If long-term interest rate r is less than the trend growth rate of GDP g

Yesterday (technically very early today) I promised a post on why long-term Treasury interest rates are very important. In particular it is very important if the long-term interest rate r is less than the trend growth rate of GDP g. If rg is a condition for optimality. This has a fancy name — the transversality condition. It also is true for an obvious reason. If all can afford to consume more now without consuming less later, they can benefit by doing so. Therefore, the current consumption/saving plan is not efficient.

To get from the whole economy owned by a mythical representative consumer to the government add the assumption that tax revenues are a constant fraction of

Why have they increased so much. The US Treasury constant maturity 10-year interest rate has increased dramatically since the FED started fighting inflation (after falling dramatically during the Covid 19 epidemic).

The increase is not unusual — Monetary policy effects GDP and employment through medium and long term interest rates, especially including the interest rate on 30 year mortgages. But I think it should be surprising.

Before going on, I have a bit of very useful investment advice: do not take investment advice from Robert Waldmann. WIth that disclaimer posted, I have to say that I have the impression that long term treasuries are a good buy when the Federal Funds rate is high — that is I think the price drops too much so the return

I think the title makes it clear that this will be a rambling confused post. I am typing on with the thought that something is better than nothing and no one has to read this.

The first topic – house prices, is in fact one that interests me a lot. I have a regression which suggests that a high ratio of house prices to the general price level is terrible news, because it indicates a housing bubble which will burst and be followed by a prolonged recession.

Currently the ratio of the Case-Shiller housing price index to the CPI is higher than it was in 2006.

I don’t want to jinx the economy (my predictions are almost always wrong) but I am not terrified. I think that this time it’s different. This time there has also been a huge increase in

“The Fed Makes a Large Rate Cut and Forecasts More to Come”

Jeanna Smialak Writes

“The Federal Reserve cut interest rates on Wednesday by half a percentage point, an unusually large move and a clear signal that central bankers think they are winning their war against inflation and are turning their attention to protecting the job market.”

I (and Brad DeLong) wonder why the Fed forecasts more rate cuts to come instead of implementing them now? I wonder why is an 0.5% cut considered large? The answer to my faux naivety is that it was not clear until yesterday if the rate would be cut by 0.25% or 0.5%. The fact that it was not cut by more than 5% was not news and not reported.

The not naive question of why forecast cuts rather than

“The Fed Makes a Large Rate Cut and Forecasts More to Come”

Jeanna Smialak Writes

“The Federal Reserve cut interest rates on Wednesday by half a percentage point, an unusually large move and a clear signal that central bankers think they are winning their war against inflation and are turning their attention to protecting the job market.”

I (and Brad DeLong) wonder why the Fed forecasts more rate cuts to come instead of implementing them now? I wonder why is an 0.5% cut considered large? The answer to my faux naivety is that it was not clear until yesterday if the rate would be cut by 0.25% or 0.5%. The fact that it was not cut by more than 5% was not news and not reported.

The not naive question of why forecast cuts rather than

I just heard an advertisement for Kamala Harris in which she said she would raise taxes on the rich and cut taxes for the middle class. I was pleased. I note the empirical fact that, in years when the income tax is constitutional yet the top marginal tax rate is below 69%, nonincumbent Democrats are elected president if and only if they promise to raise taxes on high incomes and cut taxes for the middle class.

I usually do not make predictions (I haven’t since 2004). I merely note the pattern

In 2016 I was convinced there would be an exception to the rule/stylized fact. Clinton proposed increasing taxes on the rich and a large number of tax cuts directed at families for whom they would do the most good. Like many people I expected her to get

IN 2020 the US homicide rate increased by 29% the largest percent increase on record. There are different theories of the cause. Some are related to Covid 19 with isolation (not lockdowns there were not lockdowns in the USA) causing increased stress and domestic disputes. The George Floyd associated conflict between police and those they are sworn to protect and serve could have led police to quietly quit (there is evidence of this in the reduced number of citations issued -in particular a huge reduction in San Francisco) or mistrust of the police might have led to less cooperation with the police and more people taking matters into their own hands. The enormous unemployment rate might have lead to murder even though the CARES act prevented a huge

I have thoughts on a typically interesting essay by Brad DeLong. It was sent to project syndicate and also my e-mail inbox. I think I should not quote it at length without paying. His claim is that, whether or not one likes industrial policy, we need it now. Given the 700-word limit, he doesn’t discuss Biden’s industrial policy and how it seems to be working.

I will try to define industrial policy not as anything by laissez faire but specifically as picking winners. A progressive income tax is not industrial policy. A carbon tax is not industrial policy.

“This is industrial policy “

“Today, President Biden will travel to Westby, Wisconsin to announce $7.3 billion for clean, affordable, reliable electricity for rural America, funded by his

I think the imp is my most noticed contribution to the economic discussion. Brad DeLong mentioned the fact that I mentioned him, but called him the inflation expectations imp . Then Paul Krugman mentioned him shortening the name to “the expectations imp”. Alot of time has passed since then during the slow recovery from the great recession. The Federal Reserve OPen Market Committe (FOMC) cut the Federal Funds Rate to the lower limit of 0 – 0.25% but demand remained low. They could not reach the 2% target, because inflation was persistently below 2%. Many economists argued that it would have been better to target 4% back when they had traction so they could reduce real interest rates to around mins 4% not around minus 2%.

Also fiscal policy was

And of a 3% inflation target?

There is some risk of recession in the USA because the FED insists on driving inflation down to 2%.  Oddly back in the naughts when inflation was persistently below the 2% target, there was more discussion of raising the target. Then IMF chief economist discussed it.

Paul Krugman advocated it: “The basic point is that a higher baseline for inflation would make liquidity traps, in which conventional monetary policy is up against the zero lower bound, less likely and less costly when they happen.” “What do we want? Four percent! When do we want it? Now!” The Chicago Booth definitive standard for professional consensus polled its panel of experts on it.

This discussion was a bit odd. At the time, inflation was

The Phillips curve plays a central role in the policy debate (this is partly due to the fact that debaters have finally learned to ignore very highly theoretical and unrealistic DSGE models).  Just to review, the Phillips curve should show a negative relationship between unemployment and actual inflation minus expected inflation (it has been defined this way since 1960) The point where inflation is equal to expected inflation is called the non-accelerating inflation rate of unemployment (NAIRU)

However the performance of the Phillips curve in the 21st century has been horrible. First, in the teens there was high unemployment with no reduction in inflation, then in the 20s there was high unemployment and a large increase of inflation, then a further

A soft landing (disinflation without a recession) looks possible.  Also the remaining threat is the FED’s sticking with high interest rates, even though inflation is at a very reasonable level. I personally publicly and will almost certainly decline even if unemployment remains low.

The change can be predicted, because the US index includes owner equivalent rent, a price which no one pays which is a calculation of how much homeowners would pay if they rented their houses. Rent in the following year and owner equivalent rent are very predictable, because leases generally have monthly rent in dollars fixed for at least one year. The rent on newly signed leases can be used to predict future average rent — rent is in practice a 12 month moving

Since the beginning of the Covid epidemic, the US economy has performed better than European economies and the Eurozone average. This comparison is useful, and not just for boasting rights. Fiscal policy in the USA and in the Eurozone has been dramatically different – The US Federal Government implemented Six very large fiscal stimuli:

The CARES act signed into law by Donald

The bipartisan (Manchin) stimulus enacted In December 2024 signed into law by Donald Trump which included $600 per working family.

The American Rescue plan which included $1400 dollars more signed into law by Biden (who actually kept his $2000 campaign promise amazing as that might be)

The bipartisan Infrastructure Bill

the Bipartisan information technology sector

I have long thought that there is a (partially effective) treatment for opiate addiction — suboxone. To review suboxone is a mixture of buprenorphine and naloxone. Buprenorphine is a partial opiate receptor agonist (activator) which also blocks other opiates. At least when taken orally, it relieves opiate craving but does not make people high and prevents them from getting high with other opiates. Naloxone is the well know opiate antagonist used in emergencies. It is not absorbed from the intestine and must be given intravenously or by a nasal spray. In the case of suboxone it is used so that injected suboxone does not cause euphoria, since the buprenorphine is blocked by the naloxone. In contrast if suboxone is taken orally, the naloxone does not

I have read many articles quoting (brave) Republicans complaining about Donald Trump’s focus on personal, petty and implausible attacks on Kamala Harris. They often assert that if the election were decided on the basis of policy or issues, then Trump would win. Here is the latest discussion I read about that (just the available link and an excellent blog post).

My immediate reaction is to argue that the Republicans’ claim is false and that voters support Democrats’ policy proposals and vote Republican because of identity politics and effective personal attacks. I found a poll which showed much more support for Biden’s proposals than Trump’s. Before going on, I note that it took an extraordinary amount of Googling to find that page. It was buried

Peat bogs capture much more carbon per acre than forests. Currently, peatlands store twice as much carbon as all the world’s forests . One problem is that they are being drained to free up the land. (also but I think less importantly peat and non-rotten sphagnum moss are harvested for gardening). Various sources (most or all of which seem to be advocacy organisations – yes there are pro-bog advocacy organizations) claim that this causes 10% of global carbon emissions. The more nearly neutral Pew Charitable Trust estimates 5%. Either way, this is a huge amount, but also an opportunity to fight climate change by reflooding the now drained bogs.

I am thinking of more than just ceasing this or even restoring natural peatlands. It seems to me that it

This is a second hand story about my brother in law’s experience in a Giant (TM) Supermarket checkout line (I guess he should guest post this). He saw someone checking out wearing a Trump Shirt and started a conversation (he’s like that) mentioning that he was voting for Harris. The Trump supporter said that BIden and Harris had accomplished nothing. When my brother in law (politely I’m sure) noted that he disagreed. The Trump supporters (plural including Giante employee) were not convinced. One asked if he liked an open border. He said it is now very hard to seek asylum. He was asked “where do you get your news?”

In the USA we know that we have very different opinions about facts. We know they depend on which news sources we trust. It

This is actually related to my day job. For some decades I have been puzzled by two of Kahneman and Tversky’s discoveries (reported very well in this excellent book).

First, there is the excessive reliance on diagnostic characteristics (called diagnostic expectations by economists). A classic example is the room with 90 lawyers and 10 engineers. Jim is quiet and hardworking and likes model trains. It is human nature to conclude he is an engineer (fits the stereotype perfectly). However, the data do not in fact outweigh the 9 to 1 ratio. Another is a guy has red hair. How likely is it that he is Irish (not very in the actual human population). In each case there is some diagnostic information. In each case we put too much weight on it compared to

I am late to the discussion of the (possible) US soft landing. I think I better write about the soft landing (so far) in case it is ceasing to be soft (I am not making a forecast).

The remarkable thing is that the dramatic increase in the Federal Funds Rate did not induce a downturn let alone a recession

The way interest rates affect GDP is principally residential investment and exchange rates. Other monetary authorities also raised rates in response to the Covid increase in inflation, so I won’t write about exchange rates. The interest rate relevant to housing demand is the mortgage interest rate. It is very, very different from the Federal funds rate but it also increased dramatically

This odd in itself as all evidence suggests that medium

I have my usual thoughts about inflation. People confuse levels and changes. I think this is a fundamental cognitive illusion. I think perceived inflation and the perceived effect of inflation on real incomes are based on an impressive pair of errors.

1) people estimate inflation from the price level comparing current prices to prices they remember and consider reasonable. As noted by Krugman and Nate Silver, this is not necessarily an error. It might be that they think of inflation over 24 of 36 months. The choice of 12 months is arbitrary. But it means perceived inflation is very persistent  (in your Substack you just argued for monthly and consider the noise by thinking not moving averaging).

2) people think inflation causes lower real

I have been very alarmed by the risk of a Chinese (PRC) invasion of Taiwan (province of the RC). The main reason is that the most

Xi Jin Ping announced that he has instructed his generals (and admirals) to be develope the capicto to invade by 2027 (the 30s anniversary of the return of Hong Kong to the PRC). This does not imply an invasion then.

Landing craft and landing ships (please don’t ask me to explain or define the distinction) would be key to an invasion. What does China have and how have they recently expanding their capacity to land troops and armor ? A Wikipedia article (blush, don’t blame me blame google) updated to early 2024 reports a total of 69 landing ships in active service. This does not strike me as a country preparing

“But then, in 2022“, the Justice Clarence Thomas-authored Bruen decision suggested all gun regulations had to line up with the understanding of firearms the founders had when they wrote the Constitution. “

It seems to me that if Bruen is taken very literally, it implies that the 2nd amendment only applies to muzzle loading firearms: muskets, rifles, and pistols. The founders did not imagine AR15s. How could they have regulated (or forbid regulation of) semi-automatics?

Well here I am typing about a topic where I am ignorant and many people aren’t. Let’s go. There are small c conservative rules that all judges at least pretend to accept. Respect for precedent (and binding precedents except for the Supreme court) and respect for judicial norms and

Drones are changing warfare. They are cheap and deadly. I am thinking about their use in stopping a marine invasion. The reason is that I am concerned that it is not clear enough to Xi JinPing that an invasion of Taiwan would be a huge error.

The problem with anti-ship drones is that they are attacking a target with anti-aircraft defences and one which can survive some explosions. I think this means that a very large number of drones must converge on the ship (or ships defending each other).

At least first I will discuss flying drones (although recent news shows the importance of drone boats) A lcurrent limit on mass attacks with drones is the limited number of human controlers and control stations. I think it makes sense to have a

One of the policies with the greatest effect on poverty is the ild tax credit (expanded and made fully refundable by the American Reesue Plan). It caused a 44% reduction of child poverty. UNfortunately it was a tempory one year program (approptiate for stimulus bu not for an always needed prgram). It was not renewed and there was a huge increase in povertyThis is a hugely important policy issue (currently totally impossible with GOP control of the House). There was not overwhelming support for the program — fully refundable sounds like welfare. To be blunt, some of the money went to African Americans.

I think there is a rhetorical trick which might maybe even work. I think the history of generous child credits suggests that fighting poverty was

SIlver or lead was something Pablo Escobar liked to say. It means do what I want and I will give you money (plata) if you don’t I will use lead to kill someone close to you. I just noticed that it is the Spanish translation of a debate the US should have about the apparent failure of the Great Society (Johnson;s expansion of the New Deal).

In the conventional analysis the hero is Clinton (if one is a moderate Democrat) Reagan (as always, if one is a Republican). The story is that over generous social welfare caused people to treat the safety net as a hammock with very serious long-term consequences. The evidence for this is the dramatic increase in violent crime, drug abuse and teenage pregnancy which began in the 60s and continued until around

Oddly I am back here posting. Even more oddly I am posting on the topic I am paid to address. I start by noting two things. About one year ago, many macroeconomic forecasters predicted that a recession would have started by now in the USA. I forget who placed the probability at 100%. In spite of sltightly disappointing 0.4% (1.6% if annualized) real GDP growth in the first quarter of 2024, we are not in a recesion. What went right ?

The presumed cause of a recession was the sharp shift to contractionary monetary policy in a effort to fight inflation.

In this post, I will focus mostly on domestic demand. Briefly, high interest rates can cause a recession by causing an appreciation of the national currency which causes a sharp decline in net

“U.S. officials say they believe Hamas has been constrained by the Israeli operations, but that Israel will not be able to achieve, in the foreseeable future, its goal of eliminating the group’s military capability.”

also

“An Israeli military intelligence official, who spoke on condition of anonymity under military protocol, said that Israel was engaged in a comprehensive mission to unravel Hamas’s military capabilities.

“Is it possible this mission will be left for my children?” he said. “The answer is yes.””

and “Current and former Israeli officials said Israeli forces would most likely continue to sweep northern Gaza to tamp down the Hamas insurgency for the foreseeable future, at least until there was some kind of political

His honor assumes a fact not in evidence.

Ruth Marcus has an important op-ed which cites strong evidence that the party of the president who nominated federal judges helps one predict their opinions. I will fair use the important part.

“Now comes an intriguing study by a Harvard Law School professor that buttresses my point: If anything, it suggests we have underestimated the impact of party affiliation on judicial outcomes. Alma Cohen, whose training is as an economist, examined 630,000 federal appeals court cases from 1985 to 2020 and found that the impact of party affiliation went far beyond hot-button issues such as guns or abortion.

Rather, she wrote, “the political affiliations of panel judges can help predict outcomes in a broad set

This will be a long boring post amplifying on my slogan “asymptotically we will all be dead.”

I assert that asymptotic theory and asymptotic approximations have nothing useful to contribute to the study of statistics. I therefore reject that vast bul of mathematical statistics as absolutely worthless.

To stress the positive, I think useful work is done with numerical simulations — monte carlos in which pseudo data are generated with pseudo random number generators and extremely specific assumptions about data generating processes, statistics are calculated, then the process is repeated at least 10,000 times and the pseudo experimental distribution is examined. A problem is that computers only understand simple precise instructions. This means

One of the most reliable lazy pundit columns Democrats in disarray and the related warning that Democrats have to watch out for the damage done by the McGovern wing of the party. Lazy pundits have a problem as Democrats are in array and only aging boomers such as myself remember 1972 (even older boomer Michael Kinsley noted that it is odd that the party which nominated Richard Nixon isn’t the one constantly apologizing for the mistake they made in 1972).

The new warning is about the danger poseed by the squad. A problem is that the left most Demorats in Congress have not created any trouble for other Democrats. A challenge – when was the last time the Democrats had trouble whipping votes because of extremists. Another is how many minutes have