The latest Commerce Department report and FOMC press release have, as usual, led to a flood of commentary concerning the various economic indicators that the Fed committee must have mulled over in reaching its decision to put off somewhat longer its plan to start selling off assets it accumulated during the course of several rounds of Quantitative Easing.
Those indicators also inspire me to put in my own two cents concerning things that should, and things that should not, bear on the FOMC’s monetary policy decisions. My thoughts, I hasten to say, pay no heed to the Fed’s dual mandate, which is itself deeply flawed. But then again, since that mandate allows the FOMC all sorts of leeway in making its decisions, I doubt that it would prevent that body from following my advice, assuming it had the least desire to do so.
I have a simple–some may call it quaint–way of deciding whether some information supplies reason for the Fed to either sell off or buy more assets. Here it is: does the information offer reliable evidence of either a shortage or a surplus of nominal money balances?
Why this criterion? Because of two more quaint ideas. The first is that, notwithstanding the contorted arguments that contemporary monetary economists resort to in order to avoid admitting it, monetary policy is fundamentally a matter of altering the nominal quantity of monetary balances of various sorts available to banks and the public, starting with the quantity of base money. The latter quantity is, in any case, the thing that the FOMC decides to expand, or to contract, by its deliberations, whether it expresses its decision in terms of “Quantitative Easing” or in terms of some interest rate target.
The last quaint idea is that, just as a dose of vitamin D can do a world of good to someone suffering from rickets, while too much can prove toxic, monetary expansion, though the best solution to problems that have their roots in a shortage of money, is the wrong medicine otherwise. Call it crazy if you like, but that’s my belief and I’m sticking to it.
So, those indicators. Real GDP growth, first of all, slowed to a miserable 0.2% during the last quarter, or less than one-tenth the previous quarter’s figure, and just one-25th of the quarter before that.
A bad number indeed. But considered alone the number supplies no grounds for Fed easing, for the simple reason that it doesn’t tell us why real GDP growth is so low. If its low because of a money shortage, more money is called for; if its low for other reasons, it isn’t. More information, please.
Here’s some: it was a rough winter, labor disputes closed some West Coast ports, and oil has been dirt cheap. But what have such things got to do with monetary policy? Can a dose of monetary medicine make up for a winter storm, or a strike? Is cheap oil a reason for tightening money, so as to keep general prices from sagging, or one for loosening it to provide relief to domestic energy companies or to counter “weakness in the global economy”? Hard to tell, isn’t it? But that, I say, is because when one gets down to brass tacks such changes in the real economic circumstances ought in themselves to be none of the Fed’s concern.
What’s more, and though the claim may strike many readers as paradoxical, the same can be said about changes in the CPI. Although inflation is still below the Fed’s target, core CPI inflation has been inching up, and the 5-year forward expected inflation rate has been hovering just above the Fed’s 2-percent target for some months now. Surely that means that Fed policy is itself on track, right? Well, no, because these numbers could reflect either a revival of aggregate spending, which would indeed carry such an implication, or, despite the oil glut, a reduction in aggregate supply, which would not.
If all these bits of information shouldn’t shape the FOMC’s actions, what should? The statistics that come closest to serving as reliable guides to whether monetary policy is too tight, too loose, or at least roughly on track, are those that concern neither real developments nor prices but spending. When money balances are abundant, that fact is reflected in increased spending, because when people and businesses find themselves flush with money balances, they tend to dispose of those exceeding their needs by using them to buy goods or securities. If, on the other hand, people and businesses find themselves wanting larger money balances, they try to build them up by spending or investing less.
Slice it any way you like, Q1 spending was down. Way down. The annualized growth rate of consumer spending, which was 4.4% during the last quarter of 2014, or not far from its Great Moderation average, fell to just 1.9%, while business spending dropped from 4.7% to 3.4%. But the annualized growth rate of NGDP, a much broader measure of spending, experienced the sharpest decline, to just one-tenth of one percent, bringing the full-year forecast down from 3.8% to 3.6%. Some of this decline can be written off to winter doldrums, and hence as transient. But much of it can’t.
In short, the only facts that deserve to be considered approximate indicators of whether monetary policy has been too tight, too loose, or on track, suggest that it’s too tight. The others– whether they refer to the weather, or output, or dollar exchange rates, or the CPI and its variants, or stevedores’ discontent–are so many red herrings, and ought therefore to be considered perfectly irrelevant. Whenever FOMC members or any other monetary policymakers refer to such irrelevancies, they must do so either because the press expects them to, or because they are confusing things that the Fed should try to do something about with ones that shouldn’t be any of its business.
By saying all this, do I mean to say that, if the FOMC would just keep a sharp eye on spending, ignoring everything else, we would have sound monetary policy? Not for a minute. The reason, in part, is that spending statistics are themselves imperfect guides to the state of monetary policy, for too many reasons to go into here. More importantly, so long as the policymakers aren’t obliged to conduct policy according to a single, unambiguous target, their decisions will remain shrouded by uncertainty that is itself a big drag on prosperity.
But there’s more to it than that. Even if the Fed were somehow legally committed to target NGDP, or some other broad spending measure, from now on, and even if the measure were itself reliable, it wouldn’t solve our monetary troubles. And that’s because the monetary system itself is dysfunctional, and severely so. If it weren’t, it wouldn’t take more than $4.5 trillion in Fed assets to keep spending going at a reasonable clip. The defects are partly traceable to policies–including some of the Fed’s own–that discourage banks from making certain kinds of worthwhile loans, while encouraging them to hold massive excess reserves.
It’s owing to the crippled state of our monetary system, and not to any ambiguity in relevant indicators, that I myself have grave doubts concerning the gains to be expected from further Fed easing, or even from implementing a strict NGDP targeting rule, under present conditions. For if the experience of the last several years is any guide, it may require still more massive additions to the Fed’s balance sheet to achieve even very modest improvements in spending; and an NGDP-based monetary rule that would serve as a license for the Fed to become a still greater behemoth would not be my idea of an improvement upon the status quo.
You see, unlike some economists, although I’m happy to allow that an increase in the Fed’s nominal size, which is roughly equivalent to a like increase in the monetary base, is neutral in the long run, I don’t accept the doctrine of the neutrality of increases in the Fed’s relative size. I believe that Fed-based financial intermediation is a lousy substitute for private sector intermediation, and that as it takes over, economic growth suffers. The takeover is, in other words, financially repressive.
Which means that the level of spending is, after all, not the only relevant indicator of whether the Fed is or isn’t going in the right direction. Another is the real size of the Fed’s balance sheet relative to that of the economy as a whole, which measures the extent to which our central bank is commandeering savings that might otherwise be more productively employed. Other things equal, the smaller that ratio, the better.
And there, folks, is the rub. If you want to know the real dilemma facing the FOMC, forget about the CPI, oil prices, and last quarter’s weather. Here’s the real McCoy: NGDP growth is too low. But the Fed is too darn big.
Last September Kevin Dowd authored a dandy Policy Analysis called “Math Gone Mad: Regulatory Risk Modeling by the Federal Reserve.” In it Kevin pointed to the dangers inherent in the Federal Reserve’s “stress tests,” and the mathematical risk models on which those tests are often based, as devices for determining whether banks are holding enough capital or not.
Recently my Cato colleague Jeff Miron, who edits Cato’s Research Briefs in Economic Policy, alerted us to a new working paper, entitled “The Limits of Model-Based Regulation,” that independently reaches conclusions very similar to Kevin’s. The study, by Markus Behn, Rainer Haselmann, and Vikrant Vig, is summarized in this month’s Research Brief.
The authors conclude that, instead of limiting credit risk by linking bank capital more tightly to the riskiness of banks’ asset holdings, model-based regulation has actually increased credit risk. At the same time, because the model-based approach is relatively costly, large banks are much more likely to resort to it then smaller ones. Consequently, those banks have been able to expand their lending–and their risky lending especially–at the expense of their smaller rivals. In short, big banks gain, small banks lose, and we all are somewhat less safe than we might be otherwise.
Here is a link to the full working paper.
[Cross-posted from Alt-M.org]
Here's a headline from today's Washington Post: "Sexism in science: Peer editor tells female researchers their study needs a male author." Peer review is the usually-anonymous process by which articles submitted to academic journals are reviewed for quality and relevance to determine whether or not they will be published. Over the past several years, numerous scandals have emerged, made possible by the anonymity at the heart of that process.
The justification for anonymity is that it is supposed to allow reviewers to write more freely than if they were forced to place their names on their reviews. But scientists are increasingly admitting, and the public is increasingly noticing, that the process is... imperfect. As the Guardian newspaper wrote last summer about a leading journal, Nature:
Nature [...] has had to retract two papers it published in January after mistakes were spotted in the figures, some of the methods descriptions were found to be plagiarised and early attempts to replicate the work failed. This is the second time in recent weeks that the God-like omniscience that non-scientists often attribute to scientific journals was found to be exaggerated.
In the 1990s I sat on the peer review board of an academic journal and over the years I have occasionally submitted to and been published by such journals. Peer reviews vary wildly in depth and quality. Some reviewers appear to have only skimmed the submitted paper, while others have clearly read it carefully. Some reviewers understand the submissions fully, others don't. Some double-check numbers and sources. Others don't. It's plausible that this variability (particularly on the weak end) is a side-effect of reviwers' anonymity. I have seen terse, badly-argued reviews to which I doubt the reviewer would have voluntarily attached his or her name. Personally, I try never to write anything as a peer reviewer which I would not happily sign.
Six years ago, that inspired an idea: it occurred to me to found a journal, called Litmus, that would be comprised of signed peer reviews of already published papers, with authors' responses when possible. My impression is that this would lead to a much higher average quality of reviews, and reveal to readers the extent of disagreement among scholars on the issues discussed, alternative evidence, etc.
Alas, it would also be potentially dangerous for young scholars to contribute to such a journal, were they to rub a potential employer the wrong way. In the end, I was unable to interest enough top-notch scholars to flesh out a sufficiently large editorial board. One professor declined, saying:
This strikes me as an interesting idea, but one that is sufficiently outside of what is normal that you might have quite a difficult time getting a consensus that would lead to participation high enough to sustain the journal. Some people would probably feel that signed reviews were not of the same quality as blind ones. Others would feel that signed reviews required formality so much beyond that of blind reviews (which at their best are candid and informal but accurate) that they would be unwilling to participate for lack of time. I am not saying that it is a bad idea, but I think that you're in for an uphill battle to get the idea off the ground.
Eventually I abandoned the project. But as the failure of the status quo in journal peer reviewing becomes more evident, perhaps someone will rekindle the idea. Conventional journals would have to be on their toes if they knew there was a chance their articles would be held publicly under a microscope by other reviewers.
Well... there goes our trip to Baltimore. We'd been hoping to see the annual Kinetic Sculpture Race, but I see it's been postponed sine die.
If you're inclined, now is your chance to laugh. Get it out early.
Here's a problem in describing how cities work: Any example I might pick to symbolize the decay of Baltimore can always be ridiculed: Weep, weep my friends for that lousy corporate CVS, the one that nobody really liked anyway!
See how easy that was?
The one direct effect I have experienced from the recent riots is that my daughter and I will possibly not be seeing a giant pink taffeta poodle pedaled down the streets of Baltimore by a bunch of probably inebriated art students. I'm unlikely to suffer any of the riots' more troubling effects, like having to walk an extra half mile to get my asthma medication. Or like getting my car torched.
(And yes: Leading with the pink taffeta poodle might just be the definition of white privilege, but at least I'm, you know, aware of it.)
Cities are hard to explain. They're made up of millions of tiny little things, and of the networks of trust and expectation that exist among them. Any one of those things—a CVS, a giant pink taffeta poodle, a population of inebriated art students—does not make a city. Almost any one of them can be laughed at, or just dismissed as trivial, in isolation. But good, functional cities are networks. They're not isolated nodes. A city isn't the big taffeta poodle, but it might be the expectation that there will be something fun, and free, to do in the streets on some warm spring afternoon. For which we can thank the art students.
And other expectations too: After we see the giant pink taffeta poodle, and when my daughter gets stung by a bee, there's the CVS, and after that, when we decide we want dinner, we have several choices at hand. And if we want a room for the night, there it is. And if we want to relocate to Baltimore, we might just be able to find decent housing and jobs.
I think we can all agree that that's what a city should look like. But how does it come into being?
I suspect that some significant trust has to be there first. Without it, few will venture to try new things. Restaurants won't open. Parades won't be held. Families won't move in. Few will try adding new threads to the network. And when the old threads wear out, they will not be replaced.
For a very long time the networks of trust and expectation in the city of Baltimore have been fraying. But it's not because of the rioting, which is only a symptom, if an advanced one, of an underlying condition. The well-documented culture of police brutality in Baltimore has meant that one of the bigger threads in the network—the ability to turn to police when you or your property is threatened—cannot be depended on. And when that thread goes, so go many others.
It's long been known in Baltimore that the police can't be counted on to perform their core functions, particularly in the poorer neighborhoods: In such places the police either can't or won't reliably protect persons and property from attack. Not without levels of collateral damage that any reasonable person would deplore. And when you don't have security, you can forget all about community.
That's part of why, paradoxically, the poor need property rights even more than the rich: What the poor possess is definitionally small. As a result, it's all too easy to take everything that they have. Including their sense of dignity. Including their ability to trust. And, finally, including their sense of community, which has to start (and I do feel a bit pedantic saying it) with the understanding that community leaders and enforcers aren't just out to squeeze them for cash. That the leaders and enforcers don't see them merely as yet another home to be searched, another gun to seize, another dog to shoot, and another marijuana conviction waiting to happen.
The poor need security not just in their own property, but also in that of others. And these others aren't necessarily poor. It's a good thing whenever the owner of a grocery store franchise feels confident enough to get started in a neighborhood that maybe wasn't so well-off, and that maybe lacked good choices beforehand. But that won't happen without a measure of trust, and when the community has good reason not to trust, well, outsiders probably won't trust either.
Contrast all this to the property rights of the rich. Paradoxically, the rich often barely need formal protections of their rights at all. Their property just isn't threatened all that much, whether by the police or by anyone else. And when the property rights of the rich do get threatened, the rich can fight back. Definitionally, they have many more resources at hand, including non-financial ones: The rich have political influence, private security choices, and just... moving. The would-be owner of a grocery store franchise isn't compelled to open in any particular neighborhood, or even to go into business at all. His money can always sit safely in a bank.
The rich also aren't living so precariously: Even if all else fails, and if a rich person's car does get torched, he can just buy another car. Yes, that's bad, but it's not going to ruin him. The same can't necessarily be said of a poor person, for whom a car might be her single most valuable possession.
So while I'm complaining about the loss of a silly (but fun) kinetic sculpture race, let's all remember just who depends the most on the networks of trust and expectation that can either live, or die, in our cities. Let's also remember that those networks depend on protecting the all too fragile property rights of the poor.
Update: We are informed that the drivers of all kinetic sculptures are to be sober at the time.
Taking time out of his press conference with Japanese Prime Minister Shinzō Abe on Tuesday, President Obama addressed the chaos in Baltimore following the unexplained death in custody of Freddie Gray.
While pleading for calm, President Obama lamented his lack of authority to fix the problem:
Now, the challenge for us as the federal government is, is that we don't run these police forces. I can't federalize every police force in the country and force them to retrain. But what I can do is to start working with them collaboratively so that they can begin this process of change themselves.
Obama also lamented the lack of political momentum to address the poverty and violence afflicting communities like Baltimore:
That's how I feel. I think there are a lot of good-meaning people around the country that feel that way. But that kind of political mobilization I think we haven’t seen in quite some time. And what I’ve tried to do is to promote those ideas that would make a difference. But I think we all understand that the politics of that are tough because it’s easy to ignore those problems or to treat them just as a law and order issue, as opposed to a broader social issue.
Both of those lamentations are misleading.
While it’s true that the federal government generally lacks the power to “force” local police departments to change their behavior, Obama’s comments completely omit his role in administering several federal policies that facilitate, and even incentivize, the abuses and tensions he condemned.
The federal drug war tears apart families through mass incarceration and violence and unjustly forces millions of (especially poor, minority) Americans to carry the stigma of being a convicted criminal. Prohibition, just as it did in the 1920s and 30s, has turned huge swaths of urban America into battlefields in the competition for black market real estate. President Obama has already demonstrated a willingness to ease federal drug enforcement in several states, and there is nothing keeping him from expanding that rollback. He has also pardoned several non-violent drug offenders, even while federal prosecutors convict new ones every day.
The drug war and the federal war on terror also serve as vehicles for the distribution to local police of billions of tax dollars, military-grade weaponry and surveillance equipment, a warped mandate to think of themselves as the first and last lines of defense against terrorists and drug cartels, and a perverse incentive to compete for federal handouts through arrests and seizures.
Federal civil asset forfeiture laws allow state law enforcement agencies to circumvent local budget requirements. They allow police to seize cash and property from citizens without ever charging them with any crime. This “policing for profit” is especially pernicious when directed at people in poor communities who lack the resources to contest the seizures and often desperately need the property (e.g. automobiles) being seized for their livelihoods.
All of these federal policies serve to undermine the protections of federalism, transparency, accountability, and respect for the rule of law. They incentivize conflict between the police and the community. They encourage police to view people as potential enemy combatants and sources of revenue rather than human beings with cherished rights to life, liberty, and property.
The federal government doesn’t “run these police forces,” but it does wield immense influence among them. It’s true that Barack Obama cannot wave a magic wand and make everything better, but he could do much more than his statements convey.
Sen. Bernie Sanders, the independent socialist from Vermont, is running for president as a Democrat. Since he's a self-proclaimed socialist, he's surely to the left of all the Democrats in Congress, right? Well, a few years ago I checked into that, and I found that in fact plenty of Democratic senators have been known to spend the taxpayers' money more enthusiastically than Sanders:
According to the National Taxpayers Union, 42 senators in 2008 voted to spend more tax dollars than socialist Bernie Sanders. They include his neighbor Pat Leahy; Californians Barbara Boxer and Dianne Feinstein, who just can’t understand why their home state is in fiscal trouble; and the Eastern Seaboard anti-taxpayer Murderers’ Row of Kerry, Dodd, Lieberman, Clinton, Schumer, Lautenberg, Menendez, Carper, Biden, Cardin, and Mikulski. Don’t carry cash on Amtrak! Not to mention Blanche Lambert Lincoln and Mark Pryor of Arkansas, who apparently think Arkansans don’t pay taxes so federal spending is free. [It turned out that Arkansans were not so clueless.] Sen. Barack Obama didn’t vote often enough to get a rating in 2008, but in 2007 he managed to be one of the 11 senators who voted for more spending than the socialist senator.
Meanwhile, the American Conservative Union rated 11 senators more liberal than Sanders in 2008, including Biden, Boxer, Feinstein, and again the geographically confused Mark Pryor. The Republican Liberty Caucus declared 14 senators, including Sanders, to have voted 100 percent anti-economic freedom in 2008, though Sanders voted better than 31 colleagues in support of personal liberties.
Now, I wrote that in January 2010, when 2008 ratings were the latest available. And it seems that 2008 was Sanders's best year in the eyes of taxpayers, when he voted frugally a whopping 18 percent of the time. But as this lifetime chart shows, even in the past two years a dozen or so senators were more spendthrift than the socialist guy. In 2011, at an impressive 16 percent, Sanders was only the 55th spendiest senator. Spending interests will be glad to know that in the one year that they served together and NTU has rated, Sanders spent a bit more of the taxpayers' money than Sen. Elizabeth Warren.
Today, presidential candidate Hillary Rodham Clinton addressed criminal justice reform in a speech at Columbia University. Earlier in the week, the Brennan Center released a book with chapters from politicians across the political spectrum discussing the need for criminal justice reform, and Secretary Clinton contributed one of them. Now that the Democratic front-runner has joined Republican presidential aspirants in addressing reform, criminal justice appears to be a significant 2016 campaign issue.
Three of Clinton’s policy suggestions are problematic.
First, and perhaps the one that will get the most headlines, she called for making police body cameras “the norm everywhere,” by using federal grants and matching funds. Putting aside the considerable price tag to subsidize the roughly 18,000 American law enforcement agencies to buy body cameras, how officers use those cameras and how law enforcement uses their data must be of utmost concern. As my colleague Matthew Feeney noted in a blogpost yesterday, the proposed body camera policy in Los Angeles would allow officers to review body camera footage before giving statements on use of force incidents. That policy would not serve transparency interests, but instead police officer self-interest.
Throwing money for cameras to local police departments as a solution to police transparency may sound good in theory, but making it work will be much more difficult in practice.
Second, she argued that low-level offenders, “must be some way registered in the criminal justice system.” The criminalization of drug consumption has been one of the primary drivers of incarceration. Diverting low-level offenses to drug courts, as Clinton suggests, could be an improvement over jailing offenders, but for many of these cases, it’s not clear that the criminal justice system should be involved at all.
When implemented properly, diversion may be appropriate for petty crimes like shoplifting or nuisance offences that may arise from addiction or abuse. But simple possession of most drugs is still a crime in all 50 states, adding thousands of Americans to the criminal justice system that have no business being there. Many of those people have the mental health and substance abuse problems Clinton addressed in her speech.
Society can discourage behavior by means other than the criminal law. Education, economic opportunity, and social norms can combine to deter substance abuse in the private sphere. While not ideal to libertarians, a system of taxes, fines, and regulations could be utilized by governments to discourage use without involving the criminal justice system at all. But any policy that continues to criminalize the effects and symptoms of underlying conditions like addiction will invariably lead to the broken families and diminished employment prospects for our most vulnerable citizens.
Third, Clinton discussed the “quiet epidemic” of drug use in middle and suburban America. While the overall tone of the speech lamented racial disparities and disparate socio-economic outcomes, this passage affirmed the misconception that drug use is, was or has been just an “inner city” problem. Yet whites and blacks use drugs at roughly the same rates, per capita. That enforcement has concentrated most heavily in minority communities does not mean drugs are new to the rest of the country.
Calling any drug use an “epidemic” harkens back to the overblown crack scare of the 1980s, which fueled the arguments for mandatory minimum sentences and 100:1 crack-to-powder sentencing disparity. In a recent Heritage Foundation event on the future of marijuana policy, a medical expert frankly stated that only about 10 percent of drug (and alcohol) users become problem users. Unfortunately, most calls for diversion to treatment do not distinguish between the minority who develop drug problems and the 90 percent of adult users who do not experience significant negative health or life effects.
In all, what Secretary Clinton proposed today was a large amount of federal and state spending on tools that are already being misapplied throughout our country. Body cameras can improve police-public interactions, but it will take more than grants and matching funds to make their applications useful. Giving people the choice between jail or counseling when neither is appropriate is a fundamental misallocation of resources. Every seat in treatment taken by an otherwise functioning adult is one fewer seat available to the addict who is struggling with her addiction. Misunderstanding the very real problem of addiction is compounded by misusing the criminal justice system to address it.
As Jonathan Simon argues in his book, Governing Through Crime, America needs a new approach to how we think about crime. Instead of using the criminal law as a first choice to fix society’s problems, it should be the last resort after policymakers have exhausted all other remedies. Secretary Clinton’s proposals, though well-intentioned, will be expensive and ultimately ineffective in fixing the disparities that inspired them.