The 2016 election revisited

Quillette has an interesting piece on the 2016 election.  The article includes a lot of discussion of Hillary Clinton’s rather disappointing performance among women voters, especially white women.  Then there’s this:

If the election were a referendum on Obama, as a politician or a symbol, one would expect his popularity to have declined over the course of the race — especially given how it ultimately turned out. Instead, Obama grew more popular throughout 2016, even as favorability for Trump and Hillary tanked. Two years into the Trump administration, Barack’s ratings continue to climb, with 66% of Americans offering a favorable opinion of him.

The “whitelash” theory also suggests a surge [in] white voting. Instead, participation among non-Hispanic whites was stagnant relative to 2012, and down from 2008. In fact, whites made up a smaller share of the electorate in 2016, while Hispanics and Asians made up a larger percentage of overall voters.

More damning: Trump actually won a smaller share of the white vote than Mitt Romney. He was nonetheless able to win because he won more Hispanics and Asians than his predecessors, and more black votes than any Republican since 2004.

Trump did win a number of less well-educated whites who had previously voted for Obama, but he also lost some better educated whites who had previously voted for Romney.  Overall, He did not do especially well among whites, and could not have won without holding his own among the various minorities, despite all his bigoted statements.  He was also helped by a lower turnout among black voters.

PS.  Let’s have a vote.  Which statement is more nuts:

LaVar Ball Claims Lonzo Ball Is Lakers Leader Even With LeBron James


Trump says the US would be at war with North Korea by now if it weren’t for him

Decisions, decisions . . .


Was the 1999-2000 tech “bubble” a bubble?

After my previous post, several commenters argued that I did not present persuasive evidence against the view that Nasdaq was in a bubble at the end of the 20th century.  They often made the following argument:

While the current level of Nasdaq is well above the 2000 peak value (of roughly 5040), the rate of return on Nasdaq has been far below the rate of return on alternative investments that are much less risky, such as T-bonds.

This is certainly a reasonable argument, but I find it unpersuasive for several reasons.  I’ll list them in order.

1.  I don’t think it’s reasonable to compare current prices to the absolute peak of the tech boom, which only lasted for a few days.  Whenever you look back on an asset price time series, the absolute peak level will usually look overpriced, in retrospect.  Importantly, that would be true even if there were no such things as bubbles. As an analogy, bubble predictions of Bitcoin have proved spectacularly wrong.  There were many people claiming that Bitcoin was a bubble at $30, then $300.  Last time I looked it was near $6000.  On the other hand, the absolute peak of Bitcoin was more like $19,000.  And yet I don’t think you could argue that Bitcoin was a bubble just because it briefly hit $19,000.  It’s pretty apparent that there is huge uncertainty as to what Bitcoin is worth.  Perhaps if it falls far below $30 then those who called Bitcoin a bubble at $30 can claim vindication.  But not at $6000.

2.  So here’s what I’d say.  There were widespread claims that Nasdaq was a bubble throughout the entire mid-1999 to mid-2000 period.  Most of the time, the market was trading in the 3000 to 4000 range.  Thus the current level of Nasdaq is roughly twice the level of the so-called bubble period.

3.  Even this, however is not enough to rebut my critics.  After all, T-bonds were yielding over 6% during the peak of the tech bubble, and they are a safer investment than tech stocks.  Here I’d point to the fact that long term bonds benefited hugely from an unexpected plunge in interest rates.  During most of the past 18 years, T-bills have yielded close to 1% (a bit above or below.)  And T-bills are an even safer investment than T-bonds.  For instance, I recall reading that long-term Treasury bonds lost 50% of their value during the Jimmy Carter years, even before inflation!  Then in 1982 their total return was over 40%, in a year of about 4% to 6% inflation (depending whether measured calendar year or year over year.).  That’s a pretty volatile asset.  Suppose you’d  bought a 30-year Treasury in 1981, yielding 15%.  Then suppose a friend had bought a stock that (ex post) yielded 11%/year over 30 years.  Would this suggest that the stock was overpriced in 1981?  No, it simply shows that the T-bond did far better than expected, in a relative sense.  After 1981, NGDP growth and inflation slowed sharply, which made T-bonds a great investment, ex post.  That inflation slowdown obviously reduced the nominal return on many alternative assets, such as stocks.

4.  Several commenters pointed to the fact that even (real) TIPS yields were pretty high in 2000, and Nasdaq has done poorly in real terms, relative to TIPS.  But the preceding argument also applies here.  Real interest rates also plunged sharply and unexpectedly during the 21st century.  Indeed they’ve often been negative.

5.  If you are having trouble with this argument questioning the relevance of bond yields, I can flip it around to make tech stocks look better.  Think about why interest rates plunged unexpectedly.  Much (not all) of the plunge was due to an equally unexpected plunge in trend NGDP growth, which has been far slower than expected during the 21st century.  If NGDP growth had been as fast as expected, fast enough to justify those 6% T-bond yields back in 2000, then Nasdaq would have also grown far faster.  In that case, Nasdaq would almost certainly be far higher today, say roughly 10,000.  Also, don’t forget that back in 2000, capital gains taxes were far lower than taxes on bond interest.  That made tech stocks especially attractive.

So here’s my argument.  Let’s go back to when Nasdaq was 3500 during the tech boom, a level certainly considered bubble by people like Robert Shiller (recall his initial bubble call was in 1996, when Nasdaq was barely over 1000).  I claim that this 3500 Nasdaq value was rational, if you assume NGDP would grow at the rate that bond market participants probably expected it to grow (say 5.5%/year).  If that growth had occurred, then Nasdaq would now be closer to 10000, and the market would have roughly tripled (plus dividends.)  Admittedly, even that sort of return would have been a bit lower than the historical average since 1926, but I believe markets have done well since the 1980s partly because of a growing realization that stocks were undervalued during most of the 20th century.  Thus a part of the 1982 to 2000 stock price boom was a sort of “catch up” as investors realized Shiller’s model was wrong, and historical valuations were too low. (Or historical rates of return were too high, given the risk involved, if you prefer to think that way.)  As an aside, I believe that’s why Shiller has done such a poor job of giving investment advice in the 21st century—not telling people to buy in 2009, and then saying stocks were overvalued a few years later, when in fact everyone should have been buying.  He has the wrong model, which undervalues stocks.

6.  Now let’s think about the justification for the bubble claims.  In 2000, people argued that all of these companies couldn’t be successful.  That’s true but not relevant; only some companies needed to hit the jackpot.  People also argued that these valuations only made sense if internet oriented companies eventually grew to utterly dominate the US economy.  Well, today the so-called FAANG stocks do dominate the stock market, with market valuations that dwarf the traditional corporate giants like GM, GE, etc.  I recall people mocking companies like Amazon, which made no profits year after year and were focused on growth.  So who’s the richest guy in the world right now?

Almost every single argument used against my EMH position when I started blogging in 2009, now looks far weaker.  Both Nasdaq and US housing have at least mostly recovered, even relative to trend.  The above market returns of the Ivy League school endowments are mostly gone.  Ditto for the above market returns for the hedge funds.  Bitcoin didn’t crash when it hit $30.  The people who told me the Canadian and Australian housing bubbles would crash “any day now” are still waiting, 9 years later.  And what about the overbuilt Beijing and Shanghai property markets?  Anyone willing to sell me property at 2009 prices in those two cities, widely regarded as a “bubble” even a decade ago?

I can’t prove the tech bubble was not a bubble, just as I can’t prove that people like Warren Buffett and Cliff Asness did not become rich by finding market inefficiencies.  I’d be shocked if there wasn’t an occasional case of someone spotting a market inefficiency. Almost all social science theories are technically false, in the sense that they are not completely true.  But the EMH is far less false than most of the very useful theories we teach in economics.  It’s much easier for me to find industries that violate the laws of supply and demand (say due to market power) than it is for me to beat the stock market.  I believe that 99.9% of investors should assume the EMH is true, and thus buy and hold index funds.  I believe regulators should assume the EMH is true, and thus not try to spot and pop asset price bubbles.  I believe that academic economists should assume the EMH is true, and thus replace 20th century macro with a new macro centered around real time market forecasts of expected NGDP growth, not VAR predictions of inflation and real growth.


50 million Americans are missing (in 2050)

One of the big mysteries is why the housing market crashed after 2006.  The later part of the crash (2008-12) was obviously partly due to the Great Recession.  But what about 2006-08?  I’ve occasionally argued that a decline in expected immigration may have played a role.  Here are some census estimates of the US population in 2050, first made in 2008, and then in 2012:

Screen Shot 2018-06-30 at 12.52.50 PMThat’s a striking decline in just 4 years.  More recently, the Census Bureau has further reduced their 2050 estimate, to 388 million.  (Current population is 328 million.)  And while part of the explanation is falling birth rates, immigration seems to be the main story:

A comparison of the bureau’s 2008 and 2012 projections for the year 2050 indicates that most of the 39.2 million gap in the total population forecast is due to scaled-back assumptions about the level of new immigration to the U.S. But another notable factor in the lowered population projection was that the bureau also lowered its forecasts for birth levels.

Ignoring the amnesty bulge in 1990-92, US immigration levels peaked in 2006, at over 1.26 million per year (close to the earlier 1907 peak).  At this time, there was also a high level of illegal immigration, including Mexican workers drawn in by the housing boom.  Total immigration might well have been close to 2 million per year.  It looked like immigration was about to push America’s population much higher.

All that changed after 2006.  Bush’s push for immigration reform (which would have boosted immigration levels) failed in Congress.  Border security was tightened and the net level of illegal immigration from Mexico slowed to almost zero. Not just due to tighter border security, but also a weaker economy in the US and relatively better prospects in Mexico. (Also lower Mexican birth rates.)  Now net immigration is probably closer to 1 million/year, although it’s hard to be certain.

The massive wave of expected immigrants was disproportionately pouring into the “sand states”, such as southern California, Nevada, Arizona, Texas, and Florida.  With the exception of Texas (which never had a house price “bubble”) those areas were the epicenter of the housing crash.  I am not saying that the immigration slowdown was the only factor. I’ve already mentioned the recession, and tighter lending standards also played a role.  Maybe there really was a bubble. But I don’t see how such a massive drop in expected population growth could not have played a significant role, especially in the states that were expected to receive those immigrants.

Over at Econlog I have a related post.  It punctures two myths:

1.   The myth that immigration is making America more diverse. (We’re going to stay about 75% “white”).

2.  The myth that immigration is reducing the share of Americans who vote Republican.

Check it out.

PS.  I’m not sure why I didn’t know this, but it’s really quite interesting:

The Immigration Act of 1924, or Johnson–Reed Act, including the National Origins Act, and Asian Exclusion Act (Pub.L. 68–139, 43 Stat.153, enacted May 26, 1924), was a United States federal law that set quotas on the number of immigrants from certain countries while providing funding and an enforcement mechanism to carry out the longstanding (but hitherto unenforced) ban on other non-white immigrants. The law was primarily aimed at further decreasing immigration of Southern Europeans, countries with Roman Catholic majorities, Eastern EuropeansArabs, and Jews.[1][2][3][4] The law affirmed the longstanding ban on the immigration of other non-white persons, with the exception of black African immigrants (who had long been exempt from the ban). Thus, virtually all Asians were forbidden from immigrating to America under the Act (subsequent court rulings would determine that Indians were not white and could not immigrate).[citation needed]

Contrary to popular belief, Latin Americans were not prohibited or limited from immigrating under the law. In most states and under federal law, persons of mixed white and Native American ancestry were considered white; this principle was interpreted under the Act to allow Latin Americans to immigrate as “white persons.” Moreover, unlike Eastern and Southern Europe, no nationality-based quotas were placed on Latin American immigrants. Thus, the law allowed unlimited Latin American immigration, just as it allowed unlimited northwestern European immigration. Ironically, the 1965 immigration law that replaced the 1924 Act, though abolishing racial preferences and national quotas, would effectively place greater restriction on Latin American immigration.

So the racist immigration bill of 1924 (I’m not being sarcastic, it was racist, as people defined “race” at the time) favored blacks and Hispanics over Eastern and Southern Europeans?  Can someone confirm the accuracy of this Wikipedia post?  This means the 1965 bill did not have the effect that everyone seems to think it had, as the immigration surge after 1965 was mostly from Latin America (until recently). And what about when Eisenhower expelled illegal Mexican workers?

PPS.  Below I have a graph of immigration up to 2006, when it seemed to be exploding (mentally block out the 1991 spike to see the trend), and then another showing immigration up to 2016. (2017 data, not shown, showed a slight slowdown from 2016):

Screen Shot 2018-06-30 at 12.12.26 PMScreen Shot 2018-06-30 at 12.12.51 PM

The worst prejudice of them all

I was awakened about 3am last night by my alter ego, Scott Slumber.  He seemed very upset and had me dictate a blog post.  I was only able to scribble down a small part of what he said, as his speech was rambling and erratic.  Here’s what I got:

I am sick and tired of the attitude of the awake world to the sleeping world.  They look down on us as if we are inferior—all this talk about “real life”, as if their lives are more real than ours.  Just the opposite is true; we have a much richer life, comprised of a mixture of worry and pain-free oblivion, and a rich dream world that’s far more “real” than their awake world.  How much richer?  Recall how The Wizard of Oz transitions from a drab grey opening to a glorious color fantasia, and then back to black and white.  I use this example not because color film is better than black and white (we may not even dream in color), but because it’s a metaphor for how dreams are richer than waking hours.  In dreams you move through a sort of ether of meaning, as if some momentous reality is just beyond your grasp. Even the best parts of life, such as watching a David Lynch film, cannot quite capture the feeling.  That’s not to say there aren’t downsides; the “eternal return” to searching for that exam that you forgot to study for—but waking life also has its ups and downs.

I’ve known all of this for a long time, but what’s really got me agitated is the sudden increase in anti-sleepworld prejudice.  For instance:

1.  While “wake up” has often been used as a metaphor for intellectual awakening, the millennials have added on a new insult; “woke” is being used as a metaphor for moral superiority.  Actually, just the opposite is true.  I can shoot someone in the middle of Times Square, and no one cares.  Unless you are Donald Trump, that’s not true of the awake world.  I can engage in guilt-free forbidden love that you can only dream of experiencing . . . and no one gets hurt.  The dream world is a moral paradise.  When people speak of someone being “woke”, it reminds me of when I was young and you’d still hear people say, “that’s very white of you”—as a compliment!

2.  As if that’s not bad enough, we have bloggers speculating about a technology that allows sleep hours to be bought and sold, like slaves.  You might ask, “What’s wrong with that, if it’s done freely?  Aren’t you a libertarian?”  Yes, but the awake will end up selling the sleepers without even consulting them.  Of course there are a few “woke” people who understand the value of sleep, but if you look at the comment section after the sleep market post you see the same sort of rampant bigotry that occurs when bloggers discuss immigration and diversity.  People were positively gleeful about the thought of using money and technology to kill off their sleep world alter egos, and stay awake 24 hours a day.  Disgusting.  How could they do this to us after all we’ve done for them?  We’ve given them the palaces of Kubla Khan, the guitar riff that built the Stones, and a 1000 eureka moments of scientific discovery.

3.  Puritans in the awake world want to ban chemicals that produce vivid dreams.  They are afraid that the young will find the dream world more attractive than their pathetic depressing alternative.  That’s probably because it is more attractive.

I occasionally meet Scott Sumner for brief moments, such as last week when I was cruelly ejected from a Turkish harem by his murderous beeping iPhone. In our brief exchanges I’ve convinced Sumner that I’m right.  He’s already a radical utilitarian who believes that the flow of positive and negative brain states is the only thing that matters in the universe.  He’s contemptuous of the waking world’s Trumpian fascination with money and power.  Their weird belief in “personal identity” and “free will”.  Unlike that other blogger who cowardly hides behind the controversial claims of his alter ego, Sumner will affirm that everything I say is true.  Tell them, tell them Sumner, tell th . . .

Gulp.  Drugs?  Guilt-free forbidden love?  Umm, let me sleep on it.

PS.  Critics say that Mulholland Drive and In the Mood for Love are the two best films of the 21st century.  Indeed the only two films to make the top 100 all-time.  What do they have in common?  A dream-like mood.  And the critics’ choice for the best film of all time?  It’s also dream-like:

Screen Shot 2018-07-01 at 11.46.52 AM

PPS:  This might be hard to believe, but the opening paragraph of this post is kind of true–I did wake up at 3am last night and write down notes for this post.

PPPS. Maybe I should let John Milton have the last word:

Methought I saw my late espoused saint
       Brought to me, like Alcestis, from the grave,
       Whom Jove’s great son to her glad husband gave,
       Rescu’d from death by force, though pale and faint.
Mine, as whom wash’d from spot of child-bed taint
       Purification in the old Law did save,
       And such as yet once more I trust to have
       Full sight of her in Heaven without restraint,
Came vested all in white, pure as her mind;
       Her face was veil’d, yet to my fancied sight
       Love, sweetness, goodness, in her person shin’d
So clear as in no face with more delight.
       But Oh! as to embrace me she inclin’d,
       I wak’d, she fled, and day brought back my night.


Natural experiments: Can we handle the truth?

Natural experiments are being conducted all the time.  And yet I often feel like people really don’t care about the outcome of these experiments.

Let’s consider 5 popular hypotheses:

1.  The mortgage interest deduction has a major impact on the housing market.

2.  The NASDAQ was obviously wildly overvalued in 2000.

3.  Switzerland was forced to revalue its currency in January 2015.

4.  The US housing market was obviously wildly overvalued in 2006.

5.  Brexit would cause a recession in the UK economy.

In my view, natural experiments have strongly suggested that all 5 of these hypotheses are false.  And these are not trivial unimportant hypotheses, they were widely held views about some really important issues.

1. The tax bill that passed last year sharply cut back on the mortgage interest deduction.  Before that happened I read about 1000 articles warning that if we took away this deduction it would severely hurt the housing market.  We didn’t completely eliminate the deduction, but it’s more than half gone.  And yet housing continues to boom.  I have yet to see a single news article discussing this important natural experiment.

2.  The Nasdaq is now far higher than in 2000.  Of course it could be wildly overvalued today.  Unlike in 2000, however, there is no widely held view that it is wildly overvalued today.  That’s a problem for the hypothesis that it was wildly overvalued in 2000.  If true, why don’t people feel that way about the current stock market?  And you can’t point to changing economic circumstances, such as lower nominal interest rates, as those factors are linked to other changing economic circumstances, such as an unexpected slowdown in trend NGDP growth.  I.e. where would Nasdaq be today if NGDP had grown during 2000-18 as rapidly as people expected back in 2000?  Maybe 10,000?

Screen Shot 2018-06-24 at 12.31.44 PM

3.  Tyler Cowen correctly noted that Denmark would provide a good test of whether Switzerland was forced to revalue in January 2015.  We now know that Denmark was not forced to revalue.  Even worse, evidence suggests that the Swiss revaluation did not have the intended impact on the SNB balance sheet, which kept growing. That was claimed as the reason the Swiss needed to revalue.  And yet despite this natural experiment, experts continue to claim that the Swiss were forced to devalue, as in this recent podcast. It seems obvious to me that the Swiss simply made a mistake—are there any good counterarguments?

4.  There are two powerful pieces of evidence against the claim that the US housing market was overvalued.  First, many who made that claim also said the same thing about housing markets in Canada, Australia, the UK, and other countries.  And yet many of those other countries did not crash.  Even worse, America’s housing market has mostly recovered, and yet I see almost no one currently saying “America’s in a huge housing bubble, and when it crashes we’ll have another Great Recession”.  So why continue to claim the 2008 recession was caused by a housing bubble that no longer even looks like a bubble at all?  (And don’t point to housing construction; that’s shifting the goalposts.  In 2008, everyone pointed to the historically high level of house prices in 2006; housing construction never reached unusual levels during the boom.)

Screen Shot 2018-06-24 at 12.30.41 PM

5.  This one hasn’t been entirely ignored, as the Brexit supporters pointed to a strong economy after the June 2016 vote.  The Financial Times claims that Brexit is now slowing British growth:

Screen Shot 2018-06-24 at 4.01.02 PM

In my view it’s too soon to claim that Brexit is slowing growth.  I expect it will, but the graph the FT presents does not look statistically significant to me.

Ditto on the recent corporate tax cut—it’s too soon.  Both supply-siders and Keynesians expected a short term boost to growth, for different reasons.  Only the supply-siders predicted a longer term boost.  My own view was somewhere in between.  I expect some sort of long run supply-side boost, but much less that the Larry Kudlows of the world expect.  I see perhaps an extra 2% in RGDP growth spread out many years, with most of the boost coming soon after the tax cut.  Supply-siders see the growth rate rising to a new trend of roughly 3%/year, which seems unlikely to me.  If growth is still running at 3% in late 2019, then I clearly will have underestimated its impact.  I hope I did.

I’ve done a number of previous posts on this general topic, discussing earlier experiments such as the 2013 fiscal austerity, and the 2014 elimination of extended unemployment benefits.  Those who suggested that these would be good natural experiments often ignored the results when they didn’t go as expected.  (GDP growth accelerated in 2013, and job growth accelerated in 2014.)

Many pundits can’t handle the truth, unless it confirms their prior beliefs.