Tyler Cowen linked to two posts highlighting how high monetary policy uncertainty is today due to the high levels of inflation variability. The striking thing about these posts is that at our low inflation rate, the standard deviation of inflation is just as high as it was during the 70’s.
Using the month on month changes of inflation (bottom of top chart) instead of year on year changes (top of top chart) we see inflation variability spiking in mid 2006 rather than early 2009. Furthermore, the comparison the blogs make to the 70’s glosses over that by very similar measures, inflation uncertainty was much higher in the 50’s.
Of course, this may just be due to the crazy adjustment from the post war economy, so the policy uncertainty of the 50’s was probably low despite high the variability of inflation.
The high level of inflation volatility and therefore policy uncertainty can help explain why there are deficit hawks and gold bugs with nominal ten year yields at 2.6%. Ignoring the increasing deficit, the US treasury is going to have to roll over 2.5 trillion dollars worth of debt* in the next year alone, so maybe there is something to be uncertain about.
*To look this up for yourself, go here. Download the excel file and look at marketable debt. There are over 1.7 trillion dollars worth of Treasury bills and .74 trillion worth of Treasury Notes payable in the next year. The amount of inflation adjusted notes coming due is under 40 billion and there are no long term treasury bonds coming due.
The House recently passed a party line vote to spend more money on education and Medicaid. The $10 billion dollars to the states comes with many strings attached, notably that they do not get the money if they decided to cut spending on education as a share of total revenues. I’ve touched on the irrelevance of medical spending past a certain level before, so let’s look at the effectiveness of education spending.
Source: “Does Spending More on Education Improve Academic Achievement?” by Dan Lips, Shanea Watkins and John Fleming
Of course, the chart is somewhat misleading. Education scores are range bound while spending is not, but it is notable that they often seem to be going in opposite directions*.
Using additional cross country data from NationMaster, we see that government spending on education beyond a certain point doesn’t seem help very much anywhere in the world:
Total education spending as a percent of GDP isn’t any more correlated with scientific literacy, but at least the correlation isn’t negative.
So the government may be wasting money here, which just gives us more evidence that α is very high.
*At younger ages there is some evidence of improved math scores, but these improvements are negligible by age 17. Click through the article for more charts.
Everyone is acting as if in order to maintain the Fed's independence, the Fed must be allowed to be vague about its targets, vague about how it might achieve those targets, secretive about how it thinks its actions influence those targets, and ad hoc in its approach to deciding when to take action. I would suggest re-examining such assumptions.
"My suggestion is that, if you get asked those questions, just say we're examining nontraditional methods and there are many different ways in which we can address the issue. I would be as nonspecific as you know how to be. The major reason is that I don't think we will know until we start to address the issue." - Greenspan in 2003, discussing what the Fed might do as interest rates approach the zero bound