ScratchPad: If the Economy Is in "Equipoise", Why Isn't Monetary Policy at Neutral?; Transforming the Mental Space Of Flying Economy-Minus into First-Class; & MOAR...
A scratchpad...
A scratchpad...
Economics: Once again, questions, many questions, for FOMC policymakers—in this case New York Fed President John Williams.
John, you said:
John Williams: ‘Since it’s back-to-school season, I’ll throw out another “e” word that you may find on a middle school vocabulary list. This word is a little less commonly used—at least in my own conversations. And that word is “equipoise”.
The definition, according to Merriam-Webster, is “a state of equilibrium”. If I were asked to use it in a sentence, spelling bee style, I’d say: “The significant progress we have seen toward our objectives of price stability and maximum employment means that the risks to the two sides of our dual mandate have moved into equipoise”… <bloomberg.com/news/newsletters/2024-09-…>
It seems to me that if the economy is in “equipoise”—and in fact touched down on its soft-landing fifteen months ago—then policy should be (and should have been for more than a year not) at neutral. Do you believe policy should be. now at neutral? Is policy now at neutral? If not, why is it not now at neutral? And how quickly do you anticipate moving to neutral? And what do you think neutral is?
As you repeatedly say, questions about r* are implicitly at the heart of every monetary policy decision, and cannot be evaded by pretending they do not exist.
Augmenting Reality: Borrowed an Apple Vision Pro and took it along on a plane trip. Verdict: if in-seat power is working, or if you have a large-enough powerbrick, it is, as Alix Kranz of The Verge says, a very large iPad—and for your face! And as such it turns the mental space of flying economy-minus a plane flight into a (non lie-flat) first-class mental space. But YMMV:
Isn’t [Darryl Cooper’s] a much smaller audience than David Irving had back in the day? And didn’t, back in the day, historians of note and reputation like John Keegan and D.C. Cameron Watt go the extra mile in defense of Irving—publicly regretting that he lost his case against Deborah Lipstadt and Penguin, and that her book was not pulped in the UK and Lipstadt and Penguin made to pay damages to fund Irving in the lifestyle to which he aspired?
Seems to me that we are actually in considerably better shape than back in the day. It is just that social media gives all ideas much more reach (and much less depth, as one’s attention gets so scattered, as it does).
Bill Bishop: Niall Ferguson: ‘It is surely the epitome of professional failure to have spent more than three decades writing, teaching, and speaking about these matters, and to have achieved so little that a nasty little Nazi apologist like Darryl Cooper can win an audience of millions. But that is apparently…<https://substack.com/profile/16879-brad-delong/note/c-68221808>
Economics: So what did Chris Waller say at Notre Dame? This:
Chris Waller: The Time Has Come: ‘Our patience over the past 18 months has served us well. But the current batch of data no longer requires patience, it requires action…. Maintaining the economy's forward momentum means that… the time has come to begin reducing the target range for the federal funds rate…. The labor market is continuing to soften but not deteriorate…. Wage growth has slowed to a pace consistent with the FOMC's price-stability goal…. I do not expect this first cut to be the last. With inflation and employment near our longer-run goals and the labor market moderating, it is likely that a series of reductions will be appropriate. I believe there is sufficient room to cut the policy rate and still remain somewhat restrictive to ensure inflation continues on the path to our 2 percent target… I am open-minded about the size and pace of cuts… <https://www.federalreserve.gov/newsevents/speech/waller20240906a.htm>
I read this as stating as clearly as the FOMC ever does that its consensus is to wait until the September 11 release of the CPI before it decides whether to cut interest rates by 0.25%-points or by 0.50%-points at its September meeting.
Cognition: Suppose that there is a parameter ϕ that is the share of white balls in an urn containing mixed white and black balls. You know that this ϕ has a value ϕ*. If offered odds ѱ by someone wanting to bet on whether the next ball drawn will be white or black, if the size of the stakes are such that you want to bet, and if you want to win money on average, you will bet that the ball will be white if ϕ* > ѱ and bet that the ball will be black if ϕ* < ѱ.
That much, at least, is clear.
Now suppose that you do not know what ϕ is—suppose it is itself a random variable. If the variable has a distribution very tightly clustered around value ϕ*, that makes no difference: you will still, if there is someone wanting to bet on whether the next ball drawn will be white or black, if the size of the stakes are such that you want to bet, and if you want to win money on average, you will bet that the ball will be white if ϕ* > ѱ and bet that the ball will be black if ϕ* < ѱ. Now let the spread of the distribution grow, giving you less and less confidence that the actual value of ϕ you are confronting is close to ϕ*.
Does it then make any sense to say that there is a line you cross as the spread grows beyond which it makes sense to say something like:
Dan Drezner: Gone Conferencing: ‘It would be safe to say that Nate Silver disagrees with Grimmer’s take <https://x.com/NateSilver538/status/1831100996795379981>. I find myself mostly but not completely agreeing with Grimmer. He is correct to point out that the number of election observations is just too small to properly assess the accuracy of the various forecasting models. Furthermore, Grimmer’s implicit point—that many of these models cause their audience to treat genuine uncertainty as quantifiable risk—is well taken. So as a cautionary warning, Grimmer’s essay resonates… <https://danieldrezner.substack.com/p/gone-conferencing-7c1>
As I see it, it makes sense to shift from “risk” to “uncertainty” when your counterparty is not Nature but rather some other mind with interests that are not aligned with yours, and further that the spread of the actual ϕ around the ϕ* that you think it is is large enough that that other-mind counterparty you are betting against has invested in acquiring information and knows more about what the true value of ϕ is right now than you do.
Then you simply should not bet: any odds they would offer would be a bad deal for you to accept.
That much, also, is clear.
But when your counterparty is Nature herself, does it make any sense to sharply distinguish between risk and uncertainty? Isn’t the claim that there is likely to lead you astray, perhaps very badly, as simply throwing up your hands and saying “it is uncertain” keeps you from using the information about the distribution of ϕ that you do have (and you always have some) to calculate odds and then act on them?
Economics: The news with the August employment report is that the job market is a hair weaker than we thought it was going to be. Payroll employment as of mid-August looks to have been only 56,000 higher than we thought it had been in mid-July. (Seasonally adjusted, of course.) Benchmark that against a labor force growth trend that is an increase of 160,000 a month or so. (No, the month-to-month jump in household-survey employment is not meaningful: statistical jiggle.)
New York Fed President John Williams starts speaking at 08:45 EDT at the CFR: <cfr.org/event/c-peter-mccolough-series-…>. Governor Waller speaks at Notre Dame at 11:00 EDT.
My bet is that they both say things that make it extremely likely that an 0.5%-point cut in the Federal Funds rate is on the way this month. But my reading of the FOMC has been less reliable than usual since the start of the last tightening cycle in 2022.
Bloomberg has the wrong headline. It should be “revision-adjusted, August payroll employment only 56,000 higher than in last month’s report”:
Bloomberg: US Added 142,000 Jobs in August, Trailing Forecasts: ‘Sebastian Boyd: “Markets are reading that data as clearing the way for steep interest rate cuts. Two-year yields initially jumped after the jobs data, and the slope of the 2s-10s curve flattened, but they both quickly turned around again. Two-year yields fell to the lowest since Aug. 5 after payrolls rose less than expected. The previous two months were revised to remove 86,000 jobs. So that means the labor market is much weaker than thought…. <bloomberg.com/news/live-blog/2024-09-06…>
Economics: Just in advance of the employment report: where we were after Jackson Hole with respect to the path of the easing cycle:
Dan Kohn: Reflections on Jackson Hole 2024: Powell’s speech was more forceful and forward leaning on the easing side than many expected, myself included. It was a complete pivot from ‘whatever it takes’ on inflation to ‘whatever it takes’ on the labor market, and seemingly no worry that they might not make that last mile to 2% inflation. It was all about easing policy to support the labor market. And there were no cautionary words about the pace of easing—other than it would depend on incoming data…. Moreover, he didn’t address the extent of the easing that he anticipates. There was no discussion of brookings.edu/articles/the-hutchins-cen… It was all about the direction of travel, with a focus on the labor market… <brookings.edu/articles/don-kohns-reflec…>
Public Reason: How to create a tradition. Simply make stuff up as to how old it is. Needless to say, what follows the ellipsis below was not the manner in which the non-existent Parliament was held in the reign of King Edward “The Confessor” Wessex, 1042-1066. Rather, it appears to come from the reign of Edward III Plantagenet, 1327-1377, in an attempt to codify and regulate previous quite new and hence much more loosy-goosy practices:
William Stubbs: Select Charters: ‘The Manner of Holding Parliament: Here is described the manner in which the parliament of the king of England and of his English was held in the time of king Edward, son of king Ethelred. Which manner, indeed, was expounded by the more discreet men of the kingdom in the presence of William, duke of Normandy, and Conqueror and king of England, the Conqueror himself commanding this; and was approved by him, and was customary in his times and also in the times of his successors, the kings of England... <archive.org/details/selectcharters00stu…>
Citation:Stubbs, William. 1870. Select Charters and Other Illustrations of English Constitutional History from the Earliest Times to the Reign of Edward the First. Oxford: Clarendon Press… <archive.org/details/selectcharters00stu…>
Journamalism: Take a number of investments, focus on a couple that go wrong, then exclude the big investment that went right and compare winner-excluded results to an average… Who would ever think that this is a way to do anything at all? Did Warren Buffett run over Schumpeter’s dog?:
Economist: ‘Mr Buffett’s… method—find a good business run by capable managers, let them get on with it, pocket the cashflows, repeat—is showing its age…. Buffett appears to be losing his touch…. Precision Castparts… was a flop…. A deal to take control of Kraft-Heinz, a pedlar of ketchup, has left a red stain. Exclude its investment in Apple and the value of its stock holdings rose by just 50% between the start of 2019 and June this year, compared with an increase of around 120% for the S&P 500… <economist.com/business/2024/09/03/has-w…>
Public Reason: First and most important, Nate Silver is and will always be an enormous public benefactor, if only for having stunningly successfully called bullshit on a deeply broken and mendacious political polling and forecasting industry, and then done something about it.
But here we have an ultimate takedown of Nate Silver’s The Edge: The Art of Risking Everything. I am still in its early pages. However, I was taken aback by “The River also has a canon of influences and ideas, from game theory and Nash equilibria to expected value and marginal utility, that underlie almost all of the activities it undertakes…” without any mention or note that all these ideas are a small slice of the conceptual foundations of a discipline called “economics”.
And I was taken further aback by Silver’s claim that “blackjack and slots and horse racing and lotteries and poker and sports betting… are fundamentally not that different from trading stock options or crypto tokens, or investing in new tech startups.” Investing in new tech startups is—or is supposed to be—a positive-sum activity in which people coöperate to make something useful and, hopefully, great. The rest are, when we take account of risk, negative-sum activities: someone loses, and someone wins, and with declining marginal utility of wealth the loser loses more than the winner wins, They are thus, fundamentally, parasitic: the way to win is to find people who do not understand the risks they are running, and fleece them.
There is a common dopamine thrill in doing this well. But wouldn’t it be wise to focus not on the dopamine thrill but on the usefullness of the underpinning activity?:
David Karpf: ‘JFC Nate Silver’s new book is over 450 pages. Was the advance not big enough to afford an editor?!?… Let me state at the outset that there are remarkably few 450-page nonfiction books that would not be better as 350-page nonfiction books. Already, on page 2, I can tell that I’m gonna, uhhhh, have a lot to say about this book. Nate is a serious poker player. He’s convinced that poker-thinking explains who has power today, and why. He doesn’t seem to notice that private equity gamblers keep winning b/c they have infinite freerolls. I would strongly recommend reading Dan Davies’s book, “The Unaccountability Machine,” first. Page 10, Nate notes that the gambling business is booming. Americans lost $130 BILLION in casinos, lotteries, and other gambling operations in 2022. He sees this as evidence of (demand-side) increases in risk-taking behavior. But, uh, it’s probably a supply-side phenomenon. We legalized vice. Casinos, DraftKings, etc. And then we encouraged them to market the hell out of vice, offering sweet-seeming deals to get vulnerable people hooked. That’s, y’know, BAD. But it’s good for the top gamblers, for the same reason retail investors are good for Wall Street…. The middle of the book is just the cringiest bullshit: “13 habits of highly successful risk-takers.” Silver, the statistical wunderkind, picks five big winners and generalizes that their good habits must make them successful. (…I guess successful risk-takers select on the dependent variable!)…<https://bsky.app/profile/davekarpf.bsky.social/post/3l2uf2yywtz2h>
Economics: Tech: This reaction to bad financial-accounting numbers seems to me to be a very bad sign for Intel’s future size and even existence as an institution—as a production-network institution providing sales to upstream stakeholders, income to corporate stakeholders, and value to downstream stakeholders; as what is its most important role as a technological advance-forcing institution; and even in the long run in its least important role of a financial vehicle institution providing returns to bondholders and stockholders:
Dinesh Nair, Ian King & Ryan Gould: Intel Considers Options Such as a Foundry Split; Shares Soar: ‘The company is discussing.. a split of its product-design and manufacturing businesses, as well as which factory projects might potentially be scrapped…. The news sent Intel shares up 9.5% to $22.04 in New York on Friday, marking the biggest single-day gain since October 2022. Morgan Stanley and Goldman Sachs… have been providing advice on the possibilities, which could also include potential M&A…. The discussions have only grown more urgent since the Santa Clara, California-based company delivered a grim earnings report this month, which sent the shares plunging to their lowest level since 2013… <finance.yahoo.com/news/intel-said-explo…>
Why do I think this? Because there is no reason to believe that current operating numbers are capturing what is important. And the people it is listening to right now have no grasp of what is important.
Dan Davies, I think, put his finger on the problem:
Dan Davies: the tail that wags the dog: ‘Companies which are run by their investor relations department…. When things were going well, it wasn’t too much of a problem…. When they got bad… companies which were doing badly seemed to develop this amazing cringe… promised that they were listening to investors’ concerns. Which was problematic, because investors’ concerns are always “give us more dividends, reduce investment, divest businesses, shrink assets, dividends, we want them”… short term financial capitalism… but more importantly… investors fundamentally disliked the thing and thought it was a bad business…. They either didn’t own the shares or were in the process of selling them, so obviously they weren’t going to put much thought into its future strategy. This was the death spiral…. Bosses kept tearfully promising to do better, to cut costs and not waste money. And in doing so, ensured that money would be wasted, in the pointless exercise of trying to get stable revenues out of a cyclical business… <backofmind.substack.com/p/the-tail-that…>
The Intel board hired Pat Gelsinger in 2021 to push Intel to spend an extra $50 billion on investment to create, by 2027, a profit-making foundry business to make chips designed by itself and others at scale with industry-leading technological competence. The plan was to roar through the “nodes”—Intel 7, Intel 4, 3, 20A, and 18A—without trying to harvest large profits from each node before moving on to the next. While Intel attempts this high-wire act, operating profits carry little information about whether it is succeeding. They simply mark the speed of decline of Intel’s old businesses. To interrupt this plan in the middle is to, in Dan Davies’s words, “tearfully promising… to cut costs and not waste money… [and] so ensur[ing] that money would be wasted…”
The right strategy once Gelsinger’s bet—which may have been a stupid one—was laid on the table was to wait until 2027, and look then to see whether Intel 18A was attractive as a platform to chip designers and chip customers, and then do whatever seemed good.
But the right strategy is not to let numbers that do not carry information about the likely success of the high-wire act dominate decision making right now.
Economics: Macroeconomic Management: The Minsky cycle: leverage vulnerabilities will ultimately win out, and can only be “managed” by a healthy dose of what I call “liquidationism”: Republican 1920s Treasury Secretary Andrew Mellon’s call to take advantage of an economic downturn to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate... It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people…”
Not that Raghu is a liquidationist. But I do think he errs when he calls for the public sector to intervene in order to preserve full employment less. He should be calling for the public sector to resolve institutions that hit the wall more quickly:
Raghuram Rajan: : ‘Usually, it takes an economic downturn or a financial panic to purge excess leverage from financial markets. If central banks achieve a soft landing, markets will have seen neither even as they are further buoyed by rate cuts, which will prompt further leveraging. With central banks continuing to shrink their balance sheets, the system’s leverage to cash ratio will keep growing, raising the chances of a sharp reaction to any bad news — be it a worrisome turn in the trade wars, a troubling presidential election, or geopolitical tensions. Economic stabilisation may, paradoxically, raise the chances of financial instability. None of this, of course, is to suggest that central banks should engineer an economic downturn to cleanse the financial system. It does mean, however, that they should raise the bar on intervening whenever it gets into trouble. As with forest fires, small conflagrations can prevent a larger one. Even as the central bankers at Jackson Hole take a justified anticipatory bow, they should also worry a little about what their achievement will imply… <ft.com/content/9dd2d4cd-a130-406c-82e4-…>
Comedy: This is, note well, what Karl Marx called the Fetishism of Commodities: the idea that commodity have “value” that is in some way inherent in them, rather than “value” being a product not just of the commodity but of its place in human society, and thus that “value” will change even for the same commodity as people change what they want to do. It is remarkably common—a belief that value is in the thing, rather than in some combination of resource scarcity and technology on the one hand, and human society considered along is organizational, distributional, and psychological want-generating dimensions as well:
Kieran Healy: ‘This is so funny…. Jillian d’Onfro: “Chapman needed to sell his extra [Burning Man] pass…. Chapman… wasn’t worried about selling one for face value…. But this isn’t a typical year…. Burning Man still hasn’t sold out…. ‘It sucks’… Chapman felt insulted by someone… offering to buy his ticket for $300. ‘It’s literally ticket gouging, just from the buyer’s end. I just got the offer and I was like, “Ewww, this is gross and skeezy and opportunistic”’. When another person offered $200, Chapman seethed with anger, responding that ‘decommodification goes both ways’”’… <https://www.threads.net/@kjhealy/post/C-xrE9rRdow>
PolicyGrifters: I think it began in the first half of the 1980s. Marty Feldstein as Ronald Reagan’s chief economist waged a mighty bureaucratic war of analysis and leak to try to get the Reagan administration and the Republican congressional caucuses to take the problem of the federal budget deficit that they had created seriously. He won—the eventual result was the Gramm-Rudman-Hollings PayGo budget-straitjacket legislative framework. But it was a Pyrrhic victory. James Baker and company brought down the hammer, convincingly establishing the dictum that in the future nobody who did that—nobody who did not fall in behind the policy and soldier—would have any standing or access within the Republican Party. And so the Republican Party lost its technocratic governor keeping their policy policies from going off the rails. And they have—first gradually, then suddenly—gotten to their current state of complete technocratic policy bankruptcy:
Matt Yglesias: The crank realignment is bad for everyone: ‘A stupid party + a bunch of biased institutions degrades epistemics across the board…. This optimizes their coalition for the electoral college, but it makes it harder for conservatives to actually marshal knowledge and govern the country. It’s striking that the GOP has never put together a halfway serious plan to fight inflation or reduce crime. A lot of Romney-Clinton voters could, conceivably, have been tempted back into the GOP ranks with a serious effort to persuade them that Republicans have genuine solutions to Biden-era problems. But the Trump-era Republican Party lacks the capacity to put forth such an effort. That’s not to say there are no capable people in the GOP. But they are few in number and increasingly marginalized in a conservative ecosystem that doesn’t care about experts or knowledge. For the last week, the entire right side of the political spectrum has been soaked with nonsensical conspiracy theories about the Bureau of Labor Statistics’ annual revision of employment statistics. William Beach, who ran this agency under Trump, tried to explain what actually happened <https://x.com/beachww453/status/1826681499426717931?s=46&t=Axk8KmuO5xMOGsk-4UVWZw>, but there are no institutions on the right that amplify credible experts and marginalize conspiracists… <https://www.slowboring.com/p/the-crank-realignment-is-bad-for>
«But when your counterparty is Nature herself, does it make any sense to sharply distinguish between risk and uncertainty? Isn’t the claim that there is likely to lead you astray, perhaps very badly, as simply throwing up your hands and saying “it is uncertain” keeps you from using the information about the distribution of ϕ that you do have (and you always have some) to calculate odds and then act on them?»
Maybe I am mistaken, or maybe making this more complicated than necessary, but it seems to me that there are multiple issues here. First is what we know (or have good reason to believe), second is what we do with what we know, and third is whether what we do is by choice or necessity.
If I am reading Drezdner and Grimmer correctly, then they are essentially dealing with the first issue. That is, based on what we know about the data and the models, is there good reason to believe that the polling models are accurate, and are accurately representing risk and uncertainty? If Grimmer's analysis is correct, then the answer to this question is an unqualified 'no'. And the danger of overvaluing these models is that we accept their "guesses" at the quantification of uncertainty as reasonable measures of what is not (yet) quantifiable.
The second issue is what we might do based upon our knowledge or lack thereof, and why. It seems clear that making a bet with some counterparty is always a matter of choice. We can choose what odds and stakes we might accept, or even whether we accept at all. In some cases where uncertainty is high, we might conclude that the counterparty has knowledge that we lack, and choose not to accept any odds that they might offer. Alternatively, we might conclude that the counterparty is ignorant and offers odds that are unrealistically unfavourable to themselves, and choose to accept at some reasonable odds.
I don't think that has anything in particular to do with whether the matter has to do with nature or human action. For example, if there is a prediction that it will rain heavily at some location tomorrow, and that the rainfall with be between one and two centimeters, and someone offers 100-1 odds that it will be more than 1.5 centimeters, then one might choose to accept the bet. This seems to be a case of true uncertainty, with no known way that the counterparty could have additional relevant information.
But in any case, in choosing to make a bet with some counterparty, there is always at least the question of whether they know something that you do not, and whether there is additional information that removes some of the uncertainty. In choosing to make such a bet, one is not evaluating the uncertainty (per se), but the state of the counterparties knowledge.
At other times, the question is: "do we need to act?" If we do not - if, for example, we are engaged in pure research and simply seeking knowledge - then indeed we can simply throw up our hands and say something like "it looks like X, but the uncertainty is very high, so our reasons to believe that it is X are only very weak. We need more data." If we do need to act in some way - and this can be so whether or not our "counterparty is Nature herself" (unless by 'Nature herself' we mean something like "the world"), then we have no choice but to act based upon the best reasons we have, whether or not they are sufficiently "good". If we need to decide when we will plant our crops, and the only thing we can do is decide bases on the best data we have, recognizing that we may be wrong. So also for a political campaign's decision as to where to spend its advertising dollars or to hold additional campaign stops. In both cases, uncertainty may be high, but decision is required, so the only option is to use "the information about the distribution of ϕ that you do have" - however good it is - to make such a decision (again, recognizing that it is uncertain).
As such, it seems to me something of a mistake to conflate betting markets - where even participating is a choice - with forced decisions in cases of incomplete or uncertain information. And also to conflate what we know (or have good reason to believe) with what we choose to do (or must do) with what we know.