by James W. Fox
Meeting attendance was slightly below last year, with 11,400 participants. There was little on development at the meetings. It was all financial crises, risk and uncertainty, and why things aren’t as simple as we thought.
San Diego, as expected, had blue skies and pleasant temperatures. Asians and women seemed even more evident than ever to me, the latter evident everywhere except the head table for the plenary sessions. There, women managed to occupy 3 or 4 of the 18 or so seats at the head table, even counting AEA President Claudia Goldin. Still, it was an improvement over plenary sessions in some recent years, where no women sometimes graced the head table. While Asians seemed more prominent, there was a decline of 6% in the incidence of the five most common names (all Asian) in the pre-registration. Last year, there was a 22% increase. For my druthers, there was an absence of big-concept stars this year. Too many macro theoreticians and too many central bankers, and too little big thinking.
My ex-USAID and related colleagues appeared to have boycotted the meetings, as I saw no one I recognized during the entire three days, other than the various eminences. Of those, only Angus Deaton knew me. (I finally found one friendly face at the airport on the way out.)
Next year’s meeting is in Philadelphia. Be there or be square.
1. The Presidential Address. “Paper Money”
This was given by Christopher Sims, also one of the featured Nobelists. I will do my best to summarize his presentation, but it all reminds me of the quote at the beginning of a chapter in Samuelson’s text: “Not one man in ten thousand understands the monetary question, and you meet him every day.”
Sims sought to explain the puzzle that the Fed and the European Central Bank have expanded the money supply, big time, but no inflation seems to have resulted. The bottom line seems to be this: ‘the effect of monetary policy depends on the fiscal reaction it stimulates; no fiscal stimulus, no impact on prices.’
This apparently draws on theoretical literature in recent years suggesting that monetary and fiscal policy have to be analyzed together: “the existence of the price level can’t be assessed unless fiscal policy behavior and government budgetary constraints are in the model.”
Clearly, the recent experience of expansive monetary policy with no impact on inflation is far different from what I was taught in graduate school many decades ago, but I leave it to others to explicate his paper, which will appear in the March AER.
2. The AEA/AFA Joint Luncheon: Janet Yellen, “Interconnectedness and Systemic Risks”
This was a big step down from Richard Thaler’s fascinating address last year, with its numerous demonstrations of how irrational we – including chief financial officers of major corporations — are. As Thaler explicated, even the most sophisticated tend to make overconfident and biased predictions (e.g., when stock prices are going up, they will keep going up; when they are falling, they will keep falling).
Instead, we had Janet Yellen, vice-chairman of the Fed and former head of the CEA, talking about a very central-bankish topic of interconnectedness and systemic risk. (Still, it is clear that central-bankish topics might have much larger effects on economic activity than one would expect from such a dry topic.)
Yellen started by describing what seemed to be the 2008 financial crisis. Instead, it was a description of what happened after the Panic of 1907. (My favorite picture of this is J.P. Morgan assembling the banking heavies in New York. According to his biographer, Morgan would periodically look in on the bankers to see if they were cobbling together a viable plan. Finding their efforts inadequate, he would retreat to his office to play solitaire for a while, before going back to check on progress by the bankers. Again, according to his biographer, Morgan thought playing solitaire was “the closest thing to being dead.” By early morning, Morgan had achieved his goal of avoiding a collapse of the U.S banking system.)
Eventually reacting to the Panic of 1907, Congress created the federal reserve system in 1913, along with the income tax. Trivia question: the Act created 12 regional reserve banks to be spread among the 38 states. One state was allocated two of the 12 federal reserve banks. Which was it?
Yellen outlined some of the financial “innovations” leading up to the 2008 crisis. Most notably, credit default swaps (CDSs) grew from $6 trillion in 2004 to $60 trillion in 2008, with regulators apparently unaware of the risks inherent in the interconnectedness of the CDS market. Everybody owed everybody else, and nobody knew if the institutions owing them money could pay. They knew something about their counterparty, but little about their counterparty’s counterparties.
Yellen saw considerable value in interconnectedness among financial institutions, offering risk-sharing and a more stable environment for long-term finance. She considered better information the key to reducing systemic risk. With more information, banks would be more likely to de-leverage less than they would in its absence.
The reform agenda includes a central clearing mechanism for derivatives, and higher margin requirements. Dodd-Frank provides for a central clearing mechanism, but only for standardized products, so a large part of the derivatives market will be more opaque to regulators and counterparties. Basel has proposed higher margin requirements for non-centrally cleared derivatives.
Overall, Dodd-Frank’s requirement for more information is a step forward, but – given global financial markets – it is not clear that regulators have enough information and analysis to prevent another AIG.
3. The Nobel Prize Luncheon honoring Thomas Sargent and Christopher Sims.
This was a love-fest between the two 2011 Nobel Laureates, both of whom got their Ph.D.s from Harvard in the same year, and were both colleagues in the U. Minnesota economics department for years. President-elect Goldin thought that having each describe the contribution of the other would be a good approach. Each extolled the modeling achievements of the other, which the Nobel Committee regarded as path-breaking in disentangling cause and effect in the macroeconomy. Each cited numerous articles written by the other on the intricacies of macro theorizing, none of which I have read, or would ever be likely to read. I continue to believe that Fritz Machlup, with a pencil and the back of an envelope, could make better judgments about the macroeconomy than the most learned model.
4. The Richard T. Ely Lecture
This was given by Edward Glaeser, he of the recent book on how great cities are for productivity and economic growth. His topic was “A Nation of Gamblers: Real Estate Bubbles and America’s Urban History.” He began by quoting Richard T. Ely identifying real estate as the best area for investment. He went on to describe 9 episodes of urban real-estate bubbles in the U.S. – including upstate New York, Alabama, Iowa, Chicago, New York City, and California. Each bubble was driven by land prices, combined with expectations of future population growth. In some cases, building skyscrapers ended the bubble; in others, expected population surges failed to materialize. (Expectations of residents of Los Angeles in 1988 were that housing prices would rise by 14.2% per year every year.) In yet other cases, rising interest rates bankrupted speculators.
His bottom line was that real-estate bubbles have been a constant feature of American life. Contradicting Reinhart and Rogoff, however, he thought that this time was different – it was national and not confined to a single geographic area. This was partly the result of very low interest rates after 2002, combined with sharp declines (or the complete disappearance) of down payments for urban property. Anyway, his history of bubbles will be interesting reading when the paper appears in the AER in the May 2013 issue.
Individual Sessions I Attended
1. “What Do Economists Think?”
This was a fascinating session. The first of two papers tried to identify whether economists were empirical scientists or ideologues. Overall, the evidence was convincing: economists are swayed more by evidence than by any prior expectations.
The basis for this claim comes from a survey of 6 leading economists at each of 7 universities. But someone seems to have dropped out, as only 41 academic economists participated.
So far, this panel has been asked to respond to 80 questions. In each case, they were asked to vote yes, no or uncertain. (The 80 questions, and the response of each member of the panel, are available at www.igmchicago.org.) There was unanimity (100% against) returning to a gold standard. (Obviously, Robert Mundell – see below – was not among the chosen few who voted.) Several commenters sought to identify clusters of ideological biases among sub-groups of the 41. The only robust finding was that women on the panel chose “uncertain” much more often than men. Where the literature was extensive, there was consensus. Where it was thin, women were more questioning. Paul Krugman, the final commenter, took issue with this non-ideological character, arguing that ideological preferences were very evident in one area – business-cycle macro. The impact of the fiscal stimulus falls along this divide. While this is a small piece of economics, he argued, it was a big part of what others wanted from economists.
The second paper dealt with differences between the views of these economic “experts” and those of average Americans. Unsurprisingly, there was a huge gap between average Americans and economists on free trade. This is considered the most non-intuitive idea that comes from studying economics – you have to have studied economics to get it.
More interesting was the question about a carbon tax vs. mileage standards. Economists were 93% in favor of a carbon tax, while only 23% of ordinary Americans were. When negative respondents were “primed” with a comment that 93% of economists favored the tax, positive responses by ordinary people crept up to 26%. So much for respect for economists as experts on such matters.
2. The Salvatore Session: International Policy Coordination
As usual, this session had an all-star lineup and was well-attended. The bottom line seemed to be that international policy coordination is one of those shibboleths of big thinkers that simply does not happen in practice. National interest by each of the “coordinators” trumps subsuming national concerns in favor of the collective interest.
Martin Feldstein led, noting that policy coordination among 17 countries in the Euro area was unlikely to ever lead to quick decisions. Greece was only an irritant to the Euro area, and about 40% of losses from Greek default would accrue to German banks. Italian debt is above 100% of GDP. Spain’s is lower, but rising fast. Angela Merkel has tried to address the issue by trying to get a political union – a true United States of Europe with a single monetary and fiscal authority. This has not happened, as recent fiscal commitments have been violated with impunity. Similarly, centralization of banking regulation has not happened. Altogether, little progress has been made in this direction. Action by each country has been unilateral, without coordination.
Part of the problem, according to Feldstein, was the “specious” argument by Jacques Delors that free trade among EU members meant there was a need for a common currency. He repeated his long-standing argument that the Euro was a bad idea because of Europe’s lack of fiscal unity and geographic mobility. He would like a devaluation of the Euro. But that would require coordination, which will not happen.
Robert Mundell took the unsurprising position, for him, that the gold standard was a vehicle for imposing policy coordination among trading partners. He noted that the U.S. adopted a monetary union in 1792. In the 1830’s, 10 U. S. states defaulted on their debts, though only two repudiated their debt entirely, while the federal government stood aside from such problems. Mundell worries that the U.S. government is likely to bail out California and Illinois in the current crisis – a terrible idea in his view.
His prescription is for the U.S. and the European Central Bank to agree on a common, long-term, exchange rate policy with a lower value for the Euro.
Ken Rogoff talked about international macro coordination with a debt overhang, fresh from a glowing JEL review of his book co-authored with Reinhart, This Time Is Different, about how each financial crisis over the centuries has not been different. He noted that, since 1990, emerging market country debt has fallen by half, while developed country debt quintupled. This has created a huge debt overhang. Looking at 26 episodes in 22 advanced countries, GDP growth fell from a long-term average of 3.5% to 2.3%, and it took an average of 23 years for such countries to get back to their average growth. He thought competitive devaluation might help. This would require international coordination, which remains elusive.
John Taylor argued that there was little value to international coordination in the 1980s, as compared to good policies at home. He thought the emerging markets had followed that path since, with good results. Starting in 2003, the United States started departing from rule-based monetary policies with interest rates that were too low, and later continued with Quantitative Easing. (I.e., they failed to follow the Taylor Rule.) There was spillover to other countries, whose policies also began to deviate from good practice. The U.S. policy error was amplified, according to a little model he presented. His solution was “monetary rebalancing,” which might require international policy coordination.
Jean-Claude Trichet started with an amusing, but possibly apocryphal, anecdote about an AEA meeting in San Diego in the early 1990’s. There was only one other person in the room when he presented his paper. After he finished, he started to leave the room. His one-member audience pleaded, “don’t go, I’m the next speaker.” (For me, this scenario is highly implausible, as I have never seen an AEA session without a substantial audience. If it was a session of one of the smaller ASSA organizations that also have sessions at the meetings, it is plausible. I have long since learned to not even look at non-AEA sessions, as they are unfailingly dreary.)
Trichet was much more upbeat on policy coordination in Europe. Europe, in his view, initially thought the 2008 crisis was mainly an American problem. They soon discovered that it wasn’t, but lacked the machinery to respond. (The U.S. government approved the TARP in 6 weeks, a speed inconceivable among the 17 Euro members, let along issues that had implications for the 27 members of the European Union. The result was a slow, and perhaps, insufficient, implementation of a rescue program.
For Trichet, the solution requires a move to closer unity in Europe, notably including emergency powers for the European Central Bank, as well as an EU takeover of the budgets of recalcitrant members.
3. Economic Development
This session – one of the few that deviated from macro issues, risk, real estate prices, finance, or health care—had several interesting papers.
The MCC in Armenia. Kenneth Fortson gave a paper on a $15 million component of a project by the U.S. Millennium Challenge Corporation (MCC), to train farmers to use water better, and to adopt higher-value crops in their plantings. Using a randomized sample, the authors concluded that the training was of no value. For water use, the evaluators found no economic reason for these farmers to conserve water, as it was costless to them. The reasons for unwillingness to shift to higher-value crops was less clear, but may have related to their perception of risk from something different.
[Plaudits to the MCC: alone among Washington-based development agencies, it has been willing to finance external evaluations of its activities that are released on its web page in unvarnished form. Having done evaluation work for USAID, the World Bank, the Inter-American Development Bank, and the OECD, I find this standard of accountability both laudatory and exceptional. If the MCC accomplishes nothing else, getting other donors to adopt its evaluation methodologies, would be a great service to the taxpayers who think they are paying to make poor people less poor, or even for poor countries to grow. ]
De Soto vs. Yunus: Property Rights, Microfinance, and Development Policy. Having interviewed both the two principals, having helped finance one (de Soto) and having some sympathy for both approaches, I hoped for some enlightenment from this paper. The author argued that both identified the credit constraint for poor people as a serious problem. The offered different solutions, with de Soto favoring formal property rights and Yunus proposing a system for lending without formal collateral.
The author doubted that land ownership was the best means for assuring creditworthiness, but he also argued that the information from Yunus borrowers was also not free, as it required potential borrowers to incur the costs of separating honest from strategic borrowers in the community, and to know the extent to which social sanctions would enforce repayments.
Altogether, the author concluded that the jury is still out on the two approaches. Still, one might note that the Yunus model of group lending has been outpaced, even in Bangladesh, by microloans to individuals rather than groups. And microlending in Bangladesh has not yet been shown to have impacted the country’s economic growth. The de Soto model also has yet to prove its impact on the macroeconomy. (Joe Stiglitz was listed as a commenter for this paper, but didn’t show.)
Health, Height Shrinkage and Socio-Economic Status (SES) at Older Ages: Evidence from China. This paper used a new national survey in China to test whether early-life nutrition or later-life events were more important in health and height shrinkage at older ages in China. The conclusion was that later-life events were important as well as the person’s condition at age 5. Shrinkage in later life (more extensive in females) was correlated with SES, with shrinkage much more evident among lower-income adults.
Parasitic Diseases, IQ, and Economic Development. The authors argue that IQ is important for per-capita income, and that parasites are an important determinant of IQ. Iron and Iodine deficiencies are thought to be the main culprits. They suggest iodine deficiency can cut IQ by 15%, because the early brain needs 87% of the metabolic budget. In sum, parasites matter, affecting more than 1 billion people.
Aid Under Fire: Development Projects and Civil Conflict. This paper examined insurgent activity in communities in conflict areas in the Philippines targeted for community-level development projects. Projects were chosen based on incomes below the 25th percentile, and the researchers compared insurgent violence between communities just meeting the cutoff with that in other communities just above it. The conclusion was that there was a substantial uptick in violence in chosen communities between the announcement of the development aid and the beginning of implementation, but not in others. The authors concluded that the insurgents were acting strategically, attempting to dissuade the community from accepting the aid. This happened in a few communities. But once the projects started, violence fell back to the pre-announcement level. The researchers estimated that this uptick led to 500 additional deaths from military-insurgent fighting, mostly from insurgent-initiated attacks.
4. 100 Years of the Federal Reserve System
Robert Lucas led with a disorganized discussion of time-consistent monetary policy. (He kept flipping backwards and forwards with his set of Powerpoint slides, with accompanying unfocused commentary. He thought the repeal of Glass-Stiegel in 1999 was only a formality, as the financial system had already found ways to vitiate it. He blamed Regulation Q for the mischief that had rigidified financial markets until its disorderly repeal. He thought the Fed had reacted correctly to the 2008 crisis by providing massive liquidity while maintaining an inflation target of 2%. But overall, he called for clearer rules for the Fed and less discretion. The latter creates uncertainty.
Alan Blinder commented on Lucas, noting that Glass-Stiegel also created the FDIC and Regulation Q. He thought good regulation needed to be time-consistent, efficient, pro-competitive, and willing to address externalities. He agreed with Lucas that the Fed needs clear rules, but also needs discretion in emergencies. The 2008 near-collapse of the financial system was just such an emergency.
Ken Rogoff spoke of shifting mandates for the Fed, noting that the 1913 act made no mention of inflation or unemployment. He noted that inflation from 1775 to 1913 was 20%, while that from 1913 to 2012 was 3000%. But he called the period from 1950 to 1970 the era of fiscal dominance. He noted that inflation averaged only 1.5% between 1951 and 1967. He believes that the Fed needs more emphasis on financial stability, and more tools to achieve it. The ability to raise reserve requirements, he thought, was important to financial stability. He also argued that—unlike the Fed—the other federal financial agencies (OCC, FDIC, SEC) were seriously underfunded and understaffed, and too subject to political influence.
David Romer presented a joint paper with his wife Christina (lately of the Fed) on “The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter,” or in the PG-13 version “Fear of Impotence is Bad for Performance.” He argued that the 1930s, the 1970s and the past few years were three episodes where the Fed failed to appreciate the importance of monetary policy. Contractionary policy in 1936-37 was disastrous for the recovery from the Depression. In 1971-73 and 1978-79 under William Miller were similar periods when the Fed thought it could do little. In the earlier episode, Arthur Burns thought inflation was a structural problem not amenable to monetary policy. He urged Nixon to institute price and wage controls instead, with predictable consequences. Paul Volker knew better when he arrived in 1979, and showed that monetary policy really matters. In sum, the Romers thought that humility in a central banker is a fault.
The commenter, Charles Plosser of the Federal Reserve Bank of Philadelphia, differed. He thought central bankers needed more humility, not less. But he agreed that uncertainty had often produced inaction by the Fed in the past. Uncertainty always exists, he argued, but that should not produce inaction.
5. The Lucas Paradox; Why Capital Doesn’t Flow to Poor Countries
The Lucas Paradox (AER, 1990) is about economic theory’s expectation that capital should flow to poor countries. Such countries are capital-scarce, so the return to capital there should be high. But Lucas observed the opposite: capital flight from such countries and little willingness of investors to put money in.
Clearly, the Lucas Paradox is well past its prime. The knowledge about country conditions for investment has ballooned since then, with the country comparisons of the World Economic Forum, the World Bank’s Doing Business database, and the Heritage foundation providing a much more nuanced picture of the likelihood of successful investment. It was less a matter of whether the country was rich or poor, but whether the country institutions provided a market economy and the expectation that profits earned could be kept. Such databases often lacked a historical dimension, so the sustainability of good policies today was often overestimated. Argentina is the poster child for foreign investors lacking any knowledge that default and expropriation were the standard Argentine political solution to domestic economic woes.
But there is much more. Theory also expects that richer countries will save more than poor ones. China, with its savings rate of close to 50%, needed to find an outlet for its excess savings despite robust domestic investment, chose to lend to the richest country in the world to finance its savings deficit. And when Mongolia can float a ten-year bond at a lower interest rate than Italy, the paradox disappears. (Nevertheless, I went to this session, as ex ante, it seemed the best choice, as Lant Pritchett and Paul Collier were listed in the program as discussants.)
Public and Private Marginal Productivity of Capital (MPK). This paper used a WDI dataset for 50 countries to compare the MPK of private and public investment (already creating in my mind a garbage-in, garbage-out expectation. The researcher found that the government MPK was very low for poor countries, rising steadily as per capita income increased. In effect, low-income countries made poor investment decisions. The authors suggested that private MPK was about equal across countries.
This was one of those sessions where nobody gets introduced, nobody controls time allocations, etc., so I am uncertain of commenter’s identities, though Paul Collier was not among them. It was probably Pritchett, whom I have seen a number of times – but I suffer from a learning disability when it comes to recognizing faces. Anyway, the reviewer trashed the paper. The first issue is measurement of the productivity of government capital. For much of it, e.g., water and sanitation, user fees are a dubious way to measure the social returns to the investments. How does one measure the return on public investment in national defense or public safety? Moreover, some of the productivity of private investment comes from public investment in infrastructure. Nevertheless, it is clear that some public investment in poor countries has little payoff, with stories of “showcase” projects, highways to nowhere, etc., etc., staples of recollections of expatriates who have observed investment decisions in poor countries up close.
6. International Trade and Investment
Domestic Value Added in Chinese Exports. This research used firm-level data to identify the extent of domestic value added during 2000-2006 by Chinese exporters. China, like any country serious about exporting competitively, has duty-free entry for inputs that go into final goods for export. Chinese value added has risen over the period – from 35% to 49% in export processing zones, and from 58% to 67%in all export areas. The increase in domestic value added appears due to a steady movement of suppliers, often DFI, to provide intermediate products to Chinese final goods manufacturers, gradually replacing suppliers from other countries.
Skill Premium Trade Puzzles.
This paper seeks to explain why so much of international trade does not conform to the Heckscher-Ohlin model where factor intensity drives foreign trade, subject to transport cost effects. The model incorporates demand as well as supply. They use PurdueUniversity’s GTAP7 database on bilateral trade for 94 countries and 56 sectors of manufacturing and services. (Comment later.)
The essential point seems to be sound. As incomes rise in a poor country, consumers demand more skill-intensive imports from abroad. They are shifting from cheap products to more interesting ones. The basic lesson for poor countries is that the long-term returns to technology are higher than the returns to cheap labor, because foreign demand will be more income-elastic.
Editorial on the Accuracy of Economic Observations. I have not looked at the GTAP 7 database, but I recall comparing U.S.-U.K. trade in 1977 at the three digit level. For one-third of the products, there was close correspondence between U.S. exports and UK imports, with a 10% range. For another third, the correspondence was weaker, between half and double. For the final third, the trade data for individual commodities was beyond those ranges.
More recently, I was told by the appropriate Commerce Department official that U.S. exports to Mexico are underreported by perhaps 9%. And the U.S.-Canada Automotive Free Trade Agreement (1966) took a decade or more to come anywhere near close to reconciling the export and import statistics on automotive parts because trade, like that with Mexico, is border-to-border.
In this spirit, I call on the economics profession to issue a follow-up to Oskar Morgenstern’s “On the Accuracy of Economic Observations,” written in 1950. I read that book in graduate school, and it has been a permanent part of my tool kit. “Yes, the data says this, but should we believe the data? has been a constant professional concern for me.” In recent decades, I have seen various changes in official statistics (most notably, the shift in the measuring-stick for housing services in the CPI 25 years ago that had the effect of making the CPI 4-5 percentage points higher than it would have been with a consistent measure. ) Yet I have almost never found an economist who doubted the numbers in the database. And, given the unreliability of many numbers for many countries for many dimensions in the WDI, one can only marvel at the attraction of that database. Angus Deaton’s AEA presidential address demonstrated the folly of using such numbers to identify who is really poor in a world where no yardstick can really address the human condition in diverse cultures and diverse circumstances.
I still remember Morgenstern’s discussion of accounting valuations of companies. He had a graph showing a solid-lined rectangle, with a larger dotted-line rectangle. The solid rectangle showed the values of assets that could be ascertained with reasonable certainty. The dotted area was one of uncertainty. Looking at the time since Enron exploded, the explosions have gotten bigger and bigger. The solid box where auditors could assess value reasonably correctly has shrunk, and the box that is less-tangible has grown enormously – though it shrank a lot after the AGI balloon was punctured.
In sum, the economics profession needs a new Oskar Morgenstern to tell the profession what numbers they need to pay attention to, and which ones they should ignore. Given the massive misrepresentation of the Greek fiscal situation recently to the very sophisticated EU, there has never been a greater need for a new study of the accuracy of economic observations
Annex: Special Awards, etc.
The President-Elect is William Nordhaus
The John Bates Clark Award went to Amy Finkelstein for her work on health care and insurance markets. Until five years ago, no woman had won the Clark Medal. Since then, three of the last five winners, including also Susan Athey and Esther Duflo, have won. AmyAn article in the Fall 2012 JEP describes the reasons for the award.
Distinguished Fellows Awards went to: Truman Bewley, Marc Nerlove, Neil Wallace and Janet Yellen.
Awards for Best Papers in AEA Journals went to:
|Petia Topalova||AEJ: Applied Economics, 2 (4)||Factor Immobility and Regional Impacts of Trade Liberalization: Evidence on Poverty from India|
|Raj Chetty||AEJ: Economic Policy, 1 (2)||Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance|
|Michael Woodford||AEJ: Macroeconomics, 3 (1)||Simple Analytics of the Government Expenditure Multiplier|
|Glenn Ellison and Sara Fisher Ellison||AEJ: Microeconomics, 3 (1)||Strategy Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration|
 The Taylor Rule is that Fed interest rate policy should be guided by a formula comparing actual inflation with target inflation and actual GDP growth with potential GDP growth. Taylor’s rule would have mandated higher interest rates during the mid-2000’s.