Who has the best political system in the world?

Dylan Matthews says New Zealand has it.  A mixed member proportional representation system (like Germany) and a constitutional monarch head of state (like Australia and Canada.)  And only one house, i.e. unicameralism.  I’ve argued for Switzerland, the world’s most democratic country. But Matthews has convinced me that the Kiwis have the second best system on Earth.

In case anyone is interested, the Fraser Institute has a ranking of Economic Freedom in the World. New Zealand comes in #3, between Singapore (#2) and Switzerland (#4.) Alternatively, it’s the freest economy in the world with cows and sheep.  Personally, I don’t think one should argue that a political system is optimal because it happens to produce policies that YOU prefer, rather than policies that much smarter people with Nobel Prizes prefer (Krugman, Stiglitz, etc.) The world is not set up to please YOU.  It’s set up to efficiently aggregate the Wisdom of Crowds. That’s how political systems should be judged.  Still, you wouldn’t want you’re favorite system to produce Somalia or Iraq.  And the optimal system might well depend on the cultural attributes of the population.

BTW, the US is #17 on the Fraser economic freedom list, between Estonia and Cyprus. Our political system has some good points (lots of democracy and decentralization), and some bad points (big states, non-proportional representation, and filibusters.)

[In the Heritage rankings New Zealand is #5, below Switzerland and above Canada, while the US is #12, below Estonia and above Bahrain.]

Over at Econlog I did posts discussing the recent elections in Sweden and New Zealand.  Both countries were ruled by reformist right-of-center governments, which did lots of good things. New Zealand had much better monetary policy than Sweden, where the Riksbank went after imaginary “bubbles.”  The New Zealand government was re-elected over a left-of-center alternative party advocating taxes on capital gains and higher minimum wages.  The Swedish government lost, and was replaced by a left-of-center coalition.  I wonder what explains the difference?

Abenomics is doing better than I expected (shades of grey)

Here’s commenter dtoh:

I think you’re disheartened a little bit by the results of monetary policy which has been less effective in Japan than you had hoped and therefore you are trying to blame it on socio-economic and supply side factors. Yes…. these are problems, but the primary reason monetary policy has not been effective is the hike in the consumption (and other) tax rates.

Stop worrying, it will take a little longer, but Japan will prove you are a clairvoyant genius.

This is half wrong.  Certainly less effective than I had hoped, but more effective than I expected. In my early posts on Abenomics I suggested that it was likely to have a positive effect, but that Japan would fall short of the 2% inflation goal.  I expected about 1% inflation, still a significant improvement.  Japan has exceeded 1% inflation, even if you discount the effects of the sales tax. The yen has also depreciated much more than I (and the markets) expected.  Japanese stocks have risen much more than I (and the markets) expected.  Indeed by almost every metric they’ve done better than I expected.

So why does dtoh (a careful reader) have the opposite impression?  Because I am also very pessimistic about Japan, due to its big public debt and rapidly falling working age population.  I supported the sales tax increase, but even as I did so I predicted it would hurt the economy, and it has.  And regarding monetary stimulus, it’s technically possible for a policy to improve an economy that is doing very poorly, while still leaving it doing fairly poorly.  That’s Japan.

Read this and this for my earlier pessimism about Japan.

For the same reason, people often wrongly believe I’m a fan of the Chinese government, or its economic policy.  It’s a bad policy–perhaps as bad as Greece. But if China ever became as rich as Greece it would be the single most successful economic policy in all of world history.  And China probably will become as rich as Greece, as moving from a nightmarish policy under Mao to a merely bad policy under Deng and Xi has released the entrepreneurial energies of the Chinese population.

Real world economics is never black and white; it’s always about shades of grey. I’ve frequently pointed out that Abenomics was doing all sorts of things that the liquidity trap Keynesians said was impossible.  It boosted stock prices, it depreciated the yen, and it boosted nominal and real GDP.  That made me seem like an optimist. But I also said it would fall short of the announced goals, and I now feel that more strongly than ever.  Contrary to dtoh, if Japan does well I will be forced to admit I was wrong, as I did not expect Japan to do well.

I’ve also been saying that while QE and forward guidance helped, the Fed has consistently been too optimistic about US growth.  We are in a Great Stagnation. Just yesterday I noticed that Fed officials are hard at work explaining why their latest 3% growth forecast will fail to materialize, just like the previous 5 years.

A sharply stronger dollar could hamper Federal Reserve efforts to spur growth and lift inflation, a senior Fed official said today, in unusually direct remarks about the U.S. currency from the central bank.

By the way, Nick Rowe recently had this to say about central bankers:

But I do have a lot more confidence in the BoC than in the BoJ, ECB, or the Fed. Yes. The people who run the BoC are better macroeconomists, they speak with one voice, and they have the support of the government in doing what they are doing. You do not hear them say totally stupid things, like you do with people making decisions at other central banks.

Yesterday I noticed a perfect example of what Nick was thinking about:

Japan is in danger of falling into a recession as the yen’s decline reduces the purchasing power of households and squeezes corporate profits, said a former deputy governor of the Bank of Japan.

“The current yen weakness is slightly excessive,” Kazumasa Iwata, the deputy from 2003-2008, said in an interview on Sept. 19 in Tokyo. “Abenomics entails the risk of ‘beggar thyself’ consequences and signs are already emerging.”

Hmmm . . . .

Totally off topic, fans of drug legalization will love this youtube.

Twice is enough (and don’t expect miracles)

Six weeks ago I read this post by Edward Hugh:

The question I would ask is this: given all the doubt which exists about the real roots of Japan’s problem, and the fact that it may well be a permanent structural problem and not a temporary liquidity trap one, is it really justified to run such a high risk, all-or-nothing experiment? Even Paul Krugman seems to have changed his assessment various times since the  problem started and while he still fully supports the general approach being taken he now thinks the natural rate of interest may remain permanently negative and that fiscal stimulus might be necessary on a permanent basis (liquidity trap without end, amen).

What makes people like me nervous is the thought that if the central bank can’t deliver on its promise to deliver inflation, or if the Japanese voters decide they have had enough of the experiment, then a loss of confidence might ensue, and all those dubious risky asset positions might unwind suddenly, just like an earlier set did in 2008.

And there are plenty of people in Japan who have been pointing this out all along. Seki Obata, a Keio University business school professor for example, who in 2013 published a book “Reflation is Dangerous,” argues exactly this, that “Abenomics” is exposing Japan to considerable risk without any clear sense of what it can accomplish. Obata also makes the extremely valid point that there is simply no way incomes can rise across the entire economy because the baby boomers are now retiring to be replaced by fewer young workers with post labour reform entry-level wages. Japan’s overall consumer spending power will therefore fall, rather than rise as Abe hopes. “Individual companies may offer wage increases, but because of demographics it is simply impossible to increase the total amount that is paid out in wages,” says Obata. “On the contrary, that amount will shrink.”  Simple logic you would have thought, but logic in the face of irrational exuberance scarcely stops people in their tracks.

As far as I can see, all of this  points to one simple and evident conclusion: that Japan needs deep seated cultural changes, especially ones directed to greater female empowerment and more open-ness towards immigration. Hardly matters for central bank initiatives, and indeed ones for which Shinzo Abe, who naturally has given his name to this new economic trend, is singularly ill equipped to carry through. Japan needs a series of structural reforms – like those under discussion around the third arrow – but these would be to soften the blow of workforce and population decline, not an attempt to run away from it. Monetary policy has its limits. As Martin Wolf so aptly put it, “you can’t print babies”.

The above is based on arguments fleshed out in much more detail in my  “mini book” the A B E of Economics.

Then today Tyler Cowen directed me to this brand new post by Edward Hugh:

On the other hand the administration still has to decide whether to go ahead with next year’s additional tax hike. The government is caught in a double bind, since if it doesn’t raise the consumption tax as planned and cuts spending to compensate then the economy will still contract. And if it doesn’t do either of these things  then the debt level will continue its march upwards. At the moment the government is mulling the idea of raising the tax and doing a 5 trillion yen ($47 billion) additional stimulus to compensate. Which sort of leaves me wondering why they want to raise the tax in the first place.

What makes people like me nervous is the thought that if the central bank can’t deliver on its promise to deliver inflation and revive the economy, or if the Japanese voters decide they have had enough of the experiment, then a loss of confidence might ensue, and all those dubious risky asset positions might unwind suddenly, just like an earlier set did in 2008.

And there are plenty of people in Japan who have been pointing this out all along. Seki Obata, a Keio University business school professor for example, who in 2013 published a book “Reflation is Dangerous,” argues exactly this, that “Abenomics” is exposing Japan to considerable risk without any clear sense of what it can accomplish. Obata also makes the extremely valid point that there is simply no way incomes can rise across the entire economy because the baby boomers are now retiring to be replaced by fewer young workers with post labour reform entry-level wages. Japan’s overall consumer spending power will therefore fall, rather than rise as Abe hopes. “Individual companies may offer wage increases, but because of demographics it is simply impossible to increase the total amount that is paid out in wages,” says Obata. “On the contrary, that amount will shrink.”  Simple logic you would have thought, but logic in the face of irrational exuberance scarcely stops people in their tracks.

As far as I can see, all of this  points to one simple and evident conclusion: that Japan needs deep seated cultural changes, especially ones directed to greater female empowerment and more open-ness towards immigration. Hardly matters for central bank initiatives, and indeed ones for which Shinzo Abe, who naturally has given his name to this new economic trend, is singularly ill equipped to carry through. Japan needs a series of structural reforms – like those under discussion around the third arrow – but these would be to soften the blow of workforce and population decline, not an attempt to run away from it. Monetary policy has its limits. As Martin Wolf so aptly put it, “you can’t print babies”.

The above analysis is based on arguments fleshed out in much more detail in my  “mini book” the A B E of Economics.

Sorry Edward, I think I’ll pass on the book.  Reading your analysis twice is enough for me.

Seriously, the first paragraph of the newer quotation is different, and greatly improved.  Abe has talked about supply-side reforms but failed to deliver.  Raising both taxes and government spending is not supply-side economics, last time I checked.

It was obvious from the beginning that Abenomics would both “succeed” and “fail.”  It would succeed in the sense of pushing the Japanese economy closer to full employment, and in reducing the burden of the debt, relative to the non-Abenomics trajectory.  I don’t think anyone can deny that it has achieved those two very limited objectives.  And it was also always obvious that it would be likely to come up somewhat short of 2% inflation, that RGDP growth would remain very low, and that the debt situation would continue to be quite dire.

Japan is a country where the national debt is as high as Italy (higher in gross terms), where the workforce is falling at 1.2% per year, and where the government is unable to enact supply-side reforms due to special interest politics within his own party.  That was always a scenario for “failure,” and no one should be surprised by the weak RGDP growth, or the fact that a 3% boost in sales taxes cut real wages.

Readers confused by Hugh’s relentless pessimism about Abenomics might have trouble deciphering the second paragraph in each quotation.  So let me translate into easier to understand language:

“What makes people like me nervous is that Abenomics might be abandoned and the BOJ might return to the deflationary policies of the previous 20 years, causing an economic catastrophe in Japan.”

If that’s what he was trying to say then I wholeheartedly agree.  I just wish he’d said it very clearly one time, instead of very obscurely twice.  There’s a danger that some readers might think that the claim that Abenomics equals disaster implies that “not Abenomics” equals less disaster.  That would be unfortunate given that not Abenomics equals a bigger disaster.

If you want to know what Japan is up against consider that Japanese RGDP has grown by 0.00% per year over the past 6 1/2 years.  In contrast, Germany, the shining star of the European economy, has grown at 0.5% per year over the past 6 1/2 years.  Then consider the fact that the Japanese workforce is falling at an accelerating rate, and unemployment is already at the lowest level in decades.  How fast do you expect Japan to grow?  Negative growth will be the norm; zero growth is the new “economic miracle.”

Infrastructure or entitlements?

Over at Econlog I have a new post praising Hong Kong, which I recently visited. (BTW, I’d love to discuss the Mont Pelerin Society meeting I spoke at (which was excellent) but am not allowed to–it’s off the record.)  At Econlog I positively gushed about the Hong Kong infrastructure, which was recently ranked number one in the world.

On the other hand the Bible teaches us “everything in moderation.”  And so does economics (corner solutions are rarely optimal.)  So maybe Hong Kong is spending too much money on infrastructure.  (This discusses a proposed third runway for the airport):

Having been happy to see white dolphins made the centre of opposition and having seen this opposition vanish on schedule, the lobbyists reasoned that the runway would be certain to go ahead. Events are now falling right in line with that game plan.

As a fall-back ploy, however, they also came up with the stratagem of saying that we must first decide whether we need a third runway and only then discuss the funding of it.

It is somewhat akin to my saying that I must first decide whether I really need a Ferrari and only then look at how I will raise the money for it.

It’s a great idea if I can then say that I can’t afford it and someone else must pay, as the lobbyists think they can make taxpayers pay for the third runway. The purchase has been irreversibly determined – too bad for the taxpayer, too bad for the people who must pay for my Ferrari.

And if the lobbyists say the comparison is inapt, as I don’t really need a Ferrari, well, neither did they need to clog our runways by subsidising minor airlines to operate small aircraft to minor mainland towns in competition with Shenzhen. Their cynicism extends to misuse of the facilities we bought for them.

The fact is that we immediately take into account the cost of anything we want to buy in the decision of whether to buy it or not, and when that cost is HK$200 billion, as in the latest projections for the third runway, it is rank negligence to separate the cost from the purchase decision.

Think about it. Recently our government rejected (but has not yet admitted doing so) a scheme to pay everyone over the age of 65 a pension of HK$3,000 a month. I myself thought it a poorly considered scheme, but I accept that old-age poverty is a problem.

Now let us assume that we put HK$200 billion into an old-age investment fund and target a return of 2 per cent a year, which is not high in ordinary times.

This would yield HK$4 billion a year, enough to pay 111,000 old people that pension of HK$3,000 a month, and we could keep doing it year after year without touching the capital. It would go a long way towards addressing the needs of our indigent elderly.

Should we do it? Would it make more sense for use of the money than building a third runway so that our airport can keep competing with Shenzhen in microlight traffic?

I accept no answer from the third-runway lobbyists. Their only stance can be that we must first decide whether to pay 111,000 people HK$3,000 a month and only then discuss how we would fund the scheme.

There is only one way to do things here. It is to fold a share of the cost of that runway into the airfare of every air traveller who uses our airport. Any investment banker can tell the lobbyists how to do it. But they won’t. People would then go to Shenzhen for microlight flights, and our two runways would be enough again.

That piece hints at corruption, with powerful special interest groups like builders and aviation overriding the broader interests of the elderly.

My first reaction on reading this essay was that a social security system for the poor must surely cost more than a runway; even more than twice as much, if you prefer to double the payments to $6000/HK dollars per month (which is $800US.) The problem is that once you start providing public pensions, you end up discouraging people from saving. You end up with a country where most people have earned really high incomes by international standards (even adjusting for cost of living), but were somehow unable to put money away for retirement. A country where even people making $100,000/year somehow find it impossible to save. In other words, you’ll end up like the US. There won’t be 111,000 Hong Kongers in need, there’ll be 2 million elderly “in need.”

But then I did a bit of research, and discovered that Hong Kong instituted a compulsory saving scheme for retirement in 2000.  Presto!  No more moral hazard problem.  Yes, by all means divert the money from the runway to the elderly poor, who built modern HK with their hard work. It’s a no-brainer for a utilitarian.

And yes, you can have too much infrastructure.

PS.  The discussion of the Golden Mean reminds me of this remark by Thomas de Quincey from On Murder Considered as One of the Fine Arts:

No, upon my honor—no. And that was the very point I wished to argue for your satisfaction. The truth is, I am a very particular man in everything relating to murder; and perhaps I carry my delicacy too far. The Stagirite most justly, and possibly with a view to my case, placed virtue in the  τò µε´σον or middle point between two extremes. A golden mean is certainly what every man should aim at. But it is easier talking than doing; and, my infirmity being notoriously too much milkiness of heart,  I find it difficult to maintain that steady equatorial line between the two poles of too much murder on the one hand and too little on the other. I am too soft; and people get excused through me—nay, go through life without any attempt being made upon them—that ought not to be excused.  I believe, if I had the management of things, there would hardly be a murder from year’s end to year’s end. In fact, I’m for peace, and quietness, and fawningness, and what may be styled knocking-underness. A man came to me as a candidate for the place of my servant, just then vacant.  He had the reputation of having dabbled a little in our art; some said, not without merit. What startled me, however, was, that he  supposed this art to be a part of his regular duties  in my service, and talked of having it considered it his wages. Now that was a thing I would not allow; so I said it once, “Richard, (or James as the case might be),  you misunderstood my character.   If a man will and must practice this difficult (and, allow me to add, dangerous) branch of art— if he has an overruling genius for it—why, in that case, all I can say is that he might as well pursue his studies whilst living in my service as another’s. And also I may observe that it can do no harm either to himself or to the subject on whom he operates that he should be guided by men of more taste than himself. Genius may do much, but long study of the art must always entitle a man to offer advice. So far I will go—general principles I suggest. But, as to any particular case, once for all I will have nothing to do with it. Never tell me of any special work of art you are meditating—I set my face against it in toto. For, if once a man indulges himself in murder, very soon he comes to think little of robbing, and from robbing he comes next to drinking and Sabbath-breaking, and from that to incivility and procrastination. Once begin upon this downward path, you never know where you are to stop. Many a man dated his ruin from some murder or other that perhaps he thought little of at the time. Principiis obsta—that’s my rule.” Such was my speech, and I have always acted up to it; so, if that is not being virtuous, I should be glad to know what is.

Gallup needs to learn about sunk costs

I’m a sucker for the global “well-being” rankings, so naturally I took a look at the headline that said Panama came in number one.  That didn’t really shock me—Latin America generally does well in these rankings, and Panama is fairly prosperous by Central American standards.  But I was surprised top see the entire top 10 of the Gallup-Healthways Global Wellbeing Index:

Screen Shot 2014-09-19 at 7.18.26 PMNotice that Sweden is bracketed by Guatemala and El Salvador.  Just to be clear, I’m NOT saying that the people in those two countries are not just as happy as the Swedes; for all I know they are happier.  I have no idea how to measure happiness. But if you are talking about country rankings, people are going to assume you are making some sort of statement about socio-economic/political systems.  And if a large share of the people in these highly successful societies are risking murder, rape and dying of thirst in order to flee to a country where they don’t speak the language, so that they can get jobs cleaning toilets or picking vegetables in the hot sun all day long, then I have to wonder whether these rankings actually mean much of anything.

In a rational world the Gallup/Healthways organization would have noticed these countries pop up in the top ten, and refrained from releasing the report.  Instead they just went ahead.  The internet is full of garbage anyway, why not add one more item that will draw in suckers like Scott Sumner, and increase the number of hits to our advertisers.  It’s not like Gallup has much of a reputation to protect, after the recent presidential elections.

So this is my revenge.

They also have a bottom ten:

Screen Shot 2014-09-19 at 7.30.53 PM

You know those people living in Mali, caught in the vicious civil war?  Yup, they’re better off than the residents of this town:

Screen Shot 2014-09-19 at 7.33.18 PM