Archive for December 2016


Brazil’s austerity experiment

Scott Alexander recently had this to say about a Vox article on Brazil:

Brazil has just passed the most extreme austerity measure in history in the middle of a recession, locked in with a clause making it impossible to repeal for 10-20 years. A…bold…choice. If nothing else, it’ll provide good data for future generations of macroeconomists. Register your predictions now!

I predict success, in the sense of faster growth.

I doubt, however, that the experiment will actually prove very much, as I know of no theory that predicts Brazil’s austerity would cause slower growth, and I know of no evidence that Brazil will in fact engage in extreme austerity.

Brazil has high interest rates and high inflation, and hence even Paul Krugman would not regard fiscal austerity as being contractionary in Brazil. Instead, the Brazilian central bank determines the rate of Brazil’s nominal GDP growth.

Might austerity hurt the supply-side of Brazil’s economy?  I suppose anything is possible, but it’s hard to see how.  Unlike China, Brazil’s high government spending goes to things like public pensions, not infrastructure.  In addition, Brazil’s government sector spends much more (39.1% of GDP) than other countries that seem to have at least as productive supply-sides, such as Chile (23.2%), Mexico (26.6%), Costa Rica (18.2%), Uruguay (32.6%), and Australia (35.3%).  It’s not clear to me that spending 39.1% of GDP makes your economy more efficient, especially if very little of the money goes to infrastructure.  To be fair, Venezuela spends 40.1%.  So Brazil is the not highest spender.

Perhaps the austerity will fail by increasingly inequality.  Brazil is already very unequal, although a bit less so than 20 years ago.  But that depends on which programs are cut.  In the past, government spending in Brazil has been regressive, mostly going to relatively well off government employees and pensioners.  Unfortunately, the Vox article that Scott links to doesn’t tell us where the cuts will come.

Nor does it say that there will be any cuts at all:

Americans worried that Donald Trump will try to shred the nation’s social welfare programs can take some grim comfort by looking south: No matter what Republicans do, it will pale in comparison with the changes that are about to ravage Brazil.

On Thursday, a new constitutional amendment goes into effect in Brazil that effectively freezes federal government spending for two decades. Since the spending cap can only increase by the rate of inflation in the previous year, that means that spending on government programs like education, health care, pensions, infrastructure, and defense will, in real terms, remain paused at 2016 levels until the year 2037.

A few comments:

1.   Notice that no specific cuts are announced.

2.  A constitutional amendment in Brazil doesn’t have the same meaning as in the US.  It’s more like legislation.  When a government engages in Augustinian promises to do something virtuous, but only far out in the future, it’s a pretty good indication that they have absolutely no intention to fulfill their promise.  Many governments have long range promises to balance the budget, which no one seriously expects to be enacted.  I hope the Brazilians will hold real spending fixed for 20 years (to become a bit more like Chile), but it seems very unlikely that they will do so.

The Vox article is highly misleading in all sorts of ways.  For instance, did you know that Brazil is one of the most highly taxed countries in the developing world? If you did not, you probably would not acquire that information by reading this from the Vox article:

While the amendment does a great deal to limit the expenditure of government funds, it doesn’t do anything to directly address how to generate them directly: taxes.

“The major cause of our fiscal crisis is falling revenues,” Carvalho says, noting that the populist Rousseff, known for her support for government programs, cut taxes for the corporate sector during her time in office over the past few years in an attempt to avoid losing public support.

Carvalho says taking an ax to spending is coming at the expense of discussing “taxing the very rich, who do not pay very much in taxes, or eliminating tax cuts that have been given to big corporations.”

Brazil’s tax code is extraordinarily generous to corporations and the wealthy, and helps buttress its status as one of the world’s most unequal countries. Brazil’s highest income tax rate is just 27.5 percent — for comparison, US tax rates go up to about 40 percent, and in Scandinavia they can exceed 60 percent.

The Vox article doesn’t really provide much context.  Readers are not told that a decade of socialist misrule has driven Brazil into a painful recession. Perhaps Brazilians have noticed the fact that Chile and Mexico are not in depression, and do not have as bloated a government sector.  Maybe they don’t think it’s wise to have a government sector that is almost as large as in Venezuela.

PS.  Over at Econlog I discuss the peculiar views of Trump’s new economic advisor

Bleeding heart conservatives

For years I’ve had a problem with bleeding heart liberals.  They tend to romanticize the plight of those on the bottom of society.  Of course the right made the opposite mistake of demonizing these groups.  The proper attitude is hard-headed utilitarian realism—neither victims nor villains.  Now I’m noticing a disturbing new trend in moral exhibitionism—bleeding heart conservatives.

This new conservatism romanticizes the white working class.  These conservatives used to mock bleeding heart liberals who claimed that minorities were “the victims of an unjust society”.  They pointed out that poor people often made poor life choices.  The new conservatives now claim that the white working class is not composed of people who made poor life choices—i.e., not studying hard in school or choosing to use opioids—but rather they are the “victims of neoliberal economic policies”.  (Somehow they overlook the fact that the working class in countries that did not embrace neoliberal policies is doing even worse—logic is not their strong point.)  The new bleeding heart conservatives engage in the same sort of romanticization of victims for which they used to mock the progressives.

I have an even lower opinion of bleeding heart conservatives than bleeding heart liberals.  At least the liberals have compassion for other ethnic groups.  Conservatives engage in the easiest form of compassion, which requires the least moral imagination, sympathy for one’s own ethnic group.

As a utilitarian I wish all groups well.  But I only have so much ability to sympathize with people I’ve never met.  Thus I focus most of my sympathy of those at the bottom, in places like eastern Congo and Aleppo.  America’s poor are pretty well off in global terms, and America’s working class is among the global elite (and in crude material terms is far better off than the working class when I was young.)  So while I support public policies that would help the American working class, it’s not high on my list of priorities.  I’m much more focused on how TPP could impact Vietnam’s peasants.

My greatest contempt is for those policy prostitutes that we call “politicians.”  People like Mike Pence, who had no empathy for the victims of heroin addiction until it hit the white working class in southern Indiana. Now Pence has abandoned his support for the free market:

. . . the free market has been sorting it out and America has been losing . . .

It seems that the opponents of the free market are now voting Republican, and the “leaders” of the GOP are giving up all their principles to become followers.

Commenters like to compare me to those campus snowflakes who need safe rooms.  Actually, I was mocking campus PC culture when many of them were still in diapers.  In fact they are often the real softies; they are the new bleeding hearts.  I’ll keep looking at the world in a hard-headed realistic way, in the hope that in the long run, reason will produce a more humane society than we’d get from demagoguery on either the right or the left.

PS.  I apologize for the “prostitute” slur; they are business people providing an honest service.  Comparing them to politicians was very unfair.

PPS.  Most of my commenters will fail to see the distinction that is very clear to Peter Suderman:

But the statement from Pence, who is the Trump administration’s closest link to conventional Republican politics, should be taken as a declaration of intent for the GOP as a political institution. Although Republicans have frequently and sometimes flagrantly acted in opposition to basic free market principles, the party has typically maintained a surface pretense of adhering to a pro-market understanding of the world. The GOP wasn’t exactly a free-market party, but it often pretended to be.

Even President George W. Bush, when announcing his administration’s response to the financial crisis, framed his lack of orthodoxy as an exception necessary to uphold the larger idea, saying that he has “abandoned free-market principles to save the free market system.” Even a break from free-market ideas had to be framed as a defense of free-market philosophy.

In announcing the Carrier deal, Pence has made it clear that the party has abandoned free-market principles, period. Under Trump, the GOP has dropped the pretense.

PPPS.  Tyler linked to an article discussing 99 positive trends in the world today.  Here’s one:

30. In 1990, more than 60% of people in East Asia lived in extreme poverty. As of 2016, that proportion has dropped to 3.5%. Vox

Even if all of the problems wrongly attributed to neoliberalism were true, it would still be a huge boon to humanity on this fact alone.


The internet’s highest honor

Vaidas Urba pointed me to a very clever post by John Carney of CNBC.  It includes parodies of many well known bloggers, on the theme of Christmas and economics.  Here’s an example–see if you can guess who:

If the Fed would simply announce a nominal target for presents, we’d all receive more presents on Christmas day.  There are many ways to do NCPT, but I prefer that the Fed creates a presents futures market.

A lot of people look at the amount of presents under the tree and attempt to derive the stance of Santa.  But this is wrong.  You need to examine the demand for presents as well as the supply.  In general, a large pile of presents is a sign that Christmas policy has been too tight, while coal in the stocking is a sign that it has been too loose.

At the risk of spoiling the joke, I’m going to try to improve it further

A lot of people look at the amount of presents under the tree and attempt to derive the stance the parents’ generosity.  But this is wrong.   The pile of presents represents the interaction of generosity and deserts.  In general, a larger pile of presents is a sign that the stance of Christmas policy has been relatively generous.  But the level of generosity also depends on how many presents are deserved, which depends both on the behavior of the child and the wealth of the parents.  An increased pile might represent greater generosity, but also greater deserts, due to improved wealth and/or better behavior by the child.

Yeah, I know, I’ve ruined the joke.

PS.  Although I am now a “somebody”, I am under no illusion that I am anywhere but at the bottom of the class of people called “somebody”.  But at least I’m not a nobody.

Get off of my lawn! Welcome to Planet Elderly

As I look back on 2016, several patterns stand out.  Consider the recent Brexit vote in the UK.  Millennials in the UK were strongly in favor of staying in the EU.  They might dream of studying in Italy or working in France.  They like vibrant cosmopolitan cities, and may have friends who are from the immigrant community. When you are young, nationalism is the furthest thing from your mind—the world seems like a big adventure.  (Yes, I’m old, but at least I can still recall what it was like to be young.)  Even though the younger voters were overwhelmingly opposed to Brexit, it passed by almost 4 points, based on strong support among the far more numerous elderly voters.

For years we’ve been told that demographics is destiny, and that America was going to inevitably become a browner country.  Obama said that just a few days ago.  But these pundits missed an equally momentous demographic change, which seems to be affecting politics even more dramatically. The world is aging rapidly. In the 21st century, the world will become dominated by the old for the first time in human history.  This may create a demographic split on values going forward:

Liberalism  —  authoritarianism

Cosmopolitanism — xenophobia

Optimism — fear

Change — tradition

Reform — reaction

The elderly voters will dominate—pushing politics to the right.

Japan already has a “silver democracy” where 60% of the electorate are over 55, and a far higher percentage of actual voters are over 55.  Hillary won the 18 to 44 year olds by a Reaganesque landslide of 14%, whereas Trump won the (more numerous) 45 and older voters by about 8%.  Pot legalization in Arizona failed due to opposition from the elderly.  (I believe the combined age of Trump and Hillary was the highest in US presidential election history–can someone confirm?)

Going forward, an important issue will be how voters change as they grow older.  I suspect they will become more conservative on some issues (economics, crime) but less willing to change on others (pot, gay marriage).  It depends how their views have been shaped by life experience.

At the international level, part of the friction will be between a young Muslim world, and a rapidly aging Western, Hindu and Chinese world.  That will ramp up the level of bigotry on both sides, as compared to if the average ages in each group were similar.

While the elderly tend to be nationalistic, they are also risk averse.  So they oppose total war.  Instead, wars will continue to be fought in developing countries.

It goes without saying that it will be increasingly difficult to cut entitlements aimed at the elderly.  I’m less confident in predicting monetary policy, as Abe won in Japan on a promise of increasing inflation.  For now, I think 2% inflation continues to be the most likely outcome (a view shared by the markets.)

Also keep in mind that we are in the early stages of this demographic transition. The bulk of the Baby Boomers have not yet reached 65, so the proportion of elderly will continue to grow rapidly for many years.  The 45-64 years olds were just as likely to vote for Trump as the 65 and older group.  The big issue is what happens to the politics of 30 to 44 year olds as they move into the over 45 group.

Although immigrants will make up an increasing proportion of the US and European population, non-immigrants will be older, and will continue to have a disproportionate influence on politics.

The elderly are more likely to be NIMBYs—hence the post title.  Bad news for millennials seeking a place to live.

Overall, however, 2016 was not a bad year.  Although the global rise of nationalism is certainly very discouraging, the big story continues to be the boom in China and IndoAsia, the best thing that has ever happened.

PS.  I first tried to coin the term ‘IndoAsia‘ about 3 years ago.  Now Goldman Sachs seems interested in the idea, but has not yet adopted my name for the group.  (Developing countries between Pakistan and the Philippines, with the core region being India to Indonesia.  Well over 2 billion people.)

PPS.  Merry Christmas to all my Christian readers and Happy New Year to everyone.  Blogging will be spotty over the holidays.

Do current account deficits costs jobs?

Over at Econlog I have a post that suggests the answer is no, CA deficits do not cost jobs.

But suppose I’m wrong, and suppose they do cost jobs.  In that case, trade has been a major net contributor to American jobs during the 21st century, as our deficit was about 4% of GDP during the 2000 tech boom, and as large as 6% of GDP during the 2006 housing boom.  Today it is only 2.6% of GDP.  So if you really believe that rising trade deficits cost jobs, you’d be forced to believe that the shrinking deficits since 2000 have created jobs.

screen-shot-2016-12-22-at-11-53-25-amSo why have manufacturing jobs plummeted since 2000?  One answer is that the current account deficit is the wrong figure, since it also includes our surplus in trade in services.  If you just look at goods, the deficit is closer to 4.2% of GDP.

But even that doesn’t really explain very much, because it’s slightly lower than the 4.35% of GDP trade deficit in goods back in 2000.  So again, the big loss of manufacturing jobs is something of a mystery.  Yes, we import more goods than we used to, but exports of goods have risen at about the same rate since 2000.  So why does it seem like trade has devastated our manufacturing sector?

Perhaps because trade interacts with automation.  Not only do we lose jobs in manufacturing to automation, but trade leads us to re-orient our production toward goods that use relatively less labor (tech, aircraft, chemicals, farm produces, etc.), while we import goods like clothing, furniture and autos.

So trade and automation are both parts of a bigger trend, Schumpeterian creative destruction, which is transforming big areas of our economy.  It’s especially painful as during the earlier period of automation (say 1950-2000) the physical output of goods was still rising fast.  So the blow of automation was partly cushioned by a rise in output.  (Although not in the coal and steel industries!)  Since 2000, however, we’ve seen slower growth in physical output for a number of reasons, including slower workforce growth, a shift to a service economy, and a home building recession (which normally absorbs manufactured goods like home appliances, carpet, etc.)  We are producing more goods than ever, but with dramatically fewer workers.

screen-shot-2016-12-22-at-12-08-01-pmUpdate:  Steve Cicala sent me a very interesting piece on coal that he had published in Forbes.  Ironically, environmental regulations actually helped West Virginia miners, by forcing utilities to install scrubbers that cleaned up emissions from the dirtier West Virginia coal.  (Wyoming coal has less sulfur.)  He also discusses the issue of competition from natural gas.