Finally, A Real Debate Over Monetary Policy

November 18, 2010 ,

Scott Sumner is an original economic thinker and a particular expert in monetary affairs. So I sat upright when I saw his skeptical reply to the QE2 Skeptics.

Early this week a host of high-profile economists, investors, and thinkers, under the e21 banner, issued an understated but unusually critical “open letter to Ben Bernanke.” They urged him to abandon the $600 billion QE2 strategy, warning of uncertain but possibly very large downside risks compared to little reward even in the unlikely case it works.

Sumner, who favors a concept he calls NGDP (nominal GDP) targeting, says the Fed isn’t trying to spur inflation. It’s trying to boost national income. And who could be opposed to that?

Sumner says the Fed can move the AD (aggregate demand) curve to the right. “Whether that extra spending shows up as inflation or real growth,” he acknowledges, “is of course an important issue.” A very important issue. But critics of QE2 and the broader existing Fed framework aren’t necessarily worried about short-term inflation of the CPI type. No, we are worried about sinking Fed credibility, dollar debasement, possible asset bubbles, and international turmoil. And, yes, possible inflation down the road.

I think Sumner ignores a couple important factors that argue against the simple equation that more Fed easing yields a significant and quantifiable higher level of NGDP, and more importantly RGDP.

First, the transmission mechanism whereby increased bank reserves become credit isn’t working well. A trillion dollars of excess reserves sit on U.S. bank balance sheets. Small and medium sized businesses have found access to loans difficult. Consumers, too, even with historically low mortgage and personal loan rates, have not necessarily been able to access credit because of tighter lending standards and retrenched credit cards and home equity lines. If QE2 merely increases excess reserves further, without a more effective way to boost the supply and demand of actual credit, I don’t think the Monetary Ease –> More NGDP equation is so clear. A further complication: Large companies and the federal government find credit at historically low rates abundant and accessible. But this begs the second problem with the simple Ease –> NGDP equation.

In a world of closed economies, Sumner’s view that U.S. QE would directly translate into more U.S. AD (or his preferred national income) might work, at least temporarily. But we don’t live in a closed economy. Or as Robert Mundell long ago said, “There is only one closed economy — the world economy.” Companies, hedge funds, and other global entities can borrow cheap dollars and then go find opportunities across the globe.

An example is this Nov. 17 Bloomberg story: “Bernanke’s ‘Cheap Money’ Stimulus Spurs Corporate Investment Outside U.S.”

Southern Copper Corp., a Phoenix- based mining company that boasts some of the industry’s largest copper reserves, plans to invest $800 million this year in projects such as a new smelter and a more efficient natural-gas furnace.

Such spending sounds like just what the Federal Reserve had in mind in 2008 when it cut interest rates to near zero and started buying $1.7 trillion in securities to spur job growth. Yet Southern Copper, which raised $1.5 billion in an April debt offering, will use that money at its mines in Mexico and Peru, not the U.S., said Juan Rebolledo, spokesman for parent Grupo Mexico SAB de CV of Mexico City.

Southern Copper’s plans illustrate why the Fed’s second round of bond buying may not reduce unemployment, which has stalled near a 26-year high.

Or as Richard Fisher, CEO of the Dallas Federal Reserve Bank, said in an October 19 speech:

I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.

I’m all for companies investing in the best opportunities around the globe. And some of that investment may benefit the companies’ American assets or workforce in direct or indirect ways over time. But that kind of long-term symbiotic growth is not what the Fed is aiming for or says it’s doing with QE2. When the Fed specifically targets the short-term U.S. economy and ends up pushing money overseas, that’s a direct failure of the mission. I believe the Fed should concentrate more on the dollar’s value as the world’s key reserve currency. But here we have a case of arbitrage — getting weak dollars the heck out of the country. We can see that much of ROW is growing faster than the U.S.

Beyond these transmission and international factors, it’s clear that Fed policy — now that we are beyond the panic of 2008-09 when Bernanke and Co. rightly filled an emergency monetary hole — is fueling the growth of government and giving Washington an excuse to continue with counterproductive anti-growth fiscal and regulatory policies.

Sumner tries to addresses this criticism:

7.  “Won’t monetary stimulus just paper over the failures of the Obama administration, allowing him to get re-elected?”

That’s an argument unworthy of principled conservatives.  After 30 years of major neoliberal reforms all over the world (even in Sweden!) it’s time for conservatives to become less defeatist about the possibility of making positive improvements in governance.  We need to do the right thing, and let the political chips fall where they may.  If monetary stimulus is tried, and succeeds in boosting NGDP (which even conservatives implicitly acknowledge can happen when they worry about inflation) then it would drive a stake through the heart of the Krugmanite fiscal stimulus argument (for future recessions.)

I think Sumner misses the point. Fed critics should of course root for the success of Bernanke and our other economic policymakers. But it’s not the case that QE2 is objectively the “right thing” and all critics are opposing it for political reasons. If critics think it is the wrong monetary policy — with the additional ominous factor that it is aiding and abetting (“papering over”) a harmful fiscal and regulatory path — then they are not required to bite their lips and “let the political chips fall where they may” as the economy continues to limp along. If mere monetary policy could solve all the world’s problems, then Mao’s China could have succeeded so long as Beijing printed enough money. That’s a severe reference, an exaggeration to make a point. But Bernanke himself has stated that the Fed cannot do everything, and it’s crystal clear historically that central banks often cause more problems than they cure, often when they are trying to compensate for other poisonous policies.

Despite the sluggish economy and these disagreements, I’m encouraged we are finally having a real, national (international!) debate over monetary policy — one I’ve urged for a long time. And I look forward to further offerings from Sumner . . . and many others.

Posted in: Globalization, Monetary Policy

Killing the Master Switch

November 17, 2010 ,

Adam Thierer nicely dissects a bunch of really sloppy arguments by Tim Wu, author of a new book on information industries called The Master Switch. (Scroll down to the comments section.)

Libertarians do NOT believe everything will be all sunshine and roses in a truly free marketplace. There will indeed be short term spells of what many of us would regard as excessive market power. The difference between us comes down to the amount of faith we would place in government actors versus market forces / evolution to better solve that problem. Libertarians would obviously have a lot more patience with markets and technological change, and would be willing to wait and see how things work out. We believe, as I have noted in my previous responses, that it’s often during what critics regard as a market’s darkest hour that innovation is producing some of the most exciting technologies with the greatest potential to disrupt the incumbents whose “master switch” you fear. Again, we are simply more bullish on what I have called experimental, evolutionary dynamism. Innovators and entrepreneurs don’t sit still; they respond to incentives, and for them, short-term spells of “market power” are golden opportunities. Ultimately, that organic, bottom-up approach to addressing “market power” or “market failure” simply makes a lot more sense to us – especially because it lacks the coercive element that your approach would bring to bear preemptively to solve such problems.

For Adam’s comprehensive six-part review of the book, go here.

Posted in: Uncategorized , Tagged: ,

Facebook’s (New) Old Idea

November 15, 2010 ,

With its new converged messaging service announced today, Facebook took several more steps toward David Gelernter’s Lifestreams concept, first outlined in the mid- to late-1990s. See an old Yale web page on the topic, the newer Lifestream blog, and a 2009 interview with Gelernter. A lifestream is bascially a digital representation of your life — all the communications, documents, photos, blips, bleeps, and bits that come and go . . . arranged in chronological order as a never-ending river of searchable information. Google’s Gmail was the first popular application/service that hinted at the Lifestream ideal. Facebook — with its “seamless messaging,” “conversation history,” and “social inbox” — now moves further with the integration of email, text, IM, and attachments in never ending streams, accessible on any device.

Posted in: Web , Tagged: ,

Department of Monetary Mistakes: QE2 Is Nothing New

November 15, 2010 ,

The Federal Reserve plan to buy an additional $600 billion in longer term securities — known as QE2 — is taking flak domestically and from around the world. And rightly so, in my view. Check out e21’s understated but highly critical open letter to Ben Bernanke from a group of economists, investors, and thinkers.

But in some ways, QE2 is nothing new. Yes, it is a departure from the traditional Fed purchases of only very short-term securities. And yes, it could lead to all the problems of which its new critics warn. But this is just the latest round in a long series of mistakes. The new worries are possible currency debasement, inflation, asset bubbles, international turmoil, and avoidance of the real burdens on the U.S. economy — namely fiscal and regulatory policy. These worries are real. But this would be a replay of what already happened in the lead up to the 2008 Panic. Or the 1998 Asian Flu. Or the 2000 U.S. crash.

Here was my warning to the Fed in The Wall Street Journal in 2006:

It is these periods of transition, where the value of the currency is changing fast, but before price changes filter through all commerce and contracts, when financial and political disruptions often take place.

That was two years before a Very Big Disruption. (I followed up with another monetary critique in the WSJ here.)

But over the last few decades, there was no common critique of monetary policy among conservatives, Republicans, libertarians, supply-siders, nor among Democrats, liberals, or Keynesians, etc. (Take your pick of labels: the point is there was no effective coalition with any hope of altering the American monetary status quo. There were, for example, just as many Republican backers of Greenspan/Bernanke, and of America’s weak-dollar policy, as there were detractors.) A silver lining today is that QE2 appears to have united and galvanized a broad and thoughtful opposition to the existing monetary regime. Hopefully these events can spur deeper thinking about a new American — and international — monetary policy that can build a firmer foundation for global financial stability and economic growth.

Columbia’s Charles Calomiris discusses his opposition to the Fed’s QE2

Posted in: Monetary Policy , Tagged: , , , , ,

Microsoft Outlines Economics of the Cloud

November 12, 2010 ,

In a new white paper:

We believe that large clouds could one day deliver computing power at up to 80% lower cost than small clouds.  This is due to the combined effects of three factors:supply-sideeconomies of scale which allow large clouds to purchase and operate infrastructure cheaper; demand-sideeconomies of scale which allow large clouds to run that infrastructure more efficiently by pooling users; and multi-tenancy which allows users to share an application, splitting the cost of managing that application.

Posted in: Cloud Computing

NetFlix Boom Leads to Switch

November 12, 2010 ,

NetFlix is moving its content delivery platform from Akamai back to Level 3. Level 3 is adding 2.9 terabits per second of new capacity specifically to support NetFlix’s booming movie streaming business.

Posted in: bandwidth, Exaflood

The End of Net Neutrality?

November 8, 2010 ,

In what may be the final round of comments in the Federal Communications Commission’s Net Neutrality inquiry, I offered some closing thoughts, including:

  • Does the U.S. really rank 15th — or even 26th — in the world in broadband? No.
  • The U.S. generates and consumes substantially more IP traffic per Internet user and per capita than any other region of the world.
  • Among individual nations, only South Korea generates significantly more IP traffic than the U.S. (Canada and the U.S. are equal.)
  • U.S. wired and wireless broadband networks are among the world’s most advanced, and the U.S. Internet ecosystem is healthy and vibrant.
  • Latency is increasingly important, as demonstrated by a young company called Spread Networks, which built a new optical fiber route from Chicago to New York to shave mere milliseconds off the existing fastest network offerings. This example shows the importance — and legitimacy — of “paid prioritization.”
  • As we wrote: “One way to achieve better service is to deploy more capacity on certain links. But capacity is not always the problem. As Spread shows, another way to achieve better service is to build an entirely new 750-mile fiber route through mountains to minimize laser light delay. Or we might deploy a network of server caches that store non-realtime data closer to the end points of networks, as many Content Delivery Networks (CDNs) have done. But when we can’t build a new fiber route or store data — say, when we need to get real-time packets from point to pointover the existing network — yet another option might be to route packets more efficiently with sophisticated QoS technologies.”
  • Exempting “wireless” from any Net Neutrality rules is necessary but not sufficient to protect robust service and innovation in the wireless arena.
  • “The number of Wi-Fi and femtocell nodes will only continue to grow. It is important that they do, so that we might offload a substantial portion of traffic from our mobile cell sites and thus improve service for users in mobile environments. We will expect our wireless devices to achieve nearly the robustness and capacity of our wired devices. But for this to happen, our wireless and wired networks will often have to be integrated and optimized. Wireline backhaul — whether from the cell site or via a residential or office broadband connection — may require special prioritization to offset the inherent deficiencies of wireless. Already, wireline broadband companies are prioritizing femtocell traffic, and such practices will only grow. If such wireline prioritization is restricted, crucial new wireless connectivity and services could falter or slow.”
  • The same goes for “specialized services,” which some suggest be exempted from new Net Neutrality regulations. Again, necessary but not sufficient.
  • “Regulating the ‘basic’ Internet but not ‘specialized’ services will surely push most of the network and application innovation and investment into the unregulated sphere. A ‘specialized’ exemption, although far preferable to a Net Neutrality world without such an exemption, would tend to incentivize both CAS providers and ISPs service providers to target the ‘specialized’ category and thus shrink the scope of the ‘open Internet.’ In fact, although specialized services should and will exist, they often will interact with or be based on the ‘basic’ Internet. Finding demarcation lines will be difficult if not impossible. In a world of vast overlap, convergence, integration, and modularity, attempting to decide what is and is not ‘the Internet’ is probably futile and counterproductive. The very genius of the Internet is its ability to connect to, absorb, accommodate, and spawn new networks, applications and services. In a great compliment to its virtues, the definition of the Internet is constantly changing.”
Posted in: Uncategorized , Tagged: ,

Quote of the Day

October 25, 2010 ,

“What’s the right policy toward China? They put a few trillion dollars worth of stuff on boats and sent it to us in exchange for U.S. government bonds. Those bonds lost a lot of value when the dollar fell relative to the euro and other currencies. Then they put more stuff on boats and took in ever more dubious debt in exchange. We’re in the process of devaluing again. The Chinese government’s accumulation of U.S. debt represents a tragic investment decision, not a currency-manipulation effort. The right policy is flowers and chocolates, or at least a polite thank-you note.”

— John H. Cochrane, October 26, 2010

Posted in: Monetary Policy, Quote of the Day , Tagged: , , , ,

Quote of the Day

October 24, 2010 ,

“The upside of QE is limited. The money simply won’t go to where it’s needed, and the wealth effects are too small. The downside is a risk of global volatility, a currency war, and a global financial market that is increasingly fragmented and distorted. If the U.S. wins the battle of competitive devaluation, it may prove to be a pyrrhic victory, as our gains come at the expense of others—including those to whom we hope to export.”

— Joseph Stiglitz, October 23, 2010

Posted in: Monetary Policy, Quote of the Day , Tagged: , , ,

Quote of the Day

October 15, 2010 ,

“The whole idea of having a free trade area when you have gyrating exchange rates doesn’t make sense at all. It just spoils the effect of any kind of free trade agreement . . . .”

“Fixed exchange rates operate between California and New York . . . .”

“These currencies should be fixed, as they were under Bretton Woods or the gold standard. All this unnecessary noise, unnecessary uncertainty; it just confuses the ability to evaluate market prices.”

— Robert Mundell, October 16, 2010

Posted in: Quote of the Day , Tagged: , , , ,

China Trade Redux

October 15, 2010 ,

Each time the China currency issue erupts, I like to repost my articles on the topic:

“Geithner is Exactly Wrong on China Trade” – The Wall Street Journal. January 26, 2009.

“An End to Currency Manipulation” – Far Eastern Economic Review. March 26, 2008.

“The Elephant in the Barrel” – The Wall Street Journal. August 12, 2006.

“Money and the Middle Kingdom” – September 24, 2003.

Posted in: China, Monetary Policy , Tagged: , , , , , ,

International Broadband Comparison, continued

October 14, 2010 ,

New numbers from Cisco allow us to update our previous comparison of actual Internet usage around the world. We think this is a far more useful metric than the usual “broadband connections per 100 inhabitants” used by the OECD and others to compile the oft-cited world broadband rankings.

What the per capita metric really measures is household size. And because the U.S. has more people in each household than many other nations, we appear worse in those rankings. But as the Phoenix Center has noted, if each OECD nation reached 100% broadband nirvana — i.e., every household in every nation connected — the U.S. would actually fall from 15th to 20th. Residential connections per capita is thus not a very illuminating measure.

But look at the actual Internet traffic generated and consumed in the U.S.

The U.S. far outpaces every other region of the world. In the second chart, you can see that in fact only one nation, South Korea, generates significantly more Internet traffic per user than the U.S. This is no surprise. South Korea was the first nation to widely deploy fiber-to-the-x and was also the first to deploy 3G mobile, leading to not only robust infrastructure but also a vibrant Internet culture. The U.S. dwarfs most others.

If the U.S. was so far behind in broadband, we could not generate around twice as much network traffic per user compared to nations we are told far exceed our broadband capacity and connectivity. The U.S. has far to go in a never-ending buildout of its communications infrastructure. But we invest more than other nations, we’ve got better broadband infrastructure overall, and we use broadband more — and more effectively (see the Connectivity Scorecard and The Economist’s Digital Economy rankings) — than almost any other nation.

The conventional wisdom on this one is just plain wrong.

Posted in: bandwidth, Broadband , Tagged: , , ,

Quote of the Day

September 30, 2010 ,

“Since the financial panic began in 2008, global leaders have been at pains to stress their ‘cooperation’ on numerous issues—stimulus spending, new bank rules, trade. Yet they still insist on going their own parochial, self-interested way on monetary policy and exchange rates. It’s as if world leaders had consciously decided to deal with every economic issue except the most important one—the price of the global medium of economic exchange.”

— The Wall Street Journal, October 1, 2010

Posted in: Monetary Policy, Quote of the Day

Some good short reads

August 27, 2010 ,

Scott Grannis on the “bond bubble” conundrum.

Thomas Cooley and Lee Ohanian on “Lessons from the Depression.”

Tim Carney on the real Republican divide.

Posted in: Uncategorized

Rajan v. Krugman

August 25, 2010 ,

Raghu Rajan’s Fault Lines is perhaps the most thoughtful book on the financial crisis, and now Professor Rajan is continuing his incisive analysis at a U. Chicago blog. Here, he defends his own criticism of the Fed’s ultra-easy monetary (both leading up to the crisis and again today) against Paul Krugman’s crude Keynesianism.

Some excerpts:

Before saying the real problem is we are not providing enough monetary stimulus, should we not worry about why corporations did not invest then and what other problems will emerge as we  keep rates ultra-low while hoping corporations will see the light?

. . .

If the government raised taxes explicitly to provide the interest subsidy, everyone would scrutinize the use this money was being put to carefully. Because the Fed picks investors’ pockets silently and forcibly through its ability to set the short term interest rate, no one asks questions about cost.

. . .

Of course, the Fed now disingenuously claims that the worst excesses in the housing market were committed when it had already started raising rates, and therefore it is not responsible for the housing boom. But it was complicit in setting off the boom by keeping interest rates too low for too long before then!

I may disagree with Rajan’s take on “global imbalances” (as I wrote about here) but nevertheless think he has become one of the smartest academic analysts of today’s confusing economic landscape.

Posted in: Economics, Monetary Policy , Tagged:

Thanks, Kitch

August 17, 2010 ,

Congratulations to my friend Ryan Kitchell for a stellar run as Indiana OMB director. Ryan and his team, working under the nation’s best governor, Mitch Daniels, achieved seemingly miraculous results in a brutal economic environment. Thanks from Hoosier taxpayers for your smarts, persistence, and all the effort and overtime. Chris Ruhl and team will now carry on the torch.

See the Indy Star article or Ryan’s cameo in this Weekly Standard story.

Posted in: Indiana , Tagged:

Quote of the Day

July 16, 2010 ,

“I’m waiting for Spain to melt down the World Cup to pay off its debts, or more seriously, real defaults from Spain, Greece and maybe California and New York. Let’s get on with it and put the structural reforms behind us. That would be a true buy signal.”

— Andy Kessler, July 16, 2010

Posted in: Quote of the Day

China, the UN, and the Net

July 15, 2010 ,

See our new commentary in RealClearMarkets looking beyond the Google-China dustup: “The Internet is the U.S./China’s new Dollar/Yuan.”

Posted in: China , Tagged: , , ,

John Wooden, RIP

June 6, 2010 ,

Growing up in Indiana, John Wooden was more than UCLA’s great basketball coach. He was a state legend. High school champ at Martinsville. College national champ and three-time all-American at Purdue. And then coach of South Bend Central High and of Indiana State — all before leaving for Los Angeles in 1948.

Although best known for his 10 national championships in a 12-year span at UCLA, in Indiana — at least in my little world — he was better known as a gentleman, a teacher, a leader. That’s what our fathers and coaches — and my grandfather who was captain of the Indiana University basketball team in 1942-43 — told us.

Later, when I met my wife, I learned she had attended the same tiny grammar school as John Wooden — Centerton Elementary. She had also, no doubt like so many other Hoosier students, written her eighth grade term paper about him. She loved him not for his basketball savvy but for his character.

Upon Wooden’s graduation from Centerton, his father Joshua’s gift to him was a list of maxims:

Be true to yourself. Make each day a masterpiece. Help others. Drink deeply from good books. Make friendship a fine art. Build a shelter against a rainy day.

Wooden kept the list with him for the rest of his life. Literally, and figuratively. He lived the list.

UPDATE: See this wonderful remembrance from Rich Karlgaard noting the “astonishing” parallel lives of John Wooden and Ronald Reagan.

Posted in: Basketball , Tagged: ,

Tech Nerds Talk

June 2, 2010 ,

A good conversation between Harry McCracken of Technologizer and Bob Wright of bloggingheads.tv. Topics include Apple’s ascent (and world domination?); iPhone vs. Android; whither Microsoft; Facebook’s privacy flub; etc.

Posted in: Uncategorized , Tagged: , , , , , ,
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