SC Results-- RP in Fourth

The results of the South Carolina Republican primary were disappointing. Ron Paul came in a distant fourth -- 13 percent of the vote. I had been expecting that he would come in third--more or less switching places with Santorum, who ended up with 17 percent. Of course, it was only in the past few days that I began to believe the polls that Gingrich would do so well--40 percent. It is still hard to believe. And Romney fell so low--28 percent.

Still, I live in Charleston County, which Romney carried. My interpretation of Gingrich's success is that the undecided South Carolina voters chose him for the same reason they like talk radio and Fox News. They like to hear someone who will stand up to the liberals. While they want someone to beat Obama (or so they say,) perhaps they haven't been looking at polls of Gingrich's favorable and unfavorable ratings.

What about silver linings? Ron Paul more than tripled his support from 2008. (He only received 3.6 percent of the vote, so it was increased by a factor of 3 and 1/2.) This is similar, and even slightly better, than the improvement in New Hampshire (8 percent to 23 percent is an improvement by a factor of 2.75) He did only slightly better than double in Iowa.

According to the exit polls by CBS, Paul came in third with independents (23 percent) and was close to Romney (25 percent) and not that far behind Gingrich (31 percent.) With self-described Republicans, Paul had 10 percent and came in way behind.

What about age? Paul came in first with voters between 18-24 and 25-29. He came in second with voters 30 - 39. (And also in second with all voters under 40.) But when the 40 - 49 group was added in, he dropped to fourth. While Gingrich's 37 percent was close to his total result, Paul's 19 percent was very close to Romney's 20 percent and Santorum's 21 percent in the under 50 group.

The demographic where Paul really did bad was the 50 - 65 (11 percent) and over 65 group (7 percent.) It didn't help that more than 60 percent of the voters were over 50!

Two other interesting results from the exit polls is that Paul does best who voters that describe themselves as moderates or liberals (18 percent,) and better than those who say they are conservative (13 percent) and very conservative (9 percent.) Unfortunately, Paul still came in third with the liberal/moderate group, only beating Santorum.

Also, Paul's support is negatively correlated with anti-abortion sentiment. Pro-choice (18 percent,) moderately pro-life (12 percent,) and hard-core pro-life (10 percent.) Unfortunately, Paul only came in third with pro-choice voters, (and fourth with the other groups.) I hope the Paul campaign gets this message. I received a mailing and two robo-calls explaining how pro-life Paul is. It was also the message of one his TV ads (though it was pretty soft core.)

I was disappointed that Paul came in fourth in Charleston County (though Santorum was only slightly ahead 14.6 percent to 13.9 percent) Paul did better here than statewide, but not by much. He did much better in what we call "Indian country" up there in the mountains. (Greenville County provided lots of Paul votes, and Anderson County was a high point too.)

Even closer to home, Paul came in third on James Island. Gingrich edged out Romney by 19 votes (33 percent each.) Paul had 17 percent and Santorum 14 percent. (Notice that the results for my home territory is what I expected for the state.) My home precinct, James Island 11 provided the most votes for Paul on the Island (85), but it was only 19 percent. Paul actually won James Island 8B, with 29 percent (and 79 votes.) There were a number of other precincts where Paul had more than 20 percent, but he only came in second in two of them. (Beating Romney.) Across Charleston County, Paul won a number of precincts, but most had very few voters (like 10.) These were likely in black neighborhoods, where there are very few who vote in the Republican primary.

I was disappointed that the Paul campaign seemed to almost bypass South Carolina. On the other hand, I think part of the reason is that they tried hard back in 2008 and did very poorly. And also, the primary is winner take all. While only half of the delegates are at large, it is necessary to come in first in congressional districts to get any of the other delegates. (We don't have "slates" of delegates, however. The actual delegates are selected in convention and to the degree Paul supporters can win, they will be free to vote after the first ballot and on platform questions as they think best.)

P.S. It is sad that Gingrich appears to be adopting the gold standard. If the Republican nominee wants to keep the votes of Paul's supporters in November, I hope he chooses some other issue.

More on Divisia

Scott Sumner linked to my last post on Divisia. (Not divisa--thanks Lars.)

Sumner says that I confused the "prices" and the "weights" and then referred me to the discussion of his initial post on the matter. William Barnett contributed comments, well worth reading. (Barnett also commented on my earlier post.)

Lars Christensen posted on the matter, tying the Divisia approach to Steve Horwitz's "A Subjectivist Approach to the Demand for Money." Reading about Divisia also brought that paper to my mind. Horwitz credits William Hutt's 1956 paper, "The Yield from Money Held."

Anyway, the difference between the benchmark interest rate and the rates of return of various financial instruments that provide monetary services are the prices of the monetary services. I was very much mistaken in treating those prices as if they are used as weights for the quantities of the different sorts of monetary assets too add them up to an aggregate.

According to Barnett, the weights always add up to one, and it is the prices (the value of the monetary services) that are being weighted. The weights are based on expenditure shares, which would be price times quantity. Barnett describes these as being "growth rate" weights, which I understand as being weights used to multiply the growth rates of each type of monetary instrument, and then summed to get the growth rate of the Divisia aggregate.

I realize that most macroeconomists focus on growth rates, I the past five years has shown how mistaken that focus can be. It was the large drop in the growth path of the Divisia levels that care clearly related to the significant drop in the growth path of nominal GDP, real GDP, and employment. Anyway, I am looking forward to more detailed study of Barnett's work.

Also, I should note that Josh Hendrickson, a young Market Monetarist whose blog is "The Everyday Economist," has been interested in the Divisia approach for some time.

David Eagle on Nominal GDP Targeting

David Eagle has an excellent post on Lars Chirstensen's blog

about targeting nominal GDP.

Ron Paul on Free Trade

Jeffrey Miron is quoted on Public Radio International claiming that Ron Paul is a poor representative for Libertarianism.

While I have some disagreements with Paul, Miron is mistaken about one aspect of Paul's position:

Miron said the classical Libertarian wants government to stay out of your wallet and out of your bedroom. Paul, he said.....also opposes free trade, something virtually all Libertarians and most economists support.

During this campaign, Ron Paul has regularly responded to charges that he is an "isolationist" by explaining that he favors free trade. However, Miron's charge has an element of truth.

Ron Paul has opposed most existing and proposed free trade agreements, describing them as managed trade. Instead, Paul calls for unilateral free trade. That means that U.S. businesses and households should be free to buy or sell goods and services anywhere in the world. Plenty of libertarian economists support this position.

Unfortunately, trade protectionists are dead set against that approach, and as a practical matter, more politicians are willing to "accept" letting American households and firms buy imported goods if foreign governments simultaneously agree to reduce restrictions on U.S. exports. Firms that anticipate increased foreign sales provide political support. Most economists (including libertarian ones,) agree that it is better if the foreign governments reduce their restrictions on trade too.

Unfortunately, there are plenty of special interest groups who oppose reducing U.S. government restrictions on imported goods, even if foreign governments reduce their barriers to U.S. exports. They oppose these agreements. Ron Paul makes common cause with them, because rather than making these agreements, he thinks the U.S. should simply allow foreign imports without restriction. There is really no need to negotiate a complicated agreement.

Probably most libertarians, including libertarian economists, disagree with Ron Paul's approach. They believe that these sorts of real world, complicated free trade agreements, are better than nothing. For example, Ron Paul opposed NAFTA, while most libertarian economists favored the agreement.

Polling Results

Public Policy Polling has some interesting results, here.

Mitt Romney wins over Obama 47% to 45%.

Ron Paul loses to Obama 46% to 41%.

In a three way race with Romney, Obama, and Johnson, Obama wins:

Obama 43%

Romney 41%

Johnson 9%.

In a three way race with Romney, Obama, and Paul, Obama wins:

Obama 42%

Romney 37%

Paul 17%.

In the Paul vs. Obama contest, he wins with the 30-45 age group, loses every other group. Obama gets an absolute majority of those between 18 and 29.

Paul wins the independent vote with 41% (as does Romney.) Paul wins with men (48%,) but loses women (34%.)

In the three way, with Romney, Obama, and Johnson, Johnson does best with the youngest group (14%) and goes down from there. He does best with independents, at 17%.

When Paul is matched as an independent, he ends up with 24% of both those between 18 and 29 and 30 and 45. He does less well with older groups.

He gets 27% of independents, which is close, but less than Obama 32% and Romney 31%.

The most interesting result is Paul's strength with Hispanics. He gets 37% in a two way against Obama (and still loses that group,) but it is better than any other Republican. (Paul gets 10% of the African American vote.)

In the three way race, Johnson does well with Hispanics as well, with 15% (compared to 8% for whites and 5% for African Americans.)

If Paul runs as an independent, he gets 33% of Hispanics, beating Romney's 18%, though still losing to Obama's 48%. Paul gets 17% of the white vote and 3% of the African American vote.)

Lots of interesting results. Check it out.

P.S. We just got our first poll that looks to be from the Paul campaign. At least, I cannot figure out why anyone else would have add on questions about our opinion of Mark Sanford and Rand Paul.

Overnight and Continuing Repurchase Agreements?

The New York Fed reports overnight and continuing repurchase agreements.

What are continuing repurchase agreements?

Continuing contracts resemble a series of overnight repos; they are renewed each day with the repo rate or the amount of funds invested adjusted to reflect prevailing market conditions. If, for example, the market value of the securities being held as collateral were to fall below an agreed-upon level, the borrower would be asked to return funds or provide additional securities. Continuing contracts usually may be terminated on demand by either party

.

Continuing contracts usually may be terminated on demand by either party.

Sounds a bit like a demand deposit.

What are the figures?

First, the amount of overnight and continuing repurchase agreements was vast. Nearly $3 trillion. In 2008, the amount of "official" checkable deposits was $600 billion. MZM, the broadest measure of the money supply was about $8 trillion. The overnight and continuing repurchase agreements, which were not counted in any measure of the quantity of money would make up over 25 percent of an aggregate that includes them. (Of course, to the degree this represents lending by commercial banks or money market mutual funds, there would be double counting. )

And, of course, the more important point is that it dropped by nearly $900 billion during 2008. While MZM rose by approximately $1 trillion, the uncounted money almost completely offset that change.

And then, there is the overnight commercial paper. Where are those figures?

Divisia Measures of the Quantity of Money

Scott Sumner linked to The Center for Financial Stability's website. William Barnett is leading an effort to develop inclusive divisia measures of the quantity of money. Divisia measures sum up various monetary assets according to the degree each one provides monetary services. The weights are based upon the difference between the interest rate paid on monetary assets and an estimated investment rate of return on capital. The greater the difference, the greater the monetary services provided by a particular asset.

I have been very critical of any measure of the quantity of money that includes assets that do not serve as media of exchange. In particular, I have never thought that time deposits should count as part of the quantity of money. The arbitrary dividing line of $100,000 (between small and large time deposits) has always made M2 an absurd measure of the quantity of money. Unfortunately, the development of sweep accounts has made reported values of M1 nearly worthless. Probably the least bad option is to include all savings accounts in a measure of the quantity of money. MZM includes currency, checkable deposits, savings accounts, and money market mutual funds. The dollar value of each item is summed up.

Unfortunately, it doesn't include other overnight financial assets, especially repurchase agreements, but also other commercial paper. The Fed used to include overnight repurchase agreements as part of M3, but they were bundled with term repurchase agreements. Worse, the Fed stopped reporting M3. (As far as I can tell, there are no good measures of the volume of overnight commercial paper, though the Fed does report yields on various maturities of commercial paper.)

With modern communication and payments technology, any overnight financial asset can serve as media of exchange. When they are tied to a checkable deposit with a sweep agreement, these are funds in checkable deposits, just as are the funds reported as being in savings accounts. (In my view, sweep accounts amount to a fraudulent effort to evade reserve requirements. On the other hand, I think reserve requirements are an unjust tax, with the burden suffered by small depositors.)

I have also long rejected the inclusion of Treasury bills in any measure of the quantity of money. The Fed had a measure of the money supply it called "L," that included T-bills. The problem with T-bills is that they have a market price that adjusts based on supply and demand. While the core characteristic of money is that it serves as media of exchange, that its price is fixed in terms of the unit of account is also very important.

But as the yields on T-bills approach zero, I must admit that those who argue that T-bills approach a perfect substitute for base money become more persuasive. As I have argued many times, the zero-nominal bound on other financial assets is intimately related to monetary disequilibrium. Further, there is good reason to doubt the effectiveness of open market operations using financial assets with very low yields. But does that mean that those T-bills still held by households and firms are effectively money?

The Divisia approach provides a solution to all of these problems. While I don't think it is a perfect solution, perfection is usually not a real option. But the real reason why I find it very interesting is the charts below. It is really a surprise that nominal GDP is so far below the trend of the great Moderation?

The make up of the different measures is here. The difference between M4 and M4nt is T-bills. The divisia measures show that T-bills are providing substantial monetary services. (They are now a better, if not perfect, substitute for money.) The difference between M4nt and M3 is commercial paper. Commercial paper isn't providing much in the way of monetary services now.

I support a target rule for nominal GDP. I am skeptical regarding instrument rules--formulas that tie a policy interest rate like the fed funds rate or base money to a goal of monetary policy. However, it is certainly looking like getting the divisia M4 measure of the money supply back up to trend would be a sensible intermediate goal for the Fed. (For that matter, returning them to their previous peak might be helpful.)