Thursday, February 01, 2024

Memo to Fed: Stop the News Conferences

In watching part of Jay Powell's news conference yesterday, I realized that what he is doing to just the opposite of good economics communication. When I write an article, give a lecture, or draft a textbook chapter, my goal is to convey maximum information in the fewest words possible. But when the Fed chair answers reporters' questions, he seems to be conveying the least possible information in the most words possible. 

Every answer the Fed chair gives is, more or less, a new paraphrasing of what the FOMC has already said in their statement or the chair has said many times before.  From the Fed's perspective, the ideal news conference contains no news and is mainly repetition and platitudes. "Our decisions are data-dependent....The future is uncertain....Blah blah blah...."

It is almost as if the news conference should come with a disclaimer: "I do not intend to say anything interesting. If you think I have said something interesting, please ignore because I misspoke."

Here is my recommendation: Stop giving news conferences. The Fed's policy decision and statement should stand by themselves. The Supreme Court does not give news conferences after announcing decisions. They explain their judgment once in writing and then let that stand. The Fed should do the same.

Wednesday, January 17, 2024

History of Economics Summer Camp

Grad students with an interest in the history of economic thought should click here.

Thursday, December 28, 2023

Life after Ec 10

Did you know that Kendall Roy (of Succession fame) graduated from the Harvard economics department? You can bid on his diploma here. He must have been in ec 10, though I don't recall him.

Click on image to enlarge.

Tuesday, November 07, 2023

A New Journal Ranking

 ...based on relevance for central banksAt the top is the Brookings Papers on Economic Activity, followed by the Quarterly Journal of Economics and the Journal of Monetary Economics.

Monday, September 11, 2023

This Year's First-Year Seminar

In recent years, I have been teaching a seminar to a small group of Harvard freshmen. I described the seminar in this essay in the NY Times. 

The assigned readings change a bit from year to year. In case any of my blog readers are interested, here are the books I chose for this year:

  • The Worldly Philosophers, by Robert Heilbroner
  • Capitalism and Freedom, by Milton Friedman
  • Equality and Efficiency: The Big Tradeoff, by Arthur Okun
  • We’ve Got You Covered: Rebooting American Health Care, by Liran Einav and Amy Finkelstein
  • Open Borders: The Science and Ethics of Immigration, by Bryan Caplan and Zach Weinersmith
  • The Two-Parent Privilege: How Americans Stopped Getting Married and Started Falling Behind, by Melissa Kearney

Saturday, August 05, 2023

Chip War

I just finished reading Chip War by Chris Miller (a professor of international history at Tufts). It is a fascinating history of the semiconductor industry. Relevant for not only economics but also geopolitics. Highly recommended.

Tuesday, July 25, 2023

What I've been watching

These TV shows aren't new, but they were new to me, and I enjoyed them both: Borgen (a Danish political drama) and Caliphate (a Swedish drama about an impending ISIS attack). Both are on Netflix, available dubbed in English or in the original language with subtitles. Thanks to Olivier Blanchard for the Borgen recommendation.

Tuesday, June 27, 2023

Happy Birthday, Professor Smith

Adam Smith's exact birth date is unknown, but it was sometime in June 1723.  So, 300 years ago this month.  I thought I should not let the month go by without acknowledging the father of modern economics. If you want to celebrate, I suggest reading this book about Smith's friendship with David Hume.

Friday, June 02, 2023

Five Economics Primers

Monday, May 29, 2023

A Lonely Place to Be


Click on graphic to enlarge.

This graph from David Leonhardt's column is illuminating. Now I understand why those of us who are fiscally conservative and socially liberal have trouble finding political candidates to fully represent our views. There are too few of us!

Sunday, May 28, 2023

Random Political Thought of the Day


Isn't it a bit odd to base your candidacy on the sunk cost fallacy?

Saturday, May 06, 2023

Congrats (?), Charles


Wednesday, April 05, 2023

The Importance of Teaching Fractional Reserve Banking

I was recently chatting with someone who teaches introductory macroeconomics (not using my favorite textbook). He does not teach the students about money creation under fractional reserve banking, which he considers an unnecessary technicality, but he does teach them the following two statements about inflation.

  1. If the Fed lowers the interest rate on reserves, that policy stimulates economic activity in the short run and, via the Phillips curve, increases inflation.
  2. In the long run, the quantity theory of money explains inflation.

I agree with both of these statements, and I consider them critical for students to understand. But consider: How does one explain the transition from the short run to the long run?

The only way I know to answer this question is that a lower interest rate on reserves increases bank lending and expands the money supply by increasing the money multiplier. But if students don’t know about how banks create money under fractional reserve banking, they are not equipped to understand this logic.

The bottom line: The traditional pedagogy about how banks influence the money supply remains important if students are to understand the economics of inflation.

Update: This post generated more than the usual amount of confusion and misdirection on Twitter. So let me explain my logic more slowly:

  1. It is useful to teach the quantity theory of money (M and P are parallel) as a long-run equilibrium condition, regardless of which direction causality runs.
  2. It is useful for students to know that cutting the interest rate on reserves is expansionary for aggregate demand and, over time, inflationary. That is, it raises P.
  3. To complete the story, you need to explain how cutting the interest rate on reserves raises M.
  4. To be sure, lower interest rates increase the quantity of money demanded. But you also must explain the quantity of money supplied.
  5. The money supply M equals m*B, where m is the money multiplier and B is the monetary base (currency plus reserves).
  6. Cutting the interest on reserves (unlike open-market operations) does not change B. So if it changes the money supply M, it must work through the money multiplier m.
  7. One cannot understand the money multiplier m without understanding fractional reserve banking. (Under 100-percent-reserve banking, m is fixed at 1.)

Tuesday, April 04, 2023

Is ChatGPT wise or just flattering me?

Wednesday, March 15, 2023

A Ranking of Economists

Tuesday, March 14, 2023

Five Observations on SVB

1. The collapse of Silicon Valley Bank seems closely related to the fact that we recently experienced the largest drawdown in bonds in history. That is, the bank made an imprudent bet on interest rates and was very, very unlucky. 

2. Contrary to the claims of some talking heads, the relaxation of Dodd-Frank in 2018 appears not to be a big part of the story. The "severely adverse scenario" in the regulators' stress test did not include a major bond drawdown.  Instead, it described a recession accompanied by falling interest rates. That is, the regulators would not likely have caught the imprudent bet the bank was making.

3. I am not particularly concerned about the moral hazard associated with insuring all bank deposits (though the expansion of deposit insurance should be done explicitly, rather than through the implicit and ad hoc process now occurring). It is not realistic to expect bank depositors to monitor the health of their banks. A sophisticated depositor with a large balance would instead spread his holdings in $250,000 chunks among many banks. Those left with large holdings in a single bank are, by revealed preference, unsophisticated.

4. People say we need better regulation. Of course, but that is easier said than done. Don't expect supervision to get much better, though we should try.

5. The simplest way to avoid these problems is to push banks toward higher levels of capital. Maybe that can be accomplished by making deposit insurance fees depend more strongly on the bank's capital/asset ratio. Or something along those lines.

Friday, March 10, 2023

The Budgetary Trilemma

A wise economist of the center left recently suggested to me that the Biden administration faces a trilemma: They would like to (1) increase spending on programs they consider important, (2) not raise taxes on those making less than $400,000 a year, and (3) put fiscal policy on a sustainable path. But the stark reality is that they can have only 2 out of the 3.

The President's just released budget chooses to forgo fiscal sustainability. As the Committee for a Responsible Federal Budget notes, even under the unlikely scenario that the President gets everything he wants through Congress and his economic projection turns out to be correct, "debt would hit a new record by 2027, rising from 98 percent of GDP at the end of 2023 to 106 percent by 2027 and 110 percent by 2033."

Tuesday, February 28, 2023

A Virtual Economics Teaching Conference

Cengage, the publisher of my Principles text, is sponsoring an online economics teaching conference on March 10. You can find information about the agenda and registration at this link.

Wednesday, February 22, 2023

Economic Theory Summer Camp

My colleague Eric Maskin points me to this opportunity for graduate students.

Saturday, January 07, 2023

I talk with Larry Kotlikoff

Recently, I had the opportunity to speak with Boston University economist Larry Kotlikoff and some BU students and faculty.  You can listen to the conversation here at his podcast. You can also subscribe to Larry's substack here.