Customs and Border Protectionjust announced that Border Patrol has apprehended 364,941 people from the beginning of fiscal year 2019 through to the end of March 2019. Border Patrol apprehensions this FY rose by 34 percent in the month of March. Although the number of apprehensions is rising, the proportion of all apprehensions who arecriminal aliensis dropping, in a trend that I wrote about earlier this month. Furthermore, the absolute number of criminal aliens arrested by the end of FY 2019 will be below the number arrested in any year since CBP began publishing data.

Border Patrol identifies criminal aliens as those who have been convicted of crimes here or abroad if the conviction is for conduct which is also criminal in the United States. From the beginning of FY2015 through the end of March 2019, the absolute number and percent of criminal aliens arrested by Border Patrol have fallen in every year. In 2015, about 5.7 percent of all Border Patrol apprehensions were criminal aliens. For the beginning of FY 2019 through the end of March, only about 0.7 percent of people apprehended by Border Patrol were criminal aliens. If the number of criminal aliens apprehensions continues apace for FY 2019, the absolute number will be about 75 percent below the number apprehended in FY 2015.

From February 2019 to March 2019, the total annual number of Border Patrol apprehensions climbed by 34 percent while the total number of criminal alien annual apprehensions rose by only 24 percent. In other words, the number of non-criminal apprehensions is rising much faster than the number of criminal aliens apprehended. As the flow grows, it is becoming less criminal. Only 0.5 percent of those apprehended in March were criminal aliens compared to 0.7 percent from October 2018 through February 2019.

From 2015 to FY 2019, the percentage of those apprehended by Border Patrol who were non-criminals rose from 94.3 percent to 99.3 percent while the percentage who were criminals fell from 5.7 percent to 0.7 percent (Figure 1). In absolute numbers, criminal aliens have also declined from 19,117 apprehensions in 2015 to 2,513 through half of FY 2019. If the trend of criminal alien apprehensions continues for the rest of FY 2019, there will be just over 5,000 by the end of this FY – well below the 6,698 recorded in 2018.

Figure 1
Non-Criminal and Criminal Aliens

Source: Customs and Border Protection.

The most consistent argument wielded in support of closing the border or harsher border security is that those being apprehended are dangerous criminals. Based on data supplied by Border Patrol, the absolute number of criminal aliens and their proportion of all apprehensions along the border are lower in FY 2019 than in previous years. While the government has an important role in keep criminal aliens out of the United States, the current situation along the border shows that Border Patrol has a better handle on crime than at any time in the recent past.

Since 2012, Border Patrol has apprehended a growing number of nationals from countries other than Mexico—almost all of them from Guatemala, Honduras, and El Salvador. Last year, however, the agency saw threefold increases in apprehensions of Nicaraguans and Indians. These spikes may represent a widening awareness that America will accept people from around the world who come to the border to request asylum.

Figure 1 shows that from fiscal year 2017 to 2018, the number of Nicaraguans arrested by Border Patrol increased from 1,098 to 3,337—a 204 percent increase—and the number of Indians grew from 3,135 to 9,234—a 195 percent increase. That said, the two nationalities still represent a relatively small share of the total number of non-Mexican arrivals. The two nationalities grew from 2.4 percent of all other than Mexican apprehensions to 5 percent from 2017 to 2018. But the jumps are noteworthy as similar jumps in the Northern Triangle were a prelude to a snowball effect later.

India’s economy is growing, but its unemployment rate appears to be the highest in 45 years. Meanwhile, Nicaragua has suffered from political protests after the country lost aid from Venezuela, and its government had to cut benefits. The government has cracked down on the protests, killing hundreds of people. The Nicaraguan economy has hit a severe recession. Given its proximity to the United States and to the Central American caravans moving north, Nicaraguans who initially retreated south to Costa Rica may start to head to the U.S.-Mexico border to claim asylum.

Initial reports from FY 2019 imply that this upward trend for Nicaraguans may have continued. PRI reported in late September:

‘What’s changed is the scope with which people have been targeted,’ said Alexander Parcan, an attorney with the group Human Rights First who is representing Nicaraguans seeking asylum in the United States. He said until this year, the few people fleeing Nicaragua were mostly outspoken political activists. But he says now Ortega is labeling regular people who participated in the protests — teachers, bus drivers, nurses, etc. — as political enemies.

According to Mexican immigration officials, the number of Nicaraguans detained has increased 125 percent since April. US Border Officials don’t have statistics on how many Nicaraguans are applying for asylum, but immigration attorneys say they are also seeing an increase. Much of the increase is from people like Maciel García and her family. 

Moreover, Costa Ricans started to protest the camps of Nicaraguans in their country, possibly incentivizing others to head through El Salvador, Guatemala, and Mexico to reach the United States. More Nicaraguans have shown up in the caravans in FY 2019 as well. It is likely that this summer will see yet more arrive. Congress needs to intervene to make legal immigration possible, particularly for migrants from the Northern Triangle countries, to make the asylum process manageable again.

Federal tax returns for 2018 are due April 15 in most states. With your filing, you can see how your taxes changed after the Tax Cuts and Jobs Act of December 2017.

You can compare your total taxes paid in 2018 to the amount paid in 2017. But your income may have changed, so instead you can compare your ratio of taxes to income in the two years. Middle-income filers received an estimated average tax cut of $780, and the ratio of their individual income, payroll, and excise taxes to income fell 9 percent (see top of table 1).

Polls show that the GOP tax cuts are not particularly popular. But that might be because of continued disinformation in the press. For example, in criticizing Steve Moore recently, Vanity Fair writer William D. Cohen said:

[Moore] started by saying that the tax law would reduce taxes for 90 percent of Americans. I objected strenuously. ‘Moore shouldn’t be allowed to do this anymore,” I said. “He’s been trying to do this for 35 years, talking about trickle-down economics for 25 years. He shouldn’t be allowed to do this anymore.’

I went on: ‘This isn’t a tax cut for 90 percent of the Americans. This is a tax increase for anybody who makes money paying ordinary income taxes. Maybe if you pay capital gains taxes, maybe like Donald Trump if you have a lot of partnership income, this could be a tax cut. But from both people who get a paycheck who have a W‑2, this would be a tax increase.’

What the heck? There were only minor changes to capital gains taxes in the law, and Cohen’s claim that most or all ordinary folks got tax increases is far off base. Moore’s claim that 90 percent received cuts is more accurate.

The table below from the Tax Policy Center (TPC) shows the share of households that received individual cuts in 2018 within five income groups (see top of table 2).

Overall, 65 percent of households received a tax cut and just 6 percent had an increase. However, the bottom two income groups, on net, do not pay any individual income taxes. The tax “cuts” for those two groups are mainly increases in refundable tax credits.

Looking at households that pay federal income taxes—those in the top three groups—more than 82 percent received an individual tax cut under the GOP tax law. If you include the effects of the corporate tax cuts, more than 90 percent of households in these tax-paying groups received a cut (see bottom of table 2).

Numerous aspects of the GOP tax law were misguided, including the increased progressivity it created, as noted here and here. Furthermore, Republican efforts to increase spending on defense, farm subsidies, and many other things are grossly inconsistent with their tax-cutting agenda.

However, the vast majority of tax-paying households did in fact receive a tax cut under the GOP law, and Steve Moore should “be allowed” to say it.

Presidential candidate and Sen. Elizabeth Warren (D‑Massachusetts) wants to see more business people behind bars, and she’s not fussy about how to make that happen. In a Washington Post op-ed last week she unveiled a new Corporate Executive Accountability Act, which in her words would expand “criminal liability to any corporate executive who negligently oversees a giant company causing severe harm to U.S. families.” She says she wants top executives to know that they can be (again in her own words) “hauled out in handcuffs for failing to reasonably oversee the companies they run.”

Under longstanding legal protections in the Anglo-American legal system, before convicting you of most crimes prosecutors must ordinarily show that you had mens rea, a guilty state of mind. Occasionally one or another law relaxes the standard of guilt to “willful blindness” or gross negligence. More rarely, as under a controversial doctrine in FDA law, courts have permitted convictions on a theory of what amounts to vicarious criminal liability, as of a drug executive whose underlings commit certain offenses even absent proof that the higher-up knew of, encouraged, or was willfully blind toward the offenses. I criticized that “responsible corporate officer” doctrine in the FDA setting in this space two years ago, as well as in the chapter on white-collar prosecution in the Cato Handbook for Policymakers. Warren explicitly states that her proposal “builds on” it as the basis for her proposals for what should happen to executives generally.

Cato has been sounding the alarm about decay in mens rea standards for years, even as some civil libertarians have chosen to stay on the sidelines. But you don’t have to be libertarian to find what Warren is proposing a “very bad idea,” one based on “dangerous” arguments and propelled by “political rhetoric that is designed to inflame voters’ sense of injustice and righteous indignation.” Writing in Slate, law professors Carissa Byrne Hessick and Benjamin Levin observe:

Negligence is an incredibly low standard for criminal punishment. A person who is acting negligently does not know that what she is doing (or failing to do) is wrong or risky. Negligence means that a “reasonable person” in that position would have realized that there was a risk of harm. Prosecutors are likely to think that defendants should have known that there were risks simply because something bad occurred—not because they necessarily would have recognized the risks themselves if they’d been in that situation.

Warren backs her call for a simple negligence standard for criminality with what Hessick and Levin call a “highly misleading” example in which hypothetical executives are aware that their conduct might break the law but are willing to count on a low risk of being held personally to account. But that’s not a case of simple negligence, but of “recklessness or ‘willful blindness’ —mental states that are both more serious and more difficult to prove than the negligence standard she proposes.” In other words, Warren demands a broad dragnet while inveighing against conduct that could have been addressed with a much narrower prohibition. Is the senator’s slipshod manner of argument merely negligent? Or should we interpret it as reckless or perhaps even as deliberate misconduct?

One of Warren’s most dangerous arguments for relaxing the law’s standards for knowingness and requisite mental state is that prosecutors often find it difficult to prove higher and more exacting standards. The effect, note Hessick and Levin, is “to water down the law simply to make it easier to punish people.” Some may imagine that prosecutors will use the broader powers only against defendants who did something that is worse but harder to prove. Hessick and Levin call that argument “very dangerous”: 

We should not change the law to include conduct we don’t actually want to punish in order to make it easier for prosecutors to punish people we think do bad things that are hard to prove. Overly broad laws essentially delegate the content of the criminal law to prosecutors. And prosecutors will decide what is worthy of punishment using criteria that the public doesn’t know about and that can change from case to case and defendant to defendant. Prosecutors can even enforce the law as written—to cover truly accidental behavior—and there is nothing potential defendants can do about it. 

We should be clear about who will be at risk if Sen. Warren passes her law. The civil courts already hear many thousands of cases seeking damages over claims that serious harm arose from industry conduct that falls short of being reckless or deliberately wrongful. Not infrequently — as with claims over supposed “sudden acceleration” in cars, cancer from Roundup, and autoimmune disease from silicone breast implants — large sums get paid even when science finds no basis for concluding the products caused the harms alleged, such is our legal system’s tendency to tilt against business defendants as unsympathetic. Under the Warren standard, complaints that driverless cars have gotten into avoidable accidents or vaccines have caused side effects — maybe even that cheeseburgers, supersize sodas, and margaritas have worsened the harms of obesity — will put business people at risk for long prison terms. To her backers, will this count as a bug? Or a feature?

The Cleveland Plain Dealer recently reported that, while overdose deaths have come down slightly over the past year in the Cleveland metropolitan region, a new killer has emerged on the scene: cocaine mixed with fentanyl.

The Cuyahoga County Coroner’s Office informs the public that cocaine was involved in 45 percent of overdose deaths last year, the highest rate in ten years. It reports that cocaine is being found in combination with fentanyl with increasing frequency, and it is believed that many cocaine users are either unaware of the presence of fentanyl or, if they are, they are uncertain as to the amount that is present. The highly potent fentanyl (roughly 100 times more potent than morphine) causes them to asphyxiate and die.

This phenomenon was reported a year ago in Massachusetts and the New England region. According to the Drug Enforcement Administration, fentanyl has been supplanting heroin as the narcotic often combined with cocaine to affect “speedballing”—a dangerous technique designed to minimize the negative effects of the “come-down” after the rush from cocaine. 

The rise in cocaine-related overdose deaths is also associated with a change in the demographic mix of overdose victims. The Plain Dealer report states:

Historically in Cuyahoga County, opioid deaths have had the most severe impact among white people, and in suburban communities, Gilson said. Cocaine, on the other hand, has largely been linked to overdose deaths among African-Americans, and in urban communities…

“We’re starting to see a rise in fentanyl deaths among African-Americans, but we’re also seeing more cocaine in the fentanyl deaths among the white, suburban residents,” Gilson said. “Now, as those two interface, we start to see more deaths, period.”

One encouraging part of the Plain Dealer story is that the overall overdose rate in Cuyahoga County came down slightly in the past year. Credit has been given to the more liberal distribution of the overdose antidote naloxone as well as the distribution of fentanyl test strips. Originally approved by the FDA for urine drug testing, they are now being used “off-label” to test for the presence of fentanyl in a drug bought on the black market. Distributing naloxone and fentanyl test strips are two harm reduction strategies. 

A Canadian firm, BTNX, manufactures the test strips and has neither sought nor gained approval for their use in this context. The test strips work well for IV heroin users, who adjust their heroin dose or even discard the heroin according to the amount of fentanyl detected. Public health officials are concerned that it might be more difficult to use the test strips with cocaine, because the substance must be liquified in order to test it. In most cases, the heroin is already in liquid form because it is intended for injection.

Sadly, in many states with anti-paraphernalia laws, such as my home state of Arizona, fentanyl test strips are illegal for distribution because they are considered a form of drug paraphernalia. Last June the Maryland legislature removed fentanyl test strips from that state’s drug paraphernalia list.

As public health and law enforcement authorities more openly discuss the prevalence of cocaine, fentanyl, heroin, and methamphetamines in the overdose statistics, it is reasonable to ask why they and the media continue to refer to this as an “opioid epidemic” when it is obviously a “prohibition crisis.”

In a previous post, I argued that Paul Volcker didn’t put a stop to inflation by having the Fed systematically increase interest rates when commodity prices rose, and lower them when commodity prices fell. While commodity-price targeting, aka a “price rule” for monetary policy, had some prominent proponents back in the 1980s, neither Volcker nor any other Fed chair embraced the idea.

Today’s post has to do with two things that I didn’t say in that earlier one. I didn’t say that commodity price movements played no part at all in the Fed’s decision-making. And I didn’t say whether they should or shouldn’t play any part in it. I plan here to review studies of the actual role commodity price movements have played in the Fed’s monetary policy decision-making, as well as ones that ask whether the Fed would do a better job if it let them play a bigger one.

This post is, I warn you, both long and very wonkish. But if the Fed is to consider once again the possibility of basing its monetary policy decisions on the behavior of commodity prices, it’s useful to take account of what a substantial body of previous research has had to say on the topic.

Targets and Indicators

In that research, the distinction between statistics that may serve as indicators of economic conditions to which the Fed might wish to respond and ones it should attempt to target, that is, to keep within specific bounds or on some specific path, is of crucial importance. The claim that Volcker’s Fed relied on a commodity “price rule” implies, not just that it referred to commodity price movements as one of several indicators of monetary conditions, but that it actually endeavored to target commodity prices.

Although Volcker never targeted commodity prices, it doesn’t follow that either he or later Fed chairs made no use of commodity prices as policy indicators. On the contrary: the Fed has often referred to commodity price movements in making monetary policy decisions. What’s more, at least one Fed chair appears to have assigned considerable weight to commodity price changes, and to changes in the price of gold especially. That chair was, not Paul Volcker, but Alan Greenspan. I know this because I co-authored a study on the topic with my then-UGA colleague, Bill Lastrapes.[1]

Bill and I affirmed something that Greenspan himself had claimed[2], namely, that during his tenure the Fed treated sensitive commodity prices, and the price of gold in particular, as important indicators of the state of the economy. It was more likely to raise the fed funds rate when either general commodity prices or the price of gold rose, and more likely to reduce the rate when either commodity prices generally or the price of gold fell. Bill and I were, however, careful to note that this “does not necessarily mean that the Fed ‘targets’ the price of gold, or focuses solely on sensitive commodity prices to guide policy.”

Are Commodity Prices Useful Indicators? Should the Fed Target Them?

Did Greenspan’s policy make sense? And if it did, might the Fed have done still better, either then or since, by actually targeting a commodity price index, instead of just using it as one of several economic indicators?

Many economists tried to answer these questions during Greenspan’s term. And while most concluded that commodity prices were indeed useful economic indicators, they also tended to confirm the conclusion, reached by FRB Kansas City economist C. Alan Garner in the earliest of the studies, “that monetary reforms requiring a close link between commodity prices and money growth are inadvisable.”

Garner’s 1985 article, like several subsequent ones, was written in response to price-rule proposals of Jude Wanniski and Robert Genetski, among others. Those proposals, Garner notes, called “for using either the price of gold or an index of sensitive commodity prices” not merely as economic indicators but “as an intermediate target of monetary policy.” (Wanniski favored a gold price target, whereas Genetski argued for gearing Fed policy adjustments to movements in a broader commodity index.)

The appeal of a commodity price rule is that commodity prices, being set in auction markets, adjust more rapidly than others, and might therefore serve to reveal imminent inflation or deflation before either becomes evident in broader price indexes, like the CPI. However, Garner says, a commodity price rule also suffers from two fundamental drawbacks. First, because “large fluctuations in the relative prices of commodities are not uncommon…a policy response based on changes in commodity prices could have undesirable effects on aggregate output and prices.” In practice Fed officials would have to ignore certain commodity-index movements, rather than respond to them, to avoid contributing to the business cycle instead of dampening it. The narrower the commodity set, the greater this problem becomes. For that reason a gold price target would generally be even less reliable than a broader commodity price target.

Second, the loose and uncertain relation between commodity price movements and the Fed’s actions also limits a commodity index’s usefulness as an intermediate policy target. “The channels through which monetary policy affects commodity prices are complex and circuitous,” Garner says. Consequently, “it would be difficult for policymakers to produce the desired movements in an index of sensitive commodity prices.”

These drawbacks of a price rule didn’t necessarily mean that commodity prices weren’t useful as policy indicators or, in Garner’s phrase, “information variables.” However Garner also found that they “provide only limited information about the future course of the economy,” making them insufficiently reliable “to justify a central place in monetary policy.” Commodity price movements were a poor leading indicator of changes in real GNP, and an even poorer guide to impending changes in CPI inflation. “It seems best,” Garner concluded, “to employ commodity prices as one of several information variables” the Fed used to guide its monetary policy decisions. Garner recommended, in other words, that the Fed stick to using commodity prices just as it had been using them, at least according to my and Bill Lastrapes’ research. Significantly, then-Federal Reserve Vice Chairman Manuel Johnson also believed that “commodity prices are probably more valuable as an indicator of monetary policy than as a target.”

In 1989 Garner published a more exacting econometric study of the merits of a “commodity price rule,” this time specifically addressing the claim that “commodity prices are so closely related to the general price level that achieving the commodity price target range would also control the general inflation rate.” That study reached the same conclusions as his earlier one.[3]

In the meantime, several other studies either reached conclusions very similar to Garner’s (e.g. DeFina 1988; Webb 1988; Whitt 1988; and Furlong 1989), or found that commodity prices were not even useful policy indicators (e.g. McCallum 1990).

I’ve located one study only from the period in question suggesting that the Fed might have improved its performance by linking its policy decisions more closely to commodity price movements. According to a 1989 paper, by Brian J. Cody and Leonard O. Mills, and contrary to my and Lastrapes’ findings, the Fed had “not responded to commodity price innovations in the past,” and that, so long as it attached some weight to stabilizing inflation, it might have improved its performance by using them. But, Cody and Mills add (in a passage that now seems as relevant as ever), even their favorable verdict does not mean that the Fed would have been wise to adopt a commodity price rule.

One issue that we have not examined in this paper is whether the relative merits of a commodity price rule in comparison to other recently advocated rules based on nominal quantities such as the monetary base…or nominal GNP… . It may be that the Fed could improve its policy by simply having greater feedback on any nominal variable in setting nominal interest rates. Advocates of a commodity price rule would argue that such feedback would occur in a more timely manner using commodity prices because there are no data lags or revisions. Whether this advantage, and possibly others, is large enough to favor commodity prices over other nominal variables is a subject for future research.

Getting Colder

So much for studies from the 1980s. A sampling of later studies suggests that the case for leaning heavily on commodity prices has gone from weak to weaker over time, thanks in part to the diminishing role of commodities as a share of U.S. final output.

Thus a pair of Chicago Fed Letters published in November 1993 and December 1994 found that “inflation forecasts based on individual commodity prices and commodity price indexes can be highly misleading” and “that commodity price indexes are not statistically useful in predicting consumer price inflation.” According to S. Brock Blomberg and Ethan S. Harris, the authors of a 1995 Chicago Fed study, “none of the channels through which commodity prices signal more generalized inflation” were then “operating as well as they did in the past.” More specifically, they found that the relation between changes in commodity price indexes and subsequent movements in the CPI inflation rate had “weakened considerably starting in the mid-1980s” to the point of rendering the indexes useless, if not worse than useless, even as policy indicators.

Still later studies reach similar conclusions. According to a 2010 paper by Florian Verheyen,

While there was a strong link between commodity prices and CPI inflation in the 1970s and the beginning of the 1980s, the relationship has weakened, respectively diminished over time. Today we are unable to detect a reaction of commodity prices to commodity price shocks. Thus, commodity prices might not serve as good indicator variables for monetary policy.

Verheyen adds that his findings “are pretty in line with” those of most other studies published since the mid-1990s. However, at least two studies of the period, a 2003 study by Titus Awokuse and Jian Yang, and a 2007 working paper by Frank Brown and David Cronin, found using different methods that commodity prices still possessed some information value.

Changing Goals

Of course no study of the usefulness of commodity prices as monetary policy guides can ever be regarded as the last word on the subject. That is so because the relationship between commodity price movements and changes in other macroeconomic variables continues to change. But it’s so for another reason as well, namely, the fact that our understanding of the ultimate goal of monetary policy has also been changing.

Until recently, economists generally took for granted that monetary policy should treat a stable overall inflation rate either as its sole goal or (as in the Fed’s case) as one of a small set of goals. Hence the emphasis that previous studies of the usefulness of commodity price indexes placed on the relation between movements in those indexes and changes in the CPI inflation rate. But increasing numbers of economists are now either endorsing or giving serious attention to the view that the aim of monetary policy should be, not a stable inflation rate, but a stable growth rate of some measure of aggregate nominal spending, such as nominal GDP or nominal Final Sales to Domestic Purchasers.

One of the more obvious reasons for this change of opinion has to do with the implications of productivity innovations, and adverse ones especially. The question is simple: if, say, a war or harvest failure or both (to offer a stark example) were to halve an economy’s output, would it make sense for that economy’s central bank to tighten money to keep prices from rising? Since goods are in fact less abundant, keeping their prices from rising means reducing the public’s earnings so it has less to spend on them. But that in turn means reducing firms’ ability to recoup their nominal outlays, and also making it harder for people to pay their debts. Ultimately, although prices don’t rise, real output, consumption, and employment decline more than they would were the aggregate spending kept constant. And it’s the levels of real variables like output and employment, rather than the price level, that determine peoples’ well-being.

Similar arguments hold for less severe adverse supply shocks, and also (though the fact is often overlooked) for positive ones: a decline in the inflation rate below some long-run target is no cause for concern so long as it reflects a proportionate gain in productivity. Why shouldn’t we have less inflation, if not occasional deflation, when goods’ unit production costs are falling especially rapidly, and more when those costs are falling less rapidly than usual, or rising?

Nor is there any lack of rigorous argumentation supporting these intuitive arguments favoring stable spending over stable inflation as the key to overall macroeconomic stability. I review a number of works, both early and recent, here. And new ones, like this one in the most recent JMCB number by David Beckworth and Josh Hendrickson, and this one by Jim Bullard and Aarti Singh (also forthcoming in the JMCB), are coming out regularly.

The case for maintaining a constant rate of inflation in the face of productivity gains and set-backs is, in comparison, neither intuitively compelling nor grounded in sound micro-economic analysis. Most models that appear to support it either (1) abstract from productivity innovations altogether; (2) unrealistically treat factor prices (including wages) as less “sticky” than output prices (while assuming that output prices are equally unresponsive to both aggregate demand and unit cost innovations); or (3) simply treat the absolute value of the rate of inflation, or the difference between actual and target inflation, as an argument in either agents’ utility functions or the central bank’s loss function. One only has to point out these often overlooked assumptions to appreciate the shortcomings of the models in question.

The Summer of ’08

So let’s suppose, for the sake of argument, that instead of aiming for steady inflation the Fed aims for steady NGDP growth. Might a commodity price rule help it to do that? As Cody and Mills suggested some years ago, the matter warrants further study. But I wouldn’t count on a positive finding, for commodity prices are especially likely to be influenced by supply-side innovations (such as gold discoveries) or blights. Because of that, a central bank that follows a commodity price rule would almost certainly render NGDP and other measures of nominal spending even less stable than they would be under conventional inflation targeting. For that reason, and until someone comes up with some stats suggesting otherwise, those of us who prefer NGDP targeting (or something like it) over inflation targeting have more reason than most to hope that the Fed will resist pressure to assign additional weight to commodity price movements in making monetary policy decisions.

For evidence of this sort of peril, we need look no further than the events of 2008. Throughout that period, as I’ve reported elsewhere, Fed officials — and the FOMC’s inflation hawks especially — were worried not about a possible recession but about inflation. By mid-2008 headline CPI inflation, which had been rising for a year, breached 6 percent. For that reason, and despite rapidly deteriorating financial markets, the Fed resisted cutting its fed funds target.

Of course we now know that the U.S. economy had in fact been in a recession since December 2007, and that both the headline CPI inflation rate and other measures of inflation were misleading indicators of the true state of affairs. That state was eventually made clear by NGDP data showing that the NGDP growth rate had been declining for months, and (as the above chart shows) was turning negative just as headline inflation reached its peak.

Would it have helped matters had the FOMC paid more attention to commodity price movements? Hardly. In fact such movements (shown in the chart using the IMF’s global commodity price index), and an increase in the price of oil in particular, were the chief force behind the high CPI inflation rate. It was, in other words, precisely because they were placing too much emphasis on commodity-price increases, instead of downplaying them, that Fed officials made the fatal mistake of failing to ease monetary policy as the U.S. economy floundered. Had Fed officials instead focused on a “core” inflation measure, like the core PCE inflation rate, which leaves out the influence of both food and energy prices, they might have avoided that mistake. And had they been able to ignore inflation altogether, either by tracking more accurate and frequent NGDP statistics, or by forecasting NGDP, they might have done better still.

In fairness to proponents of commodity-price targeting, the 2008 episode is a particularly unfortunate example of how commodity-price targeting can go wrong. On other occasions, as the chart below shows, placing more weight on commodity prices might have helped to tame the business cycle, as in the post-2003 run-up of commodity prices, which foretold a subsequently-revealed rise in the annual NGDP growth rate to a peak just shy of 7 percent. Commodity prices fell, on the other hand, during the peak years of the dot-com bubble, when annual NGDP growth also topped 6 percent, only to start rising as the bubble burst, dragging NGDP growth down with it.[4]

The point, once again, is that while commodity prices may provide monetary authorities with useful information, to be helpful they must be used carefully and in conjunction with other indicators. Although a central bank’s commitment to a strict commodity price rule might sometimes contribute to overall macroeconomic stability, at other times it could do just the opposite.

And No, I’m Not Against Monetary Rules

Although I’ve pointed to various disadvantages of a commodity price rule, I hasten to add that I’m far from being opposed to any sort of monetary rule. On the contrary: I’d much prefer a Fed that stuck to a predictable, systematic policy, to our present Fed with its constant policy flipping and flopping. I’d prefer it because I’m pretty sure it could simplify the challenge of economic calculation and forecasting, and thereby ultimately make us all better off. But favoring a monetary rule is one thing; favoring any old rule is another. And bad as our flip-flop Fed may be, it is not yet so bad that the wrong monetary rule couldn’t possibly make it worse. 

_______________

[1] Although we never published the study in question, the editors of The Wall Street Journal somehow got wind of it. See “Review & Outlook: Free Ride for the Fed,” Dec 19, 1995.

[2] See “Greenspan Takes the Gold,” The Wall Street Journal, Feb. 28, 1994.

[3] A subsequent study questioned Garner’s statistical procedures, but reached similar conclusions using what it’s author regarded as a more appropriate procedure.

[4] The same patterns hold, by the way, if one uses the Thompson-Reuters core CRB index.

[Cross-posted from Alt‑M.org]

In my upcoming Cato study, “Restoring Responsible Government by Cutting Federal Aid to the States,” I discuss 18 reasons why federal aid to state and local governments should be zeroed out.

Reason #12 regards how aid induces states to delay important projects such as infrastructure. Governments stall needed projects for years as they wait for federal grant approval, and then after approval federal regulations raise project costs and create further delays.

Federal disaster aid illustrates the problem. Texas is currently stalled in pursuing $4 billion of hurricane protections as it waits for federal money, according to the Wall Street Journal. But Texas has a $1.7 trillion economy. There is no reason why it cannot find $4 billion to fund its own hurricane defenses. State-funded spending would be more timely and less bureaucratic than spending funded by Washington.

Unfortunately, when it comes to subsidies for their own states, nominal conservatives such as Governor Greg Abbott and Senator John Cornyn put aside their conservative views on federalism and become federal spending proponents.

The WSJ summarizes the current battle:

Texas lawmakers are up in arms over more than $4 billion in federal aid for hurricane protection that has been delayed amid tensions between the Trump administration and Puerto Rico.

In the aftermath of the calamitous 2017 hurricane season, the federal government last April allocated a total of $16 billion to Texas, Puerto Rico, and other areas to invest in defenses against future storms. A year later, not a single dollar has been disbursed …

Political leaders in Texas, which will receive about a quarter of the total allocation, say they are being unfairly ensnared in a bureaucratic tussle. And they are increasingly worried that the delay is leaving Gulf Coast communities still recovering from Hurricane Harvey vulnerable to more destruction just as another hurricane season is set to begin June 1.

Texas Republican Sen. John Cornyn, a Trump ally on most issues, in a speech on the Senate floor last week blamed the White House budget office for the delay.

“The disregard of those who are struggling to rebuild and prepare for future storms by the bureaucrats is appalling,” Mr. Cornyn said.

His comments came after Texas Gov. Greg Abbott and state land commissioner George P. Bush, both Republicans, and members of the state’s congressional delegation have implored the Trump administration to move quicker to release the funding.

… Before any of the funds can be disbursed, the White House budget office must sign off on rules drafted by HUD detailing how the money can be spent. The federal housing agency said the process has been slow because it is the first time billions of aid dollars have gone toward such a prevention effort.

A HUD spokesman said the department expects to complete the rules in the next few weeks.

But even after those rules are complete, states must then devise a plan to disburse the money, which also needs federal approval. That process could potentially take an additional nine months, said Brittany Eck, a spokeswoman for Mr. Bush.

… The delays could slow the pace of storm-protection projects such as deepening and widening bayous, according to Alan Black, director of operations for the Harris County Flood Control District, which includes Houston.

More on federal disaster spending here.