Let them eat NGDP

This weekend, at an INET conference, Mike Konczal of Rortybomb made the excellent point that the econ blogosphere is probably adding more new policy ideas to the public discourse right now than academia itself. He identified NGDP targeting as the most important and dramatic example.

And boy was he right! NGDP frenzy has reached truly astonishing levels. I have my doubts that the Fed will actually adopt an NGDP target, but there is no denying that the blogosphere and much of the popular press has fallen for this idea like girls at my college fell for Thom Yorke back in 1999 (no I'm not bitter, why do you ask?). These days Scott Sumner says "NGDP" like Herman Cain says "9-9-9." Now, I am all for looser monetary policy, whether it comes in the form of an NGDP target or not. But NGDP has reached the point where, like Radiohead, its cult status is actually starting to annoy me. 

Take, for example, this post from Matt Yglesias (an extremely sharp dude) on how NGDP is the "actual thing":

[I]t seems natural to many people to take [real GDP and inflation] as “given” and understanding NGDP (= GDP + inflation) as somehow constructed and exotic. But actually NGDP is, relatively speaking, the simple quantity here. It measures total spending in the economy. You count everything, add it all up, and you’ve got your NGDP...Social construction enters the picture when we try to move from this nominal quantity to the allegedly “real” one... 

[W]e have all these different measures of inflation...[but it's]not directly measurable the way NGDP [is]...Nor is it particularly clear what, in principle, “real” GDP is measuring. Think up all the classic critiques of GDP as a measure of human welfare...When you shift from GDP to “real” GDP, though, you’re not measuring the total quantity of spending anymore.

I just don't think this is the right way of seeing it.

Matt's main point is that because inflation is mismeasured, real GDP ("RGDP") is also mismeasured. Sure, that's true (though of course NGDP itself is not measured with anything remotely approaching certainty). But that doesn't mean NGDP is "better" than RGDP. An accurately measured number is not necessarily more useful than a less accurately measured number, if the latter is something we care about and the former is something we really don't.

In terms of economic well-being, we do not care about NGDP. Or at least, we shouldn't. To see this, take the example of Zimbabwe. In 2007, Zimbabwe's NGDP grew at a rate of over 60,000%! No, that is not a typo. The "total quantity of spending" in Zimbabwe at the end of 2007 was more than 60,000 times what it was at the beginning of 2007. For real.

Anyone still think NGDP is the "actual thing"?

The problem with NGDP is that you can't eat it. It really is just numbers on a page. Normally, it is a reasonable approximation to a measurement of stuff we can eat. But when someone starts playing around with the numbers on the page, as in Zimbabwe's hyperinflation in 2007, NGDP stops being any kind of measure of stuff we can eat. 

In other words, NGDP has a potentially large source of mismeasurement in it, and that mismeasurement is inflation itself. When we try to take NGDP and recover some kind of measurement of how much eat-able stuff our economy produces (i.e., RGDP), we have to try to account for the mismeasurement represented by inflation. And of course we end up mismeasuring inflation, as Matt points out, but all that means is that we are mismeasuring our mismeasurement of RGDP. Inflation is still the first-order mismeasurement.

Actually, the world abounds with cases like this. It's easy to measure how many hours a worker sits in front of a desk, but hard to measure how much useful work (s)he actually accomplishes in that time. But it's the latter we care about, not the former.

Now, I am not saying that the U.S. is in danger of hyperinflation. It's not. Nor am I saying that RGDP is a perfect or even a great measure of human happiness. It's not. My point is that NGDP is not supposed to be a measure of how well the economy is doing. People who support NGDP targeting, like Scott Sumner, support it because they believe that NGDP is a good indicator of how much money we should print. Not because they think that NGDP is intrinsically good. 

NGDP may be less indirectly measured, but RGDP is still the "actual thing."

Like I said, I support printing money and buying stuff. And I think OK Computer was a rockin' album (and Kid A and The Bends were good too). But thinking of everything in terms of NGDP does not make all of macroeconomics suddenly simple and comprehensible and predictable. And Radiohead didn't save rock. Sorry, fans, but there it is.


Update: Scott Sumner agrees about Radiohead. Unfortunately, he says I'm "criticizing NGDP" and "missing several key points." Huh?? If you read the above post, you'll notice me saying:

My point is that NGDP is not supposed to be a measure of how well the economy is doing. People who support NGDP targeting, like Scott Sumner, support it because they believe that NGDP is a good indicator of how much money we should print. 

In Sumner's "rebuttal," he writes:

NGDP is...the proper indicator of nominal shocks...[it's]a nominal shock indicator, not an indicator of living standards.  I’d be the first to admit that RGDP, with all its faults, is a better measure of living standards than NGDP...[but NGDP is more] useful in developing optimal monetary policy.

Not to be excessively whiny, but is that not exactly what I just said???

So exactly what "key points" am I missing? And how on Earth am I "criticizing NGDP"? My gosh, people. NGDP is an economic indicator, not a fair damsel in need of gallant knights to defend her maiden virtue. Settle down!

Alternate Source of Home Heating

The high cost of home heating and the current recession have led many Americans to search for alternate sources of home heating. Many of these sources of heating may be acceptable if appropriate safeguards are used. However, be aware these supplemental heating devices are responsible for thousands of home fires each year.

Wood Stoves

Wood stoves cause more than 4000 residential fires each year. Carefully follow the manufacturer’s installation and maintenance instructions. Look for solid construction, such as plate steel or cast iron metal. Check for cracks and inspect legs, hinges and door seals for smooth joints and seams. Use only seasoned wood for fuel, not green wood, artificial logs or trash. Inspect and clean your pipes and chimney annually and check monthly for damage or obstructions. Cleaning more often may be necessary. Be sure to keep combustible objects at least three feet away from your wood stove.

Electric Space HeatersBuy only heaters with the Underwriter’s Laboratory (UL) safety listing. Check to make sure it has a thermostat control mechanism, and will switch off automatically if the heater falls over. Space heaters need space; keep combustibles at least three feet away from the heater. Always unplug your electric space heater when not in use.

Kerosene HeatersBuy only UP-approved heaters and check with your local fire department on the legality of kerosene heater use in your community. Never fill your heater with gasoline or camp stove fuel; both flare up easily. Only use crystal clear K-1 kerosene. Never overfill any portable heater and never fuel the heater when it is hot. Use the kerosene heater in a well-ventilated room. Kerosene heaters pose perhaps the worst exposure largely due to improper use and the fact they contain a highly flammable liquid- not to mention potentially dangerous fumes.

FireplacesFireplaces and wood stoves regularly build up creosote in their chimneys. They need to be cleaned frequently and chimneys should be inspected for obstructions and cracks to prevent deadly chimney and roof fires. Check to make sure the damper is open before starting any fire. Never burn trash, paper or green wood in your fireplace. These materials cause heavy creosote buildup and are difficult to control. Use a screen heavy enough to stop rolling logs and big enough to cover the entire opening of the fireplace to catch flying sparks. Do not wear loose fitting clothes near any open flame. Make sure the fire is completely out before leaving the house or going to bed. Store cooled ashes in a tightly sealed metal container outside the home.
Finally, having a working smoke alarm dramatically increased your chances of surviving a fire. Always remember to practice a hoe escape plan frequently with your family.
Source: US Fire Association

"NGDP targeting" means "print money and buy stuff"

The econ blogosphere is afire with talk of "NGDP targeting." I don't have a huge amount to add to this discussion, but this post by Greg Ip caught my eye:

[There is] flawed reasoning behind the newborn infatuation with nominal GDP targeting. Its advocates, which include my colleague, R.A. and Goldman Sachs, now include Christina Romer... 

A nominal target can affect expectations in two ways. First, it influences markets’ expectations of what the Fed will do, thereby amplifying monetary actions...But there are many, potentially superior, ways to achieve the same thing, such as a promise to keep short-term interest rates at zero for a specified period of time, to target bond yields, or to keep rates low until a particular inflation or unemployment rate is achieved...Second, a nominal target should encourage firms and workers to behave in a way that makes the target self-fulfilling. 

NGDP advocates base their arguments on a flawed premise: that with a different framework the Fed would have been less concerned about inflation and more about output, and would have thus eased more aggressively.

Basically (and yes, this is a simplifaction), what the Fed can do to affect the macroeconomy is 1) print money and buy stuff, and 2) convince people that it will print money and buy stuff in the future. 

Many people want the Fed to print money and buy stuff because they believe that printing money will increase economic growth and therefore reduce unemployment. Others don't want the Fed to print money and buy stuff, because they fear that this will lead to inflation. Political pressure from these two groups, but especially from the latter, tie the central bank's hands in practice, even though in theory the central bank is supposed to be independent and do whatever it thinks is best.

However, some people believe that the Fed doesn't always have to actually print money and buy stuff in order to boost economic growth. If the Fed manages to convince people that it will print money and buy stuff in the future, these people say, businesses and consumers will anticipate this and economic growth will rise in advance. Then the Fed won't actually have to print money and buy stuff, so the danger of inflation will be averted.

"NGDP targeting" is a way to convince people that the Fed is willing to print money and buy stuff. Specifically, it is a way to convince people that the Fed is willing to print as much money and buy as much stuff as is necessary for economic growth to rise. If the Fed says "we are now adopting an NGDP target," some economists think, people will believe that the Fed is willing to print quite a lot of money and buy quite a lot of stuff, and their reluctance to buy things will crumble.

There are reasons to be skeptical of this. The main reason is that people will probably not take the Fed seriously at first. After all, the Fed has proven pretty unwilling to print money and buy stuff lately, even in the midst of a long grinding depression. Why should people believe that the Fed's behavior has fundamentally and hugely changed?

They shouldn't, so what the Fed will have to do in order to make NGDP targeting work is to prove that it is not bluffing. The only way to do that is to actually print a bunch of money and buy a bunch of stuff. In other words, throw a few people against the wall to show it means business.

But everyone knows the Fed will probably not do this, because of political pressure from conservatives. As soon as the Fed started actually printing money and buying stuff, conservatives would howl, and the Fed would cut it out. And at that moment, everyone would know that the NGDP target was a lie, and it would be dropped.

How do we know that political pressure from conservatives is so strong? Well, ironically, one way that we know this is from the popularity of NGDP targeting itself! As Greg Ip writes:

There is, of course, one rather unseemly advantage to NGDP targeting, that Paul Krugman alludes to here: it is a surreptitious way of temporarily raising the inflation target without the toxic politics of doing so explicitly...One should normally be wary of a monetary policy that achieves its objectives through subterfuge, but desperate times call for desperate measures.

In other words, NGDP targeting is popular in large part because the words "NGDP targeting" are less offensive to the hard-money types, inflation hawks, Republican politicians, John Taylor's army of clone cyborg stegosauruses, etc. This is probably because A) "NGDP" sounds less scary than "inflation" or "printing money" to non-intellectual conservatives and B) the advocates of NGDP targeting focuses on the fact that it acts through rational expectations, which intellectual conservatives are supposed to like. 

That in itself tells you exactly how likely it is that an NGDP target would hold up if anyone called its bluff...i.e., very unlikely. Hence, it is very likely that the bluff would be called. Hence, knowing that the bluff would be called, the Fed will not adopt an NGDP target. Game theory in action.

I do think that "print money and buy stuff" is a good thing to try to get out of a recession. However, it strikes me as a bit farcical to think that the only way to implement this policy is to simultaneously A) convince businesspeople that the Fed is willing to print massive amounts of money, and B) convince Republicans that the Fed is not going to print massive amounts of money. It's just not going to work. Has our politics really gotten so dysfunctional that this is our best idea? Well, you can answer that one for yourself.

(Note: anyone who does not know the meme referenced in the Bernanke picture is either old, or obviously doesn't spend enough time surfing the web and getting into flame wars on Facebook...)

Niall Ferguson does not know what "Western Civilization" means

"The blood of Numenor is all but spent, its pride and dignity forgotten." - Elrond

I am forced to break my self-imposed blogging moratorium, in order to comment on an article by Niall Ferguson that recently appeared in what is left of Newsweek magazine. In this article, Ferguson warns darkly of a rapid collapse of American civilization. The article is, on its face, a fairly bland call for America (and "The West" in general) to wake up, get with the program, and recover its lost greatness. Fine. But there is a deeply disturbing subtext that annoyed me so much that...well, here, I'll just let you see for yourself.

First, Ferguson's thesis:

I believe it’s time to ask how close the United States is to the “Oh sh*t!” moment—the moment we suddenly crash downward... 

The West first surged ahead of the Rest after about 1500 thanks to a series of institutional innovations that I call the “killer applications”: 

1. Competition... 

2. The Scientific Revolution... 

3. The Rule of Law and Representative Government... 

4. Modern Medicine... 

5. The Consumer Society... 

6. The Work Ethic... 

For hundreds of years, these killer apps were essentially monopolized by Europeans and their cousins who settled in North America and Australasia. They are the best explanation for what economic historians call “the great divergence”: the astonishing gap that arose between Western standards of living and those in the rest of the world... 

Beginning with Japan, however, one non-Western society after another has worked out that these apps can be downloaded and installed in non-Western operating systems...

Now, before I move on to the really annoying part of Ferguson's article, this talk of "non-Western operating systems" has already rankled. What the heck is the "operating system" of a society? What inherent quality of "Western-ness" does Ferguson imagine Japan fundamentally lacks, such that even though Japan has representative democracy, property rights, competitive capitalism, work ethic, science, and medicine, the Land of the Rising Sun is still running on a "non-Western operating system"?

Is it Christianity? But then South Korea would be "Western," since it is majority Christian (and far more religious than, say, France). And Ferguson cites Korea as a "non-Western" civilization in his very next paragraph (which I'll get to in a moment). 

Is it geography? Would Ferguson exclude Australia and New Zealand from "the West"? 

I think you see what I'm getting at, and just to drive it home, here's Ferguson's next paragraph:

Ask yourself: who’s got the work ethic now? The average South Korean works about 39 percent more hours per week than the average American. The school year in South Korea is 220 days long, compared with 180 days here. And you don’t have to spend too long at any major U.S. university to know which students really drive themselves: the Asians and Asian-Americans. (emphasis mine)

So a sign that American civilization is in decline is that...Asian-Americans study hard?

Labeling Asian Americans as "non-Western" gives away the game completely. By "Western," Niall Ferguson is not referring to a geographic region, a political system, an economic system, or a religion. He is not even referring to a specific set of countries. He is referring to a set of people; people who have pale pinkish skin, fine wavy hair, and prominent eye ridges. By "Western," Niall Ferguson means "white people." Asian Americans may have American passports, Ferguson thinks, but civilizationally speaking they are permanent foreigners. This interpretation is basically confirmed a couple paragraphs later:

Social scientist Charles Murray calls for a “civic great awakening”—a return to the original values of the American republic. He’s got a point.

When you admit to taking your cues from America's most prominent academic racist, you've pretty much laid your cards on the table.

This makes me sick, and not just because of the racism. It's because Ferguson's offhand exclusion of non-whites from the "Western" world is, in fact, what I believe to be the biggest threat to our civilization.

You see, I believe that the United States of America has another "killer app" in addition to the ones Ferguson lists. That killer app is meritocratic diversity. Where other countries cling to blood-and-soil tribalism, America absorbs and employs the energy and talent of a vast array of peoples. All those American Nobel Prize winners? A huge chunk are immigrants or children thereof. Ditto for Silicon Valley's entrepreneurial heroes. Our above-average fertility rates? Largely thanks to immigration.

Imagine if this were 1911, and Ferguson had instead lamented: "And you don’t have to spend too long at any major U.S. university to know which students really drive themselves: the Jewish-Americans." He might have held this up as a harbinger of Western decline - after all, Jews were not at the time considered white. But he'd have been pooh-poohing the future contributions of Albert Einstein and Richard Feynman, not to mention Larry Page, Sergei Brin, Mark Zuckerberg, and probably a bunch of other Jewish Americans whom I don't know off the top of my head. The contribution of the Asian Americans whom Ferguson now dismisses are growing at a similar, if not faster rate.

In fact, Niall Ferguson pines for the days of Anglo-Saxon empire, but in fact, many historians believe that race-blind meritocracy is the key to all successful hegemons. Empires of the past have been successful when, like modern America, they didn't limit their talent pool to people with the right genes. 

The biggest threat facing American civilization now is not loss of work ethic - Americans still work more than the rich-world average. Nor is it insufficient consumerism (believe you me), the abandonment of modern medicine, the end of rule of law, creeping monopolies, or the abandonment of science. It is political dysfunction and distrust of our national institutions, brought on by the refusal of a large bloc of white Americans (the "Tea Party" etc.) to accept nonwhite Americans. The very denial of "Western-ness" to nonwhite Americans is what is threatening the West. Articles like Ferguson's, in other words, are part of the problem, not part of the solution.

Here's my idea for how to revitalize Western civilization. Widen the big tent. Recruit smart people from all over the world to be Americans. Renew the idea of America as a nation defined by principles and institutions rather than by race and tribe. Assimilate Asians and Hispanics the way we assimilated Italians and Greeks and Jews a century ago. Promote nationalism as a unifying force rather than racism, in order to rebuild trust in public institutions and improve the provision of public goods. 

And further afield, do not exclude the rising nations of Asia from "the West." To do so would instantly doom us to geopolitical extinction. Just because Japan, India, South Korea, and the rest of our Asian allies lie beyond the International Dateline does not mean that they don't share the principles and institutions and philosophies embraced by Europe and America.

Anyway, there's my main rant. Now for a few more miscellaneous knocks on this truly execrable piece of public discourse:

• Ferguson claims that societies decline quickly rather than slowly. That is poppycock. Go read Ian Morris' Why the West Rules - for Now. You will see that the declines of Rome, the second Chinese empire, and other ancient civilizations all took centuries.

• Ferguson chides Americans for not working as hard as the industrious South Koreans. However, he neglects to mention that the second, third, fourth, and fifth hardest-working countries are Greece (!), Hungary, the Czech Republic, and Poland. Aren't those countries part of the "West"?

• When explaining why "competition" is one of the West's "killer apps," Ferguson recalls that "Europe was politically fragmented into multiple monarchies and republics." Later, as an example of a competitive powerhouse, he cites...China. Yes, China, that fragmented, decentralized ferment of political competition...

• Ferguson chides America for not being sufficiently consumerist (no, really!!), and for having empty malls. This is supposedly in contrast to China. Here is a video of one of China's many "ghost malls," which happens to be the largest mall on the planet. Yes, Ferguson really is that sloppy. 

• Ferguson suggests that we "delete...the politically correct pseudosciences and soft subjects that deflect good students away from hard science." Niall Ferguson is a professional historian. Seriously.

• Ferguson suggests eliminating America's "quasi-monopoly" on education - I assume he means public schools - in order to compete with countries like South Korea. South Korea, of course, has the world's best quasi-monopoly...er, public schools.

Basically, this is one of the laziest, sloppiest, most pernicious columns that I have ever read. I am simply physically, biologically incapable of sticking to my self-enforced blogging hiatus when something this awful crosses my screen.

(P.S. - credit for the Elrond quote goes to my friend Ry.)

Home Security Alarm (re post)

On a daily basis you see ads on TV for home security systems. We at Fey Insurance highly recommend the installation of a Home Security System to add additional protection for you and your family. Insurance will work to put your property back in place after a fire or burglary, but a Home Security System will work to prevent or minimize the effects of that fire or burglary. If you are interested in such a Home Security System, please call us and we will tell you our opinion of the various manufacturers and what features to consider. For example battery backups are usually included in Home Security Systems, but we would also recommend cellular backups for your system in the event your normal phone service goes down or even disabled by a potential burglar. We would include carbon monoxide detectors in your system especially if you have a natural gas furnace or hot water heater. Central station monitoring is preferable to systems that go directly into a police or fire dispatch. Both are considered superior to a system that only sounds a local alarm in your home. There are discounts on your Homeowner policy for the installation of a Home Security System. Please call us to review those discounts. But the most important reason, in our opinion, to install such a system is for additional security for your family and peace of mind that you are doing everything to protect your family and your property.

Another blogging hiatus

Work calls again. Regular blogging will resume November 3. In the meantime, satisfy your Noahpinion cravings by staring at this cute picture of polar bears.

Professional Liability & the Claims-Made Policy

Occupations or business practices involving specialized care or advice often need professional liability insurance. Typical business classifications that need this coverage would be notary publics, real estate agents or managers, attorneys, doctors and consultants. The typical commercial general liability policy will only respond to bodily injury, property damage, personal injury or advertising injury claim.

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While most occurrence-based policies are somewhat similar, claims-made policies are usually specific to each company issuing the policy. The insurance agent must d o a careful review of these differences to determine applicability to a particular operation.