Where does Brexit stand today?

Here is the Financial Times:

Theresa May has been applauded by Brussels for her “constructive spirit” after she set out plans to keep Britain in the EU in all but name until 2021, five years after the country voted to leave the bloc.

In a conciliatory speech in Florence, Mrs May also said Britain would pay €20bn into the EU budget after Brexit and signalled the contribution was only a downpayment on what could be a considerably larger exit bill.

Although Britain will formally leave the EU in March 2019, under Mrs May’s model it would still be covered by all EU rules, European court judgments, the free movement of EU workers and budgetary contributions to Brussels until the transition ends. . . .

The speech delighted business leaders who believe Mrs May’s plan for a transition period of “around two years” after Brexit in March 2019 will avoid a cliff-edge and was welcomed by Michel Barnier, the EU’s chief negotiator.

Here are some comments:

1.  By now it should be clear why I distinguished between the economic effects of “Brexit uncertainty” and the economic effects of Brexit itself.  We now know that Brexit uncertainty had no noticeable impact on UK real GDP growth (which was about the same in the 12 months after Brexit as during the 12 months before.)  I still believe that Brexit itself will lead to somewhat slower growth, as do the currency markets.  But the delay in Brexit has allowed a partially recovery in the pound, which has bounced back to $1.35, after dropping from $1.46 to $1.23 after the vote (and subsequent “Brexit means Brexit” rhetoric.)

2.  I think it’s very unlikely that the UK will (de facto) leave the EU in March 2021 (if ever).  May is rumored to have favored an even longer delay, but worried about a leadership challenge from Boris Johnson.  Notice she said “around two years”, which could mean three years.  Britain really doesn’t want to leave; that’s obvious.

3.  And by 2021 or 2022, who knows what the political situation will look like in the UK?  What if the Tories need support from the Liberal Dems after the next election? Would the LDs demand further delays? What if Labour wins?  Every year that goes by, more older Brexit voters die off and more younger Brits who are comfortable with a cosmopolitan UK enter the voting rolls.  Like gay rights and pot legalization, globalization has massive momentum in the long run, as there are truly vast differences between the views of the young and the old.

PS.  So the Tories promised to do Brexit, but obviously don’t actually want to do so. In the US, the GOP has promised to get rid of Obamacare. When will that happen? When it comes to health care policy, is history on the side of the GOP?   And I’d say something similar about the Tories.  In 2040, the UK will be more tightly integrated into Europe than in 2010, even if they are not formally in the EU.  Bryan Caplan may lose his Brexit bet, but only on a technicality.

PPS.  I’m guessing that this was Obama’s expression earlier this afternoon, when he heard about McCain’s decision.

I think McCain made a defensible decision, but not Rand Paul.  Given Paul’s ideology, he really should have supported Graham-Cassidy.  It’s far more libertarian than any plausible alternative that Congress is likely to enact.

Did the Great Recession reduce the US birth rate?

A few years ago it was conventional wisdom that the Great Recession reduced America’s birth rate.  That’s possible, but it’s striking how little evidence there is for that claim.  It’s true that the birth rate declined between 2007 and 2010, but we all know that correlation doesn’t prove causation.  And there’s a lot of evidence pointing in the opposite direction.  Here’s one popular measure of the birth rate:

Now let’s consider all of the evidence against the claim that the Great Recession reduced America’s birth rate:

1. Rich countries tend to have much lower birth rates than poor countries.  So poverty doesn’t seem to reduce birth rates.

2.  If you prefer time series evidence; the US birth rate has trended down for 100 years, even as we’ve become much richer.

3.  It’s true that the birth rate fell during the 1930s, but it fell much faster during the booming 1920s.  It fell especially sharply during 1955-73, one of the very best periods ever for having big nuclear families with stay at home moms.  The birth rate was flat during the bad period of 1979-83, when unemployment soared to 10.8%, but fell during the booming 1990s.  Go figure.

4.  In 2016, the birth rate declined in 2016 to the lowest rate ever, despite one of the fastest 2-year growth spurts in real median household income ever seen in US data:

There may be a slight lag in the impact of the economy on the birth rate, but if we don’t see a sharp rise in the birth rate in 2017, then we may need to revise the conventional wisdom on the Great Recession.

5.  The birth rate decline has been far sharper for teens than for other groups:

In the United States, teen-aged moms are increasingly rare. In 2016, the teen birth rate dropped 9% compared to the previous year, a new government report published Friday found. This record low for teens having babies continues a long-term trend.

The birth rate among teen girls has dropped 67% since 1991, according to the National Center for Health Statistics, which presented preliminary data for 2016 based on a majority (99.9%) of births.

In 2016, the number of US births totaled 3,941,109, a decline of 1% compared to 2015. The fertility rate of 62 births per 1,000 women is a record low for the nation.

The teen rate is a “phenomenal decline,” said Dr. Elise Berlan, a physician in the section of adolescent medicine at Nationwide Children’s Hospital.

Interestingly, this sharp decline in teen births occurred during a period when teens are increasingly delaying the adoption of adult-like behavior.  The share of teens that date, have sex, drive cars, drink alcohol, smoke, work on jobs, and other similar activities is falling sharply.  I doubt the Great Recession caused teens to not want to date, drink, or get a drivers license.  More likely, we are seeing a longer term cultural change, driven by factors unrelated to the business cycle.  (Also note that the really sharp decline in teen births began with the Great Recession, and has continued right up until the present time.)

One thing I can’t stand about cultural conservatives is that they are always pessimistic about the younger generation.  I recall back in 1991 that America’s cultural conservatives were wringing their hands at how the high teenage birth rate and crack cocaine addiction was going to lead to a generation of dysfunctional children.  Since then, we’ve seen a massive decline in teen births, and also a huge decline in crime, divorce, and lots of other metrics of social distress.  America’s teens are behaving amazing responsibly, (maybe too responsibly, IMHO).

So are the social conservatives trumpeting this wonderful turnaround?  No.  Instead of celebrating this cultural trend they find new things to worry about—rising use of opioids, single moms, or the fears that immigration will bring in low IQ people that dilute our gene pool.

I really, really wish that cultural conservatives would just cheer up.  (Or light up a joint in one of the states where it’s now legal, and chill.)

Kevin Warsh for Fed chair?

There is increasing chatter that Kevin Warsh is being seriously considered for Fed chair.  He would not be my first choice, for several reasons:

1.  He is viewed as a well rounded figure, with some knowledge of both monetary policy and the financial system.  I’d prefer someone who has great expertise on monetary policy, even if they knew little about anything else.

2.  He was spectacularly wrong about policy during the Great Recession.  Here is Business Insider:

Back in 2009-2011, while still at the Fed, Warsh was keenly worried about inflation at a time when consumer price growth was actually deeply undershooting the central bank’s 2% target and unemployment remained very high. His concerns, since reiterated in the occasional opinion piece, have proven deeply misguided since the Fed continues to undershoot its inflation goal to this day. Indeed, bond investors have palpable doubts about the Fed’s plans to continue raising interest rates next year and in 2019.

And here is Politico:

Jordan Haedtler of the progressive group Fed Up, which advocates lower interest rates and more diversity at the central bank, doesn’t see Warsh’s Wall Street ties as a positive.

“He was tasked by Bernanke with being the emissary to his former employer and other major Wall Street firms, so his independence from the financial sector is just as questionable as the Trump administration as a whole,” he said.

Haedtler also argued that Warsh was “spectacularly wrong during the lead-up to the crisis, during the crisis and following the crisis.” He cited a March 2007 speech in which Warsh praised the proliferation of new financial instruments, one of the major factors leading to the crisis.

Can we now be sure that Warsh was wrong about monetary policy during the Great Recession?  I think so, but I’d also like to briefly discuss the implications of the other view, that we can’t be sure he was wrong.  If that were true, then monetary economics would be useless. There would be no core of knowledge worth teaching to our students.  The loony right wing critics of the Fed would be correct; it would be a bunch of priests in robes incanting a lot of mystical mumbo jumbo, with no connection to anything real.  Indeed it’s now so obvious that money was too tight during the Great Recession that anyone still denying that claim basically loses all credibility.

Imagine that we actually didn’t know that Warsh was wrong.  Now imagine a cynical student who likes to shoot his mouth, sitting in the front row of a college monetary economics class.  The instructor starts teaching, and the student immediately shoots his hand up in the air.  “How do we know that’s true.”  “Prove it.”  “I don’t believe you.”   “You say the Fed pursues a dual mandate, but then how come even famous monetary economists can’t agree that money was too tight during the Great Recession, when both employment and inflation were far below target, and when the inflation they warned about never showed up, even years later when unemployment fell to 4.3%”.  “If you guys can’t even agree on that, then how can you claim to know anything.”

I don’t think we could criticize that annoying student.  Who’s to say he’s wrong? Why should he accept anything he’s being taught as being true, if even the leaders of the profession can’t agree on its most basic principles?

And BTW, I’d say the same thing about microeconomics.  If we as a profession can’t agree that “price gouging” is a good thing, which should not be outlawed, then how can microeconomists claim to know anything.  And yet a recent post by David Henderson discussed a poll which showed that 8% of leading economists actually hold those deeply unscientific views. (And lots more were uncertain.) Opposing price gouging is not like denying global warming, it’s far worse.  It’s like creationism.  At least with global warming there is some doubt.  (I happen to agree with the scientific consensus.)  But if economists are wrong about price gouging, then you might as well put all EC101 textbooks into a big bonfire.  Greg Mankiw’s (excellent) textbook is probably about 750 pages long, but the basic punch line of much of what he says can be boiled down to something to the effect that, “price gouging is not only good, it’s the whole point of a market economy.” (My words, not his.)  If Mankiw is wrong about that, then he’s wrong about almost everything.

And Madura’s policies in Venezuela would be wonderful.

The value of a human life

Here’s the New York Post:

Better a million dead North Koreans than a thousand dead Americans. The fundamental reason our government exists is to protect our people and our territory. Everything else is a grace note. And the words we never should hear in regard to North Korea’s nuclear threats are “We should’ve done something.”

Instead, we should do something. Pyongyang’s Sunday test of a hydrogen bomb of devastating power begs for decisive action. Must we wait until Americans die?

A pre-emptive strike against Kim Jong Un’s nuclear and ballistic missile programs would be a terrible thing, demanding a vast military effort (if done properly) and leaving broad destruction in its wake. But that terrible option increasingly appears to be the least bad option. The question is whether we’ll delay action until it’s too late to save American lives.

Notice that they ignore the South Koreans.  I wonder how they value South Korean lives?  Perhaps 13 cents on the dollar?

Here’s Elton John, er, I mean Trump:

The United States has great strength and patience, but if it is forced to defend itself or its allies, we will have no choice but to totally destroy North Korea. Rocket Man is on a suicide mission for himself and for his regime. The United States is ready, willing and able, but hopefully this will not be necessary. That’s what the United Nations is all about; that’s what the United Nations is for. Let’s see how they do.

It is time for North Korea to realize that the denuclearization is its only acceptable future.

Just to be clear:

1.  I have no idea what the optimal policy toward N. Korea is.

2. I think Trump makes both tails more likely (nuclear exchange and N. Korea capitulation), but the most likely outcome remains more of the same. The “problem” is that the tail risks may rise from say 1% to 2% under Trump.  That’s still low, but one of those tails is a very bad outcome, should it occur.

I hope readers now have a better understanding of what I meant last year when I claimed that Trump’s reckless personality raised the risk of nuclear war from something like 1% to something like 2%.

PS.  Trump started off his talk with some comments that were of zero interest to the UN audience, and included his usual lies.

Fortunately, the United States has done very well since Election Day last November 8th. The stock market is at an all-time high — a record. Unemployment is at its lowest level in 16 years, and because of our regulatory and other reforms, we have more people working in the United States today than ever before. Companies are moving back, creating job growth the likes of which our country has not seen in a very long time. And it has just been announced that we will be spending almost $700 billion on our military and defense.

Job growth has slowed since Trump took office.  And do you recall what Trump said about the booming stock market when Obama was President?

PPS.  Are a million dead N. Koreans better than one dead American?  If not, why not? Please show your work.

PPPS:  Trump also said:

We know it kidnapped a sweet 13-year-old Japanese girl from a beach in her own country to enslave her as a language tutor for North Korea’s spies.

How should we value the welfare of that sweet Japanese girl against the lives of 13-year old N. Korean girls.  How about South Korean girls?  How about undocumented workers in America like Melania?  How about Hillary?  How about Trump?  Again, I prefer that commenters provide precise numerical answers.  After all, the NYPost says this is all very simple.

Seven hundred $100 bills are lying on the sidewalk. Pick them up!!

I have wonderful news for everyone.  The prize money for two Hypermind NGDP markets has soared to $70,000, which includes $35,000 in prize money for the 2017:Q1 to 2018:Q1 contract (currently trading at about 39, or 3.9% NGDP growth), and another $35,000 for the 2018:Q1 to 2019:Q1 contract.

Update:  This announcement triggered a lot of interest in the contract. Hypermind sent me a better link to the two markets.

Remember that this is free money.  You do not have to invest any of your own money to participate.  You can win money, but you cannot lose.  Our hope is that this prize money will lead to more trading in the NGDP markets, more liquidity.

Once again, NGDP growth expectations are the single most important market price, the single most important measure of the performance of the macroeconomy.  It’s a scandal that the economics profession has ignored this issue, but the Mercatus Center and Hypermind have cooperated so that we will have a real time measure of the public’s NGDP growth expectations.  (Here is the Mercatus announcement.)

Participating in this market can result in free money, thousands of dollars worth of free money for the more talented/lucky (pick one) participants. But the more important reason for participating is that this will tend to shine a spotlight on expected growth in aggregate demand.  Progressives should want that to happen.

And there’s something for conservatives too.  I hope that the financial press will eventually start reporting current NGDP futures prices.  This will gradually put more pressure on the Fed to pay attention to market forecasts, and move from a discretionary policy approach to a more rules-based approach.  Thus NGDP targeting has something for both progressives and conservatives, which is why it’s an increasingly popular idea among economists on both the left and the right.

PS.  I’m also a believer in the “watched pot never boils” theory, so I believe this market makes it less likely that a recession will occur before 2019. (Making this the longest expansion ever.) Recessions only occur when NGDP expectations fall sharply, and I believe the Fed will not want to see NGDP expectations fall sharply. Please file away this prediction, and remind me of it if I am wrong.

PPS.  David Beckworth has a very interesting podcast with Larry Summers.

In this Econlog post I comment.