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Scooter Libby to Replace Harriet Miers?

Max Sawicky supported the nomination of Harriet Miers for reasons he well expressed. I was not convinced. However, I highly endorse Max’s latest:

*No more “up or down vote” claptrap from the wingnuts. They advocated her pre-emptive withdrawal, so there is no onus against a committee preventing any appointment from coming to the Senate floor, and no gabble about any nominee having a right to a floor vote;
* No more denunciations of questioning nominees on the thoughts that would drive future decisions. The wingnuts favored protological levels of probing for Miers;
* No more denunciations of so-called liberal litmus tests, since the Bush loyalists were clearly testifying, admittedly to dubious effect, as to Miers’ true colors;
* No more attacks on considerations of diversity in appointments, since Miers was clearly a diversity pick, and touted as such by the Bushists.

While I have reservations about Alberto Gonzales being put on the Court, I tend to agree with Max on this one. Max goes onto to suggest Mr. Libby be nominated. You might ask how in the world could a sensible liberal endorse putting a traitor and felon on the Supreme Court, but wouldn’t this be the perfect metaphor for this Administration?

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PlameGate: Blaming the Wilsons

Today saw no public announcements of indictments but leave it to the Corner to be attacking the victim again. But the best one has to be clueless Jonah Goldberg:

Hasn’t Cliff been making the case that Wilson outed his wife to David Corn? Isn’t that a thin reed of hope?

(1) Cliff May is a liar.

(2) Cliff’s bogus argument is that the name of Valerie Plame has been publicly available for a long time. Then again, Fitzgerald interviewed her neighbors and no one knew she was a CIA agent. Then again – Cliff never bothered to explain this concept to Jonah.

(3) David Corn wrote his article on July 16, 2003. He learned that Ms. Plame was a CIA agent by reading Robert Novak’s article on July 14, 2003.

Maybe we will have some real news tomorrow.

Update: Class Clown Byron York Visits Wilson’s Neighbors
William Buckley has a talent for hiring great comedians. Read how Byron York opens his latest at the Corner:

One of the key questions about the CIA leak investigation has been: Just how covert was Valerie Wilson? At various points in the probe, there have been reports that a number of people – friends, neighbors – knew that Wilson worked for the CIA.

Really Byron? Like who? Maybe a couple of names. Oh wait, he does provide two names:

But I met two of those neighbors, David Tillotson and Marc Lefkowitz, this evening, and they both said that the visit they got from investigators on Monday was the first time they had ever been contacted by anyone from the Fitzgerald investigation. Both men seemed surprised that it had taken Fitzgerald so long to come calling; they reasoned, like everyone else, that if they had known Wilson’s secret, then others probably would have, too. But Fitzgerald had never asked, until Monday. The bottom line, however, is that both men said they did not know that Mrs. Wilson worked for the CIA. They said they were friends with the Wilsons, but did not have a clue about her true employment.

They did not have a clue! Byron is such a jokester.

What did you say? Byron was lying to the readers of the National Review Online? Now – who would be stupid enough to fall for such an obvious falsehood? And Mr. Buckley would not allow his staff to treat his readers this way – would he?

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Can the National Review Make-up its mind on Monetary Policy?

We have heard numerous NRO pundits hammer the FED for not following some sort of price-rule for monetary policy. Their version of a price-rule is often a commodity price-rule as in some sort of weird devotion to the gold standard, which I always thought was driven by the fact that Victor Canto was the only Ph.D. in economics who would lower himself to regularly write for the National Review. Well Dr. Canto just broke ranks and praised the FED:

While it’s true that the Fed has never disclosed its operating procedure, I have pointed out over the years that its policy behavior is consistent with the domestic price rule. What’s more, I have argued that the U.S. inflation rate was consistent with a price rule even prior to the Greenspan years.

In other words, Canto is still a gold bug but then the FED has sort of been following his advice all along. Does this mean that Canto is saying the Lawrence Kudlow is clueless? Or could it be possible that they are both clueless?

A little advice to the new Federal Reserve chairman (like Bernanke even needs my advice). Pay no attention to the suggestions from this crowd.

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Inflation Expectations

There has been a lot of discussion over the past two days about Ben Bernanke’s inflation-fighting credentials, as PGL so aptly summarized in the previous post. Interestingly, the past two days have also seen some significant activity in bond markets. For example, as of 3pm today (EDT) Marketwatch reports that short-term interest rates have leapt to their highest levels in four years.

But this is the result of steady upward march in interest rates that has been ongoing for some time, as the chart below illustrates.

There are a couple of reasons behind this recent trend in interest rates. First, short term rates are continuing upward because of expected continuing Fed tightening; i.e. the market fully expects the pattern of increases in the Federal Funds rate to continue.

The Federal Funds rate has little influence over long-term interest rates, however. The recent rise in long-term rates could be because that the market expects higher inflation over the coming years, because the market expects higher real interest rates, or a combination of the two. But it turns out that the recent run-up in long-term bond yields is due to higher real interest rates, not higher inflation expectations.

As the chart below illustrates, inflation expectations (which can be measured as the difference between the nominal bond yield and the inflation-adjusted bond yield) increased somewhat during August and September (almost certainly tied to the rise in oil prices during that time), but have not risen since then. (Note that the chart includes data for Monday, Tuesday, and Wednesday of this week.)

Reassuringly, the market’s inflation expectations in the wake of the Bernanke nomination have not shown any significant change from last week or last month. If there are people who worry that Bernanke will be an inflation dove, then apparently there are equal numbers who worry that he will be an inflation hawk, leaving the average inflationary expectation pretty much right where it was.


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Will Bernanke Be Too Hard on Inflation?

Brad DeLong rebuts the presumption that Bernanke will be too soft on inflation. Now where would some lame brain get such an idea anyway? Brad is ably assisted by Mark Thoma. Even those at the National review who endorsed Bush’s very good selection are clueless.

Bernanke’s critics from the left-leaning Keynesian camp are worried that he will be too inflation adverse and pursue tight monetary policies. For example, Michael Mandel asks “Will Bernanke’s Appointment Hurt Innovation and Technology?” But check out the comment section for what Dr. Lingle said. Then again, Max Sawicky points us to Galbraith the younger:

I’m a little bit concerned about the emphasis that Adam Posen already mentioned on inflation targeting as the sole or major objective of monetary policy because, of course, the Federal Reserve is bound by statute to a broader set of objectives which include primarily full employment, balanced growth and reasonable price stability … I would simply point to the implications of setting a more rigid target than the law provides for or that the practical conditions faced by the Federal Reserve will permit the chairman actually to pursue. And what you say about interest rates raises that, I think directly because the Federal Reserve has been raising interest rates. It’s raised them ten times over the last year or so. It’s running into a situation now where since long-term interest rates have not gone up at all it will either if it continues to raise interest rates, generate a condition called an inverted yield curve, which historically has been very damaging to the economy, tending to produce a recession, or if it stops, it may face the problem that the world’s holders of dollar assets may resume selling them off so that you end up losing value in the dollar and generating a renewed inflation threat that way.

Given that I have suggested that we are still shy of full employment, it is hard to argue with this statement. But then he was talking about the Greenspan FED – so if the Bernanke FED is a little softer on inflation over the next year, I’d like that. Of course, the National Review will disagree with me. I rest my case.

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PlameGate: The Corner’s Reaction to the News About Cheney

Rich Lowry noted the big news from the New York Times last night:

Brace yourselves – this will be lighting up Washington tomorrow.

The only comment from the Corner today even remotely related to this story from the Corner today is another attack on Bill Clinton. So much for the National Review’s concern with national security or the rule of law.

Update: Talkleft has more evidence of the hypocrisy of the Bush camp including George W. Bush noting that in 1999, Governor Bush said that lying during a press conference was an impeachable offense. By that standard, President Bush would have been impeached before the Iraq invasion was launched.

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More on the "Missing Inflation"

David Altig gave a good summary of the “missing inflation” arguments in a post from yesterday. The essence of his argument is, I think, that core inflation is simply not rising because inflationary expectations have not risen (which in turn is due to a very credible Fed promise to keep inflation low), and thus wage pressures have not risen.

In contrast, I tend to think that firmly anchored inflationary expectations are a necessary but not sufficient condition for stable core inflation; a labor market that is strong enough to maintain real wages in the presence of rising consumer prices may well generate rising core inflation even when inflationary expectations are muted, given that non-wage prices are downward-sticky and won’t tend to move down to compensate for higher energy and labor costs.

But David’s further discussion about the validity of focusing attention on the core inflation rate, along with the persuasive evidence provided by Mark Thoma that the core inflation rate does not systematically differ from the overall inflation rate, set me to wondering about another possible piece to the “missing inflation” puzzle (to the degree that such a puzzle still exists).

Take a look at this picture, which is a rough replication of one of Mark’s graphs, and which shows the overall CPI inflation rate (measured as the 2-year average inflation rate) compared to the CPI-core inflation rate.

Mark’s point with this picture was that it’s hard to notice much of a systematic bias in the core rate of inflation; on average, it tends to look like the overall CPI rate of inflation. But another feature of this chart strikes me as interesting: the overall CPI inflation rate seems like a pretty good leading indicator of changes in the core inflation rate.

The following chart explores this connection a bit more clearly. The blue line shows the difference between the overall CPI inflation rate and the core rate; it’s positive when the overall inflation rate is above the core rate, and conversely. Meanwhile, the red line shows the trend in the core CPI inflation rate; a positive reading at any particular point in time indicates that the core inflation rate will rise over the next 6 months compared to the rate 6 months previously, and conversely.

My point is simple: when the overall CPI inflation rate is above the core rate, the core rate tends to rise, though it takes several months. This has happened throughout the Greenspan era of monetary policy, and thus throughout a period of very firmly established inflationary expectations.

I don’t believe that the Fed’s inflation-fighting credibility has changed significantly in recent years; I think it’s as strong as it always has been under Greenspan. So if the current situation adheres to the rest of the Greenspan era, we may well expect the core inflation rate to rise over the coming months.

So in short, let me suggest the following: perhaps the only reason that the core rate hasn’t risen more is because we haven’t waited long enough. If the core rate follows the pattern of the past 15-20 years, Ben Bernanke could have his hands full, with a core rate that will be creeping upward in early 2006, just as the economy may be slowing.


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The National Review’s Reaction to Bernanke’s Nomination

Brad DeLong finds a Kudlow comment at The Corner and just shakes his head. But it was Michael Darda that was chosen to offer this critique:

Up until this point, my hope was that Vice President Dick Cheney’s influence on the nomination process would tip the scales toward former Council of Economic Advisors chairman Glenn Hubbard, a pro-growth stalwart on fiscal policy. Bernanke, however, an academic with little Wall Street experience, was the favorite, and was probably viewed as the safest option for the administration … I preferred Hubbard to Bernanke only because I thought Bush’s former CEA chief would be more open to a price-rule approach to monetary policy, whereby the Fed would shadow sensitive forward-looking indicators of excess liquidity and incipient inflation: gold, commodities, the dollar, and the Treasury yield curve (and perhaps the TIPS spread and the real short rate). While I’m told that Bernanke is open to market indicators, he also seems overtly committed to an explicit target for the core inflation rate, which I view as problematic.

While Darda was trying to praise Glenn Hubbard, I suspect that Darda has no clue what Dr. Hubbard tells his students at Columbia about fiscal policy. Hubbard is pro-growth, which means he is not fond of the fiscal irresponsibility of this Administration. Yet, the National Review defends these massive deficits. But Mr. Darda is a little confused – the Federal Reserve sets monetary policy.

As far as the price-rule approach – is Darda reviewing to Kudlow’s commodity price-rule? Maybe I missed Dr. Hubbard’s endorsement of Kudlow economics? But if Dr. Bernanke is no fan of Kudlow economics, this is just another reason to applaud President Bush for a very good choice.

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