The John Batchelor Show

Tuesday 5 May 2015

Air Date: 
May 05, 2015

Photo, left:  New main battle tank in Russian.
JOHN BATCHELOR SHOW
Co-host: Larry Kudlow, CNBC senior advisor; & Cumulus Media radio
Hour One
Tuesday  5 May 2015  / Hour 1, Block A: Bill Whalen, Hoover Institution: A Day at the Races; in re: Mrs Clinton's poll ratings.  They asked the wrong questions: not "do you like her?" but "do you trust her?". The Clintons versus everyone else, including their (nameless) donors.    On Immigration, Three Pathways to the Nomination   ;  Three More Presidential Candidates — Plus Another 300 or SoBernie Sanders, Long-Serving Independent, Enters Presidential Race as a Democrat: The Vermont senator’s candidacy will inject a leftist voice into the contest and provide Hillary Rodham Clinton with her first official rival for the Democratic nomination.
Tuesday  5 May 2015  / Hour 1, Block B: Bill Whalen, Hoover Institution; in re:   Dr Carson and Carly Fiorina really bring something to the table, Dr Carson wants a flat task but better has a high moral tone, speaks of families and [responsibility}; needs to be said and he's going to say it.  Carly Fiorina attacks Hillary as no one else does; as worked her way up from being a secretary to being CEO of HP; rails against crony capitalism – a great message coming from Republicans.  She's a much more polished candidate now than she was five years ago: messaging and speaking style much improved.  Huckabee: maybe just trying it one more time All three have rags-to-riches stories. However, the Club for Growth already running ads against Huckabee.  Jeb Bush is well-received.  If Walker or Rubio stumbles, Rick Perry is well-positioned to pick up the slack, although he has legal issues in Austin, Texas.  John Kasich is getting organized.   Mrs Clinton was thrown off by the Clinton Cash book.
Tuesday  5 May 2015  / Hour 1, Block C: John B Taylor, Hoover;  in re: Taylor on Bernanke: Monetary Rules Work Better Than ‘Constrained Discretion’  We have had a serious financial crisis, a very deep recession, a not-so-great recovery, and now a virtually strategy-free international monetary system. This is not a good record. . . . 
Rules-based monetary policy at the fed: gives people confidence and a benchmark. The fed hasn't had much of a strategy for some time; it's disconcerting.  Bernanke advocates for "constrained discretion," i.e., all tactics [read: seat-of-pants policies]. Look back while Ben Bernanke was on the Board (outside of the panic period): not such a good record. He eventually was the chair.  People using discretion without a strategy often review [to explain].   . . .  Speech argued against rule for the instruments, Friedman-type or what I endorse; why rates were too low for too long  [Greenspan time?]. . .   tricky territory. A lot of bears warning about trouble for five, six, seven years. Letting one firm go under and then rescuing another was [a contributing factor to {the crash?}]. During he Eighties and Nineties, "low inflation would increase economic growth"; now Janet Yellin is arguing the opposite.  A shift.  The magic of Volcker and Greenspan kept at it; growth began to pick up. Now, things aren't working so well. Yelling long supportive of rues-based policy, but here says "Situation's not normal, we have to wait."  I think we’ve waited too long. now one reason is her feeling that it's not ready yet.  Fed funds policy: transition is hard, kind of scary. Had they started earlier, we'd be at 1.5% now. Big advantage of a rule-based strategy is that it's predictable, an important part of economic policy, mitigate anxiety.  Twelve Fed members: – 7 on Board, 5 are presidents. All have taken to making numerous public statements on their opinions, which has become confusing – the opposite of "more transparency."  A Monetary Policy for the Future
I recently spoke at a panel on “Monetary Policy in the Future,” with Ben Bernanke and Gill Marcus at an IMF event, Rethinking Macro Policy. Our views are quite different and a serious debate followed, about which I’ll write later. Let me begin with a mini-history of monetary policy in the United States during the past 50 years. When I first started doing monetary economics in the late 1960s and 1970s, monetary policy was highly discretionary and interventionist. It went from boom to bust and back again, repeatedly falling behind the curve, and then overreacting. The Fed had lofty goals but no consistent strategy. If you measure macroeconomic performance as I do by both price stability and output stability, the results were terrible. Unemployment and inflation both rose . . .
COMMENTARY:  Taylor on Bernanke: Monetary Rules Work Better than ‘Constrained Discretion’  We have had a serious financial crisis, a very deep recession, a not-so-great recovery, and now a virtually strategy-free international monetary system. This is not a good record.  In a recent blog post Ben Bernanke criticized the use of rules-based monetary policy in which the central bank endeavors to set the instruments of policy in a predictable rule-like manner.
The post attracted a lot of attention, but this is not the first time Ben has criticized rules-based monetary policy. Soon after he joined the Federal Reserve Board he gave his “constrained discretion” speech in 2003 criticizing such policies, focusing his criticism on Milton Friedman’s well-known rule for the money supply. His recent criticism of rules-based policy focuses on the Taylor rule. It is similar to his criticism in 2010 in a major speech before the American Economic Association, which I responded to here in The Wall Street Journal, and it is an elaboration of his talk at a recent IMF conference where I also gave a talk and we had a little debate. In his 2003 speech Ben advocated “constrained discretion” as an alternative to rules-based policy, and judging from his talk at the IMF conference, “constrained discretion” is still his view of how policy has been conducted in recent years and how it should be conducted in the future.
Ben’s blog post starts off with a nice summary of the Taylor rule from my 1993 paper. The summary is accurate except for the suggestion that I put the rule forth simply as a description of past policy when in fact the rule emerged from years of research on optimal monetary policy. In his IMF talk he also quotes at length from that 1993 paper to demonstrate, perhaps in a gotcha sense, that I did not think policy could be conducted mechanically. I never thought that policy should be mechanical and still don’t. Some people say that I want to chain the Fed to an algebraic formula, but that is not what I have written or said. Having a rules-based policy for your instruments does not mean you mechanically follow a formula. It means you have an explicit strategy for setting the instruments. The same is true for my recommendation regarding legislation.
In his blog post Ben then goes on to critique “Taylor’s critique of Fed Policy.” But he defensively focuses entirely on the period when he was on the Fed Board. In fact, as I described in my recent IMF talk, my critique of the Fed goes back to the terrible economy of the 1970s when, much as in recent years, the Fed was “highly discretionary and interventionist” with “lofty goals but no consistent strategy.” And that critique became praise when Fed policy changed and became “more focused, more systematic, more rules-based” in the 1980s, 1990s and until recently with excellent results. Many economists have written about this change including Rich Clarida, Jordi Gali and Mark Gertler. Ben’s defense of the 2003-2005 period (the “too low for too long” period when he was on the Board) is based on the idea that those rates could be justified by changing the Taylor rule coefficients or changing the inputs in a way that suggested that interest rates were not too low, as shown in his Figure 2. This is the same argument used in his 2010 criticism when he considered other changes in the Taylor rule, and my response to that earlier criticism applies directly to his recent criticism.
It should be obvious to anyone that if you double the size of a coefficient in a policy rule (as Ben does) that you can radically alter the results. If Ben is suggesting that the Fed was secretly using such a rule in those years (unbeknownst to people outside the Fed at the time), then that is a good reason to make public such rules as legislation in Congress would require. Despite Ben’s own reinterpretation of the Taylor rule history, many people besides me have shown that rates were too low then, including Marek Jarocinski and Frank Smets, George Kahn, and work at the OECD by Rudiger Ahrend. Figure 1 from Bill Poole when he was on the FOMC shows this clearly as does this old graph from the Economist. In his talk at the IMF conference where Ben and I presented, Hyun Shin presented a convincing graph showing the too low rates globally. In fact, the changes in policy are so large that they can be illustrated without a specific rule.
Here is a simple plot of the inflation rate with different settings of the federal funds rate. It shows that with the inflation rate around 2%, the federal funds rate was only 1% in 2003, compared with 5.5% in 1997 when the inflation rate was also about 2%. Ben lists a number of other criticisms of policy rules. He says that there are differences of opinion about the size of the output gap. That’s certainly true, but it is no more of a problem for rules-based policy than for discretion—constrained or otherwise—where some estimates of the economy’s potential or gap are nearly universally needed.
He says that it is problematic to assume that the equilibrium real federal funds rate is 2%. Well that has been what the FOMC members have been saying for years, and according to the dots they are still pretty close to that in their long run estimate of the nominal funds rate around 3.75% and an inflation target of 2 %. But if they want to change, that can easily be incorporated into a rules based framework as Chair Janet Yellen has recently mentioned in San Francisco.
Ben says that a policy rule for the interest rate gives no guidance when the reading on the rule is negative. I completely disagree with that. The zero bound is not a new problem. Policy rule design research took that into account decades ago. The default was to move to a stable money growth regime not to massive asset purchases. And back in the year 2000 David Reifschneider and John Williams proposed another rules-based approach to deal with the problem.  Ben says there is no agreement on how much to react to changes in output or inflation. That is not quite right as there is much agreement about the so called “Taylor principle” that the reaction of the interest rate to inflation should be greater than one. But, again, disagreement about sizes of coefficients or elasticities in economics is a problem for the discretionary approaches too, and without a rules-based framework it is nearly impossible to understand the ramifications of that disagreement.
In its essence, Ben’s critique is of rules-based strategies for the instruments of policy in general rather than of particular policy rules. He prefers “constrained discretion.” As I see it, the broader evidence in the United States and in many other countries that Ben does not mention is that a rules-based policy has worked and that discretion—constrained or otherwise—has not.  We have had a serious financial crisis, a very deep recession, a not-so-great recovery, and now a virtually strategy-free international monetary system. I am sorry, but this is not a good record, even though, as I have emphasized many times, the Fed did an excellent job in its lender-of-last-resort role during the panic in the fall of 2008.
Mr. Taylor is a professor of economics at Stanford University and senior Fellow at the Hoover Institution.
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Tuesday  5 May 2015  / Hour 1, Block D: Larry Kudlow, CNBC senior advisor; & Cumulus Media radio; in re: today, ISM (Institute of Supply Managers) report came in above 57 – beat all expectations; even the mfrg number, 52, is not inflationary.   . . .  Some iffy profits numbers; that's temporary.  We are growing at 2, 2.5%; but we shd be growing at 4% - policy issues around taxes and regulations.  Bz investment spending component was down big, as were bz structures. The closing-down of a lot of fracking wells, with a small number of layoffs.  Short-term stuff comes first and is bad; the good stuff comes later.  There's not a lot of shopping during the worst blizzard in a hundred years; let's see April and May shopping figures. Real, inflation-adjusted incomes are growing at better than 3%.  We're still $2 trillion below the baseline, and maybe 8 to 10 million jobs short. 
Hour Two
Tuesday  5 May 2015  / Hour 2, Block A: Stephen F. Cohen, NYU & Princeton professor Emeritus; author: Soviet Fates and Lost Alternatives: From Stalinism to the New Cold War, & The Victims Return: Survivors of the Gulag after Stalin; in re: . . . Breedlove. Minsk II is supposed to lead to negotiations between Kiev and Donbass. The Italian PM reproaches Kiev and Poroshenko are not living up to negotiating a larger degree of home rule - states's rights, in effect. Has not been implemented because Kiev has gone another direction. Prof Alex Motyl, now at Rutgers, has had an idea for months: Kiev should let Donbass go. Recently added that Donbass is dead in the water economically and politically; an albatross for Moscow.  However, intl law and Washington and the EU all disfavor this in principle. Kiev has cruelly cut off all banking, pensions, payments and humanitarian relief from Donbass.   Novarossiya army routinely defeats Kiev army – ergo, not quite dead yet. Clearly supplied and trained by Russia, although there are few if any Russian soldiers.  Donbass political authorities are trying to repair an area that was bombarded by Kiev. What Motyl is saying makes no political, economic or military sense.
 
http://foreignpolicy.com/2015/05/04/out-of-kievs-hands/  ;  http://www.wsj.com/articles/top-nato-general-warns-on-russias-plans-in-ukraine-1430433408  
 
RT's Paula Slier leaves Ukraine following call for her arrest, death threats   RT correspondent Paula Slier, who covered the fire near the Chernobyl nuclear station, has . . .  ;  Forget Tanks. Russia's Ruble Is Conquering Eastern Ukraine   ;  Great Patriotic War  Victory Parade, May  Moscow and other cities, what is celebrated, the Russian sacrifice against the Hitlerites, 1941-1945. http://news.yahoo.com/russias-armata-tank-makes-debut-parade-rehearsal-181843758.html
 
Headlines from the NYT from 1943 to 1944 illustrate how carefully the US followed the Russian struggle, how critical it was to the American and Allied war effort at the time . . .  ; Moscow Victory Parade of 1945 - Wikipedia, the free ...  The Moscow Victory Parade of 1945 (Russian: Парад Победы, transliteration: Parad Pobedy ) was a victory parade held by the Soviet army (with a small squad from the ..
Tuesday  5 May 2015  / Hour 2, Block B: Stephen F. Cohen, NYU & Princeton professor Emeritus; in re:  My cousins fought in WWII; otherwise, I had no connection to Russia while growing up in Kentucky. I was worried when my students at Princeton and now NYU knew so little about the war. Fair to say that America won the war in the Pacific while the Russians won the war in Europe. In June 1941, catastrophe.   . . .  The Eastern Front: Soviets fought all alone It was three years before the US entered the war.   July 43; the greatest tank battle in history in Kursk.  From ht border of the USSR, Soviets fought to Germany's eastern border with almost no help. On the way, liberated camps, including Maidenek and Auschwitz.  Eighty per cent of all German casualties were on the Eastern Front. Of 13.5 million, 10 million on the Eastern Front.   At the time of Normandy, hundreds of German divisions were fighting in the east, so the Americans fought only 11 divisions ("I say 'only' advisedly.").  US lend-lease amounted to up to 6% of Soviet supplies, was highly important. 
Tuesday  5 May 2015  / Hour 2, Block C:  Stephen F. Cohen, NYU & Princeton professor Emeritus; in re: May 9 victory parade.  Hitlerites invaded the Soviet Union in June 1941. We'll see a lot of eqpt, some even from the original parade in 1945.  Also a new tank that he Russians are very keen on.  What’s missing is a tribute by other world leaders.  A direct result of the Ukraine crisis.  Generally conceded that this will be the last great round-up of living veterans. For he last month or so they’ve been all over Russian TV.  Traditionally, after the parade they go to a square and drink and celebrate.  We think that 27 million Russians died in the Great Patriotic War, WWII – 10% of the population; less than a half-per cent of Americans died in WWII.  At least 60% of every soviet family lost.  When the Germans came in 1941 and an there was emergency call-up, called 18-year-old boys Of every 100 of these, only three came home.  This mean that millions of Soviet women never married, called "Ivan's widows."  Seventy years later, three million Soviets still listed as missing.  US: 74,000 lost from WII.  About 70% were ethnic Russians.  This is the only truly secular sacred day in Russia; The American snub on the seventieth anniversary is a grave mistake, will not be forgiven for a long, long time.  After the war, . . .   Sebastopol.   Demographically and socially, the effect of the war went on and on. Politically, no matter how much citizens may have disliked the govt, they agreed on one point: you cannot have too much national security, Never again would the SUSSR expose itself to even a theoretical attack.  This was rendered obsolete with the advent of missiles.  Expanding NATO reminds Russians of secure borders; Americans in Kiev remind people of Germans in Kiev.  Only slight analogy was Pearl Harbor, but by the 1990s that was gone.  In Kentucky, we always celebrated VE Day on May 8 – but that’s gone. It's no longer part of our political memorial culture.
Tuesday  5 May 2015  / Hour 2, Block D: : Stephen F. Cohen, NYU & Princeton professor Emeritus; in re:  a Washington discussion of "spoiling the seventieth anniversary for Putin" – meaning also for Russia. Clinton went to the fiftieth; G W Bush went to the sixtieth.  Two events in Moscow: the Saturday parade is the big event, incl a retro-parade. I 1945, a special ritual: flags taken from Germans were thrown in front of Stalin on 9 May 1945 – will do this again.  Also new T-14 tank named Armata.
Hour Three
Tuesday  5 May 2015  / Hour 3, Block A:   Salena Zito, Pittsburgh Tribune-Review & Pirates fan, in re: Click here for link  If she becomes president, Carly Fiorina said, one of the first things she'd approach Congress about is undoing complex regulations that burden businesses. Fiorina, 60, a Republican businesswoman from Mason Neck, Va., announced her candidacy for the White House on Monday, saying she would try to reform the nation's tax structure so “the small and the powerless have the same opportunities” to achieve. “We have a structural problem that we have to fix over time, but the first set of things that has to be done is to radically simplify the tax code and our regulatory structure,” she told the Tribune-Review
 Tuesday  5 May 2015  / Hour 3, Block B:  John Bolton, AEI, in re:  Broader proliferation concerns should have caused wider inquiries earlier, but China’s ominous new estimates now require it. No Iran deal is acceptable until the North Korean connection is fully exposed and understood. read this article online
Tuesday  5 May 2015  / Hour 3, Block C:   Robert Zimmerman, behindtheblack.com, in re: Five things to know about the Dragon launchpad abort test  The competition heats up: In anticipation of its Wednesday, May 6, launchpad abort test of its Dragon capsule, SpaceX has put out a press release providing an overview of the test and what will happen.  The launch window opens at 7 am (Eastern), but don’t be surprised if it doesn’t happen then. They have a very long launch window, and could do it almost anytime during the day.
Tuesday  5 May 2015  / Hour 3, Block D: Bill McGurn, WSJ editorial, in re: Baltimore Is Not about Race  Government-induced dependency is the problem—and it’s one with a long history.
Hour Four
Tuesday  5 May 2015  / Hour 4, Block A:  John Nicolson, Scottish National Party, in re: According to the Guardian’s latest projection of polls, the Tories are on course to win 276 seats, Labour 267, the SNP 55, the Lib Dems 27, the DUP nine, Ukip three and the Greens to retain their one seat. Both Cameron and Miliband would need the votes of other parties to command the confidence of the House of Commons, and the arithmetic favours Labour. The sum of the “anti-Tory” bloc – those parties that have said they would vote a Tory government down – would add up to 329 seats: a majority. The possible sources of support for a Cameron-led government would add up to 315. Senior Labour figures have questioned Miliband’s hardline position. Henry McLeish, a former first minister of Scotland, said the Labour leader could not deny himself the chance of being prime minster by refusing to talk to the SNP.
McLeish told BBC Radio 4’s Today programme: “I can’t bind Ed to anything but, look, you know well enough that the pragmatic political side will say: ‘I’m going for a majority, all this talk of speaking to anyone is out of the question.’ “On the other hand, the politics of reality say I would rather see Ed Miliband in No 10, no matter the conditions. But certainly that’s the big alternative to David Cameron. “At the end of the day, Ed is not going to exclude himself from being prime minister by not talking to anyone.”
http://www.washingtonpost.com/politics/conservative-partys-fortune-is-cautionary-tale-for-gop/2015/05/02/eb64d04c-f0de-11e4-8050-839e9234b303_story.html?hpid=z5  Polls show that more voters trust the Conservatives over Labor on the economy generally but don’t think the Tories are on their side. Peter Kellner, president of the polling firm YouGov, said of the Conservatives: “They have not shifted their brand from an out-of-touch party of the rich. The Tories have to persuade people they are determined to make the lives of ordinary people better . . . not unlike the Republicans.
http://www.theguardian.com/politics/2015/may/02/observer-opinium-poll-el...http://www.theguardian.com/politics/2015/may/02/nicola-sturgeon-ed-miliband-tactical-error-ruling-out-coalition
Tuesday  5 May 2015  / Hour 4, Block B: John Nicolson, Scottish National Party (2 of 4)
Tuesday  5 May 2015  / Hour 4, Block C: John Nicolson, Scottish National Party (3 of 4)
Tuesday  5 May 2015  / Hour 4, Block D: John Nicolson, Scottish National Party (4 of 4)
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