Speaking of too little and too late, Lawrence Summers expresses considerable dissatisfaction with the moves the Federal Reserve Open Market Committee took yesterday in an op-ed in the Washington Post:

The stock market responded positively Wednesday to the Federal Reserve’s move to raise interest rates and plan for six more increases by year’s end. I wish I could share that enthusiasm. Instead, I fear, the economic projections of the Federal Open Market Committee (FOMC) represent a continuation of its wishful and delusional thinking of the recent past.

Start with the labor market. It is now tighter than at any point in history: the vacancy-to-unemployment ratio is in unprecedented territory, quits are at near-record levels and wage growth is still rising at 6 percent, having accelerated rapidly in the past few months. The FOMC expects further tightening, to a 3.5 percent unemployment rate, which it expects will be maintained through 2024.

Three years at 3.5 percent unemployment, something the country has not seen in about 60 years, is highly implausible. Indeed, the historical experience is that when unemployment is below 4 percent, there is a 70 percent chance of joblessness rising rapidly in the next two years as the economy goes into recession.

But that is not the central absurdity in the Fed forecast. The chief problem is the idea that a super-tight labor market will somehow coincide with rapidly slowing inflation. Even on the Fed’s optimistic accounting, a balanced economy requires 4 percent unemployment, meaning that it expects the labor market will remain abnormally tight over the next few years.

Data on vacancies and tightness reinforce the case that such conditions are inflationary, not disinflationary. Wages represent by far the largest component of costs. When they are rising so fast, what basis is there for supposing that inflation will slow to the 2 percent range foreseen by the Fed?

Focusing on the tightness of labor markets as a basis for forecasting inflation is firmly within progressive Keynesian tradition. Many economists look, as Milton Friedman and Paul Volcker did, to measures of money supply or projected government debt for guidance on inflation. These indicators are much more alarming.

A look at the Fed’s forecast revisions since December reveals its confused thinking. The central principle of anti-inflationary monetary policy is that to reduce inflation it is necessary to raise real rates. Equivalently, it is necessary to raise interest rates by more than the inflation being counteracted and above a neutral level that neither speeds nor slows growth. I had thought this was universally accepted following the work of former George W. Bush administration official John Taylor and former Obama administration Council of Economic Advisers chair Christina Romer and her husband, David Romer.

Yet because of upward revisions in the inflation forecast, the Fed’s predicted real rates have actually declined in recent months. In other words, the FOMC’s plans do not even call for keeping up with the rising inflationary gap. It is hard to see how interest rates that even three years from now will be about 2 percentage points less than current rates of inflation can reasonably be regarded as providing sufficient restraint.

“Delusional” is pretty strong language. The editors of the Wall Street Journal are in material agreement with him:

The Fed’s action Wednesday to raise the fed funds rates by 25 basis points was modest and expected. The surprise was in the forecast for the next two years. In December the median prediction of Fed governors and bank presidents was four 25-point increases by the end of this year. Now it’s seven, plus another four rate hikes in 2023.

The Fed also climbed down from the fence on when to start shrinking the $9 trillion balance sheet it has built up to ease financial conditions. The FOMC says it will begin to reduce its holdings of Treasurys and mortgage-backed securities “at a coming meeting.” This sounds like sooner rather than later. This “quantitative tightening” is long overdue, and inflation might be much lower than it is had the Fed started doing this a year ago.

The Fed’s problem is that it has already let inflation run free, as the governors and bank presidents all but admit. They are now forecasting an inflation rate this year of 4.3%, a leap from 2.6% only three months ago. That’s the rate of so-called personal-consumption expenditure (PCE) inflation, which is the Fed’s preferred measure and is lower than the consumer-price index. PCE inflation was 0.6% in January alone, so it will have to slow considerably in the rest of the year to meet the Fed’s 4.3% estimate for 2022. Good luck.

Even with the 11 25-point rate hikes anticipated by the Fed, the fed-funds interest rate would be only 2.8% at the end of 2023. That would still be lower than the likely inflation rate, which means real rates would be negative for all of 2022 and 2023. The long experience of monetary policy is that inflation doesn’t fall until interest rates exceed the inflation rate. There’s no reason to expect this time would be an exception, barring a recession.

Mister, we could use a man like Paul Volcker again. If inflation were reckoned the way it was in 1980, today’s inflation rate would be just about what it was in 1980. Paul Volcker started raising the fed funds rate shortly after he became Fed chairman in 1979 and was probably as important as any other man for Ronald Reagan’s landslide victory in the presidential election of 1980. It sounds to me like Jerome Powell wants to avoid a recapitulation of that.

I’m not the first person to say it but despite Joe Biden’s aspirations to be the second coming of FDR it will take considerable good fortune for him to avoid being the second coming of Jimmy Carter.

Meanwhile both the FOMC and its critics are making an increasingly convincing argument for replacing the committee with an algorithm. If its members have any desire to avoid that, they need to start showing some spine.

In his New York Times column Charles Blow argues that we have a responsibility to provide military and humanitarian aid to Ukraine. It takes him a while to build up to it but here’s his peroration:

I say that the United States must supply military aid and should supply humanitarian aid. But I also say that we must be more consistent in determining who deserves outpourings of our humanitarian impulses.

Human suffering is human suffering. It has been a constant in the story of mankind. Sometimes it overlaps with our national interests, and sometimes it does not. But our sense of morality must remain constant, and in it we must find a place for equity.

My beliefs are a bit different. I believe that we must provide humanitarian aid and may supply military aid. We have fecklessly created a geopolitical interest in a part of the world in which we had no or next to no interest.

I suspect the reason for our differences of opinion is that I don’t believe in the tikun olam (“heal the world”) theory of human beings’ role in the universe. All too often we make matters worse by trying. I think that we have a moral obligation to help others. My views are largely informed by Jesus of Nazareth’s Sermon on the Mount. While he did say “Blessed are the peacemakers” there was nothing in it about the warmakers or fomenting global nuclear war. I think we’d be better off doing our best at walking back the geopolitical interest we have created in Ukraine.

The editors of the Washington Post praise President Biden’s response to Ukrainian President Zelenskyy’s address to Congress yesterday:

To this wise suggestion, the second president to speak — President Biden — replied by announcing that the United States will indeed step up its military shipments to Ukraine, to include more shoulder-fired antiaircraft missiles and “longer-range systems,” seemingly a reference to the Russian-made S-300 batteries that Mr. Zelensky specifically asked for, and that might be available from Eastern European NATO members. Mr. Biden also offered “cutting edge” drones. All told, the president said, the United States has authorized $1 billion in military aid in just the past week. This is, indeed, a credible alternative to the no-fly zone, the risks of which still outweigh the benefits, and which NATO Secretary General Jens Stoltenberg separately ruled out in a statement between the end of Mr. Zelensky’s remarks and the beginning of Mr. Biden’s.

I found the editors’ of the Wall Street Journal’s reaction wryly amusing. They agreed with President Biden’s response but don’t want to give him credit for it. From their perspective it’s too little and too late:

In response to Mr. Zelensky, Mr. Biden chose Wednesday to announce the U.S. will send $800 million more in military aid to Ukraine. This will help, but it’s also fair to ask why it has taken three weeks of bombing for this to happen. As Nebraska Senator Ben Sasse put it in advance of Mr. Zelensky’s speech “If they can shoot it, we can ship it.” MiGs and Su-25s, S-200s and S-300s, drones.

An example are Switchblade drones that are portable and can destroy a target from a distance. The weapon is ideal for attacking tanks and some of the artillery units that are hitting cities and civilians. The latest U.S. arms package reportedly includes 100 Switchblades. But the Pentagon should have delivered all of the Switchblades in the American arsenal to Ukraine at the start of the war, and then contracted to buy more.

President Biden’s moral condemnation of Russia has been laudable, and he has coordinated well with allies. But throughout this crisis he has also had to be prodded by Congress, allies and public opinion to do more.

The U.S. failed to deter Mr. Putin by merely threatening sanctions, then imposed sanctions only gradually after the invasion. He resisted a ban on Russian oil imports, resisted trade restrictions, and had to be prodded to supply more arms. It’s as if Mr. Biden is so wary of provoking Mr. Putin that he’s afraid what might happen if Ukraine won the war.

I find no evidence that sanctions have ever deterred any major power from anything and, regardless of what you may have heard, Russia remains a major power so I’m not as disappointed as the editors are. While I think that intelligent people may differ on this subject, I think that the risks of direct intervention exceed the likely gains and it is extremely hard to manage the risks of increased military support for Ukraine. What if they lose? What if they win?

I also think there is a major lack of understanding of the Russian way of making war and the likelihood of Russia’s backing down from their invasion of Ukraine as its costs rise but that is a matter for another post.

Reading this post from Matt Yglesias in turn brought this post to my attention. There Alexander C. Furnas and Timothy M. LaPira present the results of a study illustrating the degree of separation between elites and rank-and-file voters, broken down by Democrats, Republicans, and independents. This is their definition of “elites”:

For the purposes of this survey, we defined political elites as those who hold significant authoritative roles in government, or those outside government whose occupations position them to influence those inside government as a significant part of their job. This elite population includes thousands of unelected bureaucrats, judges, media pundits, campaign consultants, lobbyists, think tankers, commissioned military officers, lawyers, scientists, and business and nongovernmental organization leaders. These political elites are important to democratic responsiveness in their own right because they influence the policy agenda, craft and implement policy, and frame the rhetoric that reelection-motivated politicians use to justify the policy positions they take.

The conclusion the authors draw from their findings is that political elites are more supportive of progressive policies than likely voters. Here are their observations:

Ultimately it is clear that political elites’ policy preferences are, in fact, distinct from those of their copartisan likely voters. While majorities of both Democratic elites and likely voters favor the progressive policies we tested, the elites are more unified in their support of these policies across the board, and elites tend to be further to the left on our measure of ideology. The picture among Republicans is a bit more nuanced; on issues of healthcare and taxes, Republican elites are consistently more conservative than likely voters, but on climate and immigration Republican elites are more divided than their likely voter counterparts.

while they believe that there is less discord within the Democratic Party than is commonly believed:

We find that Democratic elites are neither out-of-touch leftists — they have the backing of the overwhelming majority of their co-partisan voters on 9 out of 10 issues we polled — nor are they milquetoast centrists afraid to take progressive policy positions. They tend to be slightly more ideologically extreme than likely voters, but are a relatively heterogeneous group. Despite this ideological diversity, they are consistent supporters of progressive policies with widespread Democratic support.

To some degree I think those findings are “baked into” the study—they picked the issues. For the findings to be robust a much broader selection of issues would need to be considered.

I think their findings go a long way to explaining the discrepancy between what we see around us in the real world and what is happening in Washington. I don’t believe the divisions among us are quite as bitter as would appear from the workings of the Congress or what we see on the nightly news. But the wide separation between Democratic elites and Republican elites does reflect what’s happening in Washington. Here’s what I see in their findings.

• There’s quite a bit of separation between Democratic elites and Democratic voters, a point I have made here repeatedly.
• There’s quite a bit of separation between Republican elites and Republican voters.
• The separation between Democratic elites and Republican elites leaves little room for compromise. That’s what we see in Washington.
• The separation between Democratic and Republican voters is not nearly so great. That’s what we see in everyday life.

The Congress isn’t representing us—it’s representing the elites and the separation and acrimony between left and right elites are getting more pronounced with time. It isn’t as simple as “the rich”. The sample went well beyond the top .1%, well into the top 1% of earners.

Here’s a discussion at the Modern War Institute on the prospect of Russia employing a tactical nuclear weapon in Ukraine, something I’ve been speculating about since the very start of hostilities. Here’s the bottom line:

Russia and China are both considering the practical application of these weapons in the context of regional conflicts. As a result, we need to accept the possibility of tactical nuclear weapons use. It is arguably folly to discuss military conflict with China and Russia that remains at the conventional level. We need to address the conventional-nuclear transition and establish processes to coordinate between geographic combatant commands and US Strategic Command, as well as with our allies.

We should have been considering this possibility a long time ago.

There’s a story that comes from the time of the Great Depression, apparently told by Joe Kennedy at that time the richest man in the world. He had started getting stock tips from shoeshine boys and taxi drivers which convinced him it was time to get out of the stock market. He did, just in time to avoid the crash and preserve his fortune.

The other day I heard that an acquaintance of ours was taking up shed hunting as a hobby. If you’ve never heard of it, shed hunting is hunting for the antlers that elk and deer shed annually. They are sought for fun, collecting, and to resell.

This morning I read an article in the New Yorker, “The Great American Antler Boom”. Sounds like a craze that’s cresting.

The brouhaha du jour seems to revolve around Ukrainian bioweapons lab. The kick-off for that was Russian President Putin’s claim that the U. S. had bioweapons labs in Ukraine. What ensued was an increasingly partisan and acerbic argument by sophistry.

The retort to the claim was that the U. S. was funding defensive bioweapons research in Ukraine. That neatly sidesteps the more important question: should we be funding Ukrainians to maintain stocks of anthrax and other pathogens for any purpose whatever?

Perhaps it’s my paranoia speaking but I hear echoes of the Wuhan Institute of Virology in this. In my opinion evading U. S. regulation and oversight by doing research in other countries should be strictly banned with really draconian penalties for violations. Whether COVID-19 emerged from a lab leak or evolved neatly avoids the question of whether we should have been funding research in the WIV at all. I think the risks in such research are too great.

William A. Galston devotes his Wall Street Journal column to a plea to help the Ukrainians more in their war against Russia:

In the coming weeks, it is likely that the Russian army will encircle and besiege many of Ukraine’s largest cities. The inhabitants of these cities will be left without food, water and electricity, as they already are in Mariupol. The Russians will batter these cities with bombs, missiles and artillery, making no effort to distinguish between military targets and civilians. The longer Ukrainians resist, the more their cities will resemble Grozny and Aleppo. As the chief of the confederacy that fought the Romans in Scotland said of the imperial invaders’ strategy, according to Tacitus, “they make a desert and call it peace.”

President Biden insists, rightly, that America should not fight World War III in Ukraine. But there is a lot of daylight between nuclear armageddon and our current stance. For example, the U.S. is preventing the transfer of Polish aircraft to Ukraine on the grounds that doing so would be “escalatory.” Translation: It would entail risks that America should not take.

I’m not the only one to wonder whether this is true. Let’s assume that the Ukrainian government dispatches its pilots to fly these plans across Ukrainian airspace to a Ukrainian airfield that remains operational. How does this differ in principle from the other defensive weapons that NATO is sending to Ukraine?

There may be technical or operational reasons to reject this transfer. But the degree of risk the U.S. would run is not high enough to justify blocking it.

I don’t honestly know what President Putin’s reaction to such a transfer would be or whether it would be effective. I suspect we will be receiving many such pleas as the days wear on and the Russians begin overwhelming the Ukrainian military.

As I write this the Ukrainian president is delivering an emotional plea to the U. S. Congress.

What is the correct posture for the United States?

I think that food is going to become very, very expensive in the United States—more expensive in real terms than anything I have seen in my lifetime. The causes will be many. There is presently an outbreak of bird flu in the course of which millions of chickens are being euthanized (to save you the trouble of looking up how many chickens there are in the U. S., it’s about half a billion) with their bodies burned. That will raise the price of chicken and eggs, if only marginally. This year we’ve had the worst wheat harvest in 50 years. That will raise the price of bread and many other foods at least marginally. Ukraine will be offline for most of this year. Russian wheat imports will be off for the foreseeable future and they’re the world’s largest exporter.

Higher oil prices will increase the costs of farmers and producers which will be passed on to consumers to the degree that they can. Limits on imports of fertilizer from Russia will raise the cost of fertilizer.

When you add all of this up it probably means famine in some place, presumably Africa and Asia, and higher prices here in the U. S.

The political temptation to subsidize food consumption will be irresistible, the effects of which may be perverse. The percentage of poor people who are obese in this country is truly amazing.

This week the wheel hits the road for the Federal Reserve Open Market Committee. The editors of the Wall Street Journal declaim:

Government spending excesses in 2020 and 2021 played a role, but the Fed made all of that easier to pass by maintaining the policies it imposed at the height of the pandemic recession for two more years. Low interest rates make deficits seem more fiscally manageable than they really are. The Fed has continued to buy Treasurys and mortgage-backed securities even as inflation nears 8%—right up until this week’s meeting.

What went wrong? The Fed is supposed to have the world’s smartest economists and access to the best financial information. How could they make the greatest monetary policy mistake since the 1970s?

I disagree with their assessment that the Fed has erred through relying on Keynesian economics. Lord Keynes’s analysis still holds but in a globalized economy, at least in the form it has taken, deficit spending in the United States becomes Chinese factories rather than American ones. I seem to recall that the editors have supported globalization in the form it has taken.

The situation is less the fault of the Fed than it is of the Congress which has been feckless, incompetent, and, frankly, treasonous over a period of more than 30 years, Democratic majority or Republican majority.

Still, the Fed is in a difficult spot. If it raises interest rates, it’s likely to throw the U. S. economy into a recession. If it doesn’t raise interest rates, their actions will need to be greater and maintained longer.

Let me put it this way. Mr. Powell, do you want to throw the economy into recession now or in 2024 after a couple of years of double-digit inflation?