Archive for the Category Misc.


Investment flows and population growth

I saw an interview of Robert Shiller and Kenneth Rogoff at Davos, where they were asked about the sluggish level of investment in the US.  They spoke of a lack of animal spirits, lingering effects of the financial crisis, etc.  I wonder if we are underestimating the role of population growth.

For instance, suppose houses lasted forever.  In that case a permanent reduction of population growth from 2% to 1%/year would cut housing investment in half.  Even in a more realistic model, where a small fraction of houses are demolished each year, housing construction might fall by 20% or 30%.

It also seems to me that the working age population might be especially important, as they need workplaces, which are provided via new investment.  Here’s a graph of the US population from age 16 through 64:

Screen Shot 2015-01-28 at 2.10.21 PM

It looks to me as though working age population growth suddenly slowed down around the onset of the recession.  Because the most recent datum is November 2014, I went back seven years to November 2007. The total growth from 2007-14 was 3.63%.  For the seven years before that it was 9.61%.  For the seven years before that is was 9.15%, and from 1986 to 1993 it was 7.21%.

So in the late 1980s and early 1990s working age population was growing at about 1% per year.  Then growth sped up to well over 1% for 14 years.  Then when the recession began growth slowed to about 0.5%.  That seems significant.

Is it just the recession?  We are now seeing unemployment falling sharply, but growth seems to be declining even further, to just 0.31% in the last 12 months, far below the growth rates that America has seen for many generations.  And with rising disability rolls, presumably the number of non-disabled working age people is growing even more slowly.

Two theories:

1.  Boomer retirements.

2.  Less immigration.

I’d guess some of each–does anyone have the data?

Whatever the cause, this seems like it might be able to explain at least some of the sluggish investment and low interest rates.  And if it was just the recession, obviously yields on 10 year bonds would not be below 2%.  After all, unemployment is down to 5.6% and falling rapidly.  The past 10 years have been subpar, but cyclical factors can’t very easily explain low yields for the next 10 years.  On the other hand, if working age population growth continues to slow, then we’ll begin to look more like Japan—the country that first entered the low investment/low interest rate environment.

BTW, Check out my post on Keynesian economics and the 2013 austerity, at Econlog.

PS.  With the appreciation of the Swiss franc, shouldn’t the Davos meetings be moved to Innsbruck, which uses the now “worthless” euro.

PPS.  James in London directed me to an article showing that the SNB is itching to get back in there buying assets to hold down the value of the SF.  No surprise to readers of this blog.

Clark Johnson on Afghanistan

A few years ago Lars Christensen hosted a multipart post Keynes, written by Clark Johnson.  I’ve known Clark for years, as we shared an interest in gold hoarding by central banks during the Great Depression.  Clark’s book on French gold hoarding also influenced Doug Irwin’s recent work in this area.  He reminds me a bit of David Glasner (who also wrote on gold hoarding during the 1930s, way back in the late 1980s.)  Both are independent thinkers who don’t follow a predictably liberal or conservative line.

What people may not know about Clark is that he is also an expert on foreign policy. His PhD was actually in history.  Over the years we had lots of fruitful discussions on both economics and foreign policy.  As you might expect from the arrogant tone of my blog, I always feel I can hold my own in economics debates. But I gradually noticed that when we argued about foreign policy, later events showed that Clark was right and I was wrong.  And it didn’t seem to matter whether I took the more hawkish or dovish line.  There’s a reason I don’t blog on foreign policy, my brain is not wired in such a way as to make me good at the nuances of that subject, which seems more an art than a science.

I’d like to highly recommend a recent Clark Johnson article on Afghanistan, which seems much more intelligent than anything I’ve read in the media.  I wish he was in a position with more influence over US foreign policy.  BTW, Clark has spent a substantial amount of time living in various hotspots.  I have memories of getting emails from Clark in places like Kabul or Baghdad, saying his hotel had been hit by mortar fire that morning.

Here’s the abstract, but the issues are so complex you really need to read the whole thing to do justice to his arguments:

US efforts in Afghanistan since 2001, and especially since the surge of 2010-2011, have emphasized military and to a lesser extend donor aid operations, while side-stepping political and cultural complexities.  The policy has failed, as evidenced by both persistence of the insurgency and by acknowledgement of Coalition leaders that they do not know how to reinforce credibility of GIRoA (Government of Islamic Republic of Afghanistan).  Going back to 1989, and certainly since 2001, the US has failed to construct a coalition of moderates that might be able to enhance legitimacy and increase stability, and hence to begin to defuse military tensions.  Indeed, the US has often supported factions that tended to undermine stability and energize insurgent activity.  An improved political strategy going forward would look for ways to collaborate with and strengthen moderate tribal and religious leaders, and to support GIRoA structures already in-place for neutralizing extremists and warlords.  In line with Afghan historical precedent, the US and Coalition should also seek to decentralize government finance and appointments, in order that some insurgents might choose to compete politically (non-militarily) in provinces and districts.  This can be accomplished over time even without negotiations between GIRoA and Taliban leaders, and with a minimum of Coalition military support.

In macro, Clark’s strength is the interrelationship between exchange rate policy and macro outcomes, as you might expect from someone who studied under Mundell.  He’s also a fan of Keynes’s Treatise, a book I need to reread.

American liberalism, circa 2007

Marcus Nunes directed me to a very interesting piece by Jonathan Chait in the American Prospectfrom 2001.  It begins by pointing out that by the early 1990s American liberals had turned against the deficit spending policy of Ronald Reagan. Then it moves on to the Clinton Administration:

All of these developments were known at the time, but they had not fully cohered when Clinton began to construct his first economic plan. The key decision was not whether to reduce the deficit——given its size, the White House had no other realistic option——but rather what effect this would have upon the economy. Everyone present assumed that raising taxes or cutting spending would, at least in the short run, dampen economic growth. White House economists gave serious consideration to the possibility that their plan would throw the economy into recession. The only way to avoid this dismal fate was if the Federal Reserve or the bond market would lower interest rates to spur economic activity and make up for the depressing effects of deficit reduction. According to Bob Woodward’s account in The Agenda, Clinton replied to this news in a half whisper: “You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?”

The question that so bedeviled the White House in 1993——can the Fed and the bond market overcome the effects of tight budgets?——is no longer in doubt, and therein lies the great transformation of liberal economics. Previously, even liberals who favored deficit reduction considered it a painful trade-off: Reducing government borrowing would free up more savings for private investment and, in the long run, improve productivity, but in the short run, it would slow or even halt economic growth and throw millions out of work. The White House accepted this bargain in 1993 and hoped it would work out for the best. Now fiscal restraint is seen not even as a trade-off but, rather, as a way of getting the best of both worlds. This does not mean that forbearance is the one true answer, now and forever. It merely suggests that, under the present economic and political circumstances, the interests of current and future prosperity both argue for reducing deficits or expanding surpluses.

That intellectual breakthrough forms the bedrock of progressive fiscal conservatism. The principles of this economic synthesis are eminently clear. It begins with a recognition that the Federal Reserve and the bond market wield an effective control over the economy and that these instruments, rather than deficit spending, have become the most effective levers available to government for promoting economic growth. At the same time, there is an understanding among liberals that the burdens of fiscal restraint should fall primarily upon those most able to bear it and that the government should make a special effort to ensure that the benefits of economic growth also flow to those at the bottom.

Clinton’s 1993 budget bore out these tenets in their purest practical form. Its overall framework was deficit reduction, with the purpose of reducing interest rates and promoting economic health. It also had a strongly progressive tilt, raising the tax rate on the highest earners while expanding low-income subsidies such as the Earned Income Tax Credit (EITC) and Head Start. Six years later, Clinton and his advisers—and even like-minded economists outside the administration—continue to hold up the 1993 budget as their pinnacle achievement.  [The article seems to have typos, so I added dashes in the first two paragraphs.]

Recall that unemployment was pretty high when Clinton took office, much higher than today.  Of course today’s liberals would point to one key difference, interest rates were not stuck as zero.  (But that’s also true of the eurozone, circa 2008-12.)

As recently as 2007, the conventional wisdom of American liberals (on fiscal policy) was essentially market monetarist—they believed in monetary offset.  The fiscal multiplier is close to zero.  Deficits are bad.  And yet I get many Keynesian commenters who don’t know this. They act like I’m propounding some sort of weird theory.  They tell me that:

GDP = C + I + G

So “obviously” more G will boost GDP.  In fact, it is post-2007 liberals who are the “weirdos,” who have rejected the successful policies of Clinton and replaced them with the failed policies of Obama.  (Remember, this is the president who 5 years into the recovery was arguing that unemployment was still so bad that we needed to enact an “emergency” unemployment program.)

First the Keynesians argued that monetary stimulus was ineffective at the zero bound. That’s what got me into blogging.  But it soon became obvious that monetary policy was still effective. For instance, the dollar dropped 6 cents against the euro on the day QE1 was announced, in March 2009.  Then after 2011 we had a controlled experiment, both the US and eurozone did roughly equal amounts of fiscal austerity.  But the US did monetary stimulus and the eurozone did not.  Both regions had similar unemployment rates as recently at 2010, in the 9% to 10% range.  By 2014 the eurozone unemployment rate was twice that of the US (roughly 12% vs. 6%).  Monetary policy made the difference.

Then Keynesians claimed that even the Fed didn’t believe in monetary offset.  That theory lost a bit of force when (in late 2012) Fed officials said they were doing aggressive stimulus (QE3 and forward guidance) partly to keep the recovery going as Congress moved to austerity in 2013.  By early 2013 it was clear that if this new form of liberalism, this rejection of Clintonomics, was going to have any plausibility they needed to be able to show that the Fed could not or would not offset fiscal austerity. And calendar 2013 was the perfect test, as all sorts of austerity came together at the same time.  The budget deficit fell by $400 billion in fiscal 2013, but that year begins on October 1st.  The tax increases didn’t start until January 1st, 2013, and the deficit fell by an astounding $500 billion during that calendar year.  A near perfect test.

Some of my critics point out that GDP data is noisy, and that the speed up in growth in 2013 wasn’t particularly significant.  Agreed.  But the Keynesians didn’t just need a single, they needed a home run.  They needed a sharp slowdown.  The evidence in favor of monetary offset was becoming increasing persuasive.  The Fed doesn’t stop doing monetary policy at the zero bound.  If you are going to reject the previous liberal conventional wisdom, reject views held as recently as 2007, ask the public to spend a trillion dollars, you better damn well have a good reason.  They desperately needed a slowdown in 2013, and got a speed up in growth instead.  That’s why 2013 was so devastating.  Not because it was definitive, but because fiscal stimulus was already on its last legs, increasingly rejected even by liberals such as Jeffrey Sachs.  Once 2013 went against them, it was game over.

Films of 2014

I almost stopped doing these annual film reviews, as I don’t have time to see as many films as before, and I missed the films I most wanted to see (Winter Sleep, Boyhood, etc.)  In addition, each year I see more and more old films and fewer new ones, so I’m not sure why anyone would be interested in the list.  But for what it’s worth (on a scale from zero to 4.0, all are rated above 2.0 because I don’t choose to go to bad films.):

Die Nibelungen I and II (German—is there a more German film?) 3.9 A great 5 hour silent film by Fritz Lang from 1924. Deserves as much fame as Metropolis. Saw it at the Harvard film archive in 35 mm with 5 hours of superb live piano music—the only sound you need. It clearly influenced Leni Riefenstahl and Eisenstein (esp. Ivan the Terrible). Film event of the year. 

The Mirror (Russian) 3.9 A 1975 masterpiece by Tarkovsky. Some amazing dream sequences.

The Puppetmaster (Taiwan, 1993) 3.9 Somehow I missed this Hou Hsiao-Hsien film the first time around. One of his best. More than almost any other director, he gives you a real sense of the passing of time.

Springtime in a Small Town. (China, 2002) 3.8 How did I miss this perfect little film back in 2002? The cinematographer for Hou Hsiao-Hsien, combined with the director Tian Zhuangzhuang. Perhaps my all-time favorite Chinese film.

The Life of Oharu. (Japan, 1952) 3.8 Considered one of Mizoguchi’s three masterpieces (along with Ugetsu and Sansho the Bailiff) and the director’s personal favorite. There are few male directors who are as adept at portraying women. I also saw a number of other films in the Harvard series (Sisters of Gion (1936), Oyuki the Virgin (1935), A Geisha (1953), Poppy (1935) and Utamaro and His Five Women (1946).) The Utamaro film was a bit disappointing. Oyuki the Virgin was a hidden gem. Not even subtitled, Harvard had to add their own subtitles to Oyuki, and project them on the bottom of the film as it ran. Dozens of Mizoguchi’s films are lost forever.

Sorcerer (US, 1977) 3.8 A beautifully restored print at the HFA, for one of the underrated masterpieces of the 1970s. The director William Friedkin spoke for an hour afterwards, with lots of great stories. He said this was the one film he wanted to be remembered for, not the French Connection, To Live and Die in LA, the Exorcist, etc. Apocalypse Now was probably influenced by this film, as were some of the Tarantino films.

Dust in the Wind (Taiwan, 1986) 3.8 Another Hou Hsaio Hsien classic. The change in his style between 1982 and 1986 is mindboggling. One of his first mature films.

Only Lovers Left Alive 3.6 (US) Artists are portrayed as vampires in Jim Jarmusch’s new film. Interestingly, Jarmusch seems to think their behavior is justified. Or maybe the surprise is that he’s willing to admit what everyone in the arts community secretly believes—conventional morality doesn’t apply to them. (Maybe it doesn’t.)  Quite stylish.

Under the Skin (British) 3.6 Another variation of the theme in “The Man Who Fell to Earth.” Very visual, mysterious, and pretty engrossing. My only reservation is that it seemed derivative in several places. Too many reminders of other directors (and even painters like Francis Bacon.) Even so, highly recommended as a big screen film. A few very memorable scenes that did seem quite original. By the director of “Sexy Beast,” and only his second film since that classic.

Last Year at Marienbad (French) 3.5 One of the gradually diminishing number of classic films that I had never seen. Classics aren’t so much about quality, as getting there first. When they are executed brilliantly then we are in luck (Citizen Kane, Psycho, 2001, etc.) More often they are more like this film, full of flaws but still sort of unforgettable.

Lunchbox (India) 3.5 Very nicely made film. The main actor was almost perfect in the role. Indeed everything was very tasteful, not over spiced like most (American) Indian food.

Tim’s Vermeer (US) 3.5 I was worried that this might be an attempt to “debunk” Vermeer, by showing he used a camera obscura. But in the end the narrator argued (persuasively) exactly the opposite, that it made his achievements even more amazing. Interestingly, they mentioned that art experts were often resistant to the “camera” explanation, out of fear that it would make Vermeer seem less impressive—an odd perspective from a community that seems to regard Andy Warhol the greatest artist of the 1960s. Even with the mechanical aid, it took Tim more than 6 months to paint a single small Vermeer. And does this explain Vermeer’s outdoor scenes (View of Delft, The Little House?) Can it really explain the magic of The Girl with the Pearl Earring or The Artist’s Studio? I’m skeptical. It’s also odd that he chose a Vermeer not available to the public, as it would be great to see a museum mount Tim’s version right next to the original.

The Five Obstructions (Denmark) 3.5 A very amusing and interesting examination of the role that obstructions play in the creation of art. Lars Van Trier is smarter than I’d thought.

Den ganzen Beitrag lesen…

Last call for futures donations

We plan to wrap up the donations for iPredict this week.  We will look at where we are at that time, and then Ken will also make a donation.  Hopefully the market will be up and running soon.  BTW, the Hypermind full year contract is at 45 (4.5%), I hope to have the link embedded here soon, but for a low tech guy like myself the wheels turn slowly. . . .

PS.  Benn Steil and Dinah Walker have a good post on monetary offset.  Mark Sadowski did some similar empirical work last year, and reached the same conclusion.