Two tentative concerns about OpenPhil's Macroeconomic Stabilization Policy work

By Remmelt @ 2022-01-03T12:37 (+42)

Here’s something I’ve been pondering on-and-off for about two years now, but frankly know little about. I'm an amateur, and just found 3 hours to write up my speculations. Would love to get your vigorous input and corrections, particularly on economic considerations where you have some expertise as an academic or practician.

→ Update: see brief response by Open Philanthropy's staff.
 

1. Risk of macroeconomic model error when going out of the historical distribution

2. Historically, the Federal Reserve has failed to subsequently tighten monetary stimulus

PeterMcCluskey @ 2022-01-04T00:09 (+19)

You're mostly right. But I have some important caveats.

The Fed acted for several decades as if it was subject to political pressure to reduce inflation. Economists mostly agree that the optimal inflation rate is around 2%. Yet from 2008 to about 2019 the Fed acted as if that were an upper bound, not a target.

But that doesn't mean that we always need more political pressure for inflation. In the 1960s and 1970s, there was a fair amount of political pressure to increase monetary stimulus by whatever it took to reduce unemployment. That worked well when inflation was creeping up around 2 or 3%, but as it got higher it reduced economic stability without doing much for unemployment. So I don't want EAs to support unconditional increases in inflation. To the extent that we can do something valuable, it should be to focus more attention on achieving a goal such as 2% inflation or 4% NGDP growth.

I don't see signs that the pressure to keep inflation below 2% came from the rich. Rich people and companies mostly know how to do well in an inflationary environment. The pressure seems to be coming from fairly average voters who are focused on the prices of gas and meat, and from people who live on fixed pensions.

Economic theory doesn't lend much support to the idea that it's risky to have unusually large increases in the money supply. Most of the concern seems to come from people who assume the velocity of money is pretty stable. That assumption has often worked okay, but has been pretty far off in 2008 and 2020.

It's not clear why there would be much risk, as long as the Fed adjusts the money supply to maintain an inflation or NGDP target. You're correct to worry that the inflation of 2021 provides some reasons for concern about whether the Fed will do that. My impression is that the main problem was that the Fed committed in 2020 to a particular path of interest rates over the next few years, when its commitments ought to be focused on a target such as inflation or NGDP. This is an area where economists still have some important disagreements.

It's pretty clear that both unusually high and unusually low inflation cause important damage. Yet too many people worry about only one of these risks.

For more on this subject, read Sumner's book The Money Illusion (which I reviewed here).

remmelt @ 2022-01-04T04:26 (+1)

These caveats are helpful, thank you. I appreciate the elaboration on changing plans for interest rates and inflation by the Fed board and changing influences by non-high income employees and people with pension plans.

I was wondering about whether I had misinterpreted OpenPhil staff’s opinion being that rich people have been indirectly influencing the Fed towards a more hawkish stance (I recalled hearing something like this in another interview with Holden, but haven’t been able to find that interview back). Either way, OpenPhil’s analysis around this is probably much more ‘clustery’ and nuanced. I would agree with you though that high net-worth individuals who have most of their capital put into ownership stakes of companies that hold relatively little cash or bonds on their balance sheets and can flexibly hike up pricing of their products/services won’t be impacted much by rising inflation.

Edit:

Economic theory doesn't lend much support to the idea that it's risky to have unusually large increases in the money supply. Most of the concern seems to come from people who assume the velocity of money is pretty stable. That assumption has often worked okay, but has been pretty far off in 2008 and 2020.

Good nuance re: not assuming a constant velocity of money (how fast money passes hands from transaction to transaction). What you wrote doesn’t seem to refute the argument I made concerning model error in current macroeconomic theories.

As again a complete amateur, I don’t have any comment on what range of inflation to target or what the trade-offs are, except that all else equal a 2% inflation rate seems pretty benign.

Overall, your points makes me more uncertain about my understanding of what current stakeholder groups particularly can and tend to influence Fed monetary policy decisions, and how they are motivated to act. Will read your review.

remmelt @ 2022-01-12T18:26 (+1)

remmelt  ...I was wondering about whether I had misinterpreted OpenPhil staff’s opinion being that rich people have been indirectly influencing the Fed towards a more hawkish stance

 

Yes, at least what I wrote was too simplistic.  Just found a claim on advocacy they made in their 2014 write-up:

A number of people who we spoke with noted that most advocacy on monetary policy tends to come from people who are skeptical of the Federal Reserve and want to focus on limiting inflation or return to the gold standard

remmelt @ 2022-01-04T05:11 (+1)

Ah, and I assume NGDP means ‘nominal gross domestic product’. Why should the Fed use nominal GDP instead of real (inflation-adjusted) GDP as a measure for setting targets?

aogara @ 2022-01-05T03:42 (+6)

Very complicated question that I’m not at all qualified to speak on, but if you’re interested google Scott Sumner NGDP Targeting. Basically, rather than the current “dual mandate” of maintaining both low unemployment and a little inflation, targeting a fixed rate of NGDP growth would balance the mandate between unemployment and inflation. The idea became very popular in the blogosphere and in real economics literature in the aftermath of the 2008 crisis, where many believe the Fed was too slow to drop interest rates and should’ve been more concern about unemployment than inflation.

remmelt @ 2022-01-05T08:05 (+3)

Thanks, this is clarifying

Peter Favaloro @ 2022-01-24T21:14 (+9)

Thanks for this! I oversee the Macroeconomic Stabilization grant portfolio at Open Phil. We very much appreciate the thoughtful critique, and the reactions here. We don't do detailed reactions by default, but wanted to flag that we'd seen and appreciate you sharing. 


The risks you describe here are certainly worth considering, and we've tried to consider them whenever we make grants in this area. Historically, we didn't think they outweighed the benefits of more expansionary macro policy. But we've been reevaluating this issue area in light of the current macroeconomic conditions and policy landscape -- we might have more to say on that in the coming months.

remmelt @ 2022-01-25T12:21 (+1)

Hi Peter, thank you too for your brief and clear response on the stated concerns  and others' thoughtful comments.

Looking forward to reading any follow-up review you get to write on this subject later this year. 

lexande @ 2022-01-21T20:35 (+9)

It seems like this issue is basically moot now? Back in 2016-2018 when those OpenPhil and Karnofsky posts were written there was a pretty strong case that monetary policymakers overweighted the risks of inflation relative to the suffering and lost output caused by unemployment. Subsequently there was a political campaign to shift this (which OpenPhil played a part in). As a result, when the pandemic happened the monetary policy response was unprecedentedly accomodative. This was good and made the pandemic much less harmful than it would have been otherwise, at the cost of elevated but very far from catastrophic inflation this year (which seems well worth it given the likely alternative). And indeed Berger in that 80k interview brings the issue up primary as a past "big win", mission accomplished, and says it's unclear whether they will take much further action in this space.

remmelt @ 2022-01-22T11:29 (+7)

I think this is a somewhat reasonable argument: OpenPhil is no longer making any big grants in the US to increase monetary stimulus (or more indirect Fed ‘transparency’ or ‘diversity’ work), so why prioritise spending time to understand this issue even more deeply?

Having said that, the broad concerns I wrote about put in doubt whether OpenPhil’s grants there were a ‘big win’ in the first place, given

  1. that the US’ unprecedented monetary stimulus over the previous decades meant a higher chance of model error when using macroeconomic theories economists thought up in the past to make predictions ‘from outside the historical distribution’ (where acting on error-prone predictions puts the entire financial system at risk).
  2. how OpenPhil staff appear to have overlooked political dynamics that shape their and Federal Reserve board’s views and decisions (OpenPhil staff dismissing inflation concerns by conservative thinkers they don’t seem much in touch with; the Fed tending it seems to not tighten stimulus enough afterwards to curb debt-fuelled speculation if that may result in people blaming them for triggering a recession).

Frankly, the self-congratulatory stance that Holden Karnofsky in particular seemed to take on their 2016 Fed Up Campaign grant lacked the caution (that comes with recognising when you’re actually in uncharted territory) and the self-aware humility (that comes with being cognisant of the limitations and blindspots of your own ideologies, and of the social circle around you that reinforces those) that seems appropriate when technocratically deciding for everyone how the US financial system should be fine-tuned.

I wouldn’t want the lesson that up-and-coming OpenPhil analysts take away from the ‘big win’ Holden and Alexander contend they got out of this relatively small-sized grant that they must make more uncertain, high-leverage, broadly scoped policy grants like that in the future, but bigger! (try search “Effective Altruism is Self-Recommending” for some clarification why that seems an epistemologically eroding and systemically harmful cycle to get into)

Also, a nuance: Berger did mention that they’re exploring doing ‘a little bit more in that space’, particularly by pivoting to supporting policy work in Europe (though admitting they understand the policy landscape less well there). The two concerns I bring up above also seem to apply to OpenPhil lobbying for macroeconomic stabilisation in Europe, albeit to a lesser extent.

remmelt @ 2022-01-22T11:44 (+7)

As a result, when the pandemic happened the monetary policy response was unprecedentedly accomodative. This was good and made the pandemic much less harmful than it would have been otherwise, at the cost of elevated but very far from catastrophic inflation this year

These seem like plausible inferences to me! At least over the short-term, increasing stimulus further seems like it should have benefited people with low and unstable incomes in their material well-being and reduced social unrest that emerged from and got magnified by COVID restrictions.

This is a conclusion we can draw in hindsight (we couldn’t have reliably predicted at the time when a global pandemic would appear again). You can make a similar milder case though for the benefits of stimulus around the slow post-GFC economic recovery between 2016 and 2018.

In short, I think there’s a totally reasonable case to make that any extra monetary stimulus that OpenPhil’s grants enabled benefitted people over the short term (1-5 years). I’m worried about the longer-term repercussions of their approach.

aogara @ 2022-01-22T17:32 (+12)

What longer-term repercussions would you be worried about? I understand the general concern of unprecedented action within a system that’s not very well understood, but what specific harm could happen?

Monetary policy is usually framed as really only having two objectives, inflation and employment. Other impacts are surely present and important, such as recent acknowledgement given to climate change or income inequality as other strategic monetary policy priorities. But many economists I’ve seen dismiss those other goals, saying monetary policy has no direct effect on those goals and that inflation and employment are the real metrics worth tracking. Unemployment looks great right now, and while inflation is high right now, Tyler Cowen just posted evidence that markets expect stable ~2% inflation over the next five years. Are you concerned about inflation or something else?

Strongly agree with lexande above, the response to Covid was a perfect example of how we learned our lesson from 2008 and decided to deliver much more stimulus.

remmelt @ 2022-01-24T10:55 (+13)

This is a sharp question (hence the strong upvote). I appreciate this.

I’m an amateur here, so do take any more specific thoughts I have on this (that go beyond ‘this seems really uncertain/fuzzy and potentially systemically damaging’ and ‘let’s not get stuck in conflicts with people who wield differently insightful ideological views’) with a grain of salt.

Some concerns that come to mind:

  • fostering the expectation amongst institutions and companies that the US Fed will centrally take care of any economic threat or crisis whenever one appears disincentives locally responsible leaders from stockpiling needed money and materials to ensure their organisation weathers the storm and from designing regulations and programs to avert, prepare for and deal with outside shocks in more targeted and concretely verifiable ways.
  • long-run USD inflation (in twenty years or more)
  • loss of trust in the United States Dollar as a ‘world reserve currency’ with foreign governments shifting their funds away to some other currency or portfolio of currencies (this would be bad for US trade interests, but could be good from a cosmopolitan perspective if what replaces it is some common currency storage mechanism that doesn’t have first movers gain outsized wealth/decision power in bits and zeros and therefore indirectly disincentivise work by entrepreneurs and workers elsewhere).

I don’t feel satisfied by the above list. I think a reasonable counterargument is that those vaguely possible consequences don’t justify not extending monetary stimulus right now that could avert obvious harms experienced by citizens. I would be wary though of getting anchored on requiring specific claims here.

aogara @ 2022-01-24T19:21 (+6)

These all make sense to me, particularly #3 with the huge recent interest in crypto. Monetary policy seems like some strange dark art where we think we have more control over the world than we actually do, and we’re probably not seeing some of the most important unintended consequences of our actions. You have to do the best you can based on what you understand, so I mostly agree with the monetary policy regime, but wouldn’t be surprised if we look at things very differently in 50 or 100 years. (The history of the subject is really rather recent — the Federal Reserve was born in 1913, and Nixon only fully took us off the gold standard in 1971.)

A separate topic you might be interested in would be Modern Monetary Theory. It’s is widely derided by economists, mainly I think because it’s so closely tied to Democratic politics and advocating big budget increases. But as an academic theory I think it’s a really compelling new account of the function of money and the levers we have at our disposal to affect the economy. A lot of the MMT authors themselves are pretty polemical, I didn’t like Kelton’s Deficit Myth. Greg Mankiw’s introduction is pretty balanced IMO, check out the full thing if you want but here’s his conclusion:

“In the end, my study of MMT led me to find some common ground with its proponents without drawing all the radical inferences they do. I agree that the government can always print money to pay its bills. But that fact does not free the government from its intertemporal budget constraint. I agree that the economy normally operates with excess capacity, in the sense that the economy’s output often falls short of its optimum. But that conclusion does not mean that policymakers only rarely need to worry about inflationary pressures. I agree that, in a world of pervasive market power, government price setting might improve private price setting as a matter of economic theory. But that deduction does not imply that actual governments in actual economies can increase welfare by inserting themselves extensively in the price-setting process. Put simply, MMT contains some kernels of truth, but its most novel policy prescriptions do not follow cogently from its premises.”

https://www.nber.org/system/files/working_papers/w26650/w26650.pdf

remmelt @ 2022-01-25T12:30 (+7)

Monetary policy seems like some strange dark art where we think we have more control over the world than we actually do, and we’re probably not seeing some of the most important unintended consequences of our actions. You have to do the best you can based on what you understand, so I mostly agree with the monetary policy regime, but wouldn’t be surprised if we look at things very differently in 50 or 100 years. (The history of the subject is really rather recent — the Federal Reserve was born in 1913, and Nixon only fully took us off the gold standard in 1971.)

This resonates for me (it's interesting though how you and I still draw different conclusions on whether to build up the supply of monetary stimulus or not; seems like some underlying differences in how we each relate with the use of leaky abstractions like MMT in practice?). 

Thanks, I appreciate learning from you here. 

A separate topic you might be interested in would be Modern Monetary Theory.

I'll make time to read  this paper and arguments for MMT policy when/if OpenPhil writes up their updated review later this year. For now, got to focus on digging into other research and research programs.

aogara @ 2022-01-25T20:18 (+3)

Awesome yeah, this was a great discussion. Relevant to OpenPhil's grantmaking and it's great to have a venue for discussing thorny questions in a reasonable way. I probably trust the monetary establishment a bit more and see newer proposals as more predictable / within the historical distribution of what we've seen before. But I'm not an expert and definitely could change my views here. Really appreciate your perspective and would be happy to follow up later. 

remmelt @ 2022-01-25T23:10 (+3)

Glad this opened up a richer discussion :)

I probably trust the monetary establishment a bit more and see newer proposals as more predictable / within the historical distribution of what we've seen before.

Got it.

Happy to have a chat in February btw. Will try to read the paper you linked to before our call in that case: https://calendly.com/remmelt/30min/?month=2022-02&date=2022-02-01

remmelt @ 2022-01-24T11:37 (+3)

I guess Joseph Tainter’s historical work is also somewhat relevant – on past developing societies like ancient Rome becoming increasingly spread out, specialised and organisationally complex to the point where political leaders couldn’t centrally fund regulatory governance and maintenance of their society except by debasing the common currency of trade (noting that an analogy to the current US situation I think only holds if the Fed ‘printing money’ induces inflation of the US currency down the line). From this perspective, monetary stimulus could correspond with an implicit attempt at maintaining US organisational complexity at a level that is no longer tenable.

Roman Leventov @ 2024-01-25T05:39 (+1)

Another point, could be seen as generalisation of your first point: more money supply than optimal for the economy just makes the entire economy less efficient. It's entirely analogous to how an organism gets excessive fat and becomes inefficient (and incurs health risks) when over-fed (and I strongly suspect that this is deeper than just a superficial analogy, that there is a general system development law behind this).

More concretely:

  • Excessive bureaucratisation and creation of 'bullshit jobs', i.e., unproductive jobs whose main functions are in organisational politics and labor union relationships. BTW, these bullshit jobs will also mask deeper issues with employment: for example, participation rate (which is different from '100% - unemployment' though) is an important economic metric, but it seems to be misled (Goodhearted if you wish): what we are really interested in is productive participation rate.
    • Low productive participation rate is not only due to bullshit jobs, but also due to excessively many rentiers or early retirees created by too high money supply. Paradoxically, this leads to a decrease in the quality of life: many people have enough money to retire from productive jobs => shortage in real sector labour: doctors, public transport workers, street cleaners, canalisation maintenance workers, electricians, etc. => public services start to crumble, and wait times for non-public services (e.g., private doctors) increase, and the prices for both rise => lower quality of life even for those rentiers and retirees!
  • Creation of totally inefficient startups that burn money, don't have a path towards profitability, but still raise a lot of funds. It is possible to overshoot here in another direction, too, but the current situation when there are so many deeply unprofitable unicorns in late venture investment rounds and even long IPO-ed is unique.
    • Downstream effect of this unhealthy startup environment is https://en.wikipedia.org/wiki/Enshittification, which is at least partially caused or exacerbated by the monetary overhang. Too many startups are funded and are confident that they can raise money for a very long time => Price war and winner-take-all mentality => Quasi-monopolies and enshittification. We have seen this with Uber, and we are likely see it on a massive scale with AI startups, which are currently free or massively subsided, but later will come to eat our arm and leg. But note that I don't say that the over-supply of money is the only cause of this dynamic.
aogara @ 2022-03-24T23:59 (+3)

Check it out! Critique of OpenPhil's macroeconomic policy advocacy

Ramiro @ 2022-01-05T13:54 (+3)

I understand there are some good reasons to focus on the American Macroeconomic Stabilization (because US economy has direct effects all over the world), but sometimes I get under the impression that this debate neglects other economies, as the argument does not extrapolate well to developing countries (or even to EEUU).  This is curious, because they seem to be the ones that would benefit the most from stability.

Peter Wildeford @ 2022-01-04T02:39 (+3)

Worth noting that the current Fed chair, Jerome Powell has been much more dovish on inflation - much more so than his predecessors. While it is hard to draw lessons from a sample size of just a few years, it's been interesting to witness the effects so far, finding very low unemployment (3.6% in 2019) and not finding large inflation until 2021 after spending record amounts of money in economic stimulus.

remmelt @ 2022-01-04T04:15 (+1)

Noted. Amongst shorter-term factors/trends those two do seem particularly relevant. I’ve honestly not dug into Jerome Powell’s monetary policy stance.

Roman Leventov @ 2024-01-25T06:13 (+1)

2. Historically, the Federal Reserve has failed to subsequently tighten monetary stimulus I think a Keynesian idea that lies at the heart of Federal Reserve philosophy is that during economic recessions you offer monetary stimulus to support virtuous (re-)investment cycles, and during boom years you tighten market access to funds to prevent debt-fuelled excesses.

I would be really interested in reading somebody more qualified than me revising this point after the two years (or, this post more generally). It seems than right now, the economy and the financial system are closer to a third mode than they have been in decades (?): in 2024 in the US, we could see relatively low GDP growth and sustained relatively high interest rate if the Fed decides that lowering the rate prematurely could spike the inflation again.

However, this still pretty mild and benign in the US ,whereas the UK faces a real risk of downright stagflation, especially if the Labour party wins the next elections, which currently seems almost certain.

remmelt @ 2022-01-07T04:25 (+1)

Just listening to this Clearer Thinking podcast with Tyler Cowen (at 9:00 mark) https://clearerthinkingpodcast.com/episode/084

Let me transcribe what I’m hearing them say:

SPENCER GREENBERG: Lately, I’ve heard quite a bit about modern monetary theory. And I don’t know enough about it to kinda analyse it from an economics point of view but it does seem like some people are using it as a justification for massively increasing government spending. And so there seems to be at least a political element to it from the people who want to use the theory. So I’m wondering what your thoughts are on that theory.

TYLER COWEN: I don’t think modern monetary theory was coherently defined in terms of a model so I in turn could not coherently present it to you. It was a series of somewhat disassociated views with a largely political slant, the essence of which being you can inflate your way out of a lot of problems. There is not really a constraint on boosting aggregate demand. And the one specific claim that was made ‘well if inflation gets too high, you know the way out of that is to cut government spending’. Crout we’ve gotten into a world where inflation has clearly gotten too high and none of those people are calling for cutting government spending. So I would be negative on MMT. And even a lot of predominant economists on the left you know Paul Krugman, Larry Summers, Noah Smith looked at MMT and just couldn’t quite wrap their arms around what exactly what it was saying in terms of a coherent model. So I view it as kind of a marketing thing and a politics thing.

...I would say that the part of it that seemed to make sense to me was the claim that in many situations but not all you can monetize more of government debt than a lot of people had thought. And that has been true. It may not be true at this particular moment. But if you look at the last 30 years, it’s been true on average. And the MMT people have been right about that, but again I think they need to write it all out in terms of an understandable model. And I just think they’re not willing to do that’ because I don’t think the whole thing entirely makes sense.

remmelt @ 2022-01-07T04:34 (+1)

I deliberately didn’t dive into the dimensions of political movements and democratic conversation in this post, because it could distract the conversation away from the more substantial concerns I had towards broadly conflicting ideologies and group affiliations. But guess now is a good time.

Here are summarising notes I took of a conversation with a smart family member last Wednesday:

•	Political dynamics are actually really complex here. And rationalists have a tendency to think that they analysed it and know what is going on
◦	R: and OpenPhil doesn’t seem like they’re specialised/great at understanding political nuances
◦	... was there something else I wanted to add to writing here?
•	From my experience learning about economics, not one type of theory but a bunch of assorted ones and can use one for situation/problem (especially in hindsight as economists often tend to do)
•	also democrats tend to be more for stimulus, and republicans against
•	bad that EA is going into something that seems political (R: and about broad ideology)
◦	targeted like vitamin D policy seems more sensible

And here is a post I wrote on my concerns of EA field builders optimising for their views to be represented more by policy decision-makers.

I’m particularly concerned by that key OpenPhil staff decided to jump in late 2015 to boosting the Fed Up campaign while not seeming to more openly enter into dialogue with and clarify the views of other stakeholders around this complex debate.

I find their conclusions of the political landscape quite suspect in how simplifying they sound (while stating “As ever, we acknowledge that this is an unusually complex policy area, and we could be mistaken in our views.” for their grants write-up on the progressive Center for Popular Democracy campaign). The following sounds the least simplifying of their summary explanations but still seems quite off (in particular, in how it seems to write off concerns by well-informed conservative thinkers as ‘inflation aversion’):

We've come to the view that there is institutional bias in a particular direction. We believe that there is more inflation aversion than is consistent with a "most good for everyone" attitude.

I’m also concerned about the higher chance of getting carried away inadvertently by partisan arguments and of fuelling political conflicts – from entering into what seems to be like what Robin Hanson refers to as a ‘policy tug of war’.

From the arguments I’ve been able to read/hear from OpenPhil staff, I get the sense that their focus was centred rather narrowly on ‘tweaking’ the weighting of criteria used for monetary decisions by the Federal Reserve to be closer to optimised for the general good for everyone. In case that’s about right (do correct me), I can very much relate. And I think that way of thinking was insufficiently allocentric in covering a broader set of relevant perspectives for what they were getting into.

Well, there you have it.