Macro Musings Podcast: Hugh Rockoff

My latest Macro Musings podcast is with Hugh Rockoff. Hugh is a professor of economics at Rutgers University and has done extensive work on U.S. economic history. He is the coauthor of the popular textbook “History of the American Economy” and has served on the editorial boards of the Journal of Economic History and Explorations in Economic History.  

Hugh joined me for a fascinating conversation on U.S. monetary history. First, we discuss the idea of an optimal currency area (OCA) and consider how long it took the United States to become one. Hugh makes the case that it took about 150 years for the United States to become an OCA. As he notes, this does not bode well for the Eurozone. 

Second, we talked about the first two central banks of the United States, the 'free-banking' period, the monetary developments during the Civil War, and the flawed National banking system that emerged after the war.

Third, we covered one of the more underappreciated developments in U.S. monetary history: the existence of two floating currencies over the period 1861-1879. There was the well known 'Greenback' in Eastern United States, but there was also the 'Yellowback' in the Western United States. This development is not only interesting, but relevant for current conversations about the Eurozone splitting into two separate currencies. 

Finally, we concluded by talking about how some of the New Deal programs of the 1930s helped turn the United States into an optimal currency area. This was a great conversation throughout. 

You can listen to the podcast on Soundcloud, iTunes, or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more shows are coming!

Related Links
Hugh Rockoff's homepage
Hugh Rockoff's paper How Long Did It Take the U.S. to Become an Optimal Currency Area?
Hugh Rockoff's paper Yellowbaks out West and Greenbacks Back East

Macro Musings Podcast: Doug Irwin

My latest Macro Musings podcast is with Doug Irwin. Doug is a professor of economics at Dartmouth College, a research associate with the National Bureau of Economic Research, and former staff member of the President’s Council of Economic Advisors. Doug also served as an economist at the Federal Reserve’s Board of Governors.

Doug is one of the leading experts on trade economics and has published widely on the topic, in both journals and books. His books include Free Trade Under Fire, Against the Tide, an Intellectual History of Free Trade, and Peddling Protectionism: Smooth-Hawley and the Great Depression. Doug is currently working on The Battle Over U.S. Trade Policy a Historical Look at U.S. Trade Policy Since the Founding of the Country and has also researched the role the interwar gold standard played during the Great Depression. 

Doug joined me for a fascinating conversation on trade. We began the show by reviewing the main arguments for free trade and why it seems to have taken a black eye this election cycle. Among other things, we consider whether the sluggish recovery since the crisis has been a reason for why free trade has become so much more contentious, not only here but in other advanced economies. 

We then discuss some of the recent research on trade as well as some of the recent and not-so-good popular work on the topic. Along the way we consider whether free trade is a good idea for small, developing economies. 

To help put the trade debate in perspective, we then review the development of trade policy in U.S. history. Finally, we talk about the role the interwar gold standard played in creating the Great Depression. It was a great conversation throughout. This is timely topic. 

You can listen to the podcast on Soundcloud, iTunes,  or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more shows are coming!

Related Links

Doug Irwin's personal web page

Dout Irwin's twitter account

P.S. Here is a link to the upcoming monetary policy conference.

The Unwinding of QE Has Begun

Don't look now, but the Fed is quietly unwinding QE. As seen in the figure below, the Fed's share of marketable treasuries has been shrinking:

To be clear, this is a passive unwinding of QE. The Fed's treasury holdings have not changed, but the stock of marketable treasuries has grown. Nonetheless, this is still an unwinding according to the portfolio channel of monetary policy. This channel says the Fed's taking of safe treasury assets from the public would force investors to rebalance their portfolios toward riskier assets. This rebalancing, in turn, would reduce risk premiums, lower interest rates, push up asset prices, and help shore up the recovery.

Now the portfolio channel should be working in reverse. The public is getting a larger share of treasuries relative to the Fed thanks to the ongoing budget deficits. Moreover, this passive unwinding by the Fed is being reinforced by other central banks according to CNN Money:

In the first six months of this year, foreign central banks sold a net $192 billion of U.S. Treasury bonds, more than double the pace in the same period last year, when they sold $83 billion. 

China, Japan, France, Brazil and Colombia led the pack of countries dumping U.S. debt. It's the largest selloff of U.S. debt since at least 1978, according to Treasury Department data. 

"Net selling of U.S. notes and bonds year to date thru June is historic," says Peter Boockvar, chief market analyst at the Lindsey Group, an investing firm in Virginia.

So have all these central bank actions caused U.S. treasury yields to take off? Have the Bill Grosses of the world finally vindicated themselves? The answer is no. Treasury yields continue to remain at historic lows despite the unloading of treasuries by central banks. How can that be? Here is CNN again with the answer:

Despite all the selling by these countries, private demand for the bonds has sky rocketed. Demand is so high that the U.S. can afford to pay historically low interest rates. The 10-year U.S. Treasury hit a record low of 1.34% earlier this year, before bouncing back to about 1.58%, currently.

In other words, central banks have not been very important in shaping the path of long-term treasury yields. You, me, and our financial intermediaries, on the other hand, have been a key reason for the decline of U.S. treasury yields to historic lows. While not the only factor, our seemingly insatiable desire for safe assets has been a pivotal factor behind the low interest rates. And, as can be seen in the figure below, the decline in safe asset yields is a global phenomenon:

This is the safe asset shortage problem. As seen in the figure, the trend in safe asset yields turned down in 2008. This common change in trend should reinforce the point above that this is not a consequence of central bank's actions. Instead, as outlined here, the safe asset shortage problem is the consequence of a reduction in the supply of safe assets, an increase in demand for them, and an ongoing spate of bad economic news that keeps this economic sore from naturally healing. 

The failure of treasury yields to rise with the unwinding of QE is just another data point that confirms this understanding. Here's hoping the Bill Grosses of the world take note. 

Nominal Demand Ain't What It Used to Be

Nominal demand is a shadow of its former self. In the past, it averaged near 5% annual growth but has struggled ever since the crisis. The figures below illustrate this on a per capita basis for aggregate demand and domestic demand growth. 

Nominal demand growth ain't what it used to be. To be clear, nominal demand growth is not what we ultimately care about. That would be real economic growth and over the long run it is not determined by nominal demand growth but by real factors.

That, however, is not my point here. My point is that somehow policy makers were able to generate near 5% nominal demand growth per person pre-2008 and now seem completely unable to do so. Why?

My answer is that inflation targeting, as it is currently practiced, has become the poisoned chalice of macroeconomic policy. 

Central banks have been so good at creating low inflation since the early 1990s that it is now the expected norm by the body politic. Any deviation from low inflation is simply intolerable. In the US, everyone from the media to politicians to the average person start to freak out if inflation heads north of 2%. This mentality seems even worse in Europe. Inflation-targeting central banks, in other words, have worked themselves into an inflation-targeting straitjacket that has removed the few degrees of freedom they had. It is hard to imagine Yellen and Draghi being able to raise inflation temporarily above 2% in this environment. All they can do is operate in the 1-2% inflation window. Inflation targeting's success has become it own worst enemy. 

Another way of saying this is that the space for doing macro policy has shrunk to the small window of 1-2% inflation. Not only is monetary policy constrained by this, but so is fiscal policy... 

For these reasons inflation targeting has become the poisoned chalice of macroeconomic policy. It was a much needed nominal anchor in the 1990s that helped restore monetary stability. Its limitations, however, have become very clear over the past decade and now is preventing the world from having the recovery it needs...

Put differently, nominal demand growth has been weak because the Fed's past successes now prevent it and Congress from allowing the economy to temporarily run a little hot. This shortcoming is a big deal.

If a trucker gets stuck in traffic jam, he will have to temporarily speed up afterwards to make up for lost time. On average, his speed for the trip will be the legal speed limit but only if he temporarily speeds up after the traffic jam. Likewise, an economy may need temporarily higher-than-normal inflation after a sharp recession to return to full employment. This also implies temporarily higher-than-normal nominal demand growth. On average, this temporary pickup will keep inflation and nominal demand growth on target. Running a little hot, therefore, is necessary sometimes. Currently, however, this policy flexibility is not possible.

Seven years after the crisis this shortcoming still seems to be a problem. Even if we are closer to full employment, the inflation targeting straightjacket is still keeping nominal demand growth weak. This is unfortunate, especially if potential GDP has been affected by the sustained shortfall in nominal demand growth. 

What is needed, then, is a monetary policy rule that anchors long-term price stability but provides for short-run price flexibility. Enter NGDP level targeting. It does all the above and then some. 

Some of us have been making this argument for years. So it was nice to see this letter from San Francisco Fed President John Williams yesterday:

[C]entral banks and governments should critically reassess the efficacy of their current approaches and carefully consider redesigning economic policy strategies to better cope with a low r-star environment... 

Turning to policies that can help stabilize the economy during a downturn, countercyclical fiscal policy should be our equivalent of a first responder to recessions, working hand-in-hand with monetary policy... One solution to this problem is to design stronger, more predictable, systematic adjustments of fiscal policy that support the economy during recessions and recoveries (Williams 2009, Elmendorf 2011, 2016)... 

Finally, monetary policy frameworks should be critically reevaluated to identify potential improvements in the context of a low r-star... inflation targeting could be replaced by a flexible price-level or nominal GDP targeting framework, where the central bank targets a steadily growing level of prices or nominal GDP, rather than the rate...

John Williams is exactly right. NGDP level targeting is a great solution to the nominal demand shortfall and it can be implemented in a way that systematically utilizes both monetary and fiscal policy. This is done by having the Fed adopt a NGDP level target that is backstopped by the U.S. Treasury Department. It would be a rules-based way to use the power of the consolidated balance sheet of the U.S. government. Let's make nominal demand great again!

P.S. Here is the Chuck Norris and Jean-Claude Van Damme version of my NGDPLT proposal.

Macro Musings Podcasts: Nick Rowe

 

My latest Macro Musings podcast is with Nick Rowe. Nick is a professor of economics at Carleton University in Ottawa, a member of the CD Howe Institute’s Monetary Policy Council, and part of the Centre for Monetary and Financial Economics at Carleton University. Nick is well-known for his writing on monetary economics at the Worthwhile Canadian Initiative blog. 

Nick joins the show for a discussion of monetary economics. We talk about what makes macroeconomics fundamentally different than microeconomics. Nick argues that for short-run macroeconomics the key distinction is money, the one asset on every market. He notes that if you want to disrupt every market all you need to do is disrupt the demand for or supply of money. The potential for monetary disequilibrium, he argues, is at the heart of short-run macroeconomics.

We also discuss the difference between money created by banks (inside money) and money created by central banks (outside money). More importantly, we consider whether shocks to inside money or outside money is more important for monetary disruptions and recessions. 

Another interesting question we explore is whether outside money is a liability for the central bank. Outside money (i.e. the monetary base) is generally not considered a liability (like inside money) since it is fiat money. It is often considered a net asset for the public. A credible commitment to price stability, however, effectively makes outside money a liability for the government. This is a point that many observers miss. 

Finally, we discuss helicopter drops of money--Nick considers it "small beer"--and QE as well as the implications of Milton Friedman's thermostat analogy for understanding good central banking. This was a fascinating conversation throughout. If you enjoy Nick's blogging you will love this episode of the podcast.

You can listen to the podcast on Soundcloud, iTunes,  or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more shows are coming!

Related Links
Nick Rowe's coauthored blog - Worthwhile Canadian Initiative
Nick Rowe's twitter account

Macro Musings Podcast: Jason Taylor

My latest Macro Musings podcast is with Jason Taylor. Jason is a professor of economics at Central Michigan University and is editor-in-chief of the journal Essays in Economic & Business History. He has published widely on U.S. economic history, particularly for the Great Depression and World War II periods.

Jason joins the show to discuss the causes of the Great Depression and the policy under Herbert Hoover and Franklin D. Roosevelt. We cover policies ranging from the international gold standard to the National Industrial Recovery Act and how they affected the pace of recovery. We also look at the brief but amazing recovery of early-to-mid 1933, one of the sharpest recoveries on record (it can be vividly seen in the industrial production). 

Another interesting question we discuss is when did the recovery truly begin from the Great Depression. Standard economic indicators show the recovery began during World War II. But this was a wartime economy, so when did the peacetime recovery begin? Jason and I discuss how to best think about the recovery during this time.

We  also explore the possibility that large public spending during the New Deal and World War II may have facilitated a “Big Push” that helped modernize the American South. Jason and some coauthors have published an interesting article that argues that this indeed was the case. 

This was fascinating conversation throughout. You can listen to the podcast on Soundcloud, iTunes,  or your favorite podcast app. You can also listen via the embedded player above. And remember to subscribe since more shows are coming!

Related Links

Jason Taylor's webpage

Jason Taylor's article  "Did New Deal and World War II Capital Investments Facilitate a 'Big Push' in the American South?"

Macro Musings Podcast Brad DeLong

My latest macro musings podcast is with Brad DeLong. Brad is a professor of economics at the University of California at Berkeley, a research associate of the National Bureau of Economic Research, and a former deputy assistant secretary of the U.S. Treasury under President Bill Clinton. Brad’s work ranges from business cycle dynamics to political economy to economic history. He has published widely in these fields and is one of the pioneers in the economic blogosphere.

Brad and I sat down to discuss a number of interesting topics. We started with his new book that he coauthored with Stephen Cohen titled “Concrete Economics: the Hamilton Approach to Economic Growth and Policy”.  Among other things, we talked about the books pragmatic policy prescriptions outlined in the book and what they mean for today.  The book also provided a good historical context for a discussion on whether the the current wave of populism and nativism is truly new.  

We also discussed the transformation of macroeconomics as outlined in his 2000 Journal of Economic Perspectives titled “The Triumph of Monetarism?” This article argued much of New Keynesian macroeconomics was largely a micro-founded reformulation of Milton Friedman's macroeconomics. We discussed how this understanding has changed over the past sixteen years.

Finally,  we consider why policymakers failed to fully restore nominal demand after the Great Recession. Brad notes that it was widely understood that this was what macroeconomic policy was supposed to do, it was standard operation procedure. That it did not happen after 2009 remains something of a puzzle. It was a fun conversation throughout.

You can listen to the podcast via iTunes, Sound Cloud, Stitcher, or your favorite pocast app. You can also listen through the embedded player above. And remember to subscribe since more guests are coming!

Related Links
Brad DeLong's Blog
Brad DeLong's Twitter Account