The Problem With Interest-Rate Policy

Or . . . the problem with interest rates as the primary policy tool.

Interest rates are very blunt instrument. What's more the Fed only has control over a small portion of the entire yield curve. So because it wants to affect the entire yield curve through its policy, it has to act even more dramatically with its otherwise naturally blunt policy instrument.

The Austrians are right when they criticize the use of interest-rate policy as a distorting act of price fixing. Interest is the price of credit. Distortions to the interest-rate curves by the fixing of some prices along it affects the economy. And since the Fed has to act more dramatically since it has limited abilities to control the prices in this market, it has to hit harder with its big, blunt, interest-policy hammer. Right away that should strike us as problematic. We should be very concerned with the way this fractured fairy tale is playing out if this is in fact an accurate depiction, which I believe it is.

At the end of the day interest-rate policy is just a stand-in for communication. Communication is the real key policy for the Fed. The intentions that the Fed has for the money supply is the essential guideline for how that part of the economy is going to change in the future. But once we are down a particular road with monetary policy, a road the Fed may not be completely aware of much less have fully intended, we can't just hop in the Way-Back Machine to go correct matters.

This is the key advantage of using NGDP level targeting, NGPD futures price targeting, or wage growth targeting as the key policy tool. As long as the Fed can make a credible commitment by policy or by law to keeping NGDP towards a clearly communicated growth trajectory, then the economy will be on course to fulfill its potential. We need to lose the illusion that the council of elders with its fearless leader has some grand omniscience granting it the ability to figure out what monetary policy needs to be to keep NGDP on target. In truth the best the Fed can do is set the right long-term target for growth. It is the market that will best to decide what policy is necessary and what changes to policy are necessary to keep the economy on that path.

The economy is a massive ship at sea headed towards a port that lies perpetually over the horizon. The Fed is at the steering wheel, but it is not a navigator. The market is the great navigator. The market has the ability to help the Fed steer in the right direction making the needed corrections along the way and with much more rapid feedback than the long and variable lags our heroes are currently subject to.

In this universe all the Fed has to do is set the target for what level of growth it wants in the economy and then commit by law to pursuing whatever actions it takes to keep the economy at that growth rate. A highly credible Fed would not need to move interest rates and would not need to make significant asset purchases or sales to convince the market that it was truly going to pursue the proper policy to reach its target. A less credible Fed would have to make relatively larger asset purchases or sales as needed and move interest rates as needed to convince the market that it truly was going to follow policies as dictated by the market to reach the policy goal. But credibility has its own momentum, and as it grows it compounds. This is good in that it takes less to keep credibility. This is bad in that a loss of high credibility can portend dramatic repercussions. That is why central bank policy tends to be formalized in law and central bankers tend to be called to account.

Changing the policy tool and the method by which it is derived to a growth-oriented, market-driven focus isn't a magic bullet, but it is a massive step towards a much more sensible world.

Warriors And Hero-Labeling

Sheldon Richman makes a compelling case that The American Sniper was no hero. 

Some questions regarding war, warriors, the military, and support for it all:

• At what point does a soldier become a hero? 
• Are any soldiers (of one's own military) not heros? 
• Can you be a hero if you're on the "wrong" side (a hero in the eyes of the enemy while remaining an enemy)?
• Are all heros equally heroic?
• Are all villains equally evil?
• At what point is a war unjust?
• Can a originally just war become unjust?
• If so, how does this change the status of those fighting in it (on both sides) and their supporters?
• At what point do participants in an unjust war or those using unjust tactics or those engaging in unjust operations bear responsibility for their actions?
• Are any or all acts unjust if done in support of evil and just if done in support of good?
• Are any or all acts unjust if done in support of the enemy and just if done in support of one's own side?
• At what point is a soldier responsible for the moral/ethical intentions or de facto results of the soldier's own actions or the actions of the soldier's own  side?
• Same question but replace "soldier" with "citizen" and then also "government official".
• Is it ever justified or morally required that a soldier actively switch sides in a conflict? 
• Again, same question but replace "soldier" with "citizen" and then also "government official".
• Can a soldier be held morally culpable for failing to abstain from fighting or for failing to switch sides?
• If so, under what conditions?
• Yet again, same questions but replace "soldier" with "citizen" and then also "government official".

Highly Linkable

I want to go to there.

I DON'T want to go back to there then.

Speaking of a then to be glad we are no longer in, Megan McArdle on bread bags as shoes.

How about going back to the days when a computer word processor could spell check your work but had no clue about what the correction should be (start at the 10:04 point for the "New Frontiers" part)? I knew Mr. Wizard's World well. I can remember each of these episodes like I watched them yesterday.

The people of these worlds are so tiny, I'm crushing their heads.

Here are a couple of reasons nobody likes me in my world . . .

• I tend to look at sports discussions scientifically and logically rather than emotionally and indeterminately. Most people don't like that.
• I acknowledge that I am not a grammar expert . . . or are I??? But I do love pointing out to people when grammar "rules" they believe in strongly are actually grammar myths not worth believing in. 

James Altucher would tell me not to bother with people who don't like me. He is right. I've been making my way through the interviews on his podcast that he summarizes here. They have ranged from mildly interesting to fascinating. Each has been rewarding in one way or another. A great example of learning by exposure to diverse points of view.

Here is a diverse point of view from Alex Tabarrok defending the company town.

Arnold Kling offers a diverse way of looking at the purpose of the study of economics.

Finally, Timothy Taylor has a different approach to understanding cooperation and competition.

Highly Linkable

Is that a Lite-Brite? No, it's NYC.

Have you heard the country song? It seems there is only one.

Five exam hacks to help you ace the final.

I tend to be an optimist about the future including and because of technology. I welcome the coming singularity. But I have to admit this concerned me and kinda shook me a little. More here.

How do you find something when a Google search isn't enough? Lifehacker suggests some options.

Looks like I need to change my views on flossing--and revise some other oral hygiene practices while I'm at it. (HT: Tyler Cowen)

The "coach who never punts", Kevin Kelley was interviewed recently on the AFA podcast. I predict in 10 years much of his heterodoxy will be orthodoxy.

Kevin Erdmann has a very good grip on housing policy. He Zoro's Shiller in a single paragraph and then proceeds to tear down all of the housing lobby's sand castles.

While we're calling out iconic economists, John Lee of Open Borders challenges Krugman greatly and Cowen to a lesser extent.

John Cochrane continues the craze taking on Keynesianism.

You might read this first before getting right to Pete Boettke answering Noah Smith's question on if economics swings left.

The zero-interest-rate environment succinctly explained with myths debunked by Scott Sumner.

Don Boudreaux offers some new year's advice on bad habits he wishes the government would break.

(UPDATE: housing policy link restored.)

If I Were A Rich Man . . .

In the trust business we have a few inside jokes. One is that you anxiously await each typical age threshold "expecting" to receive notice that you are the beneficiary of a trust you did not know existed. These dates are generally 18, 21, 25, 35, and 45. I've got just one left. I'm not holding my breath.

I have a few crazy stories about trusts that actually do exist while the beneficiaries are completely unaware. These include some with contingencies that range from bizarre to spiteful. If those contingencies don't play out, some other party will be the recipient. In the very likely event that I am not going to win the trust lottery, what are realistic goals for my wealth going forward?

I am not so much thinking about specific numbers. It is more about evaluating where I've been and where I'd realistically like to be in real terms. I think of these as levels of wealth.

Let's get it out on the table right now that upon reflecting on my current status I have to feel incredibly lucky (just don't call it "a blessing"). It is very likely that like myself, everyone reading this blog is in the top 1% of current human wealth. Basically every household in the United States above the poverty line is in this top 1% group. I enjoy riches that would be undreamed of by previous generations of Americans or current populations around the globe today. So with an eye of thankfulness to what I have, how would I measure being "wealthier" than I am today?

Somewhat in hierarchical order, here are the levels of wealth I would like to achieve. I reserve the right to change my mind on this including adding to it; which is to say, I recognize that what I value now may not be what I value in the future.

• New cars and more often - I would like to feel financially strong enough that without hesitation I would always buy brand new cars. And I would like to be able to replace cars about every 2-3 years rather than 6-8. 
• Top-level electronic, entertainment packages - I would like to have satellite radio in all cars (I do in one and I work to always get a discount for it (see the next item on this list)), all the premium channels and other packages for TV, full memberships in all the Internet radio desired like iTunes Match, Pandora, etc., the top-tier of Internet broadband and mobile data packages, et al. 
• No discount shopping/rewards programs - I make A LOT of decisions with an eye to how I can get a discount or participate in a rewards program. At some point it is not worth one's time. I would like to be wealthy enough that it is never worth my time. It would be a hard habit to break, but I would adapt. 
• [UPDATED] Dining out without limit - Eating at the kind of places where I most like to eat and ordering as I like to order is currently something subject to a sharp budget constraint. It would be amazing if that were no longer the case.
• Top-of-the-line furniture and appliances throughout my home - Like many of these, this presumes I am wealthy enough to afford the risk my kid, my kid's friend, your kid, etc. will destroy my leather chair from a place you've never heard of, guest-bathroom TV, ice-maker in the backyard kitchen, etc. 
• First-class travel - I want every flight I take to be business class at the least with first class an option. I want to stay in the best hotels at every destination and in the best room available. This might include something as small as staying on property at Disney and in a suite with a view. It might include the Ritz-Carlton's destination club. 
• Netjets is the natural next step within this item.
• Having a private suite at my favorite sporting events - We've discussed this one before.
• [this space reserved for future awesomeness...]

Yubby dibby dibby dibby dibby dibby dibby dum.

Highly Linkable

Visit these 18 fabulous libraries.
Go there (someday) in a "windowless" airplane.
Ask if you can fly a drone around inside to potentially produce videos as cool as these.
If they'll let you, film it for a week so it can get on prime-time Norwegian TV. Those guys plus the drones are getting close to my ideas.

Barry Ritholtz shares his basic simple truths of investing. These are highly recommended. Make sure you read the whole (short) list as the last two are as important as any.

Once you've got your investing house in order, better get to work on correcting these misconceptions about exercise--many of these are no surprise to loyal readers of MM.

Before leaving the body, don't fall for any detox nonsense in your New Year's Resolutionating.

John Cochrane goes all Principal Max Anderson in reviewing Ken Rogoff's proposal to eliminate physical currency. I fully am with Cochrane but I did want to quibble with his confusion about how this would actually affect monetary policy. You or I can immunize our own exposure to the negative interest rate, but we cannot all jointly eliminate it--the burden can only be transferred. I believe Scott Sumner has this criticism nailed.

We are repeatedly reminded that the overwhelming majority of NCAA athletes will go pro in something other than sports. For those the depressing fact is their degree wasn't worth that much. That doesn't surprise David Berri who also notes how the NBA age-limit rule (friendly for the NCAA) harms players while helping colleges and coaches.

Lot of count-ups and downs in this link fest. Here are 20 reasons the wind industry's case is (motionless) hot air.

Tim Harford reminds us in this post that most ventures are failures and we can learn from the losers.

If you were looking for a succinct list of arguments against price controls (ceilings specifically) in the face of disasters, you can relax--Don Boudreaux has provided it.

David Henderson reflects on one of his more memorable times questioning the powerful. If only more of us were so courageous as to continually question the military leadership.

2014's Resolution Fulfillment

It is time again to check on how I did in fulfilling my annual resolution. One word: success. Let me explain exactly how I mean.

Ever since the first skybox suites were installed in Oklahoma Memorial Stadium, I've held steadfastly that they were not for me. My time as a student (7 years) solidified this belief as I wanted to feel and breathe the atmosphere. And even as a graduate, I continued for a season to sit among the students before migrating back to the upper-west side stands 14 years ago (the area in which I sat before college going back to the age of about 7).

While the upper-west seats were a bit sterile after my days in the student section, they were still in the elements of both weather and populace. Upgrades in recent years to include new, more glamorous suites did not sway my belief. It wasn't about a rejection of luxury per se; it was somewhat about staying true to the experience (I might as well be at home for being in a suite) and a lot about NOT being like or around those in the suites. On this latter point, there are three facets.

The first problem is these people tend to be snobs. This is perhaps the biggest single issue I have with the suites. The second problem is my perception that those in the suites don't actually watch the game much. It is easy to become distracted by the booze and the food and the conversation. The people in the suites might as well be at some pool party.

The first two problems relate to the third problem. Being in them is like playing some kind of game, but the rules don't make any sense to me. They're being made up by all the wrong people. I mean no one makes them up. They seem to make themselves up. You cannot have alcohol in the stadium at OU. In fact there are strict rules about alcohol throughout the publicly-owned, state university. But you can have it in the suites. So the guy sitting in the blazing heat or blistering cold can't have a beer, but the guy asking the attendant to adjust the thermostat can sip a bourbon.

Getting back to the resolution--what has changed? As surprising as it was for me, at some point this football season I reversed my position on where I would prefer to sit. This change of heart was gradual at first and then sudden in completion. To be sure I was not seduced by the lure of even better improvements to come. In fact there are perhaps as many amenities for the regular seats as their are for suite people in the latest plans. And it is not just that I can see the advantages of suites; I would actually prefer to be in one under certain conditions. Namely, those conditions include I don't have to endure the problems I still have with suite people.

But just as I don't want to associate with my stereotypical view of who frequents a suite, I have grown quite tired of being around the typical fan. So basically I want to watch a game in person with people of my choosing. What has soured me on those in the stands? One word: ignorance. I am tired of the following (to be sure, I have been guilty of each of these myself at one time or another):

• People who think the other team and their fans are evil, dumb, undeserving, rude, or any other negative quality rather than basically equivalent to themselves as a whole and on average. 
• People who indignantly and vocally question every thing short of perfect success.
• People who don't know the rules of the game--to a ridiculous fault. You do not have to be an expert, but appreciate what you don't know.
• People who always think they are getting screwed by the refs.
• People who think good coaching consists of yelling, getting mad, "giving them a good butt chewing" at halftime, etc.
• People who think that good player play includes never fumbling (the ol' try harder approach to solving a random phenomenon), never being out-manned or out-talented, and perfection in all its many other forms. 
• People who support concussions for players. Oh, they never say it that way. The way they express it is to become visibly irate when one of their players is flagged for an illegal hit. Apparently, dangerously injurious behavior is "part of football"--at least it is when one's own player is applying the hit.
• People who cheer this. It is theft in the least, and it is potentially criminal negligence that could lead to severe injury or death. For the unfortunate person on the ground the impact would be about the equivalent of having a football thrown at his head at 70 miles per hour from a few feet away.

I could go on and on, but it would get even more petty and unfair. Perhaps it is not them; it is me. But regardless it seems that after 176 home games attended in a row, I have changed my mind on where I would prefer to sit. Now to just come up with spare $100,000 a year or so to pay for my preference ...