The curious behavior of M2

Found something interesting in the course of doing my day job. Check out M2 (since 1995) against its trend:

Could higher interest rates help the economy?

We live in an age when central bankers grace magazine covers like pop stars. But what if they don’t actually know what they are doing? In the United States, at least, quantitative easing and low short-term interest rates may have done as much harm as good.

 

The January Jobs Numbers

Last Friday, the Bureau of Labor Statistics released its report on the employment situation for the month of January. According to the payroll survery, 257,000 private-sector jobs were created in the first month of the year. Moreover, revisions added the number of people working in previous months. According to the household survey, the unemployment rate dropped from 8.5% to 8.3%. The news is positive but the magnitude of the change is still too small to affect the overall jobs outlook, which remains pretty miserable.

The December employment report

On Friday, the Bureau of Labor Statistics released its report on the December Employment Situation. According to the payroll survey, the U.S. economy added 212,000 private sector jobs in December. Since the trough in February, 2010, an average of 144,000 private jobs have been added each month, so one might think that the recent performance is a substantive improvement. But this growth is barely sufficient to keep up with the growth in the population. Meanwhile, the household survey indicated that the civilian unemployment rate fell from 8.7% in November to 8.5% in December, although, as we shall see, there is far less in those numbers than first meets the eye. Some analysts have gone so far as to say that this is the beginning of a significant recovery. They are mistaken.

A literalist approach to “supply-side” economic policy

Trying to get a sense of household risk preferences

According to one common view, monetary policy works by influencing household (and to a lesser extent business) preferences for investing, saving, borrowing, and spending. Bernanke’s stated justification for quantitative easing was that he could stimulate the economy by getting people to move money from their checking accounts into the stock market and from their money-market funds into car dealerships.

Risk preferences are not determined solely, or even primarily, by monetary policy. When times are good and you are confident in the future, you put more of your savings in long-duration, risky, illiquid assets like equities and housing. When times are bad, cash is king. Using data from the flow of funds, we can see how American households’ risk preferences have changed over time. The crisis has caused many people to retrench and solidify their balance sheets, yet it turns out that there could be a long way to go.

Explaining the fuss over equity capital requirements

Those who have been paying even peripheral attention to the debates over financial reform since the bailouts have doubtless heard about “capital requirements” and “equity capital” without necessarily knowing what those terms mean. In general, this ignorance is by design. The megabankers and their friends have deliberately confused the conversation by using incoherent phrases like “hold capital.” Their goal is to create the perception that a tradeoff exists between a bank’s resilience and its ability to make loans. There is none. So why do they press the point? It’s all about the bonuses: banks that are more resilient would not be able to pay managers and shareholders nearly as well as the banks we have now.

The November Employment Report

Earlier today, the Bureau of Labor Statistics payroll survey claimed that the U.S. added 120,000 jobs in November while the population survey claimed that the unemployment rate fell from 9.0% to 8.6%. Furthermore, the BLS revised its earlier estimates for job growth in September and October, adding an additional 127,000 jobs. This sounds like good news. Sadly, however, it is not. The gains in payrolls are still too meager to put a meaningful dent in the number of people without work. Likewise, the sharp drop in the headline unemployment rate is due more to a collapse in the number of people looking for work rather than actual growth in the number of people employed.

More fun with level-targeting

Yesterday I asked whether the fans of NGDP-targeting had thought through the full implications of their models. Today I will look at another sort of level-targeting recently proposed by a former Fed economist who now works at Citi.

What if the Fed had taken NGDP targeting seriously?

Targeting the level of nominal GDP (the total number of dollars spent/earned in a year) has become the fad of the year, partly because it is a strong argument in favor of further Fed stimulus. Paul Krugman, Goldman Sachs, and The Economist have all said nice things about it. A professor at Bentley University seems to have dedicated the past few years of his life to it.

Of course, the idea is not new. Far from it—nominal income targeting actually goes back to the 1970s. Over subsequent years it got attention from several big-name economists including Martin Feldstein, Greg Mankiw, Robert Gordon, John Taylor and Robert Hall. It was even championed by my favorite Fed governor of the 1990s: Larry Lindsey.

The point of this post is not to review the literature or consider why nominal income targeting was not adopted earlier. I also do not want to return to the question of whether monetary stimulus alone is capable of healing the economy. Rather, I want to see what the Fed would have done in the years before the big slump if it had carefully targeted nominal income. The answer might surprise you.