Let’s not focus on Trump’s childish, insulting and inaccurate attacks on London’s mayor.

Let’s not focus on the fact that democratically elected leaders almost universally despise Trump, even people who should be his ally (like Theresa May).  Or that that Trump only has good relations with bloodthirsty tyrants.

Let’s not focus on Trump’s idiotic “travel ban” tweets, which undercut his own administration.

Let’s not focus on the fact that even conservatives now view him as mentally unstable.

Let’s not focus on how Trump’s foreign policy team was blindsided when he left Article 5 out of his NATO speech.

Let’s not focus on the latest revelations about how the Russians tried to hack the elections, or how Trump tried to cover it up, or how the intelligence services don’t know whether to report info about “bad guys” to their boss, if the boss is very likely to be the bad guy:

These latest revelations may also point to a potential bind that top intelligence officials could find themselves in.

“What do you do if you’re serving the president, and this is information he has to know,” but it relates to a topic in which Trump’s and his associates’ ties are being examined as well, Carle asked.

Law enforcement and investigative officials typically do not inform the subjects of investigations of their findings. “But in this instance, that is the chain of command,” Carle said.

Let’s focus on the positive, Trump’s proposal to privatize air traffic control.  Here are a few thoughts:

1.  When in doubt, the presumption should always favor the private sector over the public sector.  There is a mountain of evidence that the private sector is usually more efficient.

2.  There may be cases where the public sector is more appropriate.  But even in those cases, an independent government-owned corporation may well be better than a government agency that Congress can easily order around.  I believe some of the European countries use that model.

3.  The pilots and the air traffic controllers favor privatization, an indication of just how outmoded their equipment is.

4.  We also need to privatize airports and airport security, a trend where the Europeans are far ahead of us.

Will Trump get this through Congress?  I doubt it.

PS.  Commenter Alexander Hamilton directed me to a letter signed by lots of economists, supporting Labour in the current British election campaign.  For those who don’t know, the current leaders of the Labour Party are big fans of people like Castro, Trotsky and Lenin.  Their favorite policies are similar to those that Chavez used to turn Venezuela into a basket case.  So what sort of economists are fans of this madness?

Dean Baker, Co-Director of the Center for Economic and Policy Research, Washington, DC

James K. Galbraith, Professor of Government, University of Texas, USA

Simon Wren-Lewis, Professor of Economic Policy, Oxford University

Trump and Corbyn.  Both the left and the right seem to have gone completely insane.  Is it something in the water?

Vaidas Urba directed me to a very interesting talk by Vítor Constâncio, Vice-President of the European Central Bank. Here’s one item that caught my eye:

Increasing the inflation target real interest rates could then be effective to eliminate negative output and unemployment gaps. These benefits of a higher inflation target can be outweighed by the broader costs of higher inflation, depending on the chosen level. Historically, relatively higher inflation has usually been associated with more volatile inflation.^[30] Moreover, the ECB and many other inflation-targeting central banks have shown that other monetary policy tools are available when interest rates cannot be lowered further.

It’s true that the availability of alternative tools makes a higher inflation target unnecessary, but the first argument is a bit misleading.  While its true that “Historically, relatively higher inflation has usually been associated with more volatile inflation”, this isn’t actually relevant to the debate over whether the inflation target should be set at 2%, 3% or 4%.  Yes, inflation was both higher and more volatile during the 1960s-80s, but inflation was lower and more volatile during the gold standard era.

The greater stability of inflation since 1990 is due to the fact that central banks have started targeting inflation, whereas there was no consistent inflation target under either the Great Inflation or the gold standard.  Inflation will be more stable when it’s being targeted, regardless of whether the target is set at 2%, 3% or 4%. Now if you are talking about an extremely high target, say 17%, then I’d expect more volatility, as it’s unlikely the next government or central bank head would agree with that sort of specific number.  The real issue is not how high the target is, but rather the degree of consensus.  Maybe there is currently more consensus around 2% than 3%, but if the zero bound continues to be an issue then that consensus may reverse in the future.

The discussion also mentions NGDPLT, but doesn’t really offer any useful analysis of that proposal.

David Levey directed me to an interesting Vox essay by Athanasios Orphanides, which compares the debt situation in Japan and Italy:

For Japan, the dramatic rise of the debt ratio before the crisis reflects the lack of nominal growth.  While the long-term government bond yield appeared to be low (consistently below 2%), nominal GDP growth was even lower (about zero, on average). The adverse debt dynamics worsened after 2007, with the recession following the Global Crisis. Part of the problem was overly tight monetary policy: policy rates were constrained by the zero lower bound (ZLB), but the Bank of Japan was reluctant to employ the required QE policies. However, since 2013 the Bank of Japan has embarked on a decisive QE programme which has simultaneously boosted nominal GDP growth and depressed long-term government bond yields. Since September 2016, as part of its ‘Quantitative and Qualitative Monetary Easing with Yield Curve Control’ policy, the Bank of Japan has communicated explicitly its intention to keep the 10-year yield on government bonds close to zero and short-term interest rates negative until inflation rises to 2%, in line with its definition of price stability. This monetary policy has stabilised Japan’s debt dynamics and has provided the Japanese government more time to implement structural reform measures and complete the fiscal adjustment needed to bring its primary deficit under control.

Abenomics has modestly boosted inflation in Japan, but the rate remains below the BOJ’s 2% target.  In another sense, however, the policy has been a big success. Unemployment has fallen to 2.8%, NGDP growth has accelerated, and the debt ratio has stopped rising.  Japan is no longer on the road to bankruptcy.

That’s why I favored the monetary “arrow” of Abenomics, and I’m pleased to see even a partial success.  In contrast, Italy lacks its own currency and will have to combine fiscal austerity with supply-side reforms to solve its problems.  That’s much tougher to achieve.

PS.  Hester Peirce is my colleague at the Mercatus Center, where she focuses on financial regulatory issues.  In this link, she’s on a panel with Ben Bernanke, discussing Dodd-Frank provisions such as the “orderly liquidation authority”.

Looking backwards, it’s possible to see a number of turning points in the political zeitgeist.  America moved toward (left wing) liberalism around 1964, then swung back toward (right wing) neoliberalism in the late 1970s, and then toward nationalism in recent years.  And these were worldwide trends, with nationalism also on the rise in Europe, Russia, Turkey, India, China, Japan, and many other places.

Tyler Cowen pointed me to an article that suggests another turning point, which many people missed at the time.  The new millennium ushered in an Age of Complacency:

The eminent political economist Ross Garnaut says the Great Australian Complacency, as he calls it, took hold of the political system from 2000. This locates it halfway through the Howard era.

How can he be so specific? Because, after John Howard and Peter Costello enacted their landmark reform of the tax system in 2000, they lost interest in further reform, on Garnaut’s reckoning.

And this marked the end of not only Howard-Costello reforms but an entire generation of near-continuous reform efforts that started in the years of the Hawke-Keating governments.

As is so often the case, people put far too much weight on specific local factors when thinking about these changes.  Thus America’s move toward liberalism was not triggered by the Kennedy assassination, nor was the neoliberal era triggered by the elections of Thatcher and Reagan.  These were worldwide trends.

The Aussies have done very well in recent decades, and have a right to be complacent.  But the same thing happened in the US.  Here is government spending as a share of GDP, which rose sharply after 2000:

I know what you are going to say; “That’s due to special factors—G/GDP rose due to the 2001 recession and 9/11.

There is some truth in that, but it’s not the whole story.  G/GDP did not fall back when we recovered from the recession.  And indeed both Bush and Gore were promising bigger government than Clinton—the country was getting tired of neoliberalism by 2000.  Soon we would have Sarbanes-Oxley, a big new Federal education program, and a massive expansion of Medicare.  And that was under a GOP President—once Obama took office we moved even further towards big government.  And yet if you read pundits on the left all you hear about is endless “austerity”, which is nowhere to be seen in the data.

The UK was not hit by recession in 2001, nor was it impacted by 9/11.  But at almost exactly the same time the Labour Party got tired of austerity, and began rapidly boosting government spending:

You need a trained eye to read these graphs properly.  The G/GDP ratio usually tends to be somewhat countercyclical, rising during recessions and falling during booms. The sharp rise in the UK’s G/GDP ratio after 2000 was an exception, and is a tell tale sign that fiscal policy was dangerously out of control.

This might suggest that neoliberal reforms require economic distress, so that the public will see the need for changes.  But of course the economic distress of the 1930s led to the exact opposite—the rise of statism.

Rather, it seems that neoliberal reforms require both economic distress and a perception that the problem is caused by bad government policies.  The stagflation of the 1970s is one example.

Neoliberal reforms can also be triggered when countries are doing poorly relative to their neighbors.  Thus back in 2004 the Germans compared their 11% unemployment rate with the 5% rate in the UK, and concluded that excessively high labor costs were the problem.  This led to one of the last successful policy reforms of the neoliberal era.  Today, those amazingly successful reforms are politically unpopular in Germany

PS.  Over at Econlog I comment on the two (rumored) new Fed picks.

Today’s jobs report showed the unemployment rate falling to 4.3%.  That’s lower than at any time during the housing boom.  It’s almost as low as the peak of the tech boom.  Indeed, other than during a brief period around 2000, it’s the lowest unemployment rate since the 1960s.  Even the U-6 rate is back to the levels of the summer of 2006.

So we must be producing lots of jobs, right?  No, payroll employment rose by just 138,000 in May, well below the pace of the previous 7 years.  Yes, one month is not significant, but job growth over the past three months has averaged only 121,000. Companies cannot find workers.

In 2018, we’ll look back on these job gains as boom numbers, as things are going to get even worse.  And if Trump cracks down on immigration, growth will slow to a near standstill.  The second quarter GDP numbers are expected to be strong, but don’t be fooled by that (seasonal) head fake—we are entering a very slow growth period.

After Trump was elected there was a big “reflation trade” and the 10-year bond yield rose to over 2.6%,  Today it’s down to 2.17%, as the yield curve gets flatter and flatter.  At the time, I thought people were forgetting about monetary offset. But even I missed the fact that Trump was too incompetent to get his supply side package through Congress.  I expected a few tenths of a percent more RGDP growth, now I doubt even that.

So why are stocks doing well?  In my view it’s the same story as what we’ve seen since 2009:

1.  Markets are gradually realizing that ultra low interest rates are the new normal.

2.  In the “FANG” economy, American corporations don’t need fast growth to make big profits.

Predictions:

1. This will end up being the longest economic expansion in American history.

2. This will end up being the weakest economic expansion in American history.

3.  Interest rates will stay low.

4.  Unemployment will fall to 4%.

5.  Inflation will stay low (because the Phillips Curve model is wrong.)

6.  Janet Yellen will end up producing the most stable rate of NGDP growth of any Fed chair in American history.

PS.  Unlike during 2008-14, there’s nothing wrong with the current stance of monetary policy—the problem is the regime.

Surely Trump’s top aides can do better than this:

Before he abruptly ended Tuesday’s White House press briefing, Press Secretary Sean Spicer had been unusually fulsome in his praise of his displeased boss, President Trump. The president’s trip “truly was an extraordinary week for America and our people,” Spicer said, and the Saudi Arabia leg “was a historic turning point that people will be talking about for years to come,” in which Trump single-handedly “united the civilized world in the fight against terrorism and extremism.”

“We’ve never seen before at this point in a presidency such sweeping reassurance of American interests and the inauguration of a foreign policy strategy designed to bring back the world from growing dangers and perpetual disasters brought on by years of failed leadership,” Spicer said. And Trump’s interactions with German Chancellor Angela Merkel that upended 50 years of close U.S.-European relations? “I think the relationship that the president has had with Merkel, he would describe as fairly unbelievable,” Spicer said. “They get along very well.”

And Gary Cohn:

Over the weekend, White House National Economic Council Director Gary Cohn — who was the second-in-command at Goldman Sachs before joining the White House — declared the president’s economic development deal with Saudi Arabia to be unlike anything he had seen in his 30 years in business.

And Hope Hicks:

“President Trump has a magnetic personality and exudes positive energy, which is infectious to those around him,” the statement said. “He has an unparalleled ability to communicate with people, whether he is speaking to a room of three or an arena of 30,000. He has built great relationships throughout his life and treats everyone with respect. He is brilliant with a great sense of humor . . . and an amazing ability to make people feel special and aspire to be more than even they thought possible.”

I think it’s a lack of motivation.  Insufficiently effusive supporters of North Korea’s leader are executed with anti-aircraft guns.  Trump merely screams at aides who refuse to treat him like the Sun King.

PS.  And people wonder why Trump is unable to fill government positions:

Donald Trump is struggling to find new staff to work for him because everyone thinks he is “crazy”, a senior member of the US President’s Republican Party has said.

Michael Steele said potential White House employees were put off by an environment in which aides are “flying by the seat of their pants”.

“The talent pool is shrinking, because who wants to sign up for crazy?” added Mr Steele, who served as chairman of the Republican National Committee between 2009 and 2011.

Wasn’t Trump going to get the best people?  No wonder they haven’t even developed a tax proposal for Congress to consider.

PS.  Today Trump bragged about the progress of “our tax bill”:

Our tax bill is moving along in Congress and I believe it’s doing very well.

Matt Yglesias has some fun with this claim:

The thing about this is there is, literally, no tax bill.

• No tax bill has been introduced to the US House of Representatives.
• No tax bill has been introduced to the US Senate.
• The White House has not released a tax plan that is detailed enough for experts to assess its economic or fiscal impact.

Indeed, just a week ago, Trump’s Office of Management and Budget Director Mick Mulvaney explained that what most experts saw as a $2 trillion accounting mistake in the White House budget was actually deliberate.

Another Yglesias post explains why Trump makes so many false statements, and also explains why he doesn’t like people who have integrity

PPS.  FWIW, the Paris Accord was mostly symbolic.  But withdrawing is bad symbolism.