“Taylor rule” probably harmless

Update to Blame sociology

December 14

Via Brad Delong, I stumbled across this piece from Noah Smith explaining that a job is more than a pay check and that sociologists might have much to contribute to the economic policy debate. That surprised me, given what I thought his views were, so I Googled and came across this piece saying that America needs more (good) sociologists.

I guess my take on Noah’s take of sociology was a bit out of date.  It was anchored in this piece where he points out that most sociologists have a fairly low IQ and are ripe picking for econ imperialists.  That claim stuck with me, I guess. Anyhow, my view needed revising.

I am not sure what sociologists know or don’t know. I am pretty confident that the typical (?) economists’s preference for maximizing output or “GDP” is pretty much a distraction at high incomes.  In this piece, I mentioned that if you want full employment, then pursue full employment directly, not GDP.  That rhymes pretty closely with Noah’s view that a job is not just a paycheck, although I am done putting word’s in Noah’s mouth.

“Taylor rule” probably harmless

There is a move afoot to “fix” the Fed by forcing it to come up with a Taylor-type rule and then to explain any deviations of the funds rate from what is prescribed by it. Jeb Hensarling, who is fully owned by Wall Street and wants to deregulate it, supports this effort on the grounds that it will help prevent bubbles.

That is pretty hilarious.  To the extent that bubbles are created by policy, the culprit is heads-I-win / tails-you-lose finance, not a low federal funds rate.  There is a very close correlation between complaining about the Fed and favoring de-regulatory policies that would create more bubbles. This is not a coincidence, but a manifestation of the usual deflection strategy favored by frauds.

Anyhow, “imposing” such a rule on the Fed would probably be harmless. Taylor has himself said that the constant and coefficients within his rule are flexible, which means that the rule can be used to justify any fed funds rate the Fed chooses on the basis of unconstrained discretion. Other policy rules could be manipulated similarly, as we have seen. So this would be mostly a make-work project for economists skilled in tortured English.  There are plenty of those in the Fed’s communications departments already. So there is no supply-side constraint here I can think of. *

Taylor himself might be another matter. There is some discussion also of putting him atop the Fed to replace Yellen in 2018. If he were put there and other similar-thinking governors were appointed to support him, then they might actually apply the logic of a Taylor rule and not just pretend to do it.  That would be a much more serious issue, particularly if the zero bound on rates were still proximate. But I guess folks can jump off that bridge when they come to it.

* Consider, for example, how the Fed dealt with QE and bubble risks. Largely pointless QE was said to be limited by fear of unintended consequences, when the real issue was intended inconsequence.  And for six years the Fed let on that another three months of low interest rates might be destabilizing, and that they were watching the issue carefully! I think these guys can easily handle pretending policy has something to do with a policy rule, and they can rely on an extremely gullible media, Wall Street and academia to help them along, going forward as in the past. These folks described QE as making monetary policy “extremely accommodative” and Jeremy Stein as “influential.” QED

Blame sociology

Speaking of bubbles, Noah Smith has a Bloomberg View article claiming that one important cause of them is investors’ tendency to extrapolate.  Housing bubbles, for example, develop because people extrapolate the past five years of house appreciation into the next five years. No shit.

In fairness to Noah, one point of his article is to observe that academic economists have been blinded to the obvious by their attachment to the rational expectations paradigm.  But to this end, he concludes on what strikes me as a funny note.  He says that a key barrier to truth is “sociology.”

I know he dislikes sociology and likes to mock it for being soft, non-rigorous, non-empirical, etc. I don’t have a dog in that fight. But I think what he meant by “sociology” was sociological influences on economists.   It is economics, not sociology, that has been the barrier to truth in this case.