Happy Thanksgiving everyone! As we sit at home, digesting our weekend’s many heavy meals, I figure it’s a good time to talk about work and some of the issues facing the younger generation and their not-so young bosses. For instance, the new owner of Twitter, Elon Musk, is under harsh criticism for his memo to Twitter employees stating that from now on he would expect not only in person attendance but also “hardcore” work. He asked that they sign a loyalty pledge committing to work long hours. Unwilling workers are asked to leave Twitter. As you can imagine, Musk’s request was treated poorly on Twitter and within the company itself. Hundreds of employees quit, while the twitterverse has been abuzz with hot takes on how awful, insensitive, and reckless (and worse!) Musk is. To be sure, Musk’s memo is unconventional and perhaps not the most straightforward approach to building employee loyalty. But it does have the merit of both getting the message out and serving as an effective sorting mechanism. What exactly it sorts for, however, I am not entirely certain. Were I to receive such a memo from my boss, I would probably welcome it, as I think in any workplace the 80-20 rule applies: 20 percent of people do 80 percent of the work. That said, working harder is no guarantee of good results. Only time will tell what kinds of employees are left at Twitter. It appears, though, that another significant upside to Musk’ memo is that he is actually saying out loud what many bosses think, but don’t dare say publicly. See for instance this Wall Street Journal article titled, “Is Elon Musk Your Boss’s Anger Translator?” A tidbit: Your boss probably hasn’t demanded a loyalty pledge and almost certainly doesn’t own a rocket ship, but the person calling the shots at your company might be more like Elon Musk than you realize. On the inside, anyway…. Managers who think the working world has gone soft in recent years, with all the talk of flexibility and work-life balance, say they envy Mr. Musk’s unfiltered style and share his craving for maximum effort—even if they wouldn’t act quite as forcefully as the world’s richest person…. To these frustrated executives, Mr. Musk is what the comedian Keegan-Michael Key was to former President Barack Obama: the anger translator. He delivers the unvarnished version of what the person in charge is truly thinking and feeling but can’t say out loud. One question is why many bosses are so frustrated with their younger employees. Dealing with people is annoying. I often feel sorry for my bosses having to spend so much of their work time appeasing people’s hurt feelings and sensibilities, cleaning up after miscommunications, and other such problems. But today, something new seems to be going on. It’s as if between the quiet quitting and all the talk about work and life balance, some employees have forgotten that their employment is at-will and that their bosses are the ones assessing whether or not workers are contributing enough value to their employers to justify what these workers are paid. I don’t have any answers and I wonder if readers have better theories than I. But I wonder whether this is just the beginning and a symptom of a much bigger problem. This piece by Fredrick Hess at the American Enterprise Institute called “Are College Classes too Hard for Today’s Students? Alarming Numbers Say ‘Yes’,” hints at some of the issues. Some soundbites: On that point, a new survey of 1,000 four-year college students by Intelligent.com offers illumination. While these kinds of surveys should always be treated with appropriate caution, the results are provocative, especially against the backdrop of the NYU’s dust-up with professor Jones. For starters, 87% answered that they’ve thought at least one class was too difficult and that the professor should have made it easier; 64% said this was the case with “a few” or “most” of their classes. While the students said they tended to respond by studying more or asking for help, 8% reported that they had filed a complaint against the professor. When it comes to challenging classes, 18% said the instructor should “definitely” have been forced to make the class easier (48% said “maybe”). The most eye-catching finding, though, was what the students reported about their work habits. Most said they’re making an effort in their studies, with 64% reporting that they put “a lot of effort” into school. But, remarkably, of the students who answered they’re putting in a lot of effort, a third said they devote fewer than five hours a week to studying and homework – and 70% said they spend no more than 10 hours a week on schoolwork. He concludes, “Whether or not students have other interests or responsibilities, treating college as an expensive multiyear holiday isn’t good for students, colleges or the taxpayers who subsidize much of this activity.”   Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators. (1 COMMENTS)

  On Monday, November 21 (my birthday, by the way), I gave a talk at the Osher Lifelong Learning Institute (OLLI) at California State University Monterey Bay. The topic: “How Economists Helped End the Draft.” It wasn’t recorded this time but I did give the talk at Middle Tennessee State University in Murfreesboro, TN about 10 years ago and that was recorded. Here’s the talk. By the way, that was the college that James Buchanan attended as an undergrad. In prepping the talk, I re-looked at some of the studies done for the Gates Commission in 1969 and was pleased that, as I thought I had remembered, one of the studies was actually on the cost of draft avoidance. The cost was pretty high. That got me thinking: This is something special about economists. They actually take account, not just of costs to governments and costs to law-abiding people (although many methods of draft avoidance were totally legal) but also of costs to those who illegally engage in avoidance. In short, economics is fundamentally humane. Economists think of costs to pretty much everyone involved. Thinking about that after my talk, I remembered a line from George J. Stigler that I spent over half an hour trying to find and haven’t found. I think it was in one of his expositions of opportunity cost. Stigler, if I recall correctly, was actually making gentle fun of himself and of the economics profession with the quip I’m about to quote, but my own reaction was that, far from being a reason to make fun of economics, the quote from Stigler was a reason to celebrate the humaneness of economists. The quote went something like this: When economists hear that Oscar Wilde went to prison for 2 years, they are so crass as to worry about the plays he could have written but didn’t write because he was in prison. I know this quote is literally wrong but I think I’ve got the gist. My point is that it’s not crass at all: it’s humane. The picture above is of Wilde. One of the standard stories I tell in my talk to illustrate the huge cost of the draft compared to that of an all-volunteer force is of Elvis Presley, who was drafted into the army from 1958 to 1960. Just a few weeks before giving the talk, I came across a quote from John Lennon, who had been an admirer of Presley. Lennon said, “Elvis died the day he went into the army.” Of course Lennon didn’t mean that literally, but what he seemed to mean is that Elvis’s music was no longer cutting edge. I don’t know enough Presley’s music but my casual impression is that that’s true. If so, that’s another cost of the draft. Aside: A friend who managed to dodge the 1960s, early 1970s draft by not registering told me that I left out a major cost of the draft: the cost of enforcement. He pointed to the example of someone we both knew whom the FBI put serious resources into finding and finally did catch, 3 years after the draft had ended. The government had prepared its case against him and then, when President Carter granted amnesty in 1977, the case was ended. My friend estimated that the cost of pursuing this guy and preparing a prosecution could easily have been $100,000 in mid-1970s dollars. (1 COMMENTS)

Many cities across the national are facing a fiscal crisis. While pandemic-related problems that were self-induced or otherwise play a part, many of these issues have plagued cities for a long time. A serious cultural shift concerning finances among local governments is critical if people want to flourish in cities. I recently interviewed Mark Moses who is a municipal government expert and author of the recently published book The Municipal Financial Crisis: A Framework for Understanding and Fixing Government Budgeting. He contends that “many local governments are on track for bankruptcy.” And this downward trajectory can be expected to continue as municipalities fail to restrain their spending and overreach, crowding out opportunities for the private sector to work.  We’re seeing this play out in places like New York City, where city-funded expenses have been asked to be cut by 3% and on track to be slashed more in response to their recently reported $10 billion deficit. Moses says that “there’s a lack of economic understanding in lots of municipalities.” This absence of understanding often results in collecting more taxes to fund more “solutions” as a band-aid to the broken system and struggling local finances. As he puts it, “local governments give up trying to balance budget sheets.”  But failing to assess and address the tangled economic approach that’s led them to a place where more taxes and regulations seem like the only answer leads to long-term issues and a path that’s difficult to leave.  Local governments must limit their scope and focus on core issues. That means letting new initiatives and departments take a back seat while they get spending under control. This is difficult, however, especially after the 2021 American Rescue Plan Act that gave $45.6 billion to municipalities, which temporarily and artificially inflated local finances. More money under lousy management is a weak fix. And now, with rising inflation and energy costs, these municipalities are ill-equipped to thrive in a recession that wasn’t helped by the huge bailout package.  A good start to overcoming these challenges would be to get government out of the way in most cases so that the the private sector can solve key issues, which has proven to be the best antidote for most problems throughout history.  Overinflating their role instead of sticking to limited governing, such as property rights and a few public goods, is a trap that many cities fall into and that comes at a huge cost. But philanthropic and other private-led solutions tend to be crowded out through higher taxes and regulations when city hall makes promises they can’t fulfill.  Moses describes this as municipalities “seeing themselves as an end to themselves,” which is why many local governments resist spending limits or find ways around them.  This is an ongoing issue in Texas which is contributing to an affordability crisis.  Texas is blessed to have constitutional amendments against state-controlled personal income taxes or property taxes, so all property taxes are local in Texas. While there have been attempts recently by the state to limit their growth, property taxes have increased by 169% in the past 20 years compared with an increase of 104% in the rate of population growth plus inflation. This indicates that property taxes are growing well above the average taxpayer’s ability to pay for them. Some argue that Texas has high property taxes because it has no personal income taxes. But the reality is that it is really from excessive local government spending.  For example, Texas has the 6th most burdensome residential property tax according to the Tax Foundation but other states without a personal income tax like Florida and Tennessee rank 26th and 36th, respectively. This is because the latter two states do a better job restraining spending.  The best way to get budgets and taxes back on a fiscally conservative track is through a strict spending limit that covers the entire budget and grows no more than the rate of population growth plus inflation. This would help cities, and all local governments, stick to just addressing what’s in their purview.  A city’s scope shouldn’t be evaluated from one council meeting to the next but should be assessed in the long term if its local government hopes to see future success and a prosperous economy.  The same principles of economic success apply to all government institutions; people flourish where liberty is preserved, and that’s best achieved under limited government whereby politicians’ interventions remain inside their limited scope so that free markets and free people can innovate and thrive.   Just as we’re witnessing with this recession, there’s always a trade-off to overspending and unbalanced budgets. The sooner local governments realize that and reel in their spending, which is the ultimate burden of government, the sooner financial crises will be averted.    Vance Ginn, Ph.D., is founder and president of Ginn Economic Consulting, LLC. He is chief economist at Pelican Institute for Public Policy and senior fellow at Young Americans for Liberty. He previously served as the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. Follow him on Twitter @VanceGinn. (0 COMMENTS)

From early in my time as an adult, I’ve said hi to and smiled at strangers on the street. In a large percentage of cases, I’ve gotten friendly smiles or nods back. That interaction with people has been a big part of my life for almost 50 years. Unfortunately, when Covid and the lockdowns and masking came along, that changed dramatically. I continued to say hi or smile and I don’t know if the people I said hi to were smiling because I couldn’t see their faces. But they often lacked any other response also. They didn’t nod or say hi back and they walked a little faster past me. Remember that this was outdoors and that by about September 2020 it was pretty clear to those of us who looked at studies that transmission of the coronavirus outdoors, especially to people passing and at all times at least 2 or 3 feet away, was minimal. In my area, I still see a lot of people wearing masks outdoors but I would say that it’s down to about 15%. I never gave up saying hi to and smiling at people. Now I’m getting something back. Last Wednesday a friend and I were walking in Monterey and a young woman jaywalked to where she would get within a few feet of us. While she was still on the road, she must have seen me looking to make sure no car was coming that would hit her. (There wasn’t, and presumably she checked that out in advance, but my little caution cost virtually nothing.) When she looked at me, she smiled and I smiled back. Then she broke into a big smile and said, “Hi” with a lot of positive energy. I said “hi” and smiled bigger. My friend, observing this, said, “Do you know her?” “No,” I replied. I think it’s important to do things liked this. People’s fear about Covid-19 and the lockdowns, which were particularly harsh in coastal California, damaged society. Russ Roberts once said in testimony before Congress: “I want my country back.” I want my society back. (0 COMMENTS)

There are times when it seems like the entire world is moving toward authoritarian nationalism. Thus it is refreshing to see a right wing party that still seems to have a few libertarian instincts. The Economist has an article on Pierre Poilievre, the new leader of Canada’s Conservative Party. In some respects, his views are similar to those of American conservatives: Mr Poilievre dislikes mainstream media and wants to defund the cbc, a public broadcaster. He backed the “Freedom Convoy”, a protest against vaccine mandates led by lorry drivers, which paralysed central Ottawa, the capital, earlier this year.  But he’s not exactly a Trumpian: Mr Poilievre’s most consistent political conviction is a Reaganite preference for small government. The adopted son of schoolteachers, he learned early that “the greatest social safety net we can ever have” is “voluntary generosity among family and community”. As a student at the University of Calgary he entered a competition that asked contestants to write an essay on what they would do as prime minister. His answer: “I would relinquish to citizens as much of my social, political, and economic control as possible.” Now he promises to make Canada “the freest nation on earth”. His rhetorical style evokes populists such as Donald Trump. But his enemies list is more circumscribed. Unlike Mr Trump, he favours immigration.  And whereas Trump became a NIMBY during the latter part of his administration, Poilievre is strongly in favor of reducing barriers to homebuilding, opposing “‘gatekeepers’ such as city officials who block housebuilding”. Of course Poilievre isn’t actually a libertarian, as Canada’s voters are strongly attached to a number of big government policies such as national health care.  But Poilievre seems more sympathetic to libertarian ideas than the average Canadian politician. More immigration and more homebuilding is the most effective way of Making Canada Great Again. Meanwhile, Toronto mayor John Tory is poised to adopt a YIMBY agenda in Canada’s largest city: So in a city where an estimated 70% of residential land is reserved for single-family homes, Tory is proposing a major shift: open all of it for the development of multiplexes and small apartment buildings, with mid-rises on commercial streets. The plan is to make housing less expensive by building more of it, in smaller units, where people already live. Without a big-name opponent, Tory is expected to cruise to victory on Monday, and his focus on rezoning as the answer to Toronto’s housing dilemma suggests that what’s really changed is more voters are ready for a bolder idea. I see similar things happening in California.  It seems as though voters are finally getting fed up with high housing prices, and the tide is turning away from NIMBY policies. (0 COMMENTS)

On November 4, the Bureau of Labor Statistics announced that the U.S. economy added 261,000 jobs in October, beating estimates of 193,000. Isn’t this good news? Not according to Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, who said “That tells me we have more work to do to try to cool down the economy and bring demand and supply into balance.” To most Americans, the idea that good jobs numbers are bad economic news might seem strange. The explanation is that the Federal Reserve uses the Phillips Curve to guide monetary policy. This is named after the economist A.W. Phillips who, in 1958, found a relationship in a century of British data between unemployment and the ‘rate of change of money wage rates’ (Figure 1). In 1960, economists Paul Samuelson and Robert Solow elevated this into a tool for macroeconomic management by replacing the ‘rate of change of money wage rates’ with ‘Average Price Rise’ (Figure 2). Policymakers could buy lower unemployment at the price of higher inflation or they could buy lower inflation at the price of higher unemployment.     The Phillips Curve still guides Federal Reserve monetary policy. The Wall Street Journal’s chief economics correspondent Nick Timiraos notes that, Most economists, including [then Federal Reserve chair Janet] Yellen and others at the Fed, were guided by basic beliefs: first, that there is a direct inverse relationship between inflation and unemployment – if one goes down, the other must go up… With her successor, Powell, in the chair, Timiraos notes, “…modified versions of the Phillips curve lived on at central banks.” There is a problem, however: the Phillips Curve doesn’t exist. Yes, it is there in the data for a certain period, but after Samuleson and Solow, it fell victim to ‘Goodhart’s Law’: “When a measure becomes a target, it ceases to be a good measure.” – or, in Goodhart’s original formulation, “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” At the Curve’s heyday as a policy tool in 1968, the economist Milton Friedman noted that “Phillips’ analysis of the relation between unemployment and wage change…contains a basic defect-the failure to distinguish between nominal wages and real wages…” An inflationary monetary policy, pursued to reduce unemployment, could, initially, succeed, but only by reducing real wages, making labor cheaper for employers to buy. But this can’t last. “Employees will start to reckon on rising prices of the things they buy and to demand higher nominal wages for the future,” Friedman wrote: Even though the higher rate of monetary growth continues, the rise in real wages will reverse the decline in unemployment, and then lead to a rise, which will tend to return unemployment to its former level. In order to keep unemployment at its target level of 3 per cent, the monetary authority would have to raise monetary growth still more. Inflation and unemployment could rise together. Friedman was soon proved right. The inflation rate rose from 1.6% in 1965 to 5.9% in 1970 and unemployment rose too, from 3.5% in 1969 to 6.0% in 1971. Federal Reserve chairman Arthur Burns complained: The rules of economics are not working in quite the way they used to. Despite extensive unemployment in our country, wage rate increases have not moderated. Despite much idle industrial capacity, commodity prices continue to rise rapidly. Through the 1970s the Phillips Curve drifted north east (Figure 3) as inflation and unemployment rose together, what was called ‘Stagflation’. By the end of the decade it was abandoned as a policy tool.   Figure 3 – The Phillips Curve on the move Yet, somewhere along the way the Phillips Curve reemerged as a policy guide. It still doesn’t exist – fifty years after the relationship between inflation and unemployment broke down the Peterson Institute hosted a conference where they asked ‘has the relationship between inflation and unemployment broken down?’ and in 2020 economist Kristie M. Engemann asked ‘What Is the Phillips Curve (and Why Has It Flattened)?’ – but, as Timiraos notes, it guides monetary policy and explains why monetary policy makers see buoyant jobs numbers as bad news. As Scott Sumner explained recently, America’s current bout of inflation was “caused by rapid money growth.” It will only end when this growth comes to an end (as it has). Higher unemployment may well be – in fact, probably will be – a side effect of this. But to see higher unemployment as the way we bring down inflation is to mistake the side effect for the cure. It risks the political support necessary for the cure to work and is based on a curve that doesn’t exist, the Phillips Curve, the ultimate in ‘zombie economics’.   John Phelan is an Economist at Center of the American Experiment. (1 COMMENTS)

Temperance….The Polish of Life (Cicero) Prolific New York Times Bestselling author and philosopher Ryan Holiday is amidst a series of books on the four cardinal virtues. He discusses the latest, Discipline is Destiny, with Russ Roberts. Holiday has written on courage, and he will write about justice next. He is understandably wary of tackling wisdom, so he is saving it for last. Holiday admits that discipline (or temperance as it was called in the ancient world) is the virtue at which he believes he is most accomplished, with which Roberts agrees. Several examples from the book are discussed illuminating the habits, practices, limit-setting, and more by those who have achieved self-discipline. Whether discipline is or is not your strong suit, we are interested in your thoughts about this discussion and hope you will engage in continued conversation with us.      1- Roberts questions Holiday about his prolific publishing pace, noting Holiday’s young age. Holiday addresses his journey and his work on balancing his personal life with achieving greatness in his creative work. Roberts asks if he has gotten better at it. Is discipline innate, learned from a mentor, or achieved by a lifetime of practice? How does your lived experience compare?   2- Roberts sees the book as a “pep talk”, or a devotion to mastery that is different from simply being a workaholic. What does it mean to be disciplined about YOUR discipline? What might active practice in other career fields look like?    3- Consider the two kinds of practice discussed: working at a craft repetitively to seek improvement and committing to a regular activity. What differentiates the two approaches and which is more effective for improving a craft? How do we know?   4- David Epstein’s book Range is mentioned. Why do Roberts and Holiday address comparative advantage and specialization cautiously and a range of developed skills favorably? Do the anecdotal stories of famous people that follow support this thinking? Why or why not?   5- Holiday suggests that discipline in one area of life creates momentum for applying order to other areas of life and that beginners should start small. What motto, cliché, slogan, or rule is meaningful to you? Was Seneca right about the power of repeating precepts?   (0 COMMENTS)

What do people have in mind when they talk about industrial policy today? And why do politicians of all stripes clamor for industrial policies? In this episode, EconTalk Russ Roberts welcomes back perennial favorite guest Mike Munger to discuss. Roberts and Munger agree that people often don’t like what the profit-and-loss system produces, and think they can steer it better with industrial policy. So what are the things these policy makers are so concerned about? And when and why might industrial policy be superior to markets? Both fans of free markets, Roberts and Munger dig deep to answer these objections. And now we’d like to hear what you took from this episode. Please, help us continue the conversation.     1- Munger starts by reminding us that the presence of profits in an industry doesn’t necessarily mean the output is socially valuable. He reminds us, too, of the Schumpeterian view of the economy, which “may involve violent and wrenching changes.” This leads him to a provocative question: What are the entitlements of workers who lose their jobs through no fault of their own?” How would you answer this question?   2-Perhaps the central question of this episode is, if there is an objection to industrial policy, what is the correct objection? Munger’s reply is (in part) that it is simply impossible to solve the political problem in a democracy. On what does he base this argument, and to what extent are you convinced by it?   3- Roberts brings up his recent interview with Devon Zuegel on Argentinian inflation, which Munger dubs the perfect example to illustrate his stance. What does Roberts mean when he says of the Argentines, “they prefer the world of high inflation with all of its horrors?” Who is the the “they” in this statement? Why would a central bank in Argentina be politically worse than rampant inflation?   4- Roberts challenges Munger to identify the lesson of the conversation. What do you take to be the lesson? Is is that you just shouldn’t try to make the world a better place? You’re just stuck with the reality? Explain.   (0 COMMENTS)

In a recent article for CNN, Kara Alaimo voices some concerns about speech and social media. Though she makes frequent use of the term “free speech”, what she’s really worried about is unmoderated speech – that is, speech which isn’t restrained by the platform hosting the speaker. To be clear, I believe platforms have every right to moderate speech in whatever way they wish, and that such moderation does not constitute censorship. Censorship, as I understand the term, only occurs when the state forbids or prevents some form of expression. If a history podcast refuses to provide a platform to a Holocaust denier, the podcast is not engaged in censorship, nor is the Holocaust denier being deprived of his right to free speech. Your right to free speech does not entitle you to use someone else’s private platform against their will. Alaimo is worried that social media platforms like Twitter, Parler, and Truth Social are insufficiently aggressive about moderating what she considers to be “conservative” speech. But in her article she also explains, without realizing it, why attempts to shut down certain viewpoints in these platforms will backfire in ways she would find regrettable. If you take people who hold a certain worldview (conservatism, say) and systematically shut them out of a public forum, those people don’t simply disappear. Nor do they lose interest in discussing their ideas. Instead they will simply form a new platform designed for themselves and for like minded people. As Alaimo points out, this is exactly how platforms like Parler and Truth Social came into existence in the first place. And given how these new platforms are intellectually siloed from opposing viewpoints, they end up breeding more and more extreme versions of the views they originally hosted. In her words: [T]hese three social media platforms are likely to serve as ecosystems for conservative thought. This will likely make the views of those who remain on them more extreme — which could have a radical effect on our politics. That’s because when people who think similarly come together, they reaffirm and heighten one another’s initial beliefs…Those who remain in these conservative spaces will become even more extreme as a result of their interactions, which could cultivate a dangerous far-right ideology that has far-reaching effects on our politics. To me, this reaffirms not just the value, but the crucial necessity of open dialogue with a wide variety of voices- especially when those voices advocate views you find abhorrent. Banishing them from a platform doesn’t merely prevent you from hearing their discomforting views. It also prevents them from being exposed to opposing views as well, and it drives them deeper into an intellectual silo which further entrenches, and strengthens, the very views you found so objectionable in the first place. And sometimes- not always, but sometimes- open and unmoderated discussion really does work. To use one highly cherry picked example, consider the case of Megan Phelps-Roper, who grew up in the loathsome Westboro Baptist Church. She has left that organization behind, and has become a powerful voice for a much more loving and tolerant worldview. What caused her to change her mind, to abandon her worldview and lose most of her family, and to become an advocate for everything she used to oppose? It was having her views challenged on Twitter. If Twitter had banned the Phelps family early on (as I suspect Alaimo would have wanted), Megan Phelps-Roper would almost certainly continue to be a member of the Westboro Baptist Church to this day. I’ll grant that cases like Megan Phelps-Roper are not as common as I’d like. Arguments often fail to dislodge bad ideas, especially when the mind is unwilling. But at the end of the day, the only tools we have to oppose bad ideas are persuasion or violence. The only way to peacefully defeat bad ideas is by exposing those who hold them to better ideas and engaging with them, and the only way for that to happen is to keep the conversation open. Trying to shut bad ideas out of the conversation doesn’t make the bad ideas go away – on the contrary, it virtually guarantees that those bad ideas will be here to stay. And besides, maybe I am the one who holds bad views that ought to be dislodged. If that’s true, I want to know, and the only way I would be able to know is by engaging with advocates of ideas very different from my own. The more opportunities there are for that, the better.   Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University.  (0 COMMENTS)

Economics textbooks describe at least three types of policy lags—the recognition lag, the implementation lag and the impact lag. But even that may not be enough, as the impact lag is a rather ambiguous concept, and might include two separate lags:1. There is the lag between when a central bank takes concrete steps to ease or tighten policy, and the time when the policy stance actually changes.2. There is the lag between the time when policy stance actually changes, and the time when aggregate demand responds to that policy change. The first lag could be five days, five weeks, five years, or even five centuries.  Consider the following hypothetical: Assume the central bank has fallen “behind the curve”, as inflation has increased because interest rates were held below their natural rate.  The central bank raises interest rates by 1% each year, but the natural rate rises by 1.1% each year (mostly due to the Fisher effect.)  After 100 years, nominal rates have risen by 100% (i.e., 10,000 basis points), and yet the central bank has fallen ever further behind the curve, as the natural rate has risen even faster.  (Here you can think of real interest rates as having fallen.)  We are now experiencing triple digit inflation.  Then a frustrated central bank suddenly raises interest rates dramatically, the economy falls into recession, and inflation plunges much lower. How should we interpret that thought experiment? Is that a case of central bank tightening causing inflation to fall after a 100-year lag?  Or was their no real tightening at all, at least until the sudden dramatic rise in rates after 100 years had passed?  I lean toward the latter view, but I’m not certain my definition is universally accepted. Here it’s useful to get beyond quibbles over terminology and focus on where there is broad agreement.  Most economists agree that rising interest rates do not represent tight money if the natural interest rate is rising even faster.  When the Fed began raising rates in early 2022, Jay Powell referred to the need to first get rates up to “neutral”, which is roughly what economists mean by the natural, or equilibrium, rate of interest.  The implicit assumption was that as long as rates are below neutral, the net effect of monetary policy is still expansionary. Nonetheless, it seems to me that most pundits (wrongly) talk about the impact policy lag in an inclusive way, including both the lag between concrete policy steps and an effective change in policy, as well as the lag between an effective change in policy and a change in aggregate demand.  But how can this be reconciled with the frequent claims that the impact lag is something like 6 to 18 months. From these estimates, it’s pretty clear that the term “impact lag” should not refer to the lag between concrete steps and an effective change in policy.  After all, in my hypothetical example above that lag was 100 years!  And it could be any figure at all; it entirely depends on how the policy rate is adjusted relative to the natural interest rate.  The lag between concrete actions and changes in the policy stance is not a parameter “out there” in the world, waiting to be estimated by econometricians; it is a figure that entirely depends on the skill of monetary policymakers.  So when economists speak of a 6 to 18 month policy lag, they must be talking about the lag between an effective change in the stance of policy and the growth rate of aggregate demand.  It would be utter nonsense to speak of a 6 to 18 month lag between concrete policy steps and an effective change in the stance of policy. But effective policy changes are hard to observe, as the natural rate of interest is not a variable that can be directly measured.  And in the rare cases where the change in policy is so dramatic that it can be easily identified, such as the dollar depreciation that began in April 1933, the effects seem almost instantaneous.  Nominal GNP rose by 23.7% between 1933:Q1 and 1933:Q3.  And that’s the actual increase in just 6 months, not the annualized rate of change! So why do economists estimate relatively long impact lags?  I suspect it’s partly the identification problem.  These economists might be (wrongly) including some of the lag between concrete actions by the central bank and their impact of the stance of monetary policy.  Thus some people seem to assume that the Fed’s been tightening policy all year, and that we haven’t seen much slowdown in demand due to policy lags.  In fact, interest rates probably remained well below neutral for much of the year, and the Fed only began tightening recently.  Perhaps they still have not begun to tighten policy. Because there’s no general agreement about how to define tight money, let’s focus on a more clearly defined issue—policy counterfactuals.  I believe that if the Fed had been told a year ago how fast NGDP would grow over the subsequent 12 months, they would have preferred a tighter policy.  A year ago, NGDP had already moved above the pre-Covid trend line.  Even if you reject the “level targeting” argument for going back to the previous trend line, surely it was not wise to go further and further above the previous trend line.  At a minimum, the Fed should have tried to get NGDP growth to level off at no more than roughly 4% or so.  Instead, it rose by 9% over the past 4 quarters, and 2022:Q4 looks like another hot one. To prevent further overshoots, the Fed needed to quickly get interest rates up to a neutral level.  Instead, they raised rates at a very slow pace, which meant that policy remained effectively expansionary through most of 2022.  The problem is getting worse as each month goes by.  We aren’t making progress, just the opposite. There’s a great deal of debate about the policy mistakes that led to the initial inflation overshoot in 2021.  Was it easy money, fiscal stimulus, supply shocks, or all of the above?  I see much less debate about the failure of Fed policy to effectively address the issue once it was clear that aggregate demand was rising much too rapidly.  Why not immediately raise rates to at least neutral?  Perhaps the Fed feared overshooting toward a highly contractionary policy, and thus triggering a recession. These mistakes are much more likely to occur when central banks lack a clear policy regime, a clear target path for a nominal aggregate such as NGDP or core inflation.  Without that sort of clear policy target, it’s very difficult to know what sort of interest rate setting is appropriate.  Fed funds futures provide little guidance, as they merely predict future interest rates, not future appropriate interest rates.  I don’t know what interest rate would have been appropriate in 2022, because if NGDP growth had been only 4%, then the “natural” interest rate would have been far lower.  I’m actually not sure the Fed needed higher interest rates throughout all of 2022, I am sure they needed higher interest rates relative to the natural rate. This is why I have trouble answering commenter queries about what monetary policy would have been appropriate.  They want me to describe an alternative path of interest rates, whereas I can only describe an alternative monetary regime—NGDP level targeting. (0 COMMENTS)