A Conference That Would Have Been and Still Will Be

Two months ago, on March 14, 2020, we cancelled our annual Hoover monetary policy conference at Stanford on “Central Bank Strategy Reviews and Their Global Impact” then scheduled for May 1, 2020. The reason was that Stanford declared that “university units should cancel or postpone events they are hosting that involve more than 50 participants.” We were all were disappointed, as the conference was to give a careful review of the monetary policy reviews of the European Central Bank and the Federal Reserve, building on the experience of the May 2019 Hoover monetary conference.

But in the weeks since March 14, monetary policy has changed so dramatically that the issues are much bigger and more fundamental than a review of review would suggest. Effective March 16, 2020, the Federal Open Market Committee voted to cut the federal funds rate to “a target range of 0 to ¼ percent,” introduced a host of new purchase or lending facilities, and took actions to let the balance sheet explode, as shown in this figure.

It is now clear that a whole new conference is called far—not a simply a review, but a thorough examination and evaluation of what has happened at the Fed and other central banks in the past two months and what will happen going forward. We are thinking about the best time, recognizing that the normal time of May 2021 will likely be too late, and that October 2020 may be more constructive.   We are also thinking about how to have the conference on-line and remote while preserving the very essential interchanges—many one-on-one–that  have always occurred at the conferences. More on that later.

The aim of this monetary policy conference series has always been to have a rigorous analysis and discussion outside of central banks, but including central bankers as well academics, researchers, market participants, and members of the press at which the best research could be presented, debated, and heard. The proceedings of the May 2019 conference on Strategies for Monetary Policy edited by John Cochrane and me are thus quite relevant for the current debates.  You can download individual chapters for free here with contributions by Clarida, Williams, Bullard, Daly, Kaplan, Mester, Rogoff, Hamilton, Levin, Bordo, Minerd, Papell, Piazzesi, Shultz, Warsh, Wieland, and others.  Our preface summarizes each of the papers.

Now that it is likely that we will move on from a review of central bank ongoing reviews to an evaluation of very recent policy, I should also note that the four papers which were to have been presented at the May 2020 conference are excellent and worth reading, even if they were prepared just before COVID-19 and the responses. Most important they focus on strategies and rules for monetary policy. They are thus quite relevant for the ongoing debates, and you can read drafts of the four papers on-line using these links:

The Elusive Gains from Nationally-Oriented Monetary Policy which was to have been presented by Luca Guerrieri of the Federal Reserve Board

Effects of State-Dependent Forward Guidance, Large-Scale Asset Purchases, and Fiscal Stimulus in a Low-Interest-Rate Environment which was to have been presented by Frank Smets of the European Central Bank

Eight Centuries of Global Real Interest Rates, r-g, and the ‘Suprasecular’ Decline, 1311–2018  which was to have been presented by Paul Schmelzing of the Bank of England

Recovery of 1933. How to Stop Deflation with Fiscal Policy: Past Lessons for the Future, which was to have been presented by Eric Leeper of the University of Virginia

I thank these researchers as well as those who had agreed to attend and discuss the papers including Matteo Maggiori of Stanford, Michael Bordo of Rutgers University, Ramin Toloui of the Stanford Institute for Economic Policy Research, Barry Eichengreen of UC Berkeley, Harold James of Princeton University, Peter Koudjis of the Stanford Graduate School of Business and Volker Wieland of Goethe University, Frankfurt

There also were to have been informed debates on these key policy panels: The Integrated Policy Framework and the Goal of Open Markets, The Balance Sheet and the Supply and Demand for Reserves, and Monetary Policy Strategy Reviews and Financial Markets. I thank those who had agreed to attend and be part of these discussions including John Lipsky of the Johns Hopkins School of Advanced International Studies, Andy Filardo of the Bank for International Settlements, Jacob Frenkel of JP Morgan Chase, Lou Crandall of Wrightson ICAP, Darrell Duffie of the Stanford Graduate School of Business, Beth Hammack of Goldman Sachs, William Nelson of the Bank Policy Institute, Mickey Levy of Berenberg Capital Markets, Rob Kaplan of the Federal Reserve Bank of Dallas, Scott Minerd of Guggenheim Partners, Randy Quarles, Vice Chair for Supervision at the Federal Reserve Board, and Richard Clarida Vice Chair of the Federal Reserve Board.

The word strategy appears in the title to the 2019 conference volume published this May, and it was to be in the title of the May 2020 conference volume.  That theme is part of the papers in all the conference volumes in the Hoover series as shown in the book covers below. It would be appropriate to have that stay in the title for a fall 2020 conference.

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Deepak Lal and Market-Oriented Policies

Deepak Lal, an outspoken champion of freedom and market‐​oriented policies throughout the world, died yesterday in London.  I heard the sad news from my friend Ed Feulner who called on the phone tonight, and I just read the beautiful tribute by Ian Vasquez Remembering Deepak Lal. Deepak was professor emeritus at UCLA and the University College London, and a senior fellow at the Cato Institute. He earlier worked at the Indian Foreign Service, advised the Indian Planning Commission, and wrote many good books.

Deepak also served as President of the Mont Pelerin Society (MPS) from 2008-2010, and he and his wife Barbara attended the most recent meeting of the Mont Pelerin Society at the Hoover Institution at Stanford in January 15-17 of this year, where he gave the closing toast as shown in this photo.

I remember much about Deepak’s wisdom and inventiveness, but most of all I now remember how he created a special meeting of the Mont Pelerin Society in New York City in March 2009. We can learn from his approach.

The meeting was entirely his idea–a response to the global financial crisis that we confronted at the time. Deepak tells the story in his MPS Presidential Address, “The Mont Pelerin Society: A Mandate Renewed,” on March 5, 2009:  Deepak’s neighbor asked him if he still stood by the views in his book “Reviving the Invisible Hand.” At first, he answered yes: even a severe downturn would not undermine the well tested classical liberal principles. But then the Lehman catastrophe doomed “the hopes of a classical liberal resolution of the spiraling crisis” and even conservatives argued for a fiscal stimulus and other interventions.

In Deepak’s view, “This marked a turning point” and the crisis required an assessment of whether “our views and the policy conclusions we had derived from them were misguided. For all ideas need to be continually re-examined to test their continuing relevance and validity. And ideas are the lifeblood of the Mont Pelerin Society.” Deepak reported that “It was in this spirit that in early October [2008] I approached my fellow members of the Executive Committee [of the MPS] about a special meeting to discuss the global financial crisis. Their response was gratifyingly warm and supportive.”

And so, he called for a special meeting. “The program was drawn up with a number of questions in mind. The first, and most crucial is how have things come to such a pass, with a severe global crisis developing during the watch of supposedly classical liberals in charge of US economic policy? Second, were the theoretical presumptions of the classical liberal policy consensus sound, and still valid? Third, what are the likely international repercussions of the crisis and responses to it for the wholly benign process of globalization? Fourth, are the Obama administration’s policies well judged, or are they likely to lead to another period of stagflation and dysfunctional expansion of Big Government? We need to answer these questions…”

I went to Deepak’s MPS meeting in New York. It was great success. But the reason I remember Deepak’s story so well now is that the situation today is so similar. We again have a global economic crisis, even if its origins are a Coronavirus. The economic damage is great, probably greater. And the policy response is highly interventionist, probably more so than in 2008-09, with an initial emphasis on closing rather than opening markets.

The closing ordered by governments is understandable, but such efforts get in the way of markets. It is important for those who understand the advantages of markets to speak out, to write, to explore ways to use market-oriented policies, to look for new methods to relax regulations, and to ask questions like the four that Deepak drew up 11 years ago. That is the kind of remembering that we really need now.

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On-Line, Ready, and Now Raring to Go with Econ 1v

Seven years ago, I decided to create an on-line version of the on-campus Principles of Economics course—we call it Econ 1—that I had been giving for many years. I recall that we spent a lot of time and effort on this project back in 2013. Each day after giving a lecture to hundreds of students, I went to a recording studio and gave the same lecture, but divided it into shorter segments, designed for easier on-line viewing.  We edited the videos, mixing in graphs, photos, quizzes and dynamic illustrations. We captioned and indexed the videos for easy searching. We put the videos on a fun and easy-to-use on-line platform.  We added review and study material to the platform and set up small on-line discussion sections and chat rooms. We provided links to make a complete self-contained course.

I think it was an effective way to teach and learn, and it turned out to be at least as popular as my on-campus course as I explained in a 2014 Wall Street Journal article.  With the help of terrific assistants, I have given that on-line course—we call it Econ 1v (the v is for virtual)—every year since then—seven times, usually in the summer quarter, both for Stanford credit and as free massive open on-line course (with fewer features). And I have also continued to give the on-campus course in non-summer quarters.

So, when the Coronavirus pandemic hit, and Stanford required that all its Spring quarter courses had to switch on-line, unlike most faculty, I was already completely ready—actually raring—to go with Econ 1v, and I offered to give the tried and true on-line course. Stanford added the course to its Spring course catalog along with other economics courses, and many students quickly started signing up.

It is good to be able contribute—along with many other people around the world—in these difficult times.  True, it’s hard to be positive with the Coronavirus tragedy all around us. But I’m optimistic that the responses to this challenge will give an important nudge to make things better, and, in the educational area, to make for more effective virtual teaching and learning. The progress in ed-tech the past several years has been huge, and every day I now hear about new ways to improve on-line distance learning whether in college courses, seminars, graduate courses, or in the most important K-12 education.  As I said to Peter Robinson in an Uncommon Knowledge interview a few days ago, “people are rising to this occasion, and they’re thinking of different ways to produce, different ways to transact, different ways to work. And it’s been there for a long time, but I think this may be an impetus…”

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Make Section 2201 of the CARES Act Work in Practice

Section 2201 of the CARES (Coronavirus Aid, Relief, and Economic Security) Act authorizes direct payments, “Recovery Rebates,” to individual households and families.  The Section is called the “2020 Recovery Rebates for Individuals” and is estimated to total $300 billion–the sum of $1,200 to individuals ($2,400 for joint returns) plus $500 for each qualifying child. The amount is reduced for taxpayers earning over $75,000 annually (or $150,000 for joint returns) with no payments for individual taxpayers earning over $90,000. The useful Stimulus Check Calculator from Kiplinger’s gives more details.

While understandable on pure humanitarian grounds, these payments should be expedited it they are to benefit the economy as it is hit by negative shocks during the pandemic. It is good that taxpayers will get the funds faster if they have filed a 2018 or 2019 tax return, and if their bank accounts are on file at the IRS so the money can be directly deposited. It is even good that he law requires that “No refund or credit shall be made…after December 31, 2020.” Most important, the payments can be advanced to people before they file income tax returns.

This “advanced payments” approach was followed in 2008 rebate under the Economic Stimulus Act of 2008 which was signed into law on February 13, 2008 by President Bush. Even with that action, most of the payments did not go out until three month later in May, June and July.  We can only hope the Treasury can work faster than it did a dozen years ago.  Of course, Secretary Mnuchin should talk to former Secretary Paulson about that.

However, it is not simply a matter of getting the payments out faster. If the Act is to stimulate the economy, and, at least partially offset the severe negative impact of the shelter-in-place, social-distancing, and business-closing restrictions, it is important that a large fraction of the payment be spent on goods and services and not simply saved.

Here the experience of the 2008 rebate payments is instructive. Many economists have researched these rebates, including me in this 2009 Wall Street Journal op-ed and longer articles back in  2009 and more recently 2018.  But this straight-forward chart of total disposable personal income, with and without the rebate, and personal consumption expenditures shows vividly that the one-time payments had virtually no stimulus impact on economy. Consumption was not affected and continued on its path.  Regression analysis supports the graphical illustration.In other words, income rose with the rebate, but there was no noticeable impact on people’s demand for consumption.  The results may seem surprising, but they are not. The famous models of consumption–the permanent income model of Milton Friedman and the life cycle model of Franco Modigliani–both predict that a temporary increases in income, like these one-time payments, have little effect on spending.

If this happens again, the Section 2201 payments will not stimulate the economy. They won’t fill the hole caused by the forced reductions in spending elsewhere. One can wish that history won’t repeat itself, or that the vivid graphical-empirical analysis is wrong.  But why take that chance?  Why not find ways to make the payments work? But how, especially now that the limits on personal economic interaction are to continue through the month of April (as announced yesterday)?

One answer is simply for public officials to encourage people and firms to get around–not relax or remove–shelter-in-place and social-distancing restrictions. Why not explicitly encourage spending on such things as on-line gift card purchases for specific products, on-line dance classes, lego classics or a desk chair from Costco on-line. It is easy to order paint, wall-paper, shovels, or mops from Home depot, hand calculators and desks from Staples, and coffee makers and writing tablets from Office Depot, which all have extensive online operations.  All these business have ways and incentives to make such purchases more available. But thus far, there has been little such discussion

It would also help if the Treasury could be explicit about the timing of when the checks will go out or direct deposits will be made. Treasury economists could provide a chart like the one for income shown above, but more expedited, and then keep to that in practice in order to reduce uncertainty.  This would help show the way. None of this is easy.  It takes ingenuity, especially from those with expertise in merchandising, transportation, computers and the internet.


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Structural, Not Cyclical, Budget Reform

Today I published a column in Project Syndicate on fiscal policy. I am positive about pro-growth effects of the tax reform in the 2017 tax act and of the greater use of cost-benefit analysis in the recent regulatory reform effort. And the recent trade deals—the USMCA and “phase one” with China—take away some threats of trade wars.

But there is still a fiscal policy problem due to the growing federal budget deficit and debt. Fortunately, this problem can be addressed in way that promotes economic growth. Showing how this can be done with structural budget reform is the purpose of the column.

One issue, however, is taking steam out of such a structural reform effort. It is a new focus on reform of the automatic stabilizer part of the budget. But these automatic stabilizers do not need to be reformed. The following table shows why. It updates the approach of my paper, Reassessing Discretionary Fiscal Policy, published 20 years ago in the Journal of Economic Perspectives.  The table gives the estimated response of structural, cyclical and total deficit to real GDP relative to potential GDP.

The entries in the table are bi-variate regression coefficients which show how the structural, cyclical and total deficits as a percentage of GDP depend on the percentage deviation of real GDP from potential GDP.  They show the cyclical sensitivity of the deficits. The numbers in parentheses are t-values from the estimated regression.  To be sure, the structural deficit is defined as the budget deficit without automatic stabilizers as computed by the Congressional Budget Office in “The Automatic Stabilizers in the Federal Budget,” Appendix C of The Budget and Economic Outlook: 2019 to 2029. The total budget deficit is the budget deficit with the automatic stabilizers and is sum of the structural budget deficit and the cyclical deficit. The cyclical budget deficit is defined as the total budget deficit less the structural deficit.

Observe that the percentage impact of the deficit on the cyclical component is about the same amount (.38) from 2000 to 2018 as the amount (.36) from 1969 to 2018, as was mentioned in the article. So reform should focus instead on the growing structural deficit.

Posted in Budget & Debt, Fiscal Policy and Reforms | Leave a comment

A Fast and Fun Way to Learn about Rules Versus Discretion

The Hoover Institution has initiated a fascinating Perspectives on Policy video series in which experienced experts give clear explanations of key policy issues assisted by the latest in animation technology. This is not the typical video of talking heads as you might expect.  In this imaginative series tabletop cartoon figures join the experts, move around the screen, bend and twist to show emotions, and even wave at each other from time to time. Topics range from economics, including government entitlement reform and innovative market-based environmental policies, to politics, including health care and immigration.

This week Perspectives on Policy launched a whole new 5-minute video on monetary policy and the Federal Reserve.

I do most of the talking in this video, but I am joined by puppet size caricatures of policy makers such as Paul Volcker and Alan Greenspan as shown in this screen shot.

There is also a clever machine on the video with a gauge and a lever to raise and lower the federal funds interest rate, though the connection with the money supply is not forgotten. Note that monetary policy is not on automatic pilot in that people have to operate the machine.

I naturally refer to the Taylor rule to show why basic reasoning and data support rules over discretion and the importance of rules-based monetary policy.

The animation also shows the money supply, the interest rate, the inflation rate, the housing boom and bust, and even Federal Open Market Committee of monetary policy makers.

I loved working the talented Hoover production team on this video, and the reaction thus far is very positive and encouraging.

Who says monetary policy is arcane and technical? It’s fun, and, besides the video, there are key facts, quizzes, etc. that can be found at the link.


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Congressional Testimony on the Costs of Rapidly Growing Government Debt

Yesterday I testified at the Committee on the Budget of the House of Representative.  John Yarmuth chaired, and Steve Womack was the ranking member. The Committee titled the hearing “Reexamining the Economic Costs of Debt,” which was quite different from the title “Why Congress Must Balance the Budget” of a hearing of the same House Committee at which I testified only a few years ago in 2015.

At the earlier hearing I showed that basic economic theory grounded in real world data implies that high federal government debt has a cost: it reduces real GDP and real income per household compared to lower debt levels. At yesterday’s hearing I reported that a reexamination of the economic costs yields the same results. A fiscal consolidation plan which reduced debt to GDP would lead to an immediate and permanent increase in real GDP according to model calculations.

Recently the Congressional Budget Office (CBO) reported similar results. They compared their “extended baseline” in which the debt goes up to 144 percent of GDP by 2047 with an “extended alternative fiscal scenario” in which the federal debt goes to 219 percent of GDP.  CBO found that real GNP is 3.6 percent lower when debt is higher. So, the higher level of debt has real economic costs.

The CBO also analyzed scenarios in which debt is lower as share of GDP: 42 percent and 78 percent. In the 42 percent scenario, real GNP would be 5.8 percent higher; in the 78 percent scenario, real GNP would be 3.7 percent higher.

With the CBO currently projecting large increases in the federal debt relative to GDP in the United States, this reexamination implies the need for a credible fiscal consolidation strategy. Under such a strategy spending would still grow, but at a slower rate than GDP, thereby reducing debt as a share of GDP compared with current projections. Such a fiscal strategy would greatly benefit the American economy. It would also reduce the risk of the debt spiraling up much faster than projected by the CBO.

This conclusion is robust. Olivier Blanchard also testified at the hearing emphasizing that if the growth rate of the economy is greater than the relevant interest rate on the public debt, then there will be a tendency for the debt to GDP ratio to decline over time. In most of Blanchard’s simulations, the primary surplus is held to zero.  However, the primary deficit is far from zero, and, according to CBO, it is growing. Moreover, the economic costs do not distinguish between the primary and the total deficit.

Another view of the economic costs of debt is related to what is sometimes called “Modern Monetary Theory.”  It is difficult to determine how this approach would work in the future, and it is frequently associated large spending programs and wage and price controls. Model simulations would be useful, but history can be a valuable guide:

In the 1970s the United States imposed wage and price controls and the Fed helped finance the federal deficit by creating money.  The result was a terrible economy with unemployment and inflation both rising. This ended when money growth was reduced in the late 1970s and early 1980s. As explained in a forthcoming book by George Shultz and me, it is an example where poor economic reasoning led to poor economic policy and poor economic performance. It was reversed when good economics again prevailed, and policy changed.

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9/11/2001 and the 18 Years Since Then

Today we remember September 11, 2001 and all that has happened in the 18 years since then.

I was in a hotel room in Tokyo when the first plane hit the World Trade Center, recently sworn in as Under Secretary at Treasury. We immediately cancelled our meetings and by the next morning we were on a C-17 military jet Flying Back to Treasury on 9/11. When we got back, the city was on alert. DC was a logical place for another attack, and the secret service was particularly concerned about security around the White House. The United States then launched its first post-9/11 attack on terrorists from a very unusual Financial Front in the War on Terror. As President George W. Bush put it, “the first shot in the war was when we started cutting off their money, because an Al Qaeda organization can’t function without money.”

We cannot forget that the New Greatest Generation  was, and is, essential. They helped lead us, and are still helping to lead us, out of those difficult times. In his speech last year at Shanksville President Trump spoke of incredible security challenges and sacrifices: “Since September 11th, nearly 5.5 million young Americans have enlisted in the United States Armed Forces. Nearly 7,000 service members have died” he said, adding “And we think of every citizen who protects our nation at home, including our state, local, and federal law enforcement.  These are great Americans.  These are great heroes.  We honor and thank them all.”

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Economics 1: Now More Important Than Ever

Two weeks from today, I start teaching Economics 1, Stanford’s introductory economics course, and the namesake of this blog and my twitter account.   I am looking forward to it, and for the same three reasons that I gave years ago when I started teaching the course: (1) “I love to teach.” (2) “I love to do economic research” and teaching is “a natural extension of research.” (3) “I love economic policy—the application of economics to government as well as to decision-making in business.”

But things have changed dramatically since I started teaching this course decades ago.  In many ways, it is like a whole new course. And that’s exciting for me and for students.  Economics 1 is more important now than ever as the world becomes more computerized and quantified. The course now shows how ignoring economics as we consider the latest ideas in artificial intelligence, machine learning, deep learning, or big data is a recipe for disaster.

The course also shows how it’s possible—as never before in history—to make economic ideas work better in practice to improve people’s lives. Of course, we continue, starting in the first lecture, to stress the central idea that economics is about making choices with limited resources and about people interacting with other people as they make these choices. We show why free competitive markets can improve people’s lives and how such economic systems have removed millions of people from poverty, with many more, we hope, to come; we also discuss market failures, remedy to these failures, and government failure.  And as I wrote ten years ago on this blog severe set backs such as the global financial crisis are a vindication rather than a failure of economics, or more generally, we will see why good economics leads to good policy and good outcomes, and bad economics leads to bad policy and bad outcomes.

And now, and this is another big change, there’s a renewed interest in alternatives to market economics, whether you call it market socialism or more simply highly interventionist economic policy. These issues came up years ago when central planning was still used around much of the world including in Russia or China. With the demise of the Soviet Union, some case studies that showed the harms of central planning are forgotten and are not as relevant. It was helpful then to discuss, for example, how Soviet production plants could fulfill centrally imposed plans by producing, for example, one 500-pound nail rather that 500 one-pound nails, even though the giant nail was useless. Now we need new stories that take new ideas seriously.  The overall goal is to use the latest ideas in economics to understand the reasons for rising living standards and to deal better with inequality, crises, and unemployment.

In addition to the large lectures, I am happy to say that there will also be small discussion sections. There are also exciting special guest lecturers this term including Caroline Hoxby on the economics of education, Susan Athey on artificial intelligence and economics, Chad Jones on the latest ideas on economic growth, and even The Best Economics 1 Lecture Ever.

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Choice of IMF Managing Director Should Reflect 75 Years of Change

Last week Raghu Rajan and I coauthored an article for the Financial Times. We argued that the IMF should no longer continue the tradition that the Managing Director of the International Monetary Fund be a European. Instead, it should “break the mould by appointing the best possible candidate to the job, regardless of nationality,” and “hold an open competition” for the position.

As the G20 Eminent Persons Group on Global Financial Governance (on which we served) recommended, the IMF’s role needs to change to meet the requirements of a different word than existed in the year of its founding 75 years ago.

On this the 75th anniversary of the founding of the IMF and the World Bank, we need to recommit recommit to the spirit of Bretton Woods.  Indeed, this was the main message of the contributors (including me) to the recent book Revitalizing the Spirit of Bretton Woods@75 Compendium 2019.

But this is no longer a task for Europe and the US alone, or for the G7 alone, or for the G20 alone.  The economic ideas being debated are much the same, as I explained in this Truman Medal Lecture, but keeping the flame of open international trade and open capital market alive is harder than ever. It is a now fully global, multi-polar world. It is a task for all the members of the IMF. The choice of managing director should reflect that reality.

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