China opts for Romer cities

Back in the 1990s when everyone was speculating on the effects of the looming Chinese takeover of Hong Kong and Macao, I suggested that perhaps people have it backwards.  Maybe Hong Kong and Macao were about to conquer China.  Now it seems to be happening:

Hengqin Dao is an island in Zhuhai, a prefecture-level city and Special Economic Zone in the Guangdong province of the People’s Republic of China. It has a population of about 3,000.

The whole island is designated a special economic district, as Hengqin New Area, similar to Binhai New Area in Tianjin and Pudong New Area in Shanghai.

Hengqin Island is adjacent to Ilha da Taipa and Ilha de Coloane of Macau, and is connected to Macau’s Cotai via the Lotus Bridge. The island is the largest among the 146 islands of Zhuhai, being roughly three times the size of Macau. It has broad bays, sandy beaches, strangely shaped jagged rocks, beautiful scenery, fresh air, and natural vegetation cover.

.   .   .

Since the land reclamation and development, there has been a growing opinion in Macau that the island should be leased to Macau, where land is very limited and there is little room for further development. By 1 September 2005, plans were revealed that the government of Guangdong will allow tax exemptions and adopt flexible immigration control in Hengqin to promote investment from Hong Kong and Macau.

In late 2005, Las Vegas Sands openly discussed its multi-billion dollar plan to develop parts of Hengqin Island into a convention and resort destination. The project was to include four million sq ft of convention space, hotels, retail, vacation homes, and golf, tennis and yachting amenities.[3][4]

On 27 June 2009 it was officially announced by the government of Macau that the University of Macau will build its new campus on 1 km2 of the island, in a stretch directly facing the Cotai area, south of the current border post. This is the first of other possible projects. Construction of the campus shall take three years[5] and is slated to include an underwater tunnel.[citation needed] Macau law will apply in the university campus and it will not be necessary to pass a formal border post.[6] The Macau Special Administrative Region will pay an amount of rent which has not yet been set for the use of the land.

And Hong Kong is also getting into the act:

ELSEWHERE in the developing world, towns grow before the infrastructure is quite ready to support them. Things are different in Shenzhen, China’s original Special Economic Zone (SEZ), a stone’s throw from Hong Kong.

The subway station at Qianhai bay, on the city’s west coast, is spick and span, with a full complement of signs, announcements and billboards, including one for a performance by the BBC National Orchestra of Wales, sponsored by Classy Kiss milk. But only one exit is open. And it surfaces in the middle of a wasteland of dirt, scrub and puddles. It is, surely, the best connected nowhere anywhere.

This empty spot is, however, full of big ambitions. It is one corner of a 15-square-kilometre zone earmarked for experimentation by China’s cabinet. The zone has licence to try policies that are “more special” than those prevailing even in an SEZ. It aims to attract “modern service industries” rather than big-box manufacturers. It will charge only 15% corporate-profit tax and levy no income taxes on the finance professionals, lawyers, accountants and creative people it hopes eventually to attract.

These cosmopolitan folk will live in a “waterfront city”, says James Corner, whose firm won a competition two years ago to design the bay’s future landscape. Over the next couple of years, he explains, the city will build a system of “water fingers”, large parks that collect, retain and purify the streams that flow from the hinterland, allowing water to enter the bay clean and clear.

Water is not the only flow Qianhai aims to collect and retain. It also wants to attract some of the offshore yuan that have pooled outside mainland China’s borders. Over 550 billion yuan ($87 billion) now sits in Hong Kong deposit accounts; another 60 billion yuan sits in Singapore, and 35 billion more resides in customer deposits in London, according to an April study by Bourse Consult.

These yuan cannot flow freely back into mainland China, however. Banks can invest a limited amount in the mainland’s inter-bank bond market. Companies that raise yuan outside China can seek permission to invest the money in their operations inside the country. But the money can easily become bogged down in China’s exchange controls, especially when the authorities are trying to tighten credit.

Qianhai, however, will be permitted to broaden these channels. Its firms will be given help in raising yuan offshore. Hong Kong banks will be allowed to enter the zone more easily. The ground will also be laid for greater cross-border lending. “Since the mainland is targeting the gradual achievement of full yuan convertibility, Qianhai should be a pioneer for progress,” said Zhang Xiaoqiang of the National Development and Reform Commission, China’s planning body.

The plan poses some puzzles. If offshore yuan were to be lent freely to Qianhai firms, what would stop them lending the money on to the rest of the country? An easing of capital controls between Hong Kong and Qianhai would seem to require a tightening of controls between Qianhai and the rest of the mainland. Otherwise the stream of yuan inflows could become a flood. 

I seem to recall that Paul Romer is having difficulty finding a country to adopt his excellent proposal for the creation of Hong Kong-type special economic zones.  It looks like China decided to adopt his idea.  Why haven’t we heard about this success?  Because it smacks of neo-colonialism, and China is intensively nationalistic.

But within China pragmatism often trumps nationalism.

PS.  There is a third SEZ just south of Guangzhou (Canton) which is called ‘Nansha.’


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32 Responses to “China opts for Romer cities”

  1. Gravatar of CA CA
    25. August 2012 at 20:43

    Scott, I think James Pethokoukis has developed a man-crush on you.

    http://ricochet.com/main-feed/Romney-the-Republicans-and-the-Gold-Standard

  2. Gravatar of Morgan Warstler Morgan Warstler
    25. August 2012 at 22:06

    China ought to offer you a fat deal as a macro-economist.

    It would be genius on their part.

    (See Robert Mundell)

  3. Gravatar of Benjamin Cole Benjamin Cole
    25. August 2012 at 22:54

    Thailand is doing it the old way–wait until the infrastructure is overcrowded, then build something, usually in a way compromised by circumstance and politics.

    But Thailand is growing well enough. Proof that to get economic growth you just have to be okay, not great (although I suppose we could argue semantics, but I think readers get my drift).

  4. Gravatar of Rien Huizer Rien Huizer
    26. August 2012 at 00:21

    Scott,

    Enjoyable posts! Every incarnation of the Asian model is different and China is not like Japanin many respects at all. Anyway, what conditions, policies and endowments predict successful development is still a mystery. One little thing perhaps: adequate to good education (especially for the elite), pragmatic and credible policymaking. But where does it lead to? Authoritarian and dominant party polities tend to tire after a while. Maybe the Chinese system is fiercely competitive within the communist party and if so that would keep everyone on the run. Meanwhile the many open spaces within the authoritarian structure provide plenty of appetizing opportunities to keep the people at the bottom interested and working/saving/investing hard. So, who knows, these conditions may help the thing to keep growing at an average of 6-7% for another decade without some group of low cost labor stakeholders making it slow down. And that would mean doubling gdp/cap for the country as a whole and crossing the USD 5000/cap barrier with ease. And control 40-60% of world manufacturing. Remember people writing about the Japanese challenge in the 1980s?

  5. Gravatar of Martin Martin
    26. August 2012 at 00:25

    Scott,

    “I seem to recall that Paul Romer is having difficulty finding a country to adopt his excellent proposal for the creation of Hong Kong-type special economic zones.”

    There was an article in the NYTimes about Honduras trying out Romer’s idea. It’s from May 2012, so it’s a while ago; I don’t know if you’ve seen it, but here:

    http://www.nytimes.com/2012/05/13/magazine/who-wants-to-buy-honduras.html?pagewanted=all

  6. Gravatar of Martin Martin
    26. August 2012 at 00:29

    ps. I do enjoy the posts on China. Any chance we could get the odd picture and see what you’re seeing?

    Something about a finger and a whole hand 😛

  7. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. August 2012 at 03:27

    The key thing here is that these are initiatives within China where political control remains Chinese, even if it is “Chinese by special arrangement”. They are much more like medieval boroughs than Romer’s original idea. Which, as I pointed out a couple of years ago, suffered from not being medieval enough.
    http://lorenzo-thinkingoutaloud.blogspot.com.au/2010/06/paul-romers-charter-cities-not-medieval.html

  8. Gravatar of DW DW
    26. August 2012 at 03:38

    I wonder what a public choice analysis of these operations would suggest is going on. Stories of the triumph of economic rationality are great and everything, but surely things ain’t that simple.

    Is there a blog out there that analyzes the political economy of SEZs?

  9. Gravatar of Saturos Saturos
    26. August 2012 at 03:57

    Back to monetary policy – the current state of the debate: OhGodOhGodOhGOD: http://www.nytimes.com/roomfordebate/2012/08/21/should-the-fed-risk-inflation-to-spur-growth/inflation-should-be-feared

    Even Thoma scares me, he sounds discretionary enough (despite roughly echoing your proposal) that he makes Cochrane sound plausible.

  10. Gravatar of Saturos Saturos
    26. August 2012 at 03:59

    Even Ed Harrison, who was the one who linked me to your WSJ interview a year ago, seems relapsed.

  11. Gravatar of Saturos Saturos
    26. August 2012 at 04:02

    Matt Yglesias voice of sanity thank goodness: http://www.slate.com/blogs/moneybox/2012/08/22/john_cochrane_says_the_fed_can_t_create_more_inflation_here_s_why_he_s_wrong_.html

  12. Gravatar of Saturos Saturos
    26. August 2012 at 04:03

    But then there’s this: http://www.ft.com/intl/cms/s/0/06ebfdaa-ed3f-11e1-83d1-00144feab49a.html

    So much for Morgan’s theory. Marcus has a post as well.

  13. Gravatar of Saturos Saturos
    26. August 2012 at 04:39

    Oh, but now Jim Pethokoukis has our back: http://ricochet.com/main-feed/Romney-the-Republicans-and-the-Gold-Standard

    Welcome to Team MM Jim!

  14. Gravatar of ssumner ssumner
    26. August 2012 at 05:39

    Rien, No mystery at all. East Asian economies grow when they have markets, and don’t when they don’t.

    Martin, I did see that, but assumed it wasn’t a done deal yet.

    Everyone, Don’t expect fancy graphics, it’s a struggle to post anything under the conditions I’m working with over here. I can’t read many blogs, and can’t open many of the links that people send me. If there is something really important please provide a quotation from the link.

  15. Gravatar of Morgan Warstler Morgan Warstler
    26. August 2012 at 07:45

    Saturos, my position:

    1. Romney wins. Scott dedicates his book to me. Intellectual Hilarity ensues.

    2. Massive cuts to public sector are called “deflationary productivity gains” and the Fed provides Romney whatever QE cover fire is necessary – IF it is necessary. Not sure about that.

    3. The MOMENT, the very single MOMENT that interest rates increase and the Govt.’s short term debt has to get rolled, the deficit #’s EXPLODE, giving us a continued pressure on the public sector…. the entire discussion changes.

    —–

    It amazes me that the rap on Romney / Bain – that he’s a “turn around artist” or that he’s a “job outsourcer” hasn’t been truly grasped and discussed by the left.

    Dismantling the public sector union dues system is the GOP strategy before any serious cus to immediate conventional entitlements SHOULD BE EXPECTED.

    The question then becomes, and this is really the only question: if Romney wins is he gong to be able to “turn around” the PUBLC SECTOR by “outsourcing” their jobs???

    The answer is yes.

    The rest of the economy takes care of itself.

  16. Gravatar of 123 123
    26. August 2012 at 11:30

    Scott, a challenge from Atlanta Fed research director: http://macroblog.typepad.com/macroblog/2012/08/the-cost-benefit-challenge-1.html

  17. Gravatar of 123 123
    26. August 2012 at 11:32

    Basicaly above link is maybe a FOMC vote up for grabs

  18. Gravatar of Mike Sax Mike Sax
    26. August 2012 at 19:53

    Morgan, we know where Romney stands today. But what is he going to stand for tomorrow?

    Tea Party is in Tampa for Ryan not Romney http://diaryofarepublicanhater.blogspot.com/2012/08/ryan-not-romney-is-who-theyre-in-tampa.html

  19. Gravatar of Saturos Saturos
    26. August 2012 at 21:04

    OK Scott, so Cochrane says:

    The fact is, the Fed is basically powerless to create more inflation right now — or to do anything about growth. Interest rates can’t go below zero, and buying one kind of bond while selling another has minuscule effects. Which is just as well. While preventing deflation in the recession was vital — and the Fed did it — the idea that a deliberate inflation is the key out of our policy-induced doldrums makes no sense.

    which Harrison also echoes. The third contributor to the NYT Room for Debate is Mark Thoma, who says:

    Unfortunately for the millions of people who cannot find work because of the recession, the Fed is unlikely to do more to help the economy recover because of a misperception of the cost and benefits of further policy action. The Fed is far too worried about the potential for inflation, and far too pessimistic about its ability to lower the unemployment rate.

    Even if the fight against unemployment does cause inflation, a long-run problem is far from inevitable, and the costs of moderate, short-lived inflation are not that large.The Fed’s hyper-sensitivity to inflation comes in large part from memories of the 1970s, but there is very little to justify worries that the inflation problems of the 1970s will be repeated. Inflation has been running at or below target, financial markets have not displayed any inflation jitters, and the Fed can increase the interest rate it pays on bank reserves, a tool it did not have in the 1970s, which keeps funds idle in bank vaults and helps keep inflation under control. Even if the fight against unemployment does cause inflation, a long-run problem is far from inevitable, and the costs of moderate, short-lived inflation are not that large.

    In any case, the Fed needs to set its inflation fears aside, and begin a new round of quantitative easing of $200 billion in long-term bonds per month, and continue the purchases until unemployment falls below 7 percent, or the inflation rate rises above 4 percent.

    Yglesias rubbished Cochrane with a reductio ad absurdum – monetize the debt, carefully explained to the lay readers. Meanwhile, FT reports the Republicans have opened a commission in to investigating either a gold standard or a commodity basket peg. Jim Pethokoukis, taking your views to heart, explains very well why that’s a bad idea. Marcus does a few posts on that too. And Marcus also quotes this letter from Bernanke:

    “There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery,” Mr. Bernanke wrote in a letter dated Aug. 22, a copy of which was obtained by The Wall Street Journal.

    The Fed’s “Operation Twist” program””buying long-term Treasury bonds and selling short-term securities””is still “working its way through the economic system,” Mr. Bernanke said. The program was first launched in September 2011 and in June 2012 was extended through the end of this year.

    Asked by Mr. Issa if it were premature to consider additional monetary moves, Mr. Bernanke said that “because monetary policy actions operate with a lag,” the Fed must make policy “in light of a forecast of the future performance of the economy.”

    The Fed chairman also said that the Fed’s bond-buying of recent years has “helped to promote a stronger recovery than otherwise would have occurred, and to forestall the possibility of a slide into deflation…by putting downward pressure on longer-term interest rates and contributing to broader easing in financial conditions.”

    Also, in another post, another WSJ article:

    Asked whether Mr. Romney would consider appointing Mr. Bernanke to a third four-year term, Mr. Hubbard replied, “I would certainly recommend that Chairman Bernanke get every consideration.”

    Mr. Romney set the record straight Thursday, telling Fox Business News that he wants a “new person” to fill the Fed chairmanship who is focused on “monetary stability that leads to a strong dollar.”

    On Twitter, Noah Smith asks:

    What is the best historical example of monetary policy successfully counteracting a demand shock?

    which leads to this exchange:

    @mattyglesias: One good example is US after October ’87 stock crash — big rate cut, no recession.
    “@Noahpinion: But what if stock market crashes don’t cause recessions if they aren’t accompanied by waves of debt defaults?
    “@AndyHarless: Really there can be no example where you could prove that a recession would happen in the counterfactual case.
    @antipodeecon: but doesn’t that apply to every form of macro policy? You almost never have perfect counter factuals.
    @AndyHarless: That was my point: @noahpinion’s “what if” takes us into a world where knowledge is impossible @Noahpinion: That’s why I’m skeptical of the seemingly prevalent nerd-consensus that the Fed is omnipotent.
    @AndyHarless: But why aren’t you equally skeptical of the view that the Fed is not omnipotent?
    @Noahpinion: Entropy. More ways Fed could be non-omnipotent, in general.
    @AndyHarless @Noahpinion @antipodeecon @mattyglesias Otherwise the promise of sufficient future inflation guarantees a sufficient decline in money demand
    “@Noahpinion
    @AndyHarless @antipodeecon @mattyglesias Or maybe money demand is unstable. Maybe it’s not even a function.

    At this point I tried to talk some sense into Noah:

    @_Srijit But don’t you think expected future hyperinflation would necessarily make people want to hold less money assets?
    “@Noahpinion @_Srijit No way. You’d need a wheelbarrow of money to buy a loaf of bread.

    Pleased to get a reply, but… spot the fallacy.

  20. Gravatar of Saturos Saturos
    26. August 2012 at 21:06

    Sorry, I’ll repost that.

  21. Gravatar of Saturos Saturos
    26. August 2012 at 21:07

    OK Scott, so Cochrane says:

    The fact is, the Fed is basically powerless to create more inflation right now — or to do anything about growth. Interest rates can’t go below zero, and buying one kind of bond while selling another has minuscule effects. Which is just as well. While preventing deflation in the recession was vital — and the Fed did it — the idea that a deliberate inflation is the key out of our policy-induced doldrums makes no sense.

    which Harrison also echoes. The third contributor to the NYT Room for Debate is Mark Thoma, who says:

    Unfortunately for the millions of people who cannot find work because of the recession, the Fed is unlikely to do more to help the economy recover because of a misperception of the cost and benefits of further policy action. The Fed is far too worried about the potential for inflation, and far too pessimistic about its ability to lower the unemployment rate.

    Even if the fight against unemployment does cause inflation, a long-run problem is far from inevitable, and the costs of moderate, short-lived inflation are not that large.The Fed’s hyper-sensitivity to inflation comes in large part from memories of the 1970s, but there is very little to justify worries that the inflation problems of the 1970s will be repeated. Inflation has been running at or below target, financial markets have not displayed any inflation jitters, and the Fed can increase the interest rate it pays on bank reserves, a tool it did not have in the 1970s, which keeps funds idle in bank vaults and helps keep inflation under control. Even if the fight against unemployment does cause inflation, a long-run problem is far from inevitable, and the costs of moderate, short-lived inflation are not that large.

    In any case, the Fed needs to set its inflation fears aside, and begin a new round of quantitative easing of $200 billion in long-term bonds per month, and continue the purchases until unemployment falls below 7 percent, or the inflation rate rises above 4 percent.

    Yglesias rubbished Cochrane with a reductio ad absurdum – monetize the debt, carefully explained to the lay readers. Meanwhile, FT reports the Republicans have opened a commission in to investigating either a gold standard or a commodity basket peg. Jim Pethokoukis, taking your views to heart, explains very well why that’s a bad idea. Marcus does a few posts on that too. And Marcus also quotes this letter from Bernanke:

    “There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery,” Mr. Bernanke wrote in a letter dated Aug. 22, a copy of which was obtained by The Wall Street Journal.

    The Fed’s “Operation Twist” program””buying long-term Treasury bonds and selling short-term securities””is still “working its way through the economic system,” Mr. Bernanke said. The program was first launched in September 2011 and in June 2012 was extended through the end of this year.

    Asked by Mr. Issa if it were premature to consider additional monetary moves, Mr. Bernanke said that “because monetary policy actions operate with a lag,” the Fed must make policy “in light of a forecast of the future performance of the economy.”

    The Fed chairman also said that the Fed’s bond-buying of recent years has “helped to promote a stronger recovery than otherwise would have occurred, and to forestall the possibility of a slide into deflation…by putting downward pressure on longer-term interest rates and contributing to broader easing in financial conditions.”

    Also, in another post, another WSJ article:

    Asked whether Mr. Romney would consider appointing Mr. Bernanke to a third four-year term, Mr. Hubbard replied, “I would certainly recommend that Chairman Bernanke get every consideration.”

    Mr. Romney set the record straight Thursday, telling Fox Business News that he wants a “new person” to fill the Fed chairmanship who is focused on “monetary stability that leads to a strong dollar.”

    On Twitter, Noah Smith asks:

    What is the best historical example of monetary policy successfully counteracting a demand shock?

    which leads to this exchange:

    @mattyglesias: One good example is US after October ’87 stock crash — big rate cut, no recession.
    “@Noahpinion: But what if stock market crashes don’t cause recessions if they aren’t accompanied by waves of debt defaults?
    “@AndyHarless: Really there can be no example where you could prove that a recession would happen in the counterfactual case.
    @antipodeecon: but doesn’t that apply to every form of macro policy? You almost never have perfect counter factuals.
    @AndyHarless: That was my point: @noahpinion’s “what if” takes us into a world where knowledge is impossible @Noahpinion: That’s why I’m skeptical of the seemingly prevalent nerd-consensus that the Fed is omnipotent.
    @AndyHarless: But why aren’t you equally skeptical of the view that the Fed is not omnipotent?
    @Noahpinion: Entropy. More ways Fed could be non-omnipotent, in general.
    @AndyHarless @Noahpinion @antipodeecon @mattyglesias Otherwise the promise of sufficient future inflation guarantees a sufficient decline in money demand
    “@Noahpinion
    @AndyHarless @antipodeecon @mattyglesias Or maybe money demand is unstable. Maybe it’s not even a function.

    At this point I tried to talk some sense into Noah:

    @_Srijit But don’t you think expected future hyperinflation would necessarily make people want to hold less money assets?
    “@Noahpinion @_Srijit No way. You’d need a wheelbarrow of money to buy a loaf of bread.

    Pleased to get a reply, but… spot the fallacy.

  22. Gravatar of Saturos Saturos
    26. August 2012 at 21:09

    Sorry, last two tweets in the list were Andy Harless and then Noah (saying money demand isn’t a function). That’s when I cracked.

  23. Gravatar of Saturos Saturos
    26. August 2012 at 22:09

    @AndyHarless: There’s only 3 ways the Fed can be non-omnipotent: 1.lack of credibility…
    @Noahpinion: No, I think there are many more ways.
    @AndyHarless: Barring a permanent liquidity trap, the Fed can promise to make the dollar worthless. Omnipotence.
    @Noahpinion: Ah, but what if they can’t control the timing of when the promise starts to be believed? 😉
    @AndyHarless: As I said, lack of credibility is one of the 3 ways in which omnipotence can fail.
    @Noahpinion: But what is “lack”? What if credibility acts with a stochastic (and uncertain) lag?
    @Jesse_Livermore: Once the Fed owns all l/t TSY (getting close) and agencies, then what?
    @AndyHarless: It has to promise to create inflation once it gets traction. LSAPs are just toys.
    @Jesse_Livermore: Only way Fed can create sustained increase in labor demand is to buy what labor produces–not TSY, not agencies.
    @AndyHarless: Unless the liquidity trap is permanent, all it has to do is promise to keep rates low when inflation rises.
    @Noahpinion: I do not think that is necessarily true. The reaction to such a policy might be chaotic.
    @Jesse_Livermore: Does anyone right now *really* think that rates are going to rise in the next 5 years?
    @AndyHarless: So what about 10 years from now? Or 15? Or 20? Once you concede we’ll eventually exit the trap, I’ve got you.
    @Jesse_Livermore: No, you don’t, b/c you can’t make promises that far out that anyone will take seriously.
    @Noahpinion: Or people may believe the promises but have heterogeneous beliefs about the money demand “function”.
    @Noahpinion: Or people may fluctuate stochastically between believing the promises and not believing them.
    @Jesse_Livermore: Good pts, all.
    @Noahpinion: Also, just because the Fed can inflate does not mean it can control the path of the price level.
    @AndyHarless: Subject to a possible excluded middle, it can control the expected path of the price level, which would fit my omnipotence def’n
    @Noahpinion: Why should we believe it can control the expected path of the price level?
    @AndyHarless: If it can continuously control E(P(T+K)), it can keep raising that price level until E(P(T)) rises to the level it desires
    @Noahpinion: No, I think you are wrong about that….
    @Noahpinion: Ah, but to get omnipotence, you need perfect credibility at every time t, not just at one point or at t=infinity.
    @Noahpinion: Also, what if convergence to the limit is not smooth? What if it has oscillations with stochastic periods as it decays?
    @Noahpinion: No. That requires nontrivial assumptions about how expectations are formed.

    [My comment: Obviously this would all be settled if we had an NGDP futures market. In its absence, a lot depends on the Fed’s reaction function, and how asset markets respond to its communications of its intentions – points which the guys seem to be ignoring.]

    @Noahpinion: I just see no reason to believe the Fed can continuously control E(P(T+K)).
    @Noahpinion: Why does controlling lim(P(t)) imply control of E(P(T+K))? I don’t think it does.
    @Jesse_Livermore: And even then, why should my behaviors change simply b/c rates will not rise 10 years from now despite inflation?
    @AndyHarless: Because if the Fed continues to pursue that policy, your money will eventually become worthless.
    @Noahpinion: “Eventually” being the key word. Controlling lim(P) as t–>+ is not the same as controlling P(t).

    [My comment: That’s how he wrote it. Mathematically of course it depends on how well the target for the argument variable (time) can be controlled.]

    @AndyHarless: It is not by definition the same, but controlling lim(P) continuously implies controlling E(P(t))
    @Noahpinion: Why does it imply that?
    @Jesse_Livermore: Are you afraid the Fed is going to raise rates too early? Who on earth is afraid of that right now?
    @AndyHarless: I’m very worried that the Fed is going to raise rates too early. So is Christina Romer. You’re not?
    @Noahpinion: I think raising rates soon would be a quite bad idea…

    At some point (Twitter is very non-linear) I realized Noah had replied to me, and tweeted back at him:

    @_Srijit But don’t you think expected future hyperinflation would necessarily make people want to hold less money assets?
    ?@Noahpinion @_Srijit No way. You’d need a wheelbarrow of money to buy a loaf of bread.

    @_Srijit: In the future, yes. But 1st we dump money as store of value, until high prices make us hold it again. Future inflation -> present inflation. Basic Cagan model stuff.
    @_Srijit: You’re also forgetting: future inflation means low real interest rates, & above all stocks are correlated with TIPS, as Glasner has shown.

    But got no response. Back to the main variation:

    @mattyglesias: “Omnipotent” is a huge overstatement. There’s much more to life than stabilizing aggregate demand.
    @Noahpinion: But maybe there are severe limitations to the Fed’s ability to stabilize AD.
    @mattyglesias: I just don’t want to debate an “omnipotence” straw man.
    @AndyHarless: I would define omnipotence as “can hit any level of expected NGDP at a chosen horizon”
    @Noahpinion: Sure. And I am saying I am not at all sure that this kind of omnipotence exists.

    Mike Konczal interjects:

    @rortybomb: Useful to divide current debates over Fed into (1) able, (2) necessary and (3) sufficient. [1/3]
    @rortybomb: (1) has ammo (2) could trigger a recession if it eased and (3) could have prevented recession alone.
    @rortybomb: Sumners is (3), and campaigned with Cato against ARRA. I’m 1 & 2, sad most Dems aren’t but need to be
    @rortybomb: Sumner was part of campaign against ARRA/fiscal stimulus. “Omnipotent” is fair:
    @Noahpinion: I’m just saying, I am uneasy about the level of confidence placed in the Fed’s ability to control the time path of AD.
    @mattyglesias: You’ll be glad to know everyone in a position of power in the United States thinks you’re right and I’m wrong.
    @Noahpinion: Hey, I’m not saying the Fed can’t stabilize AD. I’m just saying I’m not sure if it can, because evidence is hard to come by.
    @Noahpinion: That is why Sumner’s anti-stimulus position annoys me; it admits no doubt about Fed effectiveness.
    @Noahpinion: No. But like in medicine, policymakers must act with imperfect knowledge. I say, diversify approaches.

    [My comment: this sounds like what I told you Nick Rowe said a few months ago. You said Fed perfectly controls E(NGDP), so it doesn’t matter.]

    But it all ended peacably:

    @AndyHarless: Ultimately it’s a Pascal’s wager: we have more to lose if the Fed underuses real power than if it overuses fake power.

    which Noah retweeted. And the storm passed.

    And that’s what you missed.
    (Oh, and in case you hadn’t heard, Evan Soltas writes for the Washington Post now.)

    Morgan, if I were a public sector worker, I’d be having nightmares about you.

  24. Gravatar of Saturos Saturos
    26. August 2012 at 22:16

    A lot of the argument also depended on a confusion between “stabilizing” AD (or controlling it precisely), and bringing it out of a deep hole, which Roosevelt showed we can. Also: the Great Moderation.

  25. Gravatar of Saturos Saturos
    26. August 2012 at 22:24

    Meanwhile, Neil Armstrong died. Ryan Avent had a baby. The Russians released Garry Kasparov (who had been arrested and beaten attending the Pussy Riot verdict). Obama’s team secretly begged the Eurocrats not to hold on to Greece until after the election. The Fed Meeting minutes reveal some discussion of new policy-rules, amongst them NGDP targeting (HT Evan Soltas). Arnold Kling, of course. And: The Economist does an article on the Republican economic policy, calling it “Fifty Shades of Grey without the sex” (HT Richard Thaler on Twitter) [http://www.economist.com/node/21560864?frsc=dg%7Ca].

  26. Gravatar of Saturos Saturos
    26. August 2012 at 22:24

    And THAT’s what you missed.

  27. Gravatar of Saturos Saturos
    26. August 2012 at 22:27

    That should be: Eurocrats begged to hold on to Greece until after election – ie, don’t make them leave the Euro. Full story here: http://www.independent.co.uk/news/world/europe/obama-asks-eurozone-to-keep-greece-in-until-after-election-day-8076852.html

  28. Gravatar of Eric Eric
    26. August 2012 at 22:50

    Sun Yat-sen had this crazy idea of taxing land value and distributing the income as a citizen’s dividend. He picked up this poisonous idea while in the US from a crazy economist named Henry George.

    Collecting land value tax (ground rent “” a subset of economic rent) and distributing it in a citizens’ dividend would make China’s internal demand match up with its supply and free it of too much dependence on exports.

    Since this was Sun Yat Sen’s political economic philosophy (from Henry George) and it was used in the highest growth stages of Hong Kong, it would be most interesting to locate the blocking force within China to this obvious path to economic progress and independence. I suspect it is not Chinese and would therefore require Chinese intelligence agencies to do the estimate. Of course, if the Chinese intelligence agencies are, themselves, compromised then that is probably a forlorn hope.

    Thank G-d China didn’t pick up on this or the parasites in the West would be in REAL trouble.

  29. Gravatar of John B. John B.
    27. August 2012 at 02:11

    @Lorenzo from Oz

    You are right. This is nothing disturbing for the Chinese government. Very similar stuff happens all over the world. Canadian Islands are for Sale, Greek islands too etc. We have to keep in mind that we live in a world governed by money not by countries. So it is not difficult to “conquer” new lands by money. Chinese are doing this pretty well, for example in their African projects. But Western world is not behind, with all the oil it practically steals from Nigeria.

  30. Gravatar of Benny Lava Benny Lava
    27. August 2012 at 15:14

    Good to see you blogging Scott. After a few days of no posts I was worried you died climbing Yellow Mountain.

  31. Gravatar of Scott Sumner Scott Sumner
    27. August 2012 at 18:42

    Saturos, Thanks for all that info. I’m kind of shocked to see Noah Smith arguing the liquidity trap position.

  32. Gravatar of TheMoneyIllusion » America’s approaching multiracial nightmare TheMoneyIllusion » America’s approaching multiracial nightmare
    14. August 2013 at 16:29

    […] Indeed I’d go further, and argue that every unusually successful nation is a sort of natural experiment. None of them should be dismissed as a “special case.” That doesn’t mean we should blindly copy everything they do, but places like Switzerland, Sweden, Singapore almost always offer us at least one useful lesson.  So do even lesser regional successes like Chile, Botswana or Dubai.  The Chinese understands this, which is why they are allowing Hong Kong to conquer China, one village at a time.  (Qianhai is next up.) […]

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