buy this book!

For a year and a half now, I have been sending people who ask me whether I think the economy is "getting better" to Marcus Nunes' What does a downloaded economy look like?

Now Marcus and Benjamin Cole have written the first book on "market monetarism." I've read it, I've highlighted it, and I've blurbed it --- it's terrific!

Market Monetarism: Roadmap to Economic Prosperity

"writing is rewriting" at the New York Times

I'm not sure how journalism works these days.

Last Friday, shortly after the BLS released payroll data showing 163,000 jobs created in July, the Times posted its story. The American economy, it said, had "continued" its "long slog upward from the depths of the recession." That was the lede.

The next paragraph reported that the economy was "just barely treading water."

I found this exasperating. Where jobs are concerned, the economy has not "continued" a long slog "upward." Employment crashed in 2008 and never came back, and there's an end to it. The economy is slogging sideways.

But even more annoying in some ways, to me at least, the metaphors are mixed. Barely treading water is not compatible with continuing a long slog upward. One is up, the other is down, or down as much as up. A person who is just barely treading water is not gaining altitude, and I'm pretty sure I remember a time when anyone working for the New York Times would have known this without having to think about it.

A half hour or so later, the story changed. Someone had cleaned up the mixed metaphor, which was good, but the story itself had gotten worse.

The lede was the same--the economy was still slogging upward (not true for jobs!)--but now the 2nd paragraph opened with the observation that while the payroll survey was better than economists had expected, "no one is yet popping champagne corks."

Yet?

I saw one estimate showing that if the economy continued to produce 163,000 new jobs every month from now on it would take 8 years -- 'til 2020 -- to return to the employment level we had in 2007. Eight years to produce a jobs recovery for a 4-year 5-year slump (to date): nobody uses 'yet' in a context like this.

And nobody pops champagne corks at the end of an 8-year slog.

So Take 2 was even more exasperating, and then finally a third version of the story cropped up:

America added more jobs than expected last month, offering a pleasant surprise after many months of disappointing economic news. Even so, hiring was not strong enough to shrink the army of the unemployed in the slightest.
Hiring Picks Up in July, but Data Gives No Clear Signal
By CATHERINE RAMPELL | Published: August 3, 2012

This is the same story! We've gone from the economy slogging upward to economists not popping champagne corks to an army of the unemployed not having been shrunk in the slightest, and all of this in just a couple of hours.

How does this happen?

How do mixed metaphors and bad metaphors get through copy editors at the Times, and how does a story completely change meaning within just a few hours?

I'm wondering whether, these days, news organizations post stories as soon as they possibly can, knowing they can clean things up later.

Do newspapers deliberately post first drafts these days?

update 8/8/2012: Anonymous leaves word that the story changed 9 times.

(click on the images to enlarge)

sticky wages redux

off-topic:

Having become something of a sticky wage aficionado, I was amused to see this story, which may be the ultimate sticky-wage scenario:

Wolf, a 120-pound canine cross between a wolf and a malamute, paced his pen, staring out with amber eyes. In a few hours, his work shift would begin.

He's part of a squad of wolf dog hybrids working nights at the Louisiana State Penitentiary, a local answer to the kinds of budgetary strains felt at many of the nation's prisons.

Nobody yet has tried to overpower or outrun them. Lou Cruz, 55 years old, who's serving life for a murder he committed in Jefferson Parish near Gretna in 1981, said inmates are keenly aware of the four-legged security force prowling the perimeter.

"You might run," he said, "but they're going to catch you."

The wolf dogs, as they are called here, are the brainchild of Warden Burl Cain and his staff, and they were brought in last year in response to a steady decline in the prison's annual budget from $135 million five years ago to $115 million today. The prison, which is known as Angola, has laid off 105 out of 1,200 officers, and 35 of the 42 guard towers now stand empty on the 18,000-acre prison grounds.

The animals regularly guard at least three of the seven camps that make up the complex.

Mr. Cain says the wolf dogs are a strong psychological deterrent. "The wolf ate Grandma," he said.

They also save money. The average correctional officer at Angola earns about $34,000 a year, a prison spokesman said. By comparison, the canine program, which includes about 80 dogs—the wolf hybrids along with other breeds for other tasks— costs about $60,000 annually for medical care, supplies and food.
Prison's Guards Are Part Wolf, All Business By GARY FIELDS

So we have wolf dogs earning $750 a year working side by side with humans earning $34K.^* And the warden is collecting his retirement salary along with his regular salary.

Having Googled a bit, I haven't found reports indicating that the prison cut wages or imposed furloughs before laying off people and hiring dogs. But even if they did, sticky wages are in play.

Assuming total compensation is $50K per officer, the prison could hire back all 105 employees if they reduced compensation of the 1095 remaining employees by $4,375. (Somebody check my math, please!)

That never happens.

^* I don't know whether $34K includes benefits.

Not your father's bell curve

Milton Friedman on what schools would be like with vouchers

from Scott Sumner's blog today:

I didn’t realize until now that today would have been the 100th birthday of my favorite economist. So I don’t have a post prepared. My favorite Friedman comment was in response to someone asking him what sort of schools would be provided under a voucher system. I believe he replied something to the effect; “If I knew the answer, I wouldn’t favor vouchers, I’d just instruct the public schools to operate that way.”

I love this observation, though of course the punchline is completely wrong. It is not possible to 'instruct the public schools to operate' this way or that. Public schools do what they do.

Probably true of most institutions and organizations, not to mention people.

(?)

Clear as mud

I was just reading one of my favorite "market monetarists," (pdf file) Jose Marcus Nunes, who writes Historinhas. Apparently, the Fed is at last making its move to increase transparency.

The results - charts (pdf file) illustrating such arcana as the appropriate timing of policy firming and the appropriate pacing of policy firming - brought to mind my all-time favorite edu-chart: the strands.

Goldilocks and the money illusion

the money illusion:

The findings in this paper suggest that money illusion is real in the sense that the level of reward-related brain activity in the vmPFC [ventromedial prefrontal cortex] in response to monetary prizes increases with nominal changes that have no consequence for subjects' real purchasing power.
The medial prefrontal cortex exhibits money illusion Bernd Webera, Antonio Rangelb, Matthias Wibralc and Armin Falk - PNAS March 31, 2009 vol. 106 no. 13 5025–5028

In the car just now, Ed and I were talking about the money illusion. Ed pointed out that no one thinks when you've just been given a 3% raise in an environment of 4% inflation, your pay has actually been cut. (I know ktm people would have no problem figuring this out--! But ktm people are not the norm.)

I'm wondering whether good math education and/or the distribution of inflation calculators to one and all would affect the money illusion. I have no idea. Certain cognitive biases, loss aversion,^* for instance, are apparently built-in, but -- the money illusion? Is there something built-in about the money illusion per se?

No time to think it through just now; for the moment I'm going to guess that the money illusion is a specific manifestation of something more fundamental. Which probably means good education and universal inflation calculators would help.

That said, we are stuck with the money illusion, at least for now.

So what does this mean?

I think it means that we need a certain level of inflation for the economy to work. Deflation is bad --  everyone seems to understand that -- but zero inflation is also bad. Inflation is like the porridge in Goldilocks and The Three Bears; it can be too hot, it can be too cold, or it can be just right.

What is just right?

Having spent as much time as I have reading the market monetarists (pdf file), I assume that just right means 2% inflation along with 3% real growth.^*

But of course I don't know.

from the EurkAlert release:

"We had now confronted our test subjects with two different situations", Falk explains. "In the first, they could only earn a relatively small amount of money, but the items in the catalogue were also comparatively cheap. In the second scenario, the wage was 50 per cent higher, but now all the items were 50 per cent more expensive. Thus, in both scenarios the participants could afford exactly the same goods with the money they had earned – the true purchasing power had remained exactly the same." The test subjects were perfectly aware of this, too – not only did they know both catalogues, but they had been explicitly informed at the start that the true value of the money they earned would always remain the same.

Despite this, an astonishing manifestation emerged: "In the low-wage scenario there was one particular area of the brain which was always significantly less active than in the high-wage scenario", declares Bernd Weber, focusing on the main result. "In this case, it was the so-called ventro-medial prefrontal cortex - the area which produces the sense of quasi elation associated with pleasurable experiences". Hence, on the one hand, the study confirmed that this money illusion really exists, and on the other, it revealed the cerebro-physiological processes involved.

and more from the paper:

We used fMRI to investigate whether the brain's reward circuitry exhibits money illusion. Subjects received prizes in 2 different experimental conditions that were identical in real economic terms, but differed in nominal terms. Thus, in the absence of money illusion there should be no differences in activation in reward-related brain areas. In contrast, we found that areas of the ventromedial prefrontal cortex (vmPFC), which have been previously associated with the processing of anticipatory and experienced rewards, and the valuation of goods, exhibited money illusion. We also found that the amount of money illusion exhibited by the vmPFC was correlated with the amount of money illusion exhibited in the evaluation of economic transactions.

[snip]

Intuitively, money illusion implies that an increase in income is valued positively, even when prices go up by the same amount, leaving real purchasing power unchanged (1). In this sense money illusion has been interpreted “as a bias in the assessment of the real value of economic transactions, induced by a nominal evaluation” (2). Economists have traditionally been skeptical about the notion of money illusion (3), but recent behavioral evidence has challenged this view (2, 4–6). For example, when asked to rate the happiness of 2 otherwise identical persons who received either a 2% wage increase without inflation or a 5% wage increase with 4% inflation, the majority of subjects attribute happiness on the basis of greater nominal raises, despite lower real raises (2).

[snip]

Our main hypothesis was that areas of the brain that are engaged in the experiencing of rewards (7–9), such as the ventromedial prefrontal cortex (vmPFC), would exhibit money illusion in the sense of exhibiting a stronger BOLD response for incomes that were higher in nominal terms, but had an identical real value. Activity in these brain regions has been shown to be modulated by the receipt of both primary rewards such as food delivery (10) and more abstract forms of rewards like monetary incentives (9, 11, 12). Recent neuroimaging studies have also shown that the vmPFC is involved in the valuation of goods at the time of decision making (13–15).

[snip]

The importance of this finding derives from the fact that the answer to many classic economic problems depends on whether money illusion exists. For example, money illusion has been put forward as an explanation for the nonneutrality of money, which implies that central banks can affect production, investment, and consumption through changes in monetary policy that have an impact on the inflation rate. Likewise it offers an explanation for the important phenomenon that wages and prices are often downwardly rigid, a leading explanation for involuntary unemployment (17, 18). It is also a potential cause of bubbles in important markets, such as the housing market (19), and of deviations of stock prices from their fundamental values (20, 21). At the firm level, money illusion is important to determine optimal wage policies, which depend much on whether workers care about nominal or real wages (22). Finally, the existence of money illusion is important for the understanding of the relation between income, inflation, and subjective well-being (23). Importantly, even small amounts of money illusion can have substantial effects....

^* And even loss aversion has "boundaries". (pdf file)

^* Because I'm married to a historian, I also assume that "just right" for our time would be not right for another time quite possibly.

off-topic (somewhat): Scott Sumner on targeting NGDP

Sumner: Nominal GDP Targeting Can Save the Recovery (video interview with Kelly Evans of the Wall Street Journal)

I can't remember when I first became convinced that the Federal Reserve should stop targeting the CPI PCE and start targeting NGDP (the sum of all current dollar spending in the US).

Maybe a year ago?

I bring it up today because the idea has abruptly broken through to the mainstream, and because the state of the economy will determine whether our kids have decent jobs after college (or any job at all), not to mention whether parents will have the money to pay for college in the first place. So now's the time.

I think about NGDP-targeting this way:

1.
The Federal Reserve has a dual mandate: price stability and full employment. It is required to pursue both.

Since the crash, we have had unusually low core inflation, lower than average inflation during the Great Moderation, which was 2%. Update 1/10/2012: PCE inflation has averaged 1.37% over the four years 2007-2012.

We have also had a catastrophic collapse in employment, which is not becoming any less catastrophic as the years go by:

This chart shows the percent of the civilian population that is employed. Before the crash more than 63% of the civilian population was employed; since the crash we have bounced between 58 and 59%.

2.
The chart above is, literally, an image of a depression. In it we see employment drop off a cliff, hit bottom (let's hope), and stay there. The chart makes it impossible for me to call the situation we are in a "recovery," a "weak recovery," a "faltering recovery," an "anemic recovery," a "limping recovery," a "recovery experiencing strong headwinds," or any other formulation that includes the word recovery. This is not a recovery. In my book, this is a depression: a minor depression, but a depression nonetheless. It's not getting better, and I don't believe that more 20-year olds acquiring STEM degrees will fix things.

More STEM degrees may or may not be a good idea; better K-16 education (I've expanded my horizons) unquestionably is a good idea.

Neither one is going to fix the chart.

3.
Why is that?

Since I'm not an economist, I have to choose which expert(s) to believe. And, after spending probably a year of my life reading the various explanations of the crash, I'm persuaded by Scott Sumner and the market monetarists, (pdf file) which is not to say anyone else has to be persuaded, obviously. I'm writing an amateur economics post on an education blog just to let you know about market monetarism if you don't already.

I'm convinced the market monetarists are right, and I want our federal overlords policy elites to stop targeting inflation, and start targeting NGDP, as market monetarists recommend.

4.
Wages are sticky -- sticky meaning wages can go up, but not down. (Wages are sticky in one direction.)

I live in a state, New York, where public sector wages are beyond sticky; here in New York, public sector raises are sticky. I'm tuned in to public sector compensation because I've been dealing with my district's budget crisis for a few years now, but wages are sticky across the board in every sector, public and private.

Sticky wages kill jobs. Period. Sticky wages kill jobs because when profits decline, some employees have to be laid off so other employees can maintain their current salaries. In theory, when profits (or tax revenues) fall, wages could fall, too, and everyone would still have a job. Companies would bring in less money in sales, so they would pay less money in compensation, problem solved.

In reality, when profits (or tax revenues) decline, wages stay put. So people have to be laid off.

I have had a front-row seat watching this process unfold here in my town. Where sticky wages are concerned, I don't need experts to explain the world to me. Sticky wages are real, I've seen them, they take away jobs.

Update 1/10/2012: human employees replaced by wolves....

5.
Which brings me to the Fed.

The Bernanke Fed strongly opposes deflation and will do whatever it takes to prevent it.

The Bernanke Fed also strongly opposes inflation (the cure for deflation), and appears to think that if low inflation is good, lower inflation is better. It's fine to go to 1.5% "core" inflation (CPI minus food and energy). It's fine to go to 1%. Two percent is a ceiling, not a target. Update 1/102012: The new 'ceiling' appears to be 2.5%.

At some point (where?) inflation is bad because it might turn into deflation.

Also, if you go into recession for 18 months, and "lose" all the inflation you would have had during that period, the Bernanke Fed thinks that's fine.

There is no such thing as an inflation shortfall in the Bernanke Fed, it seems.

6.
Real estate.

Housing prices, overall, are at 1990 levels.

1990.

The Bernanke Fed is a deflation fighter, and yet the Bernanke Fed has presided over a 25% deflation in house prices in just 3 years time.

7.
Given what we've been through, I conclude that neither real estate nor jobs are coming back as long as the Fed continues to target inflation. If the Fed is targeting 2% (or 1%) inflation, and we need 33% inflation (roughly) just to get back to where we were, then we're looking at the new normal. Since I personally see no way jobs can be decoupled from prices, that means jobs don't come back, either. Not for years and years and years.

Update 1/10/2012: Hamilton Jobs Gap Calculator

So I'd like the Fed to stop targeting inflation and start targeting nominal GDP, which includes inflation but is not limited to inflation. The beauty of NGDP is that it combines inflation and employment in one number. Double mandate, single target.

I'll post links to the market monetarist blogs and the various endorsements and counter-endorsements later on. In the meantime, Scott Sumner began his blog, The Money Illusion, in 2009. Within the past month Goldman Sachs published a report endorsing the idea, and Cristina Romer wrote a column agreeing. Brad DeLong and and Paul Krugman have both endorsed; at National Review, Ramesh Ponnoru was an early adopter and advocate.

Update 1/10/2012: Worthwhile Canadian Initiative has the easiest-to-understand explanation of why inflation targeting has failed -- and why "level" NGDP-targeting would succeed -- that I've seen so far.

^* I've just this moment Googled a line from Brad DeLong saying 1% is the new 2%.