Author: James Bailey

Is the Fed’s Inflation Target Really 2%?

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The Fed has had an official inflation target of 2% since 2012, a commitment they reaffirmed just last month after their policy review:

The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory maximum employment and price stability mandates.

But since 2020, they haven’t been acting like it. Lets look at their preferred measure of inflation, the annual change in the PCE price index:

The last time annual inflation was at or below 2.0% was February 2021. The Fed just cut rates despite inflation being at 2.6%. If you didn’t know about their 2% target and were trying to infer their target based solely on their actions, what would you guess their target is?

Considering the post-Covid period, I see their actions as being more consistent with a 3% target than a 2% target. They stopped raising rates once inflation got below 3.4%, and started cutting them again once inflation got below 2.4%. The Fed’s own projections show more rate cuts coming despite the fact that they don’t expect inflation to get back to 2.0% until 2028! Bloomberg’s Anna Wong does the math and infers their target is 2.8%:

Perhaps the Fed’s target should be higher than 2%, but if they have a higher target, they should make it explicit so as not to undermine their credibility. Or at least make explicit that their target is loose and they’d rather miss high than low, if that is in fact the case. This is what Greg Mankiw would prefer:

I feel strongly that a target of 2 percent is superior to a target of 2.0 percent….. It would be better if central bankers admitted to the public how imprecise their ability to control inflation is. They should not be concerned if the inflation rate falls to 1.6. That comfortably rounds up to 2. And they should be ready to declare victory in fighting inflation when the inflation rate gets back to 2.5. As the adage goes, that is good enough for government work. Maybe the Fed should even ditch a specific numerical target for inflation and instead offer a range, as some other central banks do. The Fed could say, for example, that it wants to keep the inflation rate between 1 and 3. Doing so would admit that the Fed governors are notquite as godlike as they sometimes feign.

The Fed seems to have taken Mankiw’s approach to heart, except with a preferred range of 2.0-3.5%. I take Mankiw’s point about not being able to fine-tune everything, but given the bigger picture I think the Fed should if anything err on the low side of 2.0%. The Federal deficit is in the trillions and rising, inflation has been above target since 2021, and consumers never got over the Covid-era increase in the price level:

Source: Michigan Consumer Survey

The Fed let inflation stay mostly below 2% during the 2010s, to the detriment of the labor market. They updated their policy framework in 2020 to allow for “Flexible Average Inflation Targeting”, where they would let inflation stay above 2% for a while to make up for the years of below 2% inflation. This is part of why they let inflation get so out of hand in 2022. This made up for the 2010s and then some- our price level is now 3-4% higher than it would be if we’d had 2.0% inflation each year since 2007. But the sudden big burst of inflation in 2022 led the Fed to abandon this flexible targeting idea in the 2025 framework. The lack of “make up” policy latest framework means that they don’t see themselves as needing to do anything to repair their 2022 mistake- “just don’t do it again”.

We’re certainly being stuck with permanently higher prices as a result, and I worry we will be stuck with higher inflation too.

Don’t Cut Rates

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The Federal Reserve will probably cut rates next week:

I can’t advise them on the complex politics of this, but based on the economics I think cutting would be a mistake. I see one good reason they want to cut: hiring is slow and apparently has been for a year. But that could be driven by falling labor supply rather than falling demand, and most other indicators suggest holding rates steady or even raising them.

Most importantly, inflation is currently well above their 2% target, 2.9% over the past year and a higher pace than that in August. Inflation expectations remain somewhat elevated. Real GDP growth was strong in Q2 and looks set to be strong in Q3 too, and NGDP growth is still well above trend.. The Conference Board’s measure of consumer confidence looks bad, but Michigan’s looks fine.

Financial conditions are loose, with stocks at all time highs and credit spreads low. Its only September and we’ve already seen more Initial Public Offerings than in any year since 2021 (when the last big bout of inflation kicked off):

Source: https://stockanalysis.com/ipos/statistics/

Crypto prices are back near all time highs and crypto is becoming more integrated into public stocks through bitcoin treasury companies and IPOs from Gemini and Figure.

The Taylor Rule provides a way of putting all this together into a concrete suggestion for interest rates. Some versions of the rule say rates are about on target, while others including my preferred Bernanke version suggest they should be closer to 6%. To me this is what the debate should be- do we keep rates steady or raise them? I see good arguments each way, but the case for a cut seems very weak.

I look forward to finding out in a year or two whether I or the FOMC is the crazy one here.

* The Usual Disclaimer, hopefully extra obvious in this case: These views are mine and I’m not speaking for any part of the Federal Reserve System.

$1 Million or I Quit: CTE Deaths in Football and Hockey

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Former teammates of athletes who died of CTE would require $6 million to offset this disamenity and $1 million to be indifferent between exiting and staying in the profession.

So concludes a paper by Josh Martin. I thought this paper would be about a small group, since CTE deaths mostly happen among long-retired players with few or no former teammates still playing. But it turns out there were a fair number of early deaths, and each player had many teammates who can be affected, totaling 23% of NHL players and 14% of NFL players:

But teams mostly won’t pay worried players enough extra to stay, especially in hockey. So many of them retire early:

Athletes who were teammates with a former teammate who died with CTE for three or more years and played for a team with them at least two years before their death are 7.22 percentage points more likely to retire than characteristically similar non-treated players in the same years. Relative to the pre-treatment mean, this represents a 69% increase.

People still respond to incentives though, and if you do pay them enough they mostly take the risk and stay:

The remaining players will take measures to protect themselves, like skipping games to recover from concussions:

Michael previously pointed out here that these concerns matter more for certain positions, like running backs:

If you want millionaires to show up every week to willingly endure the equivalent of a half-dozen car accidents, you’re going to have to pay them.

This all makes for a good illustration of the theory of compensating differentials, which is sometimes surprisingly hard to observe in the labor market. But sports tend to have the sort of data we can only dream of elsewhere. Which other workers have millions of people observing, measuring, and debating their on-the-job productivity and performance?

This summer I was one of thousands of people crowding into Foxborough just to watch them practice:

The NFL season kicks off today, and I say the players deserve the millions they are about to earn.

You Read It Here First

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The subjects of two of our posts from 2023 are suddenly big stories.

First, here’s how I summed up New Orleans’ recovery from hurricane Katrina then:

Large institutions (university medical centers, the VA, the airport, museums, major hotels) have been driving this phase of the recovery. The neighborhoods are also recovering, but more slowly, particularly small business. Population is still well below 2005 levels. I generally think inequality has been overrated in national discussions of the last 15 years relative to concerns about poverty and overall prosperity, but even to me New Orleans is a strikingly unequal city; there’s so much wealth alongside so many people seeming to get very little benefit from it. The most persistent problems are the ones that remain from before Katrina: the roads, the schools, and the crime; taken together, the dysfunctional public sector.

The New York Times had a similar take yesterday:

Today, New Orleans is smaller, poorer and more unequal than before the storm. It hasn’t rebuilt a durable middle class, and lacks basic services and a major economic engine outside of its storied tourism industry…. New Orleans now ranks as the most income-unequal major city in America…. In areas that attracted investment — the French Quarter, the Bywater and the shiny biomedical corridor — there are few outward signs of the hurricane’s impact. But travel to places like Pontchartrain Park, Milneburg and New Orleans East that were once home to a vibrant Black middle class, and there are abandoned homes and broken streets — entire communities that never regained their pre-Katrina luster…. Meanwhile, basic city functions remain unreliable.

I wrote in 2023 about a then-new Philadelphia Fed working paper claiming that mortgage fraud is widespread:

The fraud is that investors are buying properties to flip or rent out, but claim they are buying them to live there in order to get cheaper mortgages…. One third of all investors is a lot of fraud!… such widespread fraud is concerning, and I hope lenders (especially the subsidized GSEs) find a way to crack down on it…. This mortgage fraud paper seems like a bombshell to me and I’m surprised it seems to have received no media attention; journalists take note. For everyone else, I suppose you read obscure econ blogs precisely to find out about the things that haven’t yet made the papers.

Well, that paper has now got its fair share of attention from the media and the GSEs. Bill Pulte, director of the Federal Housing Finance Agency and chairman of Fannie Mae and Freddie Mac, has been going after Biden-appointed Federal Reserve Governor Lisa Cook over allegations that she mis-stated her primary residence on a mortgage application:

Pulte has written many dozens of tweets about this, at least one of which cited the Philly Fed paper:

Now President Trump is trying to fire Cook. Federal Reserve Governors can only be fired “for cause” and none ever have been, but Trump is using this alleged mortgage fraud to try to make Cook the first.

The Trump administration seems to have made the same realization as Xi Jinping did back in 2012– that when corruption is sufficiently widespread, some of your political opponents have likely engaged in it and so can be legally targeted in an anti-corruption crackdown (while corruption by your friends is overlooked).

I’m one of a few people hoping for the Fed to be run the most competent technocrats with a minimum of political interference:

But I’m not expecting it.

Remember, you read it here first.

The Little Book of Active Investing

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Wiley publishes a series of short books on investing called “Little Books, Big Profits“.

I previously reviewed Vanguard founder John Bogle’s entry in this series, the Little Book of Common Sense Investing:

I can sum it up at much less than book length: the best investment advice for almost everyone is to buy and hold a diversified, low-fee fund that tracks an index like the S&P 500.

You could call Bogle’s book the Little Book of Passive Investing; but most of the rest of the series could be the Little Books of Active Investing. That is certainly the case for Joel Greenblatt’s entry, The Little Book that Beats the Market (or its 2010 update, The Little Book that Still Beats the Market).

Greenblatt offers his own twist on value investing that emphasizes just two value metrics- earnings yield (basically P/E) and return on capital (return on assets). The idea is to blend them, finding the cheapest of the high-quality companies. The specific formula is to pick stocks with a return on assets of at least 25%, then select the ~30 stocks with the lowest P/E ratio among those (excluding utilities, financials, and foreign stocks), then hold them for a year before repeating the process. He shows that this idea performed very well from 1988 to 2010.

How has it done since? He still maintains the website, https://www.magicformulainvesting.com, that gives updated stock screens to implement his formula, which is nice. But the site doesn’t offer updated performance data, and his company (Gotham Capital) offers no ETF to implement the book’s strategy for you despite offering 3 other ETFs, which suggests that Greenblatt has lost confidence in the strategy. Here are the top current top stocks according to his site (using the default minimum market cap):

Perhaps this is worthwhile as an initial screen, but I wouldn’t simply buy these stocks even if you trust Greenblatt’s book. When I started looking them up, I found the very first two stocks I checked had negative GAAP earnings over the past year, meaning Greenblatt’s formula wouldn’t be picking them if it used correct data. The site does at least have a good disclaimer:

“Magic Formula” is a term used to describe the investment strategy explained in The Little Book That Beats the Market. There is nothing “magical” about the formula, and the use of the formula does not guarantee performance or investment success.

Greenblatt’s Little Book is a quick and easy way to learn a bit about value investing, but I think Bogle’s Little Book has the better advice.

Why I Started Grading Attendance

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I’ve taught college classes since 2010, but I never graded attendance directly until this year. I thought that students are adults who can make their own choices about where to spend their time, and if they could do well on my tests and assignments without spending much time in class, more power to them.

But I got tired of seeing students miss a lot of class, then fail by getting poor grades on the tests and assignments, or scramble for the last few weeks to avoid failing. Explaining the importance of attendance didn’t seem to help, so I finally turned to the economist’s solution- incentives. This Spring I tried grading attendance in one class, and this successful experiment plus the growth of AI mean I plan to grade attendance in all classes from now on.

The Benefits:

  • Get to know student’s names faster
  • Students feel rewarded for showing up
  • Students show up more, bringing more energy to the room
  • Students show up more, so they learn more and do better on other assignments
  • Physically showing up is one thing I can be sure the AI isn’t doing for them, it will be a while before humanoid robots are that good

The Costs That Turned Out Not to Be Big Deals

  • I thought students would dislike me policing their whereabouts and give me lower course evaluations (which is part of why I waited for tenure to try this). But my Spring evals were at least as high as usual, with none mentioning the attendance policy. When I asked students in a different class about this, most said they wished I would grade attendance if it meant less weight on exams.
  • I thought tracking attendance would be burdensome, but it turns out my main course software (Canvas) already has an attendance-tracking tool built in that lets you just click on names in a seating chart each day and enters grades automatically. It is certainly less burdensome than grading most assignments.

I still had some students disappear for a while due to personal issues; sometimes even the strongest grade incentives aren’t enough to get people to class. But overall I can’t believe I waited this long. I’m currently putting attendance as 10-15% of the course grade, but I dream about someday running a discussion-based class like a Liberty Fund seminar, doing a 100% attendance/participation grade, and not having to grade anything.

Parental Job Lock

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The Affordable Care Act was supposed to make it easier for American workers to switch jobs by making it easier to get health insurance from sources other than their current employer. Mostly it didn’t work out that way. But a new paper finds that one piece of the ACA actually made people less likely to switch jobs.

The ACA Dependent Coverage Mandate required family health insurance plans to cover young adults though age 26, when prior to the 2010 passage of the ACA many had to leave the family plan at age 18 or 19. I thought these newly covered young adults would be more likely to switch jobs or start businesses, but there turned out to be absolutely no effect on job switching, and no overall increase in businesses (though it did seem to increase the number of disabled young adults starting businesses, and other parts of the ACA increased business formation among older adults).

But while the Dependent Coverage mandate seems not to have reduced job lock for young adults, it increased job lock among their parents. That is the finding of a new paper in the Journal of Public Economics by Hannah Bae, Katherine Mackel, and Maggie Shi. Using a large dataset with exact months of age and coverage, MarketScan, allows them to estimate precise effects:

We find that dependents just to the right of the December 1985/January 1986 cutoff—those eligible for longer coverage—are more likely to enroll and remain covered for longer once the mandate is in effect. Dependent enrollment increases by 1.8 percentage points at the cutoff, an increase of 9.2 % over the enrollment rate for dependents born in December 1985. In addition, the enrollment duration increases by 9.7 days (14.6 %). Turning to their parents, we find that parental job retention likelihood increases by 1.0 percentage point (1.8 %) and job duration increases by 5.8 days (1.6 %) to the right of the cutoff. When scaled by the estimated share of dependents on end of year plans, our findings imply that 12 additional months of dependent coverage correspond to a 7.7 % increase in job retention likelihood and a 7.0 % increase in retention duration.

Source: Figure 2 of Bae, Mackel and Shi 2025

I believe in this parental job lock effect partly because of their data and econometric analysis, and partly through introspection. I plan to work for years after I have the money to retire myself in order to keep benefits for my kids, though personally I’m more interested in tuition remission than health insurance.

On top of working longer though, benefits like these enable employers to pay parents lower money wages. A 2022 Labour Economics paper from Seonghoon Kim and Kanghyock Koh found that the Dependent Coverage Mandate “reduced parents’ annual wages by about $2600 without significant reductions in the probability of employment and working hours.” But at least their kids are better off for it.

Is A Music Major Worth It?

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Our new paper concludes that the answer is a resounding “It Depends”.

It depends on your answer to the following questions:

  1. If you didn’t major in music, would you major in something else, or not finish college?
  2. How dead set are you on a career in music?
Source: Figure 1 of Bailey and Smith (2025)

We found that

  1. Music majors earn more than people who didn’t graduate from college, even if they don’t end up working as musicians
  2. Among musicians, music majors earn more than other majors
  3. But among non-musicians, other majors earn much more than music majors

So on average a music major means higher income if you would be a musician anyway, or if you wouldn’t have gone to college for another major, but lower income than if you majored in something else and worked outside of music. The exact amounts depend on what you control for; this gets complex but this table gives the basic averages before controls:

Source: Table 2 of Bailey and Smith (2025), showing wage plus business income for respondents to the 2018-2022 American Community Survey

For better or worse, a music major also means you are much more likely to be a musician- 113 times more likely, in fact (this is just the correlation, we’re not randomizing people into the major). Despite that incredible correlation, only 9.8% music majors report being professional musicians, and only 22.3% of working musicians were music majors.

Sean Smith had the idea for this paper and wrote the first draft in my Economics Senior Capstone class in 2024. After he graduated I joined the paper as a coauthor to get it ready for journals, and it was accepted at SN Social Sciences last week. We share the data and code for the paper here.

Continue reading →

Freedom for Freestanding Birth Centers

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Iowa recently joined the growing list of states where midwives or obstetricians can open a freestanding birth center without needing to convince a state board that it is economically necessary. The Des Moines Register provides an excellent summary:

A Des Moines midwife who sued the state for permission to open a new birthing center may have lost a battle in court, but ultimately, she has won the war.

Caitlin Hainley of the Des Moines Midwife Collective sought to open a standalone birthing center in Des Moines, essentially a single-family home repurposed with birthing tubs and other equipment needed to give birth in a comfortable, home-like environment.

To do so, the collective alleged in its 2023 lawsuit, would have required going through a lengthy, expensive regulatory process that would give already established maternity facilities, such as local hospitals, the chance to argue against granting what is known as a certificate of need for the new facility, essentially vetoing competition.

A federal district judge ruled in November that Iowa’s certificate-of-need law is constitutional, finding that legislators had a rational interest in protecting existing hospitals and health care providers.

But while losing the first round in court, the collective’s cause was winning support in a more important venue: the Iowa Capitol. Iowa legislators in their 2025 session passed a bill, which Gov. Kim Reynolds signed on May 1, removing birth centers from the definition of health facilities covered by the certificate-of-need law. The law will formally take effect July 1.

I’m honored to have played a small part in this as the expert witness in the lawsuit.

If you’d like to get involved in making sure birth options are available your state, a great place to start would be to attend the Zoom seminar Roadmap For Reform: Advancing Birth Freedom on July 23rd. It is hosted by the Pacific Legal Foundation, which represented the midwives pro-bono in the Iowa case.

There is strong momentum here with Connecticut, Kentucky, Michigan, Vermont, and West Virginia also recently repealing Certificate of Need requirements for birth centers, but a variety of other barriers remain. States often require freestanding birth centers to obtain a transfer agreement with a nearby hospital before opening to ensure that the hospital will take their emergency cases, even though hospitals are legally required to take all emergency cases. The problem is that hospitals provide both complementary services (emergency care) and substitute services (labor and delivery), and they often choose not to sign transfer agreements in order to prevent competition from a partial substitute. This whole area would benefit both from more academic study, as well as more investigation from antitrust enforcement.

But for today, congratulations to Caitlin Hainley and to Iowa on their victory.