Trade shocks and demand shocks

Paul Krugman has an excellent piece on the potential effects of an all out trade war.  Likely Krugman, I think it unlikely that we actually go that far.  My view is that before that happened, Trump would become frightened by a sharp fall in stocks and negotiate some sort of face saving deal where he could claim “victory”.  (But when thinking about the stock market as a warning device, beware of the “circularity problem”.  The stock market won’t warn Trump if it thinks he would heed their warning.)

Here I’d like to add one additional downside to a trade war, the way trade policy can (and has) interacted with monetary policy.  A trade war might be even worse than Krugman estimates, if it leads to tighter monetary policy and falling NGDP.

You might think that Krugman has already factored falling NGDP into his estimate that a trade war could reduce RGDP by 2 to 3 percent.  But unless I’m mistaken, he’s using a general equilibrium approach that abstracts from demand shocks.  In other words, Krugman is showing that even in a world where the central bank stabilizes AD, a trade war could reduce RGDP by 2 to 3 percent by making the economy less efficient.  But what if the central bank does not stabilize AD? In that case you might get an ordinary recession, piled on top of the adverse supply shock produced by a trade war.  A recession slows the process of worker re-allocation into non-tradable sectors.

I can see two possible channels by which a trade war could reduce aggregate demand:

1.  Imagine the central bank is targeting interest rates.  If a trade war occurs, it’s likely that investment demand would fall, reducing the global equilibrium (i.e. “natural”) rate of interest.  If the central bank does not reduce the policy rate as quickly as the natural rate is falling, that would lead to (effectively) tighter money and falling NGDP.  (Think of this as a channel that operates if I’m wrong about monetary offset, and the Keynesians are right.)

2.  Imagine the central bank is targeting inflation.  If inflation is kept at 2% while RGDP growth is falling, then NGDP growth will also slow.  (Here the problem can occur even if monetary offset is operative, as long as they target inflation, not NGDP.)

Keep in mind that slower NGDP growth is always a problem, even if there are other problems at the same time.  Careful readers might recall that this is exactly what went wrong in 2008.  The Fed adopted IOR to prevent its liquidity injections aimed at rescuing banking from spilling out into more aggregate demand, out of fear of inflation.  They thought the banking crisis was “the real problem” when in fact there were two real problems, banking distress and falling NGDP.  The falling NGDP led directly to higher unemployment, and also as a side effect made the other “real problem”, i.e. banking distress, even worse.

In my research on the Great Depression I found that the biggest problem caused by Smoot-Hawley was not that it reduced the efficiency of the US economy (the direct effects were modest), or even the retaliation from abroad.  Rather the biggest problem was that Smoot-Hawley led to lower aggregate demand.  This occurred either because of a fall in the Wicksellian equilibrium rate (very bad news under a gold standard), or because it reduced the likelihood of international monetary cooperation, or both.

BTW, this is no surprise:

Fears of a looming trade war between the U.S. and China are paradoxically helping to increase the value of the U.S. dollar in global currency markets, analysts say, potentially undercutting a Trump administration policy goal.

This is what happens when you have a president who hires crackpot economists who don’t even know that the current account deficit is a saving/investment issue, not an import/export issue.

HT:  Tyler Cowen

The RBA as firm and policymaker

Here is the Financial Times:

Australia has created 1m jobs over five years and its economy is growing at a healthy 3.1 per cent a year, but for workers the “lucky country” has lost some of its shine. Wages growth is stuck near record lows and household debt is among the highest in the developed world.

Average wages grew 2.1 per cent in the year to the end of March, below the 3.5 to 4 per cent levels that Australians enjoyed during a decade-long commodities boom that ended in 2013.

This is causing concern at the Reserve Bank of Australia, which has warned that weak household income growth and high debt posed a risk to the economy. “The crisis is really in wage growth,” Philip Lowe, the RBA governor, cautioned last year as he implored workers to demand higher wages to stimulate the economy.

A few comments:

1. Australia has now gone 27 years without a recession, despite wild swings in the markets for its key commodity exports (iron, coal, food, etc.)  So much for the theory that good monetary policy cannot smooth out the business cycle.  So much for the theory that housing bubbles cause economic instability.  So much for the theory that decade after decade of massive current account deficits are a problem. The naysayers have been telling me “you just wait” since I began blogging in early 2009.  I’m still waiting, and the Australian expansion keeps rolling along.

2.  The RBA is confused.  It is concerned about slow nominal wage growth, but it is the RBA itself that determines Aussie nominal wage growth.  If it wants wages to grow faster, then it should raise the Australian NGDP growth rate.

The consequences of low wage growth are not restricted to workers. Mr Lowe, RBA governor, has warned of a cascade effect whereby it contributes to weak inflation, which keeps interest rates at record low levels — a trend that pushes up asset valuations and social inequality.

Weak wage growth also damps spending by households and restricts income tax collection by the government, which is betting on a rapid recovery of wages growth to 3.25 per cent by 2019-20 to meet its pledge to return the budget to surplus.

Nope, low wage growth, low inflation, low interest rates and slow spending are all caused by slow NGDP growth, aka tight money.

It also poses a risk to industrial peace. Last month, Australia stopped printing money for the first time in 107 years due to a strike at Note Printing Australia, a wholly owned subsidiary of the RBA. Workers are demanding a pay rise of at least 3.5 per cent and have rejected an offer of 2 per cent.

“The RBA is lecturing businesses on the need to lift wages but is refusing to offer its own workers a decent raise,” said Tony Piccolo, regional secretary of the Australian Manufacturing Workers’ Union. “Governor Lowe needs to practice what he preaches.”

The RBA is both a firm and a policymaker.  The RBA as policymaker is confused as to why nominal wage growth is so slow.  The business side of the RBA is fully aware of why this is occurring. It’s “the market”, i.e. slow NGDP growth, which is holding down wage growth.

Cults are the norm

Trump is not a particularly interesting person.  The Trump cult, however, is very interesting.  I’ve been following American politics pretty closely since 1968, and I’ve never seen anything remotely like this.  (Although obviously this sort of political cult is common in other countries.)

What differentiates a cult from a normal religion?  It’s not really about the theology.  Cult beliefs may seem bizarre, but even ordinary religions hold beliefs that seem strange to an outsider.  Rather it’s about the behavior of the cult members, the blind adherence to the cult leader, the willingness to do or say or believe anything they are told.  Nothing less than 100% devotion is acceptable.

A congresswoman from Alabama named Martha Roby has been a strong supporter of Trump’s policies since he was elected in 2016.  And yet she faces a stiff primary challenge from a Trumpista candidate (and will face a runoff election).  Her sin was strongly criticizing Trump’s “grab them by the pussy” remark during the 2016 campaign.  In the Trump cult, there is simply no place for a conservative pro-life Christian woman who doesn’t believe that rich and powerful alpha males should be allowed sexually harass women.

In South Carolina, Mark Sanford’s sins were far worse.  He actually stood up for traditional GOP small government ideas, and was soundly rejected in a recent primary.  He seems confused by what’s happening:

“We’re at an interesting inflection point in American politics,” he said in an interview. “If somehow dissent from your own party becomes viewed as a bad thing, then we’re not really vetting and challenging ideas in the way the founding fathers intended.”

Broadening his argument, Mr. Sanford said America was meant to be “a nation of laws, not men” and that “we weren’t a cult of personality.”

Yes, “we weren’t”.  And this:

The stalled efforts to rein in a protectionist president have led to cries of frustration from Republican free traders bemused by what they see as a growing fealty in the party to Mr Trump at the cost of longstanding party ideals.  “We are in a strange place . . . It’s becoming a cultish thing, isn’t it?” Bob Corker, the Tennessee Republican behind the effort to impose congressional oversight on Mr Trump’s national security tariffs, told reporters after his measure failed.

There’s that word again.  Paul Ryan and a bunch of his colleagues (including Corker) saw the writing on the wall and decided to exit politics.

From an American perspective, this does all seem quite bewildering.  But remember, this is the norm throughout most of the world, throughout most of human history.  Cults are normal; classical liberalism and the enlightenment are unusual.  It’s the period before 2016 in advanced countries that is the outlier.

Trump’s cult is now so securely established that he is increasingly emboldened to push the envelope.  He can now joke about the fact that he lies all the time, without budging the unshakable conviction of his supporters

“Honestly, I think he’s going to do these things. I may be wrong; I mean, I may stand before you in six months and say, ‘Hey, I was wrong,’” he said during a press conference, adding, “I don’t know that I’ll ever admit that, but I’ll find some kind of an excuse.”

 [I fantasize about an episode of Fox News where Trump says “Let’s face it Sean, I lie all the time”, and Hannity replies “No you don’t, Mr. President”]

Interestingly, there was one Fox News contributor who did escape from the cult.  Ralph Peters is a war hero who was much loved by conservatives as long as his fire was directed at Obama.  But after resigning from Fox he sent this letter:

Four decades ago, I took an oath as a newly commissioned officer. I swore to “support and defend the Constitution,” and that oath did not expire when I took off my uniform. Today, I feel that Fox News is assaulting our constitutional order and the rule of law, while fostering corrosive and unjustified paranoia among viewers. Over my decade with Fox, I long was proud of the association. Now I am ashamed.

In my view, Fox has degenerated from providing a legitimate and much-needed outlet for conservative voices to a mere propaganda machine for a destructive and ethically ruinous administration. When prime-time hosts–who have never served our country in any capacity–dismiss facts and empirical reality to launch profoundly dishonest assaults on the FBI, the Justice Department, the courts, the intelligence community (in which I served) and, not least, a model public servant and genuine war hero such as Robert Mueller–all the while scaremongering with lurid warnings of “deep-state” machinations– I cannot be part of the same organization, even at a remove. To me, Fox News is now wittingly harming our system of government for profit.

As a Russia analyst for many years, it also has appalled me that hosts who made their reputations as super-patriots and who, justifiably, savaged President Obama for his duplicitous folly with Putin, now advance Putin’s agenda by making light of Russian penetration of our elections and the Trump campaign.

I would have expected conservative intellectuals to be immune to this sort of cult, but just the opposite is true.  Hardly a week goes by when I don’t receive an envelope from some conservative think tank saying something to the effect; “Please help us support our great President, who is being unfairly attacked by the biased liberal media.”  That’s funny, when I watch CNN or read the NYT I mostly see a media that is correctly pointing out that Trump is a pathological liar. (Obviously with an occasional inaccuracy.)

It would be interesting to do a google search of all the cases of “increasingly cult-like behavior” and then find the correlation with “ends well”.  I’d guess a Venn diagram of those two concepts does not show a lot of overlap, but heh, there’s always a first time.

PS.  I hope it’s clear that when I talk about the Trump cult, I’m not talking about Trump voters.  There are plenty of Trump voters who admit that Trump is a highly flawed individual, but hold their nose and vote for someone who will deliver corporate tax cuts and conservative Supreme Court members.  I’m talking about the people who believe that Republicans who are not blindly obedient to Trump must be excommunicated from the party.  Even many alt-right people are not in the Trump cult, as they actually care about certain issues.

PPS.  And please don’t engage in “whataboutism”.  I’m fully aware that even normal politics has some cult-like tendencies, just as even normal religions do.  Thus the GOP tends to kick out pro-choice people and the Dem’s kick out pro-life people.  That’s normal politics, as long as its based on issues.  As with almost everything of interest in the social sciences it’s a matter of degree.  What pushes the Trump cult into new territory is the almost cavalier disregard for Trump’s actual policy positions.  Tough on Iran, appeasement for North Korea, massive spending increases, tax cuts, and whatever else he decides on a given day—it doesn’t even matter to the Trump cult. All that matters is whether you are with Trump or against him.  Like any totally random individual, Trump will guess right on some issues and wrong on others.  If you think this is about the issues, you are completely missing the point.  As Sam Harris pointed out in a recent interview (see below) we shouldn’t support Trump in 2020 even if his first term ends with nothing but one brilliant success after another.

PPPS.  Speaking of Trump, I stumbled across a long interview with Sam Harris (by Dave Rubin), someone I’d heard a lot about but have not actually got around to reading.  I found it pretty interesting.  The first (least interesting) part involved Harris bashing the liberal media for excessive political correctness.  The second part involved Harris bashing Trump.  By that point I realized his views weren’t too far from mine; against excessive liberal PCism, against dishonesty among intellectuals, fed up with Twitter shaming, and strongly against Trump, although I also sensed that there are probably some areas where I would disagree. In the third part Harris discussed consciousness from a Buddhist perspective, which makes sense to me.  And in the fourth part he discussed atheism and his views on Jordan Peterson.  He mentioned that he will soon have several long conversations with Peterson (someone else I’ve heard a lot about but haven’t gotten around to reading) so I’ll have to try to catch that.  These two seem to have just the right amount of overlap and differences to make the conversation interesting.  Harris reminds me a bit of Peterson in the sense that both have a certain charisma in the way they speak, which you’d miss if you just read the transcript.

Love this tweet

Vaidas Urba directed me to this tweet from Vitor Constâncio, who’s term as the Vice President of the ECB just ended. Also recall Bernanke’s recent advocacy of level targeting.

Screen Shot 2018-06-13 at 11.06.06 AMLove it!

PS.  Here is the link embedded in the tweet:

https://www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180504.en.html

Learn from Mencken

It seems to me that people are too depressed by Trump.  Yes, he’s far and away the most appalling individual ever to achieve high political office in the US, but that doesn’t mean we can’t get some enjoyment out of the spectacle.  Think about the amusement that Trump provides in a typical day. Just yesterday he said (regarding Kim):

He really wants to do something I think terrific for their country. . .

I do trust him, yeah.

When Bush said something similar about Putin he could be forgiven on several grounds.  First, we hadn’t seen this sort of presidential naiveté toward a Russian leader since the days of FDR. And second, Putin wasn’t yet anywhere near the brutal dictator he is today.

With Trump there’s no such extenuating circumstances to prevent us from falling on the floor laughing.

Then we wake up this morning to find Trump proclaiming that North Korea is no longer a nuclear threat, and Sean Hannity believes him.  How is that not funny?

And this tweet is just to, to, to funny to pass up:

Screen Shot 2018-06-12 at 8.00.48 PMJust to be clear, I’m not one of those grammar snobs.  I think good grammar is overrated and of course I make lots of mistakes here. But while I occasionally mix up ‘to’ and ‘too’, I’ve never done so in a tweet accusing a Hollywood actor of having a low IQ.  Come on Trumpistas, even you guys have to find that a little bit amusing.

I don’t doubt for a moment that David Brooks is a far better person that HL Mencken.  But Mencken was funnier.  You can’t go through your entire life in just one mode, even a wholesome mode.  Sometimes you just have to indulge your inner cynic and enjoy the crazy spectacle.

Yes, it’s appalling to have an ignorant, bigoted, misogynistic president.  But tens of millions of women and Hispanics voted for him and if they can survive 8 years of Trump you should be able to as well.  For some reason that I cannot fathom, God has favored and protected this crazy country for more than 240 years, and I think he’ll do so for 6 more years.  Remember, as bad as Trump is, presidents just don’t have much influence over the course of events.

So relax and enjoy the spectacle.

PS.   And speaking of enjoying life, don’t get too upset about poor Anthony Bourdain.  I miss him as much as any of his other fans, but he packed more into his 61 years than you or I could do in 600 years. Tony would be appalled by all this handwringing in the media. He had a good run.

In a book on Korea, Simon Winchester made this observation:

A sixtieth birthday is a special thing in all those countries that have come under the maternal influence of old China, Korea very much included. The body is then deemed to have passed through the five twelve-year zodiacal cycles — the yukgap, as the sixty-year period is known — that constitute the proper life span of the human being.  Once someone has successfully completed the span — as old mother Hwang had done three years before — then all time beyond is regarded as a marvellous bonus: you retire from active life, take your respected ease as an elder, let your children make you as comfortable as they can, and let filial piety take over the reins of your life.

Don’t be like me, planning to do all sorts of wonderful things when you retire, and then finding out that past age 60 your body and mind are too broken down to do the things you planned to do.  Plan your life as if you will die at age 60.  That’s enough time.

PPS.  While I’m not a grammar snob, if I ever reach the point of my commenters who think that any sentence containing the word “insult” is ipso facto an insult, please tell me to just stop.

Update:  The North Korean state media is now more accurate than the White House:

North Korean state media lauded the summit as a resounding success, saying Trump expressed his intention to halt U.S.-South Korea military exercises, offer security guarantees to the North and lift sanctions against it as relations improve.

Yup, Kim won.