Relevant and even prescient commentary on news, politics and the economy.

Time Duy on QE and Signalling*

Mark Thoma once claimed to be pleased that I was shrilly criticizing him.  I sure hope he meant it, because here I go again.  He
Update: I have trouble with reading comprehension.  A one syllable name was too hard.  I am commenting on Tim Duy who posted at Mark Thoma’s site.  I apologize for the mistake.

Tim Duy

 comments on the newly released FOMC minutes

I have long believed that the Fed failed to appreciate the signalling component of quantitative easing. Indeed, I could be convinced it was the most effective channel of transmission. I am glad to see that policymakers are starting to see that as well.

I am no longer sure whether Thoma Duy thinks that QE as actually implemented was an effective signal of future monetary policy (as I guessed when writing the comment below) or whether he thinks that a new combined strategy of forward guidance and QE at the same time with the explicit assertion that the QE means the forward guidance should be taken seriously would work.

Below I copy the comment I made based on the first interpretation and argue that QE2, QE3 and QE4 were not effective signals of future conventional monetary policy.   I went to FRED and stayed there (part of the reason is I had exams to grade and FRED was one place to hide from them).

The signalling effect of QE should show up as low medium term interest rates.  I think there really is no sign of this on the dates of announcement of QE2 (3 or 4 dates right there) QE3 or QE3.1 (Dec 12 2012).  I don’t see it either on the day (as asset prices should respond quickly) or over an interval of time.

I really think that the hypothesis that signalling future short term rates is a highly effective component of QE is fairly easily testable and rejected by the data.

Consider QE3 announced September 13 2012 the 5 year constant maturity rate went from 0.7 on he 12th to 0.65 the 13th to 0.72 the 14th.  These are tiny fluctuations.  Over a longer horizon in all of September it went from 0.62% on the first trading day (Tuesday the 4th) to 0.62% on Friday the 28th.  The 3 year rate declined all of one basis point on the 13th then rose 5 on the 14th (0.33 to 0.32 to 0.35) in all of September it moved not at all (0.31 on the first trading day  to 0.31 on the last).

There is no sign at all of a forward guidance effect. I note QE3 included explicit forward guidance about future short term rates.

QE4 (December 12th 2012) was definitely a surprise.  The 3 year rate shows no change on the 12th and up 2 basis points on on the 13th.  From the first to last trading day in December it went up 2 basis points.  The 5 year rate down one basis point on the 12th and up 4 on the 13th.  In December overall it went up from 0.63% to 0.72%.

Again no sign of a forward guidance effect.  The fluctuations are tiny, much to small to be economically significant and even too small to be statistically significant.

QE2 is harder as the announcement was telegraphed.  There was Bernanke’s August 27 2010 Jackson Hole speech, the  and the final announcement November 3 2010 and other announcements in between (and even the FOMC meeting before the speech).  The 5 year rate went up (a bit) on August 27th and was higher the 28th than the 26th.  It dropped 11 basis points from the November 2nd to 4th. This is the best news the forward guidance hypothesis and it is definitely economically insignficant.  Overall from August 26th till the last trading day in November 2010 the 5 year rate went up.

I might be convinced that forward guidance is the strongest channel for QE to work, but only because I might be convinced that QE doesn’t work at all.  In fact, I think that the right kind of QE would work — that so called QE would be buying 100% of new issues of RMBS at a higher than market price.

Delivering water quality to the tap

David Zetland at Aguanomics reminds us that we always need to get people on board and invested with results of policies, and perhaps a way to keep track relevant to daily lives as well.  Water delivery is pretty local so far in the US, but taken for granted in only parts of the US:

Delivering water quality to the tap

I’m now in Kiev (looking into their water utility regulation), and a typical problem has popped up, i.e., the difficulty in delivering water quality to the tap.
The physical layout of water systems — taking raw water from ground or surface sources, treating it, pumping it through large pipes to smaller pipes, then to building pipes and finally to the tap — means that there are multiple points at which clean water can get contaminated. There’s the problem of dirty water at source and poor treatment, of course, but the more common problems occur when water in transit gets dirty from old or leaking pipes.
By my understanding, most utilities run their systems to deliver clean water to the building (usually at a meter), with the quality of the piping between the meter and the tap being the building owner’s responsibility.
Building piping has two problems. The first is old or leaky pipes that may contaminate the water. The second is that some buildings have many residents who share the same pipes (and sometimes the same meter). Neighbors therefore need to find ways to share their water (rather, the bill) as well as keep their communal and unit-plumbing in good condition.

There are several ways to share the bill (divide by people, install submeters, etc.), but I want to concentrate on the plumbing problem in buildings and networks. The first issue is to know whether the water is safe to drink at the tap. If that’s not true, then it’s important to find where it gets contaminated. That question can result in finger pointing between customers and the utility as to who should pay for water testing, so I came up with this idea, taking as given the fact that utilities (and their regulators) need to ensure that water is safe to drink; it’s not the customer’s obligation, even if it’s in the customer’s interest. Such a “fact” means that utilities need to take the lead on quality testing, and here’s how I’d do it.

  1. Any utility that says its water is safe also needs to persuade customers of that fact.
  2. So it can include coupons in a few hundred bills (every month or so) that can be used to get a free water test at the customer’s tap by a qualified tester. The real cost will be $10-100, depending on local labor costs.
  3. Qualified testers are listed on a website; they are certified and equipped to test water in the house. That website also provides them with free advertising.
  4. Customers contact a tester who measures their water quality (hand held testers are getting better and cheaper). Test results are posted on the internet (without an exact address) and to the utility.
  5. “Safe” results allow the tested customer (and some share of neighbors) to have a better opinion of their water — and drink more of it.
  6. “Unsafe” results will trigger a second test by the utility, to determine if water at the mains is clean (thus the building plumbing has issues) or also dirty. Those results will make it easier for the utility and/or building owner to take action.
  7. There’s a potential problem if tester trying to get false results of unclean water (to get more business), which can be reduced by witholding payment from those whose tests are contradicted in a retest. Those who get too many false positives can be removed from the list (in 2), which will hurt their business. So they are likely to be honest.
  8. We also hope that the utility is honest, but that’s the regulator’s responsibility — and no utility will be able to cover up bad test results for very long.

This idea will help utilities find contamination problems and persuade customers that water is safe to drink (and thus worth paying for!) at the same time as it supports an independent industry for assuring water quality. (Such an industry could survive in places like the Netherlands because testers are also likely to be plumbers who are ALWAYS needed.)

Bottom Line: Water quality is hard for an individual to determine, but utilities can make it easier — and make their product more attractive — by paying for random water tests.

To centralize or not to centralize?
Tcentralize or not to centralize? o

I’ve run into many instances of a struggle between small- and large-scale governance, e.g., local vs. regional or national water management.
These struggles occur over money, regulations, water allocations, and so on.
I can see why they happen — someone in power decides to take over responsibilities from a lower-level of government* — but I can also see why they are inefficient and unfair. It’s one thing, for example, to impose the metric system on a country, entirely another to impose the same water tariff!
The problems of overcentralization are three (at least). First, centralization tends to impose one-size-fits-all solutions onto situations that do not require them. Second, those solutions tend to create correlations in mistakes that would normally offset each other, e.g., standards that strike high or low. Third, centralization increases the cost of gathering information, administering the system, etc. because details are lost in aggregation.
In the EU, they speak in terms of “subsidiarity,” i.e., pushing responsibility down to the lowest possible level of competence, and that’s the right term to use here. The Swiss have been well governed for centuries due to their relentless pursuit of it. The Dutch have done the same with their water boards. American mayors tend to their potholes and schools.
But there are many examples of failures: The Colorado river is NOT managed across the whole watershed (Upper and Lower in the US, separated from the Mexican tail), water and wastewater are often managed by different organizations, the US Department of Education intervenes when there’s no need to homogenize methods across the country. You get the idea.
So my advice is to solve problems based on solutions that are formed at the right scale. Incumbents who are at higher scales may protest at their loss of power, but those who care about results (instead of their power) will relinquish it.** That’s a tough conversation, of course.
Bottom Line: Centralization has costs and benefits. Don’t tell me what to eat for lunch, and I won’t tell you how to educate your children.

* Ukraine has a Ministry of Regional Development, but why does the center need to develop the regions? It appears that the MRD redistributes money taken form the regions, but that’s an invitation for imbalances.
** Economists speak of Tiebout competition among different cities that attract citizens looking for different mixes of amenities, but there’s also a value in publicizing these differences, so that people (and administrators) can compare ideas without having to move.

Barkley Rosser’s Review of Behavioral Economics (ROBE) Website Goes Live

Review of Behavioral Economics (ROBE) Website Goes Live

Amazingly enough, today on my 65th birthday, the website of the new journal that I am Editor-in-Chief of, the Review of Behavioral Economics (ROBE), has gone live.  So, we are open for business at…. Prof. J. Barkley Rosser


"Of Property" and the Mercantilist Fallacy

  Sandwichman at Econospeak offers a look at a piece of history:

“Of Property” and the Mercantilist Fallacy

“Though the earth, and all inferior creatures, be common to all men, yet every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property.”

The above is the core of what is commonly referred to as John Locke’s “labour theory of property.” It is a extraordinarily compelling narrative, resplendent with “self-evident truth” (“We hold these truths to be self evident…) and nearly indiscernible ambiguity (what does “labour” mean? what’s “mixing” got to do with it?).
It is widely acknowledged by Locke scholars that his economic views were essentially mercantilist. Keynes suggested that Locke stood with “one foot in the mercantilist world and one foot in the classical world.” However that may be, chapter five of Locke’s Second Treatise on Civil Government, “Of Property”, is relentlessly, incorrigibly, two-footedly mercantilist. And nobody seems to have noticed (except possibly John R. Commons).

Why would this even matter?

Yeah, sure, we are told, ad nauseum, about how PROPERTY is the be all and end all of freedom, democracy and prosperity. A comic-book, social Darwinist pseudo-Locke lends the right-wing libertarian anti-tax mantra a veneer of moral righteousness and intellectual gravitas.

And it’s crap.

But there are bigger fish to fry: LABOUR.

While socialists and even liberals may be inclined to circumscribe the sanctity of property, they are loath to gainsay the hallowed individualist framing of labour. Some folks even think it’s downright revolutionary to insist on the worker’s right to the whole product of labour. Labour, though,  is only conventionally something an individual performs. Labour is social. Labour power is best understood as a common-pool resource.
The ideology of labour as an extension of the self is pervasive, persuasive and pernicious. From that perspective, solidarity is a voluntary act of magnanimity that can be “terminated at will” just like a redundant employee. As individuals, the relationship between workers is accidental; their relationships with the employer and with the state are what matters.

The inescapable mercantilism of Locke’s notion of natural law puts that individualist ideology in a different light. In his Essay on the Law of Nature, Locke was adamant that “the rightness of an action does not depend on its utility; on the contrary, its utility is a result of its rightness.” “It is impossible,” Locke wrote, “that the primary law of nature is such that its violation is unavoidable. Yet, if the private interest of each person is the basis of that law, the law will inevitably be broken…”

Here is where the mercantilism comes in: “when any man snatches for himself as much as he can, he takes away from another man’s heap the amount he adds to his own, and it is impossible for anyone to grow rich except at the expense of someone else.” To avoid any mistake, Locke reiterates his objection to positing “every man’s self interest the basis of natural law”:

“For in such a case each person is required to procure for himself and to retain in his possession the greatest possible number of useful things; and when this happens it is inevitable that the smallest possible number is left to some other person, because surely no gain falls to you which does not involve somebody else’s loss.”

An unequivocal zero-sum game. “No gain falls to you which does not involve somebody else’s loss.” “It is impossible for anyone to grow rich except at the expense of someone else.”

Now there are those who will object that Locke modified his views between the earlier Essay on the Law of Nature and his later Second Treatise on Civil Government. Not so. In the latter, and especially in the chapter “Of Property,” Money plays a pivotal role in repealing what has become known as the spoilage limitation:

“He that gathered a hundred bushels of acorns or apples, had thereby a property in them… He was only to look, that he used them before they spoiled, else he took more than his share, and robbed others. And indeed it was a foolish thing, as well as dishonest, to hoard up more than he could make use of.”

Someone who took so much that it spoiled before he could use it did a foolish, dishonest thing and robbed others. In short, if you take so much that it rots, it was never yours to take.

How does Money nullify that limitation? The person who gathers more perishable goods than he can use can exchange it for durable Gold or Silver. Problem solved.

Locke was a staunch metallist who insisted on the intrinsic value of Money as represented by its weight and fineness. This is not some incidental biographical trivia. Locke’s well documented views on Money were decisive in the monetary reform and re-minting of British coinage in the 1690s.

According to Locke, it was not the absolute quantity of Gold and Silver a nation held that determined its wealth but the proportion of Gold and Silver it held relative to the holdings of the rest of the world:

“Riches do not consist in having more Gold and Silver, but in having more in proportion, than the rest of the World, or than our Neighbours, whereby we are enabled to procure to our selves a greater Plenty of the Conveniencies of Life than comes within the reach of Neighbouring kingdoms and States, who, sharing the Gold and Silver of the World in a less proportion, want the means of Plenty and Power, and so are Poorer.”

A zero-sum game. What was “one man’s gain is another’s loss” in useful things is mitigated by its transmutation into metal Money where one man’s gain is still another’s loss but is at least not a net loss (through waste). This later proviso, though, only holds good for Money with an intrinsic value of specified weight and fineness.


Some readers may have wondered at the parenthetical reference to John R. Commons back in the second paragraph. Commons didn’t specifically address the passages I cited from the Essay on the Law of Nature. In fact, it wasn’t published until 20 years later. Nor did he discuss Locke’s influential writings on Money. But he did make a point in a reply to a critic that is germane to my argument here.

The context of Commons’s observations is crucial to the significance of his remark, so I will reproduce a substantial excerpt here:

My point of view is indeed personal, as was said by Professor Homan of all institutional economists. It is simply my own experience in collective action from which I drew a theory of the part played by collective action on individual action. It may or may not fit other people’s ideas of institutionalism. It started, indeed, with my trade-union membership and my later participation in labor arbitration; then turned to drafting a public utility law designed to ascertain and maintain reasonable values and reasonable practices; then to drafting and participating in administration of an industrial commission law with the similar purpose of reasonable practices applied to employers and employees; then to representing the western states before the Federal Trade Commission on the Pittsburgh Plus case of discrimination; then to aiding the House Committee on Congressman Strong’s bill for stabilization of prices; meanwhile administering and developing a plan for unemployment insurance finally enacted into law.

I do not see how anyone going through these 45 years of participation could fail to arrive at two inferences, conflict of interest and collective action. Even the state itself turned out to be merely collective action of those in possession of sovereignty.
Meanwhile I was necessarily studying hundreds of decisions, mainly of the United States Supreme Court, endeavoring to discover on what principles they decided disputes of conflicting interests under the clauses of the Constitution relating to due process, to taking property and liberty, and to equal treatment. I found that none of the economists had taken this point of view, and none of them except Professor Ely, had made any contributions that would make it possible to fit legal institutions into economics or into this constitutional scheme of American judicial sovereignty.

Drumroll… Now here’s his point:

Going back over the economists from John Locke to the orthodox school of the present day, I found they always had a conflicting meaning of wealth, namely a material thing and the ownership of that thing. But ownership, at least in its modern meaning of intangible property, means power to restrict production on account of abundance while the material things arise from power to increase the abundance of things by production, even overproduction.

A simple point but a profound and subtle one. Ownership is not the same as the material thing owned. But beyond that, the restrictive implication of ownership is contrary to the abundance implication of the material things owned.

How high does senior poverty have to go?

It’s official: President Obama has proposed cutting Social Security by replacing the program’s current inflation adjustment with the stingier “chained” Consumer Price Index. As I’ve discussed before, this risks undoing all the progress made against senior poverty since the passage of Medicare and Medicaid in 1965. 25% of seniors were poor according to official poverty line in 1968, compared to just 9.4% in 2006. Note, however, that the Supplemental Poverty Measure, which includes things like out of pocket health care expenses which hit seniors disproportionately, already shows a 16.1% rate by 2009. And our senior poverty rate, measured by the international standard of 50% of median income, is already 25%, much higher than most developed countries, more than three times Sweden’s rate and over four times as high as Canada.

Why is Obama doing this? We just rejected the candidate who wanted to cut Social Security and Medicare. Perhaps, as Krugman (link above) suggests, he chasing the fantasy of “being the adult in the room,” but this is a losing proposition. As Brian Beutler points out:

Just like that, Chained CPI morphs from a thing President Obama is willing to offer Republicans into a thing Republicans dismiss as a “shocking attack on seniors.”

We’ve seen this game before. The Heritage Foundation’s health care plan became “death panels” when President Obama endorsed it.  And, as Beutler’s title makes clear, we have plenty of examples of the President negotiating with himself to bad effect, most notably in the 2011 debt ceiling battle.

If this cut really happens, Social Security benefits will steadily fall in true inflation-adjusted terms due to the magic of compounding. Moreover, with 49% of the workforce having no retirement plan at work and another 31% with only a grossly inadequate 401(k), the cuts will worsen the coming retirement crisis. The only question will then be: how high will senior poverty have to go before we do something about it?

Cross-posted from Middle Class Political Economist.

…exceeding $3 million in such accounts is not very difficult for an individual

Greg Mankiw suggests a part of the new budget proposed by President Obama affects 401k and IRA accounts. Some comment in general retirement accounts from AB starts here.

Apparently, President Obama’s budget is going to include some kind of penalty for people who have accumulated more than $3 million in retirement accounts.  The details are not yet known, but I think we know enough to say that this is a terrible idea. A sizable body of work in public finance suggests that consumption taxes are preferable to income taxes.  Completely replacing our tax system with a better one is, however, hard.  Retirement accounts, such as IRAs and 401k plans, are one way our tax code has gradually evolved from an income tax toward a consumption tax.  The use of these accounts should be encouraged, not discouraged.

By the way, exceeding $3 million in such accounts is not very difficult for an individual who is financially successful and frugal.  Under current law, a self-employed person can put about $50,000 a year in a SEP-IRA.  If he does that every year for 40 years, and his savings earn a return of 5 percent per year, he will retire with about $6 million.

 Pro Growth Liberal notes another aspect of Greg Mankiw’s outlook:

Greg explains by noting some folks can readily put away $50,000 a year. The median worker, however, cannot. But there may be something else afoot here as Brian Beutler explains: 

One way experts believe financial managers avoid the current annual contribution limit to IRAs is by using IRAs to participate in investments and assigning those investment interests a nominal value vastly below fair market. 

Brian cites as an example some clever tax planning done by a chap named Mitt Romney.

Saving and "Government Saving"

Steve Randy Waldman and Scott Sumner (plus many others, linked from Steve’s post) wade in on notions of saving and investment.

(I’m endlessly amazed that the best econothinkers on the web — add Nick Rowe, Andy Harless, David Beckworth, Josh Mason, and many others to the list — constantly feel the need to think, re-think, and debate this fundamental economic concept. Economists haven’t figured this out yet?)

I’d like to reply to one assertion of Scott’s, because I think it cuts to the crux. This time I’ll keep it brief, at risk of obscurity. Scott:

In every case where an individual seems to be saving more and yet investment doesn’t rise, someone else is dissaving.

Scott’s far from alone in asserting this; it’s central to Krugman’s thinking.

But: This only seems right if you’re imagining an isolated private domestic nonfinancial sector, in which no new financial assets can be created. (Essentially the “loanable funds” notion.)

If you bolt on a (international) financial sector that constantly creates new/additional financial assets, and (especially) a sovereign fiat-money-issuing government sector (with the arabesques of bond issuance and OMOs), and other sovereign- (and bond-)issuing governments worldwide, and account for flows to and from those sectors, I don’t think the statement is true.

Because: “government saving” (in particular) is a meaningless concept, akin to a bowling alley “saving” points.

Cross-posted at Asymptosis.

Do policymakers listen to macroeconomists?

Ex Macroeconomist Noah Smith argues that it is a good thing that there are professional macroeconomists.  He has two arguments

So does this mean that macro research is useless for policymaking? No! Not at all!! Because here’s an interesting thing about policymaking: No matter who advises the policymakers, policy is going to get made. That includes economic policy. So if there were no academic and Fed macroeconomists around to advise policymakers, who would policymakers listen to on economic matters?

My guess: Some very dangerous people.

2) useful things have been learned from empirical macro including stuff you see with half an hour of FREDing and “slightly less than half of people seem to be “hand-to-mouth” consumers who don’t obey the Permanent Income Hypothesis.”

My rude comments:

1) A world without macroeconomists wouldn’t be a world without economists who talk to journalists about the macroeconomy.  The risk is that the voice of the economics profession will be trade theorists, economic historians, behavioral economists and finance economists such as Krugman, DeLong, C Romer, Goolsbee, Fama and Cochrane (note ex macroeconomist Smith decided to go into finance).
I actually think that macroeconomists have very little influence on macroeconomics as perceived by policy makers and the public.  Summers is influential.  He is also a total heretic (he didn’t leave the field, the field left him).  Blanchard and Woodford are influential macroeconomists and reasonable people.
The world has chosen not to benefit from the insights of the most influential academic macroeconomists Robert Lucas and Edward Prescott.  I don’t think you think this is a bad thing.
2) On consumption and the PIH the data suggest that somewhat less than half of consumption is by hand to mouth consumers.  They don’t suggest anything about the rest.  The rest of fluctuations in consumption can’t be predicted by predicting current GDP.  Also radioactive decay can’t be predicted by predicting current GDP.  The PIH is not a good theory of radiactive decay.
The (representative agent with an additively separable utility function and no liquidity constraint version of the PIH) glass is not much more than half full.  I am not aware of evidence that it isn’t empty.