The new claims for unemployment this week was a shockingly low 320,000, bringing the 4 week average down to 332,000 335,000, which is the lowest since October 2007.  This graph shows the ratio of the 4 weeks average to US population (times 1000 to make it easier to read.)

The most recent week on the graph is at about 1.1, but today’s figures are at 1.049 1.058, if they were added.  This means the ratio of new claims to pop is roughly back to the boom levels of 1999-2000 and 2006-07.   And yet the other indicators (total jobs, unemployment rate, etc), remain deeply depressed.  I can think of two ways to interpret this data:

1.  Casey Mulligan is right, we have lots of structural issues that are causing high unemployment right now.  The job market’s not that bad, it’s just that lots of people don’t want to work at the wages being offered, or are frozen out by the 40% rise in minimum wages during the housing bust.

2.  AD is still the main problem, but since 1975 there’s been a long term downward trend in the claims/pop ratio, for some mysterious reason.  That trend would explain why (according to new claims) the labor market looked as good in 2006 as 2000, even though most people think it was not.

In the past I’ve argued that the minimum wage and extended UI benefits probably raised the natural rate by 0.5% to 1.0% at most. I’m sticking with that for now, although I do believe today’s data makes the structural hypothesis a tad more likely. What would it take for me to change my mind? If wage growth stays around 2% (or more) and NGDP growth stays around 4% (or more) and the unemployment rate stops falling for a couple years. Then I’d agree Mulligan is right about the current labor market. Of course unemployment has already fallen from 10% to 7.4%, so it’s almost certain we’ve have above natural rate unemployment over the past few years.  And I still believe it will fall further.

Of course there are lots of other puzzles, like the low labor force participation rate.

As I mentioned before, when a blogger is on vacation he has the bizarre feeling that readers back home will be interested in his political/social/economic musings about his new location.  A few weeks ago we had a family vacation in Bermuda.  I took notes.  I was reminded of this trip when I saw Matt Yglesias’s recent post showing a golf course on the coast of Bermuda.  Even before I visited Bermuda I knew that it had once been ranked the richest country in the world (it has recently slipped to number three, below Qatar and Liechtenstein.)  Naturally I wondered why.

Yes, I knew it had to do with some offshore tax haven business.  But that still doesn’t quite answer the question.  There are dozens of places like that from the Isle of Man to British Virgin Islands to Cayman Islands, Jersey Island, Panama, Gibraltar, Andorra, Monaco, San Marino, Luxembourg, etc., etc.  Why was Bermuda so successful?

Let’s start with the fact that Bermuda is about 55% black.

Then consider that Bermuda only has about 65,000 people.  That fits my “small is beautiful” in governance hypothesis.

Then recall that Bermuda is about 55% black.

Bermuda has the longest continually serving legislature in the world.  That supports my view that democracy is great, the more the better.

Then recall that Bermuda is about 55% black.

Bermuda has no income tax, and I was told that people who don’t work aren’t given much welfare.  Even the recent socialist-leaning government didn’t impose an income tax.  Top rate: ZERO.  Take that Saez.  It’s a supply-sider’s paradise.

And did I mention that Bermuda is about 55% black?

OK, let’s stop dancing around the issue that everyone is thinking about—race.  What can we make of the fact that the richest country in the world around 2008 was a majority black country?  Maybe nothing.  But I think there might be a few tiny lessons:

1.  I’m told that the blacks in Bermuda were a mixture of slaves and free workers.  But even the slaves were put to work in more skilled jobs (like shipbuilding) than the farming plantation slaves in the Caribbean or the American South.  So I suppose that provides mild support for the view that some of the problems faced by blacks today are somehow related to the legacy of slavery.  It seemed to me that the blacks in Bermuda now fill lots of pretty highly skilled jobs.  But that’s just casual empiricism.

2.  Bermuda’s economic model is obviously not scalable.  A Bermuda with 65 million people would not do anywhere near as well.  Nonetheless I don’t think we should dismiss their success with a wave of the hand.  They have done better than other island nations with similar populations.  Someone should try to figure out why it’s so well-governed.

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.)

In Bermuda they’ll deny they are rich, pointing to high prices.  Don’t believe them.  People in my home state of Massachusetts will also deny we are rich, pointing to lots of poor and working class people.  But Massachusetts is one of the richest places on Earth, and so is Bermuda.  There are no slums in Bermuda.  How many majority black (or majority white!) countries have no slums?  The housing stock is extremely attractive.  These pastel colored homes on the water are being built as a low income public housing project!

I was told that the semi-socialist party that ruled Bermuda in recent years has slightly damaged the economy by sitting on their laurels, and that meanwhile other islands like Bahamas were copying their model and catching up.  However the pro-business party was returned to power last year.

Perhaps I should have gone to the Bahamas.  It’s much bigger than Bermuda (360,000 people) and is 90% black.  And it’s roughly as rich as South Korea.  So maybe Bermuda is worth emulating.

David Deutsch likes to sum up his philosophy as:

1.  Problems are inevitable.

2.  Problems are solvable.

I think problems are inevitable where different races with different cultures live in close proximity.  And I also think those problems are solvable.  Let the immigrants come.

PS.  The title was a reference to fears that immigration will turn America into another Guatemala, or another Philippines, or another Haiti.  Why not another Bermuda?

PPS.  Massachusetts is actually the richest political entity on Earth containing more than 6 million people.

PPPS.  The American “state” with by far the highest percentage of blacks is Washington DC (about 50%).  It’s also by far America’s richest “state.”  Call it “America’s Bermuda.”

So let’s review the past year:

1.  Keynesians warned us that it would be a huge mistake to adopt fiscal austerity in America.  It would cut growth sharply.  Mark Sadowski has the details.

2.  The “Laffer wing” of the Keynesian movement predicts the damage to growth will be so great that the deficit might not even decline.

3.  Then we find Congress does the austerity, despite the advice of the Keynesians.

4.  Job growth continues in 2013 at almost exactly the same pace as in 2012.  The tax revenues pour in.

5.  The budget deficit gets much smaller.

And how do the Keynesians react to all this?  They say “I told you so.”  There was never any reason to worry about the big bad deficit.  It’s coming down very fast “on its own.”  Yes, if by “on its own” you mean that the evil GOP forced eurozone-style austerity on the US, and the Fed offset the effects on NGDP (unlike the ECB.)

Some liberals seem to believe that all the good progressive monetarists are dead, and that the conservative movement is left with nothing but austerian neanderthals.  But in other fields the influence of market monetarism is increasingly noticed.  Here’s an example written by Jeremy W. Fox and published in a journal called Ideas in Ecology and Evolution:

The above list makes the case that blogs are useful. But it doesn’t really do justice to the full potential of blogs to transform how ecology is conducted and communicated. In order to illustrate that potential, I next turn to an example from economics: an obscure economics blogger may just have saved the entire US economy.

His name is Scott Sumner, he’s an economics professor at Bentley University, and since 2009 he’s written The Money Illusion blog. He’s a macroeconomist, which means he works on the economics of entire countries, as opposed to the “microeconomics” of individual households or businesses. Like many macroeconomists, he started blogging in the aftermath of the 2008 financial crisis and the ensuing “Great Recession”.  Macroeconomists were mostly blindsided by these events; the broad consensus in the field had been that we knew enough macroeconomics to prevent such serious recessions from ever occurring. In response, many macroeconomists began debating and soul-searching about what caused the crisis, how policymakers ought to respond, and whether the foundations of textbook macroeconomics needed rethinking.

One very important US economic policy-making institution is the Federal Reserve, the US central bank. Very roughly, the “Fed” manages the money supply. When the economy is struggling, it reduces interest rates, thereby injecting money into the economy and spurring consumers and businesses to spend. But what can the Fed do if, as is the currently the case, interest rates are already as low as they can go (interest rates can’t go negative)? Until recently, most economists would have answered “nothing” or “not much”. On his blog, Scott Sumner answered “a lot”. His idea is that the Fed, instead of targeting interest rates, should engage in “nominal gross domestic product (NGDP) targeting.”  Very briefly and loosely, NGDP targeting attempts to change, not current interest rates, but expectations of future interest rates, on the grounds that economic decisions in the present often reflect expectations about the future (see The Money Illusion blog for details).  At the time Scott Sumner began blogging about NGDP targeting, it was far outside the economic mainstream, although not totally unheard of or without antecedents.  But over time, NGDP targeting started winning adherents. First, other, more widely-read economics bloggers. Then, some prominent non-blogging academic economists, of various political persuasions and representing various opposing schools of macroeconomic thought. Then Paul Krugman, a Nobel Prize-winning economist, New York Times columnist, and blogger. Then, a senior Federal Reserve official. Then Mark Woodford, perhaps the most influential academic macroeconomist in the world. And in September 2012 the Federal Reserve itself announced, in a break with previous policy, its plan to attempt something fairly close to NGDP targeting (precisely how close is the subject of some debate). In summary: in three years, a radical macroeconomics idea proposed by an initially-unknown blogger has come close to being adopted as the official policy of perhaps the most important economics policymaking institution in the world. For more on this history, see recent articles in The Atlantic (http://www.theatlantic.com/business/archive/2012/09/the-blogger-who-savedthe-economy/262394/) and Business Insider (http://www.businessinsider.com/who-is-scott-sumner-2012-9).

Unless you follow economics, it might be difficult to appreciate just how remarkable all this is. Here’s an imperfect but useful ecological analogy. Imagine that Steve Hubbell’s Neutral Theory of Biodiversity (Hubbell 2001) had not previously been seriously explored in evolutionary biology when it was first proposed. Imagine further that that ecologist who first proposed it was not the already-prominent Steve Hubbell, but someone little known, at an obscure university. Imagine that that ecologist didn’t publish Neutral Theory in a Princeton Monograph or a Nature paper, but in a series of blog posts. And imagine that Neutral Theory didn’t merely become a “hot” research topic (as it has), but within three years was widely accepted by academic ecologists and policymakers as the appropriate basis for national and international conservation policymaking, our best chance to reduce historically-high rates of species loss, and preserve vital ecosystem services.

Now, Scott Sumner’s example is an extreme case, and extreme cases are rare by definition. Most bloggers will never have that much influence, just as most scientists will never be extremely widely cited. It takes exactly the right combination of circumstances for an idea to go from blog post to Fed policy as quickly as NGDP targeting did. One of those circumstances is having lots of colleagues who blog. Blogging is central to how economists exchange ideas. Many dozens of economists, including many prominent senior economists, have blogs (see the compilation of economics blogs on Mark Thoma’s Economist’s View blog). Even economists who don’t blog themselves routinely read and comment on the blogs of others. It is this culture of blogging, not the remarkable influence of a single blogger, that really separates economics and ecology, and that would represent a fundamental transformation in how ecologists share ideas. So will this transformation ever happen? Will blogging ever become as central to the conduct of ecology as it now is to the conduct of economics?

Of course this greatly exaggerates my role and underrates the role of the other MMs.  They tend to be more modest individuals than I am.  For instance, we know from a footnote that Nick Rowe gave the author of this paper some advice, and yet he doesn’t really appear, despite the fact that he’s also been hugely influential in shaping the debate.  Canadians are not as self-promoting as us Americans.

PS.  I don’t want to discuss the specific content of the article.  He’s not an economist and obviously he isn’t expected to get all the nuances correct.  That’s not the point.

HT:  Peter Schwechheimer

Here are my views on money and libertarianism:

1.  It’s an open question as to whether a purely private MOA/MOE regime would outperform a government system. Macro theory suggests a government system might be able to do better, but that doesn’t mean it would do better.  Both public and private regimes are likely to improve over time.

2.  We don’t really know what a private money system would look like in the 21st century.  Indeed it might be nothing more that private banknotes convertible into foreign fiat currencies.  That outcome would be slightly embarrassing for dogmatic principled libertarians.  It might even be a system that leads to a high rate of inflation (I doubt it).  We just don’t know.

3.  The arguments for giving the government a monopoly on the creation of money include the network effects of a single MOA, the wastefulness of a commodity MOA, and the wastefulness of non-price competition in the currency market.  There are also strong arguments against all these claims.  It’s also possible to have a hybrid system, with a government fiat asset used for interbank clearings, and then the rest of the money supply left to the private sector.

4.  I don’t think it makes sense to talk of monetary policy “fixing” the problems created by nominal wage stickiness, although I understand why people disagree with me.  Every day I walk by my TV without kicking it.  If I swung my leg to the right it would smash the TV. So in a sense my normal walk can be viewed as a “walking policy” that makes my TV work better than a silly walk would.  In the same way a stable monetary policy makes the economy work better than one that leads to wild fluctuations in NGDP.

Is my normal “walking policy” something that makes my TV work better?  Yes, but only in a very odd sense.  Ditto for sound monetary policy.  Rather it makes more sense to think of it as a policy that refrains from distorting the labor market.  The real issue here is discussed in point 5.

5.  If a pragmatic libertarian economist opts for a government run fiat money system, it is a compromise with “pure libertarianism” in much the same way as support for the EPA or anti-trust laws would represent a compromise with a 100% laissez faire regime.  But once that compromise has occurred, it makes little sense to talk of one monetary regime as being more interventionist than another.  All targets (The base, M2, P, NGDP, gold prices, exchange rates, interest rates, etc) are equally interventionist.  Perhaps the libertarian/non-libertarian distinction makes sense when considering central bank discretion vs. a futures market targeting approach.

Here’s another way to make the point.  Friedman was right when he told Mundell that floating rates are better than fixed rates.  But wrong when he claimed the regime was more “free market.”  An M2 target is just as interventionist as a stable pound/dollar exchange rate target.  It’s just different.

6.  Calling for the Fed to change it’s current policy doesn’t make one an “activist.”  Many highly libertarian Austrians are unhappy with current Fed policy.  I don’t want my daughter piloting a 747, but if she is suddenly thrust into the captain’s seat I’ll give her the best advice I can.  So would Bob Murphy.  I favor rules, not activism.

7.  If one is a pragmatic libertarian, it is not inconsistent to argue the free market is generally best, but also advocate patents, eminent domain, anti-trust laws, low wage subsidies, the EPA and the Fed.  That still leaves plenty of scope for free markets.  No country even comes close to having a government that small.  That makes the term “libertarian” a useful description of the person’s policy views.  As an analogy, most people would consider it useful shorthand to describe someone who wants the government to run 90% of the economy as a “socialist,” even if there remain dozens of large private businesses.

8.  It’s a useful exercise to consider the optimal monetary policy, regardless of whether the system is public or private.  Nothing should be accepted on faith, so at a minimum advocates of a purely private system need a benchmark for comparison when they argue that the macro outcome of that system would be “good.”  For Hayek, stable NGDP was the benchmark.  Some private money advocates (such as George Selgin) believe free banking would produce this sort of good outcome.  I’m a bit more skeptical.

PS.  Problems are inevitable under any regime.  The existence of problems doesn’t imply (contra Krugman) that a regime has failed.  Germany’s successful labor market reforms solved their high unemployment problem, and introduced a new and lesser problem of lots of low wage jobs and greater inequality.  The only thing that prevents the German policy from being seen as a widespread failure is the much worse situation in nearby countries that did not reform their labor markets.

PPS.  Nick Rowe had some related comments a few days back.