Archive for the Category Australia


The Complacent Century

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Scott Alexander on the Holocaust

[My good post today is at Econlog.]

Scott Alexander has an excellent post discussing Hannah Arendt’s book Eichmann in Jerusalem.  I’d like to discuss a couple points:

What eventually happened we all know too well. Other countries started closing their doors and refusing to accept Jewish refugees. Despite hearing this story a hundred times, the version in Eichmann in Jerusalem was new to me. I had always thought of countries as closing their gates to a few prescient people trying to flee Nazi Germany on their own, or to a few stragglers who managed to escape. The truth is on a much greater scale: the Nazis were willing to let every single Jew in Europe leave, they even had entire bureaucracies trying to make it happen – and the rest of the world wouldn’t cooperate. The blood on the hands of the people who wouldn’t let them in is not just that of a few escapees, but the entire six million.

Scott emphasizes that the primary blame lies with the Nazis.  They did the murdering.  Nonetheless, the decision not to admit Jewish refugees did have horrendous consequences.  At the time, the “America First” movement was quite popular, somewhat anti-Semitic, and very isolationist.  In fairness, I probably would have been isolationist back then, but I’d hope I would not have been anti-refugee. (Interestingly, Trump has revived the term “America First”.)

My commenters seem to believe that what’s right is determined by public opinion polls:

First of all, quinnicapac, Rasmussen, and Reuters all ran polls that showed the majority of Americans supporting the ban of immigrants from those 7 countries. In fact, those 7 countries were also on Obama’s list as countries that wouldn’t qualify under the visa program. So here is the question: is this a democracy where peoples voices get heard, or is this a place where only few get to decide policy?

With that in mind, it’s worth noting that there was far stronger support for rejecting Jewish refugees fleeing Hitler.

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I wonder what Steve Bannon and Steve Miller think about the decisions made in 1940?  And I wonder how they think future historians will judge their current actions?

Scott also notes that the Nazis in Denmark tended to “go native”.  That is, they adopted the local attitudes of the Danes, which tended to be somewhat sympathetic to the plight of the Jews (at least by contemporary standards.)  Scott makes many good points, including this one:

Third, at least during World War II conscience was a collective phenomenon. Why did some countries’ citizens cooperate almost universally with the Final Solution, while others resisted it at every turn? “Culture” is inadequate; there’s not much light between Danish and German culture, but the two countries acted in opposite ways. I’m tempted to credit single individuals; Hitler setting the tone for Germany vs. King Christian setting the tone for Denmark – but do people really respect their leaders that thoroughly? Or is this backwards causation; a country like Denmark would end up with a King like Christian, a country like Germany would elect a Fuhrer like Hitler? I don’t know. The alternative is to posit one of those chaotic networks where tiny differences in initial conditions can compound and lead to very different end states. Arendt herself offers little, beyond saying that Italy saved its Jews out of “the automatic general humanity of an old and civilized people”. Yeah, well, Japan was an old and civilized people too, and we know how that turned out. But what other possibilities are there? All I can think of is maybe looking into the pre-existing anti-Semitism level, but I don’t know if that just passes the explanatory buck.

I think he’s right to be agnostic on this question, but I can’t help pointing out that there actually are significant differences between Danish and German culture.  When I studied neoliberalism back in 2008, I found that Danish culture doesn’t just show significantly more civic virtue than German culture, but by some measures it is well ahead of any other country in the world.  Thus I do find it interesting that Danish culture seemed to make German officers at least somewhat more empathetic than did the cultures of other European countries.

One reason I like immigration is that I don’t share the alt-right view that it is a zero sum game.  I don’t think immigrants will make America worse, I think (in many cases) America will make immigrants better.  One good example is the huge flow of immigrants from southern Italy to America. Southern Italy has perhaps the least civic virtue of any developed economy.  And yet Italian Americans have done quite well.  When I was young there were still concerns that Italian Americans would not assimilate, and the Mafia was widely feared just as terrorists are feared today. Today the concerns about Italian assimilation have almost vanished.  I don’t even recall the last time I heard anyone speaking about the Mafia in anything other that a film history context.  I’m sure the Mafia is still out there, but it’s clearly not as important a part of Italian American culture as it used to be.

The strength of American civic virtue is one reason why I fear Trump much less that many others, even as my contempt for him is unsurpassed. I could see the next Russian leader being just as bad as Putin.  Ditto for the Philippines.  On the other hand, our next President will be far less of a demagogue than Trump.  There’s a reason why Putin is far more popular than Trump.  America will change Trump much more than Trump changes America.

Lorenzo sent me an article about Trump making a complete fool of himself in phone conversations with the leaders of Australia and Mexico.  Not only did he show himself to be a jerk by bragging about his recent victory, he came across as mentally deficient jerk by claiming that he won a very strong victory, when everyone knows he actually won the key states by razor thin margins. He also claimed that he attracted huge crowds for his inaugural address. Then he berated the Australian leader for a deal made with Obama, where the US would accept 1250 refugees out on some Pacific island.  As if this was the fault of the Australian leader, and not Obama.  (Of course I support Obama on this.)  And then this:

Mr Trump told President Peña Nieto in last Friday’s call, according to the Associated Press, which said it reviewed a transcript of part of the conversation: “You have a bunch of bad hombres down there. You aren’t doing enough to stop them. I think your military is scared. Our military isn’t, so I just might send them down to take care of it.”

What does that even mean?

Australia and Germany are two of our closest friends, and all Trump seems to do is antagonize them.  Meanwhile he keeps cozying up to Putin, while threatening to prevent China from occupying some small islands.  If there is a method to this madness I fail to see it.

I know that some intellectuals like to be contrarians, and claim that Trump has some sort of ingenious strategy.  For my part, as long as he behaves like he’s mentally deficient, I’m going to assume that he is in fact mentally deficient. Occam’s Razor, etc.

My critics in 2012: “See Sumner, housing prices were way too high in 2006”

Real house prices are still well below the peak, but nominal prices hit a record high in September:


The 2006 period may have been a bubble, but as of today is seems far less irrational than it seemed in 2012.  (This recovery also makes Kevin Erdmann’s arguments look even stronger.)

The world’s full of uncertainty and markets are volatile.  Get used to it.

PS.  UK house prices (green) took a dip after 2006, but are now well above 2006 levels (and equal to 2006 prices in real terms).  Australia (blue) and Canada (pink) are much higher in both real and nominal terms.

What goes up must eventually . . . go up even more!


So the US is down in real terms, the UK is even, and Canada and Australia are up in real terms.  Isn’t that sort of consistent with the EMH?

Sure, those prices will dip at some point in the future.  That’s what efficient markets do, they go up and down.


The New World Order?

Yes, the US is still the global hegemon, but this headline certainly caught my attention:

Australia snubs US by backing China push for Asian trade deal

Australia is throwing its weight behind China’s efforts to pursue new trade deals in the Asia-Pacific region amid a growing acknowledgement the US-led Trans-Pacific Partnership agreement is dead in the wake of Donald Trump’s election victory.

Steven Ciobo, Australia’s trade minister, told the Financial Times that Canberra would work to conclude new agreement among 16 Asian and Pacific countries that excludes the US.

He said Australia would also support a separate proposal, the Free Trade Area of the Asia-Pacific, which Beijing hopes to advance at this week’s Asia Pacific Economic Co-operation summit in Peru.

Again, it’s far too soon to predict where we’ll end up under Trump. But there’s no doubt we are living in interesting times. For the first time in my entire life the US is no longer the world leader in the push toward globalization.

PS:  Here’s tweet by a Danish economist who understands this country much better than most Americans:



Long run NGDP growth and long term nominal interest rates

If you had to write down a simple model of long-term nominal interest rates, you might start with long run expected NGDP growth, although as we’ll see it’s actually a lot more complicated.  Here are some recent data on NGDP growth over the past 8 years, and 10-year bond yields:

Country   NGDP growth rate   10-year yield

USA               2.75%                1.69%

Eurozone        1.17%                0.05%  (German)

Britain           2.41%                 1.28%

Japan           -0.21%                -0.15%

Australia        4.15%                 2.15%

In the first three cases, bond yields are a bit over 1% below long-term NGDP growth.  If we applied that to Japan, you’d expect negative 1.25% bond yields.  Why are actual rates so much higher (less negative) in Japan?

1.  Perhaps the zero lower bound prevents deeply negative nominal rates.  This is the best argument for Abenomics–the Japanese Treasury has been paying excessive interest on its debt.  They need at least Eurozone levels of NGDP growth, to get equilibrium bond yields up to zero.

2.  Perhaps rates are not lower because NGDP growth has recently established a higher trend, under Abenomics.  Bond yields are a forward-looking variable.

3.  Perhaps what matters is NGDP/person growth, not NGDP growth.  Thus Texas and Illinois have the same risk free rate, even though Texas’s population (and NGDP) are probably growing about 2 percentage points faster than Illinois.  Japan has a falling population, and hence growth in its NGDP per person is closer to European levels.

I’d guess all three factors matter, and others as well.

Australia is sort of the opposite of Japan.  In Australia, NGDP growth has recently slowed, not accelerated.  And they have faster than average population growth.  Those factors might help to explain why nominal bond yields are 2 percentage points behind NGDP growth.

Even so, there’s a very strong correlation between long run NGDP growth and long term interest rates.  It’s up to each central bank to determine the long run NGDP growth rate, and by implication the long-term bond yield.  If you want higher interest rates, ask for easier money.

PS.  A few corrections on recent posts:

1.  Commenter BJ Terry pointed out that in my recent Bullard post I misunderstood they way he used the term ‘regime’. I thought Bullard meant policy regime, but after reading his paper it’s clear he means macroeconomic regime (expansion or contraction).

2.  When I wrote the recent post on the Modi government, I was unaware of a decision to liberalize foreign investment regulations, which was announced yesterday. I hope my post was wrong.