I first became aware of Julian Evans-Pritchard last year, and on September 8th I did a post reporting his relatively upbeat views on Chinese growth prospects. Seven months later we have received three more Chinese GDP reports, and it’s clear that Evans-Pritchard was right, at least relative to my more pessimistic view (I predicted 6.0% growth for China, the actual number is likely to be at least 6.5%).

So it’s worth revisiting Julian Evans-Pritchard, to see his current views on the growth prospects of the world’s largest economy (reported in the FT):

While GDP growth might have notched a slight fall from the fourth quarter of 2015, at Capital Economics, Julian Evans-Pritchard pointed to signs from recent data that momentum was improving heading into the second quarter:

The slowdown was concentrated in the service sector, where growth slowed from 8.2% y/y to 7.6%. We won’t get the full breakdown until tomorrow but we suspect that this was predominately due to weaker financial sector growth. Stock market turnover surged in Q1 of last year due to the equity bubble, but it has since come back down to earth. Growth in the secondary sector, which covers industry and construction, held up better, although it nonetheless edged down somewhat from 6.1% y/y to 5.8%. …

Looking ahead, we think it makes sense to focus on the monthly data for March in order to gauge the economy’s current momentum. These beat expectations across the board. In particular, the sharp pick-up in industrial production and investment leaves us hopeful that growth has now bottomed out for the time being, with looser monetary and fiscal policy likely to result in a cyclical upturn over the coming months.

Services are now more than half of the Chinese economy, and in Q1 that proportion continued to grow (and is likely to continue growing for many more decades). Chinese data is YoY, so by the second half of this year the service sector growth may speed up, as the decline in finance during the second half of 2015 will drop out of the YoY comparisons.

Here are some more bearish views, which also seem reasonable:

At Moody’s, Marie Diron sounded a wary note, pointing to other economic indicators where a rise was less welcome:

The very large increase in investment by SOEs, at 23.3%, points to a further rise in leverage and fall in return on assets in the sector, a negative signal for the sustainability of growth.

Policy measures have also contributed to a recovery in real estate, with a marked increase in floor space started in Q1. However, if the capacity that is created does not match migrants’ demand in terms of quality and location of housing, the risk of a renewed correction in the property sector will build.

Tom Rafferty, Asia economist at the EIU, concurred, suggesting property investment was unlikely to see sustained strengthening. He went on to drive home a point many economists have touched on recently – that China’s structural problems go deeper:

Today’s released data ought not to distract from the fact that the structural issues facing China’s economy remain unresolved. It has taken considerable monetary and fiscal policy loosening to stabilise economic growth at this level and this effort has distracted from the reform agenda that is fundamental to long-term economic sustainability. Levels of debt within the Chinese economy are too high and we are concerned that the authorities are not moving quickly enough to address the issue.

While today’s data points to upside risks to our forecast of 6.5% expansion in 2016 as a whole, we still believe that growth momentum will falter in coming months. Looking further ahead, we are very sceptical that the government’s targeted 6.5% “floor” for annual economic growth over the next five years will prove attainable and the risk of a sharp economic slowdown, or hard-landing, will persist.

As I’ve said before, I think China’s biggest economic problem is over-investment in third tier cities, and the excessive debt used to finance that malinvestment.  Back around 2000, people talked of “bubbles” in places like Shanghai’s Pudong district, a prediction that looks ridiculous today.  But the third tier cities are more worrisome in my view, as I think the Chinese people will increasingly move toward the first and second tier cities.  Property prices are ridiculously high relative to income, in places like Beijing and Shanghai.  But property prices should be ridiculously high relative to income, in places like Shanghai and Beijing.  Those are the next Tokyo/New York/London-type cities, while interest rates are low, and will stay low.

PS.  If you wonder why China is so important, consider the following:

The U.S. dollar rallied and major stock markets rose on Wednesday after JPMorgan’s results beat lowered expectations and upbeat Chinese trade data offered hope Asia’s biggest economy is finally stabilising.

The euro fell nearly 1 percent versus the greenback as stronger Chinese economic growth boosted recently batted-down expectations that the Federal Reserve could raise interest rates again in the not-too-distant future.

Equity markets as far flung as Hong Kong and Germany rose sharply on the recent China data, and it even impacted the likely future path of Fed policy.  When you are the world’s largest economy, you affect everything.

PPS. I recently mentioned that 31 students from my wife’s (Beijing) high school were accepted by UCLA.  I just got some more info. The graduating class included 120 students, and 15 of them got perfect (2400) scores on the SAT—in what for them was a foreign language.  I wonder how many public schools in America have those kinds of scores.  Middle income trap for China? I doubt it.

Meanwhile, back in the States, we have about 500 perfect scores each year, many in California:

About 80 California high school students out of some 234,767 taking the SAT last year scored that perfect trifecta. Of these 80, a stunning one-quarter, or 20, came out of the program at a two-year-old San Diego startup company, Summa Education Services, founded by Chief Executive Chris Hamilton and his partners Andrew Chung and test-whiz Karl Hagen.

.  .  .  Hamilton needs to leave his modern Carmel Valley office, where chairs are piled high with new hard-bound novels he hands out like strawberry pancakes. Time to teach a class on reading comprehension. It is a discrete sea of energetic Chinese/Korean/Indian faces.

I find this kind of sad—what a waste of time in such an affluent society.

I could have just said “President”, but “President of the United States of America” sounds more impressive.

The 538 blog has an excellent new post showing how the GOP primary process is set up to favor Trump, who is winning far more delegates than votes:

Even worse, Trump tends to do better in areas with fewer GOP voters.  Perhaps the most extreme case is the Northern Mariana Islands, where a mere 471 voters delivered 9 out of 9 delegates for Trump:

Nine votes doesn’t seem like much relative to the 1237 needed for the nomination. But you need to think at the margin, not in terms of total votes.  No one knows how many votes Trump needs pre-committed, to secure the nomination in Cleveland.  Most experts think he can get a few extra votes at the convention, but not very many.  I.e., he doesn’t need to come in with 1237 votes, but something fairly close.  And guess what, he’s expected to end up with 1155.  Is that enough to put him over the top?

The betting markets currently give him a 50.5% chance at the nomination, which suggests that his expected vote total is really, really close the the cutoff point between success and failure.  Every delegate counts, and nine delegates may well be the difference.

Of course even if Trump gets the nomination, the betting markets think he’s unlikely to win. His odds of being President are 12.7% meaning he has just over a 1 on 4 chance, conditional on getting the nomination.

To conclude, I don’t want to oversell things, Trump has only a 12.7% chance of being President, and even if elected there’s maybe only a 1 in 5 or 1 in 10 chance that those 9 Northern Mariana Islander delegates will have put him over the top at the convention.  But that’s still massively more influence that the GOP voters in my home state:

On the other hand, voters in the most Republican-rich places have the least influence. For example, in Wisconsin’s 5th District (home to the famously Republican Waukesha County) three delegates were awarded to the winner among 191,735 voters — that’s 63,912 voters per delegate. Even within certain states, Republicans living in blue areas have a lot more influence than Republicans living in red areas. For example, Illinois’ 4th District (which President Obama won with 81 percent of the vote in 2012) had a votes-to-delegate ratio of 4,989 to 1, while the state’s 18th district (which Obama lost with just 44 percent of the vote) had a ratio of 43,679 to 1.

So, yes, the playing field is tilted, but it’s tilted in Trump’s favor; he’s been running downhill.

Call me a loyal Cheesehead (I’m from Wisconsin) but I feel safer sleeping at night knowing our next President is picked by the sensible citizens of suburban Milwaukee, than by the Northern Mariana Islanders, about whom I know almost nothing. Unfortunately, it’s possible the exact opposite may be the case.

BTW, Waukesha County picked Cruz over Trump by 61% to 22%.

PS.  In contrast, if it were up to “the voters” (as Trump prefers), then Trump would come into Cleveland with less than 40% of the delegates, and almost no chance at the nomination.

PPS.  OK, Art Deco, I know you are waiting for the results from the Southern Mariana Islands, aka Guam, which has another 9 delegates.  Well, you’ll have to wait until May 9th.  And another 9 from American Samoa, apparently unbound. Now we are up to 27.  Just how many fricking Pacific islands do we own?   Thank God that Teddy Roosevelt didn’t grab all of Polynesia, or Trump would already have the nomination in the bag.

PPPS.  By the way, the Northern Mariana Islands are preserving manufacturing jobs for “Americans”.  Here’s the NYT:

SAIPAN— On this tiny, tropical outpost of the United States, many people describe what happens to foreign workers here as something close to servitude.

Every year, thousands of laborers from China, the Philippines and elsewhere in Asia are flown here. The workers are often bused straight from the airport to squalid barracks where they live — sometimes for years — as many as a dozen to a room.

They are put to work almost immediately in nearby factories within view of Saipan’s pristine beaches, many of them laboring six days a week at about half the Federal minimum wage, stitching together American brand-name clothes. Familiar Labels

The labels would be familiar to anyone who has strolled through an American shopping mall. Over the last year, Arrow, Liz Claiborne, The Gap, Montgomery Ward, Geoffrey Beene, Eddie Bauer and Levi’s have all made clothes on this palm-fringed island that is part of the American commonwealth in the Western Pacific, 5,000 miles from the continental United States.

And while many of these garments are manufactured in foreign-owned factories by foreign workers, the apparel made in the Northern Marianas often bears another familiar label: “Made in the U.S.A.” The American flag flies over several of the factories.

Not exactly the sort of Pacific island paradise described by Melville.

HT:  David Levey

Ben Bernanke has done a series of posts on what central banks can do at the zero bound. His first post looked at negative IOR, and the second examined targeting long-term interest rates.  Of course Bernanke has also advocated the use of QE. Now he looks at the helicopter drop option. Bernanke agrees with my view that helicopter money should be used as a last resort.  Where we may differ slightly is how many options need to be tried before reaching that point.

In my view, it’s too soon to jump to helicopter money, just because the techniques mentioned by Bernanke have been exhausted.  I recall Bernanke once arguing that the inflation target might have to be raised if there was a danger of hitting the zero bound, but he doesn’t mention that here. In my view there are many alternatives that we’d need to run through before considering helicopter drops, such as a higher inflation target, or price level targeting, or better yet NGDPLT.  I’d also want to go beyond T-bond purchases, to the purchase of other assets.  Thus creation of a sovereign wealth fund would be far superior to helicopter drops.

For some reason Bernanke doesn’t consider those alternatives, perhaps because he doesn’t think they would be needed:

In this post, I consider the merits of helicopter money as a (presumably last-resort) strategy for policymakers. I make two points. First, in theory at least, helicopter money could prove a valuable tool. In particular, it has the attractive feature that it should work even when more conventional monetary policies are ineffective and the initial level of government debt is high. However, second, as a practical matter, the use of helicopter money would involve some difficult issues of implementation. These include (1) the need to integrate the approach with standard monetary policy frameworks and (2) the challenge of achieving the necessary coordination between fiscal and monetary policymakers, without compromising central bank independence or long-run fiscal discipline. I propose some tentative solutions for these problems.

To be clear, the probability of so-called helicopter money being used in the United States in the foreseeable future seems extremely low.  (emphasis added)

Almost everyone agrees that the US is likely to hit the zero bound in the next recession.  So obviously Bernanke doesn’t think being at the zero bound, in and of itself, calls for helicopter drops.  But then what would be the trigger?  On that issue he’s a bit vague.

Suppose we assume that “extremely low” means “1% chance”.  My response would be that we could lower than number to something closer to one in a million by adopting a different policy target, and giving the Fed the responsibility to “buy whatever it takes” to keep as close to the target as possible.  Then helicopter drops could be used as a fallback to make the “Chuck Norris effect” credible, without ever actually having to use the policy.

To his credit, Bernanke sees the problems with the helicopter drop theory—it doesn’t really solve any fundamental problem.  Even a helicopter drop may not be effective if the money supply increase is not viewed as permanent.  This causes Bernanke to suggest exotic extensions of the traditional helicopter drop:

As I’ve stressed, MFFPs [money financed fiscal policies] differ from ordinary fiscal programs by being money-financed rather than debt-financed. In my illustrative fiscal program, government spending and tax cuts are paid for by the creation of $100 billion in new money. To have its full effect, the increase in the money supply must be perceived as permanent by the public.

In practice, however, most central banks do not make monetary policy by choosing a fixed amount of money in circulation. Instead they set a target for a short-term interest rate (in the U.S., the federal funds rate) and allow the money supply to adjust as necessary to be consistent with that target. The rationale for this approach is that the relationship between interest rates and the economy appears more stable and predictable than that between the money supply and the economy. If central banks target interest rates rather than the money supply itself, than it’s not immediately obvious how the idea of a “permanent increase in the money supply” can be made operational.

One possible solution for that problem is that the central bank, rather than making an explicit promise about the money supply, could temporarily raise its target for inflation—equivalently, it could increase its target for the price level at each future date. Since the price level and the money supply tend to be proportional in the longer run, aiming for a higher price level could approximate the effects of committing to a higher money supply. A shortcoming of this approach is that it obscures the fact that the fiscal package is being financed by money creation rather than by new debt—a distinction that, again, the public must appreciate if the MFFP is to be fully effective.

This is not just a theoretical possibility.  We know that helicopter drops failed in Japan, because the monetary injections were viewed as temporary.  Bernanke correctly notes that shifting to a level target for prices can overcome this problem. But then level targeting also overcomes the main weakness of QE.  Thus if we do what Bernanke suggests, we don’t even need the fiscal component.

The methods that central banks use to meet their interest-rate targets pose further complications. Before the financial crisis, the Fed continuously varied the amount of money in the system (more precisely, the quantity of bank reserves) to keep the funds rate near the desired level. In the years since the crisis, however, several rounds of quantitative easing have resulted in very high levels of bank reserves, to the extent that the traditional method of making marginal changes to the supply of reserves is no longer effective in controlling the federal funds rate. Instead, following practices similar to those of other major central banks, the Fed currently influences the funds rate by varying the interest rate it pays on bank reserves and on other short-term investments at the Fed. [8]

As my former Fed colleague Narayana Kocherlakota has pointed out, the fact that the Fed (and other central banks) routinely pay interest on reserves has implications for the implementation and potential effectiveness of helicopter money. A key presumption of MFFPs is that the financing of fiscal programs through money creation implies lower future tax burdens than financing through debt issuance. In the longer run and in more-normal circumstances, this is certainly true: The cost to the Treasury of spending increases or tax cuts – and thus the future tax burden – will be lower if the Fed provides the financing. In particular, when the Fed’s balance sheet has shrunk and reserves are scarce again, the Fed will be able to manage short-term rates without paying interest on reserves (as it did traditionally), or in any event by paying a lower rate on reserves than the Treasury must pay on government debt. In the near term, however, money creation would not reduce the government’s financing costs appreciably, since the interest rate the Fed pays on bank reserves is close to the rate on Treasury bills.

Both interest-rate targeting and the payment of interest on reserves make it more difficult to achieve and communicate the cost savings associated with money financing. Here is a possible solution. Suppose, continuing our example, that the Fed creates $100 billion in new money to finance the Congress’s fiscal programs. As the Treasury spends the money, it flows into the banking system, resulting in $100 billion in new bank reserves. On current arrangements, the Fed would have to pay interest on those new reserves; the increase in the Fed’s payments would be $100 billion times the interest rate on bank reserves paid by the Fed (IOR). As Kocherlakota pointed out, if IOR is close to the rate on Treasury bills, there would be little or no immediate cost saving associated with money creation, relative to debt issuance.

However, let’s imagine that, when the MFFP is announced, the Fed also levies a new, permanent charge on banks—not based on reserves held, but on something else, like total liabilities—sufficient to reclaim the extra interest payments associated with the extra $100 billion in reserves. In other words, the increase in interest paid by the Fed, $100 billion * IOR, is just offset by the new levy, leaving net payments to banks unchanged. (The aggregate levy would remain at $100 billion * IOR in subsequent periods, adjusting with changes in IOR.) Although the net income of banks would be unchanged, this device would make explicit and immediate the cheaper financing of the fiscal program associated with money creation.

Or we could just raise the inflation target to 3%.

Or even keep it at 2% and do level targeting.  Or NGDPLT.  All these epicycles to make helicopter drops work make me dizzy.  The simple truth is that monetary policy is all we need if used intelligently, and if not used intelligently (as in Japan pre-2013), even helicopter drops won’t get the job done.  So let’s K.I.S.S., and work out fallbacks that don’t require wildly unrealistic assumptions about cooperation between the Fed and a GOP-controlled Congress.  Instead let’s simply shift the target slightly (4% NGDPLT anyone?), and perhaps add to the securities that the Fed is eligible to buy.

I am more sympathetic to Olivier Blanchard’s view of helicopter drops:

One thing he is not worried about is running out of monetary ammunition. “There is an argument that QE actually becomes more effective, the more you use it,” he said.

As a central bank buys more bonds, the more it has to pay to convince the last hold-outs to sell their holdings. “The effect on the price plausibly becomes stronger and stronger,” he said.

Prof Blanchard said the authorities should stick to plain vanilla QE rather than experimenting with “exotic stuff”.

He waved aside talk of ‘helicopter money’ with contempt, calling it nothing more than a fiscal expansion by other means. It makes little difference whether spending is paid for with money or bonds when interest rates are zero.

Blanchard favors a 4% inflation target, so that central banks would not hit the zero bound.  Again, K.I.S.S.

HT:  Benn Steil, James Alexander, et al.

Not from the Onion:

LA unions call for exemption from $15 minimum wage they fought for

Los Angeles city council will hear a proposal on Tuesday to exempt union members from a $15 an hour minimum wage that the unions themselves have spent years fighting for.

The proposal for the exemption was first introduced last year, after the Los Angeles city council passed a bill that would see the city’s minimum wage increase to $15 by 2020. After drawing criticism last year, the proposed amendment was put on hold but is now up for consideration once again.

Union leaders argue the amendment would give businesses and unions the freedom to negotiate better agreements, which might include lower wages but could make up the difference in other benefits such as healthcare. They argue that such exemptions might make businesses more open to unionization.

Case closed?

HT:  Anand

Last year, lots of people said the Australian miracle would finally come to an end.  I had commenters mocking me for arguing that Australia wasn’t a bubble.  They insisted that the bubble was already bursting.  (I wish you guys would come back to my comment section—I miss you.)

Now we are well into 2016, and the Australian economy is surging:

Australian business confidence jumped and an employment gauge in the survey surged to the highest in almost five years, signaling a healthy job market and reducing the likelihood of an interest-rate cut. The local currency gained.

The sentiment index doubled to six points last month, according to a National Australia Bank Ltd. survey of more than 400 firms conducted March 23-31. The business conditions gauge — a measure of hiring, sales and profits — climbed to 12, matching the highest level since before the 2008 global financial crisis. The employment index jumped four points to five, its best result since 2011.

“This is an especially good result in the context of a downbeat global economic outlook,” said Alan Oster, chief economist at NAB. “Low interest rates and a more competitive currency, even given recent strength, are expected to remain key drivers domestically. Consequently, our outlook for the economy remains unchanged — and with the non-mining recovery expected to progress further, monetary policy is likely to remain on hold for an extended period.”

Australia’s economy is proving resilient in the shadow of recent financial turbulence in China, negative interest rates in Japan and Europe and weaker commodity prices that have combined to increase global risk. The Reserve Bank of Australia cut rates to a record-low 2 percent in May last year in an easing cycle designed to cushion the economy from unwinding mining investment and encourage services industries to pick up the slack.

While gross domestic product grew a robust 3 percent last year and the unemployment rate has fallen to 5.8 percent, the Australian dollar has rebounded more than 10 percent since mid-January.

Last Australian recession—1991.

Funny how countries that maintain adequate long-term NGDP growth don’t seem to have problems with the zero bound.  I wonder if the problems in Japan and the eurozone are self-inflicted?  (NGDP growth has recently been weak in Australia, due to lower commodity prices, but the long-term expected trend is high enough to keep interest rates above zero.  That trend rate remains well above European and Japanese levels.)

When the Chinese stock market crashed last summer, lots of commenters mocked my claim that China was doing fine, and insisted that it was entering a recession. This month the consensus forecast for 2016 GDP growth in China (private forecasters) rose from 6.4% to 6.5%.  Even accounting for data problems, most experts think growth is at least 5%.  In an economy with a flat labor force, 5% is not too bad.  Retail sales growth is still running at double digits, and exports are picking up, although by less than this FT story suggests:

China reported stronger than expected trade data on Wednesday, the latest sign of a tentative revival in fortunes that paves the way for Friday’s release of first-quarter economic growth.

Exports surged 18.7 per cent in renminbi terms in March over the same month last year, after declines in both January and February. Imports also stabilised, dropping just 1.7 per cent compared with an 8 per cent fall in February.

In dollar terms, exports rose 11.5 per cent while imports fell 7.6 per cent for the period, reflecting the renminbi’s recent rise. The currency has gained 1.9 per cent against the dollar over the past two months.

China’s export sector has been buffeted by the slowdown in global trade, the dollar value of which has been shrinking since 2012 largely because of the slump in international commodities prices.

The International Monetary Fund this week warned that the world risked a “synchronised slowdown” but highlighted China as a rare bright spot among major economies.  Chinese officials have been working to counter international investors’ increasingly negative outlook for the country’s economy.

Their cause has been boosted by a slew of better than expected data releases, including March inflation figures that showed producer price deflation had moderated.

This contributed to the IMF’s decision to revise upwards its forecast for Chinese economic growth this year, to 6.5 per cent from 6.3 per cent. At last month’s meeting of China’s parliament, Premier Li Keqiang projected economic growth of 6.5-7 per cent for 2016.

“China’s commodity imports should see further improvement soon,” said Zhou Hao at Commerzbank.

“Rare bright spot” doesn’t sound like a Chinese recession.

When I hear constant predictions that the Chinese bubble will burst any day now, I’m reminded of Redd Foxx.  People need to stop predicting recessions, because recessions are unforecastable.  The IMF has predicted zero of the past 220 negative growth periods between 1999 and 2014.  This shows that the IMF is smart.  They know that the most likely outcome is growth, and hence they predict growth.  So do I!  Recession predictions also have a corrosive effect on economics as a science.  These predictions lead non-economists to believe that economists should predict recessions, and give undeserved reputational points to lucky permabears.

Peter Schiff said back in January that the US would have a big recession this year. If we don’t have a recession this year, people will forget Schiff’s false prediction, as well as false predictions of major crises in the US in 2015 and 2013, and recall his correct prediction of the 2008 recession.  (Insert broken clock analogy here.) Whenever I hear that someone has accurately predicted a recession, my evaluation of that person declines.  Economists should not be trying to predict recessions; the point is to prevent them.  That’s why we need NGDPLT.

PS.  If you have trouble with me praising the IMF being zero for 220, consider this analogy.  If I’m standing next to a statistician at the roulette wheel, and he predicts the ball will not land on the green numbers (36 out of 38 odds) for each of 220 spins, then I will assume he’s a good statistician.  If he occasionally predicts the ball landing on the green (2 out of 38 odds), I will think less of his statistical skills, even if it does land on the green.

HT:  James Alexander