Chicago Fed president Charles Evans has gone from dissenter to intellectual leader in just a year. The future of the recovery might be at stake.
Some revolutionaries wear Guy Fawkes masks and talk about the 1 percent, and some revolutionaries wear suits and talk about policy thresholds. Chicago Fed president Charles Evans is one of the latter.
A year ago Evans was the rare dovish dissenter at the Fed. He didn't think it was taking the unemployment half of its dual mandate seriously enough, so he proposed a new, eponymous rule for it to do better. He certainly wasn't the first Fed president to have his own ideas about monetary policy, but a funny thing happened on his way to heterodoxy -- his ideas quickly became the consensus. Now, just a year later, the Fed has fully embraced the so-called Evans rule by linking interest rates to the unemployment rate.
Ain't no revolution like a monetary policy revolution.
It's been a brave, old world for central banks the past four years. Short-term interest rates have been stuck at zero, which, outside of Japan, hasn't happened since the 1930s. It's what economists call a liquidity trap, and it means central banks can't stimulate growth like they normally do by cutting short-term interest rates. They can't cut below zero. This doesn't mean central banks are powerless, just that they have to try new things.
These new things come in two varieties: promises and purchases. Central banks can pledge to hold short-term rates at zero even after the recovery accelerates, or they can buy long-term bonds to push down long-term rates; the former is what Paul Krugman calls "credibly promising to be irresponsible" and the latter is what we call "quantitative easing." These sound like big changes from standard operating procedure, but the goal with both is the same as normal -- to reduce interest rates. It's just harder to do in a liquidity trap. Central banks have to increase expected inflation to lower inflation-adjusted rates when nominal, that is headline, rates are at zero. That's the point of these promises and purchases, and that's been the point of the Fed saying it expects to keep rates at zero through mid-2015 and buying $85 billion of mortgage and Treasury bonds a month. But as much as the Fed has done, there's still much more it can do -- like making its promises more explicit -- which it started to do with its latest policy move. Let's break it down into two pieces.
(1) THE EVANS RULE
The Fed's big announcement was that it won't raise rates before unemployment falls to 6.5 percent or inflation rises to 2.5 percent. Notice the word "before" here. The Fed won't automatically raise rates if unemployment or inflation hits one of these thresholds, but it won't do so until at least then. These are the exact thresholds Evans endorsed a few weeks ago, which are modest tweaks from his original thresholds last year of 7 percent unemployment and 3 percent inflation.
Why all the fuss? This Evans rule doesn't seem to tell us anything the Fed wasn't already telling us. Just look at the Federal Open Market Committee's (FOMC) latest economic projections. The Fed doesn't think unemployment will fall below 6.5 percent until 2015 -- and it never thinks inflation will rise above 2 percent -- which implies rates will stay at zero until then. That's exactly what they were saying before.
In truth, the Evans revolution is less a revolution itself and more a significant step on the way to the actual revolution -- NGDP targeting. We'll come back to this larger point, but first let's talk about why the Evans rule matters. Its virtue is it should make the Fed's decision-making more transparent, and that should affect people's expectations more. Contrast the Evans rule with what the Fed told us before -- say from October -- about how long zero interest rates would last.
[The Fed] currently anticipates that exceptionally low levels for the federal runds rate are likely to be warranted at least through mid-2015.
Is this a promise, maybe? That's how most people interpreted it, but it's not entirely clear. Read it again. The Fed was saying it expected the economy to be crummy enough to justify zero rates until mid-2015. But what if the economy picked up before then? Would the Fed raise rates then? Good question! The Evans rule clears this up a bit -- though not entirely -- but more importantly, it clears up whether the Fed has a 2 percent inflation target or ceiling.
The Fed has been trying to answer that question for the past year. As Greg Ip of The Economist pointed out, the Fed rather significantly announced back in January that it thought the inflation and unemployment halves of its mandate were equally important, and changed its long-run inflation target from 1.5-2 percent to 2 percent. This was the Fed's way of saying it wouldn't necessarily raise rates if inflation crept over 2 percent as long as unemployment was still high and long-run inflation expectations didn't rise. In other words, the Fed's inflation target was not a 2 percent speed limit on the recovery. Or was it? Look at that table again. The Fed doesn't project inflation to go above 2 percent at all. That sure looks like a ceiling, still. The Evans rule tries to correct this -- though it would help if these latest projections were symmetrical around 2 percent -- by explicitly saying the Fed really, seriously will tolerate inflation as high as 2.5 percent in the short run.
But there's plenty that still isn't clear. Like how and whether this will work. The Evans rule sounds straightforward enough, but these thresholds are not. The Fed left itself a bit of wiggle room. When it comes to unemployment, the Fed will look at other labor force measures like the participation rate. In other words, it will consider whether unemployment is falling because people are finding jobs or because people have given up on finding jobs. It gets murkier when it comes to inflation. The Fed will use its 1-2 year inflation forecasts for its threshold. Yes, forecasts. That gives the Fed some needed flexibility to ignore commodity surges, like oil in 2011, but it's not the clearest of guides.
Remember, clarity is supposed to be the point. The idea is that the more markets understand the Fed's plans, the more the Fed's plans will shape markets' expectations. It's a bit like a Jedi mind trick. If people think things will be better in the future, then things will be better in the future, because that will get them spending and investing more now. Making us expect a better tomorrow might be the best the Fed can do today. Especially when you consider how short-lived the effects have been from the Fed's other unconventional easing. You can see that in the chart below that looks at market-based inflation expectations for 1, 2, and 10 year periods. Inflation expectations rise every time the Fed does something, and then retreat a few months later.
(Note: These break-evens measure the differences between Treasury and TIPS, or inflation-protected, bonds. They aren't always reliable because TIPS are so lightly traded -- their nickname is "terribly illiquid pieces of," well, we'll let you figure out the rest -- but they're a decent proxy. All data is from Bloomberg).
Inflation expectations should tick up again, especially if we disarm the austerity bomb known as the fiscal cliff, but the overall pattern of peaks and valleys probably isn't going to go away yet.
(2) ASSET PURCHASES
The Fed's other (slightly less) big announcement was that it will continue its $85 billion of monthly asset purchases, albeit with a slight, um, twist. Here's what hasn't changed: the Fed will buy $45 billion of Treasury bonds and $40 billion of mortgage bonds each and every month until unemployment "substantially" improves. What has changed is how the Fed will pay for its $45 billion of Treasury bond purchases. Before, the Fed had been selling $45 billion of short-term bonds to pay for the $45 billion of long-term bonds it was buying, which went by the dramatic name of "Operation Twist". It was a way to lower long-term borrowing costs without printing money, back when more Fed members were worried about potential inflation. But with its supply of short-term Treasuries running, well, short, the Fed will turn Twist into QE. In other words, it will now print money to pay for the $45 billion of Treasuries it buys. The Fed's balance sheet will grow more than before, though its monthly flow of purchases remains the same.
It's okay if you have that Animal Farm feeling. There's been a revolution, but nothing has changed. The Fed still thinks it's first rate hike will come in 2015-ish, and it's still buying $85 billion of bonds a month. This is a true fact. But it undersells the intellectual shift at the Fed. It's gone from mostly thinking about inflation to creating a framework to guide its thinking about inflation and unemployment. And it's done that in just a year. This framework, the Evans rule, is really just a quasi-NGDP target. It's not exactly the catchiest of phrases, but NGDP, or nominal GDP, targeting would be a real revolution in central banking. In plain English, it's the idea that central banks should target the size of the economy, unadjusted for inflation, and make up for any past over-or-undershooting. In theory, a flexible enough inflation target should mimic an NGDP target, which is why the Evans rule is so historic. It's an incremental step on the way to regime change at the Fed.
That doesn't mean we should expect the Fed to move towards NGDP targeting anytime soon. A risk-averse institution like the Fed will want to see another country try it first -- and it might get that chance soon. Incoming Bank of England chief Mark Carney, who currently heads the Bank of Canada, endorsed the idea in a recent speech, and British Treasury officials indicated they might be open to it too -- which is significant because the British Treasury can unilaterally change its central bank's mandate. It might not be long till NGDP targeting comes to Britain, and from there, the world. If it does, you can be sure that Charles Evans will be figuring out how to make it work here.
The Evans rule won't save the economy today, but it might tomorrow -- if it leads to better central banking. It should. It's a big conceptual step forward. And it's a big conceptual step forward we're going to need if Evan Soltas is right that we're likely to hit the zero bound more often in the future.
Figures purporting to be drawn from the second wave of exit polls are now circulating on social media. There are multiple versions out there. That may be because each of the networks in the consortium weights the raw numbers differently as they adjust the data, or it may be another very good reason to take these numbers with a grain of salt.
Most of the figures circulating show Trump and Sanders with large leads, and Kasich in a solid second on the Republican side. I explained before why these numbers shouldn’t be trusted, and I’d reiterate that caution now. The exit poll numbers we have at this point tell us what voters are thinking—in a race as closely clustered as the battle for second in the GOP primary, they simply can’t tell us who’s actually winning.
The Warriors star is the embodiment of basketball’s analytics revolution.
The Golden State Warriors are now some 15 months in to their turn as one of the best teams in basketball history. Last season, they won 67 games, the most in the NBA in eight years, and secured a championship in June against LeBron James and the Cleveland Cavaliers. This season’s Warriors make last season’s Warriors look like a team that hadn’t yet gotten loose. They started the year winning their first 24 games in a row, a record opening, and as of now have won 46 of 50.
Golden State’s brilliance is more than just statistical. The Warriors are a basketball idyll, a paradise of skill and collaboration. Their offense runs on nifty ballhandling, willing passing, and sublime shooting, with their point guard and reigning NBA Most Valuable Player acting as ringleader. A slim 6’3” and 185 pounds, with a bouncy jog and a barely post-pubescent tuft of beard at his chin, Stephen Curry dribbles with the intentional abandon of a card hustler, flings one-handed passes to all sectors of the court, and shoots better than anyone ever has.
The number of American teens who excel at advanced math has surged. Why?
On a sultry evening last July, a tall, soft-spoken 17-year-old named David Stoner and nearly 600 other math whizzes from all over the world sat huddled in small groups around wicker bistro tables, talking in low voices and obsessively refreshing the browsers on their laptops. The air in the cavernous lobby of the Lotus Hotel Pang Suan Kaew in Chiang Mai, Thailand, was humid, recalls Stoner, whose light South Carolina accent warms his carefully chosen words. The tension in the room made it seem especially heavy, like the atmosphere at a high-stakes poker tournament.
Stoner and five teammates were representing the United States in the 56th International Mathematical Olympiad. They figured they’d done pretty well over the two days of competition. God knows, they’d trained hard. Stoner, like his teammates, had endured a grueling regime for more than a year—practicing tricky problems over breakfast before school and taking on more problems late into the evening after he completed the homework for his college-level math classes. Sometimes, he sketched out proofs on the large dry-erase board his dad had installed in his bedroom. Most nights, he put himself to sleep reading books like New Problems in Euclidean Geometry and An Introduction to Diophantine Equations.
Sanders’s youth movement is powered by the energy of the new campus left. What does it believe?
RINDGE, New Hampshire—Twenty-three minutes into his typically rambling, hourlong stump speech in the arena here, at a private liberal-arts college on the Massachusetts border—after he had decried the Koch brothers and the prescription-drug companies, after he had accused Wall Street of bribing its way to deregulation, after he had called out the corporate media and the political establishment—Bernie Sanders turned to the bleachers behind him, which were filled with college students waving blue signs and chanting his name.
A sly, unusual smile crossed his face. “I feel like a rock-n-roll star!” he exclaimed, taking off his jacket and tossing it to a startled youth behind him. He pantomimed tearing off his sweater, too, prompting a fresh chant of “Ber-nie! Ber-nie!” Then he grinned sheepishly. “All right, nothing else is coming off,” he said, and continued to the next topic—the sins of Walmart.
Most people in the U.S. believe their country is going to hell. But they’re wrong. What a three-year journey by single-engine plane reveals about reinvention and renewal.
When news broke late last year of a mass shooting in San Bernardino, California, most people in the rest of the country, and even the state, probably had to search a map to figure out where the city was. I knew exactly, having grown up in the next-door town of Redlands (where the two killers lived) and having, by chance, spent a long period earlier in the year meeting and interviewing people in the unglamorous “Inland Empire” of Southern California as part of an ongoing project of reporting across America.
Some of what my wife, Deb, and I heard in San Bernardino before the shootings closely matched the picture that the nonstop news coverage presented afterward: San Bernardino as a poor, troubled town that sadly managed to combine nearly every destructive economic, political, and social trend of the country as a whole. San Bernardino went into bankruptcy in 2012 and was only beginning to emerge at the time of the shootings. Crime is high, household income is low, the downtown is nearly abandoned in the daytime and dangerous at night, and unemployment and welfare rates are persistently the worst in the state.
The Wall Street Journal’s eyebrow-raising story of how the presidential candidate and her husband accepted cash from UBS without any regard for the appearance of impropriety that it created.
The Swiss bank UBS is one of the biggest, most powerful financial institutions in the world. As secretary of state, Hillary Clinton intervened to help it out with the IRS. And after that, the Swiss bank paid Bill Clinton $1.5 million for speaking gigs. TheWall Street Journal reported all that and more Thursday in an article that highlights huge conflicts of interest that the Clintons have created in the recent past.
The piece begins by detailing how Clinton helped the global bank.
“A few weeks after Hillary Clinton was sworn in as secretary of state in early 2009, she was summoned to Geneva by her Swiss counterpart to discuss an urgent matter. The Internal Revenue Service was suing UBS AG to get the identities of Americans with secret accounts,” the newspaper reports. “If the case proceeded, Switzerland’s largest bank would face an impossible choice: Violate Swiss secrecy laws by handing over the names, or refuse and face criminal charges in U.S. federal court. Within months, Mrs. Clinton announced a tentative legal settlement—an unusual intervention by the top U.S. diplomat. UBS ultimately turned over information on 4,450 accounts, a fraction of the 52,000 sought by the IRS.”
Black poverty is fundamentally distinct from white poverty—and so cannot be addressed without grappling with racism.
There have been a number of useful entries in the weeks since Senator Bernie Sanders declared himself against reparations. Perhaps the most clarifying comes from Cedric Johnson in a piece entitled, “An Open Letter To Ta-Nehisi Coates And The Liberals Who Love Him.” Johnson’s essay offers those of us interested in the problem of white supremacy and the question of economic class the chance to tease out how, and where, these two problems intersect. In Johnson’s rendition, racism, in and of itself, holds limited explanatory power when looking at the socio-economic problems which beset African Americans. “We continue to reach for old modes of analysis in the face of a changed world,” writes Johnson. “One where blackness is still derogated but anti-black racism is not the principal determinant of material conditions and economic mobility for many African Americans.”
After getting shut down late last year, a website that allows free access to paywalled academic papers has sprung back up in a shadowy corner of the Internet.
There’s a battle raging over whether academic research should be free, and it’s overflowing into the dark web.
Most modern scholarly work remains locked behind paywalls, and unless your computer is on the network of a university with an expensive subscription, you have to pay a fee, often around 30 dollars, to access each paper.
Many scholars say this system makes publishers rich—Elsevier, a company that controls access to more than 2,000 journals, has a market capitalization about equal to that of Delta Airlines—but does not benefit the academics that conducted the research, or the public at large. Others worry that free academic journals would have a hard time upholding the rigorous standards and peer reviews that the most prestigious paid journals are famous for.
For decades the Man of Steel has failed to find his groove, thanks to a continual misunderstanding of his strengths.
Superman should be invincible. Since his car-smashing debut in 1938, he’s starred in at least one regular monthly comic, three blockbuster films, and four television shows. His crest is recognized across the globe, his supporting cast is legendary, and anybody even vaguely familiar with comics can recount the broad strokes of his origin. (The writer Grant Morrison and the artist Frank Quitely accomplished it in eight words and four panels: “Doomed Planet. Desperate Scientists. Last Hope. Kindly Couple.”) He’s the first of the superheroes, a genre that’s grown into a modern mass-media juggernaut.
And yet, for a character who gains his power from the light of the sun, Superman is curiously eclipsed by other heroes. According to numbers provided by Diamond Distributors, the long-running Superman comic sold only 55,000 copies a month in 2015, down from around 70,000 in 2010—a mediocre showing even for the famously anemic comic-book market. That’s significantly less than his colleague Batman, who last year moved issues at a comparatively brisk 150,000 a month. Mass media hasn’t been much kinder: The longest-running Superman television show, 2001’s Smallville, kept him out of his iconic suit for a decade. Superman Returns recouped its budget at the box office, but proved mostly forgettable.2013’s Man of Steel drew sharp criticism from critics and audiences alike for its bleak tone and rampaging finale. Trailers for the sequel, Batman v Superman: Dawn of Justice, have shifted the focus (and top billing) to the Dark Knight. Worst of all, conventional wisdom puts the blame on Superman himself. He’s boring, people say; he’s unrelatable, nothing like the Marvel characters dominating the sales charts and the box office. More than anything, he seems embarrassing. Look at him. Truth? Justice? He wears his underwear on the outside.
Rumor has it that Cliven Bundy may travel to support the militia at Malheur National Wildlife Refuge. Even if he doesn’t, his influence is being felt.
Just two weeks ago, it looked like the standoff at Oregon’s Malheur National Wildlife Refuge was nearly over. Eight of the armed occupiers who’d seized the federal property had been arrested, and one had been shot and killed. Militia leader Ammon Bundy, one of those arrested, had called for the occupiers to disperse. Only four were left, and they were surrounded.
On Tuesday, day 39 of the occupation, stalemate is back. And with Cliven Bundy possibly on his way to Oregon, it’s hard to imagine tensions will get lower any time soon.
Cliven Bundy is the patriarch of the family of anti-federal-government crusaders who became nationally famous when he got into a standoff of his own in Nevada in 2014. Federal Bureau of Land Management officials planned to move in and round up Bundy’s cattle, which had been grazing on federal land though he’d refused to pay $1 million in grazing fees. They were met by armed men determined to stop them.