[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.

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.

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.

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:

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.

It’s been obvious for several years that the field of economics has entered a new Dark Ages.  Here’s another example, from a couple articles discussing Australian monetary policy.  First, James Alexander sent me this gem, discussing the views of RBA board member John Edwards:

“It has never been the view that the target had to be achieved each and every quarter, or for that matter each and every couple of quarters, or year for that matter,” Edwards was cited as saying. Australia’s annual inflation rate has been below 2 percent since the third quarter of 2014.

The RBA’s first rate cut in a year on May 3 came after data showed that some of the disinflationary pressures weighing upon economies from Japan to Europe are also being seen in Australia. The consumer price index dropped for the first time since 2008 in the first quarter, while annual core inflation growth slowed to the weakest on record, prompting the central bank to cut its inflation forecasts.

Some economists have argued that the inflation target should be lowered to reflect global and domestic forces that could keep downward pressure on prices for some time, the WSJ reported. The central bank will be forced to cut interest rates to 1.5 percent by August, according to most economists surveyed by Bloomberg.

This was a widespread view in the 1960s and 1970s.  Inflation was not caused by monetary policy; it reflected other forces. By the 1990s were we out of those Dark Ages, and that view was thoroughly discredited.  Actually, it was more than just discredited, it was widely mocked.  And now it’s back.

Stephen Kirchner sent me another piece on the RBA:

Former Reserve Bank of Australia governor Ian Macfarlane has lashed out at financial markets – particularly those offshore – for effectively forcing the central bank into a wasteful knee-jerk official interest rate cut this month to avoid falling victim to an increasingly erratic global currency war.

In his first public comments about Reserve Bank rates policy since handing over the governorship to Glenn Stevens a decade ago, Mr Macfarlane lambasted currency traders and analysts for assuming the central bank should always adopt a slavish adherence to its 2-3 per cent inflation target.

Describing current monetary policy as “easy” – or stimulatory – he said there was nothing in the central bank’s approach that locks it into making a cut every time a statistical report shows inflation is below the goal.

Here’s the problem.  Financial markets never have Dark Ages—they always understand what’s going on.  So when economics enters a new Dark Ages, the views of economists will be rejected by the financial markets.  Economists will then lash out at the irrationality of markets, when it’s actually the economics profession that has lost touch with reality.  (And yes, I’m also talking about the Fed.) Australia’s economic policy is clearly too tight to hit their targets, and yet they continue to insist that policy is expansionary.

Mr Macfarlane’s intervention – just as Macquarie Bank predicted on Thursday that the lack of fiscal stimulus and need for a weaker currency would see the official cash rate slashed to 1 per cent – indicates a growing desire to re-educate analysts and markets about both the limits of monetary policy and the need for greater flexibility around how the target is used.

“When countries introduced inflation targeting 20 or 25 years ago, they never envisaged a world where inflation was so low that it was below all major countries’ targets,” Mr Macfarlane, who was the first to formally announce the target when it was adopted, said.

That’s right, markets that foolishly believed that the RBA would adhere to its inflation targets need to be “re-educated”.  In fact, it’s Mr. Macfarlane who doesn’t understand what’s going on.  The markets are well aware of the fact that the RBA is willing to let inflation stay below 2%, and that’s precisely why they are putting pressure on the RBA to drive interest rates ever lower.  If markets expected 2.5% inflation going forward (the RBA target), then interest rates would probably be higher than 1.5%.

More confusion:

However, Mr Macfarlane, who is now an ANZ Bank director, suggested that one of the triggers for the surprise May cut was a fear within the central bank that markets would have reacted violently had the board left the cash rate unmoved two weeks ago because the weak inflation figures implied a cut was urgently needed to meet the 2-3 per cent target.

In the lead-up to the May rate meeting – which the Reserve Bank this week indicated was a close call – the Australian dollar traded above US78¢, an uncomfortably high level given the bank’s goal of driving down the currency to help the post-resources adjustment.

Within the board, there would have been a genuine fear that a decision not to cut could have sent the currency shooting dangerously above US80¢.

“Their problem [at the Reserve Bank] is that financial markets, particularly offshore, assume a mechanical application of what they regard as the standard model,” Mr Macfarlane said.

“The inflation targeting approach says that if inflation forecasts are below target, we should run an easy monetary policy – we already have that,” Mr Macfarlane said.

Here’s what’s actually happening:

1.   Australia doesn’t already have easy money; they have tight money.

2.  Global Wicksellian equilibrium interest rates have fallen sharply, and central banks have been slow to accept that fact.  Just as many of my commenters are slow to accept the fact that global productivity growth has slowed to a crawl. Reality’s a bitch.

3.  When the RBA (unexpectedly) holds its policy rate above the equilibrium rate, money is tight and the Aussie dollar appreciates sharply in the forex markets, which drives inflation even further below the RBA target.  The lower inflation then leads to calls for even further rate cuts.

The bond market sees what’s going on:

The benchmark 10-year government bond yield crashed this week to its lowest level in 141 years on financial market predictions that more official interest rate cuts are likely in coming months.

Over at Econlog, I have a post on the new Dark Ages in international trade.