Archive for October 2018


Every day it gets worse

Little did we know that during the golden 1990s we were complaining about things that would look utterly trivial in retrospect. The sheer stupidity of the 21st century is so mind-boggling it leaves me almost speechless.

But not quite.

Consider the “problem” of currency manipulation. Let’s start with the fact that currency manipulation is a strange term to apply to a hodgepodge of government policies that may or may not impact the current account balance. For instance, you might say that “currency manipulation” is almost the sole purpose of having a central bank.

There are some smarter economists who do worry about currency manipulation. But when you read their work, it’s pretty clear that what actually concerns them is “saving manipulation”—when countries enact policies that boost the national saving rate. These policies can “improve” the current account balance. And not all such policies, rather they worry most about a subset of relatively ineffective policies, such as swapping domestic assets for foreign assets. (I’m not saying these policies have no effect; I just don’t see how it could be very large.)  They tend not to worry as much about far more effective pro-saving policies, in the fiscal/tax area.

The Netherlands and Switzerland have CA surpluses of 10% of GDP, while Singapore’s is 20% of GDP.  Does anyone seriously believe those are due to “currency manipulation”?

Even the economists who do worry about currency manipulation find the criteria set by the US government to be absurd:

Congress’s criteria to assess if a country is interfering in its currency are: A minimum $20 billion trade surplus with the U.S., a current account surplus in excess of 3 percent of gross domestic product, and repeated intervention in currency markets.

I’ve got an idea!  Instead of labeling countries “currency manipulators” when they accumulate $20 billion surpluses with the US, how about labeling then “currency manipulators” when they, umm, manipulate their currencies?

I’ll tell you why not.  Because that would force us to actually define currency manipulation in a way that could be measured.  And that would expose the fact that what really concerns us is saving manipulation.  No, not even saving manipulation, it’s current account surpluses in other countries that actually concern us.  No, not even that, it’s bilateral deficits with other countries that concern us.  And of course bilateral deficits have nothing to do with currency manipulation in any meaningful sense of the term. Indeed they have nothing to do with anything meaningful at all.   What’s the bilateral trade deficit between New York and New Jersey?

Trump took office saying he would label China a currency manipulator from day one.  He’s failed to deliver on that promise, just as he’s failed to repeal Obamacare, secure the border, reduce the trade deficit, or stop the rest of the world from laughing at us.  He failed because the Trump’s own Treasury department wasn’t able to find evidence that China is a currency manipulator, despite using a silly set of criteria that are strongly biased toward finding China guilty, such as the provision that it’s not OK to run a $20 bilateral surplus with the US.

But it’s even worse.  Not satisfied with the fact that the Treasury’s own criteria show that China is not a currency manipulator, they are thinking of changing the criteria so that the evidence will match the predetermined verdict—guilty as charged:

Treasury Secretary Steven Mnuchin is open to changing how the U.S. determines which nations are gaming their currencies, a move that could give President Donald Trump the chance to officially brand China a foreign exchange-rate manipulator as he seeks leverage to redefine trade terms between the world’s largest economies.

One method Mnuchin would consider: Using a 1988 trade act with a broad definition of currency manipulation to designate a country a manipulator, even if the label isn’t warranted by specific tests under a 2015 law, he said. The other would be to change the criteria that help establish whether a country is engaging in competitive devaluation of its currency, according to Mnuchin.

Treasury applies three tests to measure whether a country should be labeled a currency manipulator. The framework of the criteria is provided by Congress, but the specific thresholds in the tests are at Treasury’s discretion.

Again, foreign current account surpluses are not a problem for the US.  But if you disagree with me and agree with those pundits who do worry about current account imbalances, you should be focusing on the Eurozone and Japan and Switzerland, which really do have big CA surpluses, not China, whose CA is nearly balanced.

Trump seems determined to launch a cold war against China, a country with an economy that will be twice as large as the US economy by 2035.  In the old days, militaristic countries would engage in warfare by inventing some silly pretext—say demanding that a smaller neighboring country apologize for some imagined slight.  Trump wants a cold war with China, and demands the federal bureaucracy find some sort of fig leaf to justify it.  Why not point to China’s bad human rights record in Xinjiang?  Unfortunately, mentioning human rights would simply highlight Trump’s embarrassingly friendly relationship with the Russians and the Saudis, despite their war crimes in the Ukraine and Yemen.  So Trump needs to seek out an economic rationale for war with China.  In this post-truth world, currency manipulation is as good as any.

It’s a wonderful, awful, and perplexing life

Time for another Ted talk.  Commenter Ted asked me a bunch of interesting questions, including this:

How you have thought about death and how you wish you thought about death.

This is going to be a long and dreary post, mostly focusing on my “outside view”, which features a rather apathetic attitude toward death.  So let me first reassure my readers that my inside view is much like yours.  If I’m on a Boeing jet plunging toward the ground, I’m going to be screaming in terror with the other passengers. I’m just as horrified by the prospect of death as the average guy.  Woody Allen put it this way:

There’s an old joke – um… two elderly women are at a Catskill mountain resort, and one of ’em says, “Boy, the food at this place is really terrible.” The other one says, “Yeah, I know; and such small portions.” Well, that’s essentially how I feel about life – full of loneliness, and misery, and suffering, and unhappiness, and it’s all over much too quickly.

I’ve been reading My Struggle, Vol. 6, and thus I’ve been thinking a lot about the meaning of life, and also the meaning of death—which sort of seems like the same thing.  AFAIK, death itself is nothing; what seems to matter is the life one misses out on and/or the impact of death on the lives of your loved ones.  Let’s put aside the loved ones for a moment, and think about death selfishly.  Bryan Caplan asks:

Suppose you receive the following option.

  1. You flip a fair coin.
  2. If the coin is Heads, you acquire healthy immortality.
  3. If the coin is Tails, you instantly die.

The expected value of this option seems infinite: .5*infinity + 0 is still infinity, no?  . . .

Nevertheless, I suspect that almost no one would take this deal.  Even I shudder at the possibility.  So what gives?

Statistically speaking, I have about 20 years left.  Putting aside the impact on my loved ones, I’d take that bet in a heartbeat.  But only if the immortality part were eliminated.  Just give me a 50/50 chance at living to roughly 83 in perfect health, then hit by a bus while crossing the street.  The kind of health I had at age 14, or even 24.

Borges once referred to Nietzsche’s eternal return as “the most horrible idea in the universe”.  I agree.  But why is that?  Suppose you had the option of living your life over a trillion times in exactly the same way, each time with no memory of what came before.  Would you take it?  If life is good, then why not?  My visceral reaction is “hell no!” But I’m not sure I can explain why I feel that way.  That thought experiment makes me instinctively recall painful experiences I had earlier in life that I don’t want to relive, not all the pleasant experiences I’ve also had.  I’m not even sure I’m able to think about the thought experiment in the right way.  I am presumably thinking, “once is enough”, but the person being reincarnated would have no memory of previous lives, with previous miseries and blissful moments.

When it comes to life and death, I don’t trust my intuitions.  Am I happy?  It depends on what day you ask me.  Not just in the sense that I may not be happy on a given day; rather on days that I’m unhappy I often think my whole live has been bleak and miserable, and vice versa when I’m happy.  I’m not able to see my life clearly, past my current moods.  Am I more or less happy than other people?  Again, how would I know? I’m an unreliable narrator of my own life.  I’d trust someone else’s judgment of my happiness more than my own.  (Hey, wasn’t that once a corny movie?)  With the exception of Karl Ove Knausgaard, I don’t know what it’s like to be anyone else but me.  Are Karl and I unusually moody Nordics?  Or typical people?

BTW, here’s Knausgaard describing how he’s viewed by his best friend:

[Geir] took all of this and composed a picture of my psychological and social character he then analyzed and discussed.  He construed me as a kind of baroque entity, abnormal and warped, whose inner being was utterly out of sync with its outward expression — completely the opposite of how I saw myself, which was ordinary to the point of self-erasure

Literary critics have paid too little attention to the role of this fascinating friend, who even came up with the near perfect title of Knausgaard’s book.

In previous posts, I’ve remarked that my “outside view” rejects concepts like objective truth, free will and personal identity.  In contrast, my inside view of this stuff is just like yours.  Because my outside view tells me that personal identity doesn’t exist; there is actually no “me” to die.  There are a bundle of thoughts that will no longer swirl around in my brain, but billions of other people will still have similar thoughts.  No great tragedy.  My inside view that my death would be a much greater tragedy than the death of a random 63-year old shepherd in Turkmenistan is an illusion, reflecting the bias of my own perspective. (Yes, I know, my language implies the existence of personal identity; I know of no other way to write.)

Think about the Edmund Spenser line:

Sleep after toil, port after stormy seas, Ease after war, death after life does greatly please.

This is why I find the concept of immortality (or the eternal return) to be so frightening.  I fear (and expect) something like the end of the film Avatar, where death is immediately followed by rebirth into another body.  No rest for the weary.

In a book entitled Why Buddhism is True, Robert Wright remarked:

I asked [Gary Weber] about a line of his I recall reading, something to the effect of: The bad news is that you don’t exist; the good news is that you’re everything.

That latter claim is not good news to me. I don’t want to be Donald Trump, much less a trillion future Trumps, but I fear that Weber is right.  Without personal identity, we’re everybody.  Wright also says:

Meditation can weaken the link between perceptions and thoughts, on the one hand, and the feelings, the affective resonances, that typically accompany them on the other.  Well, if you do a really thorough job of that weakening, and perceptions become increasingly free of affective associations, this could change your view of the world.  It could leave things looking the same on the outside but seeming as if they lack some inner something.

I’ve never done meditation, but that sounds like growing older.  When I went to Wisconsin basketball games at age 16, there were times late in the game when the entire arena seemed to be pulsating with swirling, delirious waves of energy, which went right through my body.  The noise was deafening and the players and the crowd were almost one in the same.  Now I’m more analytical, watching games on TV and noticing whether teams are playing “moneyball” by avoiding mid-range jumpers.  (Thank God for Coach Budenholzer!)

It seems to me that nature prepares us for death with a series of “little deaths”. (No, not in the French sense!)  As we get older, our earlier selves are repeatedly shed like the skin of a snake.  These are the little deaths.  Life is gradually drained of magic and meaning—we get wiser and grayer. We keep repeating the same basic experiences, but each time with a bit less “color”.

About 25 years ago I bought a vintage French railway poster.  Unfortunately the skin tones gradually faded from tan to grey.  I never noticed this until I recently saw a clean copy on the internet.   So I went onto eBay and bought a fresher copy, had it delivered from France, and put it in an expensive frame with UV protection.

Screen Shot 2018-10-16 at 3.19.35 PMOf course my wife thought I was crazy to spend all this money in an pathetic attempt to reclaim the color of my earlier life.  (Or maybe she saw something ominous in my desire to trade in old grey skin for young tan skin, noticing that I’ve recently been reading a Michel Houellebecq novel.)

So why keep living, with such a dreary attitude toward life?

1. Option value.

2. Most importantly, for my loved ones. (And let’s face it; that means one’s spouse.  Others may pretend to care, but at my age only one person is severely impacted by my death.)

3.  Still some good films and novels to see and read. Last week I took delivery on a 77 inch LG C8 OLED TV.  I can finally watch films at home.

4. To see how Giannis’ career plays out.

Remember, evolution doesn’t want us to be content; it wants us to struggle.  But it also wants us to hate dying, even if we are not content with life.

Recall Dylan’s line:

But it’s alright, Ma, it’s life, and life only.

PS.  I didn’t answer the second part of Ted’s question.  How do I wish I thought about death?  Like a Buddhist.  Maybe I need to start meditating.

Fed bashing

I’ve tried to avoid commenting on Trump’s Fed bashing, as I don’t wish to insult my reader’s intelligence.  But the media reports that Trump is now bashing the Fed on an almost daily basis, in order to have a fall guy in case the economy turns south.  So I suppose I must say something:

1.  In the real world, presidents don’t get to excuse policy failures by pointing to the mistakes of government officials that they themselves appointed.  But of course we no longer live in the real world; we live in TrumpWorld, where it is rhetoric, not reality, that matters.  (If you want a good laugh, read a serious media report (say the NYT) where they go out and interview Trump voters who explain why they are thrilled with Trump’s performance.  Great accomplishments like the peace deal with North Korea.)

2.  OK, enough Trump bashing.  What about the substance of his complaint?  Here I’d say he’s very likely wrong, but not obviously crazy.  The indicators I look at (NGDP, inflation, unemployment, etc.) do not indicate that money is too tight, but there’s at least a small possibility that we still don’t have a credible 2% PCE inflation rate going forward.  It’s at least debatable.

3.  If you talk to the average economist, point #2 is what they’d complain about.  Most economists don’t see money as being too tight.  But the real problem is elsewhere; Trump assumes that interest rates represent the stance of monetary policy.  Even worse, he thinks that low rates mean easy money.  Other economists are less likely to ridicule Trump for this error, as many economists are similarly confused.

The Fed influences the economy in many ways.  One method is by adjusting the policy interest rate (fed funds or IOR).  A far more important way is by affecting the natural rate of interest.  Thus the Fed sharply reduced the natural rate in 2008, while only gradually reducing the policy rate.  To the average economist (and to Trump) the Fed was “easing” monetary policy.  In fact, because the natural rate was falling even faster than the policy rate, they were tightening policy.

How does the Fed affect the natural rate of interest?  By shifting the expected NGDP growth rate (and also the level of NGDP relative to trend.)  A tight money  policy (such as late 2007 through 2008) will reduce NGDP growth expectations, and this reduces the natural rate of interest. That’s what Trump doesn’t understand, but it’s also what lots of economists don’t understand. Even the smarter economists, the one’s that understand it’s the gap between the policy rate and the natural rate that matters, often think that the natural rate is falling due to external “shocks”, not bad Fed policy.

So by all means ridicule Trump for the insanity of excusing potential policy failures by pointing to the mistakes of his own appointees, but don’t bash him for making the same mistake that many economists make.  Instead, it’s the economists that deserve ridicule.

Two big egos

Imagine a leader with an enormous ego and a devoted fan club, who frequently behaves in a reckless and irresponsible fashion.  He sends out tweets full of bizarre and irresponsible attacks on other people, and also misrepresents important financial information, which misleads various stakeholders.

What should we do with a leader like this?

I guess the answer depends on where they work.  If they work in the private sector, then they need to be punished for their bad behavior, perhaps by the SEC.  If they work in the executive branch . . . well, you can guess.

PS.  Make that three big egos—look who The Economist thinks has a good chance to become the next British Prime Minister:

Mrs May might well win such a vote, if only because Mr Johnson is so unpopular among Tory MPs. His problem is not just that the majority of Tory MPs voted “remain” in the referendum, and hate him as leader of the Brexiteers. MPs of all political persuasions regard him as a cad. One senior Tory says that “it’s 100% inconceivable that he’ll become leader of the Conservative Party…He’s a media clown, not a serious politician.” “He’s a shit who doesn’t give a shit about anything but himself,” says another. The list of charges against him is long: he doesn’t believe in anything but his own advancement; he doesn’t lift a finger to help his colleagues; he was a disaster as foreign secretary.

He has one big thing going for him, in the eyes of most Tory MPs: his performance at the polls. When he won two terms as mayor of Labour-leaning London he was praised for possessing the “Heineken factor”—the ability to reach parts of the country that other Tories couldn’t reach. . . .

But should Mrs May lose a confidence vote, Mr Johnson has a good chance. The two further hurdles are probably superable. He has to get onto a shortlist of two MPs that the parliamentary party sends to the party’s 124,000 members, and then he has to win the membership’s support.

On the first, the Brexiteers, who include not just the ERG but other eurosceptics, have enough votes to get one of their own onto the final shortlist, and are likely to coalesce behind Mr Johnson. Jacob Rees-Mogg, their leader, has already said that he thinks that Mr Johnson would make an excellent prime minister.

On the second, Tory party members like Mr Johnson more than Tory MPs do—and are getting keener with every suicide-vest jibe.

Could a conservative politicians who is hated by his elite of own party (but not the voters), who acts like a buffoon, and who likes to make outrageous attacks on a top female politician, actually become the leader of the UK?  Stranger things have happened.  Eventually every country in the world will elect a buffoonish nationalistic leader.  And then the world can pick up where it left off in the 1930s, before that unfortunate detour into the UN, EU, IMF, WTO, World Bank, NATO, NAFTA and all those other institutions that ruined everything accomplished during 1914-45, the golden age of nationalism.

PPS.  Speaking of big egos, a victim of the MeToo movement has just died:

  • Dennis Hof, the notorious pimp and Republican candidate for Nevada’s state assembly, died hours after a combination 72nd birthday party/campaign rally attended by GOP tax fighter Grover Norquist, recent Trump pardon recipient Sheriff Joe Arpaio and porn movie legend Ron Jeremy.
  • Hof died at the Love Ranch, one of his legal Nevada brothels, according to the Reno Gazette Journal. Another brothel of his, the Moonlite Bunny Ranch, was made famous by the HBO show “Cathouse.”
  • Multiple former prostitutes had accused him of sexual assault, but prosecutors did not file charges against Hof, who denied the claims.

As you’d expect, he was highly popular with evangelical voters.

What is the MMT theory of inflation?

Patrick Horan and I have a new piece over at The Bridge, which criticizes the increasingly popular “Modern Monetary Theory” of inflation:

Market monetarists argue that nominal GDP (total dollar spending on all goods and services in the economy) is the best way to determine whether monetary policy is too tight (leading to a recession) or too loose (leading to high inflation). During the recovery from the Great Recession, nominal GDP growth has averaged only four percent per year, which largely explains the low inflation rate.  The 1980s was also a period of expansionary fiscal policy and rising government debt, and inflation also fell during this period, as the Fed reduced the growth rate of the money supply.  And contrary to the predictions of MMT, the expansionary monetary policy of the 1960s and 1970s pushed inflation sharply higher, even though government spending and deficits were not unusually large.  While the market monetarist model (as well as some other conventional models) can explain why inflation has remained near two percent since 1990, MMT has no clear explanation for the relative success of inflation targeting.

Previously, whenever I criticized MMT I was told that I had gotten it all wrong, so we’ll see what sort of feedback this gets.  Brad DeLong also seemed a bit confused by their “theory”:

I think I am beginning to understand what had confused me: MMT is not M, or M, or T.

It seems to me that MMT argues that inflation is caused by excessively expansionary fiscal policy that pushes the economy past full employment, and that the cure for inflation is higher taxes.  If so, the theory is false.  They also seem to be arguing that central banks cannot control the price level by adjusting the money supply through open market operations.  Again, this is false.  Central banks control the price level through policies that affect the supply and demand for base money.

PS. Mark Sadowski expanded on DeLong’s remark:

I’ll get grief for this but like DeLong, I regard Modern Monetary Theory as none of the above. It’s more Ancient Fiscal Tautology.

1) Ancient
Chartalism, which is the intellectual foundation of MMT, was developed by G.F. Knapp in the 1920s, with contributions by Alfred Mitchell-Innes and Abba P. Lerner over 60 years ago. Not much of substance has happened since.

2) Fiscal
Exchanging money for goods or services is called “spending”. Issuing bonds in exchange for goods or services is called “borrowing.” Funding the difference via taxation is called “taxing.” Spending, borrowing, and taxing together make up fiscal policy, not monetary policy.

3) Tautology
Unless the proponents of a point of view, like MMT or Austrian Praxeology, admit that it is a set of assumptions that is falsifiable, then they don’t have a theory, they have a tautology.