Archive for November 2016


Richard Rorty in 1998

This comment from 1998 sounds strangely familiar:

[M]embers of labor unions, and unorganized unskilled workers, will sooner or later realize that their government is not even trying to prevent wages from sinking or to prevent jobs from being exported. Around the same time, they will realize that suburban white-collar workers—themselves desperately afraid of being downsized—are not going to let themselves be taxed to provide social benefits for anyone else.

At that point, something will crack. The nonsuburban electorate will decide that the system has failed and start looking around for a strongman to vote for—someone willing to assure them that, once he is elected, the smug bureaucrats, tricky lawyers, overpaid bond salesmen, and postmodernist professors will no longer be calling the shots.  . . .

One thing that is very likely to happen is that the gains made in the past forty years by black and brown Americans, and by homosexuals, will be wiped out. Jocular contempt for women will come back into fashion. The words [slur for an African-American that begins with “n”] and [slur for a Jewish person that begins with “k”] will once again be heard in the workplace. All the sadism which the academic Left has tried to make unacceptable to its students will come flooding back. All the resentment which badly educated Americans feel about having their manners dictated to them by college graduates will find an outlet.

Now you can certainly argue that this is much more extreme than what we’ve seen (and I’d agree), but can anyone deny he captures the mood of the moment?

The article where I found this has a few other remarks about Rorty’s book:

He also then argues, however, that this sadism will not solely be the result of “economic inequality and insecurity,” and that such explanations would be “too simplistic.” Nor would the strongman who comes to power do anything but worsen economic conditions. He writes next, “after my imagined strongman takes charge, he will quickly make his peace with the international superrich.”

I’m actually hoping the last part is true, I like neoliberalism much more than Rorty does.  And again, I give him credit for that prediction, as I think it’s quite possible that Trump adopts the economic policies he describes.

PS.  I also like this article comparing Trump’s win to the OJ verdict.

HT:  Lorne Smith

Steve Bannon’s world

I always thought the alt-rightists were still living in the 1930s.  Here’s

“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” he [Bannon] says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution – conservatives, plus populists, in an economic nationalist movement.”

During the 1930s, the US engaged in some of the most counterproductive economic policy in all of American history.  The unemployment rate averaged about 20%.  And speaking of the 1930s, does Huey Long remind you of anyone?  (With luck, Bannon will be kept out of economic policy.)

And here’s the new CIA chief:

With his name circulating as a candidate for the Central Intelligence Agency post, Mr Pompeo took to Twitter on Thursday to promise action on the Iran deal. “I look forward to rolling back this disastrous deal with the world’s largest state sponsor of terrorism.”

Wonderful, let’s tear up a nuclear deal that’s actually working.

When some Republican presidential candidates criticised the use of excessive surveillance, Mr Pompeo accused them of being “just as weak as Democrats”. He added in an essay in the National Review: “Less intelligence capacity equals less safety.”

When some Republican presidential candidates criticised the use of excessive surveillance, Mr Pompeo accused them of being “just as weak as Democrats”. He added in an essay in the National Review: “Less intelligence capacity equals less safety.”

That last line is worthy of George Orwell.

And no anti-Muslim bigotry in the Trump administration:

After the 2013 Boston marathon bombing, Mr Pompeo accused Islamic leaders in the US of being “complicit” in terrorist acts by not speaking out more.

“Silence has made these Islamic leaders across America potentially complicit in these [terrorist] acts and more importantly still, in those that may well follow,” he said.

Add in that wild and crazy General Flynn, and it’s hard to tell whether Trump is trying to put together an administration, or casting a sequel to Dr. Strangelove:

Mr Flynn was fired from the DIA, the intelligence agency that serves the military, over questions about his ability to lead a big organisation, which raises doubts about how he will manage the national security council. But he was also criticised internally for interpretations that did not align with the views of the analysts who worked for him — leading some people to mock him for propelling “Flynn facts”.

The former official said it was matters like these that made Mr Flynn attractive to Mr Trump, who has also been criticised for egregious lies during the campaign. “That is why Trump likes him. They are similar because they like the big dramatic statement, but when they are confronted with the facts, they kind of say ‘oh really that’s unfortunate’,” said the former official.

And the President that just a few days ago told us that he was going to represent everyone in America, has chosen an Attorney General who was denied a judgeship a while back for a long string of racist and/or borderline racist comments.  (Yes, not every example here is racist, but some are.)

And for those commenters who doubted that Steve Bannon was a racist, check out what he thinks of people like my wife:

In a conversation that actually makes Trump sound reasonable, he tells Bannon that he’s concerned about foreign Ivy League students, highly skilled and otherwise capable of working for or starting their own tech companies, graduating and then returning to their home countries. “When someone is going to Harvard, Yale, Princeton, Penn, Stanford, all the greats” and then graduate, “we throw them out of the country, and they can’t get back in,” he said. “We have to be careful of that, Steve. You know, we have to keep our talented people in this country.” To which Bannon replied: “Um.” Trump tried to get Bannon to agree with him, but to no avail. Instead, Bannon suggested there were already too many Asian tech C.E.O.s. in Silicon Valley. “When two-thirds or three-quarters of the C.E.O.s in Silicon Valley are from South Asia or from Asia, I think . . . ” Bannon said, trailing off. “A country is more than an economy. We’re a civic society.”

Is there a bright side to any of this?  I guess you could say that the fascists are no longer blaming everything on the Jews.  Asians and Muslims are the new scapegoats.  (Of course Bannon’s facts are totally wrong, not even close, but when did facts ever matter to Trumpistas?)

As for all you economic conservatives who held your nose and voted for Trump, I hope you are happy now.  No more Obama “abusing the Constitution”.  Now we have a CIA chief who thinks even his fellow Republicans are a bunch of pansies.  You made your deal with the devil, now you’ll have to live with the results.

And as for the commenters who told me Trump was the “dovish candidate” . . .  I’d hate to see your idea of a hawk.

Is inflation coming? Maybe, but probably a lot less than you assume

Since the election, there’s been a lot of speculation that we are transitioning to a more inflationary environment.  That’s certainly possible, but I’d encourage everyone to take a deep breath.  There are three arguments I’ve seen for this claim, and two are extremely weak, while the third is mixed. Let me start with the strongest of the three, rising TIPS spreads.

As a believe in the EMH, I am not going to discount the importance of TIPS spreads, I’ve cited them in the past.  Rather, I’d like to put that evidence in perspective with a few observations:

1.  As of today, 5 and 10 year T-bond yields are up 50 and 54 basis points from a month ago.  That’s pretty significant.  But that’s mostly real rates, which are up 32 and 33 basis points.  That means TIPS spreads are up 18 to 21 basis points.  That’s not trivial, but it’s also not a dramatic game changer.  We’ve seen similar moves at times over the past 5 years, and not much happened.

2.  In addition, the level of inflation expectations remains well under 2%, especially when you subtract 30 basis points to reflect the fact that PCE inflation (the Fed’s target) runs about that much below CPI inflation (reflected in TIPS.)  This is important, because TIPS spreads (as we’ll see) are basically the ONLY evidence we have for the inflation story.  And even they are not predicting that the Fed will abandon its 2% inflation target (or ceiling, as some of you would claim.)

3.  While I often cite TIPS spreads, I’ve also acknowledged in the past that experts believe these spreads are somewhat distorted by shifts in risk premia. They aren’t perfect.  The Cleveland Fed, among others, attempts to come up with adjusted spreads to better reflect true inflation expectations.  Of course these estimates are model based, and hence are not perfect either.  Please send me any recent ones you come across.

Update:  JP Koning directed me to the Cleveland Fed.  Their model adjusts TIPS spreads to account for risk premia.  Yesterday they updated their 10-year inflation expectations estiamtes to 1.75%.  Last month it was 1.69%, and two months ago it was 1.72%.

4.  With some uncertainty about the accuracy of small moves in the TIPS spreads, where else can we look for inflation signals?  Well, the big story since the election has been the dramatic appreciation of the US dollar.  If we are to believe that Trump plans to debase the dollar through higher inflation, would you expect the forex value of the dollar to be surging higher on that information?  That’s not the macroeconomics I studied in school.  Indeed doesn’t the recent upswing in the dollar suggest we might get a bit lower inflation, as import prices drop?

5.  In contrast, there is an alternative explanation for these events.  Maybe the markets expect a dose of supply-side Reaganomics, and this is driving up expected RGDP growth (modestly to be sure, as rates are still low in absolute terms) and also driving up real bond yields and the value of the dollar.  That makes more sense than the inflation story, although I’m also willing to accept a mixed claim of “0.3% more trend RGDP growth and 0.2% more inflation” as being consistent with the various markets.

The other two arguments cited for higher inflation are especially weak.  One claim is that fiscal stimulus will drive up inflation.  But Yellen recently shot that down—the Fed fully intends to do monetary offset, and is recommending that Trump not do fiscal stimulus.  I have a post on that at Econlog.  (BTW, people frustrated with my Trump derangement over here should keep in mind that I always try to put my most important posts at Econlog.)

The other reason cited is that Trump might pack the Fed with compliant pro-growth, low interest rates doves like Arthur Burns.  But there are many problems with that claim.  Trump would not be able to get a change in the Fed’s official mandate through the Senate.  It would be highly controversial, and there are more than enough GOP mavericks and inflation hawks in the Senate to stop it.  Ditto for a choice of an obvious lackey for chair of the Fed.  He needs to put up a respectable name.  The press has discussed two groups of possible Fed appointments.  One is traditional conservatives like John Taylor and Martin Feldstein.  And the other group is more heterodox thinkers like David Malpass and Judy Shelton.  Neither group includes a single person who can be described as a “dove”.  Does anyone seriously think that John Taylor would switch the Fed to a 4% inflation target just to please Trump?

For better or worse we are locked into a world of low inflation.  Get used to it, it’s not going away.  And that means that artificial attempts to generate higher wages will do nothing but slow growth and reduce employment.

The New World Order?

Yes, the US is still the global hegemon, but this headline certainly caught my attention:

Australia snubs US by backing China push for Asian trade deal

Australia is throwing its weight behind China’s efforts to pursue new trade deals in the Asia-Pacific region amid a growing acknowledgement the US-led Trans-Pacific Partnership agreement is dead in the wake of Donald Trump’s election victory.

Steven Ciobo, Australia’s trade minister, told the Financial Times that Canberra would work to conclude new agreement among 16 Asian and Pacific countries that excludes the US.

He said Australia would also support a separate proposal, the Free Trade Area of the Asia-Pacific, which Beijing hopes to advance at this week’s Asia Pacific Economic Co-operation summit in Peru.

Again, it’s far too soon to predict where we’ll end up under Trump. But there’s no doubt we are living in interesting times. For the first time in my entire life the US is no longer the world leader in the push toward globalization.

PS:  Here’s tweet by a Danish economist who understands this country much better than most Americans:



Two good questions

The comment sections of my Trump posts continue to be a cesspool overflowing with alt-right idiocy.  One recent commenter suggested that perhaps Soros was funding those KKK groups that support Trump, just to make Trump look bad.

Commenters ask me to get back to macro, but when I do nobody pays attention.  My recent post on inflation attracted three comments (excluding my two responses.)

But they were good questions:

What’s the case for Trump not moving the Fed in a more dovish direction, either through persuasion or appointments. That could explain an increase in inflation expectations and preserves monetary offset. (Ant1900)

I responded:

I think the strongest argument goes as follows. The Fed normally aims for 2%, but falls short in recessions. So inflation (post-2007) averages a bit under 2%. Trump’s supply-side reforms will make a recession less likely. So [long term] inflation expectations rise, but remain under 2%.

That might seem a bit ad hoc, and I certainly don’t have any great confidence in this explanation.  But it does at least explain why TIPS spreads remain below 2% for both the 5 and 10-year T-bonds.  (The 30-year yield will almost always be higher due to tail risk.)

Another comment:

I completely agree that we are more likely to experience continued low inflation rather than some sudden increase. Infrastructure spending won’t do the job of increasing inflation. Japan is an obvious counter example of the effects of monetary offset. Yet the media and some commentators seem to forget this entirely. At the end, one risk we face is that we might end up having a more hawkish Fed that goes too far with the offset, with corresponding economic consequences.
My question: wouldn’t supply-side policies ease price pressures, leading cp to lower inflation and lower bond yields? To me, the observed increase in bond yields remains mysterious.   (Fran)

You’d think that supply-side policies would reduce bond yields.  After all, they tend to reduce inflation, other things equal, and lower inflation reduces bond yields.  In fact, successful supply-side policies actually raise bond yields, at least when the Fed is targeting inflation at 2%. If tax cuts and deregulation boost growth, the Fed will tighten enough to keep inflation at roughly 2%.  But even so, RGDP growth will increase. And because NGDP growth is RGDP growth plus inflation (2%), NGDP growth will also increase.  And this is why bond yields will rise—they depend more on NGDP growth than inflation.  People don’t notice that distinction when both move in the same direction (as in the 1970s, when both were high.)  But when NGDP growth slows and inflation rises (as in mid 2008) we see that it is NGDP growth that matters more for interest rates.

Here’s my take on recent market moves, FWIW.  A quick knee jerk fall on election night on fear of populist policies.  A rally over the next few days as Trump people sent out messages that the worst parts of the populism (expelling 11 million illegals, 45% tariffs, etc.) will be dropped, and tax cuts, infrastructure and deregulation will be promoted.  But note that markets have not moved up all that much; the bond yields still suggest slow growth ahead, and TIPS spreads still suggest slightly below 2% inflation.  It’s not a game changer, probably . . .

There are actually two ways of interpreting the modest market reaction:

1.  Supply-side policies are simply not that effective; they don’t boost growth as much as the advocates claim.

2.  The market sees only a very modest probability that Trump will enact major supply-side reforms, either because he doesn’t want to, or because Congress will water it all down.

Long time readers know that I’m a moderate supply-sider.  I think talk of boosting trend RGDP growth to 4% or 6% is silly.  But I am a supply-sider, and I do think that if the markets were 100% sure we’d dramatically cut taxes on capital (as Trump has proposed) and dramatically deregulated, then markets (and real bond yields) would have risen much more.  Thus I think it’s both.  Supply-side policies really can be fairly effective, even as they are much less effective than proponents claim, and there really is uncertainty about how much Trump will accomplish.  Thus here’s a conditional forecast.  If Trump really were to get a strong supply-side agenda enacted, markets would rally even more.

PS.  Trump’s proposed fiscal policy is still a populist horror show, which would balloon the national debt.  We still don’t know if Trump will back off on that, once his advisers (or Congress) recognize the price tag.  So don’t take these comments on the supply-side aspects of Trump’s plan as some sort of endorsement of the overall program.  And again, we are still in the speculation stage.

PPS.  I hope all those peacenik Trumpistas saw the Bolton for Secretary of State rumors.  He probably won’t get the post, but you gotta wonder how his name even came up.  The leading name is Giuliani.  Maybe somebody told Trump that Bolton is “tough”.  Loved Josh Marshall’s reaction:screen-shot-2016-11-15-at-12-32-13-pm

PPPS.  Hey Trumpistas, don’t say I never do anything for you.  Here’s an article on the working class that you will actually like, showing how out of touch the elites are.  As for you elites, it’s a pretty good article, even if you don’t agree with it.

PPPPS.  Well doesn’t this inspire confidence:

President-elect Donald Trump has alienated many of the nation’s most senior national security officials and veteran foreign policy experts, leaving him with an apparent shortage of qualified Republicans willing to serve in his administration.

Trump’s transition team — many of whom are relative political outsiders who apparently didn’t realize that President Barack Obama’s entire West Wing staff would have to be replaced — are reportedly scrambling to fill Trump’s transition team before Inauguration Day.

But at least Trump’s not vindictive towards those who opposed him:

Eliot Cohen, a former State Department officer and Defense Department official who signed the August letter, also said it would not surprise him “in the slightest” if Trump had effectively blacklisted those in the national security community who had spoken out against him.

“If its true, I’ll wear it as a badge of honor, though,” Cohen told Business Insider on Monday. “And you can quote me on that.”

Cohen wrote last week that rather than move to Canada, Americans dismayed by a Trump administration should maintain “constant vigilance” over the US’s free institutions and “say yes” if they’re asked to work for him.

But by Tuesday morning, he’d changed his mind.

“After exchange [with] Trump transition team, changed my recommendation: Stay away,” Cohen tweeted. “They’re angry, arrogant, screaming ‘you LOST!’ Will be ugly.”

The Trump transition team didn’t respond to a request for comment on this story.

Lovely.  Of course none of this matters; Trump will be advised on strategy by his alt-right, self described “Leninist”, who wants to “destroy” the establishment.  What could go wrong?  Who needs experts?  “They got us into this mess.”  China did fine during 1966-76 with the experts sent to the countryside to feed pigs.

And how about this:

Retired neurosurgeon Ben Carson, a former 2016 Republican presidential candidate who is an adviser to President-elect Donald Trump, has opted against accepting a Cabinet position in the Trump administration, his spokesman said on Tuesday.

Carson, a popular writer and speaker in conservative circles, has been a close adviser to Trump and is a vice chairman of Trump’s transition team.

He has been mentioned as a possible secretary of health and human services or education.

“Don’t worry, Trump will be surrounded by experts.”