John Cochrane on Stephanie Kelton's New Book: ‘The Deficit Myth’ Review: Years of Magical Thinking

John Cochrane has a review of Stephanie Kelton's new book, "The Deficit Myth". Here it is, for those who don't have access, with a few comments from me, on what I agree with and don't agree with.  I haven't read the book myself, but I've also posted favorably about aspects of MMT in the past, so I felt I should defend at least parts of the doctrine.

Modern monetary theory, known as MMT, erupted suddenly into the public consciousness when it won the attention of high-profile politicians including Bernie Sanders and Alexandria Ocasio-Cortez and their media admirers. Its central proposition states that the U.S. federal government can and should freely print money to finance a massive spending agenda, with no concern about debt and deficits. 

OK, I agree with Cochrane, I don't think government should have "no concern" with debt and deficits. However, when you're in a liquidity trap or a severe recession, or just growing slowly with below-target inflation, it's not time for austerity at the Treasury.

What is MMT? Its advocates have told us in essays, blog posts, videos and tweets what MMT says about this and that, but what is its logic and evidence? As a monetary theorist who is also skeptical of conventional wisdom, I looked forward to a definitive exposition from Stephanie Kelton’s “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.” 

Ms. Kelton, a professor of economics at Stony Brook University and senior economic adviser to Bernie Sanders’s presidential campaign, starts with a few correct observations. But when the implications don’t lead to her desired conclusions, her logic, facts and language turn into pretzels. 

True, the federal government can spend any amount by simply printing up the needed money (in reality, creating bank reserves). True, our government need never default since it can always print dollars to repay Treasury bonds. But if the government prints up and spends, say, $10 trillion, will that not lead to inflation? Ms. Kelton acknowledges the possibility: “If the government tries to spend too much in an economy that’s already running at full speed, inflation will accelerate.”

What does Cochrane disagree with here? Kelton seems to say the government shouldn't spend so much that it causes inflation to accelerate. I haven't read the book, but it seems she too is concerned with debt and deficits to the extent it is inflationary when the economy is at full employment, does it not? This is a crucial point to me, and it's not exactly clear to me how Kelton phrased it from Cochrane's retelling. Is she saying print and spend all the time and become Zimbabwe (it seems not), or is she saying print enough to actually hit your inflation target (which probably needs to be raised a bit)? These are quite different, and the latter seems to be a reasonable position that is actually also implied by standard Keynesian economics.

So how do we determine if the economy is running at full speed, or full of “slack,” with unemployed people and idle businesses that extra money might put to work without inflation? Ms. Kelton disdains the Federal Reserve’s noninflationary or “natural” unemployment rate measure of slack as a “doctrine that relies on human suffering to fight inflation.” Even the recent 3.5% unemployment is heartlessly too high for her. “MMT urges us to think of slack more broadly.” OK, but how?

Various other obvious measures of labor market slack, such as the prime-age employment to population ratio, wage growth,GDP growth, and inflation were all pointing at a different conclusion.

 She offers only one vaguely concrete suggestion: When evaluating spending bills, “careful analysis of the economy’s . . . slack would guide lawmakers. . . . If the CBO [Congressional Budget Office] and other independent analysts concluded it would risk pushing inflation above some desired inflation rate, then lawmakers could begin to assemble a venue of options to identify the most effective ways to mitigate that risk.” She doesn’t otherwise define slack or even offer a conceptual basis for its measurement. She just supposes that the CBO will somehow figure it out.

OK, but I think there is some logic in looking at a variety of obvious measures, and not just saying "unemployment is low, let's ignore labor force exits or wage growth".

She doesn't mention that the CBO now calculates a measure, potential GDP, which does not reveal perpetual slack. And she later excoriates the CBO for its deficit hawkishness. Really her answer is: Don’t worry about it. She simply asserts that “there is always slack in the form of unemployed resources, including labor.”

We’re not talking about a little slack either. Ms. Kelton’s “people’s economy” starts with the full Green New Deal and moves on to a federal job for anyone, free health care, free child care, the immediate cancelation of student debt, free college, “affordable housing for all our people,” national high-speed rail, “expanded Social Security,” “a more robust public retirement system,” “middle-class tax cuts,” and more. How much does this add up to? $20 trillion? $50 trillion? She offers no numbers. How is it vaguely plausible that the U.S. has this much productive capacity lying around going to waste? 

In a book about money, the inflation of the 1970s and its defeat are astonishingly absent. History starts with Franklin Roosevelt—a hero for enacting the New Deal but a villain for paying for it with payroll taxes rather than fresh dollars. Ms. Kelton praises John F. Kennedy, too. He “pressured unions and private industry, urging them to keep wage and price increases to a minimum to avoid driving inflation higher. It worked. The economy grew, unemployment fell sharply and inflation remained below 1.5 percent for the first half of the decade.” 

The second half of that decade—Lyndon Johnson’s Great Society and Vietnam War spending, inflation’s breakout, Richard Nixon’s disastrous price controls—is AWOL. Did we not try MMT once and see the inflation? Did not every committee of worthies always see slack in the economy? Did not the 1970s see stagflation, refuting Ms. Kelton’s assertion that inflation comes only when there is no “slack”? Don’t look for answers in “The Deficit Myth.”

 OK, good point. I agree that spending a bunch of money is not the ideal response to an adverse commodity price shock. I would prefer nominal GPD growth be kept relatively constant during such periods. This would presumably mean tight fiscal and monetary policy, and causing a recession to reduce inflation.

Victory over inflation under Ronald Reagan and Margaret Thatcher goes likewise unmentioned. History starts up again when Ms. Kelton excoriates Thatcher for saying that government spending has to be paid for with taxes. She insinuates, outrageously, that Thatcher deliberately lied on this point in order to “discourage the British people from demanding more from their government.”
If spending can be financed by printing money, “why not eliminate taxes altogether?” Ms. Kelton begins consistently. She criticizes Sens. Bernie Sanders and Elizabeth Warren for claiming that they need to raise taxes to pay for spending programs. But then why raise taxes? Taxes exist to decapitate the wealthy, not to fund spending or transfers: “We should tax billionaires to rebalance the distribution of wealth and income and to protect the health of our democracy.”

I agree with Cochrane here --  taxes are necessary, in part, to finance useful spending. The entire tax and transfer system is necessary in part for redistribution, and thereby increase political support for a capitalist system that does tend to create vast inequalities. If you just try to do it by printing money, you'll end up like Zimbabwe.

She offers a second answer, more subtle, and revealingly wrong. She starts well: “Taxes are there to create a demand for government currency.” This is a deep truth, which goes back to Adam Smith. Soaking up extra money with fiscal surpluses is, in fact, the ultimate control over inflation. But then arithmetic fails her. To avoid inflation, all the new money must eventually be soaked up in taxes. The new spending, then, is ultimately paid for with those taxes.
What about the debt? Ms. Kelton asserts the government can wipe it out. Again, she starts correctly: The Fed could purchase all of the debt in return for newly created reserves. She continues correctly: The Fed could stop paying interest on reserves. But in conventional thinking, these steps would result in a swift inflation that is equivalent to default. Ms. Kelton asserts instead that these steps “would tend to push prices lower, not higher.” She reasons that not paying interest would reduce bondholders’ income and hence their spending.
The mistake is easy to spot: People value government debt and reserves as an asset, in a portfolio. If the government stops paying interest, people try to dump the debt in favor of assets that pay a return and to buy goods and services, driving up prices.

I agree with Cochrane here. Not paying IOER would likely be inflationary. Fed buying debt and returning it to the Treasury would be too.

What about all the countries that have suffered inflation, devaluation and debt crises even though they print their own currencies? To Ms. Kelton, developing nations suffer a “deficit” of “monetary sovereignty” because they “rely on imports to meet vital social needs,” which requires foreign currency. Why not earn that currency by exporting other goods and services? “Export-led growth . . . rarely succeeds.” China? Japan? Taiwan? South Korea? Her goal posts for “success” must lie far down field.
The problem is that “the rest of the world refuses to accept the currencies of developing countries in payment for crucial imports.” Darn right we do. Her solution: more printed money from Uncle Sam—a “global job guarantee.” 

She also advises small and poor countries to cut themselves off from international commerce. They should develop “efficient hydroponic and aquaponics food production” and install “solar and wind farms” rather than import cheap food and oil. They should refuse international investment, with the “classical form of capital controls” under Bretton Woods as an ideal. “We share only one planet,” she writes, yet apparently that planet must have hard national borders.

I don't agree that small and poor countries should cut themselves off from international commerce. I would very much go in the other direction, a la East Asia.

By weight, however, most of the book is not about monetary theory. It’s rather a recitation of every perceived problem in America: the “good jobs deficit,” the “savings deficit,” the “health-care deficit,” the “infrastructure deficit,” the “democracy deficit” and—of course —the “climate deficit.” None of this is original or relevant. The desire to spend is not evidence of its feasibility.

I would probably agree with most what Kelton has to offer here. I'd spend on infrastructure and a green new deal in the current climate, given the past decade of slow growth, and looming problem of climate change.

Much of “The Deficit Myth” is a memoir of Ms. Kelton’s conversion to MMT beliefs and of her time in the hallways of power. She criticizes Democrats, including President Obama and his all-star economic team, for their thick skulls or their timidity to state her truth in public.

I think many observers think the Obama admin. should have been more bold on fiscal policy, including a lot of former members of the Obama administration. Also, I recall one John Cochrane changed his mind on fiscal policy, and went from recommending austerity to stimulus in 2009/2010... Net of state and local austerity, there was basically no overall fiscal stimulus during that recession.

...

In a revealing moment, Ms. Kelton admits that “MMT can be used to defend policies that are traditionally more liberal . . . or more conservative (e.g., military spending or corporate tax cuts).” Well, if so, why fill a book on monetary theory with far-left wish lists? Why insult and annoy any reader to the right of Bernie Sanders’s left pinkie?
Writing the book to “defend” an immense list of left-wing spending policies destroys what’s left of her argument. If you could only feel her singular empathy for the downtrodden, if you could, as she does, view the federal budget as a “moral document,” if you could just close your eyes and need it to be true as much as she does, your “Copernican moment” will arrive. Logic and evidence will no longer trouble you.
That effect is compounded by her refusal to abide by the conventional norms of economic and public-policy discourse. She cites no articles in major peer-reviewed journals, monographs with explicit models and evidence, or any of the other trappings of economic discourse.

OK, good point. Note that standard Keynesian models do have some MMT-like implications in a liquidity trap though. Here's Jordi Gali on the topic, although he doesn't use the words MMT. Kelton should cite him. Here's me.

The rest of us read and compare ideas. Ms. Kelton does not grapple with the vast and deep economic thinking since the 1940s on money, inflation, debts, stimulus and slack measurement. Each item on Ms. Kelton’s well-worn spending wish list has raised many obvious objections. She mentions none.
Skeptics have called it “magical monetary theory.” They’re right.
—Mr. Cochrane is a senior fellow at the Hoover Institution and an adjunct scholar at the Cato Institute.

Debate Over Covid Fatality

So, first came this horrendous WSJ article by a Stanford couple claiming the true Coronavirus death rate may be much less than what people think. They suggest that perhaps the real rate may be as low as .01%, and thus, that maybe we should just let the disease run. After all, if just between 20,000 and 40,000 Americans die, what is the harm? 

Of course, now, with 37,000 Americans already dead from Covid-19, and the body counts still rising daily (some 2,500 just yesterday), this estimate now looks foolish. Not to say, "I told you so", but the WSJ looked problematic to me in real time, so I tweeted about it: https://twitter.com/TradeandMoney/status/1243215666297044995

In retrospect, my response looks prescient, in part since China's own government revised up its estimates of death in Wuhan.

Debraj Ray, an economist who I respect a lot, and who is an editor of the American Economic Review, also posted some interesting thoughts about the Covid-19 death rate here, influenced by the Stanford couple's WSJ article. He argued we should rethink lockdowns given the uncertainty over the fatality rate. I posted a response on his blog, which I'll repost here:

Hello Debraj. Thought provoking post. I see some potential problems in your logic, however. Why are you ignoring the growth in deaths (or lack thereof) in New York before March 14th? If it's true that there were no deaths before then, then why wouldn't it follow that cases before then were scarce? Of course, likely there were few deaths before March 14th because there was little testing -- if you die of flu symptoms with no test for Covid available, it's likely you are not marked as dying of coronavirus. To the extent this is true, the growth rate of deaths is slower that what you have merely assumed. And, if it turns out that the rate of growth doubles every four days, then that would imply that either New York had it's first case before Wuhan did, or the death rate is even higher than 1%.

Lastly, Bhattarchaya's stuff has already been debunked. The death rate in Vo was 1%. The Chinese data should not be taken at face value. The NBA is not a random sample of the US. The Stanford couple mention .01% as a plausible death rate. But, some Italian provinces have death rates already as high as .065%, and that is assuming a 100% infection rate, which can't be right, as these provinces are still recording masses of new cases despite a draconian quarantine. In other Italian towns, already .1% of the population has died, and many people have also tested negative. 

After all this, I should mention that I'm actually in agreement that the death rate could well be much less than 1%. .4-.6% seems plausible to me, but spreads easier since there is no vaccine. On the other hand, .1% seems ruled out by what we know already. This could explain why Italian hospitals were overwhelmed so early, why they are not by the flu. 

Also, you write that people have freaked out too much. Have you paid any attention, at all, to what has happened in Italy? The freak out there has not prevented ICU units to become completely overwhelmed. They are essentially letting people over the age of 65 die for lack of ventilators. You really think this mass "freaking out" in Italy makes no sense?

Very Respectfully Submitted,Doug Campbell

Debraj then provided a thoughtful response.

Hi Doug, thanks. I wish we knew the truth behind fatality rates. You are right that it could be as high as 0.4%. My post is not written with a sense of dramatic certainty. That said (1) could you give me references to the Vo fatality rate? (2) I don't know what you mean by trusting the "Chinese data" --- the data has to do with airlifts out of Wuhan where everyone was tested, (3) the flu rate is for a particular distribution of ages (say, the US distribution), and we need to correct for that age distribution when studying regions with a high proportion of elderly, and (4) please read carefully before commenting on my interpretation. My post is perfectly consistent with OVERALL deaths being higher by a factor of 3 or more. I don't know what you want to include under the term "freaking out," but I am not including the terrible sense of sorrow that people feel for losing their loved ones. I simply refer to one's *own* fear of being fatally sick. Thanks.

He agrees that a death rate as high as .4% is plausible.  In response to his point:

    (1) I actually don't see the Vo fatility rate that I had seen earlier when I was just googling, although they had like 89 people test positive when they tested the first time, and they had a high-profile early death: https://www.theguardian.com/commentisfree/2020/mar/20/eradicated-coronavirus-mass-testing-covid-19-italy-vo

   (2) Bhattarcharya's first piece of evidence, using Chinese data, takes the fatality rate in Wuhan at face value, while making an adjustment to the infection rate. I was suspicious of the Chinese fatality rate. Lo and behold, under pressure, China has now revised up its fatality estimates for Wuhan by 50% -- and many people, me included, suspect it even could be higher than that. I won't try to claim I'm any sort of a genius here -- it was obvious the Chinese data were fake. Still is. It was troubling to see the Stanford duo take them at face value.

   (3) I agree we need to adjust for ages. Also, in Italy, Wuhan, and Iran, the hospitals were clearly overwhelmed. But, the death rate in Lombardy is now at .12%. Over two-thirds of the people there tested, tested negative, and they only test high-risk people. In addition, they have undoubtedly missed a lot of deaths, and people are still dying. You add all this to the info that their hospitals were overwhelmed by the end of February, and it's clear this is vastly more deadly than the flu. You had written: "That calls for a fatality rate around 0.1%". Even in New York City, the death rate is already around .1% of the population (that is, % of the population before the exodus), and over half of the people tested there have tested negative. And this came in the US, without any overwhelmed hospitals and likely a similar population structure, if healthier and wealthier than average. Even if we assume that 20% of the New York City population has already been infected, then we get a fatality rate of around .5%. If 25%, then .4%. Given the exodus of people out of the city, and 60% negative test rate of those with severe symptoms or direct exposure, it's probably tough to make an argument that more than 25% of NYC residents could have been infected.

   (4) I still don't see a lot of evidence that people are freaking out way too much. For example, I just went to a church where old people were still packed en masse and kissing icons. At least some of New York's bars were reportedly packed before they were closed. Boris Johnson shook everyone's hands in the Covid Ward. Rudy Gobert made sure to touch every microphone. People are protesting to open the economy back up. The draconian restrictions put into place have only modestly lowered the rate of infection. Even in Italy, six weeks of quarantine have only halved the daily rate of infections. To change people's behavior, you need them to "freak out" to certain degree.

   In any case, I am also opposed to a prolonged shutdown. Only, my alternative is Vo-style ubiquitous testing, or at least doing a vigorous "Test and Trace", plus some surveillance testing, ramping up N-95 mask production to wear in public, and other kinds of surveillance (cops with temperature helmets, like in China), etc. Nevertheless, it's clear now that Covid-19 poses a significantly higher danger in terms of mortality than the flu does.

How to Respond to the Next Recession: Central Bank Fiscal Support

Now that it looks like like the next recession may be coming sooner rather than later, it's time to lay out what I think is clearly the best path forward for monetary policy in a liquidity trap (we should be more creative than we have been). This is an issue I've been thinking seriously since long before I worked in the Obama CEA in 2011 -- I wrote my undergraduate thesis on Japan's liquidity trap in 2003. And Japan is still in a liquidity trap. Some things never change...

Fiscal Support
My idea is simple: Fiscal Support from the Fed to the Treasury (some might call it Fiscal QE, a name I oppose, "Treasury remittances", or simply seigniorage, although I see this as slightly different). The Federal Reserve should print money, buy government bonds, and then -- crucial second step -- return those bonds to the Treasury! That's it. (Well, in fact, there are several more steps I'll discuss below, but these are the key ones...) In fact, the Fed already returns interest on the bonds it holds to Treasury. Over ten years after the first QE, in total, this has actually added up to be a substantial amount of money, and thus it is an ignored modest side-benefit of the QE program (in addition to lowering US government borrowing costs, and thus the debt).

Mechanisms
Why would this work? I can see several channels. First, smaller deficits, or even surpluses, would encourage governments to do fiscal stimulus. (How many politicians do you know who couldn't figure out a way to spend a surplus?) In fact, most countries in liquidity traps run such large deficits that after a few years, all but the most ardent keynesians/MMT people recommend fiscal austerity to counterbalance the deficits. Fiscal stimulus is likely to carry a bit more "oomph" than merely QE alone, particularly since this is a policy with an unlimited ceiling.

Secondly, this QE + fiscal transfer is likely to be more effective even if the government doesn't enact fiscal stimulus today. Why? First, it is a bit more difficult for the central bank to unwind. In addition, if the Fed just wanted a temporary stimulus, they would just go with normal QE rather than tying their hands by transferring these bonds to the Treasury. Thus, it is a signal of looser future monetary policy, and also a signal that the Fed is serious about getting the economy on track. Recall, a key problem in a liquidity trap is that the central bank needs to "credibly promise to be irresponsible" -- to convince the public that it will generate higher inflation, even after the crisis is over. What better way to do that than with "permanent QE"? One thing to note is that the central bank will still be able to raise interest rates later on, or increase reserve requirements, and so I don't think this will, in fact, inhibit the Fed from responding to inflation later on if it is so inclined, but it's a signal that the Fed believes it needs to bring in the big guns. 

A third mechanism, albeit less important, is that, even if fiscal policy is non-reactive today, it will have to be reactive at some point in the future. This implies that people will, at minimum, expect to be taxed less in the future, or have government spending decreased by less.

A fourth mechanism is the classic QE mechanism: purchasing long-term bonds will lower long term interest rates mechanically. A fifth mechanism is that long-term interest rates imply a devaluation of the currency. However, in this case, I'll say full stop that these mechanisms are likely to be modest, but for good reasons -- fiscal policy can be expected to be expansionary and thus raise future interest rates.

Fiscal Support + Communication: 
Were I a central banker, I would not just do this policy quietly (in which case it's likely no one would notice). I would also publicly encourage the government to engage in fiscal stimulus. I would also assure market participants that the policy will be in place and ratcheted up each month, until, at a minimum, the inflation target has been hit (even better would be to raise the inflation target, and in fact price level target, or switch to a 6% NGDP target, but this can be debated elsewhere). This is akin to telling the market you will do "whatever it takes". In fact, committing to potentially doing more at first will likely allow you to do less later on.

Alternative Options:
Of course, this is not the only policy option on the table. Short term interest rates are 1.5%. It makes sense to cut them first. However, the market is smart, and it probably realizes that the Fed only has a few arrows left in this quiver. The closer the Fed gets to zero without a credible plan for what to do next, the less effective each successive rate cut will be.

Next, the Fed could go negative.  I think they should. I think this could be an effective policy particularly if the Fed subsidizes new bank loans (a la TLRTO -- the ECB's program) in addition to taxing reserves held in excess. To prevent a negative effect on total bank profits, the Fed could simultaneously provide banks with a higher positive interest rate on required reserves while taxing some smaller fraction of excess reserves over a target threshold. CBs could also tax large cash holdings of banks. I am not necessarily opposed going this route. But, I also think it will be problematic to pass along negative interest rates to depositors. I also suspect that negative interest rates, absent bank subsidies and taxes on cash holdings, could be problematic, and may be limited in how low a central bank can go (although subsidies of course are unlimited). Also, since I'm a liberal who see value in many forms of public spending, I would prefer more public spending to higher bank subsidies. (Alternatively, since I'm a capitalist who values my hard-earned money, I'd prefer receiving a tax cut to a bank subsidy.) Also, many smart economists think that negative interest rates might be contractionary. Also, are very large bank subsidies, if needed, politically feasible? I have my doubts. Still, if I were Fed Chair, I would include negative interest rates, including new loan subsidies in particular, in the arsenal. I still believe it is a crime that the Fed did not go all the way to zero in the last crisis.

The Fed can also use forward guidance. Of course they should, but talk is always cheap. If the economy and inflation recover, of course the Fed will raise interest rates, and markets know this. Also, both this policy, and plain old vanilla QE, while beneficial overall, also tend to reduce the spread between short-term and long-term interest rates. This reduces bank profits, and may make banks more likely to wait to make loans. The Fed can promise to keep interest rates zero, or at minus one, for one or two years, but can it credibly do it for 5 or 10 years? Most of the FOMC members won't even be around in five years. And the FOMC committee itself rotates every year.

This leads me to vanilla QE. Why not just do more QE? Well, yes, the Fed should. Also, after an announcement that X amount of bonds will be bought each month, if the Fed's growth and inflation targets are not met, the Fed should increase the monthly amount of bond purchases. This is what they did not do last time around, and what the BoJ has also refused to do. One argument against QE is that it was a public relations disaster. Many economists still believe it did not work. And, even though the Fed did QE last time, the economy was very slow to recover. Thus, if the Fed does merely resort to QE this time, they need to do it much more aggressively than before. They could, for example, promise to double the bond purchases every month until NGDP hits a certain target. They also would need a new way to market it.  Instead of calling it just "QE", add a name that every day bond trader bros on Wall Street can relate to: "QE on steroids", or "QE on cocaine".

How about raising the inflation target too? Of course the Fed should. That the Fed continues to maintain a 2% inflation target (that it rarely even hits), now that we know what a problem the ZLB is can be thought of as a badge of incompetence. However, the problem circa 2009-2017 was that, although the Fed had an inflation target, it did not appear to have any ability to actually hit its own target. This almost certainly damaged the Fed's credibility.

Objections:
This will never happen!  Response: It already has! In fact, the Fed already remits interest payments to the Treasury, and other stuff associated with its operating profits. I've heard they have also remitted bond principal before, although I can't find a link and haven't seen any hard proof of this myself. (Update: A commenter on twitter suggests that the Bank of Japan and Bank of Sweden return principle to their govt's, but I cannot verify this.)

The ECB will never do this! Response: The ECB has also already implemented this before. The ship has sailed.

This will encourage governments to overspend. Response: That's a feature of the plan, not a bug. Indeed, if central banks do not to this, central governments likely will. The only thing stopping Trump from doing this himself is that he doesn't know he can. Indeed, this is the one drawback: if the Fed does it first, Trump will learn that it's possible, and likely do too much. However, as mentioned above, the Fed will still be able to raise interest rates and increase reserve requirements.

Would Fiscal Policy Actually Work? Response: Yes it would. I actually lean toward the low side on fiscal multiplier estimates. However, I also don't think there is any serious doubt that large fiscal stimulus is expansionary. If a government sends everyone a $10,000 check (financed by the printing press), spending and inflation will go up.

What if it Fails to generate growth? Response: Let's say for a second it had no effect at all on the economy. In that case, the only effect would be to lower the national debt with nothing lost! That's still a pretty good deal.

Conclusion:
The Fed has the power to create money. In a downturn, the Fed should simply print money, buy the bonds, and then return those bonds to the Treasury. For the very reason that this policy can be unlimited, it's likely to be more effective than any other option. This is simply an idea whose time has come.

PS: If any of you Macro theorists out there want to write this up into a "serious" paper, I'd be interested.

Journal Reporting Times, EJMR vs. Self-Reported Stats from Journals.

Methodology: I took the self-reported data I collected here (which come from from ejmr here), and compared to the official journal stats collected by Juan Carlos Suárez here.

Overall, the data line up fairly well.

Here is the correlation in journal first-response times, conditional on being sent out for review.  The R-squared is a respectable .52, although AEJ: Micro is an outlier on EJMR, where it actually does better than what the official statistics suggest (with N=16 though...). Author-reported weight times are about two weeks longer on average, but on ejmr, you round to the nearest month vs. day, so some difference isn't surprising.

Here is the correlation between desk rejections, author vs. journal reported. The regression coefficient is close to 1, and the R-squared is .63. The intercept is -.072, as average reported desk-rejections are lower on ejmr.

Here's the Data:

Journal	Desk Reject Rate (EJMR)	Desk Reject (Official)	First Response Time, Conditional on Being Sent Out to Referees (EJMR)	First Response Time, Conditional on Being Sent Out to Referees (Official)
QJE	61%	66%	1.5	1.5
JPE	50%	49%	8.0	4.0
REStud	34%	49%	4.5	3.4
ECTA	23%	32%	3.6	3.4
AEJ: Macro	21%	38%	2.9	3.4
AEJ: Applied	37%	45%	2.5	2.7
Journal of Finance	33%	32%	3.0	2.2
AER	47%	46%	3.7	3.1
JEEA	58%	49%	2.5	3.2
AEJ: Policy	36%	51%	2.8	3.1
EJ	45%	55%	3.7	3.6
AEJ: Micro	25%	38%	3.4	4.5

Ranking Economic Journals by Speed, Updated

I decided to update my previous ranking on economics journals ranked by speed.

In the table below, # is the journal's rank by citations (may be 2 years old, I didn't update this), and then there is data on the acceptance rate, desk rejection rate, average time to acceptance, median time to acceptance, and the 25th and 75th percentiles (all in terms of months). Only journals with at least 5 observations were included. Data come from here.

There are some similarities with the previous ranking by speed. The QJE is still the fastest, and the JME still brings up the rear -- despite the fact I've doubled the sample size.

One note is that I just copy-pasted and ran my previous code, so if you notice any errors below, please let me know.

My big hesitation with doing this is that I think it may not purely be a good thing to incentive journals to respond quickly. They tend to do this by desk-rejecting more papers, and I worry that desk-rejections are often done on the basis of institutional affiliation, or perhaps after a less-than-fully-thorough examination of the paper. I may do an updated version which conditions on the paper going out to journals. Nevertheless, if you are contemplating which journal to submit a paper to, this may be helpful.

#	Journal Name	Accept %	Desk Reject %	Avg. Time	Median Time	25th Percent. (Months)	75th Percent. (Months)	N =
1	Quarterly Journal of Economics	1%	61%	0.59	0	0	1	82
80	Journal of Economic Geography	0%	80%	0.67	0	0	1	5
12	Journal of the European Economic Association	3%	58%	1.16	0	0	2	31
81	Kyklos	8%	33%	1.33	1	0.5	2	12
94	Economics and Human Biology	43%	43%	1.50	1	0	3	7
74	Management Science	18%	45%	1.55	2	0	2	22
15	Review of Financial Studies	11%	37%	1.59	2	0	2	27
78	Demography	0%	80%	1.60	1	0	2	5
14	Journal of Human Resources	15%	54%	1.60	1	0	3	46
31	European Economic Review	28%	44%	1.72	1	0	3	50
6	American Economic Journal: Applied Economics	8%	37%	1.76	2	0	3	49
13	American Economic Journal: Economic Policy	8%	36%	1.83	2	0	3	36
100	China Economic Review	67%	33%	1.83	2	0.5	2	9
7	Journal of Finance	0%	33%	2.05	2	0	3	21
19	Journal of Financial Economics	24%	18%	2.06	2	1	3	17
27	Journal of Financial Intermediation	14%	29%	2.14	3	1	3	7
9	American Economic Review	7%	47%	2.16	1	0	4	91
46	Econometrics Journal	0%	50%	2.17	0.5	0	5	6
55	Review of Income and Wealth	17%	67%	2.17	0.5	0	4	6
38	Journal of Financial and Quantitative Analysis	29%	6%	2.18	2	1	3	17
37	Journal of Population Economics	22%	44%	2.22	3	0	4	9
76	Explorations in Economic History	56%	11%	2.22	2	2	3	9
32	Theoretical Economics	8%	0%	2.23	2	2	2	13
90	Economics Letters	45%	25%	2.24	2	1	2	114
42	Review of Finance	0%	8%	2.25	2.5	1.5	3	12
16	Economic Journal	16%	45%	2.26	2	0	4	56
34	Journal of Health Economics	13%	55%	2.32	2	1	4	31
5	American Economic Journal: Macroeconomics	13%	21%	2.33	2	1.5	3	24
62	Regional Science and Urban Economics	52%	14%	2.35	2	2	3	21
65	International Journal of Industrial Organization	7%	20%	2.47	2	1	4	15
91	Public Choice	14%	48%	2.48	1	0	3	29
35	Labour Economics	9%	27%	2.55	2.5	2	3	22
41	Journal of Law and Economics	0%	43%	2.57	3	1	4	14
61	Journal of Comparative Economics	27%	33%	2.63	2	0.5	4.5	15
71	European Journal of Political Economy	38%	23%	2.69	2	2	3	13
58	B.E. Journals in Economic Analysis & Policy	33%	7%	2.71	3	1	4	15
26	Journal of Urban Economics	22%	17%	2.72	3	1	4	18
30	American Economic Journal: Microeconomics	19%	25%	2.74	3	1	4	16
4	Econometrica	6%	23%	2.77	3	1	4	35
24	Journal of Applied Econometrics	9%	35%	2.78	2	0	5	23
57	Industrial and Labor Relations Review	27%	36%	2.82	2	1	5	11
64	The Journal of Law, Economics, and Organization	18%	27%	2.82	3	2	4	11
85	Energy Journal	38%	0%	2.88	3	2	3.5	8
36	World Bank Economic Review	8%	31%	2.92	2	2	4	13
11	Journal of Labor Economics	0%	32%	3.00	3	0	6	19
21	Journal of Public Economics	12%	27%	3.10	3	1	4	60
83	American Journal of Health Economics	43%	0%	3.14	3	2	4	7
3	Review of Economic Studies	4%	34%	3.16	3	0	5	73
23	Journal of Development Economics	17%	41%	3.16	3	1	4	54
63	Oxford Economic Papers	17%	42%	3.23	3	1	5	12
67	Journal of Banking and Finance	18%	18%	3.25	3	2	4	28
87	Southern Economic Journal	14%	14%	3.29	4	2	4	7
99	American Journal of Agricultural Economics	23%	0%	3.31	3	3	4	13
82	Journal of Macroeconomics	31%	25%	3.31	3	0.5	5.5	16
69	Economics and Politics	40%	0%	3.33	3	1	6	5
89	Journal of Economic History	17%	0%	3.33	3	2	4	6
93	Review of Economics of the Household	20%	10%	3.46	3	1	3	10
17	Journal of Economic Growth	0%	0%	3.50	2.5	2	3	10
92	Small Business Economics	25%	25%	3.50	3	1.5	5	8
10	Review of Economics and Statistics	2%	48%	3.51	2	0	5	65
56	Journal of Economic Behavior and Organization	30%	27%	3.67	4	0	6	33
25	Journal of Business and Economic Statistics	20%	10%	3.70	2.5	2	5	10
49	Canadian Journal of Economics	28%	6%	3.72	4	3	5	18
53	Economics of Education Review	50%	7%	3.79	4	2	5	14
51	Journal of Industrial Economics	13%	33%	3.81	4	1.5	5.5	15
88	World Development	39%	37%	3.92	3	1	6	49
33	Journal of Economic Theory (Elsevier)	21%	18%	3.94	4	3	5	33
22	RAND Journal of Economics	6%	21%	3.97	4	3	5	34
68	Macroeconomics Dynamics (Cambridge)	57%	21%	4.07	4	1	6	14
28	Experimental Economics	38%	8%	4.08	3	2	6	13
40	Journal of Environmental Economics and Management	24%	8%	4.15	3.5	2	5	25
45	Econometric Theory	0%	40%	4.20	4	0	5	5
84	Health Economics	8%	50%	4.21	3	3	6	12
44	Journal of Economic Dynamics and Control	50%	14%	4.22	3	1	4	22
54	Journal of Economics and Management Strategy	54%	8%	4.23	3	3	6	13
66	International Tax and Public Finance	14%	14%	4.29	3	2	7	7
60	B.E. Journal of Macroeconomics	63%	0%	4.33	4	2	6	8
75	Economic Theory	23%	27%	4.35	4	1	6	22
95	Energy Economics	55%	0%	4.42	4	3.5	6	11
98	Economics of Transition	71%	14%	4.50	4.5	2.5	6	7
47	Oxford Bulletin of Economics and Statistics	29%	36%	4.64	4	2	6	14
72	Environmental and Resource Economics	27%	47%	4.69	4	2.5	6.5	15
18	Journal of International Economics	18%	6%	4.71	3	3	6	17
43	Journal of International Money and Finance	40%	5%	4.75	3	2	7	20
97	Journal of Corporate Finance	14%	14%	4.75	3.5	3	6.5	7
73	Review of International Economics	30%	10%	4.91	3	3	6	10
52	Games and Economic Behavior	18%	18%	4.94	4	3	6	50
59	Economic Development and Cultural Change	27%	20%	5.00	4.5	3	6.5	15
48	Economic Inquiry	25%	25%	5.18	3	2	7	36
39	Journal of Economic Surveys	0%	40%	5.20	5	0	7	5
2	Journal of Political Economy	0%	50%	5.34	3	2	8	32
96	Empirical Economics	44%	13%	5.56	5.5	3.5	6	16
50	Economica	11%	53%	5.57	3	1	6	19
20	Journal of Money, Credit, and Banking	13%	13%	5.72	4.5	2.5	9	30
77	Journal of Public Economic Theory	27%	18%	5.86	6	3	9	11
79	The World Economy	40%	0%	6.25	5	3.5	8.5	5
70	Econometric Reviews	33%	0%	6.86	7	4	10	6
29	Journal of Econometrics	10%	10%	6.90	6.5	5	10	10
86	Journal of Empirical Finance	38%	0%	8.22	7	6	13	8
8	Journal of Monetary Economics	21%	11%	9.12	6	4	11	19

On the Uses (and Abuses) of Economath: The Malthusian Models

Many American undergraduates in Economics interested in doing a Ph.D. are surprised to learn that the first year of an Econ Ph.D. feels much more like entering a Ph.D. in solving mathematical models by hand than it does with learning economics. Typically, there is very little reading or writing involved, but loads and loads of fast algebra is required. Why is it like this?

The first reason is that mathematical models are useful! Take the Malthusian Model. All you need is four simple assumptions: (1) that the birth rate is increasing in income, (2) that the death rate is decreasing in income, (3) that income per person is negatively related to population, and (4) the rate of technological growth is slow relative to population growth, and you can explain a lot of world history, and it leads you to the surprising conclusion that income in a Malthusian economy is determined solely by birth and death rate schedules, and is uncorrelated with technology. Using this model, you can explain, for example, why incomes before 1800 were roughly stagnant for centuries despite improving technology (technological advance just resulted in more people; see the graph of income proxied by skeletal heights below). It also predicts why the Neo-Europes -- the US/Australasia/Southern Cone countries are rich -- they were depopulated by disease, and then Europeans moved in with lots of land per person. It is a very simple, and yet powerful, model. And it makes (correct) predictions that many historians (e.g., Kenneth Pomeranz), scientists (e.g., Jared Diamond), and John Bates Clark-caliber economists (see below) get wrong.

A second beneficial reason is signalling. This reason is not to be discounted given the paramount importance of signalling in all walks of life (still not sufficiently appreciated by all labor economists). Smart people do math. Even smarter people do even more complicated-looking math. I gratuitously put a version of the Melitz model in my job market paper, and when I interviewed, someone remarked that I was "really teched up!" Simple models are not something that serious grown-ups partake in. Other social science disciplines have their own versions of peacock feathers. In philosophy, people write in increasingly obtuse terms, using obscure language and jargon, going through enormous effort to use words requiring as many people as possible to consult dictionaries. Unfortunately, the Malthusian model above, while effective in terms of predictive power, is far too simple to play a beneficial signalling role, and as a result would likely have trouble getting published if introduced today. 

A third reason to use math is that it is easy to use math to trick people. Often, if you make your assumptions in plain English, they will sound ridiculous. But if you couch them in terms of equations, integrals, and matrices, they will appear more sophisticated, and the unrealism of the assumptions may not be obvious, even to people with Ph.D.'s from places like Harvard and Stanford, or to editors at top theory journals such as Econometrica. A particularly informative example is the Malthusian model proposed by Acemoglu, Johnson, and Robinson in the 2001 version of their "Reversal of Fortune" paper (model starts on the bottom of page 9). Note that Daron Acemoglu is widely regarded as one of the most brilliant economic theorists of his generation, is a tenured professor of Economics at MIT, was recently the editor of Econometrica (the top theory journal in all of economics), and was also awarded a John Bates Clark medal (the 2nd most prestigious medal in the profession) in large part for his work on this paper (and a closely related paper). Also keep in mind this paper was eventually published in the QJE, the top journal in the field. Very few living economists have a better CV than Daron Acemoglu. Thus, if we want to learn about how economath is used, we'll do best to start by learning from the master himself.

What's interesting about the Acemoglu et al. Malthusian model is that they take the same basic assumptions, assign a particular functional form to how population growth is influenced by income, and arrive at the conclusion that population density (which is proportional to technology) will be proportional to income! They use the model:

p(t+1) = rho*p(t) + lambda*(y-ybar) + epsilon(t),

where p(t+1) is population density at time t+1, p(t) is population at time t, rho is a parameter (perhaps just less than 1), lambda is a parameter, y is income, ybar is the level of Malthusian subsistence income, and epsilon is an error term. If you impose a steady state (p* and y*) and solve for p*, you get:

p* = 1/(1-rho)*lambda(y*-ybar)

I.e., you get that population density is increasing in income, and thus that income per person should have been increasing throughout history. Thus, these guys from MIT were able to use mathematics and overturn one of the central predictions of the Malthusian model. It is no wonder, then, that Acemoglu was then awarded a Clark medal for this work.

Except. This version doesn't necessarily fit the skeletal evidence above, although that evidence may be incomplete and imperfect (selection issues?). What exactly was the source of the difference in the classical Malthusian model and the "MIT" malthusian model? The crucial assumption, unstated in words but there in greek letters for anyone to see, was that income affects the level of population, but not the growth rate in population. Stated differently, this assumption means that a handful of individuals could and would out-reproduce the whole of China and India combined if they had the same level of income. (With rho less than one, say, .98, the first term will imply a contraction of millions of people in China/India. With income over subsistence, we then need to parameterize lambda to be large enough so that overall population can grow in China. But once we do this, we'll have the implication that even a very small population would have much larger absolute growth than China given the same income.) Obviously, this is quite a ridiculous assumption when stated in plain language. A population can grow by, at most, a few percent per year. 100 people can't have 3 million offspring. What this model does successfully is reveal how cloaking an unrealistic assumption in terms of mathematics can make said assumption very hard to detect, even by tenured economics professors at places like MIT. Math in this case is used as little more than a literary device designed to fool the feebleminded. Fortunately, someone caught the flaw, and this model didn't make the published version in the QJE. Unfortunately, the published version still included the view that population density is a reasonable proxy for income in a Malthusian economy, which of course it is not. And the insight that Malthusian forces led to high incomes in the Neo-Europes was also lost. 

Given that this paper then formed part of the basis of Acemoglu's Clark medal, I think we can safely conclude that people are very susceptible to bullshit when written in equations. More evidence will come later in the comments section, as, conditioned on getting hits, I suspect several people will be taken in by the AJR model, and will defend it vigorously. 

This episodes shows some truth to Bryan Caplan's view that "The main intellectual benefit of studying economath ... is that it allows you to detect the abuse of economath." 

Given the importance of signaling in all walks of life, and given the power of math, not just to illuminate and to signal, but also to trick, confuse, and bewilder, it thus makes perfect sense that roughly 99% of the core training in an economics Ph.D. is in fact in math rather than economics.


Update: Sure enough, as I predicted above, we have a defender of the AJR model in the comments. He argues the AJR model shows why math clarifies, even while his posts unwittingly convey the opposite.

Above, I took issue with the steady state relationship in the model and the fallacious assumption which yields it. The commenter points out correctly, that, outside of the steady state, the AJR model actually implies that there are two conflicting forces. But, so what? My argument was about the steady state. If one fixes the wrong assumption, steady-state income in the Malthusian model will be equal to subsistence income, and thus the main argument for correlation between population density and income outside of the steady state will also be shut down.

Second the commenter unfairly smears Acemoglu & Co., writing that the real problem is not with their model, but that they didn't interpret their model correctly: "goes ahead in the empirical work to largely, in contrast to what their model says, take population density as a proxy for income!".

Thus I'd like to defend Acemoglu against this unfair smear. In preindustrial societies, there were vast differences in population densities between hunter-gatherer groups, and agricultural societies, even though there were not vast income differences between the two. In fact, quite surprisingly, hunter-gatherer societies often look to have been richer despite working less (read Greg Clark), and despite far more primitive technology. Thus it is quite reasonable to assume, as AJR did, that it is likely that differences in technology would swamp the differences in other population shocks (A more important than epsilon). The Black Death might have doubled or tripled incomes, but settled agrarian societies might have population densities 1000 times as large as primitive hunter-gatherer tribes. This isn't an airtight argument, but, given their model, I believe AJR's empirical extension is reasonable, particularly given that they provide a caveat. The problem is that their model is not reasonable.

The commenter goes on to argue that I've gotten AJR's conclusion backward: "You claim that the point they are making is "population density will be a decent proxy for income in a Malthusian model." The point they are making is explicitly the exact opposite: that "caution is required in interpreting population density as a proxy for income per capita." 

Huh? The first two lines of the abstract of the AJR paper read: "Among countries colonized by European powers during the past 500 years, those that were relatively rich in 1500 are now relatively poor. We document this reversal using data on urbanization patterns and population density, which, we argue, proxy for economic prosperity."

Seems clear here they are arguing for using it as a proxy.

Reminder: Most Published Research is Probably Wrong!

At least in some way. Don't get me wrong, there is a lot of great research out there. However, it has occured to me that many people are much too trusting of published research, particularly when written by people from fancy universities with fancy letters behind their names and when published in prestigious journals. I saw this recently during a very lively session on the Decline in US Manufacturing Growth and Productivity at the AEA meetings in Philadelphia several weeks ago. Several people asked David Autor why his results on the impact of China on US innovation was different from what other prominent researchers had found. (One of the answers, of course, is that there is little reason to believe the competing research, but I digress...) Similarly, one of my complaints of the otherwise excellent Trade Talks podcast with Chad Bown is that published results, particularly by prominent researchers, are generally taken at face value, with not enough discussion, in my view, about potential caveats and shortcomings of the methodologies employed.

The reality is that science is difficult, and that Cowen's First Law (there is something wrong with everything!) applies to economic research.

Here's a moving video from Neil Degrasse Tyson which I mostly love. My only issue was his description of science:

One of the great things about science, is that it's an entire exercise in finding what is true.
You have a hypothesis, you test it. I get a result. A rival of mine double checks it, because they think I might be wrong. They perform an even better experiment than I did, and they find out, “Hey, this experiment matches! Oh my gosh. We’re on to something here!” And out of this rises a new, emergent truth.

This is a description of everything I wish science was! Perhaps it is an accurate description of hard sciences (I'm skeptical), but this is not how the social sciences operate. In practice, when a top researcher has a major finding, other top researchers, with rare exceptions, do not check it. Occasionally, grad students or less prominent researchers will overturn the result, but they will find that journals simply aren't the least bit interested in publishing papers which reverse seminal papers. Thinking like an economist, this creates some rather perverse incentives. If you are a well-connected researcher in a prominent department, you are well-incentivized to publish as much as possible. This means creating research which appears sophisticated, and it also means not pissing off the people who will judge your research. On the contrary, implies that there are benefits from having a lot of close friends (what deGrasse calls your "rivals") in the profession. You don't accomplish this by pointing out that another researcher's results disappear when you control for latitude. As a result, many top researchers are in fact incentivized to crank out many low-quality papers but with seemingly blockbuster results.

Part of the way this system survives is because there is a culture frowning on writing "comment papers", and the other reason is that there is, fortunate for the existence of this system, a willing population of "sheep", the "true believers", available to consume and believe this research.

In any case, on my ride back to Moscow from Philadelphia, I fired up Stata, and took a second look at some of the research which found that the China shock led to a huge increase in productivity and patenting in Europe, published in a leading journal. The thesis sounded quite dubious to me from the beginning. It turned out that including sectoral fixed effects -- a very basic control -- killed the results. If I were to write this up, the journal that published it would never, in a million years, accept it. Secondly, although the original authors seem to me like fine people, traditionally, economists behave in a way which is mafia-level shady (see the comments) when their research comes under attack. Partly, they have to do this, since the masses believe that most top research is correct, it is seen as a huge black mark on someone's reputation to have a paper overturned. If there was widespread knowledge that science is difficult and most papers have flaws, this might not be so necessary. Then, perhaps, we could get a bit closer to Neil Degrasse Tyson's idealized view of science.

Janet Yellen's Tenure, in Retrospect (Has the Economy Really Recovered?)

On Twitter, Paul Romer lauds the job that Janet Yellen has done, writing that "In an extraordinarily difficult political context, J. Yellen did an extraordinarily important public policy job extraordinarily well."

However, I've long been a skeptic of the job that both Ben Bernanke and Janet Yellen have done. (Seems I'm the only one who remembers that 2010 discount rate hike, with GDP 20% below trend, she voted for, which helped spawn the Tea Party...) The economy never had a full recovery, as growth is still slow and inflation is still below target. I once explained this to a colleague, and she told me that "Sorry, but I don't think you are smarter than Ben Bernanke. He knows more about monetary policy than you." When I was at the CEA, virtually everyone else there thought I was the stupid one, and that Ben-"When Growth is Not Enough"-Bernanke's policy was roughly optimal.

Of course, this is long before Ben Bernanke himself amended his views, to say that central banks should do price-level targeting when exiting a liquidity trap. I.e., Ben Bernanke (2017) thinks the Fed should have aimed for higher inflation in the 2009 to 2014 period, whereas Ben Bernanke (2009-2014) seemed to be content with below-target inflation, much less inflation over and above the inflation target. That Bernanke (and Yellen) also believed that when growth and inflation were below forecast, a central bank should not provide more stimulus, but instead lower the forecasts.

However, Bernanke's reappraisal isn't just a repudiation of the views of the 2009 to 2014 Ben Bernanke, but also a repudiation of the views of Janet Yellen over this period. Of course, Janet has only been the Chair since 2014. Since that time, she has seen fit to end QE and raise interest rates repeatedly. So, let's do some Monday-morning quarterbacking on how well this has gone.

In terms of the Core PCE deflator, inflation has been below the Fed's own target under Yellen's entire term, and is currently nowhere near the target. In addition, there's a good case to be made that the Fed's inflation target is, itself, too low. And then there is Bernanke's argument, that, coming out of a liquidity trap period, central banks should aim for temporarily high inflation. Yellen's record here is not good.

How about with GDP growth and employment? If all is well there, slightly lower inflation would not be a real problem. However, here is Real GDP relative to the long-run trend.

Note that the US is well below it's long-run growth trend, and getting further away from it. The near-consensus among economists, interestingly enough, is that most everything that can be invented has already been invented, and there just isn't that much "stuff" left. Yes, really. I think that is nonsense (the iphone was invented in 2007!). In fact the cause is the China (+RER) shock, and then poor regulation during the housing bubble, and poor monetary policy managing the liquidity trap. This is all fairly obvious by now. Strange it isn't already the consensus. But slow inflation along with slow growth suggests that the problem isn't some structural supply problem, but due to a shortfall of demand.

However, to be fair to Paul Romer, unemployment is way down. This is a good sign, and an indicator that the labor market has improved.

However, it is not the only labor market indicator, and thus, by itself, does not provide a full picture of the economy. The employment rate for prime-aged workers is another legitimate measure to look at, as the unemployment rate might look good if many people have simply left the labor force. And, the prime-age employment rate below shows that, while the US has made steady progress, it is not quite back to the level it was at in 2007. In addition, the 2007 peak, which came after 7 years of relatively slow GDP growth despite a housing bubble, and was also the decade of the collapse in manufacturing employment, was significantly lower than the 2000 peak. (The overall employment-to-population ratio still looks terrible.)

However, even this measure is flawed in several respects. One problem is that, given heavy baby boomer retirement, more jobs have opened up for younger workers than would otherwise be the case. While I don't think an adjustment for this would change the picture that much, we might actually deduct a quarter to a half of a percent for this.

A second factor is that the several decades since the 1970s had saw increasing numbers of women enter the labor force. Optimists may say that this trend was simply complete by 2000. But, even since then, we have seen female employment continue to increase on a relative basis. Thus, I would say that our baseline shouldn't be the 2000 peak, but that we should have expected emp-to-pop to have increased more than this. How much more? Perhaps another .25 or .5%. A good paper could probably tease this out. Again, I don't think this necessitates a large adjustment. But, these are starting to add up, and means we might still be 3.5-4% below where we should be.

The graph of the female prime-aged employment rate shows that female employment has essentially recovered back to its level in 2007. This means that it is still gaining ground relative to male employment, even since 2000. And, it is still about 7% lower than the overall employment rate.

A third factor is that just because people are working, it doesn't mean they are doing work they are happy with, or have seen the wage growth they would like. Here is the part-time employment rate, which is still elevated, and presents a rather pessimistic figure. But, if more people are working part-time, this is an indication that other people who are working full-time are not employed in their ideal jobs, but would rather have better jobs with higher salaries. And, of course, given the slower GDP growth, incomes have not grown as fast as they used to.

Obviously, incomes are also not increasing as fast as they used to.

Sure, inflation is also low, but GDP growth is slow. That both are slow is an indication that the economy is demand constrained. Why is it demand constrained? Well, the end of QE and four rate hikes are certainly part of the story. Those rate hikes caused the dollar to appreciate, inflation to subside, and more manufacturing jobs to be lost. And this is Janet Yellen's doing. This wasn't a one-time mistake either. She repeatedly failed to hit her inflation target, with slow GDP, and never re-thought the course the Fed was on.

The defence of Yellen (and also of Bernanke) is that she might have liked to have been more accommodative over much of this period, but also had to deal with more conservative elements on the Board (see here).

To get a sense of how competent the people around Yellen at the Fed have been, read this stream of jaw-dropping quotes, stolen from a commenter here on Scott Sumner's excellent blog:

The 2008 “Dream Team”
SEPTEMBER 16, 2008 FOMC TRANSCRIPT
SELECTED QUOTES EXCERPTED FROM ROUNDTABLE DISCUSSION
MR DUDLEY
Either the financial system is going to implode in a major way, which will lead to a significant further easing, or it is not.
MR LOCKHART
But I should follow the philosophy of Charlie Brown, who I think said, “Never do today what you can put off until tomorrow.” [Laughter]
MR ROSENGREN
Deleveraging is likely to occur with a vengeance as firms seek to survive this period of significant upheaval… I support alternative A to reduce the fed funds rate 25 basis points. Thank you.
Mr HOENIG.
I also encourage us to look beyond the immediate crisis, which I recognize is serious. But as pointed out here, we also have an inflation issue. Our core inflation is still above where it should be.
MS YELLEN. I agree with the Greenbook’s assessment that the strength we saw in the upwardly revised real GDP growth in the second quarter will not hold up. Despite the tax rebates, real personal consumption expenditures declined in both June
and July, and retail sales were down in August. My contacts report that cutbacks in spending are widespread, especially for discretionary items. For example, East Bay plastic surgeons and dentists note that patients are deferring elective procedures. [Laughter]
MR BULLARD
Meanwhile, an inflation problem is brewing. The headline CPI inflation rate, the one consumers actually face, is about 6¼ percent year-to-date…My policy preference is to maintain the federal funds rate target at the current level and to wait for some time to assess the impact of the Lehman bankruptcy filing, if any, on the national economy.
MR PLOSSER
As I said, it is my view that the current stance of policy is inconsistent with price stability in the intermediate term and so rates ultimately will have to rise.
MR STERN
Given the lags in policy, it doesn’t seem that there is a heck of a lot we can do about current circumstances, and we have already tried to address the financial turmoil. So I would favor alternative B as a policy matter. As far as language is concerned with regard to B, I would be inclined to give more prominence to financial issues. I think you could do that maybe by reversing the first two sentences in paragraph 2. You would have to change the transitions, of
course.
MR. EVANS
But I think we should be seen as making well-calculated moves with the funds rate, and the current uncertainty is so large that I don’t feel as though we have enough information to make such calculations today.
MS PIANALTO
Given the events of the weekend, I still think it is appropriate for us to keep our policy rate unchanged. I would like more time to assess how the recent events are going to affect the real economy. I have a small preference for the assessment-of-risk language under alternative A.
MR LACKER
In fact, it’s heartening that compensation growth is coming in a little below expected in response to the energy price shock this year. This has allowed us to accomplish the inevitable decline in real wages without setting off an inflationary acceleration in wage rates.
MR. HOENIG
I think what we did with Lehman was the right thing because we did have a market beginning to play the Treasury and us, and that has some pretty negative consequences as well, which we are now coming to grips with.
MR. ROSENGREN
I think it’s too soon to know whether what we did with Lehman is right. Given that the Treasury didn’t want to put money in, what happened was that we had no choice…I hope we get through this week. But I think it’s far from clear, and we were taking a bet, and I hope in the future we don’t have to be in situations where we’re taking bets.
Mr. FISHER. All of that reminds me—forgive me for quoting Bob Dylan—but money doesn’t talk; it swears. When you swear, you get emotional. If you blaspheme, you lose control. I think the main thing we must do in this policy decision today is not to lose control, to show a steady hand. I would recommend, Mr. Chairman, that we embrace unanimously—and I think it’s important for us to be unanimous at this moment—alternative B
MR WARSH.
Those would be my suggestions to try to strike that balance—that we are keenly focused on what’s going on, but until we have a better view of its implications, we are not going to act.


The optimistic view of Yellen is that, while overall policy was quite inappropriately tight for essentially the entire period since 2008, Yellen may have been struggling all the time against these clowns in private, leading policy on a less-bad course. It seems this was partly true, but this case remains to be made, however, as I see no evidence that she wasn't in favor of the rate hikes as Fed Chair.  She also could have talked Obama into making timely appointments in 2009 and 2010, to try to get policy back on track. Instead, she voted for a rate hike in 2010. I viewed this as unforgivable at the time, and it even looks worse in retrospect.

Of course, she also got unlucky. Had it not been for Comey, her mistakes as Fed Chair would likely not have led to Donald Trump.


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