Don’t expect the future to be like the past

Garrett MacDonald directed me to a interesting article by Paul Donovan, chief economist at UBS.

What can we forecast about next year?

Among the many interesting points, this caught my eye:

The ups and downs of the economic cycle may be less violent than they used to be. Recessions are probably less recessionary in the future (see the July Chief Economists comment “Will recessions be less recessionary in the future”).

I often point out that the US business cycle has some very bizarre features:

1.  Expansions never last more than 10 years.

2.  There are no mini-recessions.

The first is bizarre because recessions seem to occur randomly, not according to any fixed cycle.  Expansions do not die of old age.  You’d expect some expansions to just randomly drag on for more than 10 years.  The second is bizarre because you’d expect that whatever process causes recessions (some sort of shock?) would create far more mini-recessions than sizable recessions.  Think about how there are far more small earthquakes than big earthquakes.  Instead, the United States NEVER has mini-recessions, defined as an increase in the unemployment rate of more than 0.8% and less than 2.0%.  That’s just bizarre.  (And even the one 0.8% increase was due to the unusual 1959 nationwide steel strike—normally there is almost no increase in unemployment beyond random noise, unless unemployment soars much higher.)

Before you respond with good reasons why these patterns are not bizarre, I’d like to point out that other countries such as Britain and Australia do have economic expansions that last much more than 10 years, and they do have mini-recessions.  So the US really is a very weird place.  But for some reason American economists don’t seem to pay much attention to this weirdness.

I’m on record as predicting that this will be the longest expansion in history, the first that extends for more than 10 years.  Now I’d like to go on record predicting that we will see some mini-recessions in the next few decades.  I don’t see any reason why we haven’t had them; other countries have them, so why can’t we?

Here’s another interesting point:

Economics can generally predict central bank policy. This is hardly surprising. Central banks – at least, the good central banks – are run by economists.

In the past I’ve argued that economists don’t blame central banks for recessions because central banks follow the consensus of economists, and economists don’t want to blame themselves.

Economists should not make forecasts.

In the past, I’ve argued that good economists don’t forecast, they infer market forecasts.

PS.  Here are 6 British mini-recessions, in each case with the unemployment rate rising by about 1%.

And here are three recent mini-recessions in Australia, in each case with unemployment rising between 1% and 2%:

Off topic:  Did Jesus once say: “Blessed are the beta males: for they shall inherit the earth”?  Scanning the recent news headlines, it almost seems like his prediction is coming true, after 2000 years.

PS.  Here’s an excellent USA Today editorial on Trump. The press has been way too soft on him.

Is tax reform falling apart?

First we have the Senate reinstating the AMT.  And now this:

On Friday, Gary Cohn, the president’s senior economic adviser, suggested the White House might push for a cap on federal deductions for state income taxes, rather than an elimination.

Both the House and Senate have already passed bills that cap SALT deductions (for property taxes) at $10,000.  Why put this idea out there now?  This is just mind-bogglingly dumb.

And now we discover that the corporate income tax changes will encourage firms to move plants overseas.

PS.  I enjoyed reading this:

As written, the plan is “a disaster”, said the head of another powerful New York-based investment bank, who asked not to be named for fear of being attacked by Mr Trump on Twitter.

He added: “This won’t happen over the period of a quarter or a year, but in five to 10 years, when we’ll look back at the amount of intellectual capital lost by New York City and other blue [Democratic-led] states because of Trump’s tax reform, we’ll get the full extent of how damaging all this is.”

But wait, I thought it’s been “proved” that supply-side economics is wrong; marginal tax rates don’t affect behavior.

Why Trump failed to create jobs

As a candidate, Trump dismissed the stock market boom as a mere “bubble”.  His focus was on the labor market, which was a “disaster”.  He would create lots of jobs.

Immediately after the election, there were a few good economic data points, and the Trump people argued that the economy was already improving under the influence of more positive expectations created by his victory.  So let’s go with that assumption, and look at the economy in the 12 months since the election.  Here is the rise in payroll employment over the past 12 months, as well as during the previous 4 years:

11/16 to 11/17:   2.071 million

11/15 to 11/16:   2.324 million

11/14 to 11/15:   2.729 million

11/13 to 11/14:   2.793 million

11/12 to 11/13:  2.499 million

So why has job growth slowed under Trump?  After all, Trump claimed the “true” unemployment rate was 30% or 40%, so there’s obviously lots of labor market slack.  Right?

Of course I’m being sarcastic.  Both liberals and conservatives claimed there was lots of labor market slack, and they were both wrong.  Liberals made that claim to justify expansionary monetary and fiscal policies, and conservatives wanted discredit the economic performance under Obama.  In fact, we are nearing full employment.  I expect one more decent year in 2018, and then job growth will become extremely slow beginning in 2019.  RGDP growth will also slow in 2019.  I say that because the tax cut will provide a modest boost to the economy in 2018, but not much after that.

Interestingly, this poor job growth occurred despite some very positive tailwinds:

1. Manufacturing employment actually picked up slightly, as the fracking boom resumed and lots of manufacturing jobs are related to that industry.

2. NGDP and RGDP growth has been a bit better in 2017.

3.  There’s been a bit of deregulation.

Despite these factors, we are simply running out of bodies.  Job growth will continue to slow sharply over the next few years, especially in 2019.

Other Trump promises that won’t be kept:

1.  Repeal Obamacare.

2.  Build the wall.

3.  Build infrastructure.

4.  Cut the top personal income tax rate from 43.4%  to 25%.  (Trump will increase it.)

5.  Lock her up.

However Trump will succeed in continuing to move the GOP from being a party of economic/foreign policy/social conservatives, to a paranoid conspiracy theory mongering, fake news, anti-intellectual, pro coal, white nationalist party whose leadership endorses people who long for the days of slavery, want to ban Muslims from Congress and say gays should be locked up.

PS.  Read this horrifying article about what they plan to do with capital gains taxes—increase the rate and make the system far more complex.

Bubblemongers don’t get a second chance

Tyler Cowen recently made this statement:

I used to think Bitcoin was a bubble, but I no longer hold this view.

Yes, but at the risk of being a pedant I wish he had said the following:

I used to think Bitcoin was a bubble, but we now know that this is not the case.

There is literally nothing that could happen between now and the end of time that would in any sense confirm the view that bitcoin is a bubble.  It isn’t.

But let’s say I’m wrong.  What would that imply about bubble claims?  If we gave bubblemongers a second chance, then they could do the following:

1.  Predict that Bitcoin was a bubble when the price was $10.

2.  After they were shown to be wrong they could make a new prediction that bitcoin is a bubble, this time when the price hits $100.

3.  After that prediction was shown to be wrong, make a new bubble prediction when the price hits $1000

4.  After that prediction was shown to be wrong, make a new bubble prediction when the price hits $10,000.

I hope you see the problem here.  In any 100% efficient, bubble-free market, where prices are highly volatile, eventually there will come a time when predictions that prices are too high will come true.  But that’s virtually a tautology, a market cannot be both highly volatile and efficient, unless there are occasional steep plunges in the price.  There will be some price which, in retrospect, will have been the peak price—even in an efficient market.  I don’t understand why so many people have difficulty grasping this point.

So what would tend to confirm bubble theories?  I can think of lots of evidence.  For instance, a meta-study of mutual funds that shows the superiority of funds taking advantage of bubble theories did better than funds that assumed the EMH is true (i.e. contrarian funds vs. index funds).

But again, we know for certain that bitcoin bubble theories are useless.  It’s far to late for any new information to change that fact.

Perhaps part of the problem is that people don’t spend enough time reading Richard Rorty.  They think that truth is some sort of objective reality out in the world, which we can grasp.  Perhaps (they think) the bubble theory can still be shown to be true, but for a price of $10,000, not $10.  Sorry, things don’t work that way.  In fact, there is no objective reality.  True ideas are simply useful ideas.  Since bitcoin bubble theories have already been shown to be useless, and would continue to be useless even if prices plunged by 99% tomorrow, bitcoin bubble theories can never become true.  They are already falsified for all time.  There are no second chances–so if you are going to call a bubble, don’t do so at a time when the asset price is about to rise far higher.

Here’s an analogy.  If you claim that a certain coin is unfair, biased towards heads, you don’t get to keep flipping it until you happen to get 20 heads in a row.  You get 20 coin flips.  And those first 20 flips are your test.  Sorry bubblemongers; you lost.

It’s too late Mitt

Here’s the latest

The Republican National Committee is following in the footsteps of President Donald Trump and supporting Alabama senatorial candidate Roy Moore, according to an RNC official.

Gee, I wonder why they changed their minds?

And here’s Mitt Romney:

Roy Moore in the US Senate would be a stain on the GOP and on the nation. Leigh Corfman and other victims are courageous heroes. No vote, no majority is worth losing our honor, our integrity.

It’s too late Mitt.

Meanwhile the President’s press secretary is asked whether Trump thinks Muslims should be banned from Congress, and is unable to answer the question.  She doesn’t know the answer.  Let that sink in.  Too bad they didn’t ask her whether Trump thinks gays should be put in prison; I’d guess she doesn’t know the answer to that question either.

PS.  Steve Bannon opposes immigration from Asia because he believes it might change our culture, by which he means white culture, not American culture.  (Blacks and Hispanics don’t count to white nationalists).  Even before the election we can be pretty sure that a large majority of white Alabamans are going to vote for Bannon’s preferred Senate candidate, a guy who has said that Muslims should not be allowed to serve in Congress and gays should be put in prison.  I know quite a few Asian immigrants, indeed each Saturday morning I hang out with about 40 of them.  And I can confirm that they do not share the culture of whites living in Alabama.  Unlike Bannon, I see that as a good thing.  I am happy that Asians keep pouring into the country.  I look forward to our culture changing.  And there’s nothing Bannon can do to stop it.

PPS.  The deficit is about to get much bigger:

The deficit will hit $1.05 trillion in 2019 and $1.1 trillion in 2020, according to the Committee for a Responsible Federal Budget, if Congress passes the tax cut legislation it’s currently negotiating, along with disaster relief and other measures meant to avert arbitrary limits on spending established several years ago. The tax cuts alone would add about $150 billion to the deficit each year, on average, with other likely changes pushing that up by another $25 billion per year, or so. Deficits will only get larger, unless there are major cutbacks in spending or new taxes in the future.

I can’t wait to see the GOP bring about “major cutbacks in spending”.  The deficit was $585 billion in Obama’s last year in office.  Recall how the GOP insisted that Obama’s deficits would bring down our economy?  Now the deficit is about to explode during a period of economic expansion, when deficits usually fall.  Hey, what could go wrong?