The Fed Can’t Reduce Inflation by Winging It

The central bank needs a systematic strategy, such as the Taylor rule, and a focus on real interest rates

By Andrew T. Levin and Mickey D. Levy. Mr. Levin is a professor of economics at Dartmouth College. Mr. Levy is a senior economist at Berenberg Capital Markets. Excerpts: 

"The economy now faces a serious risk of persistent high inflation. To avert such disaster, the Fed needs a systematic strategy—including contingency plans—and it needs to explain to everyone what that strategy is.

Since inflation began to accelerate in early 2021, Fed officials have been overly optimistic that it would quickly recede to the central bank’s 2% target. In clinging to that rosy outlook, the Fed completely misjudged how the government’s unprecedented fiscal stimulus—along with its own extraordinary monetary accommodation—would affect aggregate demand and inflation. In its most recent June economic forecast, the Fed projected that raising interest rates a few more notches would be enough to reduce inflation, while incurring only a minor effect on the unemployment rate. Such a benign outcome remains plausible, but it would be a grave error for the Fed to ignore the possibility that inflation could turn out to be much higher."

"The price of shelter, the single biggest component of consumer inflation, rose 6.2% over the past year and accelerated to an annualized rate of 7.6% over the past four months. It typically takes a year or more for changes in home prices to be reflected in rental costs and owner-occupied rental equivalents."

"Healthy gains in employment and disposable personal income are fueling nominal consumer spending growth, and confidence has lifted. These trends reinforce the view that monetary policy isn’t exerting any substantial disinflationary pressure.

A crucial pitfall in the Fed’s approach has been its focus on nominal interest rates rather than the inflation-adjusted interest rate, the traditional barometer for assessing the success of the Fed’s monetary policy. This week the Fed is expected to raise the federal-funds rate by 75 basis points to 3.25%. The real interest rate, however, will remain deeply negative, rendering the Fed’s monetary stance inconsistent with its inflation target."

"But a fed-funds rate of 4.25% will prove severely inadequate if core inflation keeps running well above 4%. In that case, holding the policy rate at 4% would still entail a negative real interest rate and continuing monetary stimulus that would generate further upward pressure on nominal spending."

"Chairmen Paul Volcker and Alan Greenspan both emphasized that price stability is the best foundation for sustained economic growth, and both raised real interest rates sharply to combat inflation."

The Hidden Cost of China’s Industrial Policy

America should not respond in kind

Letter to The WSJ.

"Pleading for U.S. industrial policy (“China Hit Some Bumps on Its Road to Semiconductor Dominance,” op-ed, Sept. 21), Rick Switzer and David Feith commit an error famously described by Frédéric Bastiat: They are enchanted by that which is seen while they ignore that which is unseen.

One can question Messrs. Switzer and Feith’s claim that China’s industrial policy unfairly hamstrings U.S. companies; see, for example, research by Scott Lincicome and Alfredo Carrillo Obregon showing that investment in U.S. semiconductor production is robust. But even if the claim is accurate, it follows neither that Chinese industrial policy is successful nor that America should respond in kind.

What these authors don’t see is that which the Chinese sacrifice by diverting resources to politically favored producers. Which firms in China are artificially weakened, or annihilated altogether, by having resources stripped away from them by Beijing’s industrial-policy mandarins? Which advanced industries are failing to thrive in China because high-tech workers are directed by bureaucrats into semiconductor production?

Only by ignoring such questions can Messrs. Switzer and Feith conclude that “Beijing’s policy is finding success.” Because there’s no doubt that particular industries can be sustained with tariffs sufficiently high and subsidies sufficiently profuse, it’s not news that industries so favored in China are growing. But there’s also no doubt that these “successes” are bought at the terribly high price of the many unseen Chinese firms and industries whose growth is artificially stymied.

Since resource allocation is more wasteful when done by government officials spending other people’s money than when done by markets in which entrepreneurs and consumers spend their own money, industrial policy is a recipe for economic decline. We Americans shouldn’t mimic China’s economic self-destruction.

Prof. Donald J. Boudreaux

Mercatus Center, George Mason U.

Fairfax, Va."

Why Trains Will Struggle to Replace Short Flights

Poor rail links to hub airports are a headache for those who see trains as a broad alternative to single-aisle planes

By Jon Sindreu of The WSJ. Excerpts:

"a new paper by Vreni Reiter, Augusto Voltes-Dorta and Pere Suau-Sánchez casts doubt over the extent to which trains can take over.

The authors use Germany as an example of a dense, distributed population with extensive access to high-speed rail. They identified 87 nonstop flight routes—about 32% of Germany’s annual seat capacity—that would be theoretical targets of a ban, with the longest train journey taking five hours and 37 minutes. 

Crucially, they account for something that most studies of this kind don’t: About a quarter of passengers aren’t traveling point to point, but rather going to a hub airport and then hopping on a long-haul plane.

As is the case with Air France, officials would presumably be more tolerant of such flights. But that would also limit the environmental benefits: In a scenario in which airlines would only be required to use 10% of seats for connections to preserve a route, air-travel carbon emissions would only fall 2.7%.

Increasing the threshold to 80% would yield a larger 22% cut, but 71% of passengers would be diverted to rail or direct long-haul flights which, on average, would make journeys two hours longer. In some extreme cases of popular routes involving non-hub airports, such as Berlin-Stuttgart, even a 10% threshold would leave more than a million people each year with no alternative but to more than double their travel time.

The lessons are applicable everywhere. High-speed rail will keep increasing its market share in short routes with a lot of point-to-point demand, such as Munich-Berlin, Barcelona-Madrid or Seoul-Busan. But to act as hub feeders, rail networks would need a massive upgrade.

Capacity must be sized to the few departure hours in which airlines fill their big planes, leaving wasted space for much of the day. Trains must also take people directly to airports, not city centers. Such “intermodal” networks are often nonexistent. Spain, for example, is only surpassed by China in kilometers of high-speed rail, but so far hasn’t connected its main airports to it. The investments needed to deliver all of this high-speed capacity to smaller cities aren’t just hugely costly, but also polluting.

“A cost-benefit analysis leaves blanket-ban policies in a bad place,” said Dr. Suau-Sánchez. “A surgical approach is best.”"

Don’t Believe the Hype About Antarctica’s Melting Glaciers

Two studies carefully explore the factors at play, but the headlines are only meant to raise alarm

By Steven Koonin. Excerpts: 

"Each year, some 2,200 gigatons (or 0.01%) of the ice is discharged in the form of melt and icebergs, while snowfall adds almost the same amount. The difference between the discharge and addition each year is the ice sheet’s annual loss. That figure has been increasing in recent decades, from 40 gigatons a year in the 1980s to 250 gigatons a year in the 2010s.

But the increase is a small change in a complex and highly variable process. For example, Greenland’s annual loss has fluctuated significantly over the past century. And while the Antarctic losses seem stupendously large, the recent annual losses amount to 0.001% of the total ice and, if they continued at that rate, would raise sea level by only 3 inches over 100 years."

"Two recent studies reported in the media focus on the terminus of glaciers—i.e., where the ice, the ocean and the ground come together. One study used an underwater drone to map the seabed at a depth of 2,000 feet, about 35 miles from the terminus of the Thwaites Glacier in Antarctica. Detailed sonar scans showed a washboard pattern of ridges, most less than 8 inches high. The ridges are caused by daily tides and serve as a record of where ice touched the seabed in the past. Researchers could read that record to infer that at some time in the past the glacier retreated for half a year at more than twice the fastest rate observed between 2011 and 2019."

"a connection between ocean currents and discharge would increase the overall discharge rate in one region of the continent by some 10% by the end of the century. But to emphasize the idea being tested, the modelers used human influences almost three times larger. Even though that fact is stated in the paper, reporters rarely catch such nuance, and the media goes with headlines such as “Antarctic Ice Melting Could Be 40 Percent Faster Than Thought” with the absurd statement that “a massive tsunami would swamp New York City and beyond, killing millions. London, Venice and Mumbai would also become aquariums.” A more accurate headline would read: “Ocean currents connecting antarctic glaciers might accelerate their melting.”"

The Problems with the White House Competition Council

By Clyde Wayne Crews of CEI.

"Sometimes seemingly little things slip under the radar that have big implications. One of those this week was the third meeting of President Biden’s Competition Council, established by a July 9, 2021, Executive Order on Promoting Competition in the American Economy, ostensibly charged “to drive forward the Administration’s whole-of-government effort to promoting competition.”

Biden’s order and the pursuits undertaken in its name do not promote competition, but consolidate federal power over the economy, companies, and lives. The Council, composed of 10 cabinet members, has the wind at its back given the regulatory legislative enactments of the past three years.

This week’s summit on competition policy got little attention, but highlights how cross-governmental meta-regulation has become normalized. The targets at the moment are airlines, Internet services, pharmaceuticals, and, strangely enough, meatpacking.

Biden, for his part, used the occasion to repeat his demand that the “companies running gas stations” to “Bring down the prices you’re charging at the pump to reflect the cost you pay for the product. Do it now.”

A priority of the Council is to shift blame onto others for mangled marketplaces, supply chain chaos, and the dire financial straits inflicted on consumers by policy makers’ reactions to the pandemic—namely, the shutdowns, lockdowns, bailouts, and mandates already analyzed to death. At the same time, the Council is facilitating administration efforts to transform business and sectors into government/business “partnerships” that squeeze out free enterprise.

The Council’s primary function in the current setting is to cement the notion that someone other than Washington politicians are to blame for the nation’s economic peril, while at the same time inflicting new regulatory policies from which consumers and businesses will be unable to escape.

In reality, free competitive enterprise—undermined by much of the legislation and regulation since the pandemic—is a highly energized driver of transparency and punisher of shady pricing practices. The Council’s regulatory push in the name of these two values is substitute for them.

On airline turmoil, the White House readout for the Council meeting declares that the Department of Transportation “called them out” and has launched a “transparency dashboard” to pressure airlines to “cover hotels and meals” and provide free guaranteed rebooking. New rules are underway to “require airlines and online search sites to disclose up front—while you are shopping for the best fare—any fees to sit next to one’s kid, for baggage, and for changes or cancellations. This will stop airlines from hiding the true cost of a ticket, so that consumers can find the actual best deal.”

At the Federal Communications Commission, “similar rules” are being pursued to “require Internet companies to display a standardized ‘Broadband Nutrition Label’ that discloses their monthly prices, fees, and internet speeds—so customers can see which company is cheapest and companies will have to compete for business.”

Real transparency and consumer benefits would emerge from further freeing the sectors in question from three-letter agency domination. Biden’s “transparency” mandates allow Washington to avoid having to liberalize the sectors in question.

Not only is the administration throwing its weight around at airlines and telecommunications companies. We are reminded that the Department of Justice and Federal Trade Commission are “Strengthening enforcement against illegal mergers” by “working to finalize revisions to the merger guidelines—the framework for their analysis of mergers under the antitrust laws.”

The Department of Agriculture “will soon announce the distribution of millions in funding to help expand and diversify meat and poultry processing capacity.” Note that it is not just big business being seduced or pressured into partnerships with the federal government.

Much of what we see here is classic deflection. Biden is himself the Edward Scissorhands of genuine transparency, having “modernized” regulatory disclosure such that we get little of it anymore. Among much else, Fiscal Year 2023 will mark four years without a mandatory Office of Management and Budget report to congress on the costs and benefits of the federal regulatory enterprise.

What Biden’s misnamed “competition” mandates signal is an intent to never deregulate further. Incumbents are at risk of being enlisted as gatekeepers protecting regulatory fiefdoms in exchange for protection from competition.

In the actual pursuit of free and liberalized markets, Biden’s “nutrition labeling” provisions interfere with ordinary and sometimes beneficially confidential trade or business practices. As long as consumers are getting the speed and services contracted for, there is no public policy issue at hand.

These forced disclosures are inferior alternatives to competition. Markets produce desired products and services, but they also produce relevant true information about rates and prices and add-ons. Disclosure and transparency exist in a continuum from absolute non-transparency and secrecy to full-disclosure of network and pricing practices. Where we “belong” on the continuum shifts continually with every new drone corridor, fiber deployment, wireless startup, merger, content deal, undigested meal—the list is endless.  Users should and can pay for varying amounts of disclosure or tiered access as they see fit. Competitive pressures between the businesses in question, plus demands by investors and shareholders, advertisers and Wall Street also impel disclosure improvements.

Transparency regarding particular mundane practices becomes increasingly irrelevant in a world of torrential competitive pressures to disclose useful information. The proper approach is to foster settings in which everything from flights to Internet speeds are so redundant and instantaneous and so supremely tailored and flush with wealth that disclosure doesn’t matter. Beyond that, the only need is that providers of goods and services adhere to any contract or promise given to users.  

The Competition Council’s summit claims to deliver on the President’s call to action to reduce or eliminate unfair fees that Americans shouldn’t have to pay.” Ironically, a lot of federal shenanigans of the past three years, costing multiple trillions of dollars, fall into this category."

The US redistributes a greater share of national income to low-income groups than any European country

From Greg Mankiw.

""Europe's lower inequality levels cannot be explained by more equalizing tax and transfer systems. After accounting for indirect taxes and in-kind transfers, the US redistributes a greater share of national income to low-income groups than any European country."

• From a new paper by Thomas Blanchet, Lucas Chancel, and Amory Gethin"

• 
  

FDA Modernization Act 2.0 Is A Welcome Reprieve For Puppies, But More Comprehensive Reform is Urgently Needed

See By Jeffrey A. Singer of Cato.

"Today the U.S. Senate passed, by unanimous consent, the FDA Modernization Act 2.0, co‐​sponsored by Senators Rand Paul (R‑KY) and Cory Booker (D‑NJ). The bill removes the mandate, included in the 1938 Food, Drug, and Cosmetic Act (FDCA), that requires all drugs to be tested on animals to exclude toxicity. The bill does not end animal testing, but it now permits drug developers to use alternative methods to test for toxicity when feasible. Similar provisions are in a bill passed earlier in the U.S. House of Representatives, making this reform likely to become law.

Since the FDCA was passed 83 years ago, research has shown animal testing to be an inconsistent indicator of drug toxicity and, in many cases, alternative methods are equally or more reliable. Yet, because of the 1938 mandate, hundreds of animals must be killed for a pharmaceutical company to bring a single drug to market. Last year, Senator Paul held a “Puppy Press Conference,” making the case for the reform.

This bipartisan legislation is certainly commendable. But, to be fair, it’s low‐​hanging fruit. The FDCA needs much more comprehensive reform and must be made consistent with its authors’ pledge to respect the people’s right to self‐​medicate.

In our white paper “Drug Reformation,” Michael Cannon and I provide a laundry list of reform proposals, ranging from ending the FDA’s monopoly over deciding which drugs may be over‐​the‐​counter and which may be prescription‐​only, to allowing Americans to purchase drugs that have been approved by designated certification agencies, including foreign regulatory bodies. We point out:

According to one study, recognizing drug approvals by regulatory bodies in Canada and Europe between 2000 and 2010 would have given U.S. consumers quicker access to 37 “novel” drugs for which “no other FDA‐​approved prescription medicine had the same mechanism of action,” including 10 drugs treating mostly orphan diseases “for which no alternative therapy was available in the USA.” Such recognition would have allowed U.S. consumers to access those drugs a median of 13.6 months earlier.

We also suggest creating intermediate drug classifications, such as “behind the counter,” which would still require consumers to get permission from government‐​approved gatekeepers (pharmacists), but would let them avoid the costs of a visit to the doctor to get a prescription.

The FDA Modernization Act 2.0 is a timely demonstration of bipartisan FDA reform and a welcome reprieve for the puppies. Hopefully, in the not‐​too‐​distant future, we can look back on its passage as the first in a long line of pharmaceutical regulatory reforms."