Syriza’s communications strategy

This recaps on a tweetstorm this morning.  Perhaps it’s all a cunning plan, or misrepresenation by the media, but if not, the current media strategy of Syriza is worrying.

1.  There is a remarkable amount of cross-section variation (ie across different Syriza representatives) and time-series variation in what is being demanded or proposed.  We have had variation on how to treat legacy debt;  the difference between G and T going forwards (the primary surplus), and even who would be dealt with.

2.  This makes me think that they had not thought through clearly what they would say they would do or wanted, nor what they would actually do and accept.

3.  If that’s the case, perhaps they were caught out by how many seats they won, and had only wargamed on the assumption that they would have to form a centre-left coalition and water down their demands at the outset, at the point of coalition-formation, ie before confronting the Troika.

4.  If 3 was right, that would account for why the detail behind the more robust demands was not there, and why the tough line was hard to maintain.

5.  All this is a shame, because as many have observed, even if there is an agreement to be had, the dispute could still end in Grexit by accident.

6.  And there is no real excuse for not being prepared.  There was and is plenty of free help around to plan everything thoroughly.

7.  I’d say that this cross-section and time-series  variability in Syriza demands makes a bad outcome more likely.

8.  The Troika might take it as a sign of weakness, take heart, and try to ram home a solution too close to the status quo, which ultimately fails.

9.  Or this could be a sign Syriza don’t really know what they would settle for, nor what they could deliver.

10.  A more forgiveable reason for the shifting talk is that what can be delivered, or what might have to be accepted is shifting, as capital flows out of Greece, and tax collection collapses.

11.  You can see how this creates an unfortunate feedback loop.  Uncertainty about what Syriza wants causes capital to fly, taxes to fall, which causes what Syriza can achieve/deliver to scale back, which causes the rhetoric to change, and so on.

12.  Despite all this criticism, it’s hard for Syriza to fashion a proper approach.  Re-engineering debt that is symbolic only now (it will never be repaid regardless) is hard to make meaningful to ones partners….

13.  And as I’ve said before, the other main bit of the bargain, the future primary surplus, is now an unforcastable chimera.  No-one has any idea what it would be on unchanged policy, since no-one can tell what tax collection will recover to.

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Steve Williamson on Taylor Rules

Steve Williamson responds to my post asking whether it was sticking to the Taylor Rule that got us into the mess [the opposite of John Taylor’s contention, that it was departing from it that was the problem!].

Two points by way of a response.

My first arises, I think, out of a misunderstanding Steve has of my ambiguous drafting.  In my post I explain the result than in the NK models religious adherence to the Taylor Rule produces two steady-states, one involving being trapped at the zero bound.  I argue that this wasn’t the reason the Fed wound up trapped at the zero bound, because those at the Fed ‘don’t use rules like this’.  By which I mean ‘don’t use rules in the sense of believing them to be religiously adhered to’ and not ‘don’t use Taylor Rules for any purpose’ which Steve takes that to mean.  Monetary policy rules are ubiquitous in conversations about monetary policy in the Fed and all central banks.  But talking about them is not enough.  SGU’s paper doesn’t have anything to say about central banks that follow a Taylor Rule unless they think it’s leading them into a liquidity trap and then deviate from it.  Or about central banks that use Taylor Rules as a ‘cross check’ [a frequently used term that in my experience meant not really using them at all].

The point being that without total commitment to the rule, this pathology of the model goes away.

Steve’s second point is a reprise of his contentions in previous blogs that the Fed could raise inflation by raising the nominal interest rate.  And, relatedly, that perhaps inflation is too low because the Fed lowered rates.

This has been debated on the blogosphere extensively.  I don’t have anything new to add to it. A summary of the case against Steve is something like this:

1.  Steve’s proposition is true in flex-price versions of the standard monetary business cycle model.  But in that model, business cycles are of no concern, and the Fed would have no business attempting to smooth them, or doing anything with interest rates.  Rather, interest rates at zero forever is Nirvana, this being the Friedman Rule which equalises returns from holding monetary and real assets.

2.  Micro evidence suggests – though there are a few who dispute it – that prices are sticky.  In the sticky price version of the model in 1. above, Steve’s contention is not true.  Raising nominal rates would raise real rates and depress demand, lower inflation, raising real rates, accentuating that recession, and so on.  Steve and his peers in the ‘new monetarist’ literature often say:  so what?  This model is full of made up stuff that can’t be justified from first principles.  I’m in the camp that worries about this and much admires what Steve and coauthors are doing to construct alternative and ‘deeper’ macro-models.  But for now, the conventional model seems to be the best we have.

3.  Empirical VAR evidence on the effects of identified monetary policy (ie interest rate) shocks suggests that raising rates would have effects similar to those described in 2.  Taken individually, there are lots of shots one can take at papers in this literature.  But taken as a whole, the evidence is pretty compelling.  If you raise interest rates, inflation falls.  Some (like Uhlig, for example) quibble about whether output falls.  Most don’t.

 

The natural rate may still be edible

This summarises a Sunday afternoon conversation with Roger Farmer on Twitter. Apologies for multiple drafts and no links: this is one- fingered on an iPhone from hospital.

Roger has a new microfounded macroeconomic theory that has the prediction that the unemployment rate is a random walk, and cointegrated with the stock market.  He looks at the data and finds that the unemployment rate is a random walk and is cointegrated with the stock market.

Is the natural rate hypothesis, at the heart of mainstream modern macro dead, or, as Roger puts it, ‘well past its sell by date’? That’s the inference, at face value.

Another explanation, is that there is slow moving institutional change that drives both the stock market and the unemployment rate.  Institutions related to benefits, employment protection legislation, taxes that affect labour demand and supply, unions and collective bargaining have all been in slow motion change, which over small samples may look non-stationary (or even be thus), and may have affected the labour share and the value of a claim on the remainder. These changes one would have expected too to have pushed around the equilibrium unemployment rate.

On this view while naive manifestations of the natural rate that exclude institutional change may be past its sell by date, those that embrace it may still be edible.

Of course at this point I have done no more than raise a counter conjecture to compare with Roger’s econometrics but it is at least worth investigating.

Roger has been urging large scale intervention in the stock market to raise equilibrium employment. In fact dovish natural rate believers can find common cause with this and related policies right now, although the cost -benefit analysis will differ somewhat. So even though until entirely disproven I would urge we keep some eggs in thematically rate basket, at present the policy prescriptions from the two perspectives are not in direct opposition.

The hawk’s talk about Greece

Andrew Sentance tweeted: ‘If Greece now “insolvent” why was UK not “insolvent” in 1945? Public debt/GDP = 200%+ http://www.res.org.uk/view/article5jan12Correspondence.html … 25 yrs later was <70%!’

The answer is:  it was insolvent.  The Marshall Plan amounted to roughly £3.3bn pounds over just 3 post war years 48-51, which was about 30% of nominal GDP at the time.  I imagine that might have helped us somewhat.

And, there was what sovereign debt researchers have termed ‘financial repression’.  Liquidation of government debt via inflation, sub-market real interest rates, regulation.  Reinhardt and Sbrancia estimate that this liquidated about 3.3% of GDP’s worth of debt on average over 1945-1980 for the UK.  ie about 100% of GDP in total.  Measuring the contribution of these factors is not a precise science.  But still, you get a feel for the magnitudes involved.

So, it seems it wasn’t just ‘growth’.

Roughly 80% of the Greek sovereign debt is owed to the foreign official sector.  So the methods the UK used to steal from its mostly domestic bond holders aren’t so readily available.

Leaving all this aside, what does  Andrew Sentance think would happen to Greece if either the debt were not forgiven, or the generous terms to ‘repay it’ [in quotes because of course no one expects much of it to be repaid] were not extended?

Of course Greece [the murky combination of the public and banking sector] is insolvent.  The Greek banks would collapse instantaneously without the ECB’s ELA.  And that would bankrupt what, 5-10% of the private sector too, over the next 12 months?   More?

Did John Taylor get us stuck at the ZLB?

Paul Krugman picks up on my post about proposed legislation to get the Fed to pick a policy rule.  The legislation is being championed by John Taylor because he thinks that the reason we got into this mess was because we deviated from his rule.

It’s interesting to wonder whether in fact the truth is the reverse.

Was it the sticking to the rule, rather than deviating it, which got the Fed trapped at the zero bound?  That’s one way of reading PK’s post.

In the public exchange between JT and Bernanke, Bernanke argued that they didn’t really deviate from the rule, so that could not have been the problem.  However, PK – if he is suggesting this – has theory on his side in the shape of a paper by Schmitt-Grohe and Uribe called ‘The perils of Taylor Rules‘.  This paper shows that religious adherence to the Taylor Rule produces two ‘steady-states’ [jargon for where the economy settles when there is nothing buffeting it around], one of which involves interest rates trapped at the zero bound.

I don’t really think this can be the reason.  The theory offers a knife-edge result, a trap that would be avoided by a Fed with even a slight tendency for discretion.  And those who are briefing FOMC and even on it don’t use rules like this.  Though many of them produced the papers exploring the usefulness of these rules, their instinct is to respond as they sit to events as they arise.

In so far as monetary policy was at fault, the problem was that it was directed at a rate of inflation that with hindsight was just too low.  Hence why I and others, PK and Blanchard included, have argued for a higher inflation target in the future.  In the long run, higher inflation means higher central bank rates, one for one.  And this means fewer and less severe episodes at the zero bound.

RIP the primary surplus

Any negotiations over debt relief between Greece and the Troika can no longer focus on the primary surplus.  There is clearly a sharp contraction under way, amplified by a decline in funding for Greek banks.  Whatever primary surplus there was has surely disappeared right now.  And how the current events will play out into future values of that surplus – even on unchanged policies – is highly uncertain.  Bargains over Greek policy can’t be expresed in terms of a fuzzy forecast future primary surplus that some civil servant economist somewhere thinks those policies will generate.

The probable disappearance of that surplus weakens the Greek hand somewhat.  But not that much more.  It was already pretty weak, since the financial convulsions associated with a default would have swallowed the surplus anyway.  There has been no sign of contagion into private or sovereign spreads outside Greece, and that will also make the Troika more confident of holding its line.

The Greek behaviour post-election makes me marginally more pessimistic about a deal being reached.  Partly because there is a sense of there being a lack of coordination between Tsipras and Varoufakis, who are saying things that imply different notions of what would be an acceptable deal with the Troika.  Can they get their acts together, agree a common line, and deliver any agreement to their party?

The sense of chaos is amplified by the (to me) surprising foreign policy ploys of blocking further sanctions against Russia, irritating China, a potential lender of last resort, by cancelling the port privatisation;  and even annoying Turkey over a visit to disputed Island territories.  Perhaps these are viewed as relatively costless acts to please their followers, sweetening them before a compromise on what really matters, finance.  But they could also add to the arguments rehearsed in Northern political dinner parties that Greece can leave the euro, since it would not play a constructive role in the Eurozone political union anyway.

 

No legislation on the Taylor Rule please

John Taylor and Alan Blinder have been exchanging op-eds in the US press on a bill before Congress now that, if passed, will force the Fed to ‘describe’ its preferred rule for monetary policy.

I posted before here on why I thought this was a bad idea.

The recent exchanges are about whether the legislation would tie the hands of the Fed or not.  Blinder argues that it will, Taylor argues that it won’t, since all the Fed have to do is disclose the rule they will follow.

John Cochrane blogged some time ago sounding supportive of the idea.  Which I found puzzling, since he has written a few fascinating papers tearing apart the framework that produced central bank received wisdom that these monetary policy rules were a good idea.  For example, he questioned the notion of equilibrium that most people sweep aside along the way to admiring the stabilisation properties of Taylor Rules, and the stories people tell about why the rules do well.  And he even queried  whether people have the sign right in New Keynesian models when they think about the effect of monetary policy on inflation].

To recap earlier arguments, there are many reasons this is a terrible idea.

1.  Supposing the Taylor Rule was genuinely thought to be a great guide to policy.  In a few years, we might realise it isn’t.  And legislation is hard to change.

2.  The legislation sets a terrible precedent for interfering in the operational independence of the Fed.  The right way to delegate monetary policy is to be clear about what goal they are set.  [A little unfortunate that the Fed have been left to define their own goals, quantifying the previously unquantified definition of price stability].  And then the Fed ought to be left to decide itself how to achieve those goals, and be held to account based on performance.  Even if this were a well-designed interference, (it isn’t), the next one might be for nefarious political ends.

3.  The US Congress is not to be expected to reach fair-minded conclusions on anything these days.  The effort to tame the Fed is probably entirely a political thing stemming from the visceral libertarian feeling that the Fed’s activism – admirable in my view – is part of the problem in the US, rather than the solution.

4.  The Taylor Rule or any particular rule like it only ever performed well in a very narrow class of DSGE models.  That class of models now looks much less reliable after the crisis as a testing ground for monetary policy design.  In some senses, the crisis shows why it was a great idea not to have legislated in the days of the Great Moderation, when rules like this reigned supreme as explanations for why macroeconomic performance looked so good.

5.  John Taylor’s argument that the act of describing the rule won’t constrain the Fed must be incorrect.  If this were not the aim, or the likely outcome, there would be no point.  JT wants description to bring about more rule-following.

6.  The Fed do enough describing without legislation.  Continual reference to rules is made in their research outputs, the staff forecasts, research based work in the speeches of the PhD FOMC members, even the FOMC minutes themselves.  Why is legislation need to force this process of ‘describing’?

7.  JT’s support for the legislation is based on his view that deviating from the Taylor Rule was a major factor in causing the financial crisis.  This is a really weak argument.  In the models JT developed himself and in which the TR is a good policy, monetary policy just does not have such powerful and long-lasting real effects.  As I said above, we might argue that there’s good reason to ditch this model.  But if we do, we can’t keep the Taylor Rule or anything like it as the prescribed policy.  There’s a long learning process to go through that legislation won’t help.  Moreover, Bernanke pretty conclusively refuted the idea that monetary policy was anyhow loose relative to a sensible rule in the early 2000s.  JT’s own rule remember is not actually operational (point made by McCallum long ago) since it includes contemporaneous inflation and GDP, not available in real time.  If forecasts are inserted instead, policy looks fine.  And, there are some pretty strong pieces of circumstantial evidence that other policy failures were the cause!  This thesis is to be twinned with his comment on fiscal policy.  He sees the fiscal stimulus agreed at the beginning of Obama’s first term as a deviation from rule-based behaviour.  Despite the fact that in the same model that is the testing ground for the Taylor Rule, which JT built himself, a fiscal stimulus is an optimal response to a recession.

So, for all those reasons, legislation on monetary policy rules is a terrible idea.  My main hope is that this issue just sounds too technical for your average Republican mischief-maker looking to make some headlines.