There is a popular line in elite DC circles that political figures are not supposed to talk about the Federal Reserve Board’s monetary policy. This was the theme of Catherine Rampell’s Washington Post column in today’s paper. The piece complained about Donald Trump’s criticisms of the Fed’s interest rate hikes and said that countries where monetary policy is controlled by politicians end up with hyperinflation.
While there is a list of countries where political control of the central bank has led to hyperinflation, there are also many examples of countries where political control did not lead to hyperinflation, starting with the United Kingdom. The Bank of England had been under the control of the finance minister until Tony Blair made it independent in May of 1997. The United Kingdom did not have any bouts of hyperinflation that I can recall.
The law gives the Fed a large degree of independence. It’s seven governors are appointed by the president and approved by Congress. They serve 14-year terms, which means they don’t have to worry about losing their jobs if they anger a politician. There are also twelve presidents of the regional Feds who sit on the Fed’s Open Market Committee that determines monetary policy. (Only five have votes at any point in time.) These bank presidents largely owe their job to the banks in the region.
Its structure gives the financial industry a disproportionate voice in setting monetary policy. This means that the Fed has a tendency to be overly concerned about limiting inflation, a main concern of the financial industry, and much less concerned about the full employment part of its mandate.
In this context, it is perfectly reasonable for politicians to criticize the conduct of monetary policy. We can view the Fed as being like the Food and Drug Administration (FDA). While we would not want members of Congress or the president deciding which drugs get approved, it would be very reasonable for them to complain if, for example, the FDA went three years without approving any drugs, or alternatively was rapidly approving drugs that were causing people to die. Similarly, political figures have every right in the world to complain if the Fed is being overly concerned about inflation at the cost of slower growth and higher unemployment.
It is questionable whether Trump has adopted the most effective route in pressing this sort of criticism. Rather than saying he does not like the policy that the Fed chair he picked is following, it might have been more useful to have his Council of Economic Advisers produce evidence that the economy does not face a serious risk of inflation right now.
He might also choose to withdraw the nomination of Marvin Goodfriend for one of the open governor positions. Goodfriend has long been an inflation hawk who has argued for higher interest rates for many years. If Trump really doesn’t want the Fed to raise interest rates, it doesn’t make sense to appoint someone to the Board of Governors who is very committed to raising rates.
There is a popular line in elite DC circles that political figures are not supposed to talk about the Federal Reserve Board’s monetary policy. This was the theme of Catherine Rampell’s Washington Post column in today’s paper. The piece complained about Donald Trump’s criticisms of the Fed’s interest rate hikes and said that countries where monetary policy is controlled by politicians end up with hyperinflation.
While there is a list of countries where political control of the central bank has led to hyperinflation, there are also many examples of countries where political control did not lead to hyperinflation, starting with the United Kingdom. The Bank of England had been under the control of the finance minister until Tony Blair made it independent in May of 1997. The United Kingdom did not have any bouts of hyperinflation that I can recall.
The law gives the Fed a large degree of independence. It’s seven governors are appointed by the president and approved by Congress. They serve 14-year terms, which means they don’t have to worry about losing their jobs if they anger a politician. There are also twelve presidents of the regional Feds who sit on the Fed’s Open Market Committee that determines monetary policy. (Only five have votes at any point in time.) These bank presidents largely owe their job to the banks in the region.
Its structure gives the financial industry a disproportionate voice in setting monetary policy. This means that the Fed has a tendency to be overly concerned about limiting inflation, a main concern of the financial industry, and much less concerned about the full employment part of its mandate.
In this context, it is perfectly reasonable for politicians to criticize the conduct of monetary policy. We can view the Fed as being like the Food and Drug Administration (FDA). While we would not want members of Congress or the president deciding which drugs get approved, it would be very reasonable for them to complain if, for example, the FDA went three years without approving any drugs, or alternatively was rapidly approving drugs that were causing people to die. Similarly, political figures have every right in the world to complain if the Fed is being overly concerned about inflation at the cost of slower growth and higher unemployment.
It is questionable whether Trump has adopted the most effective route in pressing this sort of criticism. Rather than saying he does not like the policy that the Fed chair he picked is following, it might have been more useful to have his Council of Economic Advisers produce evidence that the economy does not face a serious risk of inflation right now.
He might also choose to withdraw the nomination of Marvin Goodfriend for one of the open governor positions. Goodfriend has long been an inflation hawk who has argued for higher interest rates for many years. If Trump really doesn’t want the Fed to raise interest rates, it doesn’t make sense to appoint someone to the Board of Governors who is very committed to raising rates.
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The overall and core CPI both rose just 0.1 percent in September. Over the last year, the increases in the two indexes have been 2.3 and 2.2 percent, respectively. The core index excluding shelter has risen just 1.4 percent over the last year.
Rather than accelerating, it appears that inflation is actually slowing slightly. The annualized rate of inflation in the core index comparing the last three months (July, August, September) with the prior three (April, May, June) is just 2.0 percent.
This pattern might be a good reason for the Fed to hold off on further rate hikes. If it is actually targeting 2.0 percent as an average inflation rate (in the PCE deflator, which is about 0.2 percentage points lower, on average), then it should want the inflation rate to rise somewhat above 2.0 percent when we are approaching the peak in the cycle.
While growth was strong in the second quarter and is likely to be strong again in the third quarter, recent weakness in housing and car sales indicate the economy may slow substantially in the fourth quarter. There seems little downside risk if the Fed were to delay further rate hikes since inflation remains well under control. The potential benefits in terms of employment and growth are substantial.
The overall and core CPI both rose just 0.1 percent in September. Over the last year, the increases in the two indexes have been 2.3 and 2.2 percent, respectively. The core index excluding shelter has risen just 1.4 percent over the last year.
Rather than accelerating, it appears that inflation is actually slowing slightly. The annualized rate of inflation in the core index comparing the last three months (July, August, September) with the prior three (April, May, June) is just 2.0 percent.
This pattern might be a good reason for the Fed to hold off on further rate hikes. If it is actually targeting 2.0 percent as an average inflation rate (in the PCE deflator, which is about 0.2 percentage points lower, on average), then it should want the inflation rate to rise somewhat above 2.0 percent when we are approaching the peak in the cycle.
While growth was strong in the second quarter and is likely to be strong again in the third quarter, recent weakness in housing and car sales indicate the economy may slow substantially in the fourth quarter. There seems little downside risk if the Fed were to delay further rate hikes since inflation remains well under control. The potential benefits in terms of employment and growth are substantial.
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The Washington Post used some bizarre economics to tell people that Trump’s tax cuts and military spending are bad (they are) because:
“The federal debt is also rising in the United States. That means there will be less money to spend in a downturn, …”
Ummm, why? The limit on federal spending is the risk that it will lead to too much demand in the economy, thereby causing inflation. If the economy is in a downturn, we don’t have to worry about too much demand by definition.
So, we get that the Washington Post doesn’t like deficits and has long been crusading for cuts in Medicare and Social Security, but it would be nice if it tried to stay in the fact-based universe with its arguments.
The Washington Post used some bizarre economics to tell people that Trump’s tax cuts and military spending are bad (they are) because:
“The federal debt is also rising in the United States. That means there will be less money to spend in a downturn, …”
Ummm, why? The limit on federal spending is the risk that it will lead to too much demand in the economy, thereby causing inflation. If the economy is in a downturn, we don’t have to worry about too much demand by definition.
So, we get that the Washington Post doesn’t like deficits and has long been crusading for cuts in Medicare and Social Security, but it would be nice if it tried to stay in the fact-based universe with its arguments.
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The story is that in a desperate move, since it doesn’t have more imports to tax, China could dump $1 trillion in US treasuries to screw the United States. No part of this makes any sense.
China bought up massive amounts of US treasury bonds and other foreign assets to keep down the value of its currency against the dollar. This helped its competitive position, allowing it to continue to run a large trade surplus, a major anomaly for a fast-growing country. These purchases of treasury bonds were actually the “currency manipulation” that Trump constantly complained about during his campaign.
There is no doubt that a massive dumping of these bonds would create upheaval in financial markets, but the Fed would have little problem buying them up. Also, other central banks would rush to buy them as well, since they would not want to see the euro, pound, and yen suddenly jump by 20 percent against the dollar.
This would have the same impact on their relative competitiveness as if Trump imposed tariffs of 20 percent and also subsidized all US exports by 20 percent. It would be very bizarre if China’s big weapon in against Trump was to give him exactly what he had demanded for a year and a half prior to the election. (Currency seems to have disappeared from Trump’s agenda since the election.)
China has very powerful weapons it can still use in the trade war. For example, it could shut US firms out of its market. This would be a huge hit since its economy is already 25 percent larger than the US economy on a purchasing power parity basis and 70 percent as large on an exchange rate basis. (Dumping a trillion dollars of treasury bonds would quickly close much of this gap.)
It could also mass produce items in clear violation of US copyrights and patents. Imagine hundreds of millions of computers using Windows and other Microsoft software and Bill Gates not getting a penny. Imagine Pfizer not getting a penny for the drugs on which it holds patent rights.
These are huge weapons that China still has at its disposal. While NYT business columnists may lack the imagination to understand this fact, the leadership in China is probably not as ill-informed.
The story is that in a desperate move, since it doesn’t have more imports to tax, China could dump $1 trillion in US treasuries to screw the United States. No part of this makes any sense.
China bought up massive amounts of US treasury bonds and other foreign assets to keep down the value of its currency against the dollar. This helped its competitive position, allowing it to continue to run a large trade surplus, a major anomaly for a fast-growing country. These purchases of treasury bonds were actually the “currency manipulation” that Trump constantly complained about during his campaign.
There is no doubt that a massive dumping of these bonds would create upheaval in financial markets, but the Fed would have little problem buying them up. Also, other central banks would rush to buy them as well, since they would not want to see the euro, pound, and yen suddenly jump by 20 percent against the dollar.
This would have the same impact on their relative competitiveness as if Trump imposed tariffs of 20 percent and also subsidized all US exports by 20 percent. It would be very bizarre if China’s big weapon in against Trump was to give him exactly what he had demanded for a year and a half prior to the election. (Currency seems to have disappeared from Trump’s agenda since the election.)
China has very powerful weapons it can still use in the trade war. For example, it could shut US firms out of its market. This would be a huge hit since its economy is already 25 percent larger than the US economy on a purchasing power parity basis and 70 percent as large on an exchange rate basis. (Dumping a trillion dollars of treasury bonds would quickly close much of this gap.)
It could also mass produce items in clear violation of US copyrights and patents. Imagine hundreds of millions of computers using Windows and other Microsoft software and Bill Gates not getting a penny. Imagine Pfizer not getting a penny for the drugs on which it holds patent rights.
These are huge weapons that China still has at its disposal. While NYT business columnists may lack the imagination to understand this fact, the leadership in China is probably not as ill-informed.
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I know it’s considered bad manners to bring data into an economic debate, but after seeing numerous stories telling us how bad China’s economy has been hit by Trump’s tariffs (e.g. this NYT piece), I thought it was worth looking at the numbers. In the first eight months of 2018, China’s exports to the US were $344.7 billion. This is up by $25.4 billion from $319.3 billion in the first eight months of 2017.
I’m afraid I have a hard time seeing how China’s economy could be hurt all that much from tariffs that still did not prevent its exports from rising year-over-year. I’m sure there have been some businesses and specific industries that have been hurt, but I have a hard time seeing how a $14 trillion economy ($25 trillion in purchasing power parity terms) could be sunk by reducing its exports to the US by $60 or even $100 billion. And, since we are constantly told that much of the value of these exports actually comes from third countries like Japan or South Korea, the impact would be even less.
Of course, if China’s exports are still rising in spite of Trump’s trade war, it is even harder to understand how it could be sinking its economy.
I know it’s considered bad manners to bring data into an economic debate, but after seeing numerous stories telling us how bad China’s economy has been hit by Trump’s tariffs (e.g. this NYT piece), I thought it was worth looking at the numbers. In the first eight months of 2018, China’s exports to the US were $344.7 billion. This is up by $25.4 billion from $319.3 billion in the first eight months of 2017.
I’m afraid I have a hard time seeing how China’s economy could be hurt all that much from tariffs that still did not prevent its exports from rising year-over-year. I’m sure there have been some businesses and specific industries that have been hurt, but I have a hard time seeing how a $14 trillion economy ($25 trillion in purchasing power parity terms) could be sunk by reducing its exports to the US by $60 or even $100 billion. And, since we are constantly told that much of the value of these exports actually comes from third countries like Japan or South Korea, the impact would be even less.
Of course, if China’s exports are still rising in spite of Trump’s trade war, it is even harder to understand how it could be sinking its economy.
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We all know how difficult it is for elite economists at places like Harvard to get information about the economy, so perhaps we should excuse him for this little mess up. Of course, if he had heard of the Great Recession he would not be writing a piece in the New York Times telling us that trade deficits really don’t matter:
“Nations run trade deficits when their spending on consumption and investment, both private and public, exceeds the value of goods and services they produce. If you really want to reduce a trade deficit, the way to do it is to bring down spending relative to production, not to demonize trading partners around the world.”
If Mankiw had heard about the Great Recession, he would have known that countries often face shortfalls in demand, meaning that we have unemployment because there is not enough demand (i.e. spending on consumption and investment). In this context, if we reduce domestic spending, as Mankiw advocates, it may reduce the trade deficit somewhat, but it will also lead to a further reduction in demand and loss of jobs.
In a context where the economy faces a shortfall of demand, a situation that has become popularly known among non-Mankiw economists as “secular stagnation,” a large trade deficit is one of the factors reducing demand in the economy. If we have a trade deficit of 3.0 percent of GDP, it is equivalent to a reduction in domestic consumption equal to 3.0 percentage points of GDP, or the government reducing its spending by 3.0 percentage points of GDP as part of an austerity program.
For this reason, people who see secular stagnation as a problem should be viewing the trade deficit as a problem. That is, at least if they understand basic economics. And, the best remedy is a lower-valued dollar, but we’ll get to that another day.
Addendum:
Just to flesh my point a bit. Mankiw is of course right about the accounting identity. The trade deficit is equal to the excess of domestic consumption and investment over domestic savings. The problem is that this accounting identity says nothing about causation.
If an economy is operating below its potential level of output that the additional output stemming from a lower trade deficit can lead to more savings (both private and government) and therefore a lower imbalance between domestic consumption and investment and domestic savings. Without saying it, Mankiw has slipped in the assumption that the economy is already operating at its potential level of output so that a smaller trade defcit cannot boost output. In that context, a smaller trade deficit would lead to higher interest rates, which would crowd out domestic consumption and investment.
We all know how difficult it is for elite economists at places like Harvard to get information about the economy, so perhaps we should excuse him for this little mess up. Of course, if he had heard of the Great Recession he would not be writing a piece in the New York Times telling us that trade deficits really don’t matter:
“Nations run trade deficits when their spending on consumption and investment, both private and public, exceeds the value of goods and services they produce. If you really want to reduce a trade deficit, the way to do it is to bring down spending relative to production, not to demonize trading partners around the world.”
If Mankiw had heard about the Great Recession, he would have known that countries often face shortfalls in demand, meaning that we have unemployment because there is not enough demand (i.e. spending on consumption and investment). In this context, if we reduce domestic spending, as Mankiw advocates, it may reduce the trade deficit somewhat, but it will also lead to a further reduction in demand and loss of jobs.
In a context where the economy faces a shortfall of demand, a situation that has become popularly known among non-Mankiw economists as “secular stagnation,” a large trade deficit is one of the factors reducing demand in the economy. If we have a trade deficit of 3.0 percent of GDP, it is equivalent to a reduction in domestic consumption equal to 3.0 percentage points of GDP, or the government reducing its spending by 3.0 percentage points of GDP as part of an austerity program.
For this reason, people who see secular stagnation as a problem should be viewing the trade deficit as a problem. That is, at least if they understand basic economics. And, the best remedy is a lower-valued dollar, but we’ll get to that another day.
Addendum:
Just to flesh my point a bit. Mankiw is of course right about the accounting identity. The trade deficit is equal to the excess of domestic consumption and investment over domestic savings. The problem is that this accounting identity says nothing about causation.
If an economy is operating below its potential level of output that the additional output stemming from a lower trade deficit can lead to more savings (both private and government) and therefore a lower imbalance between domestic consumption and investment and domestic savings. Without saying it, Mankiw has slipped in the assumption that the economy is already operating at its potential level of output so that a smaller trade defcit cannot boost output. In that context, a smaller trade deficit would lead to higher interest rates, which would crowd out domestic consumption and investment.
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Of course the NYT would never do this sort of mind reading on the intentions of the French president. Instead it told readers about changes to the labor code that were “intended to stoke hiring.” It would be nice if the NYT could limit itself to reporting what politicians say and do instead of telling us what their intentions are.
The piece also refers to tax breaks of 6 billion euros targeted to workers and and 18.8 billion euro reduction in payroll and other business taxes. It is unlikely that many NYT have much idea how large these cuts are for the French people or economy. If the cuts are for one year (this is not clear from the piece), the reduction in taxes for workers comes to roughly $100 per worker. The business tax cuts are equal to a bit less than 0.9 percent of GDP.
Of course the NYT would never do this sort of mind reading on the intentions of the French president. Instead it told readers about changes to the labor code that were “intended to stoke hiring.” It would be nice if the NYT could limit itself to reporting what politicians say and do instead of telling us what their intentions are.
The piece also refers to tax breaks of 6 billion euros targeted to workers and and 18.8 billion euro reduction in payroll and other business taxes. It is unlikely that many NYT have much idea how large these cuts are for the French people or economy. If the cuts are for one year (this is not clear from the piece), the reduction in taxes for workers comes to roughly $100 per worker. The business tax cuts are equal to a bit less than 0.9 percent of GDP.
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Yeah, you know, that big boom in investment that was supposed to lead to a surge in productivity growth. Higher productivity was then going to give us all a big pay increase — 10 percent above baseline after four years.
Anyhow, for those keeping score, the investment boom seems to still be hiding. The Commerce Department’s latest report shows that new orders for capital goods (excluding aircraft) are up just 6.3 percent in August from the year-ago level. Comparing the first eight months of 2018 with the first eight months of 2017, the gain is 7.6 percent. It is 6.9 percent if we include aircraft.
Those are respectable increases, but not very different from anyone’s pre-tax cut baseline. They certainly are not the sort of figures that will generate the promised productivity boom and wage growth.
Yeah, you know, that big boom in investment that was supposed to lead to a surge in productivity growth. Higher productivity was then going to give us all a big pay increase — 10 percent above baseline after four years.
Anyhow, for those keeping score, the investment boom seems to still be hiding. The Commerce Department’s latest report shows that new orders for capital goods (excluding aircraft) are up just 6.3 percent in August from the year-ago level. Comparing the first eight months of 2018 with the first eight months of 2017, the gain is 7.6 percent. It is 6.9 percent if we include aircraft.
Those are respectable increases, but not very different from anyone’s pre-tax cut baseline. They certainly are not the sort of figures that will generate the promised productivity boom and wage growth.
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Just thought people may be interested since Trump has made the trade deficit such a central issue in his campaign and his presidency. The deficit for the first seven months of 2018 was $337.9 billion, that is an increase of 17.1 percent from the trade deficit of $288.5 billion in the same months of 2016. The trade deficit has been running at an annual rate of $579.3 billion so far this year, or just under 2.9 percent of GDP.
There are many factors that affect the deficit, including more rapid growth and the increase in the value of the dollar. But the followers of Donald Trump who see this as the main measure of the success of the country’s trade policy may be interested in this number.
Just thought people may be interested since Trump has made the trade deficit such a central issue in his campaign and his presidency. The deficit for the first seven months of 2018 was $337.9 billion, that is an increase of 17.1 percent from the trade deficit of $288.5 billion in the same months of 2016. The trade deficit has been running at an annual rate of $579.3 billion so far this year, or just under 2.9 percent of GDP.
There are many factors that affect the deficit, including more rapid growth and the increase in the value of the dollar. But the followers of Donald Trump who see this as the main measure of the success of the country’s trade policy may be interested in this number.
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