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The Taylor Rule Is Wrong

Posted on Apr. 04, 11 | 06:26 PM by David Keating | Topic: Other
Brian Wesbury and Robert Stein have another great report out today on the danger behind the Fed's monetary policy and the threat of inflation.


The Fed, even though it won’t say it publicly, is putting a great deal of stock in the “Taylor Rule.”  This rule, created by John Taylor at Stanford, says a “neutral” federal funds rate can be calculated by a formula that considers the divergence of the real GDP growth rate and inflation from certain targets (click here for a general description of the Taylor Rule, and click here for a history of the Taylor Rule).

In recent years, this model (depending on which inflation measure is used) has signaled the need for a negative federal funds rate. At the worst of the crisis the Taylor Rule said rates should have been negative 5% or 6%. And some versions of the model signal the need for negative rates right now. This has been the impetus behind Quantitative Easing (QE).  If interest rates should be negative, but clearly can’t be so, then some other form of easing is necessary, right?

The problem with this is that the Taylor Rule can be, and in our opinion has been, wrong.

In 1993, at virtually the same time John Taylor was building his rule, Brian Wesbury discovered that using a simple two-year annualized rate of growth of nominal GDP provided a robust target for the federal funds rate. This model explained the inflation of the 1970s and the disinflation of the 1980s and 1990s. If the Fed holds rates below nominal GDP it is too loose. If it holds rates above nominal GDP it is too tight.

Back in 2004, this nominal GDP model showed that Alan Greenspan’s policy of 1% interest rates was inappropriate. The model said interest rates should have never fallen below 4% or so. No wonder there was overinvestment in housing. Interest rates were misleadingly low – they fooled people into thinking credit was cheaper than it really was.

There is also a good article in today's Wall Street Journal (Fed's Low Interest Rates Crack Retirees' Nest Eggs) about how low interest rates are hammering retirees whose incomes have dropped dramatically on their savings.  If Wesbury and Stein are right, these people will soon be hit with a second whammy, higher inflation, which will make their savings worth less.

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New House Seats -- 8 of 12 Go to Income Tax Free States

Posted on Dec. 22, 10 | 04:33 PM by David Keating | Topic: Other
Eight states get 12 new house seats at the next election, according to the new Census Bureau figures.

Incredibly, 8 of the 12 new seats go to states with no general income tax -- Florida, Texas, Nevada and Washington. 

In the Congress elected in 2012, 91 of the 435 seats will go to the 9 largely income tax free states.  That's up from 70 in 1980.

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"The Dangers of Quantitative Easing" by Senator-Elect Pat Toomey

Posted on Dec. 16, 10 | 11:06 AM by Andrew Roth | Topic: Other
Senator-elect Pat Toomey recently gave a speech outlining his concerns about the Federal Reserve's decision to massive ramp up the printing press (formally known as "quantatitive easing").  Excerpt:

[L]et me run through a couple of the arguments that we sometimes hear in favor of this massive quantitative easing and tell you why I’m skeptical about these arguments.

One is that this huge new supply of money will have the effect of devaluing the dollar and that will make our exports more competitive so we’ll have an export surge and corresponding economic growth. I am very skeptical about that scenario. I think QE2 might very well lead to a devaluation of the dollar, but it seems to me that there is not a strong historical correlation between a declining currency and a surge in exports, and if it were to occur, it would probably be temporary. Think about it: Obviously, if we diminish the value of the dollar, all the inputs are going to become more expensive and that tends to offset the advantage from the decline in the dollar’s exchange rate.

But maybe even more compelling as a reason why that’s not likely to be very effective is that everyone else can play that game too. We can devalue our currency and everyone else can do likewise. And then, we have a global round of competitive devaluations that gets us absolutely nowhere but can be enormously disruptive to the economy.
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The Pilgrims and Property Rights

Posted on Nov. 26, 10 | 09:19 AM by Andrew Roth | Topic: Other

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Four Democrats Switch to the GOP in Alabama

Posted on Nov. 23, 10 | 09:23 AM by Andrew Roth | Topic: Other
Interesting news from the Montgomery Advertiser:

The four Democrats in the Alabama House of Representatives who switched parties Monday, give Republicans the necessary majorities in both chambers of the Legislature to vote as a bloc to bring up their agenda or to shut down delays from Democrats.

Alan Boothe of Troy, Mike Millican of Hamilton, Lesley Vance of Phenix City, and Steve Hurst of Munford announced their switch, which was reported by the Montgomery Advertiser on Friday.

The shift brings the number of Republicans in the House to 66, compared to 39 Democrats. About 20 Republicans, including U.S. Rep. Mike Rogers and the likely choice for the next speaker of the House, Rep. Mike Hubbard of Auburn, were at the announcement.
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CFG Power Ranking Update

Posted on Nov. 15, 10 | 04:06 PM by Andrew Roth | Topic: Other
I've made the following updates to the Club's Power Ranking:

DE-Sen: Removed Sen. Edward Kaufman and added Sen. Chris Coons.

WV-Sen: Removed Carte Goodwin and added Sen. Joe Manchin.
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Interesting News Items

Posted on Nov. 01, 10 | 10:30 AM by Andrew Roth | Topic: Other

The Club's Office Pumpkin

Posted on Oct. 29, 10 | 10:07 AM by Andrew Roth | Topic: Other
Designed by Stacy French, Adam Rozansky, and Alyssa Bonk:

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A Massive Facelift for Eastern Germany

Posted on Oct. 21, 10 | 08:20 AM by Andrew Roth | Topic: Other
Der Spiegel has an online slideshow of before and after pictures of when the Berlin Wall came down in Germany.  If you want to see the stark differences between communism and capitalism, this is it.

HT: Within the Crainium
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Quote of the Day

Posted on Oct. 20, 10 | 10:05 AM by Andrew Roth | Topic: Other
Former President George W. Bush gave a speech last night in Tyler, Texas, and had the following to say.  Read the entire's worth it.

“I believe this country is engaged in an ideological struggle of a kind we have never seen before."
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