A little closer to Italy. The fragmentation of the vote was the expected and actual result of yesterday's general election. Incumbent Partido Popular (PP - moderate right) won the most votes, but came far short of the majority it had obtained in 2011.
The main other party, Partido Socialista (PSOE - moderate left) might be able to form a government coalition with the new Podemos (far left), but they will still need the support of a motley crew of smaller parties in order to reach the 176-seat majority. Another possibility is a core coalition of PSOE with Ciudadanos (C's - center), plus somebody else. But that seems even less likely, as Ciudadanos promised during the campaign that they wouldn't join forces with either Podemos or nationalist parties. A grand coalition of PP and PSOE, à la Germany
, would be unpalatable for PSOE - and its demise as the leading party on the left.
After the first vote to form a government, which the incumbent prime minister will presumably lose, the parties have two months to form a government coalition before they must call fresh elections.
Any coalition will be uneasy and precarious. Partido Popular has made bitter enemies during its four years in government. It's been an acrimonious election campaign. The programs differ wildly across parties. Whatever government they form, I think significant advances on important legislation are unlikely over the next four years (labor market, changes to the Constitution, education, Catalonia's independence referendum).
Another important (and surprising to me) result was the decline of nationalist parties in Catalunya and Euskadi, and the rise, in those same regions, of the new left-wing party, Podemos. As a pro-referendum force, Podemos could actually do more for the independence cause than either the Catalan or Basque nationalists on their own. Yesterday's elections gave Podemos 69 seats, more than all the nationalist parties combined ever got in any general election. It's still doubtful, however, whether Podemos will be part of the new government. Moreover, those 69 seats won't belong to a single parliamentary group, as Podemos is itself an umbrella brand that includes a cluster of regional, left-wing parties with their own agendas.
Messy. Bumpy. And thoroughly entertaining.
Election results, town by town
Can you spot which two regions are different?
A recent poll by Chicago Booth
) asked a panel of economists in early December to agree or disagree with the following statement
The Fed should raise its target interest rate when it meets in mid-December.
The respondents (all of whom are "senior faculty at the most elite research universities in the United States") were largely in favor of a hike. Forty-eight percent either agreed or strongly agreed; and 19% disagreed. Nobody disagreed strongly.
Digging through previous questions to the same panel, I found a puzzling result from early April
. The question then was:
The Fed should wait until its preferred measure of inflation (Core PCE) is clearly rising — and not just forecast to rise — before it begins hiking interest rates.
Here's how the results of the two polls compare:
The hawkish swing is dramatic. In April 40% of respondents thought the Fed should wait for core inflation to rise. In December, even though core inflation had not risen at all
, only 19% didn't think the Fed should raise immediately. What's going on? (Remember, both statements were about what respondents thought the Fed should
do, not predictions of what the Fed would
1) Unemployment went down. But I find this hard to believe, because the unemployment rate fell just 0.5% between March and November, and the consensus forecast in March was already that unemployment would go down.
2) Despite the wording of the April question, respondents did have in mind forecast inflation, not just actual inflation. But forecasts of core inflation
barely changed between April and December. If anything, medium-term forecasts went down slightly.
3) There is a third (fourth, fifth?) variable in the respondents' mental Taylor rule. However, this additional variable would have to produce a hawkish leaning by December. Output didn't grow particularly fast, in the U.S. or globally. Perhaps a heightened awareness that low interest rates are destabilizing the global financial system? I'm not convinced because, if anything, the consensus is probably that the system is more fragile now than in April. An interest rate hike, at the wrong time, could trigger the crisis.
4) Respondents are concerned about the Fed's credibility. The Fed had been beating the hiking drum from October through December. Doing nothing in December would have undermined the effectiveness of future Fed communications.
5) The respondents, by December, believed that the December hike was largely testimonial, a mere assertion that the Fed is still "in charge," and the hike is to be followed by a gentle tightening cycle. This was not the consensus in April yet.
6) The poll statements are poorly written, because they fail to account for a behavioral bias that makes respondents more likely to agree than disagree with whatever statement they face.
7) Respondents are unconsciously conflating the normative statement with predictions of what the Fed will do. (The consensus prediction shifted dramatically between April and December, mostly because the Fed itself gave strong guidance of an interest rate hike in October and November.)
8) Tyler is right
, and economists don't know what they're talking about. Moreover, their ignorant self-confidence produces time-varying biases.
I think a combination of #3, #4, and #5 is most likely, but (as a respondent to opinion polls myself) I can't completely dismiss behavioral biases of the respondents.
John Authers has written another good column
. It's about "what happens if rates never rise." Among many interesting things, he reminds us to watch profits (payrolls and GDP are secondary, really). He also walks us through the (increasingly plausible) scenario where the Fed doesn't raise rates at all, and the central bank needs to resort to QE to counter an economic slowdown.
He writes, in passing, something with disturbing implications:
The risk continues to be that investors at some point give up on monetary policy and its power to make a difference — and that would be bad for stocks. So rather than plan for a continued indiscriminate rally in US stocks, it is probably better to focus on those that can show some sustained pricing power, and on those that pay a decent yield.
That first sentence (emphasis mine) entails a mind-blowing possibility. What it the emperor has no clothes? What if the main (only?) effect of QE is through higher asset valuations? What if QE works because investors think it works and nothing else? What if investors wake up and decide that QE doesn't work?