDP” is wired backward from what we think it is, but I think there are other explanations at work.
I’m still inclined to think that the overestimation of future GDP is at least partially driven by wishful thinking that keeps them from having to stick their necks out too far. IIRC, Paul Volcker said that if he had known how aggressively the Fed would have to act to combat inflation in the 80’s, he might not have had the guts to do it. I’m thinking it would be easier to convince yourself that the expected future path for inflation was down anyway and you could be a little more gentle and ruffle fewer feathers. It’s surely not fun to sit in that chair during a crisis.Report
http://www.calculatedriskblog.com/2014/06/fomc-projections-and-press-conference.html
Projections seem to be trending more positively, no?Report
Do you read the Beige Book?
It’s a pretty good picture of the general economic picture the Fed is looking at.
My arm-chair generalling: The Fed’s trying a different push on the levers here.
We’ve had a lot of incentives to hire, and most of them haven’t panned out all that well.
Currently, there are an increasing numbers of job openings, but hiring still remains relatively flat, inflation remains flat. But sales-tax revenues are also increasing, and in many states, are well above projected revenues.
I think easing back on the supposed stimulative effect of quantitive easing right now is to put pressure on people psychologically; because as access to capital is more expensive, people invest now, while the capital is cheaper. It’s applying the psychology of house purchases during the housing-bubble build-up (prices are rising, better get in now) to capital to get people to make the hiring investments now, since there’s some pent-up demand for labor that’s still being ignored. What’s been missing from the picture of economic growth has been the notion that capital will be more expensive tomorrow then it is today; the perception that it will be more expensive increases the notion that there might be some competitive advantage to putting it to work now, while you’ll get more bang for the soon-to-be inflated buck that your competitor will have to invest.
(And yes, I can poke a thousand holes in this theory, and you’re welcome to do so, too.)Report
@vikram-bath good to have the screen-shot, the headline’s different, now.Report
The Fed’s trying a different push on the levers here.
We’ve had a lot of incentives to hire, and most of them haven’t panned out all that well.
That’s more or less how I look at it. The Fed can’t provide tax incentives to hire, and they can’t provide tax incentives to buy long-term durable goods, or do any of the other manipulations that may or may not increase demand. But they still have a mandate to cut down on unemployment.Report
They’ve obviously given up on fiscal policy every happening. Biggest recession since the Great Depression and we got what — a stimulus that was a fraction of the size necessary, tilted heavily towards lower efficiency tax cuts (payroll tax wasn’t, but the rest was) and that cut-off the second the economy started lurching forward in favor of massive austerity.
Frankly, I’m surprised the economy did as well as it did.
I still think the Fed should try targeting a higher inflation rate and commit to it for five years or so.
I read an interesting proposal for a new Fed tool — printing up helicopter drops of cash, doled out to each and every taxpayer monthly. Fed decides how much (if any), and just..sends it out. It’d be a pretty blunt tool and probably rarely used, but I can think of times it’d be handy.Report
Frankly, I’m surprised the economy did as well as it did.
FWIW, I am as well.
I did not see the influx of Chinese money buying SoCal real estate at above 2007 property assessment levels occurring in 2013 and 2014, helping to stabilize the housing market.
Here anyway.
I’ll note that this still makes little sense economically. Politically, yes.Report
They’ve obviously given up on fiscal policy every happening. Biggest recession since the Great Depression and we got what — a stimulus that was a fraction of the size necessary, tilted heavily towards lower efficiency tax cuts (payroll tax wasn’t, but the rest was) and that cut-off the second the economy started lurching forward in favor of massive austerity.
I don’t want to argue it, but I’ll just note that there are plenty of economists who don’t think fiscal stimulus is a useful approach, and plenty who think austerity is the way to go. Scott Sumner would agree with you on the inflation target, but would scoff at the fiscal policy part.
That’s not to claim you’re wrong, but to claim there’s it’s not certain you’re right.Report
James,
I would point out that each and every one of those economists would have said the Great Recession couldn’t possible happen, too.
Greenspan was one of them.
So I don’t put a whole lot of stock in their opinions, because they’ve not only been proven badly wrong, their recipes for austerity failed everywhere it was tried. (Europe is still suffering).
So why on earth would I listen to people who explicitly claimed something like the Great Recession COULDN’T happen, whose models couldn’t even handle it much less predict it, whose ‘fix’ for it was tried in multiple countries — all of whom suffered far worse than the US and are still way behind us….
Why would I listen to them, over the New Keynesians whose models did quite nicely explain this, whose models predicted both the effect of the stimulus in the real world (and the fact that it was too small) and whose models are continuing to be accurate?
That’s sort of the problem. The people saying austerity was the cure, well — they’re like Dick Cheney talking about Iraq now. When money was on the line, they were badly wrong and they haven’t so much as changed a note despite real life smacking them in the head with their errors.
I’m not saying the New Keynsians (or Keynesians or whatever they call themselves) have perfect models, or our indeed always right. But here and now? They’re far, far more accurate than anyone else and straightforward when modeling this, while everyone else is taking badly inaccurate models and loading them down trying to force them to fit.Report
@morat20 there were people who were saying there were problems. Janet Yellen. Elizabeth Warren. Earlier. Brooksley Born. I take no end of pleasure that they were women, and that at least two have been rewarded for their insight; Warren by the voters of MA and Yellen by Obama and the Congress. I’m particularly proud of Born’s accomplishments, and would guess both Warren and Yellen learned a lot both from her work questioning synthetic derivatives and her failure to make the good ‘ol boys of finance take heed.Report
zic,
Tanta Vive! (She wasn’t writing policy, but she was one of the key people speaking out against NINJA loans).Report
If I recall, Tanta was one of the first people to point out the obvious flaw in AAA-rated CDO’s – that the AAA rating was not equivalent to the AAA rating on the other MBS issuances because the CDOs comprised of the first loss positions of the original mortgage pools with perhaps some insurance or other collateral.
In 2007, that’s precisely what happened. Defaults hit the CDOs hardest. Investors bought them with leverage and were forced to make margin calls. They said screw that and everyone started selling out. Since the value of a lot of those positions were pretty much worthless, to cover their margin positions, they started selling off what they could. This is how the market for commercial mortgage backed securities dried up almost immediately towards the end of 2007, about a year before the crisis hit.
@morat20
Why would I listen to them, over the New Keynesians whose models did quite nicely explain this, whose models predicted both the effect of the stimulus in the real world (and the fact that it was too small) and whose models are continuing to be accurate?
Which models are you speaking of?
You’re not suggesting that the models predicted the crisis are you? That seems a bit impossible since the underlying causes were making themselves know around the exact time they were becoming a problem. No model could have predicted a financial meltdown because no model could have accurately accounted for the amount of systemic risk that built up in the financial system because modern finance is so damn opaque.
I’d be interested to see what models could have accurately predicted the impact of stimulus and how those models would have accounted for the extremely dislocated nature of the capital markets in 2009. Since the recession was caused by a global financial meltdown, one that almost sank our banking system, the wounds to the system were so deep that no amount of stimulus could have made that healing process faster unless the government wanted to take on every and any toxic loan out there. That option was about as politically tenable as a larger stimulus package.Report
I would point out that each and every one of those economists would have said the Great Recession couldn’t possible happen, too.
Head, desk.Report
their recipes for austerity failed everywhere it was tried.
Apparently the Estonians weren’t informed that they had to fail.Report
Maybe I’m looking at the wrong data, but Estonia still seems to be in the toilet at a quick glance. Am I not remembering some important dust-up over the meaning of the uptick in 2010-2011? A quick look at the graphs shows that a lot of countries appear to have that tick followed by a sharp flattening (or drop). I’m thinking that Estonian policy was probably not the driver.Report
Wait… your argument that austerity is great rests on Estonia? I’ll leave the question of whether the US economy looks more like the UK or Estonia to the reader…
And, of course, Estonia isn’t doing anything like booming. Here’s Krugman in 2012. And their 2013 Real GDP growth rate? 0.8
Maybe the Estonians “weren’t informed that they had to fail”, but they still did. Because austerity is a shitty economic idea.Report
I don’t want to argue it, I’ll just note that there are plenty of economists who don’t think fiscal stimulus is a useful approach, and plenty who think austerity is the way to go.
And that is basically why the public laughs when economists claim that theirs is a science. Because the description of how the world works, and what policy should be, coming from the well-respected academic economists on the Council of Economic Advisers, just happens to always match the ideology of the person sitting in the Oval Office.
I’m not arguing with you, I’m just making an observation.Report
Michael Caine, I’d just tweak that to macro econ.
T-frog, re Estonia. Lots of folks, like Krugman, keep pointing out that Estonia hasn’t reached its pre-employment GDP yet. But few of them mention that the Estonian finance officials think their pre-recession peak was a false economy, not sustainable, so not recovering to that level isn’t, they think, a good measure.
By some accounts–not Krugman’s, so for those whom he is the economic oracle (not you Troubling Frog, I know), this will be simply dismissible–the countries that have employed austerity are doing well. My point is not that I “know” they’re right, but that like Krugman and others who disagree with them they are more fully trained economists than anyone on this blog, so obviously whatever is happening, it’s not clear enough to lead all knowledgeable people to the same conclusion. So anyone here who makes a claim as simplistically absolutist as the one I was responding to is responding based not on knowledge but on an ideology approaching religious faith in a favored set of prophets.Report
It’s not just that. Estonia doesn’t even seem to be on an upward trajectory. Did you look at the graph? That’s not “slow and steady growth back to normal.” That’s a brief upward ripple (an artifact which seems to be common across a lot of countries that are not Estonia) followed by stagnation. It’s not that the Estonian Miracle is being dismissed. It’s just not there. They’re not doing well historically, they’re not doing well compared to comparable countries, they’re not doing well compared to wealthy countries, and they’re certainly not doing well compared to us. So philosphizing over the meaning of the Estonian Miracle seems like arguing over why the sea is boiling hot.
The Estonian thing bothers me especially because it’s indicative of a trend I saw throughout this crisis: everybody likes to pick a poster child country for their preferred policies and then start a storm of blog posts and editorials whenever their charts move over the short term. Estonia was probably about the fourth or fifth “amazing success story” of a preferred policy that I remember reading about, and none of them turned out to be useful data at all. They tend to revert to the mean and then get forgotten as anything other than a great example of a time their preferred policy “worked” and the other guy was “wrong” in later debates, never mind the extra historical data.
It’s been a while since I did the exercise, but you can do a sanity check plot of change in government purchases vs gdp growth in the following couple of years and you get a noisy graph with a visibly positive slope that makes reasonable logical and theoretical sense. There are obviously *a lot* of problems with that simple methodology, but it beats drawing a line through one data point. The poster children everybody wants to point to are inevitably carefully chosen outliers, and the Estonian one popped out at me as a really clear example of the problem.Report
Dave,
“You’re not suggesting that the models predicted the crisis are you? That seems a bit impossible since the underlying causes were making themselves know around the exact time they were becoming a problem. No model could have predicted a financial meltdown because no model could have accurately accounted for the amount of systemic risk that built up in the financial system because modern finance is so damn opaque.”
Krugman predicted a crisis. So did Dr. Doom — so did McBride and Tanta, for that matter.
Now, I’ll buy that they might have been off a few orders of magnitude on the scale of the crisis — I don’t recall folks mentioning Argentina before the crash…
There are computer models that account for systemic risk, and that are designed to work with pretty flexible inputs. I wouldn’t be at all surprised if someone didn’t have one running on some of these opaque derivatives.Report
But few of them mention that the Estonian finance officials think their pre-recession peak was a false economy, not sustainable, so not recovering to that level isn’t, they think, a good measure.
On a related note, over the last couple decades US employment reaches unsustainable peaks before recessions that take longer and longer to recover (we are, in fact, far from our previous employment peak once population growth and reduced workforce participation are included). I argue that this is a natural outgrowth of an economy with so many low-end service jobs — day care, lawn care, laundry service, fast food, etc. All of those jobs depend on the tier(s) above them doing well; when part of the income in those higher-tier households goes away due to a recession, the kids come out of day care, the lawn mower comes out of storage, and the washing machine gets used for more stuff. It takes a long time for the higher-tier households to feel comfortable enough to resume hiring out all of those tasks.
In one of the other symposium pieces there was a sub-thread about how hiring out all that work, allowing increased specialization, makes us all richer than if people did the work themselves. It also assumes, particularly for the low-end jobs, that nothing is ever going to interfere with the income streams. Being a generalist to a reasonable degree is a form of insurance against income loss, which sometimes happens for reasons beyond our control.Report
Kick in the pants theory. I like.Report
Yglesias’ interpretation of his employment chart is…curious.Report
The Fed’s tools are asymmetric in that they basically hold a leash on the economy. They can quite effectively restrain an overheated economy but for stimulus about all they can do is let out some rope and hope it wants to run. And when they do try something “drastic” like printing money they water the top of the tree instead of the roots by passing it out to banks instead of consumers. Not their fault, really, Congress holds that particular steering wheel.
Yeah, I think @zic is right that they’re trying to raise expectations of higher future capital costs in hope of spurring more investment now. The problem with that gambit is that borrowing costs or access to cash hasn’t been the issue. What businesses really need is some good reason to invest. Something like the prospect of increased demand for their goods and services. Otherwise there’s simply no point to investing.Report
jfc, I can’t believe I’m defending Ygleisias.
a) “There is no support for the action the Fed chose. The Fed, where economics PhDs cavort as if they were Playmates at the Hefner estate, chose a completely unsupported action over the correct, well-supported one.”
This is a strawman. The article provided reasons why it felt the fed’s latest action was incorrect. It did not, and need not, say anything about the Fed’s own reasons as part of the article’s prima facie case.
b) “Despite the formidable tasks of beating the Fed at a game it has been playing for 101 years with a blank check for a budget, Vox also managed to figure out the optimal lane in which you should drive and how society judges its pop artists.”
Organizations have different people with different tasks for different expertise. News gathering and reporting organizations have had such for years. We expect any major daily newspaper to have reportorial experience and subject matter familiarity on everything from politics, crime, arts & entertainment, sports, weather and traffic. We don’t say “hm, how can these newspaper people intelligently talk about the school board’s latest education proposal *and* simulatenously talk about that new comedy which opened last weekend at the downtown theater.”
The overall appeal to authority in this post is pretty weak sauce. And frankly, undemocratic. Plus, it’s not like the Fed’s gotten one or two things wrong, and at least once disastrously so, in that 101 year stretch.Report
It did not, and need not, say anything about the Fed’s own reasons as part of the article’s prima facie case.
I know there’s a new chair in town, but: isn’t the Fed, by tradition, pretty cagey about their reasoning? I haven’t paid much attention lately, but writing, it was a regular part of my gig, and they were always opaque, and idiots like me always hung on their every word, hoping for some insight into their thinking that never really materialized.
Again, I think the Beige Book is the best look at the economic fundamentals they look at; @road-scholar I linked to it up thread, you should take a look, but it’s basically sayint that things are looking up, however slowly. Tax revenues are up in every state except Wyoming; in mine, they’re up significantly above projections. Housing starts, another big indicator, are up, and there’s some concern that builders cannot find enough skilled workers for their crews.Report
“I know there’s a new chair in town, but: isn’t the Fed, by tradition, pretty cagey about their reasoning?”
Yes, which imo amplifies my point that ‘the Fed has no support’ is not an assertion one can deduce from the article at ‘face value.’
My criticism isn’t about what the Fed did or didn’t do and whether it’s wrong or not, my criticism is about the post’s criticism of Vox’s criticism of the fed. That might be a meta to far, but I feel ‘they’ve been doing this a long time, you know nothing jonsnow’ is a bad analytical framework.
For example, in beginning of 2003, Vice President Cheney had been part of the defense establishment a long time, had access to all the inside data, and his previous experience with Iraq – Desert Shield/Desert Storm – was successful in achieving its stated aims. That year, unless you found yourself as a Defense Secretary somewhere, it was unlikely that you had done the work necessary to reliably beat Dick Cheney at his own, full-time gig.
And yet, he was a integral cog in the biggest mistake to date in 21st century geopolitics.Report
Holohe is exactly right. The Cheney example fits. One could also make sports analogies (for example, it’s certainly fair to criticize shitty baseball GMs even though they have insider information).
And the criticism is particularly fair here when the Fed has a long history of (1) not caring about unemployment; and (2) seeing its inflation target as a cap instead of a target.Report
Whoops, looks like I triggered a moderation queue somehow. Reposting:
Holohe is exactly right. The Cheney example fits. One could also make sports analogies (for example, it’s certainly fair to criticize baseball GMs even though they have insider information).
And the criticism is particularly fair here when the Fed has a long history of (1) not caring about unemployment; and (2) seeing its inflation target as a cap instead of a target.Report
It did not, and need not, say anything about the Fed’s own reasons as part of the article’s prima facie case.
Especially when the institution is as authoritative and verbose in its explanations of its actions as this one is.Report
Premature submit there.
Was going to say, I don’t entirely disagree with Vikram that the argument is strengthened when you deal with the counter argument directly (or vice versa to some extent in this case). It wouldn’t have hurt Yglesias to give a bit more of a nod. But there’s no way you’re ever really going to do justice to the Fed’s own account of its reasons; it’s pretty much a pro forma gesture in this case. I don’t see any kind of remarkable arrogance here, I just see really the most space-efficient way for Yglesias to make his argument that avoids either misstating the Fed’s view or giving over half the article to an argument the Fed makes best in its own words. There’s certainly no particularly egregious discursive negligence here.Report
As noted above, Kolohe nails the response. But I think more broadly ideas like the OP’s are the reason we have such problems with “Very Serious” policy issues right now.
Vikram doesn’t seem to care whether what the Fed did was right, doesn’t seem to know either way, and doesn’t seem to consider the criticism. He just knows that the Fed is tasked with doing things and that they get lots of money to do those things. Therefore all criticism reflects a truly Homeric ego.
I get that people can’t be engaged on every issue, and that deferring to authority is a necessary way to make decisions in your life. But criticizing the people who don’t, and who take time to explain why, simply BECAUSE they don’t defer to authority strikes me as pretty sad.Report
I knew the invasion of Iraq was going to be a clusterfish, and I got many of the reasons right. I missed three of the big ones:
1. The Bush administration would be in such strong denial about the need for an occupation that they would refuse to do any planning for one, and
2. They would also spend years denying that the resulting insurgency was actually occurring,
3. The people they sent to rebuild the Iraqi infrastructure would be, not people who understood the problem, but campaign contributors, ideologues, or both. (E.g, what to do about the electric grid which had been decimated by the war and the subsequent insurgency? Privatize it! Immediately!)
But these strengthen my man point: Vikram could make the same arguments that I’m just some guy who likes classical music and makes bad puns, and must have a truly Simpsonsesque ego to think I know better than all those experts.Report
On (3), you should have been able to predict the likely outcome based on the fact that the administration was determined to do everything on the cheap. You knew enough to know that putting reliable power into Iraq’s cities — let alone the countryside — would be a very expensive undertaking, due not only to military damage but to decades of neglect before that. So the people put in charge would be the ones with the magic fairy dust — “Privatize!” — that they claimed would make an expensive job cheap.
Okay, you might not have known which magic fairy dust was going to get selected, but you knew magic dust was going to be involved.Report
Should I have known that pre-invasion? Sure, they were talking about how Iraq’s oil would pay for everything, but how could I know they were dumb enough to believe it?Report
Given that pre-invasion they poo-poo’ed the generals who said it would take 400,000 troops on the ground to really occupy the country, said that we would be greeted as liberators by all, that the whole thing would be over in nine months, that the Sunni, Shi’a and Kurds would lay down together like the proverbial lions and lambs, and as you mention, Dick Cheney would lay his Halliburton hands on the wells and the pipelines and the oil would flow like water… Yes. Magic fairy dust.Report
For years, I’ve offered the Federal Reserve the use of Cain’s Law™ for free: “Any situation in which it is easier to become rich by manipulating financial instruments than by producing actual goods and services will end badly.”Report
That would be a hard sell to a banker.Report
Yes, but that doesn’t it make it any less valid as a description of history.Report
Bankers, buy and large, do provide a service. So does the financial industry. But as useful as it is, making it 20% of the economy is…pushing it.
Like by twice or more as much as is needed. Finance bubble. 🙂Report
Yes, banks and bankers sell services in the real economy that provide honest value. Banks and bankers that do that don’t get fabulously wealthy, because it’s a tough job where the usual aspects of the real economy apply — competitors, costs, efficiency, risk assessment, etc. Glass-Steagall worked well for 60-odd years by keeping those bankers separate from the folks whose “job” was finding new ways to create debt and sell it for a profit.Report