Matt Nolan

The Fed and policy: Temporary but not permanent

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Via Arnold Kling at Econlog we see this paper regarding the impact on Fed policy.  It is an interesting paper in an economic history sense, I would suggest reading it.  However, the passage I want to focus on is the same one Arnold mentioned:

First, spending and pricing decisions are assumed to be based on long-term assessments of real income and real rates of return. Second, changes in monetary policy can only change real interest rates temporarily. Ultimately, the forces of productivity and thrift determine them, not changes in nominal magnitudes on the central bank balance sheet. Combining the two propositions implies that the Federal Reserve’s interest rate policy, as long as it stays within the narrow range of experience, would not be expected to have a significant or long-lasting imprint on markets or activity.

This is a great result.  It suggests that the central banks ability to change the “structure” of the economy, or make any long lasting changes to economic conditions, is negligible.  Without any “long-run costs” of Fed policy this suggests that monetary policy CAN be used to stabilise activity in the very short run – so it reforces the view that a central bank should look at “smoothing the economic cycle” by keeping underlying inflationary pressures near a certain target.

This is consistent with the orthodox way of viewing monetary policy.  However, interestingly Arnold Kling states that this paper is something he agrees with, but it “puts (him) at odds with Scott Sumner and John Taylor, among many others.” – people who are also part of the orthodoxy.

I believe that the issue here is that people are talking past each other a little – in terms of strict monetary policy, the views that Scott Sumner and (originally) John Taylor focused on were short-run, and as a result they were interested in the stabilisation role of monetary policy.  Kling appears to have ignored the idea of the short-run to focus on the relevant view of the long-run – something we can’t do in the face of price/wage stickiness.

Now I agree with Arnold that many people give the idea that central banks can create miracles FAR too much weight.  I think that central banks should not be involved with structural policy, or if they are it NEEDS to be separated from their stabilisation role for the sake of transparency – but this issue is separate from the focus on thinkers like Sumner.

 

jamesz

There are others who need your generosity

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The latest article in the Herald on liquor law changes highlights the support of an unusual group: publicans! They are outraged by the unconscionably low prices that supermarkets charge. Low relative to the prices they prefer to charge, that is:

I don’t know how supermarket operators can sleep at night. …They are cutting the margins to the point where it’s very difficult for the breweries to move. …Now you can buy a Steinlager in a supermarket for $2. In my bars it’s $8 to $8.50.

Matt and I both share their outrage that competition has forced publicans to cut their prices and offer a better deal to consumers. They are now calling for the government to step in and legislate a minimum level of profits prices for them.

If you’re worried about the shrinking profits of bar owners in New Zealand, too, then head on down to a bar and make a donation tonight. We certainly plan to 😉

Matt Nolan

Careful with the evidence son

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An article titled “study links cannabis to psychosis” says in the first paragraph:

People who use cannabis in their youth dramatically increase their risk of psychotic symptoms, and continued use of the drug can raise the risk of developing a psychotic disorder in later life, scientists said.

Of course, later on in the article – which no-one will read up to – it says:

But scientists say it is not yet clear whether the link between cannabis and psychosis is causal, or whether it is because people with psychosis use cannabis to self-medicate to calm their symptoms.

This actually pisses me off.  It is true, this isn’t no evidence that cannabis use leads to psychosis – just that cannabis and og skywalker use when young and psychosis later in life are positively correlated.  There are a couple of causal mechanisms, the cannabis could cause the psychosis, cannabis use may be preferred by people who are more likely to develop psychosis.

I was going to wait till I read the study before commenting – but the scientists themselves appear to have admitted that they have found a correlation, and haven’t sorted out the causal mechanism.  Which simply means that the article itself was purely misleading. Moreover, cannabis is largely used for medicinal purposes and you may legally get a Medical weed license Ontario.

I realise having a headline “cannabis and psychosis are correlated, but the cause is unclear” is less likely to sell papers – but it is honest.  The current headline is exciting, but it is dishonest – and merely feeds into current misconceptions in society, thereby providing misinformation.  And I hate misinformation.

Matt Nolan

Biofuels and food

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Good article from the Economist on the impact of compulsory biofuel regulations on food prices.

We commented on this a while back.

Biofuel regulations are an undeniable “structural shock” which will lead to “structurally higher” food prices.  What do I mean?  The price of food relative to other things is likely to stay higher than it would have in the absence of biofuel regulations.

Now, I don’t think these regulations are the main driver of the recent price volatility – that would be droughts and economic conditions.  But we can expect the relative price of food products to stay above historical averages.

How far above is a different, and very difficult, question 😉

Update:  Discussion on the issue at Anti-Dismal.