Catch Up Larry!

Larry Kudlow at the NRO needs to do some reading.  When he raises his usual objections to inflation targeting and the Taylor-type rules that implement such policies, he says:

Are any of the Fed bigwigs in Jackson Hole watching the market price-rule indicators? Do they understand the teachings of Milton Friedman and Frederich Hayek — that markets, which contain more information than economic models, are the best judges of economic “risk management”?

He seems to be unaware of that Milton Friedman now supports inflation targeting (see here too).  He might also want to read up on the modern versions of Hayek which also support the Fed’s movement towards inflation targeting and transparency (he could start here, here, and here, or read this).  Setting aside the over-tightening debate he refers to, which is separate, he can believe whatever out of the mainstream position he wants, but he should be a little more careful about whom he cites as supporting it.  And in answer to his question, I think the Fed bigwigs understand the teachings of Milton Friedman and Friedrich Hayek very, very, well, more so than a certain columnist at the NRO.

Comments

[gary lammert]

An unfolding hyperpole replay of 1929

A Completed Fibbonocci Third Growth Sequence on Friday 26 August 2005

The fractal evolution since October 2002 strongly suggests that there are very real and very simple quantum number fractal laws that underlie the macroeconomy. This discovery will be little consolation to the turmoil that is about to unfold over the next decade.

August 24 (Wednesday's) and August 25 (Thursday's) trading days once again demonstrated on a 5 minute unit fractal level, the recurrent precise fractal theme of x/2.5x/2x-2.5x - that pervades the economic universe.

For the Wilshire 5000 the base was about 17 five minute units. The three sequential growth fractals were 17/42/34 of 34 before the fall on Friday morning. The lateral 'skeletonized' evolution of this fractal sequence suggests the final lower (very lower) high is close at hand. Friday August 26 is the Fibonacci 85th day of a 52/130/85 daily sequence dating since August 2004.

1.62 times 52 equals 84.24 days.... If growth sequences follow idealized
Fibonacci related fractals, Monday 29 August 2005 will break lower in
a nonlinear manner. A deluge is coming.

Gary Lammert The Economic Fractalist http://www.economicfractalist.com/

[pgl]

Good post! An Angrybear goes after Kudlow on his demand = supply of oil "model" and then praises (sort of) Jerry Fuzzcharts Bowyer.

[bailey]

Kudlow deserves some credit. He blew his mind & still found a way to make a living.

[Lee A. Arnold]

I believe that the idea that markets (or models) "contain information," and that their "contained information(s)" can stand in comparison to each other, are types of intellectual mystification. "Information" is merely a difference between two things, and the rather amazing fact that "Money" is the only significant physically-quantized version of it, should not mislead about its other, rather invariant basic characteristics.

For example, you could define markets as the most voluminous transmission channels for information of a specific kind, but only up to the point where other problems intervene or (market) failure occurs, or crisis and panic makes them unusable or dangerous. (Just like all transmission channels whatsoever.)

That of course would be what the Fed is trying to look at.

On another matter, while it is doubtless true that the economy, like every other biological and social subsystem, "conforms" to power laws and therefore resembles fractal patterning, I believe that this is a whole-systems attribute related to hierarchical causality (Aristotle's one-to-many pattern, ...a zillion times overlapped,) and so far the mathematics is suggestive but rarely precisely predictive of single events, much less catastrophes.

I stand with Gregory Bateson and say that we are dealing with "pattern" as an abstract axiom. I gave-up trying to mathematicize it, and symbolized it by using a general syntax of snowflakes. See http://ecolanguage.net/

[pgl]

You trackbacked Bill Polley - who did a wonderful job of expressing what my frustation with the D = S for oil part of Larry's oped. Thanks!

[PrestoPundit]

It's spelled "Friedrich".

[Mark Thoma]

Thanks - I copied the names from the Kudlow article without paying much attention. You can find it spelled both ways, but I agree that Friedrich is more common than Frederich, so I changed the text. I left the article as written.

[Joe Rotger]

Mark,

Is it necessary to downgrade Kudlow's assessment of the economy do to an outdated reference to the teachings of Friedman or Hayek?

I truly think he's got the main point right. Commodity prices are telling their story.

If you take all the mumble jumble noise out of the discussion, the main culprits of the problems the US economy faces are: low wages in China, high oil prices and the overspending of the government, --mainly, brought about the war in Iraq.

And, raising short-term rates, in my humble opinion, counter to allowing the dollar to fall, or letting inflation rise, to erode US wages --will not allow the US to get out of the corner it's in.

How are exports going to grow with a higher dollar? How is the US going to improve its trade imbalance?

I'm sorry, but there is no nice way out for the US worker, US wages have to fall, if not, jobs will disappear.

As a matter of fact, investment is not growing in the US, as it normally would, because it makes much more sense, with the actual wage disparity, to invest in China. So, what extra relief, low rates are providing, apart from housing, the rest of the investments are either in cash or fleeing to China.

Why would anybody invest in the US?

Investors are further worried because they know that in the end the US dollar must also capitulate, to allow for a solution to the wage disparity issue.

So, why not accept the facts and avoid trying to postpone the inevitable: US dollar falls or inflation rises in the US. Only then, investors will channel their money into the US, not sooner.

In other words, the facts are there, they are not pretty, I think Mr. Greenspin and company, can only aggravate the situation by making the wrong move.

Raising the Fed rate was the first mistake. Or is it that the Fed is protecting its protege banks –they sure don’t want monopoly money as repayment of their outstanding loans?

Let’s stick to the real issues.

[Mark Thoma]

I really care about output stabilization because that is, I think, one of the keys to stabilizing employment over the business cycle. The true focus of all of this is maximizing the welfare of the typical household - that is the policy objective of the very latest theoretical models.

Presently, neither side is very happy with my position on these issues. That's okay, I believe in my position. The left, in general, does not like my advocacy of inflation targeting. I have made my arguments, and very much acknowledge theirs (and yours), but I see things differently - I believe in what the very best monetary theorists and what the very latest empirical work are telling us is the best for stabilization policy (with model uncertainty accounted for) and when I look over the entire business cycle and not just at the conditions of the moment I am led to this view. I will note that for quite awhile I've been calling for the Fed to pause and catch its breath at around 4.25% - and still do, though I'm now wondering if slightly higher, 4.50% perhaps, is an appropriate level to pause at (this is distinct from what I think the Fed will do - I don't see a pause yet). There are others calling for aggressive rate increases right now, 50 bps at the next meeting, but I think that would be a mistake, particulalry if it was a big surprise to the markets.

When people are promoting what I see as a discredited and out of date policy, and furthermore acting as though it's supported by people who don't support it at all, I think it is necessary to point that out. In my view such a step backwards would be a big mistake, and I am not alone here, just read the papers in the links I provided. I will not stand by and watch a policy be promoted that I think has the potential to do harm so yes, in my view it is necessary to speak up.

But these are not settled issues and my mind is open. I am puzzling about asset price targeting, something I've written about, but still have unresolved questions. I'm worried about all sorts of question with regard to inflation targeting. There is much yet to be done but moving backwards, which is sometimes appropriate if you have gone down the wrong road, is not the direction I want to see us move.

[Joe Rotger]

Mark,

Models?

Why do I get the feeling that we have to get a solid footing of the problems to solve them?

Any model, at this point in time, has to take into account the following:

Yes, we can give President Bush and his government a slap in the hand for all the spending (and tax cutting).

Maybe, there are a lot of things you and I don't know of what’s going on with the high prices of oil. But, why do I get the feeling that oil producers have smelled blood? And, oil is not ours! We'll have to pay dearly if we want some. To add salt to the wound, China wants its share of oil too.

And, yes, what is the US going to do about Chinese low wages?
Make the problem disappear?

US workers are losing their jobs, and they’re either staying at home (understandable) or finding lower wage and poor quality jobs. Maybe you’ll agree with me that raising the US dollar, inflation threat or not, is raising their wages and making US prices less competitive.

Investors are either sitting on their cash or setting up shop in China (or close by).

Of your previous post, I can only relate to targeting inflation. To solve the disparity of wages, the US must inflate its way out or devalue the US dollar. It’s the easy and only solution to low wages in the US.

Now, when you target inflation, be sure to make the US trade balance positive. I’ll give you a hint --raising Fed fund rates is not in the cards.

Or tell me, please tell me, how the hell are we going to pay US debt?

Or, how are we going to avoid the massive destruction of jobs --to Chinese low wage competition?

Once these jobs are gone…

And the houses are gone… let’s not forget the MBS –held by the Asian CBs, guarantee those home equity loans.

I for one, will be very upset with the economists for siding with the bankers, either by overlooking or actively taking part in covering the real issues which may have saved the massive destruction of good jobs in the US.

Yes, the bankers, I’m not buying the crap about CBs caring about "maximizing the welfare of every household". Bankers have at stake the repayment of their loans –or their protégé banks, and they surely would not like repayments of monopoly money --future US dollars. That’s why the Fed has been raising their lending rate. The US dollar appreciation favors both, the Fed and Asian Central Banks, in this respect. This is called the conundrum, or the CBs concerted effort to take advantage of the US household from this unique wage disparity situation.

Mark, the Chinese were dormant, they’re awake now.
Bankers nor oil producers are going to help US households…
Please wake up, there is very little time.

Finally, so you get a perspective of where I’m coming from, I’m an Ayn Rand admirer, a free thinker, if you will.

And, I have nothing against the Asians. They have much to admire, and they are only guilty of looking for their best interests, like any of us.

[Mark Thoma]

Joe - I think you and I want the same things and see similar problems, we just may not see eye to eye on the means of attaining those goals.

One thing I hear over and over in the comments is that economists and the policies we promote are out of touch with what the working person needs and wants, that their interests are not adequately represented. When they come to these sites they are often frustrated to find economists saying things that appear to apply more to textbooks than the world they observe around them. There is, then, at a minimum a communication problem where I and others make very clear whose interests we have in mind as we think about policy prescriptions. We do not seem to have communicated very well on that front. But perhaps it goes beyond that and I want to give that some thought. Thanks.

[Joe Rotger]

Mark,

After rereading my statements.

If I seem a little rude, my apollogies. I do get carried away sometimes...

Take good care.

[Mark Thoma]

Not at all. Thanks and have a good night as well.