Interest Rates and the Hack Gap.

by
Robert Waldmann
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Kevin Drum notes conservative hackitude. I’m just going to fair use the whole post

(please click the link so I don’t feel guilty)

I would like to offer a comment on the hack gap this morning:

It’s remarkable the number of liberal economists who continue to favor an interest rate cut from the Fed. They are displaying intellectually honesty here: with inflation low, there’s no reason not to take out an insurance policy that could keep the current economic expansion going for a while longer, despite the fact that it would help Donald Trump politically.

Conservative economists, by contrast, have almost universally changed their opinions, favoring high interest rates when Obama was president and now favoring low rates when Trump is president.

I’m too lazy to create an actual list of liberal and conservative economists to see whose positions have changed and whose haven’t. Maybe someone can do it and prove me wrong. But I doubt it.

After the jump I report on some googling.

But now I would like to discuss Fresh Water views on interest rates. After the jump, I say that academically prominent macroeconomists who work near great lakes are so far out into theory that they can barely communicate with policy makers or ordinary people.

Then I thought of the interesting case of Narayana Kocherlakota who, as chairman of the Minnesota economics department (a major center of fresh water macro) then the Minneapolis Fed (*the* main center of freshwater macro now that Chicago has gone brackish). I will discuss his academic work on money and interest rates. But the interesting thing is that soon after becoming a policymaker (serving on the Fed Open Market Committee) he pretty much repudiated all of it, the repudiated the mainstream of academic macro, turned into an interest rate dove (not a hack he went from hawk to dove during the Obama presidency). Dramatic and honest, demonstrating integrity (and brilliance in both periods).

But back in the day, he did work (published in top journals) which would have puzzled his colleagues on the FOMC. First in standard fresh water monetary models there is always full employment. There is no role for monetary stimulus. Second, the models typically give an optimal nominal interest rate i of 0. This is not extremely loose monetary policy, because typically the optimal inflation rate is negative giving a market clearing real interest rate. Over in the real world, it has been noted that negative inflation rates are strongly correlated with great depressions. Partly, this is because only extremely high unemployment can cause workers to accept lower nominal wages. Such downward nominal rigidity is absolutely alien to new classical (freshwater) macroeconomics and almost entirely alien to New Keynesian DSGE (mainstream) macro. The fact that it is blatantly obvious to anyone who looks at micro data is irrelevant. But also negative inflation causes an increase in the real value of debts which causes huge trouble. This is because debt contracts are written in dollars or euros and not indexed to the CPI. There is no reason why creditors and debtors both bet on inflation and face risk which they could avoid. Therefore such contracts don’t exist, because over there they agree with Hegel that only that which is rational is real.

The point is that if one argues for moderate real interest rates, zero nominal interest rates, deflation and notes that one assumes all markets clear, one will have some difficulty being a hack. Also one will have trouble making policy. Kocherlakota demonstrated that he is not only brilliant but also serious. He flip flopped because of evidence. It is a pity this is so rare that I think it’s worth a post.

OK I hunt hacks after the jump. I’m not sure I found any. I think the hacks are conservative “economists” not conservative economists.

I certainly can’t think of a liberal who has switched to advocating high interest rates.
Deficits spending is another issue. Republicans switched from deficits are terrible to deficits are no problem. Many conservative alleged economists switched with them. I can’t think of a liberal who said deficits were no big problem before Jan 20 1017 who switched to saying they are a big problem.

I think elected Democrats especially including Obama acted as if deficits were a huge problem starting January 2010 at the latest (when unemployment was around 10%). So wrong, but consistently wrong.

I’d say political journalists have, to a remarkable extent, followed the GOP with occasional comments about hypocrisy but zero willingness to express opinions on policy (reasonable) or quote academics who can point to solid evidence that they understand what is going on (not just Paul Krugman but yeah whatabout Paul Krugman).

OK now I google. Mankiw stayed mushy and respectful of authority

I say no flip flop.

The late Martin Feldstein seems to have flipped (but I don’t subscribe to project syndicate)

Rogoff (a Republican) seems to be a consistent interest rate dove

Volcker (a conservadem) seems to be consistently for high interest rates. He is a very extreme inflation hawk

I haven’t found proof of a flip flop yet.

I think the “conservative economists” you have in mind are conservative “economists”. Hacks like Laffer, Moore and Kudlow not actual economists.

Looking for a extremely reputable economist who has become a partisan hack, I googled John Taylor. I see he has not flipped at all. He supported Fed policy when Trump was denouncing it. On monetary policy consistently middle of the road.
https://www.cnbc.com/2019/0…

Then there are the Fresh water crazies. Some are so far out into theory that they don’t think monetary policy affects output, so they basically don’t engage in the same discussion as policy makers or the general public.

I’d say my profession has shown some integrity. Of course I don’t concede that I am in the same occupation or even sector of the economy as Moore, Kudlow, and Laffer. I concede that we are members of the same species, and, indeed, citizens of the same country, but that is as far as I am willing to go.