Commodities are fungible

Here’s the Financial Times, discussing recent trade negotiations with China:

They said that after two days of “constructive talks” China had agreed to “significantly increase” its purchases of US goods and services and on the need for “meaningful increases” in US agricultural and energy exports to China.

Beijing had agreed, they said, to amend relevant laws and regulations, including its patent law, to address US intellectual property complaints that have fuelled Mr Trump’s recent threats to impose tariffs on up to $150bn in imports from China. They also pledged to continue engagement to resolve their differences.

In recent years we’ve heard a lot of complaints about a “China Shock”, the idea that a surge in Chinese exports to the US has cost jobs in manufacturing.  And now the US is pushing China to import more US food and energy, which would create an even bigger China shock, if it were successful. That’s because any trade policy that leads more food and energy exports also tends to lead to more imports of manufactured goods.

On the other hand, the policy is not likely to be successful.  If the Chinese buy more corn and oil for the US, they will buy less corn and oil from Brazil.  Brazil will send those goods to the countries that previously were buying the US corn and oil that are being redirected to China.  The bilateral deficit with China will shrink, but the overall US trade deficit with the rest of the world will not change.  Commodities are fungible.  All that will happen is that trade patterns will be rearranged, imposing more transportation costs.  A deadweight loss for the global economy.  And of course Trump’s fiscal policy will make the trade deficit “worse”.

The Chinese surely understand this, but I suspect the Trump administration does not.  Or perhaps people like Larry Kudlow do understand, but are keeping quiet because they wish to avoid something much worse.

Saturday’s vague statement did not mention telecommunications company ZTE and its lack of firm targets highlighted a continuing gap between both sides’ priorities.

The apparent failure came as political reaction forced the Trump administration to back away from a presidential commitment to resolve a dispute over ZTE, which was forced to suspend business operations after being banned from buying US components. . . . Mr Trump’s tweet provoked a backlash from both Republicans and Democrats in Congress who pointed to US intelligence agencies’ longstanding security concerns about ZTE. Politicians across the US political spectrum warned the president on Friday not to cave in to China.

Trump’s negotiating has been so ineffective that both Dems and Republicans are complaining he’s too weak on China, not nationalistic enough.  ROFL.

Trump is discovering that trade is like health care, much more complicated than he imagined.  It’s already clear that the Bannon wing of the GOP has lost on trade; there will be no meaningful actions to reduce the US trade deficit.  Indeed Trump’s policies will likely widen the deficit.  The alt-right has successfully transformed the GOP into an alt-right party in terms of rhetoric.  You see mainstream GOP politicians like Mike Pence heaping praise on criminal, racist, right-wing extremists like Sheriff Arpaio.  The alt-right can also take comfort in the fact that we have despicable, stupid, bigoted preachers represent the US at the Jerusalem embassy opening.  But the alt-right is losing on policy.  They failed to get an alt-right foreign policy, they failed to get a Mexican wall or a sizable cut in immigration (except refugees, a tiny portion of immigration), they failed to get a big increase in infrastructure spending, and they will fail to get an alt-right trade policy.

The one signature success of Trump—big tax cuts for corporations—is not an alt-right policy. It’s from the traditional Mitt Romney GOP playbook.

The poor, the sick, the sad, and the lonely: Blaming the victims

Most people will want to skip this post, but it’s something I need to get off my chest. One unfortunately aspect of the internet is that it lifts off the lid, and exposes all the dark sides of human nature. One of those dark aspects is the urge to blame the victim.

1.  The sick

If you follow sports, you will eventually come across a case like Derrick Rose, or Kawhi Leonard. These are players that suffered severe injuries, and had trouble getting healthy again. At some point medical science is no longer able to identify the problem. They look healed but they still felt pain, which got worse when they played. When that happens, sports reporters start whispering that it’s a mental thing, that these players are weak. This despite the fact that when healthy, these men were among the toughest in the league, willing to mix it up with much bigger players under the rim. We get frustrated that they aren’t healed yet—and that the problem cannot be identified—so it’s their fault. (This year it’s Markelle Fultz who is being picked on.)

Medical science may be impressive, but there is still a great deal that it doesn’t understand. If you go to the doctor and complain about chronic intestinal pain, there’s a good chance that he or she won’t be able to pinpoint the problem. Indeed there are lots of things that cannot be identified in X-rays or blood tests, including severe back pain, chronic fatigue syndrome, migraine headaches, and dozens of other illnesses. We get frustrated with people who have these hard to pinpoint problems, and label them “hypochondriacs.” Or we say they have a low threshold for pain—as if anyone knows the pain felt by another person. Yes, it’s true that the pain is “all in their head”, but that’s equally true of someone suffering pain from a “phantom limb”, and someone who has their hand on a hot stove. Where else would the pain be?

2.  The sad

It’s even worse with mental illnesses. People suffering from depression are told to just “snap out of it”, or think positive thoughts. They are viewed as losers.

3.  The lonely

There has been recent discussion of “incels”, people who are celibate but who would prefer to be in a romantic relationship. The non-lonely often tell them to just “lower their standards”, as if they had never thought of that. Or join a church. Please, just stop. Even worse, one prominent pundit implied that tech firms might want to get rid of these awful people. After all, one incel in Canada murdered some people.

4.  The poor

Like you and I, indeed like almost everyone, poor people often make bad choices. But the last thing they want to hear is someone telling them what they did wrong. Consider a young woman at the bottom of society (in terms of looks and education). Her life is pretty bleak, with only a few men to choose from. Having a child would provide some meaning to her life. She finds the best man she can, but in the end he walks out on her, leaving her a poor single mother. Or maybe he beat her and she walks out on him.  Sure, she might have been able to stay slightly above the poverty line by becoming a low wage, childless, “incel” worker with nothing in life to look forward to; but not everyone can live that way. Yes, poverty is bad, but being physically ill, mentally ill, or lonely might well be worse.

I understand that there are people out there who are deserving of blame. Think of the famous case of the worker who is on disability for a bad back, but is discovered out skiing. (Or Trump with his “bad feet“.)  These people exit. But unless you have clear evidence pointing in this direction, do not blame victims for their plight. Just don’t do it.

If I were to generalize, I’d say that the biggest mistake made by conservatives is to view the unfortunate as “losers” who are to blame for their plight. In the case of incels, both the left and the right piles on.

On the liberal side, the biggest mistake pundits make is to rank people by how much sympathy each victim deserves. Don’t tell people that their suffering is less bad than someone else’s. YOU DON’T HAVE ANY IDEA WHAT IT’S LIKE TO BE IN THEIR SHOES. For all we know, the most miserable person in America might well be a billionaire. These pundits base their opinions on social science, whereas they ought to spend more time reading great literature.  There’s more to life than money.

HT:  Scott Aaronson, who has a much better post.

NeoFisherism in Turkey

From the FT:

The Turkish lira led a broad drop in emerging market currencies on Tuesday after President Recep Tayyip Erdogan vowed to take greater control of monetary policy if he wins elections next month.

Mr Erdogan has for years harboured a deep antagonism towards high interest rates, taking the unconventional view that they cause rather than curb inflation. Last week, he warned that they were “the mother and father of all evil”, fuelling concern that he would not allow the central bank the freedom to raise rates.

The Turkish president told Bloomberg that cutting interest rates would lower inflation. “The lower the interest rate is, the lower inflation will be,” he said. “The moment we take it down to a low level, what will happen to the cost inputs? That too will go down . . . you will be able to get the opportunity to sell your products at much lower prices . . . The matter is as simple as this.”

PS.  A new paper by Warwick J. McKibbin and Augustus J. Panton makes the case for NGDP targeting:

Looking to the future the importance of supply shocks being driven by climate policy, climate shocks and other productivity shocks generated by technological disruption as well as a structural transformation of the global economy appear likely to be increasingly important. This suggests an important evolution of the monetary framework may be to shift from the current flexible inflation targeting regime to a more explicit nominal income growth targeting framework. The key research questions that need further analysis are: how forecastable is nominal income growth relative to inflation?; and what precise definition of nominal income is most appropriate given the ultimate objectives of policy (nominal GDP, nominal GNP or some other measure that is available at high frequency (e.g. big data on spending)). Also, the issue of growth of income versus the level of income is an open research question with many of the same issues to be faced as the choice between inflation targeting versus price level targeting.

The economy is doing fine (as it was 16 months ago)

Lars Christensen is now doing videos at Patreon.  Check it out.

Also check out my new post at Econlog, where I express skepticism about whether Japan is a “safe haven”.

So how’s the economy doing over the past 16 months?  Here’s RGDP growth:

Screen Shot 2018-05-12 at 11.38.06 AMThat’s better a bit better than before.

Here’s employment growth (annual % change):

Screen Shot 2018-05-12 at 11.39.06 AMThat’s a bit worse than before.  Yet the unemployment rate is falling, as it has been for 8 1/2 years.

Here are real wages (deflated by the PCE):

Screen Shot 2018-05-12 at 11.36.30 AMStill rising modestly, as before.

Here is the trade deficit:

Screen Shot 2018-05-12 at 11.40.46 AM

Worse than before, as expected.

Here’s the stock market:

Screen Shot 2018-05-12 at 11.48.27 AM

The bull market continues.

Conclusion.  We are still in the Obama economy, with the possible exception of RGDP growth, which seems a bit stronger.  Otherwise things are about the same.

Prediction:  RGDP growth will stay around 3% for a couple more quarters (reflecting the corporate tax cuts and Fed easing), and then fall back below 2%.

Trumpism in Canada

The Economist reports that a number of Trumpian politicians are on the rise in Canada.  Interestingly, the Trumpian issues there are not immigration and trade.

Meanwhile the same issue says that Republican politicians report that their constituents couldn’t care less what Trump’s views are on the issues, they just want to know if their elected representatives support Trump.

I know that my commenters will never believe me, but the global rise of anti-intellectual, tribal, populist, right wing authoritarianism is not about the “issues”, it’s about something much deeper.  Because it has no appeal to me, I’m completely blind to the attraction.  So are all the liberal pundits who write articles claiming to understand Trumpism.  Maybe it’s about how the rise of the internet and cable TV mean that the elites are no longer gatekeepers for information.  “Hey liberal pundits, it’s not about the issues, it’s about the fact that voters despise YOU.”  (But then there’s China, which doesn’t fit that theory.)

I suspect this means Trump will be re-elected, if his health holds up.  (And his health is said to be absolutely spectacular.)

Off topic; I was glad to see that sports betting is going to be allowed at the state level.  (I have no opinion on the legal aspects of the Supreme Court decision, which seems to have been based on a technicality.  I don’t know how I would have voted, but I like the policy outcome.)